LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.

(Exact Name of Registrant as Specified in Its Charter)

Maryland		20-1237795
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1985 Cedar Bridge Avenue, Suite 1
Lakewood, New Jersey		08701
(Address of Principal Executive Offices)		(Zip Code)

(732) 367-0129

(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    ¨     No   þ  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   ¨

Accelerated filer   ¨

Non-accelerated filer    þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨  No þ

As of November 6, 2009, there were 31.5 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust, Inc., including shares issued pursuant to the dividend reinvestment plan.  

 

 

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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

INDEX

 

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008	3
	Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2009 and 2008	4
	Consolidated Statement of Stockholders’ Equity and Other Comprehensive Loss (unaudited) for the Nine Months Ended September 30, 2009	5
	Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2009 and 2008	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4T.	Controls and Procedures	52
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults Upon Senior Securities	55
Item 4.	Submission of Matters to a Vote of Security Holders	55
Item 5.	Other Information	55
Item 6.	Exhibits	56

 

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		Three Months Ended								Nine Months Ended
		September 30, 2009				September 30, 2008				September 30, 2009			September 30, 2008
Revenues:
Rental income		$	8,863,816			$	9,191,180			$	27,326,273			$	26,841,456
Tenant recovery income			1,277,035				1,075,673				3,684,443				3,136,626
Total revenues			10,140,851				10,266,853				31,010,716				29,978,082
Expenses:
Property operating expenses			4,029,502				4,712,463				11,907,805				12,951,925
Real estate taxes			1,093,325				1,030,937				3,319,905				3,117,564
General and administrative costs			1,891,522				1,335,185				5,818,245				8,299,384
Impairment of long lived assets, net of gain on disposal			44,960,800				-				44,960,800				-
Depreciation and amortization			2,694,337				2,136,873				7,568,009				6,539,587
Total operating expenses			54,669,486				9,215,458				73,574,764				30,908,460
Operating (loss) income			(44,528,635	)			1,051,395				(42,564,048	)			(930,378	)
Other income, net			145,453				120,873				510,474				385,512
Interest income			1,038,464				1,550,433				3,076,695				3,528,156
Interest expense			(3,653,893	)			(3,492,802	)			(10,816,747	)			(10,473,022	)
Gain/(loss) on sale of marketable securities			1,187,620				(7,454	)			343,724				(7,454	)
Other than temporary impairment - marketable securities			-				(9,733,015	)			(3,373,716	)			(9,733,015	)
Loss from investments in unconsolidated affiliated real estate entities			(3,508,079	)			(676,194	)			(4,248,298	)			(2,236,511	)
Net loss			(49,319,070	)			(11,186,764	)			(57,071,916	)			(19,466,712	)
Less: net loss attributable to noncontrolling interests			673,924				173				767,040				322
Net loss attributable to Company's common shares		$	(48,645,146	)		$	(11,186,591	)		$	(56,304,876	)		$	(19,466,390	)
Net loss per Company's common share, basic and diluted		$	(1.55	)		$	(0.44	)		$	(1.80	)		$	(0.97	)
Weighted average number of common shares outstanding, basic and diluted			31,297,445				25,464,696				31,204,618				20,058,683

The Company’s notes are an integral part of these consolidated financial statements.

 

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ITEM 1. FINANCIAL STATEMENTS.

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND OTHER COMPREHENSIVE GAIN/(LOSS)

(UNAUDITED)

		Preferred Shares								Common Shares
		Preferred Shares				Amount				Common Shares				Amount				Additional Paid-In Capital				Accumulated Other Comprehensive Gain/(Loss)				Accumulated Distributions in Excess of Net Loss				Total Noncontrolling Interests				Total Equity
BALANCE,    December 31, 2008			-			$	-				30,985,544			$	309,855			$	275,589,300			$	(4,212,454	)		$	(57,173,374	)		$	23,113,983			$	237,627,310
Comprehensive loss:
Net loss			-				-				-				-				-				-				(56,304,876	)			(767,040	)			(57,071,916	)
Unrealized gain on available for sale securities			-				-				-				-				-				499,314				-				49,395				548,709
Reclassification adjustment for loss realized in net loss			-				-				-				-				-				4,077,722				-				(122	)			4,077,600
Total comprehensive loss																																			(52,445,607	)
Distributions declared			-				-				-				-				-				-				(21,776,937	)			-				(21,776,937	)
Distributions paid to noncontrolling interests			-				-				-				-				-				-				-				(3,200,003	)			(3,200,003	)
Proceeds from special general partner interest units			-				-				-				-				-				-				-				6,982,534				6,982,534
Redemption and cancellation of shares			-				-				(453,167	)			(4,532	)			(4,267,550	)											-				(4,272,082	)
Shares issued from distribution reinvestment program			-				-				746,769				7,468				7,086,832				-				-				-				7,094,300
Issuance of equity in subsidiary in exchange for payment of acquisition fee (see Note 13)			-				-				-				-				-				-				-				6,878,087				6,878,087
Units issued to noncontrolling interest in exchange for investment in unconsolidated affiliated real estate entity			-				-				-				-				-				-				-				78,988,411				78,988,411
Note receivable secured by noncontrolling interest units			-				-				-				-				-				-				-				(70,857,707	)			(70,857,707	)
BALANCE,  September 30, 2009			-			$	-				31,279,146			$	312,791			$	278,408,582			$	364,582			$	(135,255,187	)		$	41,187,538			$	185,018,306

The Company’s notes are an integral part of these consolidated financial statements.

 

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PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

		Nine Months Ended				Nine Months Ended
		September 30, 2009				September 30, 2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(57,071,916	)		$	(19,466,712	)
Adjustments to reconcile net loss to net cash  provided by operating activities:
Depreciation and amortization			7,140,070				6,100,190
Impairment of long lived assets, net of gain on disposal			44,960,800				-
(Gain)/loss on sale of marketable securities			(343,724	)			7,454
Realized loss on impairment of marketable securities			3,373,716				9,733,015
Amortization of deferred financing costs			284,657				368,625
Amortization of deferred leasing costs			427,939				439,397
Amortization of above and below-market lease intangibles			(286,641	)			(632,518	)
Equity in loss from investments in unconsolidated affiliated real estate entities			4,248,298				2,236,511
Provision for bad debts			785,987				990,613
Changes in assets and liabilities:
Decrease/(increase) in prepaid expenses and other assets			154,085				(1,567,703	)
Decrease/(increase) in tenant and other accounts receivable			980,160				(1,032,029	)
Increase in tenant allowance and security deposits payable			250,023				31,335
Decrease)/increase in accounts payable and accrued expenses			(2,450,934	)			9,882,151
Increase/(decrease) in due to sponsor			132,485				(3,209,190	)
(Decrease)/increase in prepaid rental revenues			313,259				(26,645	)
Net cash provided by operating activities			2,898,264				3,854,494
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment property, net			(7,875,155	)			(22,656,237	)
Purchase of marketable securities			-				(9,290,458	)
Proceeds from sale of marketable securities			12,166,886				83,562
Issuance of note receivables, related party			-				(49,500,000	)
Investment in unconsolidated affiliated real estate entity			-				(10,150,000	)
Distribution from investments in unconsolidated affiliate			1,866,664				-
Purchase of investment in unconsolidated affiliated real estate entity			(18,997,677	)			-
Funding of restricted escrows			588,592				(407,832	)
Net cash used in investing activities			(12,250,690	)			(91,920,965	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage financing			-				3,187,177
Mortgage payments			(2,014,703	)			(230,947	)
Payment of loan fees and expenses			(22,911	)			(441,509	)
Proceeds from issuance of common stock			-				152,146,559
Redemption and cancellation of common stock			(4,272,082	)			-
Proceeds from issuance of special general partnership units			6,982,534				12,292,129
Payment of offering costs			-				(15,853,449	)
Issuance of note receivable to noncontrolling interest			(22,357,708	)			(17,640,000	)
Distributions paid to noncontrolling interests			(3,200,003	)			(482,697	)
Distributions paid to Company's common stockholders			(9,163,231	)			(4,951,117	)
Net cash (used in) provided by financing activities			(34,048,104	)			128,026,146
Net change in cash and cash equivalents			(43,400,530	)			39,959,675
Cash and cash equivalents, beginning of period			66,106,067				29,589,815
Cash and cash equivalents, end of period		$	22,705,537			$	69,549,490
Cash paid for interest		$	10,633,573			$	10,667,126
Dividends declared		$	21,776,937			$	10,645,812
Non cash purchase of investment property		$	232,952			$	5,725,735
Value of shares issued from distribution reinvestment program		$	7,094,300			$	3,447,577
Issuance of equity for payment of acquisition fee obligation (See Note 13)		$	6,878,087			$	-
Issuance of units in exchange for investment in unconsolidated affiliated real estate entities		$	78,988,411			$	19,600,000

The Company’s notes are an integral part of these consolidated financial statements.

 

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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

1.

Organization

 

Lightstone Value Plus Real Estate Investment Trust, Inc., a Maryland corporation (“Lightstone REIT” and, together with the Operating Partnership (as defined below), the “Company”) was formed on June 8, 2004 and subsequently qualified as a real estate investment trust (“REIT”) during the year ending December 31, 2006. The Company was formed primarily for the purpose of engaging in the business of investing in and owning commercial and residential real estate properties located throughout the United States and Puerto Rico.

The Lightstone REIT is structured as an umbrella partnership real estate investment trust, or UPREIT, and substantially all of the Lightstone REIT’s current and future business is and will be conducted through Lightstone Value Plus REIT, L.P., a Delaware limited partnership formed on July 12, 2004 (the “Operating Partnership”). The Lightstone REIT is managed by Lightstone Value Plus REIT, LLC (the “Advisor”), an affiliate of the Lightstone Group (the “Sponsor”), under the terms and conditions of an advisory agreement. The Sponsor and Advisor are owned and controlled by David Lichtenstein, the Chairman of the Company’s board of directors and its Chief Executive Officer.

The Company commenced an initial public offering to sell a maximum of 30,000,000 shares of common shares on May 23, 2005, at a price of $10 per share (exclusive of 4 million shares available pursuant to the Company’s dividend reinvestment plan, 600,000 shares that could be obtained through the exercise of selling dealer warrants when and if issued and 75,000 shares that are reserved for issuance under the Company’s stock option plan). The Company’s Registration Statement on Form S-11 (the “Registration Statement”) was declared effective under the Securities Act of 1933 on April 22, 2005, and on May 24, 2005, the Lightstone REIT began offering its common shares for sale to the public. Lightstone Securities, LLC (the “Dealer Manager”), an affiliate of the Sponsor, is serving as the dealer manager of the Company’s public offering (the “Offering”).

 

The Company sold 20,000 shares to the Advisor on July 6, 2004, for $10 per share. The Company invested the proceeds from this sale in the Operating Partnership, and as a result, held a 99.9% general partnership interest in the Operating Partnership.  

The Offering terminated on October 10, 2008 when all shares offered where sold.   However, the shares continued to be sold to existing stockholders pursuant to the Company’s dividend reinvestment plan.   As of September 30, 2009, cumulative gross offering proceeds of approximately $308.9 million, which includes redemptions and $14.8 million of proceeds from the dividend reinvestment plan, have been released to the Lightstone REIT and used for the purchase of a 98.4% general partnership interest in the common units of the Operating Partnership.

 

Noncontrolling Interest – Partners of Operating Partnership

On July 6, 2004, the Advisor also contributed $2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The limited partner has the right to convert operating partnership units into cash or, at the option of the Company, an equal number of common shares of the Company, as allowed by the limited partnership agreement.

Lightstone SLP, LLC, an affiliate of the Advisor, purchased special general partner interests (“SLP Units”) in the Operating Partnership at a cost of $100,000 per unit for each $1.0 million in offering subscriptions. As of September 30, 2009, the Company has received proceeds of $30.0 million from the sale of SLP Units, of which approximately $7.0 million was received during the three months ended March 31, 2009 and none thereafter.

On  June 26,  2008, the Operating Partnership issued (i) 96,000 units of common limited partnership interest in the Operating Partnership (“Common Units”) and 18,240 Series A preferred limited partnership units in the Operating Partnership (the “Series A Preferred Units”) with an aggregate liquidation preference of $18,240,000 to Arbor Mill Run JRM, LLC, a Delaware limited liability company (“Arbor JRM”) and (ii) 2,000 Common Units and 380 Series A Preferred Units with an aggregate liquidation preference of $380,000 to Arbor National CJ, LLC, a New York limited liability company (“Arbor CJ”) in exchange for a 22.54% membership interest in Mill Run LLC (Mill Run) (See Note 3). The total aggregate value of the Common Units and Series A Preferred Units issued by the Operating Partnership in exchange for the 22.54% membership interest in Mill Run was $19,600,000.

On March 30, 2009, the Operating Partnership issued 284,209 Common Units and 53,146 Series A Preferred Units with an aggregate liquidation preference of $53,146,000 to AR Prime Holdings LLC, a Delaware limited liability company (“AR Prime”) in exchange for a 25% membership interest in Prime Outlets Acquisitions Company (“POAC”) (See Note 3).

 

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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

On August 25, 2009, the Operating Partnership issued  a total of 115,000 Common Units and 21,850 Series A Preferred Units with an aggregate liquidation preference of $21,850,000 to TRAC Central Jersey LLC, a Delaware limited liability company (“TRAC”), Central Jersey Holdings II, LLC, a New York limited liability company (“Central Jersey”) and  JT Prime LLC, a Delaware limited liability company (“JT Prime”), in exchange for an additional 14.26% membership interest in Mill Run and for an additional 15% membership interest in POAC (See Note 3).

See Note 13 for further discussion of noncontrolling interests.

Operating Partnership Activity

Through its Operating Partnership, the Company will seek to acquire and operate commercial, residential, and hospitality properties, principally in the United States. The Company’s commercial holdings will consist of retail (primarily multi-tenanted shopping centers), lodging (primarily extended stay hotels), industrial and office properties.   All such properties may be acquired and operated by the Company alone or jointly with another party. Since inception, the Company has completed the following acquisitions and investments:

2006

The Company completed the acquisition of the Belz Factory Outlet World in St. Augustine, Florida, four multi-family communities in Southeast Michigan, a retail power center and raw land in Omaha, Nebraska and a portfolio of industrial and office properties located in New Orleans, LA (5 industrial and 2 office properties), Baton Rouge, LA (3 industrial properties) and San Antonio, TX (4 industrial properties).

2007

 The Company has made an investment in a sub-leasehold interest in a ground lease to an office building located at 1407 Broadway in New York, NY, purchased a land parcel in Lake Jackson, TX on which it completed the development of a retail power center in the first quarter of 2008, an 8.5-acre parcel of undeveloped land, including development rights, which is intended to be used for further development of the adjacent Belz Factory Outlet World in St. Augustine, Florida, five apartment communities located in Tampa, FL (one property), Charlotte, North Carolina (two properties) and Greensboro, North Carolina (two properties), and two hotels located in Houston, TX .

2008

The Company has made a preferred equity contribution in exchange for membership interests of a wholly owned subsidiary of Park Avenue Funding, LLC, an affiliated real estate lending company and acquired a 22.54% interest in Mill Run, which consists of two retail properties located in Orlando, Florida.

2009

On March 30, 2009, the Company acquired a 25% interest in POAC which has a portfolio of 18 retail outlet malls and two development projects located in 15 different states across the United States.  On August 25, 2009, the Company acquired an additional 14.26% interest in Mill Run and an additional 15% interest in POAC.  As of September 30, 2009, the Company’s membership interest in Mill Run was 36.8% and 40% in POAC.

All of the acquired properties and development activities are managed by affiliates of Lightstone Value Plus REIT Management LLC (the “Property Manager”).

The Company’s Advisor, Property Manager and Dealer Manager are each related parties. Each of these entities has received compensation and fees for services related to the offering and will continue to receive compensation and fees and services for the investment and management of the Company’s assets. These entities will receive fees during the offering (which was completed on October 10, 2008), acquisition, operational and liquidation stages. The compensation levels during the offering, acquisition and operational stages are based on percentages of the offering proceeds sold, the cost of acquired properties and the annual revenue earned from such properties, and other such fees outlined in each of the respective agreements (See Note 14).

   

2.

Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of the Company and the Operating Partnership and its subsidiaries (over which Lightstone REIT exercises financial and operating control). As of September 30, 2009, the Company had a 98.4% general partnership interest in the common units of the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation.  

 

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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate, depreciable lives of fixed assets, amortizable lives of intangibles, revenue recognition, the collectability of trade accounts receivable and the realizability of deferred tax assets. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.

The unaudited consolidated statements of operations for interim periods are not necessarily indicative of results for the full year.  The December 31, 2008 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.  For further information, refer to consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2008.

Investments in real estate entities where the Company has the ability to exercise significant influence, but does not exercise financial and operating control, are accounted for using the equity method.

 Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. All cash and cash equivalents are held in money market funds or commercial paper.  To date, the Company has not experienced any losses on its cash and cash equivalents.

 

Marketable Securities

Marketable securities consist of equity securities and corporate bonds that are designated as available-for-sale and are recorded at fair value. Unrealized holding gains or losses are reported as a component of accumulated other comprehensive income (loss). Realized gains or losses resulting from the sale of these securities are determined based on the specific identification of the securities sold. An impairment charge is recognized when the decline in the fair value of a security below the amortized cost basis is determined to be other-than-temporary. We consider various factors in determining whether to recognize an impairment charge, including the duration and severity of any decline in fair value below our amortized cost basis, any adverse changes in the financial condition of the issuers’ and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. The Board has authorized the Company from time to time to invest the Company’s available cash in marketable securities of real estate related companies. The Board of Directors has approved investments up to 30% of the Company’s total assets to be made at the Company’s discretion, subject to compliance with any REIT or other restrictions.  See Note 5.

Revenue Recognition

 

Minimum rents are recognized on a straight-line accrual basis, over the terms of the related leases. The capitalized above-market lease values and the capitalized below-market lease values are amortized as an adjustment to rental income over the initial lease term. Percentage rents, which are based on commercial tenants’ sales, are recognized once the sales reported by such tenants exceed any applicable breakpoints as specified in the tenants’ leases. Recoveries from commercial tenants for real estate taxes, insurance and other operating expenses, and from residential tenants for utility costs, are recognized as revenues in the period that the applicable costs are incurred.  Room revenue for the hotel properties are recognized as stays occur, using the accrual method of accounting. Amounts paid in advance are deferred until stays occur.

  

Accounts Receivable

 

The Company makes estimates of the uncollectability of its accounts receivable related to base rents, expense reimbursements and other revenues. The Company analyzes accounts receivable and historical bad debt levels, customer credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, tenants in bankruptcy are analyzed and estimates are made in connection with the expected recovery of pre-petition and post-petition claims. The Company’s reported net income or loss is directly affected by management’s estimate of the collectability of accounts receivable. The total allowance for doubtful accounts was approximately $0.3 million and $0.2 million at September 30, 2009 and December 31, 2008, respectively.

 

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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

Investment in Real Estate

 

Accounting for Acquisitions

 

The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based in each case on their fair values. Purchase accounting is applied to assets and liabilities related to real estate entities acquired based upon the percentage of interest acquired. Fees incurred related to acquisitions are expensed as incurred within general and administrative costs within the consolidated statements of operation.  Transaction costs incurred related to the Company’s investment in unconsolidated real estate entities, accounted for under the equity method of accounting, and are capitalized as part of the cost of the investment.

Upon the acquisition of real estate operating properties, the Company estimates the fair value of acquired tangible assets and identified intangible assets and liabilities and assumed debt at the date of acquisition, based on evaluation of information and estimates available at that date. Based on these estimates, the Company allocates the initial purchase price to the applicable assets, liabilities and noncontrolling interests, if any.  As final information regarding fair value of the assets acquired, liabilities assumed and noncontrolling interests is received and estimates are refined, appropriate adjustments are made to the purchase price allocation. The allocations are finalized as soon as all the information necessary is available and in no case later than within twelve months from the acquisition date.

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 Lightstone Value Plus Real Estate Investment Trust, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Lightstone Value Plus Real Estate Investment Trust, Inc., a Maryland corporation, and, as required by context, Lightstone Value Plus REIT, L.P. and its wholly owned subsidiaries, which we collectively refer to as “the Operating Partnership.”

 

Forward-Looking Statements

 

Certain information included in this Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by us with the Securities and Exchange Commission, or the SEC, contain or will contain, forward-looking statements. All statements, other than statements of historical facts, including, among others, statements regarding our possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives, are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of Lightstone Value Plus Real Estate Investment Trust, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that actual results may differ materially from those contemplated by such forward-looking statements.

Such statements are based on assumptions and expectations which may not be realized and are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, may differ from the results discussed in the forward-looking statements.

Risks and other factors that might cause differences, some of which could be material, include, but are not limited to, economic and market conditions, competition, tenant or joint venture partner(s) bankruptcies, failure to increase tenant occupancy and operating income, rejection of leases by tenants in bankruptcy, financing and development risks, construction and lease-up delays, cost overruns, the level and volatility of interest rates, the rate of revenue increases versus expense increases, the financial stability of various tenants and industries, the failure of the Company (defined herein) to make additional investments in real estate properties, the failure to upgrade our tenant mix, restrictions in current financing arrangements, the failure to fully recover tenant obligations for common area maintenance (“CAM”), insurance, taxes and other property expenses, the failure of the Lightstone REIT to continue to qualify as a real estate investment trust (“REIT”), the failure to refinance debt at favorable terms and conditions, an increase in impairment charges, loss of key personnel, failure to achieve earnings/funds from operations targets or estimates, conflicts of interest with the Advisor and its affiliates, failure of joint venture relationships, significant costs related to environmental issues as well as other risks listed from time to time in this Form 10-Q, our Form 10-K, our Registration Statement on Form S-11 (File No. 333-117367), as the same may be amended and supplemented from time to time, and in the Company’s other reports filed with the Securities and Exchange Commission (“SEC”).

 

We believe these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are qualified in their entirety by these cautionary statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time unless required by law.

 

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  Overview

Lightstone Value Plus Real Estate Investment Trust, Inc. (the “Lightstone REIT” or “Company”) intends to acquire and operate commercial, residential and hospitality properties, principally in the United States. Principally through the Lightstone Value Plus REIT, LP, (the “Operating Partnership”), our acquisitions may include both portfolios and individual properties. We expect that our commercial holdings will consist of retail (primarily multi-tenanted shopping centers), lodging (primarily extended stay hotels), industrial and office properties and that our residential properties will be principally comprised of ‘‘Class B’’ multi-family complexes.

 We do not have employees. We entered into an advisory agreement dated April 22, 2005 with Lightstone Value Plus REIT LLC, a Delaware limited liability company, which we refer to as the “Advisor,” pursuant to which the Advisor supervises and manages our day-to-day operations and selects our real estate and real estate related investments, subject to oversight by our board of directors. We pay the Advisor fees for services related to the investment and management of our assets, and we will reimburse the Advisor for certain expenses incurred on our behalf.

Beginning with the year ended December 31, 2006, the Company qualified to be taxed as a real estate investment trust (a “REIT”), under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its ordinary taxable income to stockholders. As a REIT, the Company generally will not be subject to federal income tax on taxable income that it distributes to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will then be subject to federal income taxes on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to stockholders. As of September 30, 2009, the Company has complied with the requirements for maintaining its REIT status.

To maintain our qualification as a REIT, we engage in certain activities through LVP Acquisitions Corp. (“LVP Corp”), a wholly-owned taxable REIT subsidiary (“TRS”). As such, we are subject to federal and state income and franchise taxes from these activities.

Acquisitions and Investment Strategy

We intend to acquire fee interests in multi-tenanted, community, power and lifestyle shopping centers, and in malls located in highly trafficked retail corridors, high-barrier to entry markets, and sub- markets with constraints on the amount of additional property supply. Additionally, we seek to acquire mid-scale, extended stay lodging properties and multi-tenanted industrial properties located near major transportation arteries and distribution corridors; multi-tenanted office properties located near major transportation arteries; and market-rate, middle market multifamily properties at a discount to replacement cost. We do not intend to invest in single family residential properties; leisure home sites; farms; ranches; timberlands; unimproved properties not intended to be developed; or mining properties.

Investments in real estate will be made through the purchase of all or part of a fee simple ownership, or all or part of a leasehold interest. We may also purchase limited partnership interests, limited liability company interests and other equity securities. We may also enter into joint ventures with affiliated entities for the acquisition, development or improvement of properties as well as general partnerships, co-tenancies and other participations with real estate developers, owners and others for the purpose of developing, owning and operating real properties. We will not enter into a joint venture to make an investment that we would not be permitted to make on our own. Not more than 10% of our total assets will be invested in unimproved real property. For purposes of this paragraph, “unimproved real properties” does not include properties acquired for the purpose of producing rental or other operating income, properties under construction and properties for which development or construction is planned within one year. Additionally, we will not invest in contracts for the sale of real estate unless in recordable form and appropriately recorded.

Through September 30, 2009, Lightstone REIT has completed eight acquisitions: the Belz Factory Outlet World, a retail outlet shopping mall in St. Augustine, Florida, on March 31, 2006; four multi-family communities in Southeast Michigan on June 29, 2006; the Oakview Plaza, a retail shopping mall located in Omaha, Nebraska, on December 21, 2006 a portfolio of 12 industrial and 2 office buildings in Louisiana and Texas, on February 1, 2007; and a land parcel in Lake Jackson, TX, intended for immediate development as a power retail center, on June 29, 2007, two hotels in Houston, Texas on October 17, 2007, five multi family apartment communities, one in Tampa, Florida, two in Greensboro, North Carolina and two in Charlotte, North Carolina on November 16, 2007, and an industrial building in Sarasota, Florida on November 13, 2007.

 

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In addition, as of September 30, 2009, Lightstone REIT has acquired three investments in unconsolidated affiliated real estate entities: a 49% equity interest in a joint venture, formed to purchase a sub-leasehold interest in a ground lease to an office building in New York, NY, on January 4, 2007; a 36.8% membership interest in a limited liability corporation which owns two factory outlet centers in Orlando, Florida, of which 22.54% was acquired on June 26, 2008 and 14.26% was acquired on August 25, 2009; and  a 40% membership interest in an affiliated limited liability company which owns 18 factory outlet centers located in 15 different states in the United States, of which 25% was acquired on March 30, 2009 and 15% was acquired on August 25, 2009.  In addition on April 16, 2008, Lightstone REIT made a preferred equity contribution in exchange for membership interests of a wholly owned subsidiary of Park Avenue Funding, LLC, an affiliated real estate lending company.

Although we are not limited as to the geographic area where we may conduct our operations, we intend to invest in properties located near the existing operations of our Sponsor, in order to achieve economies of scale where possible. Our Sponsor currently maintains operations throughout the United States (Hawaii, South Dakota, Vermont and Wyoming excluded), the District of Columbia, Puerto Rico and Canada.

We may finance our property acquisitions through a variety of means, including but not limited to individual non-recourse mortgages and through the exchange of an interest in the property for limited partnership units of the Operating Partnership. We plan to own substantially all of our assets and conduct our operations through the Operating Partnership.

 

Current Environment

The slowdown in the economy coupled with continued job losses and/or lack of job growth leads us to be cautious regarding the expected performance of 2009 for our commercial as well as multifamily residential properties.  In addition, the effect of the current economic downturn is having an impact on many retailers nationwide, including tenants of our commercial properties.  There have been many national retail chains that have filed for bankruptcy.  Analysts expect that more retailers will file for bankruptcy during 2009.  In addition to those who have filed, or may file, bankruptcy, many retailers have announced store closings and a slowdown in their expansion plans. For multifamily residential properties, in general, evictions have increased and requests for rent reductions and abatements are becoming more frequent.

U.S. and global credit and equity markets have recently undergone significant disruption, making it difficult for many businesses to obtain financing on acceptable terms or at all. As a result of this disruption, in general there has been an increase in the costs associated with the borrowings and refinancing as well as limited availability of funds for refinancing.  If these conditions continue or worsen, our cost of borrowing may increase and it may be more difficult to refinance debt obligations as they come due in the ordinary course.  Our best course of action may be to work with existing lenders to renegotiate an interim extension until the credit markets improve.  See notes 9 and 10 of notes to consolidated financial statements for discussion of maturity dates of our debt obligations.

As a result of the current environment and the direct impact it is having to certain properties, we recorded an impairment charge to our long-lived assets of $45.2 million which represents the excess of carrying value compared to fair value during the three and nine months ended September 30, 2009.  This charge is netted with a gain on disposal in the line item impairment of long-lived assets, net of gain on disposal within our consolidated statements of operations. In addition, during October 2009, we choose not to make our required debt service payments of $0.2 million on two of the five loans within the Camden portfolio, which had an outstanding principal balance of $42.3 million as of September 30, 2009.  We determined that future debt service payments on these loans would no longer be economically beneficial to us based upon the current and expected future performance of the locations associated with these two loans.   We are in current discussions with the lender regarding our default status and potential future remedies.   See Notes 7 and 9 of the notes to the consolidated financial statements.

Our operating results are impacted by the health of the North American economies.  Our business and financial performance, including collection of our accounts receivable, recoverability of assets including investments, may be adversely affected by current and future economic conditions, such as a reduction in the availability of credit, financial markets volatility, and recession.

We are not aware of any other material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting real estate generally, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from the acquisition and operation of real estate and real estate related investments, other than those referred to in this Form 10-Q.

 

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Portfolio Summary –

														Annualized Revenues based
				Year Built (Range of			Leasable Square			Percentage Occupied as				on rents at
		Location		years built)			Feet			of September 30, 2009				September 30, 2009
Wholly-Owned Real Estate Properties:
Retail
Wholly-owned:
St. Augustine Outlet Mall		St. Augustine, FL		1998				337,732			84.2	%	$	4.4 million
Oakview Power Center		Omaha, NE		1999 - 2005				177,103			99.3	%	$	2.3 million
Brazos Crossing Power Center		Lake Jackson, TX		2007-2008				61,213			100.0	%	$	0.8 million
		Subtotal wholly-owned						576,048			90.5	%
Unconsolidated Affiliated Real Estate Entities:
Orlando Outlet & Design Center		Orlando, FL		1991-2008				978,254			92.8	%	$	28.2 million
Prime Outlets Acquisition Company (18 retail outlet malls)		Various						6,394,158			93.4	%	$	118.6 million
		Subtotal unconsolidated affiliated real estate
		entities						7,372,412			93.4	%
				Retail Total				7,948,460			9.2	%
Industrial
7 Flex/Office/Industrial Bldgs from the Gulf Coast Industrial
Portfolio		New Orleans, LA		1980-2000				339,700			84.4	%	$	3.0 million
4 Flex/Industrial Bldgs from the Gulf Coast Industrial
Portfolio		San Antonio, TX		1982-1986				484,255			70.2	%	$	1.9 million
3 Flex/Industrial Buildings from the Gulf Coast Industrial
Portfolio		Baton Rouge, LA		1985-1987				182,792			96.2	%	$	1.2 million
Sarasota Industrial Property		Sarasota, FL		1992				276,316			4.2	%	$	0.1 million
				Industrial Total				1,283,063			63.5	%

										Percentage Occupied as				Annualized Revenues based
				Year Built (Range of						of				on rents at
Residential:		Location		years built)			Leasable Units			September 30, 2009				September 30, 2009
Michigan Apt's (Four Multi-Family Apartment Buildings)		Southeast MI		1965-1972				1,017			86.3	%	$	7.4 million
		Greensboro/Charlotte, NC &
Southeast Apt's (Five Multi-Family Apartment Buildings)		Tampa, FL		1980-1987				1,576			92.7	%	$	11.0 million
				Residential Total				2,593			90.2	%

 

Percentage Occupied for

the

Revenue per Available

Year to date

Nine Months Ended

Room through September

Location

Year Built

Available Rooms

September 30, 2009

30, 2009

Wholly-Owned Operating Properties:

Sugarland and Katy Highway Extended Stay Hotels

Houston, TX

1998

79,443

69.4

%

$

34.55

Percentage Occupied as

Annualized Revenues based

Leasable Square

of

on rents at

Location

Year Built

Feet

September 30, 2009

September 30, 2009

Unconsolidated Affiliated Real Estate Entities-Office:

1407 Broadway

New York, NY

1952

1,114,695

80.7

%

$

31.8 million

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