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EX-31.2 - EXHIBIT 31.2 - Lightstone Value Plus Real Estate Investment Trust, Inc.v222271_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.v222271_ex32-1.htm
EX-32.2 - EXHIBIT 32.2 - Lightstone Value Plus Real Estate Investment Trust, Inc.v222271_ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.v222271_ex31-1.htm

UNITED STATES
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 March 31, 2011

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 May 5, 2011, there were approximately 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 March 31, 2011 (unaudited) and December 31, 2010
 
3
     
 
Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2011 and 2010
  
4
       
 
Consolidated Statement of Stockholders’ Equity and Comprehensive Income (unaudited) for the Three  Months Ended March 31, 2011
 
5
       
 
Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2011 and 2010
 
6
     
 
Notes to Consolidated Financial Statements
  
8
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
28
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
  
42
     
Item 4.
Controls and Procedures
  
43
     
PART II
OTHER INFORMATION
  
 
     
Item 1.
Legal Proceedings
  
44
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
  
45
     
Item 3.
Defaults Upon Senior Securities
  
45
     
Item 4.
Removed and Reserved
  
45
     
Item 5.
Other Information
  
45
     
Item 6.
Exhibits
  
45
 
 
 

 

 PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

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

   
As of March 31,
2011
   
As of December 31,
2010
 
    
(unaudited)
        
Assets
           
Investment property:
           
Land and improvements
  $ 53,283,288     $ 51,480,810  
Building and improvements
    212,796,519       207,227,594  
Construction in progress
    531,735       266,253  
Gross investment property
    266,611,542       258,974,657  
Less accumulated depreciation
    (18,164,369 )     (16,504,956 )
Net investment property
    248,447,173       242,469,701  
Investments in unconsolidated affiliated real estate entities
    15,396,885       14,890,250  
Cash and cash equivalents
    13,024,191       24,317,785  
Marketable securities, available for sale
    210,177,332       172,378,784  
Restricted marketable securities, available for sale
    37,083,056       33,945,909  
Restricted escrows
    13,205,483       16,028,108  
Tenant accounts receivable (net of allowance for doubtful accounts of $216,077 and $366,912, respectively)
    1,873,241       1,547,800  
Intangible assets, net
    3,188,683       1,795,893  
Deferred leasing costs (net of accumulated amortization of $531,642 and $694,581 respectively)
    1,710,741       1,412,047  
Deferred financing costs (net of accumulated amortization of $1,301,465 and $1,183,856 respectively)
    817,617       935,526  
Interest receivable from related parties
    1,164,501       1,949,591  
Prepaid expenses and other assets
    6,802,110       5,786,683  
Total Assets
  $ 552,891,013     $ 517,458,077  
Liabilities and Stockholders' Equity
               
Mortgage payable
  $ 195,170,908     $ 195,523,028  
Margin loan
    37,655,304       -  
Accounts payable and accrued expenses
    5,677,972       4,684,783  
Due to sponsor
    456,589       300,787  
Loans due to affiliates
    1,256,908       1,492,834  
Tenant allowances and deposits payable
    2,109,552       880,370  
Distributions payable
    5,468,202       5,604,241  
Deferred rental income
    1,208,120       1,285,160  
Acquired below market lease intangibles, net
    510,439       547,912  
Deferred gain on disposition
    32,175,788       32,175,788  
Total Liabilities
    281,689,782       242,494,903  
Commitments and contingencies (See Note 15)
               
Stockholders' equity:
               
Company's Stockholders Equity:
               
Preferred shares, $0.01 par value, 10,000,000 shares authorized,  none outstanding
    -       -  
Common stock, $.01 par value; 60,000,000 shares authorized, 31,576,542 and 31,613,622 shares issued and outstanding in 2011 and 2010, respectively
    315,765       316,136  
Additional paid-in-capital
    281,501,371       281,733,402  
Accumulated other comprehensive income
    10,178,795       4,839,775  
Accumulated distributions in excess of net earnings
    (51,998,195 )     (42,857,834 )
Total Company's stockholder’s equity
    239,997,736       244,031,479  
Noncontrolling interests
    31,203,495       30,931,695  
Total Stockholders' Equity
    271,201,231       274,963,174  
Total Liabilities and Stockholders' Equity
  $ 552,891,013     $ 517,458,077  

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 March 31,
 
   
2011
   
2010
 
             
Revenues:
           
Rental income
  $ 7,329,819     $ 6,798,287  
Tenant recovery income
    1,213,706       1,180,556  
Total revenues
    8,543,525       7,978,843  
Expenses:
               
Property operating expenses
    3,350,370       3,078,583  
Real estate taxes
    898,790       933,075  
Loss on long-lived assets
    -       (25,896 )
General and administrative costs
    1,718,301       3,014,357  
Depreciation and amortization
    1,960,868       1,425,928  
Total operating expenses
    7,928,329       8,426,047  
Operating income/(loss)
    615,196       (447,204 )
Other (loss)/income, net
    (3,641,782 )     253,762  
Interest income
    3,228,161       1,086,627  
Interest expense
    (2,975,246 )     (2,798,136 )
Loss on sale of marketable securities
    (793,088 )     -  
Loss from investments in unconsolidated affiliated real estate entities
    (232,944 )     (1,682,141 )
Net loss from continuing operations
    (3,799,703 )     (3,587,092 )
Net loss from discontinued operations
    -       (636,217 )
Net loss
    (3,799,703 )     (4,223,309 )
                 
Less: net loss attributable to noncontrolling interests
    136,380       73,979  
Net loss attributable to common shares
  $ (3,663,323 )   $ (4,149,330 )
Basic and diluted loss per common share:
               
Continuing operations
  $ (0.12 )   $ (0.11 )
Discontinued operations
    -       (0.02 )
Net loss per common share
  $ (0.12 )   $ (0.13 )
Weighted average number of common shares outstanding, basic and diluted
    31,653,060       31,616,298  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
4

 

PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
 
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPRESHENSIVE INCOME
(UNAUDITED)
 
    
Common Shares
   
Additional Paid-In
   
Accumulated Other
   
Accumulated
Distributions in
   
Total
Noncontrolling
       
    
Number of Shares
   
Amount
   
Capital
   
  Comprehensive Income
   
Excessof Net Earnings
   
Interests
   
Total Equity
 
                                           
BALANCE, December 31, 2010
    31,613,622     $ 316,136     $ 281,733,402     $ 4,839,775     $ (42,857,834 )   $ 30,931,695     $ 274,963,174  
                                                         
Comprehensive income/(loss):
                                                       
Net loss
    -       -       -       -       (3,663,323 )     (136,380 )     (3,799,703 )
Unrealized gains on available for sale securities
    -       -       -       5,156,452       -       81,173       5,237,625  
Reclassification adjustment for gain realized in net loss
    -       -       -       182,568       -       2,874       185,442  
Total comprehensive income, net
                                                    1,623,364  
                                                         
Distributions declared
    -       -       -       -       (5,477,038 )     -       (5,477,038 )
Distributions paid to noncontrolling interests
    -       -       -       -       -       (1,739,787 )     (1,739,787 )
Contributions received from noncontrolling interests
    -       -       -       -       -       2,063,920       2,063,920  
Redemption and cancellation of shares
    (238,989 )     (2,390 )     (2,148,513 )     -       -       -       (2,150,903 )
Shares issued from distribution reinvestment program
    201,909       2,019       1,916,482       -       -       -       1,918,501  
                                                         
BALANCE, March 31, 2011
    31,576,542     $ 315,765     $ 281,501,371     $ 10,178,795     $ (51,998,195 )   $ 31,203,495     $ 271,201,231  

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 Three Months Ended March 31,
 
   
2011
   
2010
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (3,799,703 )   $ (4,223,309 )
Less net loss - discontinued operations
    -       636,217  
Net loss from continuing operations
    (3,799,703 )     (3,587,092 )
                 
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
    1,762,420       1,323,592  
Mark to market adjustment on derivative financial instrument
    3,721,011       -  
Loss on sale of marketable securities
    793,088       -  
Amortization of deferred financing costs
    117,909       31,424  
Amortization of deferred leasing costs
    198,448       102,336  
Amortization of above and below-market lease intangibles
    (18,098 )     (17,717 )
Loss on long-lived assets
    -       (25,896 )
                 
Equity in loss from investments in unconsolidated affiliated real estate entities
    232,944       1,682,141  
Provision for bad debts
    (82,763 )     22,879  
Changes in assets and liabilities:
               
(Increase)/decrease in prepaid expenses and other assets
    171,439       499,951  
Increase in tenant and other accounts receivable
    (180,875 )     (293,700 )
Increase in tenant allowance and security deposits payable
    57,982       25,402  
(Decrease)/increase in accounts payable and accrued expenses
    (692,632 )     567,575  
Increase in due to Sponsor
    155,802       -  
(Decrease)/increase in deferred rental income
    (77,040 )     98,389  
Net cash provided by operating activities - continuing operations
    2,359,932       429,284  
Net cash provided by operating activities - discontinued operations
    -       808,751  
Net cash provided by operating activities
    2,359,932       1,238,035  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of investment property, net
    (9,636,301 )     (450,827 )
Capital expenditures
    (265,482 )     -  
Purchase of marketable securities
    (48,845,644 )     -  
Proceeds from sale of marketable securities
    12,539,929       -  
Redemption payments from investment in affiliate
    -       1,360,342  
Deposit for purchase of real estate
    (1,377,000 )     -  
Purchase of investment in unconsolidated affiliated real estate entities
    (437,562 )     (18,202 )
Funding from/(to) restricted escrows
    2,822,625       (743,164 )
                 
Net cash provided by/(used in) investing activities - continuing operations
    (45,199,435 )     148,149  
Net cash used in investing activities - discontinued operations
    -       (410,633 )
Net cash used in investing activities
    (45,199,435 )     (262,484 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Mortgage payments
    (352,120 )     (982,992 )
Payment of loan fees and expenses
    -       (36,250 )
Payments from loans due to affiliates
    (235,926 )     2,493,466  
Redemption and cancellation of common stock
    (2,150,903 )     (1,570,048 )
Net proceeds from margin loan
    37,655,304       -  
Distribution received from discontinued operations
    -       3,472  
Contributions received from noncontrolling interests
    2,063,920       -  
Distributions paid to noncontrolling interests
    (1,739,787 )     (1,700,540 )
Distributions paid to Company's common stockholders
    (3,694,575 )     (6,573,573 )
Net cash provided by (used in) financing activities - continuing operations
    31,545,913       (8,366,465 )
Net cash used in financing activities - discontinued operations
    -       (3,472 )
Net cash provided by (used in) financing activities
    31,545,913       (8,369,937 )
                 
Net change in cash and cash equivalents
    (11,293,590 )     (7,394,386 )
Cash and cash equivalents, beginning of period
    24,317,785       17,076,320  
Cash and cash equivalents, end of period
  $ 13,024,195     $ 9,681,934  

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

 
6

 

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 - CONTINUED
(UNAUDITED)

 
 
For the Three Months Ended March 31,
 
   
2011
   
2010
 
Supplemental disclosure of cash flow information:
           
Cash paid for interest
  $ 2,857,451     $ 2,891,585  
Distributions declared
  $ 5,477,038     $ 5,460,385  
Value of shares issued from distribution reinvestment program
  $ 1,918,501     $ 4,444,482  

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

 
7

 

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 as the general partner, held a 98.4% interest as of March 31, 2011. 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 (the “Board”) and its Chief Executive Officer.

As of March 31, 2011, on a collective basis, the Company (i) wholly owned and consolidates the operating results and financial condition of 4 retail properties containing a total of approximately 0.7 million square feet of retail space, 15 industrial properties containing a total of approximately 1.3 million square feet of industrial space, 6 multi-family residential properties containing a total of 1,585 units, and 2 hotel hospitality properties containing a total of 290 rooms, (ii) majority owned and consolidates the operating results and financial condition of 1 hotel hospitality property containing 366 rooms and a 65,000 square foot water park, and (iii) owned interests accounted for under the equity method of accounting in 1 office property containing a total of approximately 1.1 million square feet of office space and 2 development outlet center retail projects.  All of the Company’s properties are located within the United States. As of March 31, 2011, the retail properties, the industrial properties, the multi-family residential properties and the office property were 83.7%, 74.8%, 92.2% and 78.6% occupied based on a weighted-average basis, respectively. Its hotel hospitality properties’ average revenue per available room (“Rev PAR”) was $30.04 and occupancy was 67.7%, respectively, for the three months ended March 31, 2011.

During 2010, as a result of the Company defaulting on the debt related to three properties within its multi-family segment due to the properties no longer being economically beneficial to the Company, the lender foreclosed on these three properties. The operating results of these three properties through their respective dates of disposition have been classified as discontinued operations on a historical basis for all periods presented.

 
8

 

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). 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, 2010. The unaudited interim consolidated 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 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
  
There were no accounting standards adopted in the first quarter of 2011.

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.

3.
Simon Transaction

On December 8, 2009, the Company, its Operating Partnership and Pro-DFJV Holdings LLC (“PRO”), a Delaware limited liability company and a wholly-owned subsidiary of ours (collectively, the “LVP Parties”) entered into a definitive agreement (“the “Contribution Agreement”) with Simon Property Group, Inc. (“Simon Inc.”), a Delaware corporation, Simon Property Group, L.P., a Delaware limited partnership (“Simon OP”), and Marco Capital Acquisition, LLC, a Delaware limited liability company (collectively, referred to herein as “Simon”) providing for the disposition of a substantial portion of our retail properties to Simon including our (i) St. Augustine Outlet Center, which is wholly owned, (ii) 40.00% interests in its investment in Prime Outlets Acquisition Company (“POAC”), which includes 18 operating outlet center properties (the “POAC Properties”) and two development projects, Livermore Valley Holdings, LLC (“Livermore”) and Grand Prairie Holdings, LLC (“Grand Prairie”), and (iii) 36.80% interests in its investment in Mill Run, LLC (“Mill Run”), which includes 2 operating outlet center properties (the “Mill Run Properties”). On June 28, 2010, the Contribution Agreement was amended to remove the previously contemplated dispositions of St. Augustine and the Company’s 40.00% interests in both Livermore and Grand Prairie. The transactions contemplated by the Contribution Agreement, as amended, are referred to herein as the “Simon Transaction”.
 
 
9

 

Additionally, certain affiliates of our Sponsor were parties to the Contribution Agreement, pursuant to which they would simultaneously dispose of their respective interests in POAC and Mill Run and certain other outlet center properties, in which the LVP Parties had no ownership interest, to Simon. Furthermore, as a result of the aforementioned amendment to the Contribution Agreement, the St. Augustine Outlet Center no longer met the criteria to be classified as held for sale and was reclassified to held for use effective as of June 28, 2010. The Company’s 40.00% and 36.80% interests in investments in POAC, including Grand Prairie and Livermore, and Mill Run, respectively, have been accounted for as investments in unconsolidated affiliated real estate entities since their acquisition.

On August 30, 2010, the Simon Transaction was completed and, as a result, the LVP Parties received total consideration, before allocations to noncontrolling interests, of approximately $265.8 million (the “Aggregate Consideration Value”) , after certain transaction expenses of approximately $9.6 million which was paid at closing. The Aggregate Consideration Value consisted of approximately (i) $204.4 million in the form of cash, (ii) $1.9 million of escrowed cash (the “Escrowed Cash”) and (iii) $59.5 million in the form of equity interests (“Marco OP Units”).

The cash consideration of $204.4 million that the LVP Parties received in connection with the closing of the Simon Transaction was paid by Simon with the proceeds from a draw under a revolving credit facility (the “Simon Loan”) that Simon entered into contemporaneously with the signing of the Contribution Agreement. In connection with the closing of the Simon Transaction, the LVP Parties have provided guaranties of collection (the “Simon Loan Collection Guaranties”) with respect to the Simon Loan. See Note 15. The Escrowed Cash of $1.9 million is included in restricted escrows in the consolidated balance sheet as of December 31, 2010. The equity interests that the LVP Parties received in connection with the closing of the Simon Transaction consisted of 703,737 Marco OP Units that are exchangeable for a similar number of common operating partnership units (“Simon OP Units”) of Simon Property Group, L.P. (“Simon OP”) subject to various conditions as discussed below. Subject to the various conditions, the Company may elect to exchange the Marco OP Units to Simon OP Units which must be immediately delivered to Simon in exchange for cash or similar number of shares of Simon common stock, based on the then current weighted-average 5-day closing price of Simon’s common stock (“Simon Stock”), at Simon’s election.

Although the Marco OP Units may be immediately exchanged into Simon OP Units, if upon their delivery to Simon, Simon elects to exchange them for a similar number of shares of Simon Stock rather than cash, the LVP Parties will be precluded from selling the Simon Stock for a 6-month period from the date of issuance. Additionally, because the Company is required to indemnify Simon OP and Simon for any liabilities and obligations (the “TPA Obligations”) that should arise under certain tax protection agreements (the “POAC/Mill Run Tax Protection Agreements”) through March 1, 2012 (see Note 15), the Company was required to place 367,778 of the Marco OP Units (the “Escrowed Marco OP Units”) into an escrow account.

Pursuant to the Contribution Agreement, as amended, there was a period after closing, of up to 215 days, for the Aggregate Consideration Value to be finalized between the LVP Parties and Simon. However, the Company and Simon have agreed to extend the period and currently expect the Aggregate Consideration Value to be finalized during the second quarter of 2011.  The Escrowed Cash and The Escrowed Units are reserved for the final settlement of certain consideration adjustments (collectively, the “Final Consideration Adjustments”) related to net working capital reserves, including the true-up of debt assumption costs, certain indemnified liabilities and specified transaction costs. The Escrowed Marco OP Units may be used to cover any shortfalls resulting from the Final Consideration Adjustments not covered by the Escrowed Cash. Remaining Escrowed Cash, if any, is currently expected to be released during the second quarter of 2011. Remaining Escrowed Marco Units, net of any amounts used to settle shortfalls resulting from the Final Consideration Adjustments and TPA Obligations, will be released to the Company on March 1, 2012.

The Escrowed Marco OP Units had an estimated fair value of $30.3 million as of the closing date of the Simon Transaction and are classified as restricted marketable securities, which are available for sale, in our consolidated balance sheets as of March 31, 2011 and December 31, 2010. The 335,959 Marco OP Units which were not placed in an escrow had an estimated fair value of $29.2 million as of the closing date of the Simon Transaction and are classified as marketable securities, which are available for sale, in our consolidated balance sheets as of March 31, 2011 and December 31, 2010 . The estimated fair value of the Marco OP Units and the Escrowed Marco OP Units were based on the weighted-average closing price of Simon’s common stock for the 5-day period immediately prior to the closing date, discounted for certain factors, including the applicable various conditions.
 
 
10

 

In connection with the closing of the Simon Transaction, the Company recognized a gain on disposition of approximately $142.8 million in the consolidated statements of operations during the third quarter of 2010. The Company also deferred an additional $32.2 million of gain (the “Deferred Gain”) on the consolidated balance sheet consisting of the total of the (i) $1.9 million of Escrowed Cash and (ii) $30.3 million of Restricted Marco OP Units received as part of the Aggregate Consideration Value because realization of these items is subject to the Final Consideration Adjustments and the TPA Obligations. An additional $0.1 million of transaction expenses were incurred by the Company during the fourth quarter of 2010 which reduced the recognized gain to approximately $142.7 million for the year ended December 31, 2010.

PRO’s portion of the aforementioned $204.4 million of net cash proceeds received from the closing of the Simon Transaction were approximately $73.5 million, which were distributed to its members (the “PRO Distributions”) during the third quarter of 2010 pursuant to its operating agreement.

4.
Investments in Unconsolidated Affiliated Real Estate Entities

The entities listed below are partially owned by the Company.  The Company accounts 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
 
Date(s) Acquired
 
Ownership
Interest
   
March 31,
 2011
   
December 31, 2010
 
Livermore Valley Holdings, LLC ("Livermore")
 
March 30, 2009 & August 25, 2009
    40.00 %   $ 7,699,277     $ 7,102,275  
Grand Prairie Holdings, LLC ("Grand Prairie")
 
March 30, 2009 & August 25, 2009
    40.00 %     7,624,624       7,482,047  
1407 Broadway Mezz II, LLC ("1407 Broadway")
 
January 4, 2007
    49.00 %     72,984       305,928  
Total Investments in unconsolidated affiliated real estate entities
              $ 15,396,885     $ 14,890,250  
 
Prime Outlets Acquisitions Company

As previously discussed, on August 30, 2010, the Company disposed of its interests in investments in POAC, except for its interests in Livermore and Grand Prairie, two outlet center development projects (see below).  Prior to disposition, our Operating Partnership owned a 40.00% membership interest in POAC (the “POAC Interest”), of which a 25.00% and 15.00% membership interests were acquired on March 30, 2009 and August 25, 2009, respectively.  The POAC Interest was a non-managing interest, with certain consent rights with respect to major decisions. An affiliate of the Company’s Sponsor, was the majority owner and manager of POAC.  Profit and cash distributions were allocated in accordance with each investor’s ownership percentage.  Through the date of disposition, the Company accounted for this investment in accordance with the equity method of accounting, and its portion of POAC’s total indebtedness was not included in the Company’s investment.

POAC Financial Information

The following table represents the unaudited condensed income statement for POAC for the period indicated:

   
For the Three
Months Ended
March 31, 2010
 
Revenue
  $ 45,402,236  
Property operating expenses
    19,936,230  
Depreciation and amortization
    9,305,553  
Operating loss
    16,160,453  
Interest expense and other, net
    14,223,152  
Net loss
  $ 1,937,301  
Company's share of net loss
  $ 774,920  
Additional depreciation and amortization expense (1)
    (3,438,996 )
Company's loss from investment
  $ (2,664,076 )

1.
Additional depreciation and amortization expense related 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.
 
 
11

 

Livermore Valley Holdings, LLC

Livermore was wholly owned by POAC through August 30, 2010 and, therefore, was historically included in the Company’s POAC Interest as discussed above. In connection with the closing of the Simon Transaction, the Company retained its 40.00% interest in investment in Livermore. Our Operating Partnership owns a 40.00% membership interest in Livermore (the “Livermore Interest”). The Livermore 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 Livermore. Contributions are allocated in accordance with each investor’s ownership percentage. Profit and cash distributions, if any, will be allocated in accordance with each investor’s ownership percentage.

Livermore is an outlet center development project expected to be constructed in Livermore, California and had no operating results through March 31, 2011 or debt outstanding as of March 31, 2011. The Company made additional capital contributions of approximately $0.5 million to Livermore during the three months ended March 31, 2011. The Company accounts for its Livermore Interest in accordance with the equity method of accounting.

Livermore Financial Information

The following table represents the unaudited condensed balance sheet for Livermore as of  the dates indicated:

   
As of
   
As of
 
   
March 31, 2011
   
December 31, 2010
 
Construction in progress
  $ 19,027,795     $ 18,216,654  
Total assets
  $ 19,027,795     $ 18,216,654  
                 
Other liabilities
  $ 1,437,422     $ 1,248,323  
Members' capital
    17,590,373       16,968,331  
Total liabilities and members' capital
  $ 19,027,795     $ 18,216,654  

Grand Prairie Holdings, LLC

Grand Prairie was wholly owned by POAC through August 30, 2010 and, therefore, was historically included in the Company’s POAC Interest as discussed above.  In connection with the closing of the Simon Transaction, the Company retained its 40.00% interest in investment in Grand Prairie.   Our Operating Partnership owns a 40.00% membership interest in Grand Prairie (the “Grand Prairie Interest”).  The Grand Prairie 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 Grand Prairie.  Contributions are allocated in accordance with each investor’s ownership percentage.  Profit and cash distributions, if any, will be allocated in accordance with each investor’s ownership percentage.

Grand Prairie is an outlet center development project expected to be constructed on land it owns in Grand Prairie, Texas, and had no operating results through March 31, 2011 or debt outstanding as of March 31, 2011.  The Company made additional capital contributions of approximately $0.2 million to Grand Prairie during the three months ended March 31, 2011.  The Company accounts for its Grand Prairie Interest in accordance with the equity method of accounting.
 
 
12

 

Grand Prairie Financial Information

The following table represents the unaudited condensed balance sheet for Grand Prairie as of the dates indicated:
   
As of
   
As of
 
   
March 31, 2011
   
December 31, 2010
 
             
Construction in progress
  $ 19,275,493     $ 18,696,577  
Other assets
    3,187       3,187  
Total assets
  $ 19,278,680     $ 18,699,764  
                 
Other liabilities
  $ 756,453     $ 302,695  
Members' capital
    18,522,227       18,397,069  
Total liabilities and members' capital
  $ 19,278,680     $ 18,699,764  

Mill Run, LLC

As previously discussed, on August 30, 2010, the Company disposed of its interests in investments in Mill Run.  Prior to disposition, our Operating Partnership owned a 36.80% membership interest in Mill Run (the “Mill Run Interest”), of which a 22.54% and 14.26% membership interests were acquired on June 26, 2008 and August 25, 2009, respectively.  The Mill Run Interest included Class A and B membership shares and was a non-managing interest, with consent rights with respect to certain major decisions. The Company’s Sponsor was the managing member and owned 55% of Mill Run.  Profit and cash distributions were to be allocated in accordance with each investor’s ownership percentage after consideration of Class B members adjusted capital balance.  Through the date of disposition, the Company accounted for this investment in accordance with the equity method of accounting, and its portion of Mill Run’s total indebtedness was not included in the Company’s investment.

Mill Run Financial Information

  The following table represents the unaudited condensed income statement for Mill Run for the period indicated:

   
For the Three
Months Ended
March 31, 2010
 
Revenue
  $ 11,895,434  
Property operating expenses
    3,051,084  
Depreciation and amortization
    3,041,241  
Operating income
    5,803,109  
Interest expense and other, net
    1,631,904  
Net income
  $ 4,171,205  
Company's share of net income
  $ 1,535,003  
Additional depreciation and amortization expense (1)
    (441,072 )
Company's income from investment
  $ 1,093,931  

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.
 
 
13

 

1407 Broadway Mezz II, LLC
 
As of March 31, 2011, the Company has a 49.00% ownership in 1407 Broadway Mezz II, LLC (“1407 Broadway”), which has a sub-leasehold interest in a ground lease to an office building located at 1407 Broadway Street in New York, New York.  As the Company has recorded this investment in accordance with the equity method of accounting, its portion of 1407 Broadway’s total indebtedness of approximately $127.3 million as of March 31, 2011 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.

During March 2010, the Company entered a demand grid note to borrow up to $20.0 million from 1407 Broadway.  During the quarters ended June 30, 2010 and September 30, 2010, the Company received aggregate loan proceeds from 1407 Broadway associated with this demand grid note in the amount of $490,000 and $980,000, respectively.  During the quarter ended March 31, 2011, the Company made a principal payment of $235,000 to 1407 Broadway.  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.  As of March 31, 2011 and December 31, 2010, the outstanding principal and interest of approximately $1.2 million and $1.5 million, respectively, is recorded in loans due to affiliates in the consolidated balance sheets.

1407 Broadway Financial Information
 
The following table represents the unaudited condensed income statement for 1407 Broadway for the periods indicated:
 
   
For the Three Months Ended March
31,
 
   
2011
   
2010
 
             
Total revenue
  $ 8,935,706     $ 8,861,739  
Property operating expenses
    6,775,888       6,478,568  
Depreciation and amortization
    1,592,483       1,542,768  
Operating income
    567,335       840,403  
Interest expense and other, net
    (1,042,731 )     (1,068,967 )
Net loss
  $ (475,396 )   $ (228,564 )
Company's share of net loss (49%)
  $ (232,944 )   $ (111,996 )
 
The following table represents the unaudited condensed balance sheet for 1407 Broadway as of the dates indicated:

   
As of
   
As of
 
   
March 31, 2011
   
December 31, 2010
 
Real estate, at cost (net)
  $ 111,772,281     $ 112,213,056  
Intangible assets
    933,453       1,068,455  
Cash and restricted cash
    12,403,229       9,788,481  
Other assets
    15,465,930       17,371,992  
Total assets
  $ 140,574,893     $ 140,441,984  
Mortgage payable
  $ 127,250,000     $ 126,574,844  
Other liabilities
    13,317,603       13,384,454  
Members' capital
    7,290       482,686  
Total liabilities and members' capital
  $ 140,574,893     $ 140,441,984  
 
 
14

 

5. 
CP Boston Joint Venture

On February 17, 2011, the Company’s Sponsor and Advisor, the Lightstone Group (the “Buyer”), made a successful auction bid to acquire a 366-room, eight-story, full-service hotel (the “Hotel”) and a 65,000 square foot water park (the “Water Park”), collectively, the “CP Boston Property”, located at 50 Ferncroft Road, Danvers, Massachusetts (part of the Boston “Metropolitan Statistical Area”) from WPH Boston, LLC (the “Seller”) for an aggregate purchase price of approximately $10.1 million, excluding closing and other related transaction costs. Pursuant to the terms of the Agreement of Purchase and Sale and Joint Escrow Instructions (the “PSA”) dated February 17, 2011, between the Buyer and the Seller, the Buyer made an earnest money deposit of approximately $1.0 million on February 18, 2011 representing 10% of the aggregate purchase price.

On March 4, 2011, the Buyer offered the Company and its other sponsored public program, the Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone REIT II”), through their respective operating partnerships, the opportunity to purchase, at cost, joint venture ownership interests in LVP CP Boston Holdings, LLC (“the CP Boston Joint Venture”) which will acquire the CP Boston Property through LVP CP Boston, LLC (“LVP CP Boston”), a wholly owned subsidiary, subject to the Buyer obtaining the Seller’s consent which was obtained on March 21, 2011. The Company’s Board of Directors and Lightstone REIT II’s Board of Directors approved 80% and 20% participations, respectively, in the CP Boston Joint Venture.  During the three months ended March 31, 2011, Lightstone REIT II contributed $2.1 million to the CP Boston Joint Venture.

On March 21, 2011, the CP Boston Joint Venture closed on the acquisition of the CP Boston Property and the Company’s share of the aggregate purchase price was approximately $8.0 million. Additionally, in connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 2.75% of the acquisition price, or approximately $0.2 million. The Company’s portion of the acquisition was funded with cash.

The CP Boston Joint Venture established a taxable subsidiary, LVP CP Boston Holding Corp., which has entered into an operating lease agreement for the CP Boston Property. At closing, LVP CP Boston Holding Corp. also entered into an interim management agreement with Sage Client 289, LLC, an unrelated third party, for the management of the Hotel and the Water Park.

The CP Boston Property was purchased “as is” and it is currently expected that approximately $10.0 million (of which approximately $8.0 million is the Company’s proportionate share) of additional renovations and improvements will be funded proportionately by the owners of CP Boston Joint Venture subsequent to the acquisition. Management of the Company believes the CP Boston Property is adequately insured.

The Seller was not affiliated with the Company or its affiliates

The capitalization rate for the acquisition of the CP Boston Property during 2011 was 9.0%.  We calculate the capitalization rate for real property by dividing the net operating income of the property by the purchase price of the property, excluding costs.  For purposes of this calculation, net operating income is determined using the projected or budgeted net operating income of the property based upon then-current projections.  Additionally, net operating income is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation and amortization.

Our interest in the CP Boston Joint Venture is a managing interest.  All distributions from the CP Boston Joint Venture will be made on a pro rata basis in proportion to each member’s equity interest percentage.  Beginning on March 21, 2011, we have consolidated the operating results and financial condition of the CP Boston Joint Venture and accounted for the ownership interest of Lightstone REIT II as a noncontrolling interest.

The acquisition was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. The allocation of purchase price is based upon certain preliminary valuations and other analyses that have not been completed as of the date of this filing.  Any changes in the estimated fair values of the net assets recorded for these acquisitions prior to the finalization of more detailed analyses will change the allocation of the purchase price.  As such, the purchase price allocations for this transaction are preliminary estimates, which are subject to change within the measurement period. Any subsequent changes to the purchase price allocations that are material will be adjusted retroactively. There was no contingent consideration related to this acquisition.

The Company paid approximately $9.1 million in cash and assumed approximately $1.2 million is liabilities.  Approximately $1.0 million was allocated to land, $5.6 million was allocated to building and improvements, $2.0 million was allocated to furniture and fixtures, and $1.7 million was allocated to intangibles with a life of 10 years and other assets.
 
 
15

 

For the three months ended March 31, 2011, approximately $0.3 million of revenue and a net loss of $0.4 million are included in net loss on the Company’s consolidated statements of operations from the CP Boston Joint Venture since the date of acquisition.

The following table provides unaudited pro forma results of operations for the periods indicated, as if CP Boston Joint Venture had been acquired at the beginning of each period presented.   Such pro forma results are not necessarily indicative of the results that actually would have occurred had the acquisition been completed on the dates indicated, nor are they indicative of the future operating results of the combined company.

   
For the Three Months Ended March 31,
 
   
2011
   
2010
 
Pro forma net revenue
  $ 11,956,188     $ 11,845,176  
Pro forma net loss
  $ (3,967,422 )   $ 4,892,593  
Pro forma earnings per share
  $ (0.13 )   $ (0.15 )

6.
Option Agreement to Acquire an Interest in Festival Bay Mall

On December 8, 2010, FB Orlando Acquisition Company, LLC (the “Owner”), a previously wholly owned entity of David Lichtenstein (“Lichtenstein”), who does business as the Lightstone Group and is the sponsor of the Company, acquired Festival Bay Mall (the “Property”) for cash consideration of approximately $25.0 million (the “Contract Price”) from BT Orlando LP, an unrelated third party seller. Ownership of the Owner will be transferred to the A.S. Holdings LLC (“A.S. Holdings”), a wholly-owned entity of Lichtenstein, on or about June 4, 2011 (the “Transfer Date”) pursuant to the terms of a transfer and exchange agreement between various entities, including a qualified intermediary.

On March 4, 2011, the Company, through its Operating Partnership, entered into an agreement with A.S. Holdings, providing the Operating Partnership an option to acquire a membership interest of up to 10% in A.S. Holdings. The option is exercisable in whole or in part, up to two times, by the Operating Partnership at any time, but in no event later than June 30, 2012. Although the option may be exercised immediately, if it is exercised in whole or in part before the Transfer Date, the closing on the acquisition of the applicable membership interests in A.S. Holdings will occur within 10 business days after the Transfer Date. The Company has not exercised its option, in whole or in part, as of the date of this filing. There can be no assurance that the Company will elect to exercise its option, in whole or in part, to purchase up to a 10% ownership interest in Festival Bay Mall.

The Property, which opened in 2003, consists of an approximately 751,000 square foot enclosed mall situated on 139 acres of land located at 5250 International Drive in Orlando close to the convergence of I-4 and the Florida Turnpike. The Property was built as a hybrid retail center with entertainment, destination retail and traditional in-line mall tenants. Concurrent with the closing of the acquisition, management of the Property was assumed by Paragon Retail Property Management LLC (“Paragon”), an affiliate of the Company’s sponsor. Paragon is currently evaluating redevelopment opportunities for the Property.

7.
Marketable Securities and Fair Value Measurements

Marketable Securities:

The following is a summary of the Company’s available for sale securities as of the dates indicated:

   
As of March 31, 2011
 
   
Adjusted Cost
   
Gross Unrealized Gains
   
Gross Unrealized
Losses
   
Fair Value
 
Equity Securities, primarily REITs
  $ 104,342     $ -     $ (17,489 )   $ 86,853  
Marco OP Units
    29,221,714       5,435,816       -       34,657,530  
Corporate Bonds and Preferred Equities
    35,001,132       724,716       (172,629 )     35,553,219  
Mortgage Backed Securities
    142,264,537       -       (2,384,807 )     139,879,730  
Total
  $ 206,591,725     $ 6,160,532     $ (2,574,925 )   $ 210,177,332  
 
 
16

 

   
As of December 31, 2010
 
   
Adjusted Cost
   
Gross Unrealized Gains
   
Gross Unrealized
Losses
   
Fair Value
 
Equity Securities, primarily REITs
  $ 104,342     $ 122,052     $ -     $ 226,394  
Marco OP Units
    29,221,714       3,060,586       -       32,282,300  
Mortgage Backed Securities
    141,753,040       -       (1,882,950 )     139,870,090  
Total
  $ 171,079,096     $ 3,182,638     $ (1,882,950 )   $ 172,378,784  

Since the Company purchased all of its corporate bonds and preferred equities and mortgage back securities (“MBS”) on or after September 28, 2010, all of these corporate bonds and preferred equities and MBS with unrealized losses as of March 31, 2011 and December 31, 2010 were in a loss position for less than 12 months.
 
Margin loan
 
The Company has a brokerage account at a financial institution that holds custody of substantially all of the Company's corporate bonds and preferred securites and MBS.  Under its agreement with this financial institution the Company has the option to use a margin loan to purchase securities.  The margin loan is collateralized by the marketable securities in the Company’s account. The amounts available to the Company under the margin loan are at the discretion of the financial institution and not limited to the amount of collateral in its account.
 
In February 2011, the Company used the margin loan to purchase marketable securities.  The amount outstanding under this margin loan is $37.7 million at March 31, 2011 and is due on demand. The margin loan bears interest at libor + 0.85% and interest expense on the margin loan was $12,461 for the three months ended March 31, 2011.
 
Restricted Marketable Securities:

The following is a summary of the Company’s restricted available for sale securities as of the dates indicated:

   
As of March 31, 2011
 
   
Adjusted Cost
   
Gross Unrealized
Gains
 
Gross Unrealized
Losses
   
Fair Value
 
Marco OP Units
  $ 30,286,518     $ 6,796,538   $ -     $ 37,083,056  
Total
  $ 30,286,518     $ 6,796,538   $ -     $ 37,083,056  

   
As of December 31, 2010
 
   
Adjusted Cost
   
Gross Unrealized
Gains
 
Gross Unrealized
Losses
   
Fair Value
 
Marco OP Units
  $ 30,286,518     $ 3,659,391   $ -     $ 33,945,909  
Total
  $ 30,286,518     $ 3,659,391   $ -     $ 33,945,909  

None of the Company’s restricted available for sale securities had unrealized losses as of March 31, 2011 and December 31, 2010.

On August 30, 2010, the Company disposed of certain of its interests in investment in unconsolidated affiliated real estate entities in connection with the closing of the Simon Transaction and received 367,778 of Escrowed Marco OP Units, with an adjusted cost basis valued at $30.3 million, and 335,959 Marco OP Units, with an adjusted cost basis valued at $29.2 million. The Escrowed Marco OP Units and the Marco OP Units are classified as restricted marketable securities, available for sale and marketable securities, available for sale, respectively, in our consolidated balance sheet as of March 31, 2011 and December 31, 2010.

All of the MBS were issued by various U.S. government-sponsored enterprises (Freddie Mac and Fannie Mae).  The Company considers the declines in market value of its investment portfolio to be temporary in nature. The unrealized losses on the Company’s investments were caused primarily by changes in market interest rates or widening credit spreads. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. During the three months ended March 31, 2011 and 2010, the Company did not recognize any impairment charges.  As of March 31, 2011, the Company does not consider any of its investments to be other-than-temporarily impaired.

 
17

 

The Company may sell certain of its investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management. The Company did not sell any investments during the three months ended March 31, 2011. Additionally, the Company realized $0.8 million of gross losses related to early redemptions of MBS by the security issuer.     The maturities of the Company’s MBS generally range from 27 year to 30 years.
 
Derivative Financial Instruments

In order to manage risk related to changes in the price of Simon Stock, in October and November of 2010, the Company entered into a hedge of its Marco OP Units.  The hedge transactions were executed with Morgan Stanley on 527,803 of the Marco Units (75% of the 703,737 total Marco OP Units).  The hedges were structured as a collar where a series of puts were purchased at an average strike price of $90.32 per share and a series of calls were sold at an average strike price of $109.95 per share.  Morgan Stanley is restricted under the agreement from assigning its rights to this hedge to another counter party.

The collateral for hedge is the greater of (i) the number of shares hedged times Simon stock price or (ii) 150% of the value of the calls sold times 30% less the value of the puts purchased.  The initial collateral requirement was approximately $6.9 million and is subject to change based on changes in the share price of Simon stock.  The hedge cost $5.6 million, or $10.70 per share, and expires in December 2013. The dividends, if any, on the hedged shares continue to accrue to the Company, however Morgan Stanley has the right to adjust the put strike price for any future increases in the dividend declared by Simon Inc.

The hedges were classified as fair value hedges and initially recorded on the consolidated balance sheets under prepaid and other assets with changes in the fair value of the hedge reported as a gain or loss in other income, net within the consolidated statements of operations.  As of March 31, 2011, the fair value of the hedges was a liability of $0.6 million included in accounts payable and accrued expenses on the consolidated balance sheet and the collateral requirement was approximately $3.5 million.  As of December 31, 2010, the fair of the hedges was an asset of $3.1 million and the collateral requirement was approximately $6.9 million.  The collateral was recorded on the consolidated balance sheets under restricted escrows.  For the three months ended March 31, 2011, a loss of $3.7 million was recorded in other income/(loss), net within the consolidated statement 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.

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.

Marketable securities, available for sale, and derivative financial instruments measured at fair value on a recurring basis as of the dates indicated are as follows:

 
18

 

   
Fair Value Measurement Using
       
As of March 31, 2011
 
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Cash equivalents (money market accounts)
  $ 69,538     $ -     $ -     $ 69,538  
                                 
Marketable Securities:
                               
Equity Securities, primarily REITs
  $ 86,853     $ -     $ -     $ 86,853  
Marco OP Units
    -       34,657,530       -       34,657,530  
Corporate Bonds and Preferred Equities
    -       35,553,219       -       35,553,219  
MBS
    -       139,879,730       -       139,879,730  
Total
  $ 86,853     $ 210,090,479     $ -     $ 210,177,332  
                                 
Restricted Marketable Securities:
                               
Marco OP Units
  $ -     $ 37,083,056     $ -     $ 37,083,056  
Total
  $ -     $ 37,083,056     $ -     $ 37,083,056  
                                 
Derivative Financial Instruments:
                               
Marco OP Units Collar
  $ -     $ (633,364 )   $ -     $ (633,364 )
Total
  $ -     $ (633,364 )   $ -     $ (633,364 )

   
Fair Value Measurement Using
       
As of December 31, 2010
 
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Cash equivalents (money market accounts)
  $ 9,059,126     $ -     $ -     $ 9,059,126  
                                 
Marketable Securities:
                               
Equity Securities, primarily REITs
  $ 226,394     $ -     $ -     $ 226,394  
Marco OP Units
    -       32,282,300       -       32,282,300  
Corporate Bonds
                               
MBS
    -       139,870,090       -       139,870,090  
Total
  $ 226,394     $ 172,152,390     $ -     $ 172,378,784  
                                 
Restricted Marketable Securities:
                               
Marco OP Units
  $ -     $ 33,945,909     $ -     $ 33,945,909  
Total
  $ -     $ 33,945,909     $ -     $ 33,945,909  
                                 
Derivative Financial Instruments:
                               
Marco OP Units Collar
  $ -     $ 3,087,648     $ -     $ 3,087,648  
Total
  $ -     $ 3,087,648     $ -     $ 3,087,648  
 
The Company did not have any other significant financial assets or liabilities, which would require revised valuations that are recognized at fair value.

 
19

 

8.
Intangible Assets

The Company has 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 the dates indicated:
 
   
As of March 31, 2011
   
As of December 31, 2010
 
   
Cost
   
Accumulated
Amortization
   
Net
   
Cost
   
Accumulated
Amortization
   
Net
 
Assets:
                                   
Acquired in-place lease intangibles
  $ 3,778,262     $ (1,226,810 )   $ 2,551,452     $ 2,320,350     $ (1,212,787 )   $ 1,107,563  
                                                 
Acquired above market lease intangibles
    556,696       (382,827 )     173,869       557,704       (364,459 )     193,245  
                                                 
Deferred intangible leasing costs
    1,160,201       (696,839 )     463,362       1,189,666       (694,581 )     495,085  
                                                 
Total
  $ 5,495,159     $ (2,306,476 )   $ 3,188,683     $ 4,067,720     $ (2,271,827 )   $ 1,795,893  
                                                 
Liabilities:
                                               
Acquired below market lease intangibles
  $ (1,469,260 )   $ 958,821     $ (510,439 )   $ (1,472,588 )   $ 924,676     $ (547,912 )

During the three months ended March 31, 2010, the Company wrote off fully amortized acquired intangible assets of approximately $0.1 million resulting in a reduction of cost and accumulated amortization of intangible assets at March 31, 2011 compared to the December 31, 2010.  Also, as a result of the Company’s acquisition of the CP Boston Property, the Company added $1.5 million of intangible assets with an estimated life of 10 years as part of its preliminary allocation of the purchase price.

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 as of March 31, 2011:

   
Remainder
of 2011
   
2012
   
2013
   
2014
   
2015
   
Thereafter
   
Total
 
Amortization expense/(benefit) of:
                                                       
Acquired above market lease value
  $ 48,281     $ 38,210     $ 27,071     $ 22,702     $ 15,199     $ 22,406     $ 173,869  
Acquired below market lease value
    (110,767 )     (110,320 )     (108,214 )     (60,312 )     (60,312 )     (60,514 )     (510,439 )
Projected future net rental income increase
  $ (62,486 )   $ (72,110 )   $ (81,143 )   $ (37,610 )   $ (45,113 )   $ (38,108 )   $ (336,570 )

 Amortization benefit of acquired above and below market lease values included in total revenues in our consolidated statements of operations was $18,098 and $31,754 for the three months ended March 31, 2011 and 2010, 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 as of March 31, 2011:

   
Remainder
                                     
   
of 2011
   
2012
   
2013
   
2014
   
2015
 
Thereafter
   
Total
 
Amortization expense of:
                                                       
Acquired in-place leases value
  $ 279,356     $ 316,743     $ 306,374     $ 289,895     $ 269,919     $ 1,089,165     $ 2,551,452  
Deferred intangible leasing costs value
    84,826       82,542       75,024       62,941       52,858       105,171       463,362  
Projected future amortization expense
  $ 364,182     $ 399,285     $ 381,398     $ 352,836     $ 322,777     $ 1,194,336     $ 3,014,814  

Actual total amortization expense included in depreciation and amortization expense in our consolidated statements of operations was $95,900 and $71,431 for the three months ended March 31, 2011 and 2010, respectively.
 
 
20

 

9.
Assets and Liabilities Disposed of and Discontinued Operations

As a result of the Company defaulting on the debt related to three of the five apartment communities (of which one was located in Tampa, Florida, one was located in Charlotte, North Carolina and one was located in Greensboro, North Carolina) within its Camden Multi Family Properties due to the three properties no longer being economically beneficial to the Company, the lender foreclosed on the three properties during the year ended December 31, 2010. As a result of the foreclosure transactions, the debt associated with these three properties of $51.4 million was extinguished and the obligations were satisfied with the transfer of the applicable properties’ assets and working capital and the Company no longer has any ownership interests in these three properties. The operating results of these three properties through their respective dates of disposition have been classified as discontinued operations on a historical basis for all periods presented. The foreclosure transactions resulted in a gain on debt extinguishment of $19.9 million, of which $17.2 million and $2.7 million was recorded during the second quarter and fourth quarter of 2010, respectively.  During the year ended December 31, 2009, the Company recorded an asset impairment charge of $30.3 million associated with these three foreclosed properties. No additional impairment charges were subsequently recorded as the net book values of their assets approximated their estimated fair market values, on a net aggregate basis, through their respective dates of disposition.

The following summary presents the operating results of the three properties within the multi-family segment included in discontinued operations in the Consolidated Statements of Operations for the periods indicated.

   
For the Three
Months Ended
March 31, 2010
 
Revenues
  $ 1,674,999  
Expenses:
       
Property operating expense
    885,601  
Real estate taxes
    187,145  
Loss on long-lived assets
    300,000  
General and administrative costs
    36,377  
Depreciation and amortization
    189,041  
Total operating expense
    1,598,164  
Operating income
    76,835  
Other income/(loss)
    8,754  
Interest income
    676  
Interest expense
    (722,482 )
Net loss from discontinued operations
  $ (636,217 )

Cash flows generated from discontinued operations are presented separately in the consolidated statements of cash flows.
 
 
21

 

10.
Mortgages Payable

Mortgages payable, totaling approximately $195.2 million March 31, 2011 and $195.5 million at December 31, 2010 consist of the following:

          
Weighted Avg
Interest Rate
as of
           
Balance as of
 
Property
 
Interest Rate
   
March 31,
2011
 
Maturity Date
 
Amount Due at
Maturity
   
March 31, 2011
   
December 31,
2010
 
                                 
Southeastern Michigan Multi-Family Properties
     5.96%       5.96 %   
July 2016
  $ 38,138,605     $ 40,725,000     $ 40,725,000  
                                         
Oakview Plaza
  5.49%       5.49 %
January 2017
    25,583,137       27,500,000       27,500,000  
                                         
Gulf Coast Industrial Portfolio
  5.83%       5.83 %
February 2017
    49,556,985       53,025,000       53,025,000  
                                         
Houston Extended Stay Hotels (Two Individual Loans)
 
LIBOR + 4.50%
      4.75 %
June 2011
    8,671,250       8,758,750       8,890,000  
                                         
Brazos Crossing Power Center
 
Greater of LIBOR + 3.50% or
6.75%
      6.75 %
December 2011
    6,385,788       6,463,683       6,492,894  
                                         
Camden Multi-Family Properties - (Two Individual Loans)
  5.44%       5.44 %
December 2014
    26,334,204       27,756,664       27,849,500  
                                         
St. Augustine Outlet Center
  6.09%       6.09 %
April 2016
    23,747,523       25,941,811       26,040,634  
                                         
Everson Pointe
 
Greater of Prime + 1.00% or 5.85%
      5.85 %
December 2015
    4,418,281       5,000,000       5,000,000  
                                         
Total mortages payable
          5.75 %     $ 182,835,773     $ 195,170,908     $ 195,523,028  
 
LIBOR at March 31, 2011 was 0.25%.  Each of the loans is secured by acquired real estate and is non-recourse to the Company, with the exception of the Houston Extended Stay Hotels loan which is 35% recourse to the Company.
 
The following table shows the contractually scheduled principal maturities during the next five years and thereafter as of March 31, 2011:
 
Remainder of
2011
 
2012
   
2013
   
2014
   
2015
   
Thereafter
   
Total
 
$ 15,956,892   $ 2,239,291     $ 2,518,608     $ 28,957,980     $ 6,773,098     $ 138,725,039     $ 195,170,908  

 Pursuant to the Company’s loan agreements, escrows in the amount of approximately $7.5 million were held in restricted escrow accounts as of March 31, 2011. Escrows held in restricted escrow accounts are included in restricted escrows on the consolidated balance sheets.  Such escrows will be released in accordance with the applicable loan agreements for payments of real estate taxes, insurance and capital improvement transactions, as required.  Our mortgages payable also contains clauses providing for prepayment penalties.
 
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In April 2011, the lender extended the maturity date of the loan secured by the Houston Extended Stay Hotels by 30 days to May 16, 2011 and in May 2011 another 30 days to June 16, 2011  to allow additional time for the Company and the lender to continue current negotiations with respect to an extension of the loan.  If the Company is unable to extend the loan at acceptable terms with the lender, the Company intends to refinance or repay in full the amount due at maturity.

The Company’s loan secured by the Brazos Crossing Power Center is scheduled to mature on December 4, 2011. The Company intends to seek an extension to the maturity date of the loan. If the Company is unable to extend the loan at acceptable terms with the lender, the Company intends to refinance or repay in full the amount due at maturity.

Certain of the Company’s debt agreements require the maintenance of certain ratios, including debt service coverage. The Company did not meet certain debt service coverage ratios on the debt associated with its Gulf Coast Industrial Portfolio for the quarters ended June 30, 2010, December 31, 2010 and March 31, 2011. The Company currently is in compliance with all of its other debt covenants or has obtained waivers from their lenders.

Under the terms of the loan agreement for the Gulf Coast Industrial Portfolio, the lender may elect to retain all excess cash flow from the associated properties because of such noncompliance. Through the date of this filing, the lender has taken no such action and the Company is current with respect to regularly scheduled debt service payments on the loan.  Additionally, the Company believes that if the lender should elect to retain all excess cash flow from the associated properties, it would not have a material impact on its results of operations or financial position.

The Company currently expects to remain in compliance with all its other existing debt covenants; however, should circumstances arise that would constitute an event of default, the various lenders would have the ability to exercise various remedies under the applicable loan agreements, including the potential acceleration of the maturity of the outstanding debt.

11.
Net Income/(Loss) Per Share
 
Basic net income/(loss) per share is calculated by dividing net income/(loss) attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the applicable period.  As of March 31, 2011, the Company has 36,000 options issued and outstanding.  Diluted net income/(loss) per share includes the  potentially dilutive effect, if any, which would occur if our outstanding options to purchase our common stock were exercised.  For all periods presented, the effect of these exercises was anti-dilutive due to the net loss and, therefore, dilutive net income/(loss) per share is equivalent to basic net income/(loss) per share.

12.
Related Party Transactions

The Company has agreements with the Advisor and Lightstone Value Plus REIT Management LLC (the “Property Manager”) to pay certain fees in exchange for services performed by these entities and other affiliated entities. The Company’s ability to secure financing and subsequent real estate operations are dependent upon its Advisor, Property Manager and their affiliates to perform such services as provided in these agreements. 

The Company pursuant to the related party arrangements has recorded the following amounts for the periods indicated:

   
Three Months Ended March 31,
 
   
2011
   
2010
 
       
Acquisition fees
  $ 221,183     $ -  
Asset management fees
    456,589       1,452,809  
Acquisition expenses reimbursed to advisor
    242,211       -  
Property management fees
    326,635       434,476  
Development fees and leasing commissions
    385,930       84,821  
Total
  $ 1,632,548     $ 1,972,106  
 
Lightstone SLP, LLC, an affiliate of our Sponsor, has purchased SLP units in the Operating Partnership. These SLP units, the purchase price of which will be repaid only after stockholders receive a stated preferred return and their net investment, will entitle Lightstone SLP, LLC to a portion of any regular distributions made by the Operating Partnership.
 
 
23

 

During the three months ended March 31, 2011, distributions of $0.5 million were declared and paid to the SLP units and are part of noncontrolling interests.  Since inception through March 31, 2011, cumulative distributions declared were $7.1 million, of which $6.6 million were paid.  See Notes 4, 5 and 14 for other related party transactions.

13.  Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and margin loan approximate their fair values because of the short maturity of these instruments.  The estimated fair value (in millions) of the Company’s debt is summarized as follows:

   
As of March 31, 2011
   
As of December 31, 2010
 
   
Carrying Amount
   
Estimated Fair 
Value
   
Carrying Amount
   
Estimated Fair 
Value
 
Mortgage payable
  $ 195.2     $ 196.6     $ 195.5     $ 197.6  

The fair value of the mortgage payable was determined by discounting the future contractual interest and principal payments by a market interest rate of approximately 6.0%.
 
14.  Segment Information

The Company currently operates in four business segments as of March 31, 2011: (i) retail real estate, (ii) multi-family residential real estate, (iii) industrial real estate and (iv) hospitality. The Company’s advisor and its affiliates provide leasing, property and facilities management, acquisition, development, construction and tenant-related services for its portfolio. The Company’s revenues for the three months ended March 30, 2011 and 2010 were exclusively derived from activities in the United States. No revenues from foreign countries were received or reported. The Company had no long-lived assets in foreign locations as of March 31, 2011 and December 31, 2010. The accounting policies of the segments are the same as those described in Note 2: Summary of Significant Accounting Policies of the Company’s December 31, 2010Annual Report on Form 10-K.  Unallocated assets, revenues and expenses relate to corporate related accounts.

The Company evaluates performance based upon net operating income from the combined properties in each real estate segment.

Selected results of operations for the three months ended March 31, 2011 and 2010, and total assets as of March 31, 2011and December 31, 2010 regarding the Company’s operating segments are as follows:

   
For the Three Months Ended March 31, 2011
 
   
Retail
   
Multi-Family
   
Industrial
   
Hospitality
   
Unallocated
   
Total
 
                                     
Total revenues
  $ 2,767,086     $ 2,980,561     $ 1,721,066     $ 1,074,812     $ -     $ 8,543,525  
                                                 
Property operating expenses
    702,039       1,366,084       476,784       805,463       -       3,350,370  
Real estate taxes
    283,395       320,309       220,938       74,148       -       898,790  
General and administrative costs
    (74,539 )     23,690       (9,237 )     504,968       1,273,419       1,718,301  
Net operating income/(loss)
    1,856,191       1,270,478       1,032,581       (309,767 )     (1,273,419 )     2,576,064  
                                                 
Depreciation and amortization
    924,422       391,002       516,964       128,480       -       1,960,868  
Operating income/(loss)
  $ 931,769     $ 879,476     $ 515,617     $ (438,247 )   $ (1,273,419 )   $ 615,196