Attached files

file filename
EX-31.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.v193789_ex31-1.htm
EX-32.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.v193789_ex32-1.htm
EX-32.2 - Lightstone Value Plus Real Estate Investment Trust, Inc.v193789_ex32-2.htm
EX-31.2 - Lightstone Value Plus Real Estate Investment Trust, Inc.v193789_ex31-2.htm

SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

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 333-117367
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 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
Yes  ¨      No ¨

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 August 6, 2010, there were 31.8 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust, Inc., including shares issued pursuant to the dividend reinvestment plan.  
 


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 June 30, 2010 (unaudited) and December 31, 2009
3
     
 
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2010 and 2009
4
     
 
Consolidated Statement of Stockholders’ Equity and Comprehensive Income (unaudited) for the Six Months Ended June 30, 2010
5
     
 
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2010 and 2009
6
     
 
Notes to Consolidated Financial Statements
7
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
42
     
Item 4T.
Controls and Procedures
43
     
PART II
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
43
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
44
     
Item 3.
Defaults Upon Senior Securities
44
     
Item 4.
Removed and Reserved
44
     
Item 5.
Other Information
44
     
Item 6.
Exhibits
44

 
2

 

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
   
June 30, 2010
   
December 31, 2009
 
   
(unaudited)
       
Assets
           
Investment property:
           
Land
  $ 50,410,265     $ 50,702,303  
Building
    206,807,213       211,668,479  
Construction in progress
    50,365       284,952  
Gross investment property
    257,267,843       262,655,734  
Less accumulated depreciation
    (13,666,330 )     (15,570,596 )
Net investment property
    243,601,513       247,085,138  
Investments in unconsolidated affiliated real estate entities
    109,460,592       115,972,466  
Investment in affiliate, at cost
    5,672,996       7,658,337  
Cash and cash equivalents
    6,371,866       17,076,320  
Marketable securities
    160,278       840,877  
Restricted escrows
    7,222,269       5,882,766  
Tenant accounts receivable (net of allowance for doubtful account of $305,697 and $298,389, respectively)
    1,368,424       892,042  
                 
Other accounts receivable
    5,419       23,182  
Acquired in-place lease intangibles, net
    495,438       641,487  
Acquired above market lease intangibles, net
    173,900       239,360  
Deferred intangible leasing costs, net
    318,398       406,275  
                 
Deferred leasing costs (net of accumulated amortization of $282,854 and $353,331 respectively)
    1,479,432       1,137,052  
Deferred financing costs (net of accumulated amortization of $947,491 and $862,357 respectively)
    1,138,069       964,966  
Interest receivable from related parties
    1,992,525       1,886,449  
Prepaid expenses and other assets
    2,458,766       2,574,801  
Assets disposed of (See Note 8)
    -       26,282,358  
Total Assets
  $ 381,919,885     $ 429,563,876  
Liabilities and Stockholders' Equity
               
Mortgage payable
  $ 200,421,258     $ 202,179,356  
Accounts payable and accrued expenses
    3,450,035       3,154,371  
Due to sponsor
    1,408,264       1,349,730  
Loans due to affiliates (see Note 3)
    496,471       -  
Tenant allowances and deposits payable
    995,522       896,319  
Distributions payable
    -       5,557,670  
Prepaid rental revenues
    1,187,283       1,049,316  
Acquired below market lease intangibles, net
    486,150       663,414  
Liabilities disposed of (See Note 8)
    -       43,503,349  
Total Liabilities
    208,444,983       258,353,525  
                 
Commitments and contingencies (Note 17)
               
Stockholders' equity:
               
Company's Stockholders Equity:
               
                 
Preferred shares, $1 Par value, 10,000,000 shares authorized,  none outstanding
    -       -  
                 
Common stock, $.01 par value; 60,000,000 shares authorized, 31,828,941 and 31,528,353 shares issued and outstanding in 2010 and 2009, respectively
    318,289       315,283  
Additional paid-in-capital
    283,548,296       280,763,558  
Accumulated other comprehensive income
    12,245       326,077  
Accumulated distributions in excess of net loss
    (146,645,334 )     (149,702,633 )
Total Company's stockholder’s equity
    137,233,496       131,702,285  
Noncontrolling interests
    36,241,406       39,508,066  
Total Stockholders' Equity
    173,474,902       171,210,351  
Total Liabilities and Stockholders' Equity
  $ 381,919,885     $ 429,563,876  

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

 
3

 

PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
 
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)  

   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2010
   
June 30, 2009
   
June 30, 2010
   
June 30, 2009
 
Revenues:
                       
Rental income
  $ 7,288,988     $ 8,014,770     $ 14,410,625     $ 15,896,815  
Tenant recovery income
    1,163,083       1,044,888       2,361,081       2,233,632  
Total revenues
    8,452,071       9,059,658       16,771,706       18,130,447  
                                 
Expenses:
                               
Property operating expenses
    3,042,229       3,237,628       6,365,320       6,551,020  
Real estate taxes
    952,956       929,238       1,918,602       1,887,471  
Loss on long-lived assets
    1,149,574       -       1,423,678       -  
General and administrative costs
    2,228,253       2,311,515       5,261,572       3,697,957  
Depreciation and amortization
    1,412,846       2,176,023       2,879,590       4,305,601  
Total operating expenses
    8,785,858       8,654,404       17,848,762       16,442,049  
Operating (loss)/income
    (333,787 )     405,254       (1,077,056 )     1,688,398  
                                 
Other income, net
    99,672       142,345       365,238       271,920  
Interest income
    1,046,554       946,639       2,133,184       2,038,055  
Interest expense
    (3,047,598 )     (3,024,107 )     (5,973,125 )     (5,966,286 )
Gain/(loss) on sale of marketable secuirites
    66,756       (843,896 )     66,756       (843,896 )
Other than temporary impairment - marketable securities
    -       (3,373,716 )     -       (3,373,716 )
Loss from investments in unconsolidated affiliated real estate entities
    (2,034,335 )     (849,155 )     (3,716,476 )     (740,219 )
                                 
Net loss from continuing operations
    (4,202,738 )     (6,596,636 )     (8,201,479 )     (6,925,744 )
                                 
Net income/(loss) from discontinued operations
    17,070,221       (397,906 )     16,845,653       (827,102 )
                                 
Net income/(loss)
    12,867,483       (6,994,542 )     8,644,174       (7,752,846 )
Less: net (income)/loss attributable to noncontrolling interests
    (200,469 )     90,097       (126,490 )     93,116  
Net income/(loss) attributable to Company's common shares
  $ 12,667,014     $ (6,904,445 )   $ 8,517,684     $ (7,659,730 )
                                 
Basic and diluted net income/(loss) per Company's common share
                               
Continuing operations
  $ (0.14 )   $ (0.21 )   $ (0.26 )   $ (0.22 )
Discontinued operations
    0.54       (0.01 )     0.53       (0.03 )
Net income/(loss) per Company's common share, basic and diluted
  $ 0.40     $ (0.22 )   $ 0.27     $ (0.25 )
                                 
Weighted average number of common shares outstanding, basic and diluted
    31,833,231       31,205,067       31,725,364       31,157,435  

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

 
4

 

PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPRESHENSIVE INCOME
(UNAUDITED)

                                 
Accumulated
                   
   
Preferred Shares
   
Common Shares
   
Additional
   
Other
   
Accumulated
             
   
Preferred
         
Common
         
Paid-In
   
Comprehensive
   
Distributions in
   
Total Noncontrolling
   
Total
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Income
   
Excess of Net Income
   
Interests
   
Equity
 
BALANCE, December 31, 2009
    -     $ -       31,528,353     $ 315,283     $ 280,763,558     $ 326,077     $ (149,702,633 )   $ 39,508,066     $ 171,210,351  
                                                                         
Comprehensive income:
                                                                       
Net income
    -       -       -       -       -       -       8,517,684       126,490       8,644,174  
Unrealized loss on available for sale securities
    -       -       -       -       -       (181,133 )     -       (2,866 )     (183,999 )
Reclassification adjustment for gain realized in net income
                                            (132,699 )             (2,101 )     (134,800 )
Total comprehensive income
                                                                    8,325,375  
                                                                         
Distributions declared
    -       -       -       -       -       -       (5,460,385 )     -       (5,460,385 )
Distributions paid to noncontrolling interests
    -       -       -       -       -       -       -       (3,388,183 )     (3,388,183 )
Redemption and cancellation of shares
                    (166,919 )     (1,669 )     (1,651,903 )                     -       (1,653,572 )
Shares issued from distribution reinvestment program
    -       -       467,507       4,675       4,436,641       -       -       -       4,441,316  
                                                                         
BALANCE, June 30, 2010
    -     $ -       31,828,941     $ 318,289     $ 283,548,296     $ 12,245     $ (146,645,334 )   $ 36,241,406     $ 173,474,902  

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

 
5

 

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)
   
For the Six Months Ended
 
   
June 30, 2010
   
June 30, 2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
             
Net income/(loss)
  $ 8,644,174     $ (7,752,846 )
                 
Less net income/(loss) - discontinued operations
    16,845,653       (827,102 )
Net loss from continuing operations
  $ (8,201,479 )   $ (6,925,744 )
Adjustments to reconcile net income/(loss) to net cash  provided by operating activities:
               
Depreciation and amortization
    2,680,995       4,018,457  
(Gain)/loss on sale of marketable securities
    (66,756 )     843,896  
Realized loss on impairment of marketable securities
    -       3,373,716  
Amortization of deferred financing costs
    142,664       153,727  
Amortization of deferred leasing costs
    198,595       287,144  
Amortization of above and below-market lease intangibles
    (28,956 )     (206,906 )
Loss on long-lived assets
    1,423,678       -  
Equity in loss from investments in unconsolidated affiliated real estate entities
    3,716,476       740,219  
Provision for bad debts
    128,922       447,437  
Changes in assets and liabilities:
               
Increase in prepaid expenses and other assets
    30,901       398,958  
(Decrease)/increase in tenant and other accounts receivable
    (587,541 )     1,354,106  
Increase/(decrease) in tenant allowance and security deposits payable
    25,585       (24,024 )
Increase/(decrease) in accounts payable and accrued expenses
    393,288       (2,303,817 )
Decrease in due to Sponsor
    -       (1,127,514 )
Increase in prepaid rents
    137,967       137,668  
Net cash (used in)/provided by operating activities - continuing operations
    (5,661 )     1,167,323  
Net cash provided by operating activities - discontinued operations
    1,168,701       561,046  
Net cash provided by operating activities
    1,163,040       1,728,369  
CASH FLOWS USED IN INVESTING ACTIVITIES:
               
Purchase of investment property, net
    (984,046 )     (5,809,110 )
Proceeds from sale of marketable securities
    428,556       5,521,106  
Redemption payments from investment in affiliate
    1,985,341       1,241,665  
Purchase of investment in unconsolidated affiliated real estate entity
    (21,325 )     (12,859,177 )
Funding of restricted escrows
    (1,339,503 )     (397,705 )
Net cash provided by/(used in) investing activities - continuing operations
    69,023       (12,303,221 )
Net cash used in investing activities - discontinued operations
    (1,541,121 )     (559,388 )
Net cash used in investing activities
    (1,472,098 )     (12,862,609 )
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Mortgage payments
    (1,758,098 )     (1,738,391 )
Payment of loan fees and expenses
    (329,100 )     (22,911 )
Proceeds from loans due to affiliates
    3,310,295       -  
Redemption and cancellation of common stock
    (1,653,572 )     (2,439,760 )
Proceeds from issuance of special general partnership units
    -       6,982,534  
Issuance of note receivable to noncontrolling interest
    -       (1,657,708 )
Distribution received from discontinued operations
    26,345       -  
Distributions paid to noncontrolling interests
    (3,388,183 )     (1,775,233 )
Distributions paid to Company's common stockholders
    (6,576,738 )     (6,113,030 )
Net cash used in financing activities - continuing operations
    (10,369,051 )     (6,764,499 )
Net cash used in financing activities - discontinued operations
    (26,345 )     -  
Net cash used in financing activities
    (10,395,396 )     (6,764,499 )
Net change in cash and cash equivalents
    (10,704,454 )     (17,898,739 )
Cash and cash equivalents, beginning of period
    17,076,320       66,106,067  
Cash and cash equivalents, end of period
  $ 6,371,866     $ 48,207,328  
                 
Cash paid for interest
  $ 5,830,301     $ 7,026,597  
Distributions declared
  $ 5,460,385     $ 16,257,530  
Value of shares issued from distribution reinvestment program
  $ 4,441,316     $ 4,699,779  
Loan due to affiliate converted to a distribution from investment in unconsolidated affiliated real estate entity
  $ 2,816,724     $ -  
                 
Issuance of units in exchange for investment in unconsolidated affiliated real estate entity
  $ -     $ 55,988,411  

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

 
6

 

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 (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 Company is structured as an umbrella partnership real estate investment trust, or UPREIT, and substantially all of the Company’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 Company 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.

As of June 30, 2010, on a collective basis, the Company either wholly owned or owned interests in 23 retail properties containing a total of approximately 7.9 million square feet of retail space, 15 industrial properties containing a total of approximately 1.3 million square feet of industrial space, 7 multi-family properties containing a total of 1,805 units, 2 hotel properties containing a total of 290 rooms and 1 office property containing a total of approximately 1.1 million square feet of office space.  All of its properties are located within the United States. As of June 30, 2010, the retail properties, the industrial properties, the multi-family properties and the office property were 93%, 61%, 89% and 76% occupied based on a weighted average basis, respectively. Its hotel properties’ average revenue per available room was $27 and occupancy was 70% for the six months ended June 30, 2010.
 
On December 8, 2009, the Company signed a definitive agreement to dispose of a substantial portion of its retail properties; its St. Augustine Outlet center plus its interests in its investments in Prime Outlets Acquisitions Company (“POAC”), which includes 18 retail properties and Mill Run, LLC (“Mill Run”), which includes 2 of its retail properties.  On June 28, 2010, the aforementioned definitive agreement was modified to remove St. Augustine from the terms of the agreement.  As result, St. Augustine no longer meets the criteria as held for sale (see note 7).   Upon closing of the transaction, the Company is expecting to receive $239.5 million in total consideration after transaction expenses, of which approximately $187.3 million will be in the form of cash and the remainder in the form of equity, which may not be available for sale until July 2013.  The equity will be interests that are exchangeable for common units of the operating partnership of Simon Property Group. 

We expect the transaction to be completed during second half of 2010. At a meeting on May 13, 2010, the board of directors of the Company (the “Board”) made the decision to distribute proceeds to the shareholders equal to the estimated tax liability, if any, they would accrue from the transaction.  Subject to change based on market conditions that may prevail when the transaction closes and the proceeds are received, the Board further determined to direct the reinvestment of the balance of the cash proceeds.  In reaching its determination, the board considered that, in the event all proceeds were distributed, the Company would need to substantially reduce or eliminate the distribution to shareholders. The Board concluded that reinvesting a significant portion of the proceeds will allow the Company to take advantage of the current real estate environment and is consistent with our shareholders’ original expectation of being invested in the Company’s common shares for seven to ten years.

During the three months ended June 30, 2010, as a result of the Company defaulting on the debt related to two properties due to the properties no longer being economically beneficial to the Company, the lender foreclosed on these two properties.  As a result of the foreclosure transactions, the debt associated with these two properties of $42.3 million was extinguished and the obligations were satisfied with the transfer of the properties’ assets and working capital.   As of June 30, 2010, the Company no longer owns these two properties.  These two properties during the three and six months ended June 30, 2010 and 2009 have been classified as discontinued operations on a historical basis.  The transactions resulted in a gain on debt extinguishment of $17.2 million which is included in discontinued operations (see note 8).   Accordingly, the assets and liabilities of these two properties are reclassified as assets and liabilities disposed of on the consolidated balance sheet as of December 31, 2009.

During the three months ended June 30, 2010, the Company decided to not make the required debt service payments of $65,724 in the month of June and thereafter on a loan collateralized by an apartment property located in North Carolina, which represents 220 units of the 1,805 units owned in the multifamily segment.  This loan has an aggregate outstanding principal balance of $9.1 million as of June 30, 2010.  The Company determined that future debt service payments on this loan would no longer be economically beneficial to the Company based upon the current and expected future performance of the property associated with this loan.  See Notes 9 and 10.

 
7

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

 
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 the Company exercises financial and operating control). As of June 30, 2010, 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.  
 
The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of  the Company and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. The accompanying unaudited condensed consolidated financial statements of Lightstone Value Plus Real Estate Investment Trust, Inc. and its Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The unaudited consolidated statements of operations for interim periods are not necessarily indicative of results for the full year or any other period.

 Reclassifications
 
Certain prior period amounts have been reclassified to conform to the current year presentation.

New Accounting Pronouncements
  
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”, which was primarily codified into Topic 810 in the ASC.  This standard requires ongoing assessments to determine whether an entity is a variable entity and requires qualitative analysis to determine whether an enterprise’s variable interest(s) give it a controlling financial interest in a variable interest entity. In addition, it requires enhanced disclosures about an enterprise’s involvement in a variable interest entity. This standard is effective for the fiscal year that begins after November 15, 2009. The Company adopted this standard on January 1, 2010 and the adoption did not have a material impact on the Company's consolidated financial statements.

In January 2010, the FASB issued FASB Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”.  ASU No. 2010-06 amends ASC 820 and clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements. This ASU becomes effective for the Company on January 1, 2010. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

The Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial position, results of operations and cash flows, or do not apply to its operations.

 
8

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

 
3.
Investments in Unconsolidated Affiliated Real Estate Entities

The entities listed below are partially owned by the Company.  The Company accounted for these investments under the equity method of accounting as the Company exercises significant influence, but does not control these entities. A summary of the Company’s investments in unconsolidated affiliated real estate entities is as follows:

             
As of
 
Real Estate Entity
 
Dates Acquired
 
Ownership
%
   
June 30, 2010
   
December 31, 2009
 
Prime Outlets Acquistions Company ("POAC")
 
March 30, 2009 & August 25, 2009
    40.00 %   $ 75,624,611     $ 84,291,011  
Mill Run LLC ("Mill Run")
 
June 26, 2008 & August 25, 2009
    36.80 %     32,361,140       29,809,641  
1407 Broadway Mezz II LLC ("1407 Broadway")
 
January 4, 2007
    49.00 %     1,474,840       1,871,814  
Total Investments in unconsolidated affiliated real estate entities
              $ 109,460,592     $ 115,972,466  

Prime Outlets Acquisitions Company

As of June 30, 2010, the Operating Partnership owns a 40% membership interest in POAC (“POAC Interest”).  The POAC Interest is a non-managing interest, with certain consent rights with respect to major decisions. An affiliate of the Company’s Sponsor, is the majority owner and manager of POAC.  Profit and cash distributions will be allocated in accordance with each investor’s ownership percentage.

As the Company has recorded this investment in accordance with the equity method of accounting, its portion of POAC’s total indebtedness of $1.2 billion as of June 30, 2010 is not included in its investment.   In connection with the acquisition of the investment in POAC, the Company’s advisor charged an acquisition fee equal to 2.75% of the acquisition price, or approximately $15.4 million.  In addition, the Company incurred other transactions fees associated with the acquisition of the POAC Interest of approximately $10.4 million.

On December 8, 2009, the REIT has entered into a definitive agreement to dispose of its retail outlet center interests that include its investments in Mill Run and POAC.  See Note 1.

During March 2010, the Company entered a demand grid note to borrow up to $20 million from POAC.  During the quarters ended March 31, 2010 and June 30, 2010, the Company received loan proceeds from POAC associated with this demand grid note in the amount of $2.0 million and $0.8 million, respectively. The loan bears interest at libor plus 2.5%.  The principal and interest on this loan is due the earlier of February 28, 2020 or on demand.  On June 30, 2010, the principal balance of $2.8 million, together with accrued and unpaid interest of $16,724, was converted to be a distribution by POAC to the Company and is reflected as a reduction in the Company’s investment in POAC.

POAC Financial Information

The Company’s carrying value of its POAC Interest differs from its share of member’s equity reported in the condensed balance sheet of POAC due to the Company’s cost of its investments in excess of the historical net book values of POAC.  The Company’s additional basis allocated to depreciable assets is recognized on a straight-line basis over the lives of the appropriate assets.

 
9

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

The following table represents the unaudited condensed income statement for POAC for the three and six months ended June 30, 2010, the three months ended June 30, 2009 and the period March 30, 2009 through June 30, 2009:

   
For the Three
Months Ended
June 30, 2010
   
For the Three
Months Ended
June 30, 2009
   
For the Six
Months Ended
June 30, 2010
   
For the Period
March 30, 2009 to
June 30, 2009
 
Revenue
  $ 46,412,723     $ 44,568,048     $ 91,814,959     $ 45,553,685  
                                 
Property operating expenses
    21,682,276       20,506,710       41,618,506       21,033,361  
Depreciation and amortization
    9,699,040       10,466,817       19,004,593       10,622,138  
Operating income
    15,031,407       13,594,521       31,191,860       13,898,186  
                                 
Interest expense and other, net
    (15,127,042 )     (11,419,904 )     (29,350,194 )     (11,690,297 )
Net income/(loss)
    (95,635 )     2,174,617       1,841,666       2,207,889  
Company's share of net income/(loss)
    (38,254 )     543,654       736,666       551,972  
Additional depreciation and amortization expense (1)
    (3,168,672 )     (1,860,000 )     (6,607,668 )     (1,860,000 )
Company's loss from investment
  $ (3,206,926 )   $ (1,316,346 )   $ (5,871,002 )   $ (1,308,028 )

 
1.
Additional depreciation and amortization expense relates to the amortization of the difference between the cost of the POAC Interest and the amount of the underlying equity in net assets of the POAC.

The following table represents the unaudited condensed balance sheet for POAC as of June 30, 2010 and December 31, 2009:

   
As of
   
As of
 
   
June 30, 2010
   
December 31, 2009
 
             
Real estate, at cost (net)
  $ 746,914,904     $ 757,385,791  
Intangible assets
    9,581,304       11,384,965  
Cash and restricted cash
    39,652,802       44,891,427  
Other assets
    54,662,475       59,050,970  
Total Assets
  $ 850,811,485     $ 872,713,153  
                 
Mortgage payable
    1,175,843,314     $ 1,183,285,466  
Other liabilities
    37,252,463       46,447,451  
Member capital
    (362,284,292 )     (357,019,764 )
Total liabilities and members' capital
  $ 850,811,485     $ 872,713,153  

Mill Run Interest

As of June 30, 2010, our operating partnership owns a 36.8% membership interest in Mill Run (“Mill Run Interest”).  The Mill Run Interest includes Class A and B membership shares and is a non-managing interest, with consent rights with respect to certain major decisions. The Company’s Sponsor is the managing member and owns 55% of Mill Run.  Profit and cash distributions will be allocated in accordance with each investor’s ownership percentage after consideration of Class B members adjusted capital balance.

As the Company has recorded this investment in accordance with the equity method of accounting, its portion of Mill Run’s total indebtedness of $256.7 million as June 30, 2010 is not included in the Company’s investment.   In connection with the acquisition of the investment in Mill Run, the Company’s advisor charged an acquisition fee equal to 2.75% of the acquisition price, or approximately $3.6 million plus we incurred other transactions fees of $2.9 million.

On December 8, 2009, the REIT has entered into a definitive agreement to dispose of its retail outlet center interests that include the investments in Mill Run and POAC.  See Note 1.

 
10

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

Mill Run Financial Information

The Company’s carrying value of its Mill Run Interest differs from its share of member’s equity reported in the condensed balance sheet of Mill Run due to the Company’s cost of its investments in excess of the historical net book values of Mill Run.  The Company’s additional basis allocated to depreciable assets is recognized on a straight-line basis over the lives of the appropriate assets.

The following table represents the unaudited condensed income statement for Mill Run for the three and six months ended June 30, 2010 and 2009:

   
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30, 2010
   
June 30, 2009
   
June 30, 2010
   
June 30, 2009
 
Revenue
  $ 12,097,477     $ 10,887,821     $ 23,992,911     $ 21,531,573  
                                 
Property operating expenses
    3,244,643       3,553,386       6,295,727       6,974,357  
Depreciation and amortization
    1,972,174       2,368,535       5,013,415       4,729,688  
Operating income
    6,880,660       4,965,900       12,683,769       9,827,528  
                                 
Interest expense and other, net
    (1,739,877 )     (1,161,920 )     (3,371,781 )     (3,111,000 )
Net income
    5,140,783       3,803,980       9,311,988       6,716,528  
Company's share of net income
    1,891,808       857,417       3,426,812       1,513,905  
Additional depreciation and amortization expense (1)
    (434,240 )     (393,933 )     (875,312 )     (633,804 )
Company's income from investment
  $ 1,457,568     $ 463,484     $ 2,551,500     $ 880,101  

 
1.
Additional depreciation and amortization expense relates to the amortization of the difference between the cost of the Mill Run Interest and the amount of the underlying equity in net assets of the Mill Run.

The following table represents the unaudited condensed balance sheet for Mill Run as of June 30, 2010 and December 31, 2009:
   
As of
   
As of
 
   
June 30, 2010
   
December 31, 2009
 
             
Real estate, at cost (net)
  $ 252,980,844     $ 257,274,810  
Intangible assets
    594,891       644,421  
Cash and restricted cash
    12,110,938       6,410,480  
Other assets
    9,564,447       9,755,013  
Total Assets
  $ 275,251,120     $ 274,084,724  
                 
Mortgage payable
  $ 256,669,969     $ 265,195,763  
Other liabilities
    22,647,652       22,267,449  
Member capital
    (4,066,501 )     (13,378,488 )
Total liabilities and members' capital
  $ 275,251,120     $ 274,084,724  

1407 Broadway
 
As of June 30, 2010, the Company has a 49% ownership in 1407 Broadway.  As the Company has recorded this investment in accordance with the equity method of accounting, its portion of 1407 Broadway’s total indebtedness of $123.3 million as June 30, 2010 is not included in the Company’s investment.  Earnings for this investment are recognized in accordance with this investment agreement and where applicable, based upon an allocation of the investment’s net assets at book value as if the investment was hypothetically liquidated at the end of each reporting period.

 
11

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

During March 2010, the Company entered a demand grid note to borrow up to $20 million from 1407 Broadway. As of June 30, 2010, the Company has received loan proceeds from the 1407 Broadway associated with this demand grid note in the amount of $0.5 million. The loan bears interest at libor plus 2.5%. The principal and interest on this loan is due the earlier of February 28, 2020 or on demand. The principal and interest on the loan is recorded in loans due to affiliates in the consolidated balance sheets.

1407 Broadway Financial
 
The following table represents the condensed income statement derived from unaudited financial statements for 1407 Broadway for the three and six months ended June 30, 2010 and 2009:

   
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30, 2010
   
June 30, 2009
   
June 30, 2010
   
June 30, 2009
 
                         
Total Revenue
  $ 8,484,306     $ 9,226,665     $ 17,346,045     $ 18,834,186  
Property operating expenses
    6,349,728       6,257,064       12,828,298       13,225,823  
Depreciation & Amortization
    1,541,905       2,318,051       3,084,673       4,483,673  
Operating income
    592,673       651,550       1,433,074       1,124,690  
Interest Expense and other, net
    (1,174,258 )     (643,984 )     (2,243,225 )     (1,762,021 )
Net income/(loss)
  $ (581,585 )   $ 7,566     $ (810,151 )   $ (637,331 )
Company's share of net income/(loss) (49%)
  $ (284,977 )   $ 3,707     $ (396,974 )   $ (312,292 )

The following table represents the condensed balance sheet derived from unaudited financial statements for 1407 Broadway as of June 30, 2010 and December 31, 2009:

   
As of
   
As of
 
   
June 30, 2010
   
December 31, 2009
 
             
Real estate, at cost (net)
  $ 111,682,163     $ 111,803,186  
Intangible assets
    1,420,578       1,845,941  
Cash and restricted cash
    13,418,139       10,226,017  
Other assets
    13,522,866       11,887,040  
Total assets
  $ 140,043,746     $ 135,762,184  
                 
Mortgage payable
  $ 123,304,302     $ 116,796,263  
Other liabilities
    13,739,876       15,156,202  
Member capital
    2,999,568       3,809,719  
Total liabilities and members' capital
  $ 140,043,746     $ 135,762,184  
 
Debt Compliance for Investments in Unconsolidated Affiliated Real Estate Entities
 
The debt agreements of the unconsolidated affiliated real estate entities, which the Company has an equity investment in, are subject to various financial and reporting covenants and requirements.  Noncompliance with these requirements could constitute an event of default, which could allow the lenders to accelerate the repayment of the loan, or to exercise other remedies.  Although all of these real estate entities are current on payment of their respective debt obligations as of June 30, 2010, certain of these entities have instances of noncompliance with other requirements stipulated by their applicable debt agreements.  These noncompliance issues do not constitute an event of default until the borrower is notified by the lender.   In certain cases, the borrower has an ability to cure the noncompliance within a specified period.   To date, these entities have not been notified by the lenders.  Should the lender take action to exercise its remedies, it could have an unfavorable impact on these entities’ cash flows and rights as owner of any investment holdings in the underlying property.    Management believes that these entities will satisfactorily resolve these matters with the applicable lender for each instance where noncompliance has occurred.

 
12

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

 
4.
Investment in Affiliate

 Park Avenue Funding

On April 16, 2008, the Company made a preferred equity contribution of $11,000,000 (the “Contribution”) to PAF-SUB LLC (“PAF”), a wholly-owned subsidiary of Park Avenue Funding LLC (“Park Avenue”), in exchange for membership interests of PAF with certain rights and preferences described below (the “Preferred Units”). Park Avenue is a real estate lending company making loans, including first or second mortgages, mezzanine loans and collateral pledges of mortgages, to finance real estate transactions. Property types considered include multi-family, office, industrial, retail, self-storage, parking and land. Both PAF and Park Avenue are affiliates of our Sponsor.
 
PAF’s limited liability company agreement was amended on April 16, 2008 to create the Preferred Units and admit the Company as a member. The Preferred Units are entitled to a cumulative preferred distribution at the rate of 10% per annum, payable quarterly. In the event that PAF fails to pay such distribution when due, the preferred distribution rate will increase to 17% per annum. The Preferred Units are redeemable, in whole or in part, at any time at the option of the Company upon at least 180 days’ prior written notice (the “Redemption”). In addition, the Preferred Units are entitled to a liquidation preference senior to any distribution upon dissolution with respect to other equity interests of PAF in an amount equal to (x) the Contribution plus any accrued but unpaid distributions less (y) any Redemption payments.

In connection with the Contribution, the Company and Park Avenue entered into a guarantee agreement on April 16, 2008, whereby Park Avenue unconditionally and irrevocably guarantees payment of the Redemption amounts when due (the “Guarantee”). Also, Park Avenue agrees to pay all costs and expenses incurred by the Company in connection with the enforcement of the Guarantee.

The Company does not have any voting rights for this investment, and does not have significant influence over this investment. The Company accounts for this investment under the cost method. Total accrued distributions related to this investment totaled $47,275 and $65,945 at June 30, 2010 and at December 31, 2009, respectively, and are included in interest receivable from related parties in the consolidated balance sheets.   Through June 30, 2010, the Company received redemption payments from PAF of $5.3 million, of which $2.0 million was received during the six months ended June 30, 2010.  As of June 30, 2010, the Company’s investment in PAF is $5.7 million and is included in investment in affiliate, at cost in the consolidated balance sheets.  Subsequent to June 30, 2010, the Company received an additional redemption payment of $3.0 million.

 
5.
Marketable Securities and Fair Value Measurements

The following is a summary of the Company’s available for sale securities at June 30, 2010 and December 31, 2009:

   
As of June 30, 2010
   
As of December 31, 2009
 
   
Adjusted Cost
   
Unrealized
Gain/(Loss)
   
Fair Value
   
Adjusted Cost
   
Unrealized
Gain/(Loss)
   
Fair Value
 
Equity Securities, primarily REITs
  $  104,341       55,937     $  160,278     $  466,142     $  374,735     $  840,877  
                                                 
Total Marketable Securities - available for sale
  $  104,341     $  55,937     $  160,278     $  466,142     $  374,735     $  840,877  

In May 2010, the Company sold 20,000 shares of equity securities with an aggregate cost basis of $361,800 and received net proceeds of $428,556.   As a result of the sale, the Company reclassified $134,800 of unrealized gain from accumulated other comprehensive income and recognized a realized gain of $66,756, which is included in gain/(loss) on sale of marketable securities in the consolidated statements of operations. 

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

 
13

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

 
Level 1 – Quoted prices in active markets for identical assets or liabilities.

 
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets measured at fair value on a recurring basis as of June 30, 2010 are as follows:

   
Fair Value Measurement Using
       
As of June 30, 2010
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Equity Securities, primiarily REITs
  $ 160,278     $ -     $ -     $ 160,278  
Total Marketable securities - available for sale
  $ 160,278     $ -     $ -     $ 160,278  

Assets measured at fair value on a recurring basis as of December 31, 2009 are as follows:

   
Fair Value Measurement Using
       
As of December 31, 2009
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Equity Securities, primiarily REITs
    840,877     $ -     $ -     $ 840,877  
Total Marketable securities - available for sale
  $ 840,877     $ -     $ -     $ 840,877  

The Company did not have any other significant financial assets or liabilities, which would require revised valuations that are recognized at fair value.

 
6.
Intangible Assets

At June 30, 2010, the Company had intangible assets relating to above-market leases from property acquisitions, intangible assets related to leases in place at the time of acquisition, intangible assets related to leasing costs, and intangible liabilities relating to below-market leases from property acquisitions.
 
The following table sets forth the Company’s intangible assets/ (liabilities) as of June 30, 2010 and December 31, 2009:

   
At June 30, 2010
   
At December 31, 2009
 
   
Cost
   
Accumulated
Amortization
   
Net
   
Cost
   
Accumulated
Amortization
   
Net
 
                                     
Acquired in-place lease intangibles
  $ 1,762,527     $ (1,267,089 )   $ 495,438     $ 2,625,791     $ (1,984,304 )   $ 641,487  
                                                 
Acquired above market lease intangibles
    538,711       (364,811 )     173,900       1,026,821       (787,461 )     239,360  
                                                 
Deferred intangible leasing costs
    1,027,784       (709,386 )     318,398       1,354,295       (948,020 )     406,275  
                                                 
Acquired below market lease intangibles
    (1,332,116 )     845,966       (486,150 )     (3,012,740 )     2,349,326       (663,414 )

During the three and six months ended June 30, 2010, the Company wrote off fully amortized acquired intangible assets of approximately $0.2 million and $1.1 million resulting in a reduction of cost and accumulated amortization of intangible assets at June 30, 2010 compared to the December 31, 2009.  There were no additions during the three and six months ended June 30, 2010.

 
14

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

The following table presents the projected amortization benefit of the acquired above market lease costs and the below market lease costs during the next five years and thereafter at June 30, 2010:

Amortization expense/(benefit) of:
 
Remainder
of 2010
   
2011
   
2012
   
2013
   
2014
   
Thereafter
   
Total
 
                                                         
Acquired above market lease value
  $ 35,377     $ 52,826     $ 23,379     $ 14,425     $ 14,425     $ 33,468     $ 173,900  
                                                         
Acquired below market lease value
    (100,144 )     (125,832 )     (87,911 )     (86,625 )     (42,819 )     (42,819 )     (486,150 )
                                                         
Projected future net rental income increase
  $ (64,767 )   $ (73,006 )   $ (64,532 )   $ (72,200 )   $ (28,394 )   $ (9,351 )   $ (312,250 )

 Amortization benefit of acquired above and below market lease values is included in total revenues in our consolidated statement of operations was $11,239 and $0.1 million  for the three months ended June 30, 2010 and 2009, respectively and $28,957and $0.2 million for the six months ended June 30, 2010 and 2009, respectively.

The following table presents the projected amortization expense of the acquired in-place lease intangibles and acquired leasing costs during the next five years and thereafter at June 30, 2010:

Amortization expense of:
 
Remainder
of 2010
   
2011
   
2012
   
2013
   
2014
   
Thereafter
   
Total
 
                                                         
Acquired in-place leases value
  $ 77,919     $ 109,287     $ 72,836     $ 66,883     $ 65,565     $ 102,948     $ 495,438  
                                                         
Deferred intangible leasing costs value
    52,919     $ 76,368     $ 46,358     $ 41,219       38,922     $ 62,612       318,398  
                                                         
Projected future amortization expense
  $ 130,838     $ 185,655     $ 119,194     $ 108,102     $ 104,487     $ 165,560     $ 813,836  

Actual total amortization expense included in depreciation and amortization expense in our consolidated statement of operations was $0.2 million and $0.2 million for the three months ended June 30, 2010 and 2009, respectively and $0.2 million and $0.3 million for the six months ended June 30, 2010 and 2009, respectively.

 
7.
Assets and Liabilities Previously Classified as Held for Sale and Discontinued Operations

On December 8, 2009, the Company signed a definitive agreement to dispose of its St. Augustine Outlet center (“St. Augustine”) as part of an agreement to dispose of its interests in its investments in POAC and Mill Run. On June 28, 2010, the definitive agreement was modified to remove St. Augustine from the terms of the agreement. As a result of such removal, the St. Augustine assets and liabilities no longer meet the criteria for classification as held for sale as of June 30, 2010 since management does not have an active plan to market this outlet center for sale. Therefore, the Company has reclassified the assets and liabilities related to St. Augustine from assets and liabilities held for sale to held and used on the consolidated balance sheets for all periods presented. The reclassification resulted in an adjustment of $1.2 million to St. Augustine’s assets balance to the lower of its carrying value net of any depreciation (amortization) expense that would have been recognized had the assets been continuously classified as held and used or the fair value on June 28, 2010, and the $1.2 million adjustment is included in loss on long-lived assets in the consolidated statements of operations for the three and six months period ended June 30, 2010. St. Augustine’s results of operations for all periods presented have been reclassified from discontinued operations to the Company’s continuing operations.

To date, the Company has not recorded an impairment charge related to the expected sale of its investments in POAC and Mill Run, as the Company’s carrying value of these two investments are lower than the expected proceeds, after consideration of debt to be assumed by buyer.

 
15

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)

The following is a summary of the financial information related to St. Augustine which were previously classified as held for sale and discontinued operations.

   
For the Three Months ended
   
For the Six Months ended
 
   
June 30,
2010
   
June 30,
2009
   
June 30,
2010
   
June 30,
2009
 
Revenue
  $ 1,708,882     $ 1,769,390     $ 3,408,833     $ 3,423,002  
                                 
Expenses:
                               
Property operating expenses
    510,069       641,897       1,161,905       1,283,195  
Real estate taxes
    131,484       132,737       259,548       265,074  
Loss on long-lived asset
    1,193,233       -       1,193,233       -  
General and administrative costs
    9,704       70,840       16,533       98,466  
Depreciation and amortization
    -       570,155       -       1,131,441  
Total Operating Expense
    1,844,490       1,415,629       2,631,219       2,778,176  
                                 
Operating Income
    (135,608 )     353,761       777,614       644,826  
                                 
Other income
    16,681       44,452       155,687       46,508  
Interest income
    5,218       5,016       7,698       7,985  
Interest expense
    (404,237 )     (416,164 )     (805,457 )     (838,298 )
                                 
Net income/(loss)
  $ (517,946 )   $ (12,935 )   $ 135,542     $ (138,979 )

   
As of
 
   
June 30,
2010
   
December 31,
2009
 
Net investment property
  $ 54,797,288     $ 55,787,190  
Intangible assets, net
    732,593       801,818  
Restricted escrows
    4,347,592       4,015,945  
Other assets
    966,550       944,631