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EXCEL - IDEA: XBRL DOCUMENT - Lightstone Value Plus Real Estate Investment Trust, Inc.Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.v312379_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - Lightstone Value Plus Real Estate Investment Trust, Inc.v312379_ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - Lightstone Value Plus Real Estate Investment Trust, Inc.v312379_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.v312379_ex32-1.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

xQUARTERLY 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 000-52610

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland   20-1237795

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

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

 

(732) 367-0129

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes    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    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 30.0 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust, Inc., including shares issued pursuant to the dividend reinvestment plan.  

 

 
 

 

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

 

INDEX

 

    Page
PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
     
  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 (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 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 41
     
Item 4. Controls and Procedures 42
     
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings 43
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 43
     
Item 3. Defaults Upon Senior Securities 43
     
Item 4. Mine Safety Disclosures 43
     
Item 5. Other Information 43
     
Item 6. Exhibits 44

 

 
 

 

 PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

 

  

 

As of March 31, 2012

   As of December 31,
2011
 
   (Unaudited)     
Assets          
Investment property:          
Land and improvements  $86,970   $86,953 
Building and improvements   218,908    218,647 
Furniture and fixtures   3,499    3,459 
Construction in progress   4,409    1,688 
Gross investment property   313,786    310,747 
Less accumulated depreciation   (24,220)   (22,278)
Net investment property   289,566    288,469 
Investments in unconsolidated affiliated real estate entities   14,875    14,780 
Cash and cash equivalents   15,976    31,525 
Marketable securities, available for sale   165,317    103,174 
Restricted marketable securities, available for sale   -    47,256 
Restricted escrows   41,741    33,543 
Tenant accounts receivable (net of allowance for doubtful accounts of $146 and $173, respectively)   2,358    2,495 
Mortgages receivable   31,553    31,062 
Intangible assets, net   1,395    1,475 
Interest receivable from related parties   1,422    2,269 
Prepaid expenses and other assets   8,764    8,308 
Total Assets  $572,967   $564,356 
Liabilities and Stockholders' Equity          
Mortgages payable  $223,505   $224,270 
Margin loan   18,340    20,400 
Accounts payable and accrued expenses   26,250    17,608 
Due to sponsor   324    751 
Loans due to affiliates   2,879    476 
Tenant allowances and deposits payable   1,233    1,329 
Distributions payable   5,212    5,557 
Deferred rental income   990    964 
Acquired below market lease intangibles, net   372    400 
Deferred gain on disposition   -    30,287 
Total Liabilities   279,105    302,042 
Commitments and contingencies (See Note 12)          
Stockholders' equity:          
Company's Stockholders Equity:          
Preferred shares, $0.01 par value, 10,000 shares authorized,  none outstanding   -    - 
Common stock, $.01 par value; 60,000 shares authorized, 29,812 and 29,747 shares issued and outstanding in 2011 and 2010, respectively   298    297 
Additional paid-in-capital   263,453    263,558 
Accumulated other comprehensive income   40,145    24,252 
Accumulated distributions in excess of net earnings   (42,527)   (59,418)
Total Company's stockholders' equity   261,369    228,689 
Noncontrolling interests   32,493    33,625 
Total Stockholders' Equity   293,862    262,314 
Total Liabilities and Stockholders' Equity  $572,967   $564,356 

 

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

 

3
 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

   Three Months Ended March 31, 
   2012   2011 
         
Revenues:          
Rental income  $8,719   $7,330 
Tenant recovery income   1,400    1,214 
Other service income   2,404    - 
Total revenues   12,523    8,544 
           
Expenses:          
Property operating expenses   6,098    3,351 
Real estate taxes   1,107    899 
General and administrative costs   1,650    1,718 
Depreciation and amortization   2,137    1,961 
Total operating expenses   10,992    7,929 
Operating income   1,531    615 
Other income, net   348    79 
Mark to market adjustment on derivative financial instruments   (7,654)   (3,721)
Interest income   3,659    3,228 
Interest expense   (3,365)   (2,975)
Gain on disposition of unconsolidated affiliated real estate entities   30,287    - 
Loss on sale of marketable securities   (82)   (793)
Income/(loss) from investments in unconsolidated affiliated real estate entities   83    (233)
Net income/(loss)   24,807    (3,800)
Less: net (income)/loss attributable to noncontrolling interests   (2,704)   136 
Net income/(loss) attributable to Company's common shares  $22,103   $(3,664)
Net income/(loss) per Company’s common share, basic and diluted  $0.74   $(0.12)
Weighted average number of common shares outstanding, basic and diluted   29,849    31,653 

 

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

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

 

   For the Three Months Ended  March 31, 
   2012   2011 
         
Net income/(loss)  $24,807   $(3,800)
           
Other comprehensive income:          
Unrealized gain on available for sale securities   16,153    5,238 
Realized gain on available for sale securities   5    185 
           
Other comprehensive income   16,158    5,423 
           
Comprehensive income   40,965    1,623 
           
Less: Comprehensive (income)/loss attributable to non-controlling interests   (2,969)   52 
           
Comprehensive income attributable to the Company's common shares  $37,996   $1,675 

 

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

 

5
 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Amounts in thousands) (UNAUDITED)

 

   Common Shares                     
   Number of Shares   Amount   Additional Paid-In
Capital
   Accumulated Other
Comprehensive Income
   Accumulated
Distributions in
Excess of Net
Earnings
   Total
Noncontrolling
Interests
   Total Equity 
                                    
BALANCE, December 31, 2011   29,747   $297   $263,558   $24,252   $(59,418)  $33,625   $262,314 
                                    
Net income   -    -    -    -    22,103    2,704    24,807 
                                    
Other comprehensive income                  15,893    -    265    16,158 
                                    
Distributions declared   -    -    -    -    (5,212)   -    (5,212)
                                    
Distributions paid to noncontrolling interests   -    -    -    -    -    (2,063)   (2,063)
                                    
Contributions received from noncontrolling interests   -    -    -    -    -    157    157 
Redemption and cancellation of shares   (127)   (1)   (1,165)   -    -    -    (1,166)
Shares issued from distribution reinvestment program   192    2    1,825    -    -    -    1,827 
Acquisition of noncontrolling interest in a subsidiary   -    -    (765)   -    -    (2,195)   (2,960)
                                    
BALANCE, March 31, 2012   29,812   $298   $263,453   $40,145   $(42,527)  $32,493   $293,862 

 

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

 

6
 

  

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)(UNAUDITED)

 

   For the Three Months Ended March 31, 
   2012   2011 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income/(loss)   24,807    (3,800)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:          
Depreciation and amortization   2,137    1,762 
Mark to market adjustment on derivative financial instruments   7,654    3,721 
Loss on sale of marketable securities   82    793 
Gain on disposition of unconsolidated affiliated real estate entities   (30,287)   - 
(Income)/loss from investments in unconsolidated affiliated real estate entities   (83)   233 
Other non-cash adjustments   (364)   216 
Changes in assets and liabilities:          
Decrease in prepaid expenses and other assets   768    171 
Decrease/(increase) in tenant and other accounts receivable   120    (181)
Increase in tenant allowance and security deposits payable   94    58 
Increase/(decrease) in accounts payable and accrued expenses   979    (693)
(Decrease)/increase in due to Sponsor   (673)   156 
Increase/(decrease) in deferred rental income   26    (77)
Net cash provided by operating activities   5,260    2,359 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of investment property, net   (3,628)   (9,901)
Purchase of noncontrolling interest in a subsidiary   (560)   - 
Purchase of investment in unconsolidated affiliated real estate entities   (39)   (438)
Purchase of marketable securities   -    (48,846)
Collections on mortgage receivable   28    - 
Proceeds from sale of marketable securities   1,189    12,540 
Distribution from investments in unconsolidated affiliates   27    - 
Deposit for purchase of real estate   1,990    (1,377)
Funding (to)/from restricted escrows   (10,188)   2,823 
Net cash used in investing activities   (11,181)   (45,199)
CASH FLOWS FROM FINANCING ACTIVITIES:          
Mortgage payments   (765)   (352)
Payments from loans due to affiliates   -    (235)
Redemption and cancellation of common stock   (1,166)   (2,151)
Net margin loan (payments)/proceeds   (2,060)   37,655 
Contributions received from noncontrolling interests   157    2,064 
Distributions paid to noncontrolling interests   (2,063)   (1,740)
Distributions paid to Company's common stockholders   (3,731)   (3,695)
Net cash (used in)/provided by financing activities   (9,628)   31,546 
Net change in cash and cash equivalents   (15,549)   (11,294)
Cash and cash equivalents, beginning of period   31,525    24,318 
Cash and cash equivalents, end of period  $15,976   $13,024 

 

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

 

7
 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(Amounts in thousands) (UNAUDITED)

 

   For the Three Months Ended March 31, 
   2012   2011 
Supplemental disclosure of cash flow information:        
Cash paid for interest  $3,210   $2,857 
Distributions declared  $5,212   $5,477 
Value of shares issued from distribution reinvestment program  $1,827   $1,919 
Issuance of note payable in exchange for remaining interest in CP Boston Joint Venture  $2,400   $- 

 

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

 

8
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data and where indicated in millions)(Unaudited)

 

1.Organization

 

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

 

Lightstone REIT 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, L.P., a Delaware limited partnership formed on July 12, 2004 (the “Operating Partnership”), in which Lightstone REIT as the general partner, held a 98.3% interest as of March 31, 2012.

 

The Lightstone REIT 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 or the Company as required by the context in which such pronoun is used.

 

The Company is managed by Lightstone Value Plus REIT, LLC (the “Advisor”), an affiliate of the Lightstone Group, Inc., under the terms and conditions of an advisory agreement. The Lightstone Group, Inc. previously served as the Company’s sponsor (the “Sponsor”) during its initial public offering, which closed on October 10, 2008. The Sponsor and Advisor are majority owned and controlled by David Lichtenstein, the Chairman of the Company’s board of directors (the “Board”) and its Chief Executive Officer.

 

The Company’s stock is not currently listed on a national securities exchange. The Company may seek to list its 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 October 10, 2018 (the tenth anniversary of the completion of its initial public 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.

 

As of March 31, 2012, on a collective basis, the Company (i) wholly owned and consolidates the operating results and financial condition of 6 retail properties containing a total of approximately 0.9 million square feet of retail space, 15 industrial properties containing a total of approximately 1.3 million square feet of industrial space, 6 multi-family residential properties containing a total of 1,585 units, and 3 hotel hospitality properties containing a total of 656 rooms, (ii) majority owned and consolidates the operating results and financial condition of 1 residential development project, and (iii) owned interests accounted for under the equity method of accounting in 1 office property containing a total of approximately 1.1 million square feet of office space and 2 development outlet center retail projects. All of the Company’s properties are located within the United States. As of March 31, 2012, the retail properties, the industrial properties, the multi-family residential properties and the office property were 85.7%, 83.0%, 95.6% and 80.1% occupied based on a weighted-average basis, respectively. Its hotel hospitality properties’ average revenue per available room (“Rev PAR”) was $29.57 and occupancy was 50.9%, respectively for the three months ended March 31, 2012.

 

2.Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of the Lightstone REIT and its Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). All inter-company balances and transactions have been eliminated in consolidation.

 

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of the Company and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. The unaudited interim consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. The accompanying unaudited consolidated financial statements of Lightstone Value Plus Real Estate Investment Trust, Inc. and its Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

9
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data and where indicated in millions)(Unaudited)

 

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

 

 Reclassifications

 

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

 

New Accounting Pronouncements

 

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. Dispositions of Investments in Unconsolidated Affiliated Entities

 

Prime Outlets Acquisition Company (“POAC”)/Mill Run LLC (“Mill Run”) Transaction

 

On December 8, 2009, the Company, its Operating Partnership and Pro-DFJV Holdings LLC (“PRO”), a Delaware limited liability company and a wholly-owned subsidiary of the Company (collectively, the “LVP Parties”) entered into a definitive agreement (“the “Contribution Agreement”) with Simon Property Group, Inc. (“Simon Inc.”), a Delaware corporation, Simon Property Group, L.P., a Delaware limited partnership (“Simon OP”), and Marco Capital Acquisition, LLC, a Delaware limited liability company (collectively, referred to herein as “Simon” with respect to the Contribution Agreement) providing for the disposition of a substantial portion of the Company’s retail properties to Simon including the Company’s (i) St. Augustine Outlet Center, which is wholly owned, (ii) 40.0% aggregate interest in its investment in POAC, which included 18 operating outlet center properties (the “POAC Properties”), Grand Prairie Holdings LLC (“GPH”) and Livermore Valley Holdings LLC (“LVH”) and (iii) 36.8% aggregate interest in its investment in Mill Run, which includes 2 operating outlet center properties (the “Mill Run Properties”). On June 28, 2010, the Contribution Agreement was amended to remove the previously contemplated dispositions of St. Augustine and the Company’s 40.0% aggregate interests in both GPH and LVH. The transactions contemplated by the Contribution Agreement are referred to herein as the “POAC/Mill Run Transaction”.

 

Additionally, certain affiliates of the Company’s Sponsor were parties to the Contribution Agreement pursuant to which they would simultaneously dispose of their respective interests in POAC and Mill Run and certain other outlet center properties, in which the LVP Parties had no ownership interest, to Simon.

 

The Company’s 40.0% and 36.8% aggregate interests in investments in POAC, including GPH and LVH, and Mill Run, respectively, were accounted for under the equity method of accounting since their acquisition.

 

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

 

The gross cash consideration that the LVP Parties received in connection with the closing of the POAC/Mill Run Transaction was paid by Simon with the proceeds from a draw under a revolving credit facility that Simon entered into contemporaneously with the signing of the Contribution Agreement. In connection with the closing of the POAC/Mill Run Transaction, the LVP Parties provided guaranties of collection (the “POAC/Mill Run Simon Loan Collection Guaranties”) with respect to such revolving credit facility (see Note 12 for additional information). The equity interests that the LVP Parties received in connection with the closing of the POAC/Mill Run Transaction consisted of 703,737 Marco OP Units that are exchangeable for a similar number of common operating partnership units (“Simon OP Units”) of Simon OP subject to various conditions as discussed below. Subject to the various conditions, the Company may elect to exchange the Marco OP Units to Simon OP Units which must be immediately delivered to Simon in exchange for cash or similar number of shares of Simon Inc. common stock (“Simon Stock”).

 

10
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data and where indicated in millions)(Unaudited)

 

Although the Marco OP Units may be immediately exchanged into Simon OP Units, if upon their delivery to Simon, Simon elects to exchange them for a similar number of shares of Simon Stock rather than cash, the LVP Parties may be precluded from selling the Simon Stock for a 6-month period from the date of issuance. Additionally, because the Company was required to indemnify Simon for any liabilities and obligations (the “TPA Obligations”) that should arise under certain tax protection agreements (the “POAC/Mill Run Tax Protection Agreements”) through March 1, 2012 (see Note 12 for additional information), the Company was required to place 367,778 of the Marco OP Units (the “Escrowed Marco OP Units”) into an escrow account.

 

Pursuant to the Contribution Agreement, there was a period after closing, of up to 215 days, for the Aggregate Consideration Value to be finalized between the LVP Parties and Simon. However, the Company and Simon agreed to extend the period and the Aggregate Consideration Value was finalized during the third quarter of 2011. The Escrowed Cash and the Escrowed Units were reserved for the final settlement of certain consideration adjustments (collectively, the “Final Consideration Adjustments”) related to net working capital reserves, including the true-up of debt assumption costs, certain indemnified liabilities and specified transaction costs. The Escrowed Marco OP Units also could have been used to cover any shortfalls resulting from the Final Consideration Adjustments not covered by the Escrowed Cash. In connection with the finalization of the Aggregate Consideration Value, the entire Escrowed Cash, plus interest was, released to the Company during the third quarter of 2011. Additionally, the Escrowed Marco Units were fully released to the Company on March 1, 2012 as no TPA Obligations arose under the POAC/Mill Run Tax Protection Agreements.

 

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

 

In connection with the closing of the POAC/Mill Run Transaction, the Company initially recognized a gain on disposition of approximately $142.8 million in its consolidated statements of operations during the third quarter of 2010. The Company also deferred an additional $32.2 million of gain (the “Deferred Gain”) on its consolidated balance sheet consisting of the total of the (i) $1.9 million of Escrowed Cash and (ii) $30.3 million of Restricted Marco OP Units received as part of the Aggregate Consideration Value because realization of these items was subject to the Final Consideration Adjustments and the TPA Obligations. An additional $0.1 million of transaction expenses were incurred by the Company during the fourth quarter of 2010 which reduced the recognized gain to approximately $142.7 million for the year ended December 31, 2010. During the third quarter of 2011, the Company recognized an additional $2.8 million gain on the POAC/Mill Run Transaction consisting of the full return of the Escrowed Cash, plus interest, to the Company and certain other items. As a result, the remaining Deferred Gain of $30.3 million which was reflected on our consolidated balance sheet as of December 31, 2011, was recognized during the three months ended March 31, 2012 as a result of aforementioned release of the Escrowed Marco Units on March 1, 2012.

 

Outlet Centers Transaction

 

As discussed above, the Company, through its Operating Partnership and PRO, has an aggregate 40.0% interest in GPH and LVH, which holds ownership interests in various entities, including entities that are developing two outlet centers located in Grand Prairie, Texas (the “Grand Prairie Outlet Center”) and Livermore Valley, California (the “Livermore Valley Outlet Center”). The Grand Prairie Outlet Center, which will consist of approximately 418,000 square feet of Gross Leasable Area or GLA, is currently under construction and expected to open during the third quarter of 2012. The Livermore Valley Outlet Center, which will consist of approximately 511,000 square feet of GLA, is currently under construction and expected to open in the fourth quarter of 2012. The Company accounts for its ownership interests in GPH and LVH under the equity method of accounting in its consolidated financial statements. Certain affiliates of the Company’s Sponsor (the “Sponsor’s Affiliates”) own the remaining 60% interest in GPH and LVH.

 

11
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data and where indicated in millions)(Unaudited)

 

On December 9, 2011, GPH, LVH and certain of their subsidiaries (collectively, the “Holdings Entities”) entered into definitive agreement (the “2011 Contribution Agreement”) with Simon OP, Simon Inc. and Marco II LP Units, LLC, a Delaware limited liability company (collectively, referred to herein as “Simon” with respect to the 2011 Contribution Agreement) providing for the immediate disposition of 50.0% of their interests in the Grand Prairie Outlet Center and the Livermore Outlet Center, respectively, at valuations (the “Initial Valuations”) based on the then projected stabilized net operating income of the respective outlet center divided by a capitalization rate of 7.0%, adjusted for certain other items, including expected indebtedness. The transactions contemplated by the 2011 Contribution Agreement are referred to herein as the “Outlet Centers Transaction”. Additionally, on December 9, 2011, certain joint venture agreements (collectively, the “Outlet Center JV Agreements”) were amended and restated with respect to the Grand Prairie Outlet Center and the Livermore Valley Outlet Center.

 

On December 9, 2011, the Outlet Centers Transaction was completed and, as a result, GPH and LVH received combined net consideration of approximately $87.6 million (the “Combined Consideration”), after certain transaction expenses of approximately $1.2 million which were paid at closing. The Combined Consideration consisted of approximately (i) $78.7 million in the form of cash and (ii) $8.9 million in the form of equity interests (“Marco II OP Units”). GPH and LVH immediately distributed the net cash proceeds to its members of which the Company’s aggregate share was approximately $31.5 million, before allocations to noncontrolling interests.

 

The gross cash consideration that GPH and LVH received in connection with the closing of the Outlet Centers Transaction was paid by Simon with the proceeds from a draw under a revolving credit facility. In connection with the closing of the Outlet Center Transaction, the Holdings Entities, the Company, the Operating Partnership, PRO and the Sponsor Affiliates provided certain guaranties of collection (the “Outlet Centers Simon Loan Collection Guaranties”) with respect to such revolving credit facility (see Note 12 for additional information with respect to the Company’s proportionate share). The equity interests that GPH and LVH received in connection with the closing of the Outlet Centers Transaction consisted of 73,428 Marco II OP Units that are exchangeable for a similar number of Simon OP Units. Subject to the various conditions, GPH and LVH may elect to exchange their Marco II OP Units to Simon OP Units which must be immediately delivered to Simon in exchange for cash or similar number of shares of Simon Stock.

 

The 73,428 Marco II OP Units received by GPH and LVH had an estimated combined fair value of $8.9 million as of the closing date of the Outlet Centers Transaction. The estimated fair value of the Marco II OP Units was based on the weighted-average closing price of Simon Stock for the 10-business day period ending 3 business days prior to the closing date.

 

In connection with the closing of the Outlet Center Transaction, GPH and LVH recognized a combined gain on disposition of approximately $63.3 million during the fourth quarter of 2011. Because the Company accounts for its interests in GPH and LVH under the equity method of accounting, it recognized its pro rata share of the combined gain on disposition, or approximately $25.3 million, in its consolidated statements of operations during the fourth quarter of 2011.

 

Pursuant to the terms of the Outlet Center JV Agreements, commencing fifteen months after the grand opening date (the “Grand Opening Date”), as defined, of the respective outlet center, GPH and LVH have the right to put (the “Put”) their remaining interests in the Grand Prairie Outlet Center and/or Livermore Valley Outlet Center, respectively, to Simon at certain prescribed exit consideration amounts (the “Exit Consideration Amounts”) and Simon has the right to call (the “Call”) the remaining interests from GPH and/or LVH at the Exit Consideration Amounts. The Exit Consideration Amounts consist of (i) a final valuation (the “Final Valuation”) based on respective outlet center’s in-place net operating income, subject to certain adjustments, as of the one-year anniversary of its Grand Opening Date, divided by a capitalization rate of 7.0%, adjusted for certain items, including outstanding indebtedness and (ii) a true-up valuation which represents the change in the Initial Valuations using the in place net operating income.

 

4.Investments in Unconsolidated Affiliated Real Estate Entities

 

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

 

        As of 
Real Estate Entity  Date(s) Acquired  Ownership
%
   March 31, 2012   December 31, 2011 
GPH  March 30, 2009 & August 25, 2009   40.0%  $5,325   $5,297 
LVH  March 30, 2009 & August 25, 2009   40.0%   9,550    9,483 
1407 Broadway Mezz II, LLC ("1407 Broadway")  January 4, 2007   49.0%   -      
Total Investments in unconsolidated affiliated real estate entities        $14,875   $14,780 

 

 

12
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data and where indicated in millions)(Unaudited)

 

GPH

 

The Operating Partnership and PRO own a 25.0% and 15.0% membership interest in GPH, respectively. The Company’s ownership interest is a non-managing interest, with certain consent rights with respect to major decisions. An affiliate of the Company’s Sponsor is the majority owner and manager of GPH. Contributions, profits and cash distributions are allocated in accordance with each investor’s ownership percentage.

 

GPH, through subsidiaries, had an ownership interest of 50.0% in the Grand Prairie Outlet Center as of March 31, 2012 and December 31, 2011. GPH, through subsidiaries, also had an ownership interest of 100.0% in certain rights related to the land on which the Grand Prairie Outlet Center is being constructed as March 31, 2012 and December 31, 2011.

 

GPH Financial Information

 

GPH had no operating results for the three months ended March 31, 2011. The following table represents the unaudited condensed income statement for GPH for the three months ended March 31, 2012:

 

   For the Three Months Ended
March 31, 2012
 
     
Interest income and other, net  $24 
Income from investment in unconsolidated affiliated entity   70 
Net income  $94 
Company's share of net income (40.0%)  $38 

 

The following table represents the unaudited condensed balance sheet for GPH:

 

   As of   As of 
   March 31, 2012   December 31, 2011 
         
Investments in unconsolidated affiliated real estate entities  $10,184   $10,114 
Marketable securities, available for sale   3,785    3,350 
Other assets   96    127 
Total assets  $14,065   $13,591 
           
Other liabilities  $111   $142 
Members' capital   13,954    13,449 
Total liabilities and members' capital  $14,065   $13,591 

 

LVH

 

The Operating Partnership and PRO own 25.0% and 15.0% membership interests in LVH, respectively. The Company’s ownership interest is a non-managing interest, with certain consent rights with respect to major decisions. An affiliate of the Company’s Sponsor, is the majority owner and manager of LVH. Contributions, profit and cash distributions are allocated in accordance with each investor’s ownership percentage.

 

13
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data and where indicated in millions)(Unaudited)

 

LVH, through subsidiaries, had an ownership interest of 50.0% in the Livermore Outlet Center as of March 31, 2012 and December 31, 2011. LVH, through subsidiaries, had an ownership interest of 100% in a parcel of land adjacent to the Livermore Outlet Center as of March 31, 2012 and December 31, 2011. The parcel of land was acquired in December 2010 for a potential expansion to the Livermore Outlet Center.

 

LVH Financial Information

 

LVH had no operating results for the three months ended March 31, 2011. The following table represents the unaudited condensed income statement for LVH for the three months ended March 31, 2012:

 

   For the Three Months Ended
March 31, 2012
 
     
Interest income and other, net  $43 
Income from investment in unconsolidated affiliated entity   69 
Net income  $112 
Company's share of net income (40.0%)  $45 

 

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

 

   As of   As of 
   March 31, 2012   December 31, 2011 
         
Construction in progress  $3,802   $3,776 
Investments in unconsolidated affiliated real estate entities   14,246    14,176 
Marketable securities, available for sale   6,912    6,117 
Other assets   94    127 
Total assets  $25,054   $24,196 
           
Other liabilities  $221   $226 
Members' capital   24,833    23,970 
Total liabilities and members' capital  $25,054   $24,196 

 

1407 Broadway Mezz II, LLC

 

  As of March 31, 2012 and December 31, 2011, the Company has a 49.0% ownership in 1407 Broadway Mezz II, LLC (“1407 Broadway”), which has a sub-leasehold interest in a ground lease to an office building located at 1407 Broadway in New York, New York. During the second quarter of 2011, the Company’s share of cumulative losses resulting from its ownership interest in 1407 Broadway brought the carrying value of its investment in 1407 Broadway to zero. Since the Company is not obligated to fund 1407 Broadway’s deficits and the balance of the Company’s investment in 1407 Broadway is zero, the Company has suspended the recording of its portion of equity losses or earnings from 1407 Broadway until such time as the Company’s investment in 1407 Broadway is greater than zero.

 

During March 2010, the Company entered a demand grid note to borrow up to $20.0 million from 1407 Broadway. During 2010 the Company received aggregate loan proceeds from 1407 Broadway associated with this demand grid note in the amount of $1.5 million. During 2011, the Company made principal payments of approximately $1.0 million to 1407 Broadway. The loan bears interest at LIBOR plus 2.5%. The principal and interest on this loan is due the earlier of February 28, 2020 or on demand. As of March 31, 2012 and December 31, 2011, the outstanding principal and interest of approximately $0.5 million, is recorded in loans due to affiliates in the consolidated balance sheets.

 

14
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data and where indicated in millions)(Unaudited)

 

1407 Broadway Financial

 

The following table represents the unaudited condensed income statement for 1407 Broadway:

 

   For the Three Months Ended 
March 31,
 
   2012   2011 
         
Total revenue  $9,019   $8,936 
Property operating expenses   6,444    6,776 
Depreciation and amortization   1,463    1,592 
Operating income   1,112    568 
Interest expense and other, net   (1,045)   (1,043)
Net income/(loss)  $67   $(475)
Company's share of net income/(loss) (49%)  $-   $(233)

 

The following table represents the unaudited condensed balance sheet for 1407 Broadway:

 

   As of   As of 
   March 31, 2012   December 31, 2011 
         
Real estate, at cost (net)  $108,732   $109,275 
Intangible assets   597    663 
Cash and restricted cash   10,380    10,010 
Other assets   8,816    16,653 
Total assets  $128,525   $136,601 
           
Mortgage payable  $127,250   $127,250 
Other liabilities   4,437    12,581 
Member (deficit) capital   (3,162)   (3,230)
Total liabilities and members' capital  $128,525   $136,601 

 

5.CP Boston Joint Venture

 

On March 21, 2011, the Company and its Sponsor’s other public, the Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone REIT II”), acquired, through LVP CP Boston Holdings, LLC (the “CP Boston Joint Venture”) a 366-room, eight-story, full-service hotel (the “Hotel”) and a 65,000 square foot water park (the “Water Park”), collectively, the “CP Boston Property”, located at 50 Ferncroft Road, Danvers, Massachusetts (part of the Boston “Metropolitan Statistical Area”) from WPH Boston, LLC, 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 II had 80.0% and 20.0% joint venture ownership interests, respectively, in the CP Boston Joint Venture and the Company’s share of the aggregate purchase price was approximately $8.0 million. Additionally, in connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 2.75% of the acquisition price, or approximately $0.2 million. The Company’s portion of the acquisition was funded with cash. During the second quarter of 2011, management of the CP Boston Property decided to rebrand the hotel property and incurred a franchise cancellation fee of approximately $1.2 million.

 

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

 

15
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data and where indicated in millions)(Unaudited)

 

On February 20, 2012, the Company completed the acquisition of the remaining 20.0% joint venture ownership interest in the CP Boston Joint Venture, with an effective date of January 1, 2012, from Lightstone REIT II. As a result, the Company now owns 100.0% of the CP Boston Joint Venture. Under the terms of the agreement, the Company paid $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 II Note”), which is included in loans due to affiliates in the consolidated balance sheet as of March 31, 2012. The Lightstone REIT II Note requires monthly payments of interest and during the three months ended March 31, 2012, the Company incurred $61 of interest expense on the Lightstone REIT II Note. The difference between the book value of the 20.0% non-controlling interest previously owned by Lightstone REIT II and the purchase price was recorded as a deduction from paid in capital of approximately $0.8 million.

 

The Company’s interest in the CP Boston Joint Venture is a managing interest. Beginning on March 21, 2011, the Company consolidated the operating results and financial condition of the CP Boston Joint Venture and accounted for the joint venture ownership interest of Lightstone REIT II as a noncontrolling interest from the date of initial acquisition through the date the Company acquired Lightstone REIT II’s 20.0% joint venture ownership interest, effective January, 1, 2012.

 

The Company paid approximately $9.1 million in cash and assumed approximately $0.9 million in net liabilities. Approximately $2.4 million was allocated to land, $6.1 million was allocated to building and improvements, $1.8 million was allocated to furniture and fixtures and other assets.

 

For the three months ended March 31, 2011, $0.3 million of revenue and $0.4 million of property operating expenses and for the three months ended March 31, 2012, $3.3 million of revenue and $3.0 million of property operating expenses are included in operating income on the Company’s consolidated statements of operations from the CP Boston Joint Venture since the date of acquisition.

 

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

 

   For the Three Months
Ended March 31, 2011
 
Pro forma net revenue  $11,956 
Pro forma net income/(loss)  $(3,967)
Pro forma earnings/(loss) per share  $(0.13)

 

6. 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, primarily REITs  $104   $-   $(101)  $3 
Marco OP Units   59,509    43,012         102,521 
                     
Corporate Bonds and Preferred Equities   47,395    689    (2,659)   45,425 
Mortgage Backed Securities ("MBS")   17,459    7    (98)   17,368 
Total  $124,467   $43,708   $(2,858)  $165,317 

 

16
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data and where indicated in millions)(Unaudited)

 

   As of December 31, 2011 
   Adjusted Cost   Gross Unrealized Gains   Gross Unrealized
Losses
   Fair Value 
Equity Securities, primarily REITs  $104   $-   $(32)  $72 
Marco OP Units   29,222    14,097         43,319 
Corporate Bonds and Preferred Equities   47,395    -    (6,257)   41,138 
Mortgage Backed Securities   18,730    2    (87)   18,645 
Total  $95,451   $14,099   $(6,376)  $103,174 

 

Restricted Marketable Securities:

 

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

 

   As of December 31, 2011 
   Adjusted Cost   Gross Unrealized
Gains
   Gross Unrealized
Losses
   Fair Value 
Marco OP Units  $30,287   $16,969   $-   $47,256 
Total  $30,287   $16,969   $-   $47,256 

 

On August 30, 2010, the Company disposed of certain of its interests in investment in unconsolidated affiliated real estate entities in connection with the closing of the POAC/Mill Run Transaction and received 367,778 of Escrowed Marco OP Units, with an adjusted cost basis valued at $30.3 million, and 335,959 Marco OP Units, with an adjusted cost basis valued at $29.2 million. The Escrowed Marco OP Units and the Marco OP Units are classified as restricted marketable securities, available for sale and marketable securities, available for sale, respectively, in the consolidated balance sheet as of December 31, 2011. The Escrowed Marco OP Units were fully released to the Company on March 1, 2012 as no TPA Obligations arose under the POAC/Mill Run Tax Protection Agreements. As of March 31, 2012, the entire 703,737 Marco OP Units that the Company received in connection with the closing of the POAC/Mill Run Transaction are classified as marketable securities, available for sale, in the consolidated balance sheet.

 

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

 

The Company may sell certain of its investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management. Additionally, for the three months ended March 31, 2012 and 2011, the Company realized $0.1 million of gross gains and $0.2 million of gross losses, respectively, related to sales of securities and early redemptions of MBS by the security issuer. The maturities of the Company’s MBS generally range from 27 year to 30 years.

 

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% (1.100% 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 is $18.3 million and $20.4 million as of March 31, 2012 and December 31, 2011, respectively. Interest expense on the margin loan was $58 and $39 for the three months ended March 31, 2012 and 2011, respectively.

 

17
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data and where indicated in millions)(Unaudited)

 

Derivative Financial Instruments

 

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

 

The initial collateral requirement was approximately $6.9 million and is subject to change based on changes in the share price of Simon stock.  The hedge cost $5.6 million, or $10.70 per share, and expires in December 2013. The dividends, if any, on the hedged shares continue to accrue to the Company, however Morgan Stanley has the right to adjust the put strike price for any future increases in the dividend declared by Simon Inc. and as of March 31, 2012, the strike price of the calls was adjusted to $109.29 per share.

 

The hedges were classified as fair value hedges and initially recorded on the consolidated balance sheets under prepaid and other assets with changes in the fair value of the hedge reported on the consolidated statements of operations. As of March 31, 2012 and December 31, 2011, the fair value of the hedges was a liability of $18.5 million and $10.9 million, respectively, recorded on the consolidated balance sheets under accounts payable and accrued expenses and the collateral requirement was approximately $17.5 million and $8.3 million, respectively. The collateral was recorded on the consolidated balance sheets under restricted escrows. For the three months ended March 31, 2012 and 2011, a loss of $7.7 million and $3.7 million, respectively, was recorded within the consolidated statements of operations.

 

Fair Value Measurements

 

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

 

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

 

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

 

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

 

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

 

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

 

 

18
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data and where indicated in millions)(Unaudited)

  

 

   Fair Value Measurement Using     
As of March 31, 2012  Level 1   Level 2   Level 3   Total 
                 
Cash equivalents (money market accounts)  $70   $-   $-   $70 
                     
Marketable Securities:                    
Equity Securities, primarily REITs  $3   $-   $-   $3 
Marco OP Units   -    102,521    -    102,521 
Corporate Bonds and Preferred Equities   -    45,425    -    45,425 
MBS   -    17,368    -    17,368 
Total  $3   $165,314   $-   $165,317 
                     
Derivative Financial Instruments:                    
Marco OP Units Collar  $-   $(18,509)  $-   $(18,509)
Total  $-   $(18,509)  $-   $(18,509)

 

   Fair Value Measurement Using     
As of December 31, 2011  Level 1   Level 2   Level 3   Total 
                 
Cash equivalents (money market accounts)  $70   $-   $-   $70 
                     
Marketable Securities:                    
Equity Securities, primarily REITs  $72   $-   $-   $72 
Marco OP Units   -    43,319    -    43,319 
Corporate Bonds        41,138         41,138 
MBS   -    18,645    -    18,645 
Total  $72   $103,102   $-   $103,174 
                     
Restricted Marketable Securities:                    
Marco OP Units  $-   $47,256   $-   $47,256 
Total  $-   $47,256   $-   $47,256 
                     
Derivative Financial Instruments:                    
Marco OP Units Collar  $-   $(10,855)  $-   $(10,855)
Total  $-   $(10,855)  $-   $(10,855)

 

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

 

7. Mortgages Payable  

 

Mortgages payable, totaling approximately $223.5 million and $224.3 million at March 31, 2012 and 2011, respectively, consists of the following:

 

19
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data and where indicated in millions)(Unaudited)

 

                  Loan Amount as of 
Property  Interest Rate   Weighted
Average Interest
Rate as March
31, 2012
   Maturity Date  Amount Due at
Maturity
   March 31,2012   December 31,
2011
 
                        
Southeastern Michigan Multi-Family Properties   5.96%   5.96%  July 2016  $38,139   $40,420   $40,539 
                             
Oakview Plaza   5.49%   5.49%  January 2017   25,583    27,440    27,500 
                             
Gulf Coast Industrial Portfolio   5.83%   5.83%  February 2017   49,557    52,961    53,025 
                             
Houston Extended Stay Hotels (Two Individual Loans)   LIBOR + 4.50%   4.75%  June 2012   7,147    7,278    7,409 
                             
Brazos Crossing Power Center   Greater of LIBOR +3.50% or 6.75%   6.75%  December 2012   6,045    6,257    6,336 
                             
Camden Multi-Family Properties (Two Individual Loans)   5.44%   5.44%  December 2014   26,334    27,398    27,492 
                             
St. Augustine Outlet Center   6.09%   6.09%  April 2016   23,748    25,558    25,658 
                             
2nd Street Project   LIBOR
+ 1.00
%
   1.30%  June 2012   13,500    13,500    13,500 
                             
Crowe’s Crossing   5.44%   5.44%  November 2016   5,578    5,974    5,993 
                             
DePaul Plaza   6.4825%   6.4825%  October 2012   11,632    11,756    11,818 
                             
Everson Pointe   Prime + 1% with a 5.85% floor    5.85%  December 2015   4,418    4,963    5,000 
                             
Total mortgages payable        5.54%     $211,681   $223,505   $224,270 

 

Libor as of March 31, 2012 and December 31, 2011 was 0.2413% and 0.2953%, respectively. Each of the loans is secured by acquired real estate and is non-recourse to the Company, with the exception of the Houston Extended Stay Hotels loan which is 35% recourse to the Company.

 

 The following table shows the contractually scheduled principal maturities during the next five years and thereafter as of March 31, 2012:

 

 

Remainder of
2012
   2013   2014   2015   2016   Thereafter   Total 
$40,613   $2,600   $29,044   $6,864   $69,179   $75,205   $223,505 

 

Pursuant to the Company’s loan agreements, escrows in the amount of approximately $8.4 million and $7.7 million were held in restricted escrow accounts as of March 31, 2012 and December 31, 2011, respectively. Escrows held in restricted escrow accounts are included in restricted escrows on the consolidated balance sheets. Such escrows will be released in accordance with the applicable loan agreements for payments of real estate taxes, insurance and capital improvement transactions, as required. Additionally, approximately $13.5 million of cash collateral required for the 2nd Street Project mortgage loan was held in restricted escrows. Certain of our mortgages payable also contain clauses providing for prepayment penalties.

 

20
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data and where indicated in millions)(Unaudited)

 

Certain of the Company’s debt agreements require the maintenance of certain ratios, including debt service coverage. The Company did not meet certain debt service coverage ratios on the debt associated with its Gulf Coast Industrial Portfolio during several quarterly periods in 2010, all quarter periods in 2011, and the first quarter of 2012 (see below). The Company currently is in compliance with all of its other debt covenants.

 

As a result of the Company not meeting certain debt service coverage ratios on the debt associated with its Gulf Coast Industrial Portfolio, beginning in July 2011, the lender elected to retain all excess cash flow from the associated properties until the Company meets the required coverage ratios for two successive quarters. Through the date of this filing, notwithstanding the fact that the lender has taken such action, the Company is current with respect to regularly scheduled debt service payments on the loan.  Additionally, the Company believes that the lender’s election to retain all excess cash flow from the associated properties will not have a material impact on its results of operations or financial position.

 

8.Net Earnings Per Share

 

Basic net 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. Diluted net income/(loss) per share includes the potentially dilutive effect, if any, which would occur if our outstanding options to purchase our common stock were exercised. For all periods presented, the effect of these exercises was anti-dilutive and, therefore, diluted net income/(loss) per share is equivalent to basic net income/(loss) per share.

 

9.Related Party Transactions

 

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

 

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

 

   Three Months Ended March 31, 
   2012   2011 
     
Acquisition fees  $34   $221 
Asset management fees   573    457 
Property management fees   356    327 
Development fees and leasing commissions   107    386 
Total  $1,070   $1,391 

 

Lightstone SLP, LLC, an affiliate of the Company’s Sponsor, has purchased subordinated profits interests in the Operating Partnership (“SLP units”). These SLP units, the purchase price of which will be repaid only after stockholders receive a stated preferred return and their net investment, entitle Lightstone SLP, LLC to a portion of any regular distributions made by the Operating Partnership.

 

During the three months ended March 31, 2012, distributions of $0.5 million were declared and paid on the SLP units and are part of non controlling interests. Since inception through March 31, 2012, cumulative distributions declared were $9.2 million, of which $8.7 million were paid. See Notes 3, 4 and 12 for other related party transactions.

 

Consolidated Joint Venture

 

On August 18, 2011, the Operating Partnership and its Sponsor formed a joint venture, 50-01 2nd Street Associates Holdings LLC ( the “2nd Street Joint Venture”) to own and operate 50-01 2nd Street Associates, LLC (the “2nd Street Owner”).  The Operating Partnership owns a 75% membership interest in the 2nd Street JV (the “2nd Street JV Interest”).  The 2nd Street JV Interest is a managing membership interest.  The Sponsor has a 25.0% non managing membership interest with certain consent rights with respect to major decisions. Contributions are allocated in accordance with each investor’s ownership percentage.  Profit and cash distributions, if any, will be allocated in accordance with each investor’s ownership percentage.   In addition, the 2nd Street JV Interest has a put option (the “Put”) whereby the Operating Partnership can put its interest to the Sponsor through August 18, 2012 in exchange for the dollar value of its capital contributions as of the date of exercise.  As of March 31, 2012, the Operating Partnership’s total capital contributions were $15.5 million.  As the Operating Partnership through the 2nd Street JV Interest has the power to direct the activities of the 2nd Street JV that most significantly impact the performance, beginning August 18, 2011, the Company has consolidated the operating results and financial condition of the 2nd Street JV and has accounted for the ownership interest of the Sponsor as a noncontrolling interest. 

 

21
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data and where indicated in millions)(Unaudited)

  

On August 18, 2011, the 2nd Street Owner, which is wholly owned by the 2nd Street JV, acquired a parcel of land located in Queens, New York for approximately $19.3 million from an unaffiliated third party. The 2nd Street JV contributed approximately $19.3 million in cash to the 2nd Street Owner to fund the land acquisition. In connection with the acquisition of the land, the 2nd Street Owner entered into a loan for $13.5 million (the “Interim Loan”) with CIBC, Inc. that bears interest at Libor plus 1.0% per annum with monthly interest only payments through its stated maturity. The Interim Loan is collateralized by $13.5 million in cash held in escrow (included in restricted escrows on our consolidated balance sheet as of March 31, 2012) and is guaranteed by our Sponsor.  In addition, the 2nd Street Owner incurred approximately $0.2 million in deferred financing costs associated with the 2nd Street Project through March 31, 2012.  The Company’s Advisor will be entitled to an acquisition fee equal to 2.75% of its portion of the acquisition price, or approximately $0.5 million upon expiration of the Put.

 

The acquired land is expected to be used for the future development of a residential project (the “2nd Street Project”).  The 2nd Street Owner is currently exploring the development plans and financing alternatives for the 2nd Street Project. 

 

 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.

 

10. Financial Instruments

 

The carrying amounts of cash and cash equivalents, restricted escrows, tenants’ accounts receivable, interest receivable from related parties, accounts payable and accrued expenses, loans due to affiliates, 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 mortgages receivable approximated their 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 (in millions) of the Company’s debt is summarized as follows:

 

   As of March 31, 2012   As of December 31, 2011 
   Carrying Amount   Estimated Fair
Value
   Carrying Amount   Estimated Fair
Value
 
Mortgage payable  $223.5   $222.5   $224.3   $224.4 

 

The fair value of the mortgages payable was determined by discounting the future contractual interest and principal payments by estimated current market interest rates.

  

22
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data and where indicated in millions)(Unaudited)

  

11. Segment Information

 

The Company currently operates in four business segments as of March 31, 2012: (i) retail real estate (the “Retail Segment”), (ii) multi-family residential real estate (the “Multi-family Residential Segment”), (iii) industrial real estate (the “Industrial Segment”) and (iv) hotel hospitality (the “Hotel Hospitality Segment”). The Company’s advisor and its affiliates provide leasing, property and facilities management, acquisition, development, construction and tenant-related services for its portfolio. The Company’s revenues for the three months ended March 31, 2012 and 2011 were exclusively derived from activities in the United States. No revenues from foreign countries were received or reported. The Company had no long-lived assets in foreign locations as of March 31, 2012 and December 31, 2011. The accounting policies of the segments are the same as those described in Note 2: Summary of Significant Accounting Policies of the Company’s December 31, 2011 Annual Report on Form 10-K. Unallocated assets, revenues and expenses relate to corporate related accounts.

 

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

 

Selected results of operations for the three months ended March 31, 2012 and 2011, and total assets as of March 31, 2012 and December 31, 2011 regarding the Company’s operating segments are as follows:

 

   For the Three Months Ended March 31, 2012 
   Retail   Multi Family   Industrial   Hospitality   Unallocated   Total 
                         
Total revenues  $3,726   $3,098   $1,530   $4,169   $-   $12,523 
                               
Property operating expenses   855    1,375    452    3,402    14    6,098 
Real estate taxes   428    333    168    178    -    1,107 
General and administrative costs   7    75    -    91    1,477    1,650 
                               
Net operating income (loss)   2,436    1,315    910    498    (1,491)   3,668 
                               
Depreciation and amortization   1,027    407    474    229    -    2,137 
                               
Operating income  $1,409   $908   $436   $269   $(1,491)  $1,531 
                               
As of March 31, 2012:                              
Total Assets  $135,190    66,675    61,501    33,135    276,466   $572,967 

 

   For the Three Months Ended March 31, 2011 
   Retail   Multi Family   Industrial   Hospitality   Unallocated   Total 
                         
Total revenues  $2,767   $2,981   $1,721   $1,075   $-   $8,544 
                               
Property operating expenses   703    1,366    477    805    -    3,351 
Real estate taxes   283    321    221    74    -    899 
General and administrative costs   (90)   24    (9)   34    1,759    1,718 
                               
Net operating income (loss)   1,871    1,270    1,032    162    (1,759)   2,576 
                               
Depreciation and amortization   924    391    517    129    -    1,961 
                               
Operating income  $947   $879   $515   $33   $(1,759)  $615 
                               
As of December 31, 2011:                              
Total Assets  $134,952   $66,702   $61,721   $31,229   $269,752   $564,356 

   

12. 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.

 

23
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data and where indicated in millions)(Unaudited)

 

On March 29, 2006, Jonathan Gould, a former member of our Board and Senior Vice-President-Acquisitions, filed a lawsuit against us in the District Court for the Southern District of New York. The suit alleges, among other things, that Mr. Gould was insufficiently compensated for his services to us as director and officer. Mr. Gould has sued for damages under theories of quantum merit and unjust enrichment seeking the value of work he performed. Management believes that this suit is frivolous and entirely without merit and intends to defend against these charges vigorously. The Company believes any unfavorable outcome on this matter will not have a material effect on the consolidated financial statements.

 

On January 4, 2007, 1407 Broadway Real Estate LLC ("Office Owner"), an indirect, wholly owned subsidiary of 1407 Broadway Mezz II LLC ("1407 Broadway "), consummated the acquisition of a sub-leasehold interest (the "Sublease Interest") in an office building located at 1407 Broadway, New York, New York (the "Office Property"). 1407 Broadway is a joint venture between LVP 1407 Broadway LLC ("LVP LLC"), a wholly owned subsidiary of our operating partnership, and Lightstone 1407 Manager LLC ("Manager"), which is wholly owned by David Lichtenstein, the Chairman of our Board of Directors and our Chief Executive Officer, and Shifra Lichtenstein, his wife.

 

The Sublease Interest was acquired pursuant to a Sale and Purchase of Leasehold Agreement with Gettinger Associates, L.P. ("Gettinger"). In July 2006, Abraham Kamber Company, as Sublessor under the sublease ("Sublessor"), served two notices of default on Gettinger (the "Default Notices"). The first alleged that Gettinger had failed to satisfy its obligations in performing certain renovations and the second asserted numerous defaults relating to Gettinger's purported failure to maintain the Office Property in compliance with its contractual obligations.

 

In response to the Default Notices, Gettinger commenced legal action and obtained an injunction that extends its time to cure any default, prohibits interference with its leasehold interest and prohibits Sublessor from terminating its sublease pending resolution of the litigation. A motion by Sublessor for partial summary judgment, alleging that certain work on the Office Property required its prior approval, was denied by the Supreme Court, New York County. Subsequently, by agreement of the parties, a stay was entered precluding the termination of the Sublease Interest pending a final decision on Sublessor's claim of defaults under the Sublease Interest. In addition, the parties stipulated to the intervention of Office Owner as a party to the proceedings.

 

On April 12, 2012, the Supreme Court, New York County decided in favor of the Company with respect to all matters before the Court.

 

While any proceeding or litigation has an element of uncertainty, management currently believes that the likelihood of an unfavorable outcome with respect to any of the aforementioned legal proceedings is remote. No provision for loss has been recorded in connection therewith.

 

As of the date hereof, the Company is not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss.

 

POAC/Mill Run Tax Protection Agreements

 

In connection with the contribution of the Mill Run Interest and the POAC Interest, our Operating Partnership entered into the POAC/Mill Run Tax Protection Agreements with each of Arbor JRM, Arbor CJ, AR Prime, TRAC, Central Jersey and JT Prime (collectively, the “Contributors”). Under the POAC/Mill Run Tax Protection Agreements, our Operating Partnership is required to indemnify each of Arbor JRM, Arbor CJ, TRAC and Central Jersey with respect to the Mill Run Properties, and AR Prime and JT Prime, with respect to the POAC Properties, from June 26, 2008 for Arbor JRM, Arbor CJ and AR Prime and from August 25, 2009 for TRAC, Central Jersey and JT Prime to June 26, 2013 for, among other things, certain income tax liability that would result from the income or gain which Arbor JRM, Arbor CJ, TRAC, Central Jersey on the one hand, or AR Prime, JT Prime, on the other hand, would recognize upon the Operating Partnership’s failure to maintain the current level of debt encumbering the Mill Run Properties or the POAC Properties, respectively, or the sale or other disposition by the Operating Partnership of the Mill Run Properties, the Mill Run Interest, the POAC Properties, or the POAC Interest (each, an “Indemnifiable Event”). Under the terms of the POAC/Mill Run Tax Protection Agreements, our Operating Partnership is indemnifying the Contributors for certain income tax liabilities based on income or gain which the Contributors are deemed to be required to include in their gross income for federal or state income tax purposes (assuming the Contributors are subject to tax at the highest regional, federal, state and local tax rates imposed on individuals residing in New York City) as a result of an Indemnifiable Event. This indemnity covers income taxes, interest and penalties and is required to be made on a "grossed up" basis that effectively results in the Contributors receiving the indemnity payment on a net, after-tax basis. The amount of the potential tax indemnity to the Contributors under the POAC/Mill Run Tax Protection Agreements, including a gross-up for taxes on any such payment, using current tax rates, is estimated to be approximately $95.7 million. The Company has not recorded any liability in its consolidated balance sheets as the Company believes that the potential liability is remote as of March 31, 2012.

 

24
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data and where indicated in millions)(Unaudited)

 

Each of the POAC/Mill Run Tax Protection Agreements imposes certain restrictions upon our Operating Partnership relating to transactions involving the Mill Run Properties and the POAC Properties which could result in taxable income or gain to the Contributors. Our Operating Partnership may not dispose or transfer any Mill Run Property or any POAC Property without first proving that the Operating Partnership possesses the requisite liquidity, including the proceeds from any such transaction, to make any payments that would come due pursuant to the POAC/Mill Run Tax Protection Agreement. However, our Operating Partnership may take the following actions: (i) (A) as to the POAC Properties, commencing with the period one year and thirty-one days following the date of the POAC/Mill Run Tax Protection Agreement, our Operating Partnership can sell on an annual basis part or all of any of the POAC Properties with an aggregate value of ten percent (10%) or less of the total value of the POAC Properties as of the date of contribution (and any amounts of the ten percent (10%) value not sold can be applied to sales in future years); and (B) as to the Mill Run Properties either the same ten percent (10%) test as set forth above in (i)(A) with respect to the Mill Run Properties or the sale of the property known by Design Outlet Center; and (ii) our Operating Partnership can enter into a non-recognition transaction with either the consent of the Contributors or an opinion from an independent law or accounting firm stating that it is “more likely than not” that the transaction will not give rise to current taxable income or gain.

 

On August 30, 2010, the LVP Parties completed the POAC/Mill Run Transaction which included the disposition their interests in the POAC Properties and the Mill Run Properties and contemporaneously entered into a tax matters agreement with Simon (See Simon Tax Matters Agreements below). Additionally, the Company has been advised by an independent law firm that it is “more likely than not” that the POAC/Mill Run Transaction will not give rise to current taxable income or loss.  Accordingly, the Company believes the POAC/Mill Run Transaction is a non-recognition transaction and not an Indemnifiable Event under the POAC/Mill Run TPA. 

 

Simon Tax Matters Agreements

 

In connection with the closing of the POAC/Mill Transaction, the LVP Parties entered into a tax matters agreement with Simon pursuant to which Simon generally may not engage in a transaction that could result in the recognition of the “built-in gain” with respect to POAC and Mill Run at the time of the closing for specified periods of up to eight years following the closing date. Simon has a number of obligations with respect to the allocation of partnership liabilities to the LVP Parties. For example, Simon agreed to maintain certain of the outstanding mortgage loans that are secured by POAC Properties and Mill Run Properties until their respective maturities, and the LVP Parties have provided and will continue to have the opportunity to provide guaranties of collection with respect to a revolving credit facility (or indebtedness incurred to refinance the revolving credit facility) for at least four years following the closing of the POAC/Mill Run Transaction. The LVP Parties were also given the opportunity to enter into agreements to make specified capital contributions to Simon OP in the event that it defaults on certain of its indebtedness. If Simon breaches its obligations under the tax matters agreement, Simon will be required to indemnify the LVP Parties for certain taxes that they are deemed to incur, including taxes relating to the recognition of “built-in gains” with respect to POAC Properties and Mill Run Properties, and gains recognized as a result of a reduction in the allocation of partnership liabilities. These indemnification payments will be “grossed up” such that the amount of the payments will equal, on an after-tax basis, the tax liability deemed incurred because of the breach.

 

Simon generally is required to indemnify the LVP Parties and certain affiliates of the Lightstone Group for liabilities and obligations under the POAC/Mill Run Tax Protection Agreements relating to the contributions of the Mill Run Interest and the POAC Interest (see POAC/Mill Run Tax Protection Agreements above) that are caused by Simon OP’s and Simon’s actions subsequent to the closing of the POAC/Mill Run Transaction (the “Indemnified Liabilities”). The Company and its operating partnership are required to indemnify Simon OP and Simon for all liabilities and obligations under the POAC/Mill Run Tax Protection Agreements other than the Indemnified Liabilities.

 

In connection with the closing of the Outlet Centers Transaction, the Holdings Entities, the Company, the Operating Partnership, PRO and the Sponsor’s Affiliates (collectively, the “Outlet Centers Parties”) entered into a tax matters agreement with Simon pursuant to which Simon generally may not engage in a transaction that could result in the recognition of the “built-in gain” with respect to the Grand Prairie Outlet Center and the Livermore Valley Outlet Center at the time of the closing for specified periods of up to eight years following the closing date. Simon has a number of obligations with respect to the allocation of partnership liabilities to the Outlet Centers Parties For example, Simon agreed to maintain a debt level of no less than the cash portion of the proceeds from the Outlet Centers Transaction until at the fourth anniversary of the closing, and the Outlet Centers Parties have provided and will continue to have the opportunity to provide guaranties of collection with respect to a revolving credit facility (or indebtedness incurred to refinance the revolving credit facility) for at least four years following the closing of the Outlet Centers Transaction. The Outlet Centers Parties were also given the opportunity to enter into agreements to make specified capital contributions to Simon OP in the event that it defaults on certain of its indebtedness. If Simon breaches its obligations under the tax matters agreement, Simon will be required to indemnify the Outlet Centers Parties for certain taxes that they are deemed to incur, including taxes relating to the recognition of “built-in gains” with respect to the Grand Prairie Outlet Center and the Livermore Valley Outlet Center, and gains recognized as a result of a reduction in the allocation of partnership liabilities. These indemnification payments will be “grossed up” such that the amount of the payments will equal, on an after-tax basis, the tax liability deemed incurred because of the breach.

 

25
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share data and where indicated in millions)(Unaudited)

 

POAC/Mill Run Simon Loan Collection Guaranties

 

In connection with the closing of the POAC/Mill Run Transaction, the LVP Parties have provided POAC/Mill Run Simon Loan Collection Guaranties with respect to the draws under a revolving credit facility made in connection with the closing of the POAC/Mill Run Transaction. Under the terms of the POAC/Mill Run Simon Loan Collection Guaranties, the LVP Parties are obligated to make payments in respect of principal and interest due under the revolving credit facility after Simon OP has failed to make payments, the amount outstanding under the revolving credit facility has been accelerated, and the lenders have failed to collect the full amount outstanding under the revolving credit facility after exhausting other remedies. The POAC/Mill Run Simon Loan Collection Guaranties by the LVP Parties are limited to a specified aggregate maximum of $201.1 million, with the maximum of each of the respective LVP Parties limited to an amount that is at least equal to its respective cash considerations. The maximum amounts of the POAC/Mill Run Transaction Collection Guaranties will be reduced to the extent of any payments of principal made by Simon OP or other cash proceeds recovered by the lenders. In connection with completion of the POAC/Mill Run Transaction, the Company recorded a liability in the amount of $0.1 million, representing the estimated fair value of the POAC/Mill Run Simon Loan Collection Guaranties as of the closing date, which is included in accounts payable and accrued expenses in the consolidated balance sheet as of March 31, 2012 and December 31, 2011, respectively.

 

Outlet Centers Simon Loan Collection Guaranties

 

In connection with the closing of the Outlet Centers Transaction, the Operating Partnership and PRO have provided Outlet Centers Simon Loan Collection Guaranties with respect to the draws under a revolving credit facility made in connection with the closing of the Outlet Centers Transaction. Under the terms of the Outlet Centers Simon Loan Collection Guaranties, the Company, its Operating Partnership and PRO are obligated to make payments in respect of principal and interest due under the revolving credit facility after Simon OP has failed to make payments, the amount outstanding under the revolving credit facility has been accelerated, and the lenders have failed to collect the full amount outstanding under the revolving credit facility after exhausting other remedies. The Outlet Centers Simon Loan Collection Guaranties by the Company, its Operating Partnership and PRO are limited to a specified aggregate maximum of $63.8 million, with the maximum of each of the respective parties limited to an amount that is at least equal to its respective cash considerations. The maximum amounts of the Outlet Centers Simon Loan Collection Guaranties will be reduced to the extent of any payments of principal made by Simon OP or other cash proceeds recovered by the lenders. In connection with completion of the Outlet Centers Transaction, the Company recorded a liability in the amount of $32, representing the estimated fair value of the Outlet Centers Simon Loan Collection Guaranties as of the closing date, which is included in accounts payable and accrued expenses in the consolidated balance sheet as of March 31, 2012.

 

13. 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 0.2 million 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 cash flows provided from operations (approximately $3.5 million or 66%) and excess cash proceeds from the issuance of common stock through the Company’s Distribution Reinvestment Program (approximately $1.8 million or 34%).

 

Distribution Declaration

 

On May 14, 2012, the Board 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 $0.0019178 per day, and will equal a daily amount that, if paid each day for a 365-day period, would equal a 7.0% 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 the Company’s DRIP.

  

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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, 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, 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, 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, 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 (defined herein) to make additional investments in real estate properties, the failure to upgrade our tenant mix, restrictions in current financing arrangements, the failure to fully recover tenant obligations for common area maintenance (“CAM”), insurance, taxes and other property expenses, the failure of the 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, 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. 333-117367), 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.

  

Overview

 

Lightstone Value Plus Real Estate Investment Trust, Inc. (the “Lightstone REIT”) and Lightstone Value Plus REIT, 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, its Operating Partnership or the Company as required by the context in which such pronoun is used.

 

Lightstone REIT has acquired and operates commercial, residential and hospitality properties, principally in the United States. Principally through the Operating Partnership, our acquisitions have included both portfolios and individual properties. Our commercial holdings consist of retail (primarily multi-tenant shopping centers), lodging (primarily extended stay hotels), industrial properties and that our residential properties are principally comprised of ‘‘Class B’’ multi-family complexes.

 

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

 

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Portfolio Summary –

 

    Location  Year Built (Range of
years built)
  Leasable Square
Feet
   Percentage Occupied as
of March 31, 2012
   Annualized Revenues based
on rents at
March 31, 2012
   Annualized Revenues per
square foot March 31,
2012
 
Wholly Owned Real Estate Properties:                          
                           
Retail                          
St. Augustine Outlet Center  St. Augustine, FL  1998   330,246    81.2%  $ 3.8 million   $14.34 
Oakview Plaza  Omaha, NE  1999 - 2005   177,103    91.4%    2.4 million   $14.83 
Brazos Crossing Power Center  Lake Jackson, TX  2007-2008   61,213    100.0%  $ 0.8 million   $12.58 
Crowe's Crossing  Stone Mountain, GA  1986   93,728    76.8%  $ 0.6 million   $8.80 
DePaul Plaza  Bridgeton, MO  1985   187,090    86.4%  $ 1.8 million   $11.06 
Everson Pointe  Snellville, GA  1999   81,428    89.1%  $ 0.8 million   $11.02 
      Retail Total   930,808    85.7%          
                           
Industrial                          
7 Flex/Office/Industrial Buildings within the Gulf Coast Industrial Portfolio  New Orleans, LA  1980-2000   339,700    82.9%  $ 3.0 million   $10.77 
4 Flex/Industrial Buildings within the Gulf Coast Industrial Portfolio  San Antonio, TX  1982-1986   484,364    70.2%  $ 1.6 million   $4.68 
3 Flex/Industrial Buildings within the Gulf Coast Industrial Portfolio  Baton Rouge, LA  1985-1987   182,792    91.2%  $ 1.1 million   $6.62 
Sarasota  Sarasota, FL  1992   280,242    100.0%  $ 0.5 million   $1.71 
      Industrial Total   1,287,098    83.0%          

 

   Location  Year Built (Range
of years built)
  Leasable Units   Percentage Occupied as
of
March 31, 2012
   Annualized Revenues based
on rents at
March 31, 2012
   Annualized Revenues per
unit March 31, 2012
 
Multi - Family Residential                      
Southeastern Michigan Multi-Family Properties (Four Apartment Buildings)  Southeast  MI  1965-1972   1,017    94.6%  $ 7.6 million   $7,885 
Camden Multi-Family Properties (Two Apartment Communities)  Greensboro/Charlotte, NC  1984-1985   568    97.5%  $3.8 million   $6,912 
      Residential Total   1,585    95.6%         

 

   Location  Year Built  Year to date
Available Rooms
   Percentage Occupied for
the Year Ended March
31, 2012
   Revenue per Available
Room through March 31,
2012
 
Wholly-Owned and Consolidated Hospitality Properties:                     
Houston Extended Stay Hotels (Two Hotels)  Houston, TX  1998   26,481    77.1%  $31.31 
                      
CP Boston Property (Hotel and Water Park Resort)  Danvers, Massachusetts  1978   33,186    30.0%  $28.17 
                      
      Hospitalisty Total   30,389    50.9%     

 

   Location  Year  Built  Leasable Square
Feet
   Percentage Occupied as
of
March 31, 2012
   Annualized Revenues based
on rents at
March 31, 2012
   Annualized Revenues per
square foot March 31,
2012
 
Unconsolidated Affiliated Real Estate Entities-Office:                          
                           
1407 Broadway(1)  New York, NY  1952   1,114,695    80.1%  $ 35.5 million   $39.78 

 

(1) - Sub-lease interest indirectly owned by 1407 Broadway Mezz II, LLC, in which we have an 49.0% ownership interest.

 

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 and nine 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.

 

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Results of Operations

 

Our primary financial measure for evaluating each of our properties is net operating income (“NOI”). NOI represents revenues less property operating expenses, real estate taxes and general and administrative expenses. We believe 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 our properties.

 

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

 

Consolidated

 

Revenues

 

Our revenues are comprised of rental revenues, tenant recovery income and other service income. Total revenues increased by approximately $4.0 million to $12.5 million for the three months ended March 31, 2012 compared to $8.5 million for the same period in 2011. The increase reflects higher revenues in our Hotel Hospitality and Retail segments of $3.1 million and $1.0 million, respectively. Revenues in our Multi-Family Residential and Industrial segments remained relatively flat. See “Segment Results of Operations for the Three Months Ended March 31, 2012 compared to March 31, 2011” for additional information on revenues by segment.

 

Property operating expenses

 

Property operating expenses increased by approximately $2.7 million to $6.1 million for the three months ended March 31, 2012 compared to $3.4 million for the same period in 2011. The increase reflects higher property operating expenses in our Hotel Hospitality of approximately $2.6 million in the 2012 period attributable to the timing of the acquisition of the CP Boston Property, which was acquired on March 21, 2011.

 

Real estate taxes

 

Real estate taxes increased by approximately $0.2 million to $1.1 million for the three months ended March 31, 2012 compared to $0.9 million for the same period in 2011. The increase of approximately $0.3 million attributable to the timing of acquisitions made in 2011 partially offset by decreases due to reassessments.

 

General and administrative expenses

 

General and administrative expenses were relatively unchanged at $1.7 million for both the three months ended March 31, 2012 and the same period in 2011.

 

Depreciation and Amortization

 

Depreciation and amortization expense expenses were relatively unchanged at approximately $2.0 million for both the three months ended March 31, 2012 and the same period in 2011.

 

Mark to market adjustment on derivative financial instruments

 

During the three months ended March 31, 2012 and 2011, we recorded negative mark to market adjustment on derivative financial instruments of $7.7 million and $3.7 million, respectively. These mark to market adjustments represent the change in the fair values of a collar entered into to protect the value of a portion of our Marco OP Units within a certain specified range.

 

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Interest income

 

Interest income increased by approximately $0.4 million to $3.6 million for the three months ended March 31, 2012 compared to $3.2 million the same period in 2011. The increase is primarily attributable to higher interest on our mortgages receivable partially offset by lower income from our marketable equity securities.

 

Interest expense

 

Interest expense, including amortization of deferred financing costs, increased by approximately $0.4 million to $3.4 million for the three months ended March 31, 2012 compared to $3.0 million for the same period in 2011. The increase is primarily attributable to the debt associated with 2011 acquisitions.

 

Gain on disposition of unconsolidated affiliated real estate entities

 

On March 1, 2012, Marco OP Units previously held in escrow for potential indemnified liabilities related to the disposition of certain of our investments in unconsolidated affiliated real estate entities in August 2010 were fully released to us. As a result, we recognized a previously deferred gain in the amount of $30.3 million during the three months ended March 31, 2012. See Note 3 for additional information.

 

Loss on sale of marketable securities

 

Loss on sale of marketable securities decreased by $0.7 million to $0.1 million for the three months ended March 31, 2012 compared to $0.8 million for the same period in 2011 primarily due to timing of sales of securities and the differences in adjusted cost basis compared to proceeds received upon sale.

 

Income/(loss) from investments in unconsolidated affiliated real estate entities

 

This account represents our portion of the earnings associated with our interests in investments in unconsolidated affiliated real estate entities which consists of our investments in 1407 Broadway, GPH and LVH. Our income from investments in unconsolidated affiliated real estate entities was $0.1 million during the three months ended March 31, 2012 compared to a loss of $0.2 million during the same period in 2011. See Note 4 for additional information.

 

Noncontrolling interests

 

The net earnings allocated to noncontrolling interests relates to (i) the interests in the Operating Partnership held by our Sponsor as well as common units held by our limited partners (ii) the interest in PRO held by our Sponsor, (iii) the 20.0% interest in the CP Boston Joint Venture previously held by Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone REIT II”) in the 2011 period, (iv) the 10.0% interest in the Rego Park Joint venture held by Lightstone REIT II and (iv) the 25.0% interest in the 50-01 2nd Street Joint Venture held by our Sponsor.

 

Segment Results of Operations for the Three Months Ended March 31, 2012 compared to March 31, 2011

 

Retail Segment

 

   For the Three Months Ended March 31,   Variance Increase/(Decrease) 
   2012   2011   $   % 
   (unaudited)         
Revenues  $3,726   $2,767   $959    34.7%
NOI   2,436    1,871    565    30.2%
Average Occupancy Rate for period   86.6%   82.8%        3.8%

 

Revenues increased by approximately $1.0 million for the three months ended March 31, 2012 compared to the same period in 2011. The higher revenues for the 2012 period are reflect an aggregate $0.8 million for Crowes Crossing and DePaul Plaza, which were acquired on October 4, 2011 and November 22, 2011, respectively (November 22, 2011). Revenues at our other retail properties were relatively consistent in the 2012 and 2011 periods.

 

NOI increased by approximately $0.6 million for the three months ended March 31, 2012 compared to the same period in 2011. This increase is primarily attributable to the timing of the aforementioned 2011 property acquisitions.

 

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Multi- Family Residential Segment

 

   For the Three Months Ended March 31,   Variance Increase/(Decrease) 
   2012   2011   $   % 
   (unaudited)         
Revenues  $3,098   $2,981   $117    3.9%
NOI   1,315    1,270    45    3.5%
Average Occupancy Rate for period   94.9%   93.5%        1.5%

 

Revenues increased by approximately $0.1 million for the three months ended March 31, 2012 compared to the same period in 2011. This increase is primarily attributable to the higher average occupancy rate in the 2012 period.

 

NOI increased by approximately $0.1 million during the three months ended March 31, 2012 compared to the same period in 2011. This increase is primarily attributable to the aforementioned increase in revenues in the 2012 period.

 

Industrial Segment

 

   For the Three Months Ended  March 31,   Variance Increase/(Decrease) 
   2012   2011   $   % 
   (unaudited)         
Revenues  $1,530   $1,721   $(191)   -11.1%
NOI   910    1,032    (122)   -11.8%
Average Occupancy Rate for period   82.4%   70.5%        11.9%

Revenues decreased by $0.2 million for the three months ended March 31, 2012 compared to the same period in 2011. This decrease is primarily attributable to a reduction in revenues recognized at Sarasota due to a tenant dispute.

 

NOI decreased by $0.1 million for the three months ended March 31, 2012 compared to the same period in 2011 primarily as a result of the revenues decline discussed above.

 

Hotel Hospitality Segment

 

   For the Three Months Ended March 31,   Variance Increase/(Decrease) 
   2012   2011   $   % 
   (unaudited)         
Revenues  $4,169   $1,075   $3,094    287.8%
NOI   498    162    336    207.4%
Average Occupancy Rate for period   50.9%   67.7%        -16.8%
Rev PAR  $29.57   $30.04   $(0.47)   -1.6%

 

The revenues in our Hotel Hospitality Segment increased by approximately $3.1 million for the three months ended March 31, 2012 compared to the same period in 2011. The increase reflects higher aggregate rental revenues and other service income of approximately $3.0 million in the 2012 period attributable to the timing of the acquisition of the CP Boston Property, which was acquired on March 21, 2011. Other service income was $2.4 million in the 2012 period and consists of revenues of $1.0 million, $1.3 million and $0.1 million from food and beverage services, water park admissions and arcade income, respectively. The lower average occupancy rate and the increased Rev PAR during the 2012 period were primarily driven by the CP Boston Property.

 

NOI in our Hotel Hospitality Segment increased by approximately $0.3 million for the three months ended March 31, 2012 compared to the same period in 2011. This increase reflects the aforementioned increase in revenues substantially offset by additional operating expenses of approximately $2.6 million during the 2012 period attributable to the timing of the acquisition of the CP Boston Property, which was acquired on March 21, 2011.

 

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Financial Condition, Liquidity and Capital Resources   

 

Overview:

 

Rental revenue and borrowings are our principal source of funds to pay operating expenses, scheduled debt service, capital expenditures and distributions, excluding non-recurring capital expenditures.

 

We expect to meet our short-term liquidity requirements generally through working capital and proceeds from our distribution reinvestment plan and borrowings. 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.

 

We currently have $223.5 million of outstanding mortgage debt, $2.9 million of loans due to affiliates and an $18.3 million margin loan. 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 the independent directors and is disclosed to our stockholders. We may also incur short-term indebtedness, having a maturity of two years or less.

 

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. As of March 31, 2012, our total borrowings of $244.7 million represented 77% of net assets.

 

Our borrowings consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. We typically have obtained level payment financing, meaning that the amount of debt service payable would be substantially the same each year. As such, most of the mortgages on our properties provide for a so-called “balloon” payment and are at a fixed interest rate.

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.

 

Any future properties that we may acquire may be funded through a combination of borrowings, proceeds generated from the sale of our marketable securities, available for sale, and proceeds received from the disposition of certain of our retail assets. These 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.

 

We may also obtain lines of credit to be used to acquire properties or real estate-related assets. These lines of credit will be at prevailing market terms and will be repaid from proceeds from the sale or refinancing of properties, working capital or permanent financing. Our Sponsor or its affiliates may guarantee the lines of credit although they will not be obligated to do so.

 

In addition to meeting working capital needs and distributions to our stockholders, our capital resources are used to make certain payments to our Advisor and our Property Manager, included payments related to asset acquisition fees and asset management fees, the reimbursement of acquisition related expenses to our Advisor and property management fees. We 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, LLC, an affiliate of the Advisor.

 

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The following table represents the fees incurred associated with the payments to our Advisor, our Dealer Manager, and our Property Manager for the periods indicated:

 

   Three Months Ended March 31, 
   2012   2011 
   (unaudited) 
Acquisition fees  $34   $221 
Asset management fees   573    457 
Property management fees   356    327 
Development fees and leasing commissions   107    386 
Total  $1,070   $1,391 

 

As of March 31, 2012, we had approximately $16.0 million of cash and cash equivalents on hand and $165.3 million of marketable securities, available for sale.

 

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:

 

   For the Three Months Ended March 31, 
   2012   2011 
   (unaudited) 
Cash flows provided by operating activities  $5,260   $2,359 
Cash flows used in investing activities   (11,181)   (45,199)
           
Cash flows (used in)/provided by financing activities   (9,628)   31,546 
Net change in cash and cash equivalents   (15,549)   (11,294)
           
Cash and cash equivalents, beginning of the period   31,525    24,318 
Cash and cash equivalents, end of the period  $15,976   $13,024 

 

Our principal demands for liquidity are (i) our property operating expenses, (ii) real estate taxes, (iii) insurance costs, (iv)leasing costs and related tenant improvements, (v) capital expenditures, (vi) acquisition and development activities, (vii) scheduled debt service and (viii) distributions to our stockholders and noncontrolling interests. The principal sources of funding for our operations are operating cash flows and proceeds from (i) the sale of marketable securities, (ii) the disposition of properties or interests in properties, (iii) the issuance of equity and debt securities and (iv) the placement of mortgage loans or other indebtedness.

 

Operating activities

 

Net cash flows provided by operating activities of $5.3 million for the three months ended March 31, 2012 consists of the following:

 

·cash inflows of approximately $4.0 million from our net income after adjustment for non-cash items; and

 

·cash inflows of approximately $1.3 million associated with the net changes in operating assets and liabilities.

 

Investing activities

 

The net cash used in investing activities of $11.2 million the three months ended March 31, 2012 consists primarily of the following:

 

·purchases or deposits for purchases of investment property of approximately $3.4 million;

 

·funding for the collateral requirement on our Marco OP Units Collar of approximately $9.0 million;

 

·proceeds from the sale of marketable securities of $1.2 million;

 

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Financing activities

 

The net cash used by financing activities of approximately $9.6 million for the three months ended March 31, 2012 is primarily related to the following:

 

·distributions to our common shareholders of $3.7 million and common share redemptions of $1.2 million made pursuant to our share redemption program;

 

·distributions to our noncontrolling interests of $2.1 million and contributions from our noncontrolling interests of $0.2 million;

 

·debt principal payments $2.8 million; and

 

The following summarizes our indebtedness maturing in 2012 and our current intentions:

 

·Our mortgage on the Houston Extended Stay Hotels has an outstanding principal balance of $7.3 million as of March 31, 2012 and is scheduled to mature in June 2012 at which time we will be required to make a balloon principal payment of $7.1 million.  However, this loan may be extended, subject to satisfaction of certain conditions, for two additional one-year periods and we currently expect to exercise the first one-year extension option before the scheduled maturity date.
·Our mortgage on the 2nd Street Project has an outstanding principal balance of $13.5 million as of March 31, 2012 and is scheduled to mature in June 2012 at which time we will be required to make a balloon principal payment of $13.5 million.  This loan is fully collateralized by a cash escrow account held by the lender.  We  plan to seek an extension to the maturity date of this loan; however, if we are unable to extend the loan at acceptable terms with the lender, we intend to refinance or repay in full (using the cash escrow account) the amount due at maturity.
·Our mortgage on the DePaul Plaza has an outstanding principal balance of $11.8 million as of March 31, 2012 and is  scheduled to mature in October 2012 at which time we will be required to make a balloon principal payment of $11.6 million.   We intend to refinance or repay in full the amount due at maturity.
·Our mortgage on the Brazos Crossing Power  Center has an outstanding principal balance of $6.3 million as of March 31, 2012 and is scheduled to mature in December 2012 at which time we will be required to make a balloon principal payment in the amount of $6.0 million.  We  plan to seek an extension to the maturity date of this loan; however, if we are unable to extend the loan at acceptable terms with the lender, we intend to refinance or repay in full the amount due at maturity.

 

CP Boston Property Improvements

 

The CP Boston Property was purchased “as is” and we are currently renovating and improving the property. During the three months ended March 31, 2012, we spent approximately $2.2 million on renovations and improvements and it is expected that approximately $13.2 million of additional renovations and improvements will be completed during 2012.

 

We anticipate that adequate cash will be available to fund our operating and administrative expenses, regular debt service obligations, and the payment of distributions in accordance with REIT requirements in both the short and long-term.   We believe our current financial condition is sound, however due to the current economic conditions and the continued weakness in, and unpredictability of, the capital and credit markets, we can give no assurance that affordable access to capital will exist when our debt maturities occur.  

 

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 the 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 contractual obligations outstanding over the next five years and thereafter as of March 31, 2012. 

 

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Contractual
Obligations
  Remainder of 2012   2013   2014   2015   2016   Thereafter   Total 
                             
Mortgage Payable 1  $40,613   $2,600   $29,044   $6,864   $69,179   $75,205   $223,505 
Interest Payments2   9,031    10,637    10,481    8,876    6,534    620    46,179 
                                    
Total Contractual Obligations  $49,644   $13,237   $39,525   $15,740   $75,713   $75,825   $269,684 
1)These amounts represent future interest payments related to mortgage payable obligations based on the fixed and variable interest rates specified in the associated debt agreements. All variable rate debt agreements are based on the one-month rate. For purposes of calculating future interest amounts on variable interest rate debt the one-month rate as of March 31, 2012 was used.

 

Certain of the Company’s debt agreements require the maintenance of certain ratios, including debt service coverage. The Company currently is in compliance with all of its debt covenants, with the exception of certain debt service coverage ratios on the debt associated with the Gulf Coast Industrial Portfolio.

 

Under the terms of the loan agreement for the Gulf Coast Industrial Portfolio, the lender has elected to retain all excess cash flow from the associated properties because of the aforementioned noncompliance. Through the date of this filing, notwithstanding the fact that the lender has taken such action, the Company is current with respect to regularly scheduled debt service payments on the loan. Additionally, the Company believes that the lender’s election to retain all excess cash flow from the associated properties, will not have a material impact on its results of operations or financial position.

 

In addition to the mortgage payable described above, we use 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 the Company’s 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 $18.3 million at March 31, 2012 and is due on demand. The margin loan bears interest at Libor plus 0.85% (1.100% 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.

 

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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.

 

   For the Three Months Ended 
   March 31, 2012   March 31, 2011 
Net income/(loss)  $24,807   $(3,800)
FFO adjustments:          
Depreciation and amortization:          
Depreciation and amortization of real estate assets   2,137    1,961 
Equity in depreciation and amortization for unconsolidated affiliated real estate entities   717    781 
Adjustments to equity in earnings from unconsolidated entities, net   33    - 
Gain on disposal of unconsolidated affiliated real estate entities   (30,287)   - 
FFO   (2,593)   (1,058)
MFFO adjustments:          
Other Adjustment          
Acquisition and other transaction related costs expensed(1)   103    733 
Amortization of above or below market leases and liabilities(2)   (42)   (81)
Accretion of discounts and amortization of premiums on debt investments   (519)   - 
Mark-to-market adjustments(3)   7,654    3,721 
Non-recurring gains/(losses) from extinguishment/sale of debt, derivatives or securities holdings(4)   -    - 
Gain/(loss) on sale of marketable securities   82    793 
MFFO   4,685    4,108 
Straight-line rent(5)  $(119)  $(260)
MFFO - IPA recommended format  $4,566   $3,848 
           
Net income/(loss)  $24,807   $(3,800)
Less: income attributable to noncontrolling interests   (2,704)   136 
Net income/(loss) applicable to company's common shares  $22,103   $(3,664)
Net income/(loss) per common share, basic and diluted  $0.74   $(0.12)
           
FFO  $(2,593)  $(1,058)
Less: FFO attributable to noncontrolling interests   (194)   93 
FFO attributable to company's common shares  $(2,787)  $(965)
FFO per common share, basic and diluted  $(0.09)  $(0.03)
           
MFFO - IPA recommended format  $4,566   $3,848 
Less: MFFO attributable to noncontrolling interests   (261)   (93)
MFFO attributable to company's common shares  $4,305   $3,755 

  

Notes:

(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.

 

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(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.

 

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

 

   From inception through 
   March 31, 2012 
     
FFO  $42,838 
Distributions  $90,730 

 

Sources of Distribution

 

The amount of distributions paid to our stockholders in the future will be determined by our Board 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.

 

The following table provides a summary of the quarterly distribution declared and the source of distribution based upon cash flows provided by operations for the three months ended March 31, 2012 and 2011.

 

   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  $3,452        $3,654      
Distributions reinvested   1,760         1,824      
Total Distributions  $5,212        $5,478      
                     
Source of distributions:                    
Cash flows provided by operations  $3,452    66%  $2,359    43%
Excess cash   -    0%   1,295    24%
Proceeds from issuance of common stock through DRIP   1,760    34%   1,824    33%
Total Sources  $5,212    100%  $5,478    100%
                     
Cash flows provided by/(used in) operations (GAAP basis)  $5,260        $2,359      
                     
Number of shares (in thousands) of common stock issued pursuant to the Company's DRIP   185         192      

 

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Information Regarding Dilution

 

In connection with the ongoing offering of shares of our common stock under our DRIP, 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 audited 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 and (ii) the funding of distributions from sources other than our cash flow from operations. As of March 31, 2012, our net tangible book value per share was $9.86. The offering price of shares under our DRIP at March 31, 2012 was $10.12.

 

Our offering price under out DRIP 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.

 

New Accounting Pronouncements

 

See Note 2 to 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.

 

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.

 

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 had one interest rate cap outstanding with an insignificant intrinsic value.

 

As of March 31, 2012, we held various marketable securities with a fair value of approximately $165.3 million, which are available for sale for general investment return purposes. We regularly review the market prices of these investments for impairment purposes. In order to manage risk related to changes in the price of Simon Stock, we entered into a hedge, structured as a collar on 527,803 (75% of our total Marco OP Units) of our Marco OP Units. As of March 31, 2012, a hypothetical adverse 10% movement in market values (after taking into consideration the effect of our collar) would result in a hypothetical loss in fair value of approximately by approximately $16.5 million.

 

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

 

 

   Remainder of
2012
   2013   2014   2015   2016   Thereafter   Total   Estimated Fair
Value
 
Mortgage Payable  $40,613   $2,600   $29,044   $6,864   $69,179   $75,205   $223,505   $222,479 
                                         
Marco OP Units Collar:                                        
                                         
Notional Amount   527,803    Units                            $(18,509)
                                         
Average Cap (Highest)  $109.29                                    
Average Floor (Lowest)  $90.32                                    

  

As of March 31, 2012, approximately $32.0 million, or 14%, of our debt has variable interest rates and our interest expense associated with these instruments is, therefore, subject to changes in market interest rates. Based on rates as of March 31, 2012, a 1% adverse movement (increase in Libor) would increase our annual interest expense by approximately $0.3 million.

 

The carrying amounts of cash and cash equivalents, restricted escrows, tenants’ accounts receivable, interest receivable from related parties, accounts payable and accrued expenses, loans due to affiliates 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 mortgages receivable approximated their 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 (in millions) of the Company’s debt is summarized as follows:

 

   As of March 31, 2012   As of December 31, 2011 
   Carrying Amount   Estimated Fair
Value
   Carrying Amount   Estimated Fair
Value
 
Mortgage payable  $223.5   $222.5   $224.3   $224.4 

 

The fair value of the 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 lessees, which may affect our ability to refinance our debt if necessary. As of March 31, 2012, the only off-balance sheet arrangements we had outstanding was an interest rate cap with an insignificant intrinsic value.

 

 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 our last fiscal quarter 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.

 

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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.

 

On March 29, 2006, Jonathan Gould, a former member of our Board and Senior Vice-President-Acquisitions, filed a lawsuit against us in the District Court for the Southern District of New York. The suit alleges, among other things, that Mr. Gould was insufficiently compensated for his services to us as director and officer. Mr. Gould has sued for damages under theories of quantum merit and unjust enrichment seeking the value of work he performed. Management believes that this suit is frivolous and entirely without merit and intends to defend against these charges vigorously. The Company believes any unfavorable outcome on this matter will not have a material effect on the consolidated financial statements.

 

On January 4, 2007, 1407 Broadway Real Estate LLC ("Office Owner"), an indirect, wholly owned subsidiary of 1407 Broadway Mezz II LLC ("1407 Broadway "), consummated the acquisition of a sub-leasehold interest (the "Sublease Interest") in an office building located at 1407 Broadway, New York, New York (the "Office Property"). 1407 Broadway is a joint venture between LVP 1407 Broadway LLC ("LVP LLC"), a wholly owned subsidiary of our operating partnership, and Lightstone 1407 Manager LLC ("Manager"), which is wholly owned by David Lichtenstein, the Chairman of our Board of Directors and our Chief Executive Officer, and Shifra Lichtenstein, his wife.

 

 The Sublease Interest was acquired pursuant to a Sale and Purchase of Leasehold Agreement with Gettinger Associates, L.P. ("Gettinger"). In July 2006, Abraham Kamber Company, as Sublessor under the sublease ("Sublessor"), served two notices of default on Gettinger (the "Default Notices"). The first alleged that Gettinger had failed to satisfy its obligations in performing certain renovations and the second asserted numerous defaults relating to Gettinger's purported failure to maintain the Office Property in compliance with its contractual obligations.

 

In response to the Default Notices, Gettinger commenced legal action and obtained an injunction that extends its time to cure any default, prohibits interference with its leasehold interest and prohibits Sublessor from terminating its sublease pending resolution of the litigation. A motion by Sublessor for partial summary judgment, alleging that certain work on the Office Property required its prior approval, was denied by the Supreme Court, New York County. Subsequently, by agreement of the parties, a stay was entered precluding the termination of the Sublease Interest pending a final decision on Sublessor's claim of defaults under the Sublease Interest. In addition, the parties stipulated to the intervention of Office Owner as a party to the proceedings.

 

On April 12, 2012, the Supreme Court, New York County decided in favor of the Company with respect to all matters before the Court.

 

While any proceeding or litigation has an element of uncertainty, management currently believes that the likelihood of an unfavorable outcome with respect to any of the aforementioned legal proceedings is remote. No provision for loss has been recorded in connection therewith.

 

As of the date hereof, the Company is not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss.

 

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

 

During the period covered by this Form 10-Q, we did not sell any equity securities that were not registered under the Securities Act of 1933, and we did not repurchase any shares.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

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 15 d-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, 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)

 

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