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EXCEL - IDEA: XBRL DOCUMENT - LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II INCFinancial_Report.xls
EX-32.2 - EXHIBIT 32.2 - LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II INCv312385_ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II INCv312385_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II INCv312385_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II INCv312385_ex32-1.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, 2012

 

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 000-54047

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland   83-0511223
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   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   þ    No ¨

 

 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   þ    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   ¨ Smaller reporting company  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 7, 2012, there were approximately 4.9 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust II, Inc., including shares issued pursuant to the distribution reinvestment plan.  

 

 
 

 

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

 

INDEX

 

      Page
PART I FINANCIAL INFORMATION    
       
Item 1. Financial Statements    
       
  Consolidated Balance Sheets as of  March 31, 2012 (unaudited) and December 31, 2011   3
       
  Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2012 and 2011   4
       
  Consolidated Statements of Comprehensive Income/(Loss) (unaudited) for the Three Months Ended March 31, 2012 and 2011   5
       
  Consolidated Statement of Stockholders’ Equity (unaudited) for the Three Months Ended March 31, 2012   6
       
  Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended  March 31, 2012 and 2011   7
       
  Notes to Consolidated Financial Statements   8
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   20
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   31
       
Item 4. Controls and Procedures   32
       
PART II OTHER INFORMATION    
       
Item 1. Legal Proceedings   32
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   32
       
Item 3. Defaults Upon Senior Securities   33
       
Item 4. Mine Safety Disclosures   33
       
Item 5. Other Information   33
       
Item 6. Exhibits   35

 

2
 

 

 PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

 

   March 31, 2012   December 31, 2011 
   (Unaudited)     
Assets          
Investment property, at cost  $12,531   $12,514 
Less accumulated depreciation   (385)   (293)
Net investment property   12,146    12,221 
           
Investments in unconsolidated affiliated entities   5,216    7,388 
Cash and cash equivalents   12,498    5,114 
Marketable securities, available for sale   6,727    5,701 
Restricted escrows   981    374 
Mortgage loan receivable, net   7,029    7,029 
Note receivable from affiliate   2,400    - 
Prepaid expenses and other assets   723    245 
Total Assets  $47,720   $38,072 
           
Liabilities and Stockholders' Equity          
Accounts payable and other accrued expenses  $583   $659 
Margin loan   3,185    3,340 
Mortgage payable   6,000    - 
Due to sponsor   72    74 
Distributions payable   757    717 
Total liabilities   10,597    4,790 
           
Commitments and contingencies (Note 14)          
           
Stockholders' Equity:          
Company's stockholders' equity:          
Preferred shares, $0.01 par value, 10,000 shares authorized,  none issued and outstanding   -    - 
Common stock, $0.01 par value; 100,000 shares authorized, 4,810 and 4,503 shares issued and outstanding in 2012 and 2011, respectively   48    45 
Additional paid-in-capital   38,240    35,822 
Subscription receivable   (14)   (104)
Accumulated other comprehensive loss   (1,188)   (2,214)
Accumulated distributions in excess of net earnings   (4,715)   (5,002)
Total Company stockholders' equity   32,371    28,547 
           
Noncontrolling interests   4,752    4,735 
           
Total Stockholders' Equity   37,123    33,282 
           
Total Liabilities and Stockholders' Equity  $47,720   $38,072 

 

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 II, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data) (Unaudited)  

 

   For the Three Months Ended  March 31, 
   2012   2011 
         
Rental revenue  $957   $694 
           
Expenses:          
Property operating expenses   425    312 
Real estate taxes   45    26 
General and administrative costs   321    710 
Depreciation and amortization   92    55 
           
Total operating expenses   883    1,103 
           
Operating income/(loss)   74    (409)
           
Interest and dividend income   227    9 
           
Gain on disposition of unconsolidated affiliated entity   741    - 
Income/(loss) from investments in unconsolidated affiliated entities   47    (150)
Other (expense)/income, net   (28)   4 
           
Net income/(loss)   1,061    (546)
           
Less: net (income)/loss attributable to noncontrolling interests   (17)   2 
           
Net income/(loss) attributable to Company's common shares  $1,044   $(544)
           
Net income/(loss) per Company's common share, basic and diluted  $0.22   $(0.15)
           
Weighted average number of common shares outstanding, basic and diluted   4,675    3,598 

 

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 II, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(Amounts in thousands, except per share data) (Unaudited)  

 

   For the Three Months Ended  March 31, 
   2012   2011 
         
Net income/(loss)  $1,061   $(546)
           
Other comprehensive income:          
Unrealized gain on available for sale securities   1,026    - 
           
Other comprehensive income   1,026    - 
           
Comprehensive income/(loss)   2,087    (546)
           
Less: Comprehensive income attributable to non-controlling interests   (17)   2 
           
Comprehensive income/(loss) attributable to the Company's common shares  $2,070   $(544)

 

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

 

5
 

 

PART I. FINANCIAL INFORMATION:    

ITEM 1. FINANCIAL STATEMENTS.

 

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

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Amounts in thousands) (Unaudited)

 

                      Accumulated   Total         
   Common Shares    Additional           Distributions in   Company   Total     
   Common       Paid-In   Subscription   Accumulated Other   Excess of Net   Stockholders'   Noncontrolling   Total 
   Shares   Amount   Capital   Receivable   Comprehensive Loss   Earnings   Equity   Interests   Equity 
BALANCE, December 31, 2011   4,503   $45   $35,822   $(104)  $(2,214)  $(5,002)  $28,547   $4,735   $33,282 
                                              
Net income   -    -    -    -    -    1,044    1,044    17    1,061 
Other comprehensive income   -    -    -    -    1,026    -    1,026         1,026 
Distributions declared   -    -    -    -    -    (757)   (757)   -    (757)
Proceeds from offering   283    3    2,820    90    -    -    2,913    -    2,913 
Selling commissions and dealer manager fees   -    -    (293)   -    -    -    (293)   -    (293)
Other offering costs   -    -    (345)   -    -    -    (345)   -    (345)
Redemption and cancellation of shares   (12)   (1)   (106)   -    -    -    (107)   -    (107)
Shares issued from distribution reinvestment program   36    1    342    -    -    -    343    -    343 
                        -                     
BALANCE, March 31, 2012   4,810   $48   $38,240   $(14)  $(1,188)  $(4,715)  $32,371   $4,752   $37,123 

 

 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 II, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands) (Unaudited)

 

   For the Three Months Ended March 31, 
   2012     2011   
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income/(loss)  $1,061   $(546)
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:          
(Income)/loss from investments in unconsolidated affilated entities   (47)   150 
Depreciation and amortization   92    55 
Amortization of deferred financing costs   6    - 
Gain on disposition of investment in unconsolidated affiliated entity   (741)   - 
Changes in assets and liabilities:          
Decrease in restricted escrow   289    213 
Increase in prepaid expenses and other assets   (301)   (558)
Increase/(decrease) in accounts payable and other accrued expenses   28    (215)
Decrease in due to sponsor   (2)   (31)
           
Net cash provided by/(used) in operating activities   385    (932)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of investment property, net   (18)   (12,207)
Purchase of investments in unconsolidated affiliated entities   -    (2,030)
Proceeds from disposition of investment in unconsolidated affiliated entity   560    - 
Refundable deposit for investment in real estate   (975)   - 
Collections on mortgage loan receivable   -    60 
           
Net cash used in investing activities   (433)   (14,177)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from mortgage financing   6,000    - 
Payment of loan fees and expenses   (184)   - 
Payments on margin loan   (155)   - 
Proceeds from issuance of common stock   2,913    2,242 
Payment of commissions and offering costs   (661)   (374)
Contribution of non-controlling interests   -    655 
Redemption and cancellation of common shares   (107)   (281)
Distributions to common stockholders   (374)   (277)
           
Net cash provided by financing activities   7,432    1,965 
           
Net change in cash and cash equivalents   7,384    (13,144)
Cash and cash equivalents, beginning of period   5,114    18,177 
Cash and cash equivalents, end of period  $12,498   $5,033 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest  $9   $- 
Distributions declared  $757   $577 
Value of shares issued from distribution reinvestment program  $343   $267 
Commissions and other offering costs accrued but not paid  $263   $161 
Subscription receivable  $(90)  $(159)
Note receivable received in connection with disposition of investment in unconsolidated affiliated entity  $2,400   $- 

 

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

 

7
 

 

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

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share/unit data and where indicated in millions) (Unaudited)

 

1.Organization

 

Lightstone Value Plus Real Estate Investment Trust II, Inc. (the “Lightstone REIT II”) is a Maryland corporation formed on April 28, 2008, which has qualified as a real estate investment trust (“REIT”) for U.S. federal income tax purposes since its taxable year ending December 31, 2009. The Lightstone REIT II was formed primarily for the purpose of engaging in the business of investing in and owning commercial and residential real estate properties located principally in North America, as well as other real estate-related securities, such as collateralized debt obligations, commercial mortgage-backed securities and mortgage and mezzanine loans secured, directly or indirectly, by the same types of properties which it may acquire directly.

 

The Lightstone REIT II is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT II LP (the “Operating Partnership”), a Delaware limited partnership formed on April 30, 2008.

 

The Lightstone REIT II and the Operating Partnership and its subsidiaries are collectively referred to as the ‘‘Company’’ and the use of ‘‘we,’’ ‘‘our,’’ ‘‘us’’ or similar pronouns refers to the Lightstone REIT II, its Operating Partnership and its subsidiaries or the Company as required by the context in which such pronoun is used.

 

The Company is currently offering to sell a maximum of 51,000,000 shares of common stock (exclusive of 6,500,000 shares available pursuant to the Company’s distribution reinvestment plan (the “DRIP”), and 255,000 shares reserved for issuance under the Company’s Employee and Director Incentive Restricted Share Plan), at a price of $10.00 per share (subject to certain volume discounts). The Company’s Registration Statement on Form S-11 was declared effective under the Securities Act of 1933 on February 17, 2009, and on April 24, 2009 the Company commenced its initial public offering of common stock (the “Offering”). The Offering was originally set to expire on February 17, 2011. However, as permitted under Rule 415 of the Securities Act of 1933, on December 13, 2010, the Company’s Board of Directors approved an extension of the Offering of up to 51,000,000 primary shares and up to 6,500,000 shares pursuant to its DRIP until the earlier of (i) the sale of all 57,500,000 shares or (ii) February 17, 2012. The Company also reserves the right to reallocate the shares of common stock registered in its Offering between the primary offering and the DRIP. The Company may terminate the Offering at any time.

 

On November 4, 2011, the Company filed a registration statement on Form S-11 (the “Follow-On Offering”) with the Securities and Exchange Commission (the “SEC”) to register 22,500,000 share of its common stock (exclusive of shares to be sold pursuant to its DRIP) at a price of $10.00 per share (subject to certain volume discounts), for aggregate gross offering proceeds of $225.0 million, pursuant to a follow-on offering to our Offering. As permitted by Rule 415 under the Securities Act of 1933, the Company may continue its Offering until the earlier of August 15, 2012 or the date the SEC declares the registration statement for the Follow-On Offering effective.

 

Effective July 8, 2011, ICON Securities Corp. (“ICON Securities”) became the dealer manager (“Dealer Manager”) of the primary shares under the Company’s Offering pursuant to an Assignment and Amendment of Dealer Manager Agreement (the “Assignment and Amendment”). Pursuant to the Assignment and Amendment, ICON Securities was assigned the Dealer Manager Agreement between Lightstone Securities LLC ("Lightstone Securities”) and the Company dated February 17, 2009 and assumed all of Lightstone Securities’ rights and obligations thereunder from and after the effective date of the Assignment and Amendment. Prior to July 8, 2011, Lightstone Securities served as the dealer manager for the primary shares under the Company’s Offering. All further references to the Dealer Manager will be deemed to refer to either Lightstone Securities or ICON Securities during the respective period of time that each was serving in such capacity. As of July 8, 2011, upon the effectiveness of the Assignment and Amendment, the Wholesaling Agreement between the Company, Lightstone Securities LLC and ICON Securities, dated as of November 11, 2010 was terminated.

 

Our Sponsor and ICON Capital Corp. (“ICON Capital”), an affiliate of ICON Securities, have entered into a joint venture with respect to its management. Pursuant to the joint venture, ICON Capital has been admitted as a member to Lightstone Value Plus REIT II, LLC (the “Advisor”), the advisor to the Company, and Lightstone SLP II LLC, the holder of subordinated profits interests in the Operating Partnership (the “Subordinated Profits Interests”), which is majority owned and controlled by the Sponsor.

 

The Company issued 20,000 shares to the Advisor on May 20, 2008, for $10.00 per share. In addition, as of September 30, 2009, the Company had reached its minimum offering by receiving subscriptions of its common shares, representing gross offering proceeds of approximately $6.5 million, and effective October 1, 2009 investors were admitted as stockholders and the Operating Partnership commenced operations. Through March 31, 2012, cumulative gross offering proceeds of $46.2 million were released to the Company. The Company invested the proceeds from this sale and proceeds from the Advisor in the Operating Partnership, and as a result, held a 99.99% general partnership interest at March 31, 2012 in the Operating Partnership’s common units.

 

8
 

 

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

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share/unit data and where indicated in millions) (Unaudited)

 

The Company’s shares of common stock are not currently listed on a national securities exchange. The Company may seek to list its shares of common stock for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its shares of common stock until they are listed for trading. In the event the Company does not obtain listing prior to the tenth anniversary of the completion or termination of its Offering, its charter requires that the Board of Directors must either (i) seek stockholder approval of an extension or amendment of this listing deadline; or (ii) seek stockholder approval to adopt a plan of liquidation of the corporation.

 

Noncontrolling Interests – Partners of Operating Partnership

 

On May 20, 2008, the Advisor contributed $2 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The limited partner has the right to convert operating partnership units into cash or, at the option of the Company, an equal number of common shares of the Company, as allowed by the limited partnership agreement.

 

Lightstone SLP II LLC, which is majority owned and controlled by the Company’s Sponsor committed to purchase Subordinated Profits Interests at a cost of $100,000 per unit for each $1.0 million in subscriptions up to ten percent of the proceeds from the primary shares under the Offering on a semi-annual basis beginning with the quarter ended June 30, 2010. Lightstone SLP II LLC may elect to purchase the Subordinated Profits Interests with either cash or an interest in real property of equivalent value. The proceeds received from the cash sale of the Subordinated Profits Interests, if any, will be used to offset payments made by the Company from offering proceeds to pay the dealer manager fees, selling commissions and other offering costs.

 

From our inception through March 31, 2012, the Company’s Sponsor has contributed cash of approximately $0.2 million and elected to contribute equity interests totaling 40.0% in Brownmill, LLC (“Brownmill”) in exchange for 41.0 Subordinated Profits Interests with an aggregate value of $4.1 million. The Company’s Sponsor may continue to elect to contribute interests in real property in lieu of cash in exchange for Subordinated Profits Interests in order to fulfill its semi-annual commitment. See Note 3 for additional information regarding Brownmill.

   

2.Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of Lightstone REIT II and its Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). As of March 31, 2012, the Lightstone REIT II had a 99.99% 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, 2011. 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 consolidated financial statements of the Lightstone Value Plus Real Estate Investment Trust II, 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.

 

9
 

 

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

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share/unit data and where indicated in millions) (Unaudited)

 

New Accounting Pronouncements

 

On January 1, 2012, the Company adopted changes issued by the Financial Accounting Standards Board (the “FASB”) to the presentation of comprehensive income. These changes give an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made to the calculation and presentation of earnings per share. Management elected to present the two-statement option. Other than the change in presentation, the adoption of these changes had no 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.

 

3.Investments in Unconsolidated Affiliated 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 exercise financial and operating control, and is not considered to be the primary beneficiary of these entities. A summary of the Company’s investments in unconsolidated affiliated entities is as follows:

 

Entity  Date of Ownership  Ownership
Interest as of
March 31, 2012
   As of
March 31, 2012
   As of
December 31, 2011
 
Brownmill LLC ("Brownmill")  Various   40.0%  $3,433   $3,463 
LVP CP Boston, LLC ("CP Boston Joint Venture")  March 21, 2011   0.0%   -    2,218 
LVP Rego Park, LLC ("Rego Park Joint Venture")  April 12, 2011   10.0%   1,783    1,707 
                   
Total investments in unconsolidated affiliated entities          $5,216   $7,388 

 

Brownmill

 

During 2010 and 2011, the Company, through its Operating Partnership, entered into three separate contribution agreements between the Operating Partnership and Lightstone Holdings LLC (‘‘LGH’’), a wholly-owned subsidiary of the Company’s Sponsor, pursuant to which LGH contributed to the Operating Partnership an aggregate 40.0% equity interest (34.413% and 5.587% in 2010 and 2011, respectively) in Brownmill in order to fulfill the Sponsor’s semi-annual commitment to purchase Subordinated Profit Interests with cash or contributed property. In exchange, the Operating Partnership issued an aggregate of 38 units (33 and 5 in 2010 and 2011, respectively) of Subordinated Profits Interests, at $100,000 per unit (at an aggregate total value of $3.8 million, of which $3.3 million and $0.5 million were in 2010 and 2011, respectively), to Lightstone SLP II LLC.

 

The aggregate fair value of the Company’s 40.0% interest in Brownmill, based on estimated fair values as of the effective dates of the applicable contributions, was approximately $13.1 million, of which $3.8 million was in the form of equity and $9.3 million was in the form of mortgage indebtedness.

 

As a result of these contributions in exchange for Subordinated Profit Interests, as of March 31, 2012, the Operating Partnership owns a 40.0% membership interest in Brownmill. The Company’s interest in Brownmill is a non-managing interest. An affiliate of the Company’s Sponsor is the majority owner and manager of Brownmill. Profit and cash distributions are allocated in accordance with each investor’s ownership percentage. The Company recorded its investment in Brownmill in accordance with the equity method of accounting. Accordingly, its portion of Brownmill’s total indebtedness is not included in the investment. In connection with the contributions of the ownership interests in Brownmill, the Company did not incur any transactions fees.

 

Brownmill owns two retail properties known as Browntown Shopping Center, located in Old Bridge, New Jersey, and Millburn Mall, located in Vauxhaull, New Jersey, which collectively, are referred to as the ‘‘Brownmill Properties.’’

 

10
 

 

 

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

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share/unit data and where indicated in millions) (Unaudited)

 

Brownmill Financial Information

 

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

 

The following table represents the unaudited condensed income statement for Brownmill for the periods indicated:

 

   For the Three Months Ended
March 31,
 
   2012   2011 
Revenue  $942   $1,015 
           
Property operating expenses   317    459 
Depreciation and amortization   217    184 
           
Operating income   408    372 
           
Interest expense and other, net   (296)   (294)
Net income  $112   $78 
Company's share of net income  $45   $27 
Additional depreciation and amortization expense (1)   (74)   (65)
Company's loss from investment  $(29)  $(38)

 

(1)Additional depreciation and amortization expense relates to the amortization of the difference between the cost of the Company’s investment in Brownmill and the amount of the underlying equity in net assets of Brownmill.

 

The following table represents the condensed balance sheets for Brownmill as of the periods indicated:

 

   As of   As of 
   March 31, 2012   December 31, 2011 
         
Investment property, at cost (net)  $17,324   $17,500 
Cash and restricted cash   777    642 
Other assets   1,669    1,677 
Total assets  $19,770   $19,819 
           
Mortgage payable  $21,482   $21,589 
Other liabilities   548    602 
Members' deficiency   (2,260)   (2,372)
Total liabilities and members' deficiency  $19,770   $19,819 

 

CP Boston Joint Venture

 

On March 21, 2011, the Company and its Sponsor’s other public program, Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone REIT I”), acquired, through LVP CP Boston Holdings, LLC (the “CP Boston Joint Venture) a 366-room, eight-story, full-service hotel and a 65,000 square foot water park located at 50 Ferncroft Road, Danvers, Massachusetts from WPH Boston, LLC, an unrelated third party, for an aggregate purchase price of approximately $10.1 million, excluding closing and other related transaction costs. The Company and Lightstone REIT I had 20.0% and 80.0% joint venture ownership interests, respectively, in the CP Boston Joint Venture and the Company’s share of the aggregate purchase price was approximately $2.0 million. Additionally, in connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 0.95% of the acquisition price, or approximately $19.

 

On February 20, 2012, the Company completed the disposition of its 20.0% joint venture ownership interest in the CP Boston Joint Venture with an effective date of January, 1, 2012, to subsidiaries of Lightstone REIT I, which now owns 100.0% of the CP Boston Joint Venture. Under the terms of the agreement, the Company received $3.0 million in total consideration, consisting of $0.6 million of cash and a $2.4 million unsecured 10.0% interest-bearing demand note (the “Lightstone REIT I Note”) from the operating partnership of Lightstone REIT I, which is reflected in Note Receivable from Affiliate in the consolidated balance sheet as of March 31, 2012. The Lightstone REIT I Note requires monthly interest payments. During the three months ended March 31, 2012 the Company recognized $61 of interest income on the Lightstone REIT I Note.

 

11
 

 

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

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share/unit data and where indicated in millions) (Unaudited)

 

In connection with the disposition of its 20.0% joint venture ownership interest in the CP Boston Joint Venture, the Company recognized a gain on disposition of investment in unconsolidated affiliated entity of $0.7 million in its consolidated statements of operations during the first quarter of 2012.

 

The Company’s 20.0% joint venture ownership interest in the CP Boston Joint Venture was a non-managing interest, which it accounted for in accordance with the equity method of accounting from the date of acquisition through the date of disposition.

 

CP Boston Joint Venture Financial Information

 

The following table represents the unaudited condensed income statement for the CP Boston Joint Venture for the period from March 21, 2011 through March 31, 2011:

 

   For the Period March
21, 2011 through
March 31, 2011
 
Revenue  $340 
      
Property operating expenses   900 
Operating loss   (560)
Other expense   - 
Net loss  $(560)
Company's share of net loss  $(112)

 

The following table represents the unaudited condensed balance sheet for the CP Boston Joint Venture as of December 31, 2011:

 

   As of 
   December 31, 2011 
     
Investment property, at cost (net)  $10,820 
Intangible assets   93 
Cash and restricted cash   1,754 
Other assets   997 
Total assets  $13,664 
      
Other liabilities  $2,692 
Members' capital   10,972 
Total liabilities and members' capital  $13,664 

 

Rego Park Joint Venture

 

On April 12, 2011, LVP Rego Park, LLC, (“the Rego Park Joint Venture”) a joint venture in which the Company and Lightstone REIT I have 10.0% and 90.0%, ownership interests, respectively, acquired a $19.5 million, nonrecourse second mortgage note (the “Second Mortgage Loan”) for approximately $15.1 million from Kelmar Company, LLC ( “Kelmar”), an unrelated third party. The purchase price reflected a discount of approximately $4.4 million to the outstanding principal balance. The Company’s share of the aggregate purchase price was approximately $1.5 million. The Company accounts for its investment in the Rego Park Joint Venture in accordance with the equity method of accounting. Additionally, in connection with the purchase, the Company’s Advisor received an acquisition fee equal to 0.95% of its portion of the acquisition price, or approximately $14. The Company’s portion of the acquisition was funded with cash.

 

The Second Mortgage Loan was originated by Kelmar in May 2008 with an original principal balance of $19.5 million, is due May 31, 2013 and is collateralized by a 417 unit apartment complex located in Queens, New York. The Second Mortgage Loan bears interest at a fixed rate of 5.0% per annum with monthly interest only payments of approximately $0.1 million through maturity. The Second Mortgage Loan is current with respect to debt service payments. The Rego Park Joint Venture is amortizing the discount using the effective interest rate method through maturity.

 

12
 

 

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

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share/unit data and where indicated in millions) (Unaudited)

 

Rego Park Joint Venture Financial Information

 

The following table represents the unaudited condensed income statement for the Rego Park Joint Venture for the period indicated:

 

   Three Months Ended
March 31, 2012
 
     
Operating expenses  $3 
Operating loss   (3)
Interest income   763 
Net income  $760 
Company's share of net income  $76 

 

The following table represents the unaudited condensed balance sheets for the Rego Park Joint Venture as of the periods indicated:

 

   As of   As of 
   March 31, 2012   Decemer 31, 2011 
         
Cash and restricted cash  $897   $656 
Mortgage note receivable, net   16,779    16,260 
Total assets  $17,676   $16,916 
           
Members' capital  $17,676   $16,916 
Total liabilities and members' capital  $17,676   $16,916 

  

4. Investment Property

 

All of the Company’s investment property resulted from the TownePlace Suites Hotel acquisition on January 19, 2011. Investment property consists of the following:

 

   As of   As of 
   March 31, 2012   December 31, 2011 
         
Land  $1,800   $1,800 
Buildings and improvements   9,947    9,930 
Total land, buildings and improvements   11,747    11,730 
Furniture, fixtures and equipment   784    784 
Investment property at cost   12,531    12,514 
Less - Accumulated depreciation   (385)   (293)
Investment property at cost, net  $12,146   $12,221 
Construction in progress included above  $18   $513 

 

13
 

 

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

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share/unit data and where indicated in millions) (Unaudited)

 

5. 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, 2012 
   Adjusted Cost   Gross Unrealized
Gains
   Gross Unrealized
Losses
   Fair Value 
Equity Securities  $7,915   $-   $(1,188)  $6,727 

 

   As of December 31, 2011 
   Adjusted Cost   Gross Unrealized
Gains
   Gross Unrealized
Losses
   Fair Value 
Equity Securities  $7,915   $-   $(2,214)  $5,701 

  

Since the Company purchased all of it equity securities in July 2011, all of the equity securities with unrealized losses as of March 31, 2012 and December 31, 2011 were in a loss position for less than 12 months. The Company has not sold nor otherwise disposed of any of its marketable securities during this period.

 

The Company has access to a margin loan from a financial institution that holds custody of certain of the Company’s marketable securities. The margin loan, which is due on demand, bears interest at Libor plus 0.85% (1.10% as of March 31, 2012) and 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. The amount outstanding under this margin loan was $3.2 million and $3.3 million as of March 31, 2012 and December 31, 2011, respectively. Interest expense on the margin loan was $9 during the three months ended March 31, 2012.

 

The Company considers the declines in market value of its investment portfolio to be temporary in nature. 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, 2012 and 2011, the Company did not recognize any impairment charges. As of March 31, 2012, the Company does not consider any of its investments to be other-than-temporarily impaired.

 

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.

 

As of March 31, 2012 and December 31, 2011, all of the Company’s equity securities were classified as Level 2 assets and there were no transfers between the level classifications during the three months ended March 31, 2012.

 

6. Mortgage Loan Receivable and Restricted Escrow

 

On June 29, 2010, the Company purchased a fixed-rate of 5.916%, nonrecourse mortgage note (the “Loan”) from Citigroup Global Markets Realty Corp. (“CGMC”), an unrelated third party, for $7.9 million. The Loan was originated by the CGMC in August 2007 with an original principal balance of $18.7 million and is collateralized by a 141-room limited service hotel located in East Rutherford, New Jersey. The hotel is currently operating under a Marriott Franchise Agreement as a Fairfield Inn. The Loan was scheduled to mature in September 2017 under its original term, and has been in default since February 2009.

 

14
 

 

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

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share/unit data and where indicated in millions) (Unaudited)

 

The Company initially recorded the Loan as a mortgage loan receivable at $7.9 million, net of a discount of $10.8 million, on its consolidated balance sheet. As the Loan is in default, the Company is not amortizing the discount.

 

The borrower under the loan agreement is required to transfer any excess cash to the Company on a monthly basis. Prior to April 1, 2011, the Company, was applying the excess cash to required funding for taxes and insurance and other escrow related disbursements and any remaining cash was applied to outstanding principal and the excess, if any, was to be recognized as interest income (the cost recovery method of income recognition). On April 1, 2011, the Company determined that it was no longer probable that it would take ownership in the foreseeable future and stopped applying the cost recovery method and instead began to apply the cash receipts method of income recognition, whereby the Company will recognize any excess cash, after the required funding for taxes and insurance and other escrow related disbursements, as interest income until such time as the borrower is current on all amounts owed to the Company for interest and then any remaining cash will be applied to outstanding principal. During the three months ended March 31, 2012 and 2011 the Company did not recognize any interest income on the Loan.

 

7.  Acquisition of a TownePlace Suites Hotel

 

On January 19, 2011, the Company, through LVP Metairie JV, LLC (“LVP Metairie JV”), a joint venture subsidiary of its Operating Partnership, completed the acquisition of a 95.0% ownership interest in a four-story, limited service extended-stay hotel located in Harahan, Louisiana (the “TownePlace Suites Hotel”) from Citrus Suites, LLC, an unrelated third party. The remaining 5.0% ownership interest was acquired by TPS Metairie, LLC, an unrelated third party.  During the three months ended March 31, 2011, TPS Metairie contributed $0.7 million to LVP Metairie JV. The TownePlace Suites Hotel, which has immediate access to the New Orleans Airport, operates as a “TownePlace Suites” pursuant to a Relicensing Franchise Agreement (“Franchise Agreement”) with Marriott International, Inc. (“Marriott”).

 

The aggregate purchase price for the TownePlace Suites Hotel was approximately $12.2 million, inclusive of closing and other transaction-related costs. Additionally, in connection with the acquisition, the Company’s advisor received an acquisition fee of $0.1 million which was equal to 0.95% of the Company’s proportionate share of the total contract price of $12.0 million, or $11.4 million. The Company’s share of the acquisition was funded with cash proceeds from the sale of shares of its common stock.

 

The Company has established a taxable REIT subsidiary, LVP Metairie Holding Corp. (“LVP Metairie Holding”), which has entered into an operating lease agreement for the TownePlace Suites Hotel. LVP Metairie Holding has also entered into management agreement (the “TownePlace Suites Management Agreement”) with Trans Inns Management, Inc., an unrelated third party, for the management of the TownePlace Suites Hotel, and the Franchise Agreement with Marriott.  The Towne Place Suites Management Agreement, which had an initial term of one-year commencing on January 19, 2011, provides for (i) monthly base management fees equal to 3% of gross revenues, as defined and (ii) certain incentive fees.  The TownePlace Suites Management Agreement , which was extended for an additional one-year commencing on January 19, 2012 now provides for eight additional one-year extensions and may be terminated by either party with no less than 90-days written notice, by either party, in advance of the anniversary date.

 

The Company’s interest in TownePlace Suites is a managing interest. Generally, quarterly distributions from TownePlace Suites have been made, beginning on May 10, 2011, (i) initially, to the Company and TPS Metairie, LLC on a pro rata basis in proportion to each member’s equity interest percentage until an annualized preferred return of 12.0% is achieved on their invested capital and (ii) thereafter, 85.0% to the Company and TPS Metairie, LLC pro rata in accordance with their respective ownership interest and 15.0% to the Sherman Family Trust, a third party related to TPS Metairie, LLC but not related to the Company. Beginning on January 19, 2011, the Company has consolidated the operating results and financial condition of TownePlace Suites and accounted for the ownership interest of TPS Metairie, LLC and any allocations of earnings and distributions to the Sherman Family Trust as noncontrolling interests.

 

The acquisition was accounted for under the purchase method of accounting with the LVP Metairie JV treated as the acquiring entity. Accordingly, the consideration paid by the LVP Metairie JV to complete the acquisition has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. There was no contingent consideration related to this acquisition.

 

Approximately $1.8 million was allocated to land, $9.9 million was allocated to building and improvements and $0.8 million was allocated to furniture and fixtures.

 

The following table provides the amounts of revenue and net income included in the Company’s consolidated statements of operations from the TownePlace Suites Hotel since the date of acquisition for the periods indicated:

 

15
 

 

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

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share/unit data and where indicated in millions) (Unaudited)

 

   For the Three Months Ended   For the Three Months Ended 
   March 31. 2012   March 31. 2011 
Revenue  $957   $694 
Net income (loss)  $341   $(30)

 

The following table provides unaudited pro forma results of operations for the periods indicated, as if TownePlace Suites 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
 
     
Pro forma net revenue  $880 
Pro forma net loss  $(691)
Pro forma loss per share  $(0.19)

 

8.    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 was transferred to the A.S. Holdings LLC (“A.S. Holdings”), a wholly-owned entity of Lichtenstein, on June 26, 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 10.0% 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. 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 10.0% 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.

 

9. Selling Commissions, Dealer Manager Fees and Other Offering Costs

 

Selling commissions and dealer manager fees are paid to the Dealer Manager, pursuant to various agreements, and other third-party offering expenses such as registration fees, due diligence fees, marketing costs, and professional fees are accounted for as a reduction against additional paid-in capital (“APIC”) as costs are incurred. Any organizational costs are accounted for as general and administrative costs. The following table represents the selling commissions and dealer manager and other offering costs for the periods indicated:

 

16
 

 

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

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share/unit data and where indicated in millions) (Unaudited)

 

   For the Three Months Ended March 31, 
   2012   2011 
         
Selling commissions and
dealer manager fees
  $293   $175 
Other offering costs  $345   $237 

 

Since the commencement of its Offering through March 31, 2012, the Company has incurred approximately $5.0 million in selling commissions and dealer manager fees and $4.7 million of other offering costs.

 

10. Mortgage Payable

 

On March 14, 2012, the LVP Metairie JV obtained a mortgage (the ‘‘Mortgage’’) in the principal amount of $6.0 million from the Bank of the Ozarks. The Mortgage has an initial term of 3 years, bears interest at a floating rate of Libor plus 3.75%, subject to a 6.00% floor, and requires monthly principal and interest payments through its stated maturity. The monthly principal payment resets each month based on the outstanding principal balance and the current interest rate pursuant to a 25-year amortization schedule less the number of payments made.

 

In connection with the financing, the LVP Metairie JV paid loan fees and expenses totaling approximately $0.2 million, which are being amortized into interest expense in accordance with the effective interest method over the initial term of the Mortgage. Subject to certain conditions, the Mortgage provides for two, one-year extension periods, at the borrowers option, that require the payment of an extension fee of 0.25% of the then outstanding principal balance. The Mortgage is secured by the TownePlace Suites Hotel and the Company has provided a guaranty to the lender for non-recourse carve-outs.

 

The following table, based on the initial term of the Mortgage, sets forth the estimated contractual principal maturities, including a balloon payment at maturity in the amount of $5.7 million, as of March 31, 2012:

 

Remainder of
2012
   2013   2014   2015   Total 
                  
$77   $111   $117   $5,695   $6,000 

 

Libor as of March 31, 2012 was 0.24%. As of March 31, 2012, the estimated fair value of the Mortgage approximated its carrying value.

 

11. Earnings per Share

 

The Company had no potentially dilutive securities outstanding during the periods presented. Accordingly, earnings 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.

 

12. Related Party Transactions    

 

In addition to certain related party payments made to the Dealer Manager (see Note 9 for additional information), the Company also 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 following table represents the fees incurred associated with the payments to the Company’s Advisor and Property Manager for the periods indicated:

 

17
 

 

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

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share/unit data and where indicated in millions) (Unaudited)

 

   For the Three Months Ended
March 31,
 
   2012   2011 
Acquisition fees  $-   $127 
Asset management fees   72    59 
Total  $72   $186 

 

As of both March 31, 2012 and December 31, 2011, $0.1 million was due to the Company’s Sponsor for unpaid asset management fees. As of March 31, 2012, the Company owns a 40.0% membership interest in Brownmill and a 10.0% interest in the Rego Park Joint Venture. Affiliates of the Company’s Sponsor are the majority owners and managers of these entities.

 

13. Financial Instruments

 

The carrying amounts of cash and cash equivalents, accounts receivable (included in other assets in the consolidated balance sheet), note receivable from affiliate, accounts payable and accrued expenses, and the margin loan approximated their fair values as of March 31, 2012 because of the short maturity of these instruments. The carrying amount of the mortgage loan receivable approximated its fair value as of March 31, 2012 based upon current market information that would have been used by a market participant to estimate the fair value of such loan.

 

14. Commitments and Contingencies

 

Legal Proceedings

 

From time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes. As of the date hereof, the Company is not a party to any material pending legal proceedings.

 

18
 

 

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

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share/unit data and where indicated in millions) (Unaudited)

 

15. Subsequent Events

 

Distribution Payment

 

On April 13, 2012, the distribution for the three-month period ending March 31, 2012 was paid in full using a combination of cash and approximately 37,000 shares of the Company’s common stock issued pursuant to the Company’s DRIP, at a discounted price of $9.50 per share. The distribution was paid from offering proceeds (approximately $22 or 3%), cash flows provided from operations (approximately $385 or 51%) and excess cash proceeds from the issuance of common stock through REIT II's Distribution Reinvestment Program (approximately $350 or 46%).

 

Distribution Declaration

 

On May 14, 2012, the Board of Directors authorized and the Company declared a distribution for the three-month period ending June 30, 2012. The distribution will be calculated based on shareholders of record each day during this three-month period at a rate of $0.00178082191 per day, and will equal a daily amount that, if paid each day for a 365-day period, would equal a 6.5% annualized rate based on a share price of $10.00. The distribution will be paid in cash on July 13, 2012 to shareholders of record as of June 30, 2012. The shareholders have an option to elect the receipt of shares under our distributions reinvestment program.

 

19
 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Lightstone Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Lightstone Value Plus Real Estate Investment Trust II, Inc., a Maryland corporation, and, as required by context, Lightstone Value Plus REIT, L.P. and its wholly owned subsidiaries, which we collectively refer to as the “Operating Partnership”. Dollar amounts are presented in thousands, except per share data and where indicated in millions.

 

Forward-Looking Statements

 

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

 

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

 

Risks and other factors that might cause differences, some of which could be material, include, but are not limited to, economic and market conditions, competition, tenant or joint venture partner(s) bankruptcies, our lack of operating history, the availability of cash flows from operations to pay distributions, changes in governmental, tax, real estate and zoning laws and regulations, failure to increase tenant occupancy and operating income, rejection of leases by tenants in bankruptcy, financing and development risks, construction and lease-up delays, cost overruns, the level and volatility of interest rates, the rate of revenue increases versus expense increases, the financial stability of various tenants and industries, the failure of the Company to make additional investments in real estate properties, the failure to upgrade our tenant mix, restrictions in current financing arrangements, the failure to fully recover tenant obligations for common area maintenance (“CAM”), insurance, taxes and other property expenses, the failure of the Company to continue to qualify as a real estate investment trust (“REIT”), the failure to refinance debt at favorable terms and conditions, an increase in impairment charges, loss of key personnel, failure to achieve earnings/funds from operations targets or estimates, conflicts of interest with the Advisor and the Sponsor and their affiliates, failure of joint venture relationships, significant costs related to environmental issues as well as other risks listed from time to time in this Form 10-Q, our Form 10-K, our Registration Statement on Form S-11 (File No. 333-151532), as the same may be amended and supplemented from time to time, and in the Company’s other reports filed with the SEC.

 

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

 

20
 

 

  Overview

 

Lightstone Value Plus Real Estate Investment Trust II, Inc. (the “Lightstone REIT II”) and Lightstone Value Plus REIT II, LP, (the “Operating Partnership”) and its subsidiaries are collectively referred to as the ‘‘Company’’ and the use of ‘‘we,’’ ‘‘our,’’ ‘‘us’’ or similar pronouns refers to the Lightstone REIT II, its Operating Partnership or the Company as required by the context in which such pronoun is used.

 

Lightstone REIT II intends to continue to acquire and operate commercial, residential and hospitality properties, principally in North America. Principally through the Operating Partnership, our future acquisitions may include both portfolios and individual properties. We expect that our commercial holdings will consist of retail (primarily multi-tenanted shopping centers), lodging, industrial and office properties and that our residential properties located either in or near major metropolitan areas.

 

Capital required for the future purchases of real estate and/or real estate related investments is expected to be obtained from the public offering of shares of our common stock and from any indebtedness that we may incur either in connection with the acquisition of any real estate and real estate related investments or thereafter. A Registration Statement on Form S-11 covering our initial public offering (the “Offering”) was declared effective under the Securities Act of 1933 on February 17, 2009. The Offering commenced on April 24, 2009 and is ongoing. We are dependent upon the net proceeds from our current Offering or future offerings to conduct our proposed activities.

 

We do not have employees. We entered into an advisory agreement, dated February 17, 2009, with Lightstone Value Plus REIT II LLC, a Delaware limited liability company, which we refer to as the “Advisor,” pursuant to which the Advisor supervises and manages our day-to-day operations and selects our real estate and real estate related investments, subject to oversight by our board of directors. We pay the Advisor fees for services related to the investment and management of our assets, and we will reimburse the Advisor for certain expenses incurred on our behalf.

 

Current Environment

 

Our operating results as well as our investment opportunities are impacted by the health of the North American economies.  Our business and financial performance may be adversely affected by current and future economic conditions, such as availability of credit, financial markets volatility, and recession.

 

U.S. and global credit and equity markets have undergone significant volatility and disruption over the last several years, making it difficult for many businesses to obtain financing on acceptable terms or at all.  As a result of this disruption, in general there has been an increase in costs associated with borrowings and refinancing as well as limited availability of funds for borrowings and refinancing. If these conditions continue or worsen, our cost of borrowings may increase and it may be more difficult to finance investment opportunities in the short term.   

 

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

 

Portfolio Summary –

 

Retail   Location   Year Built    Leasable
Square Feet
  Percentage Occupied
as of March 31, 2012
    Annualized Revenues
based on rents as of
March 31, 2012
    Annualized Revenues
per Square Foot as of
March 31, 2012
                            (not in thousands)
Unconsolidated Affiliated Real Estate Entity:                            
Brownmill LLC (2 retail properties)   Old Bridge and Vauxhall, New Jersey   1962   156,046   87%   $  2.6 million   $ 16.97

 

 

Hospitality   Location   Year Built   Year to Date
Available
Rooms
  Percentage Occupied
for the Three Months
Ended March 31, 2012
  Revenue per Available
Room ("RevPAR")
for the Three Months
Ended March 31, 2012
                      (not in thousands)
Consolidated Hospitality Property:                      
Towne Place Suites   Harahan, Louisiana   2000    11,284   74%   $ 85

 

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Annualized revenue is defined as the minimum monthly payments due as of March 31, 2012 annualized, excluding periodic contractual fixed increases and rents calculated based on a percentage of tenants’ sales. The annualized base rent disclosed in the table above includes all concessions, abatements and reimbursements of rent to tenants.

 

Critical Accounting Policies and Estimates

 

There were no material changes during the three months ended March 31, 2012 to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Results of Operations

 

The Company’s primary financial measure for evaluating its properties is net operating income (“NOI”). NOI represents revenues less property operating expenses, real estate taxes and general and administrative expenses. The Company believes that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate company because it is a direct measure of the actual operating results of the Company’s properties.

 

For the periods presented, the Company’s only consolidated operating property was the TownePlace Suites Hotel, which was acquired on January 19, 2011.

 

For the Three Months Ended March 31, 2012 vs. March 31, 2011

 

Consolidated

 

Rental revenue

 

Rental revenue increased by $263 to $957 during the three months ended March 31, 2012 compared to $694 for the same period in 2011. The increase reflects the timing of the TownePlace Suites acquisition and higher RevPAR in the 2012 period ($85 and $75 in the 2012 and 2011 periods, respectively).

 

Property operating expenses

 

Property operating expenses increased by $113 to $425 during the three months ended March 31, 2012 compared to $312 for the same period in 2011. The increase is primarily attributable to the timing of the acquisition of the TownePlace Suites Hotel.

 

Real estate taxes

 

Real estate taxes increased by $19 to $45 during the three months ended March 31, 2012 compared to $26 for the same period in 2011. The increase is primarily attributable to the timing of the acquisition of the TownePlace Suite Hotel.

 

General and administrative expenses

 

General and administrative decreased by $389 to $321 during the three months ended March 31, 2012 compared to $710 for the same period in 2011. The decrease is primarily attributable to higher acquisition fees and accounting fees in the 2011 period related to the acquisition of the TownePlace Suites Hotel.

 

Depreciation and amortization

 

Depreciation and amortization expense increased by $37 to $92 during the three months ended March 31, 2012 compared to $55 for the same period in 2011. The increase is primarily attributable to the timing of the acquisition of the TownePlace Suite Hotel.

 

Interest and dividend income

 

Interest income increased by $218 to $227 for the three months ended March 31, 2012 compared to $9 for the same period in 2011. The 2012 amount includes(i) $61 of interest on the note receivable from affiliate we received in connection with the disposition of our 20.0% joint venture ownership interest in LVP CP Boston Holdings, LLC (the “CP Boston Joint Venture), effective January 1, 2012, (ii) $165 of dividend income earned on our investments in marketable securities, which were acquired in July 2011, and $1 of interest on our cash and cash equivalents. The 2011 amount consisted solely of interest on our cash and cash equivalents.

 

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Gain on disposition of unconsolidated affiliated entity

 

On February 20, 2012, we completed the disposition of our 20.0% joint venture ownership interest in LVP CP Boston Holdings, LLC (the “CP Boston Joint Venture”) with an effective date of January, 1, 2012, to subsidiaries of Lightstone Value Plus Real Estate Investment, Inc. (“Lightstone REIT I”), our Sponsor’s other public program, which now owns 100.0% of the CP Boston Joint Venture. In connection with the disposition, we recognized a gain on disposition of investment in unconsolidated affiliated entity of $741 in our consolidated statements of operations during the three months ended March 31, 2012.

 

Income/(loss) from investments in unconsolidated affiliated entities

 

Our income from investments in unconsolidated affiliated entities during the three months ended March 31, 2012 was $47 compared to a loss of $150 for the three months ended March 31, 2011. Our income from investments in unconsolidated affiliated entities is attributable to our investments in (i) Brownmill (40.0% and 34.413% ownership interests during the 2012 and 2011 periods, respectively), (ii) the CP Boston Joint Venture (20.0% ownership interest acquired on March 21, 2011 and disposed of effective January 1, 2012) and (iii) LVP Rego Park LLC (10.0% interest acquired on April 12, 2011). We account or accounted for our ownership interests in these unconsolidated affiliated entities in under the equity method of accounting commencing with their respective dates of acquisition. See Note 3 of the Notes to Consolidated Financial Statements for additional information.

 

Other (expense)/income, net

 

Other expense, net was $28 during the three months ended March 31, 2012 compared to income of $4 for the same period in 2011. The decrease is primarily attributable to interest expense of $27 in the 2012 period, of which $18 related to our mortgage payable obtained on March 14, 2012 and $9 related to our margin loan obtained in July 2011.

 

Noncontrolling interests

 

The income or loss allocated to noncontrolling interests relates to (i) the interest in our Operating Partnership held by our Sponsor and (ii) membership interests held by others in the TownePlace Suites Hotel.

 

Financial Condition, Liquidity and Capital Resources   

 

Overview:

 

For the three months ended March 31, 2012, our primary sources of funds were $2.9 million of proceeds from the sale of shares under our Offering, net of commissions and offering costs paid during the period, and $6.0 million of mortgage financing proceeds related to our TownePlace Suites Hotel. We are dependent upon future net proceeds expected to be received from our current Offering or subsequent offerings to conduct our proposed activities. The capital required to purchase real estate investments is expected to be obtained from our offerings and from any indebtedness that we may incur in either in connection with the acquisition or the operations of any real estate investments thereafter.

 

We have and intend to continue to utilize leverage either in connection with acquiring our properties or subsequent to their acquisition. The number of different properties we will acquire will be affected by numerous factors, including, the amount of funds available to us. When interest rates on mortgage loans are high or financing is otherwise unavailable on terms that are satisfactory to us or within a timeframe that is acceptable to us, we may purchase certain properties for cash with the intention of obtaining a mortgage loan at a later time.

 

Our future sources of funds will primarily be the net proceeds from our current Offering and/or future offerings, operating cash flows and borrowings. We currently believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.

 

We currently have a mortgage payable of $6.0 million on our TownePlace Suites Hotel and a margin loan of $3.2 million. We have and intend to continue to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of our independent directors and is disclosed to our stockholders. Market conditions will dictate the overall leverage limit; as such our aggregate long-term permanent borrowings may be less than 75% of aggregate fair market value of all properties. We may also incur short-term indebtedness, having a maturity of two years or less.

 

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Our charter provides that the aggregate amount of borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. Market conditions will dictate the overall leverage limit; as such our aggregate borrowings may be less than 300% of net assets. As of March 31, 2012, our total borrowings aggregated $9.2 million which represented 25% of our net assets.

 

Our future borrowings may consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. Such mortgages may be put in place either at the time we acquire a property or subsequent to our purchasing a property for cash. In addition, we may acquire properties that are subject to existing indebtedness where we choose to assume the existing mortgages. Generally, though not exclusively, we intend to seek to encumber our properties with debt, which will be on a non-recourse basis. This means that a lender’s rights on default will generally be limited to foreclosing on the property. However, we may, at our discretion, secure recourse financing or provide a guarantee to lenders if we believe this may result in more favorable terms. When we give a guaranty for a property owning entity, we will be responsible to the lender for the satisfaction of the indebtedness if it is not paid by the property owning entity.

 

 In general the types of future financing executed by us to a large extent will be dictated by the nature of the investment and current market conditions. For long-term real estate investments, it is our intent to finance future acquisitions using long-term fixed rate debt. However there may certain types of investments and market circumstances which may result in variable rate debt being the more appropriate choice of financing.  To the extent floating rate debt is used to finance the purchase of real estate, management will evaluate a number of protections against significant increases in interest rates, including the purchase of interest rate caps instruments.     

 

We may also obtain lines of credit to be used to acquire properties. If obtained, these lines of credit will be at prevailing market terms and will be repaid from offering proceeds, proceeds from the sale or refinancing of properties, working capital and/or permanent financing. Our Sponsor and/or its affiliates may guarantee our lines of credit although they are not obligated to do so. We may draw upon lines of credit to acquire properties pending our receipt of proceeds from our offerings. We expect that such properties may be purchased by our Sponsor’s affiliates on our behalf, in our name, in order to minimize the imposition of a transfer tax upon a transfer of such properties to us.

 

Additionally, in order to leverage our investments in marketable securities and seek a higher rate of return, we borrowed using a margin loan collateralized by the securities held with the financial institution that provided the margin loan.  This loan is due on demand and will be paid upon the liquidation of securities.

 

In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make certain payments to our Advisor, our Dealer Manager, and our Property Manager during the various phases of our organization and operation. During our organizational and offering stage, these payments include payments to our Dealer Manager for selling commissions and the dealer manager fee, and payments to our Advisor for the reimbursement of organizational and offering costs. During the acquisition and development stage, these payments will include asset acquisition fees and asset management fees, and the reimbursement of acquisition related expenses to our Advisor. During the operational stage, we will pay our Property Manager a property management fee and our Advisor an asset management fee. We will also reimburse our Advisor and its affiliates for actual expenses it incurs for administrative and other services provided to us. Additionally, the Operating Partnership may be required to make distributions to Lightstone SLP II LLC, an affiliate of the Advisor.

 

The following table represents the fees incurred associated with the payments to our Advisor and our Property Manager:

 

   For the Three Months Ended
March 31,
 
   2012   2011 
Acquisition fees  $-   $127 
Asset management fees   72    59 
           
Total  $72   $186 

  

In addition, total selling commissions and dealer fees incurred during the three months ended March 31, 2012 and 2011 were $293 and $175, respectively.

 

Summary of Cash Flows

 

The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below:

 

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   For the Three Months Ended March 31, 
   2012   2011 
         
Net cash flows provided by/(used in) operating activities  $385   $(932)
Net cash flows used in investing activities   (433)   (14,177)
Net cash flows provided by financing activities   7,432    1,965 
Net change in cash and cash equivalents   7,384    (13,144)
Cash and cash equivalents, beginning of the period   5,114    18,177 
Cash and cash equivalents, end of the period  $12,498   $5,033 

 

Our principal sources of cash flow were derived from net offering proceeds received and proceeds from a mortgage financing. In the future, we intend to acquire properties which will provide a relatively consistent stream of cash flow in order to provide us with resources to fund our operating expenses, scheduled debt service and any quarterly distributions authorized by our Board of Directors.

 

Our principal demands for liquidity currently are acquisition and development activities, scheduled debt service on our mortgage payable and costs associated with our public offerings. The principal sources of funding for our operations are currently the issuance of equity securities. Additionally, we have a demand note receivable in the amount of $2.4 million received from Lightstone REIT I in connection with the sale of our 20.0% joint venture ownership interest in the CP Boston Joint Venture.

 

Operating activities

 

The net cash provided by operating activities during the 2012 period primarily related to our net income of $1.1 million and non-cash expenses of aggregating $0.1 million less a nonrecurring gain on disposition in the amount of $0.7 million related to the disposition of our 20.0% joint venture ownership interest in the CP Boston Join Venture.

 

Investing activities

 

The net cash used in investing activities during the 2012 period reflects the placement in escrow of a $1.0 million refundable deposit for investment in real estate partially offset by $0.6 million of cash proceeds received from Lightstone I in connection with the disposition of our 20.0% joint venture ownership interest in the CP Boston Joint Venture.

 

Financing activities

 

The net cash provided by financing activities during the 2012 period primarily consists of proceeds from the issuance of our common stock of $2.9 million and net mortgage financing proceeds of $5.8 million on our TownePlace Suites Hotel partially offset by the payment of selling commissions, dealer manager fees and other offering costs of $0.7 million, distributions to common stockholders of $0.4 million, and a paydown on our margin loan of $0.2 million.

 

We believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.

 

Distribution Reinvestment Plan and Share Repurchase Program

 

Our DRIP provides our stockholders with an opportunity to purchase additional shares of our common stock at a discount by reinvesting distributions. Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to us, subject to restrictions. We redeemed redemption requests at an average price per share of common stock of $9.00. We fund share redemptions from the cumulative proceeds of the sale of shares of common shares pursuant to our DRIP. Our Board of Directors reserves the right to terminate either program for any reason without cause by providing written notice of termination of the DRIP to all participants or written notice of termination of the share repurchase program to all stockholders. As of March 31, 2012, the share price determined by our Board of Directors for the share redemption program is $9.00 per share.

 

Contractual Obligations  

 

The following is a summary of our estimated contractual obligations outstanding over the next five years and thereafter as of March 31, 2012.

 

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Contractual Obligations   2012    2,013    2,014    2,015    2,016      Thereafter      Total 
                                    
Mortgage Payable(1)  $77   $111   $117   $5,695   $-   $-   $6,000 
Interest Payments(2)   242    357    350    92    -    -    1,041 
                                    
Total Contractual Obligations  $319   $468   $467   $5,787   $-   $-   $7,041 

  

(1)Our mortgage payable provides for monthly principal payments through its initial term. The monthly principal payment resets each month based on the outstanding principal balance and the current interest rate pursuant to a 25-year amortization schedule less the number of payments made. These amounts represent future estimated principal payments based on the floor interest rate of 6.00%, which was in effect as of March 31, 2012.
(2)Our mortgage payable bears interest at Libor plus 3.75%, subject to a floor of 6.00%. These amounts represent estimated future interest payments based on the floor rate of 6.00%, which was in effect as of March 31, 2012.

 

In addition to the mortgage payable described above, in July 2011, we used a margin loan that is available from a financial institution that holds custody of certain of our marketable securities. The margin loan is collateralized by the marketable securities in our account. The amounts available to us under the margin loan are at the discretion of the financial institution and not limited to the amount of collateral in our account. The amount outstanding under this margin loan was $3.2 million as of March 31, 2012 and is due on demand. The margin loan bears interest at Libor plus 0.85% (1.10% as of March 31, 2012).

 

Funds from Operations and Modified Funds from Operations

 

Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, Inc., or NAREIT, an industry trade group, has promulgated a measure known as funds from operations, or FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to net income or loss as determined under generally accepted accounting principles in the United States, or GAAP.

 

We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the White Paper. The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property and asset impairment write-downs, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT’s policy described above.

 

The historical accounting convention used for real estate assets requires depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Additionally, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indications exist and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate-related depreciation and amortization and impairments, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. However, FFO and MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.

 

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Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under GAAP, that are typically accounted for as operating expenses.

 

Management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. We will use the proceeds raised in our offering to acquire properties, and we intend to begin the process of achieving a liquidity event (i.e., listing of our common stock on a national exchange, a merger or sale of the company or another similar transaction) within seven to ten years after the proceeds from the primary offering are fully invested. Thus, we will not continuously purchase assets and will have a limited life. Due to the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association, or IPA, an industry trade group, has standardized a measure known as modified funds from operations, or MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our offering has been completed and our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our offering and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on our operating performance during the periods in which properties are acquired.

 

We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, nonrecurring unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. While we are responsible for managing interest rate, hedge and foreign exchange risk, we do retain an outside consultant to review all our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such non-recurring gains and losses in calculating MFFO, as such gains and losses are not reflective of ongoing operations.

 

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Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses, amortization of above and below market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income. These expenses are paid in cash by us, and therefore such funds will not be available to distribute to investors. All paid and accrued acquisition fees and expenses negatively impact our operating performance during the period in which properties are acquired and will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. Therefore, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired. MFFO that excludes such costs and expenses would only be comparable to non-listed REITs that have completed their acquisition activities and have similar operating characteristics as us. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of derivatives and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to investors. Acquisition fees and expenses will not be reimbursed by the advisor if there are no further proceeds from the sale of shares in our offering, and therefore such fees and expenses will need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties or from ancillary cash flows.

 

Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors. For example, acquisition costs are funded from the proceeds of our offering and other financing sources and not from operations. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.

 

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value and there is no net asset value determination during the offering stage and for a period thereafter. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO or MFFO.

 

Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.

 

The below table illustrates the items deducted in the calculation of FFO and MFFO. Items are presented net of non-controlling interest portions where applicable.

 

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   For the Three Months Ended 
   March 31, 2012   March 31, 2011 
Net income/(loss)  $1,061   $(546)
FFO adjustments:          
Depreciation and amortization of real estate assets   92    55 
Gain on disposition of unconsolidated affiliated entity   (741)   - 
Adjustments to equity in earnings from unconsolidated entities, net   161    126 
FFO   573    (365)
MFFO adjustments:          
           
Other adjustments:          
Acquisition and other transaction related costs expensed(1)   10    379 
Adjustments to equity in earnings from unconsolidated entities, net   (68)   (8)
Amortization of above or below market leases and liabilities(2)   -    - 
Accretion of discounts and amortizatio of premiums on debt investments   -    - 
Mark-to-market adjustments(3)   -    - 
Non-recurring gains/(losses) from extinguishment/sale of debt, derivatives or securities holdings(4)   -    - 
MFFO   515    6 
Straight-line rent(5)   -    - 
MFFO - IPA recommended format  $515   $6 
           
Net income/(loss)  $1,061   $(546)
Less: (income)/loss attributable to noncontrolling interests   (17)   2 
Net income/(loss) applicable to Company's common shares  $1,044   $(544)
Net income/(loss) per common share, basic and diluted  $0.22   $(0.15)
           
FFO  $573   $(365)
Less: FFO attributable to noncontrolling interests   (22)   (1)
FFO attributable to Company's common shares  $551   $(366)
FFO per common share, basic and diluted  $0.12   $(0.10)
           
MFFO - IPA recommended format  $515   $6 
Less: MFFO attributable to noncontrolling interests   (22)   (18)
MFFO attributable to Company's common shares  $493   $(12)
           
Weighted average number of common shares outstanding, basic and diluted   4,675    3,598 

 

(1)The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to investors. In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for non-listed REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition costs, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our advisor or third parties. Acquisition fees and expenses under GAAP are considered operating expenses and as expenses included in the determination of net income and income from continuing operations, both of which are performance measures under GAAP. Such fees and expenses are paid in cash, and therefore such funds will not be available to distribute to investors. Such fees and expenses negatively impact our operating performance during the period in which properties are being acquired. Therefore, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property. Acquisition fees and expenses will not be paid or reimbursed, as applicable, to our advisor even if there are no further proceeds from the sale of shares in our offering, and therefore such fees and expenses would need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties or from ancillary cash flows.
(2)Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.
(3)Management believes that adjusting for mark-to-market adjustments is appropriate because they are nonrecurring items that may not be reflective of ongoing operations and reflects unrealized impacts on value based only on then current market conditions, although they may be based upon current operational issues related to an individual property or industry or general market conditions. The need to reflect mark-to-market adjustments is a continuous process and is analyzed on a quarterly and/or annual basis in accordance with GAAP.
(4)Management believes that adjusting for fair value adjustments for derivatives provides useful information because such fair value adjustments are based on market fluctuations and may not be directly related or attributable to the company’s operations.
(5)Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance.

 

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Distributions Declared by our Board of Directors and Source of Distributions

 

The following table provides a summary of our quarterly distributions declared for the three months ended March 31, 2012 and 2011, respectively. The amount of distributions paid to our stockholders in the future will be determined by our Board of Directors and is dependent on a number of factors, including funds available for payment of dividends, our financial condition, capital expenditure requirements and annual distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code. Additionally, our stockholders have the option to elect the receipt of shares in lieu of cash under our DRIP.

 

   Three Months Ended March 31, 2012   Three Months Ended March 31, 2011 
Distribution period:  Q1 2012   Percentage of
Distributions
   Q1 2011   Percentage of
Distributions
 
                 
Date distribution declared   March 30, 2012         March 4, 2011      
                     
Date distribution paid   April 13, 2012         April 15, 2011      
                     
Distributions paid  $407        $290      
Distributions reinvested   350         288      
Total Distributions  $757        $578      
                     
Source of distributions:                    
Cash flows provided by operations  $385    51%  $-    0%
Offering proceeds   22    3%   290    50%
Proceeds from issuance of common stock through DRIP   350    46%   288    50%
Total Sources  $757    100%  $578    100%
                     
Cash flows provided by/(used in) operations (GAAP basis)  $385        $(932)     
                     
Number of shares (in thousands) of common stock issued pursuant to the Company's DRIP   36         30      

 

The table below presents our cumulative distributions paid and cumulative FFO:

 

   For the period April, 28, 2008 
   (date of inception) through
 
   March 31, 2012 
     
FFO  $1,190 
Distributions  $5,133 

 

Information Regarding Dilution

 

In connection with our ongoing offering of shares of our common stock, we are providing information about our net tangible book value per share. Our net tangible book value per share is a mechanical calculation using amounts from our consolidated balance sheet, and is calculated as (1) total book value of our assets (2) minus total liabilities, (3) divided by the total number of shares of common stock outstanding. It assumes that the value of real estate, and real estate related assets and liabilities diminish predictably over time as shown through the depreciation and amortization of real estate investments. Real estate values have historically risen or fallen with market conditions. Net tangible book value is used generally as a conservative measure of net worth that we do not believe reflects our estimated fair value per share. It is not intended to reflect the value of our assets upon an orderly liquidation of the Company in accordance with our investment objectives. Our net tangible book value reflects dilution in the value of our common stock from the issue price as a result of (i) operating losses, which reflect accumulated depreciation and amortization of real estate investments, (ii) the funding of distributions from sources other than our cash flow from operations, and (iii) fees paid in connection with our public offerings, including commissions, dealer manager fees and other offering costs. As of March 31, 2012, our net tangible book value per share was $7.72. The offering price of primary shares under our current Offering (ignoring purchase price discounts for certain categories of purchasers) as of March 31, 2012 was $10.00.

 

Our offering price was not established on an independent basis and bears no relationship to the net value of our assets. Further, even without depreciation in the value of our assets, the other factors described above with respect to the dilution in the value of our common stock are likely to cause our offering price to be higher than the amount you would receive per share if we were to liquidate at this time.

 

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New Accounting Pronouncements

 

See Note 2 of the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been adopted during 2012 and certain accounting standards that we have not yet been required to implement and may be applicable to our future operations.

 

Subsequent Events

 

See Note 15 of the Notes to Consolidated Financial Statements for further information related to subsequent events during the period from April 1, 2012 through the date of this filing.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk.

 

We may be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund the expansion and refinancing of our real estate investment portfolio and operations. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes. As of March 31, 2012, we did not have any derivative agreements outstanding.

 

As of March 31, 2012, we held marketable securities with a fair value of a $6.7 million, which are available for sale for general investment purposes. We regularly review the market prices of our investments for impairment purposes. As of March 31, 2012, a hypothetical adverse 10.0% movement in market values would result in a hypothetical loss in fair value of approximately $0.7 million.

 

The following table shows the mortgage payable obligations maturing during the next five years and thereafter as of March 31, 2012:

 

Contractual Obligations   2012    2,013    2,014    2,015    2,016      Thereafter      Total 
                                    
 Mortgage Payable  $77   $111   $117   $5,695   $-   $-   $6,000 

 

As of March 31, 2012, our mortgage payable bore interest at a variable rate of Libor plus 3.75%, subject to a floor of 6.00%. Accordingly, the interest expense associated with this instrument is subject to changes in market interest rates. However, based on the Libor rate of 0.24% as of March 31, 2012, a 1% adverse movement (increase in Libor) would have no effect on our annual interest expense.

 

The carrying amounts of cash and cash equivalents, accounts receivable (included in other assets in our consolidated balance sheet), note receivable from affiliate, accounts payable and accrued expenses, and the margin loan approximated their fair values as of March 31, 2012 because of the short maturity of these instruments. The carrying amount of our mortgage loan receivable approximated its fair value as of March 31, 2012 based upon current market information that would have been used by a market participant to estimate the fair value of such loan. The estimated fair value of our mortgage payable, which we obtained on March 14, 2012, is as follows:

 

   As of March 31, 2012 
   Carrying Amount   Estimated Fair
Value
 
Mortgage payable  $6,000   $6,000 

 

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The fair value of our mortgage payable was determined by discounting the future contractual interest and principal payments by a market interest rate.

 

 In addition to changes in interest rates, the value of our real estate and real estate related investments is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of tenants, which may affect our ability to refinance debt in the future. As of March 31, 2012, we had no off-balance sheet arrangements.

 

 We cannot predict the effect of adverse changes in interest rates on our debt and, therefore, our exposure to market risk, nor can we provide any assurance that long-term debt will be available at advantageous pricing. Consequently, future results may differ materially from the estimated adverse changes discussed above.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

As of the end of the period covered by this report, management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.

 

There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There were no significant deficiencies or material weaknesses identified in the evaluation, and therefore, no corrective actions were taken.

 

PART II. OTHER INFORMATION:

 

ITEM 1. LEGAL PROCEEDINGS  

 

From time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes. As of the date hereof, the Company is not a party to any material pending legal proceedings.

 

ITEM 1A. RISK FACTORS  

 

We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. For the quarter ended March 31, 2012, there were no such material developments.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Recent Sales of Unregistered Securities  

 

During the period covered by this Form 10-Q, we did not sell any unregistered securities.

 

Use of Offering Proceeds  

 

On February 17, 2009, our Registration Statement on Form S-11 (File No. 333-151532), covering a public offering, which we refer to as the “Offering,” of up to 51,000,000 primary share of our common stock for $10.00 per share (exclusive of 6,500,000 shares available pursuant to our DRIP, and 255,000 shares reserved for issuance under our employee and director incentive restricted share plan) was declared effective under the Securities Act of 1933.

 

We issued 20,000 shares to our Advisor on May 20, 2008, for $10.00 per share. In addition, as of September 30, 2009, we had reached the minimum offering by receiving subscriptions of common shares representing gross offering proceeds of approximately $6.5 million. Through March 31, 2011, cumulative gross offering proceeds of $46.4 million have been released to us. We have invested the proceeds from this sale of our common stock and proceeds from our Advisor in our Operating Partnership, and as a result, held a 99.99% general partnership interest as of March 31, 2012 in our Operating Partnership’s common units.

 

Lightstone SLP II LLC committed to purchase Subordinated Profits Interests at a cost of $100,000 per unit for each $1.0 million in subscriptions up to ten percent of the proceeds from the primary shares under the Offering on a semi-annual basis beginning with the quarter ended June 30, 2010. Lightstone SLP II LLC may elect to purchase the Subordinated Profits Interests with either cash or an interest in real property of equivalent value. The proceeds received from the cash sale of the Subordinated Profits Interests, if any, will be used to offset payments made by us from offering proceeds to pay the dealer manager fees and selling commissions and other offering costs.

 

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From our inception through March 31, 2012, the Company’s Sponsor has contributed cash of approximately $0.2 million and elected to contribute equity interests totaling 40.0% in Brownmill, LLC (“Brownmill”) in exchange for 41.0 Subordinated Profits Interests with an aggregate value of $4.1 million. The Company’s Sponsor may continue to elect to contribute interests in real property in lieu of cash in exchange for Subordinated Profits Interests in order to fulfill its semi-annual commitment. See Note 3 of the Notes to Consolidated Financial Statements for additional information regarding Brownmill. .

 

We will utilize a portion of offering proceeds towards funding the dealer manager fees, selling commissions and other offering costs.

 

Below is a summary of the expenses we have incurred from April 28, 2008 (date of inception) through March 31, 2012 in connection with the issuance and distribution of registered securities.

 

(Dollars in thousands)    
Type of Expense Amount     
Underwriting discounts and commissions  $5,011 
Other expenses incurred and paid to non-affiliates   4,676 
Total  offering expenses  incurred  $9,687 

 

As of March 31, 2012, the total costs of raising capital associated with our offerings which we have funded, including fees paid to our Dealer Manager was approximately 21% of total proceeds. As a significant amount of the offering costs associated with accounting, legal and marketing costs were incurred prior to the sale of shares, the percentage of proceeds utilized towards commissions, dealer manager fees and other offering costs is currently higher than our estimate of approximately 10% of offering proceeds. As more shares are sold, we expect this percentage to decline over time.

   

From our inception date through March 31, 2012, we have used the cumulative net offering proceeds received of $36.7 million, after deducting offering expenses paid of $9.7 million, as follows:

 

(Dollars in thousands)    
Purchase of investment property, net of mortgage financings  $6,582 
Purchase of investments in unconsolidated affiliated entities   3,993 
Purchase of mortgage loan receivable, net of collections   7,029 
Purchase of marketable securities, net of margin loan   4,730 
Cash and cash equivalents (as of March 31, 2012)   12,498 
Subscriptions receivable (as of March 31, 2012)   14 
Cash distributions not funded by operations   1,268 
Other uses (primarily timing of payables)   611 
      
Total uses                $36,725 

  

From our inception date through May 7, 2012, we have sold 4.9 million shares for an aggregate amount of approximately $49.2 million, including approximately 0.3 million shares for an aggregate amount of approximately $2.5 million under our DRIP.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

None.

 

ITEM 5. OTHER INFORMATION 

None.

 

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ITEM 6. EXHIBITS

 

Exhibit

Number

 

 

Description

     
31.1*   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2*   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1*   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
32.2*   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”

 *Filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE

INVESTMENT TRUST II, INC.

   
Date: May 14, 2012 By:   /s/ David Lichtenstein
  David Lichtenstein
 

Chairman and Chief Executive Officer

(Principal Executive Officer)

 

Date: May 14, 2012 By:   /s/ Donna Brandin
  Donna Brandin
 

Chief Financial Officer and Treasurer

(Duly Authorized Officer and Principal Financial and Accounting Officer)

 

35