UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2014

 

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to

 

Commission file number 000-54047

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland		83-0511223
(State or Other Jurisdiction of 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   ¨       Smaller reporting company  þ

 

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

Yes  ¨  No þ

 

As of May 8, 2014, there were approximately 9.6 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust II, Inc., including shares issued pursuant to the distribution reinvestment plan.  

 

  

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

 

INDEX

 

				Page
PART I		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013		3
		Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2014  and 2013		4
		Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2014 and 2013		5
		Consolidated Statements of Stockholders’ Equity (unaudited) for the Three Months Ended March 31, 2014		6
		Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2014 and 2013		7
		Notes to Consolidated Financial Statements		8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		27
Item 4.		Controls and Procedures		28
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings		28
Item 1A.		Risk Factors		28
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		28
Item 3.		Defaults Upon Senior Securities		30
Item 4.		Mine Safety Disclosures		30
Item 5.		Other Information		30
Item 6.		Exhibits		30

 

  

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

 

		March 31, 2014				December 31, 2013
		(Unaudited)
Assets
Investment property:
Land and improvements		$	8,974			$	8,942
Building and improvements			39,154				35,567
Furniture and fixtures			10,165				8,706
Construction in progress			97				3,542
Gross investment property			58,390				56,757
Less accumulated depreciation			(3,234	)			(2,670	)
Net investment property			55,156				54,087
Investments in unconsolidated affiliated entity			3,798				3,834
Cash and cash equivalents			22,076				26,520
Marketable securities, available for sale			18,348				8,134
Restricted escrows and deposits			6,096				2,294
Due from sponsor			6				-
Prepaid expenses and other assets			1,333				957
Total Assets		$	106,813			$	95,826
Liabilities and Stockholders' Equity
Accounts payable and other accrued expenses		$	1,848			$	1,356
Margin loan			1,750				1,906
Mortgages payable			24,134				24,260
Due to sponsor			-				107
Distributions payable			1,323				1,172
Total liabilities			29,055				28,801
Commitments and contingencies (Note 9)
Stockholders' Equity:
Company's stockholders' equity:
Preferred shares, $0.01 par value, 10,000 shares authorized,  none issued and outstanding			-				-
Common stock, $0.01 par value; 100,000 shares authorized, 8,935 and 7,643 shares issued and outstanding in 2014 and 2013, respectively			89				76
Additional paid-in-capital			72,034				60,755
Subscription receivable			(103	)			(25	)
Accumulated other comprehensive income			419				399
Accumulated deficit			(3,076	)			(1,781	)
Total Company stockholders' equity			69,363				59,424
Noncontrolling interests			8,395				7,601
Total Stockholders' Equity			77,758				67,025
Total Liabilities and Stockholders' Equity		$	106,813			$	95,826

 

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

 

  

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

		For the Three Months Ended March 31,
		2014				2013
Rental revenue		$	3,268			$	2,323
Expenses:
Property operating expenses			2,296				1,645
Real estate taxes			86				152
General and administrative costs			471				439
Depreciation and amortization			564				376
Total operating expenses			3,417				2,612
Operating loss			(149	)			(289	)
Interest and dividend income			444				326
Interest expense			(321	)			(193	)
Other income/(expense), net			95				(27	)
(Loss)/income from investments in unconsolidated affiliated entities			(36	)			54
Net income /(loss)			33				(129	)
Less: net (income)/loss attributable to noncontrolling interests			(5	)			11
Net income/(loss) applicable to Company's common shares		$	28			$	(118	)
Net income/(loss) per Company's common share, basic and diluted		$	0.00			$	(0.02	)
Weighted average number of common shares outstanding, basic and diluted			8,258				5,464

 

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

 

  

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) (Unaudited)  

 

		For the Three Months Ended March 31,
		2014				2013
Net income/(loss)		$	33			$	(129	)
Other comprehensive income:
Unrealized gain on available for sale securities			20				149
Comprehensive income			53				20
Less: Comprehensive (income)/loss attributable to noncontrolling interests			(5	)			11
Comprehensive income attributable to the Company's common shares		$	48			$	31

 

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

 

  

PART I. FINANCIAL INFORMATION:    

ITEM 1. FINANCIAL STATEMENTS.

 

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

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Amounts in thousands) (Unaudited)

 

 

		Common Shares								Additional								Accumulated Other								Total
		Common								Paid-In				Subscription				Comprehensive								Noncontrolling				Total
		Shares				Amount				Capital				Receivable				Income				Accumulated Deficit				Interests				Equity
BALANCE, December 31, 2013			7,643			$	76			$	60,755			$	(25	)		$	399			$	(1,781	)		$	7,601			$	67,025
Net income			-				-				-				-				-				28				5				33
Other comprehensive income			-				-				-				-				20				-				-				20
Distributions declared			-				-				-				-				-				(1,323	)			-				(1,323	)
Distributions paid to noncontrolling interests			-				-				-				-				-				-				(11	)			(11	)
Contributions from noncontrolling interests			-				-				-				-				-				-				800				800
Proceeds from offering			1,264				13				12,560				(78	)			-				-				-				12,495
Selling commissions and dealer manager fees			-				-				(1,197	)			-				-				-				-				(1,197	)
Other offering costs			-				-				(355	)			-				-				-				-				(355	)
Redemption and cancellation of shares			(33	)			(1	)			(305	)			-				-				-				-				(306	)
Shares issued from distribution reinvestment program			61				1				576				-				-				-				-				577
BALANCE, March 31, 2014			8,935			$	89			$	72,034			$	(103	)		$	419			$	(3,076	)		$	8,395			$	77,758

 

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

 

  

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands) (Unaudited)

 

		For the Three Months Ended March 31,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss)		$	33			$	(129	)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Depreciation and amortization			564				376
Amortization of deferred financing costs			18				23
Gain on sale of marketable securities			(112	)			(10	)
Loss/(income) from investments in unconsolidated affiliated entities			36				(54	)
Changes in assets and liabilities:
Decrease in restricted escrows			-				157
Increase in prepaid expenses and other assets			(395	)			(172	)
Increase in accounts payable and other accrued expenses			219				338
(Decrease)/increase in due to sponsor			(113	)			76
Net cash provided by operating activities			250				605
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment property, net			(1,366	)			(1,047	)
Purchase of marketable securities			(19,774	)			-
Proceeds from sale of marketable securities			9,692				190
Distributions from unconsolidated affiliated entity			-				25
(Funding)/release of restricted escrows and deposits			(3,802	)			1,023
Net cash (used in)/provided by investing activities			(15,250	)			191
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on mortgages payable			(126	)			(53	)
Payment on margin loan			(156	)			(344	)
Proceeds from issuance of common stock			12,495				2,963
Payment of commissions and offering costs			(1,545	)			(641	)
Redemption and cancellation of common shares			(306	)			(253	)
Contribution of noncontrolling interests			800				-
Distributions to noncontrolling interests			(11	)			-
Distributions to common stockholders			(595	)			(459	)
Net cash provided by financing activities			10,556				1,213
Net change in cash and cash equivalents			(4,444	)			2,009
Cash and cash equivalents, beginning of year			26,520				8,152
Cash and cash equivalents, end of period		$	22,076			$	10,161

 

See Note 2 for supplemental cash flow information.

 

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

 

  

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

Notes to Consolidated Financial Statements

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

 

1.	Organization

 

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

 

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

 

The Lightstone REIT II and the Operating Partnership 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’s sponsor is David Lichtenstein (“Lichtenstein”), who does business as The Lightstone Group (the “Sponsor”) and majority owns the limited liability company of that name. The Company’s advisor is Lightstone Value Plus REIT II LLC (the “Advisor”), which is wholly owned by our Sponsor.

 

The Company’s registration statement on Form S-11, pursuant to which it offered to sell up to 51,000,000 shares of its common stock at a price of $10.00 per share, subject to certain volume discounts, (exclusive of 6,500,000 shares which were available pursuant to its distribution reinvestment plan (the “DRIP”) at an initial purchase price of $9.50 per share and 255,000 shares which were reserved for issuance under its Employee and Director Incentive Restricted Share Plan), was declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933 on February 17, 2009, and on April 24, 2009 the Company commenced its initial public offering of common stock (the “Offering”). The Offering, which terminated on August 15, 2012, raised aggregate gross proceeds of approximately $49.8 million from the sale of approximately 5.0 million shares of common stock. After allowing for the payment of approximately $5.2 million in selling commissions and dealer manager fees and $4.5 million in organization and other offering expenses, the Offering generated aggregate net proceeds of approximately $40.1 million. In addition, through August 15, 2012 (the termination date of the Offering), the Company had issued approximately 0.3 million shares of common stock under its DRIP, representing approximately $2.9 million of additional proceeds.

 

The Company’s registration statement on Form S-11 (the “Follow-On Offering”), pursuant to which it is offering to sell up to 30,000,000 shares of its common stock for $10.00 per share, subject to certain volume discounts (exclusive of 2,500,000 shares available pursuant to its DRIP at an initial purchase price of $9.50 per share and 255,000 shares reserved for issuance under its Employee and Director Incentive Restricted Share Plan) was declared effective by SEC under the Securities Act of 1933 on September 27, 2012. As of March 31, 2014, the Company had received aggregate gross proceeds of approximately $35.4 million from the sale of approximately 3.6 million shares of its common stock in its Follow-On Offering. The Company intends to sell shares of its common stock under the Follow-On Offering until the earlier of the date on which all the shares are sold, or September 27, 2014, two years from the date the Follow-On Offering was declared effective by the SEC. The Company reserves the right to reallocate the shares of common stock it is offering between the primary offering and the DRIP. Additionally, the Follow-On Offering may be terminated at any time.

 

Effective September 27, 2012, Orchard Securities, LLC (“Orchard Securities”) became the Dealer Manager of the Company’s Follow-On Offering.

 

As of March 31, 2014, the Advisor owned 20,000 shares of common stock which were issued on May 20, 2008 for $200, or $10.00 per share. In addition, as of September 30, 2009, the Company had reached the minimum offering under its Offering by receiving subscriptions of its common shares, representing gross offering proceeds of approximately $6.5 million, and effective October 1, 2009 investors were admitted as stockholders and the Operating Partnership commenced operations. Through March 31, 2014, cumulative gross offering proceeds of $85.2 million were released to the Company. The Company invested the proceeds received from the Offering and from the Advisor in the Operating Partnership, and as a result, held a 99.9% general partnership interest as of March 31, 2014 in the Operating Partnership’s common units.

 

  

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

Notes to Consolidated Financial Statements

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

 

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

 

Noncontrolling Interests

 

The noncontrolling interests consist of (i) parties of the Company that hold units in the Operating Partnership and (ii) certain interests in LVP Metairie JV LLC, LVP East Rutherford LLC, LVP TPS Little Rock Holdings LLC and LVP TPS Fayetteville Holdings LLC which are not owned by the Company.

 

Partners of Operating Partnership

 

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

 

Lightstone SLP II LLC, which is wholly owned by the Company’s Sponsor committed to purchase subordinated profits interests in the Operating Partnership (“Subordinated Profits Interests”) at a cost of $100,000 per unit for each $1.0 million in subscriptions up to ten percent of the proceeds from the primary shares under the Offering and the Follow-On Offering on a semi-annual basis beginning with the quarter ended June 30, 2010. Lightstone SLP II LLC may elect to purchase the Subordinated Profits Interests with either cash or an interest in real property of equivalent value.

 

From our inception through March 31, 2014, the Company’s Sponsor has made cash contributions of $2.4 million and elected to contribute equity interests totaling 48.6% in Brownmill, LLC (“Brownmill”), which were valued at $4.8 million, in exchange for a total of 72.0 Subordinated Profits Interests with an aggregate value of $7.2 million. The Company’s Sponsor may continue to elect to contribute interests in real property in lieu of cash in exchange for Subordinated Profits Interests in order to fulfill its semi-annual commitment. See Note 3 for additional information on Brownmill.

 

2.	Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of Lightstone REIT II and its Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). As of March 31, 2014, the Lightstone REIT II had a 99.9% general partnership interest in the common units of the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation.

 

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of the Company and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. The accompanying unaudited consolidated financial statements of the Lightstone Value Plus Real Estate Investment Trust II, Inc. and its Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

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

 

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

 

  

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

Notes to Consolidated Financial Statements

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

 

Supplemental disclosure of cash flow information

 

		Three Months Ended March 31,
		2014				2013
Cash paid for interest		$	304			$	170
Distributions declared		$	1,323			$	874
Commissions and other offering costs accrued but not paid		$	200			$	343
Subscription receivable		$	78			$	175
Value of shares issued from distribution reinvestment program		$	577			$	401

 

Pro Forma Financial Information

 

The following table provides unaudited pro forma results of operations for the period indicated, as if the acquisitions that the Company made in 2013 (the TownePlace Suites – Fayetteville and the TownePlace Suites – Little Rock) had been acquired at the beginning of that period. Such pro forma results are not necessarily indicative of the results that actually would have occurred had these acquisitions been completed on the date indicated, nor are they indicative of the future operating results of the combined company.

 

		For the Three Months Ended March 31, 2013
Pro forma rental revenue		$	3,114
Pro forma net loss		$	(105	)
Pro forma net loss per Company's common share, basic and diluted		$	(0.02	)

 

Reclassifications

 

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

 

New Accounting Pronouncements

 

In April 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standards update providing new guidance on the requirements for reporting a discontinued operation. The update changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. This update is effective for fiscal years beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in the financial statements previously issued or available for issuance.  The adoption of this standards update affects presentation only and, as such, will not have a material impact on the Company’s consolidated financial statements.

 

3.	Investment in Unconsolidated Affiliated Entity

 

The entity listed below is partially owned by the Company. The Company accounts for this investment under the equity method of accounting as the Company exercises significant influence, but does not exercise financial and operating control, and is not considered to be the primary beneficiary of this entity. A summary of the Company’s investment in the unconsolidated affiliated entity is as follows:

 

  

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

Notes to Consolidated Financial Statements

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

 

Entity		Date of Ownership		Ownership Interest as of March 31, 2014				As of March 31, 2014				As of  December 31, 2013
Brownmill LLC ("Brownmill")		Various			48.6	%		$	3,798			$	3,834

 

Brownmill

 

As of March 31, 2014, the Operating Partnership owns an approximate 48.6% membership interest in Brownmill. The Company’s interest in Brownmill is a non-managing interest. An affiliate of the Company’s Sponsor is the majority owner and manager of Brownmill. Profit and cash distributions are allocated in accordance with each investor’s ownership percentage. The Company recorded its investment in Brownmill in accordance with the equity method of accounting. Accordingly, its portion of Brownmill’s total indebtedness is not included in the investment.

 

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

 

Brownmill Financial Information

 

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

 

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

 

		For the Three Months Ended March 31,
		2014				2013
Revenue		$	1,004			$	961
Property operating expenses			468				389
Depreciation and amortization			209				211
Operating income			327				361
Interest expense and other, net			(277	)			(287	)
Net income		$	50			$	74
Company's share of net income		$	24			$	36
Additional depreciation and amortization expense (1)			(60	)			(69	)
Company's loss from investment		$	(36	)		$	(33	)

 

Note:

(1)

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

 

  

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

Notes to Consolidated Financial Statements

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

 

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

 

		As of				As of
		March 31, 2014				December 31, 2013
Investment property, at cost (net)		$	15,837			$	16,039
Cash and restricted cash			1,501				1,530
Other assets			1,496				1,363
Total assets		$	18,834			$	18,932
Mortgage payable		$	20,578			$	20,700
Other liabilities			562				588
Members' deficiency			(2,306	)			(2,356	)
Total liabilities and members' deficiency		$	18,834			$	18,932

 

Rego Park Joint Venture

 

During 2013, LVP Rego Park, LLC (the “Rego Park Joint Venture”), a joint venture in which the Company and Lightstone REIT I had 10.0% and 90.0% ownership interests, respectively, made final distributions to its members and, as a result, , the Company no longer has any investment in the Rego Park Joint Venture. During the three months ended March 31, 2013, the Rego Park Joint Venture had net income of approximately $867, of which the Company’s share was approximately $87.

 

4.	Marketable Securities, Margin Loan 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, 2014
		Adjusted Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Corporate Bonds and Preferred Equity Securities		$	17,929			$	550			$	(131	)		$	18,348

 

		As of December 31, 2013
		Adjusted Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Preferred Equity Securities		$	7,735			$	399			$	-			$	8,134

 

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 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 margin loan bears interest at Libor plus 0.85% (1.00% as of March 31, 2014).

 

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. As of March 31, 2014 and December 31, 2013, the Company did not recognize any impairment charges.

 

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.

 

  

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

Notes to Consolidated Financial Statements

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

 

•

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

 

•

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

 

As of March 31, 2014 and December 31, 2013, all of the Company’s equity securities were classified as Level 1 assets and there were no transfers between the level classifications during the three months ended March 31, 2014.

 

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

 

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

 

		For the Three Months Ended March 31,
		2014				2013
Selling commissions and dealer manager fees		$	1,197			$	293
Other offering costs		$	355			$	437

 

Since the Company’s inception through March 31, 2014, it has incurred approximately $8.5 million in selling commissions and dealer manager fees and $8.3 million of other offering costs in connection with the public offering of shares of its common stock.

 

6.	Earnings per Share

 

The Company had no potentially dilutive securities outstanding during the periods presented. Accordingly, earnings per share is calculated by dividing net income attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the applicable period.

 

7.	Related Party Transactions

 

In addition to certain related party payments made to the Dealer Manager (see Note 5 for additional information), the Company also has agreements with the Advisor and Lightstone Value Plus REIT Management LLC (the “Property Manager”) to pay certain fees in exchange for services performed by these entities and other affiliated entities. The Company’s ability to secure financing and subsequent real estate operations are dependent upon its Advisor, Property Manager and their affiliates to perform such services as provided in these agreements.

 

The following table represents the fees incurred associated with the payments to the Company’s Advisor and Property Manager for the periods indicated:

 

		For the Three Months Ended March 31,
		2014				2013
Asset Management Fees		$	-			$	114
Development Fees		$	140			$	-
Total		$	140			$	114

 

Pursuant to an Advisory Agreement, our Advisor is entitled to receive an asset management fee equal to 0.95% of our average invested assets, as defined. The asset management fee is payable quarterly and based on balances as of the end of each month in the quarterly period. Commencing with the quarter ended June 30, 2013, the Advisor has elected to waive or reduce its quarterly asset management fee to the extent our non-GAAP measure modified funds from operations available, or MFFO, as defined by the Investment Program Association, or IPA, for the preceding twelve months period ending on the last day of the current quarter is less than the distributions declared with respect to the same twelve month period. As a result, asset management fees of $0.1 million were waived by the Advisor during three months ended March 31, 2014.

 

 

 

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

Notes to Consolidated Financial Statements

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

 

See Note 3 – Investments in Unconsolidated Affiliated Entities for additional information with respect to the Company’s ownership interests in Brownmill.

 

8.	Financial Instruments

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted escrows, accounts receivable (included in other assets), accounts payable and accrued expenses and the margin loan approximated their fair values because of the short maturity of these instruments. The estimated fair value of our mortgages payable is as follows:

 

		As of March 31, 2014								As of December 31, 2013
		Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value
Mortgages payable		$	24,134			$	23,809			$	24,260			$	23,898

 

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

 

9.	Commitments and Contingencies

 

Legal Proceedings

 

From time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes.

 

As of the date hereof, the Company is not a party to any material pending legal proceedings 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. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

 

10.	Subsequent Events

 

Acquisition of a Holiday Inn Express Hotel and Suites Located in Opelika, Alabama

 

On April 1, 2014, the Company completed the acquisition of an 87-room select service hotel located in Opelika, Alabama (the “Holiday Inn — Opelika”), from an unrelated third party. The Holiday Inn — Opelika operates as a “Holiday Inn Express Hotel & Suites” pursuant to a 15-year franchise agreement with the International Hotel Group.

 

The aggregate purchase price for the Holiday Inn — Opelika was approximately $6.9 million. Additionally, in connection with the acquisition, our advisor received an acquisition fee equal to 0.95% of the contractual purchase price of $6.9 million, or approximately $66.

 

Acquisition of an Aloft Located in Tucson, Arizona

 

On April 8, 2014, the Company completed the acquisition of a 154-room select service hotel located in Tucson, Arizona (the “Aloft — Tucson”), from an unrelated third party. The Aloft — Tucson operates as an “Aloft” pursuant to a 20-year franchise agreement with Sheraton LLC, or Starwood.

 

The aggregate purchase price for the Aloft - Tucson was approximately $19.0 million. Additionally, in connection with the acquisition, our advisor received an acquisition fee equal to 0.95% of the contractual purchase price of $19.0 million, or approximately $181.

 

  

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

Notes to Consolidated Financial Statements

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

 

Distribution Payment

 

On April 15, 2014, the total distribution for the three-month period ending March 31, 2014 of approximately $1.3 million was paid in full using a combination of cash and approximately 69,000 shares of the Company’s common stock issued pursuant to the Company’s DRIP, at a discounted price of $9.50 per share. The distribution was paid from cash other than cash flows provided from operations (approximately $0.1 million or 11%), cash flows provided from operations (approximately $0.5 million or 39%) and excess cash proceeds from the issuance of common stock through REIT II's DRIP (approximately $0.7 million or 50%).

 

Distribution Declaration

 

On May 14, 2014, the Board of Directors authorized and the Company declared a distribution for the three-month period ending June 30, 2014. The distribution will be calculated based on shareholders of record each day during this three-month period at a rate of $0.00178082191 per day, and will equal a daily amount that, if paid each day for a 365-day period, would equal a 6.5% annualized rate based on a share price of $10.00. The distribution will be paid in cash on July 15, 2014 to shareholders of record as of June 30, 2014. The shareholders have an option to elect the receipt of shares under our DRIP.

 

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

 

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

 

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

 

Forward-Looking Statements

 

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

 

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

 

Risks and other factors that might cause differences, some of which could be material, include, but are not limited to, economic and market conditions, competition, tenant or joint venture partner(s) bankruptcies, our lack of operating history, the availability of cash flows from operations to pay distributions, changes in governmental, tax, real estate and zoning laws and regulations, failure to increase tenant occupancy and operating income, rejection of leases by tenants in bankruptcy, financing and development risks, construction and lease-up delays, cost overruns, the level and volatility of interest rates, the rate of revenue increases versus expense increases, the financial stability of various tenants and industries, the failure of the Company to make additional investments in real estate properties, the failure to upgrade our tenant mix, restrictions in current financing arrangements, the failure to fully recover tenant obligations for common area maintenance, insurance, taxes and other property expenses, the failure of the Company to continue to qualify as a real estate investment trust (“REIT”), the failure to refinance debt at favorable terms and conditions, an increase in impairment charges, loss of key personnel, failure to achieve earnings/funds from operations targets or estimates, conflicts of interest with the Advisor and the Sponsor and their affiliates, failure of joint venture relationships, significant costs related to environmental issues as well as other risks listed from time to time in this Form 10-Q, our Form 10-K, our Registration Statements on Form S-11, 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 II, Inc. (the “Lightstone REIT II”) and Lightstone Value Plus REIT II, LP, (the “Operating Partnership”) and its subsidiaries are collectively referred to as the ‘‘Company’’ and the use of ‘‘we,’’ ‘‘our,’’ ‘‘us’’ or similar pronouns refers to the Lightstone REIT II, its Operating Partnership or the Company as required by the context in which such pronoun is used.

 

  

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

 

Capital required for the future purchases of real estate and/or real estate related investments is expected to be obtained from public offerings of shares of our common stock and from any indebtedness that we may incur either in connection with the acquisition of any real estate and real estate related investments or thereafter. We are dependent upon the net proceeds from public offerings of our common stock to conduct our proposed activities.

 

The Company’s registration statement on Form S-11, pursuant to which it offered to sell a maximum of 51,000,000 shares of its common stock (exclusive of 6,500,000 shares which were available pursuant to its distribution reinvestment plan (the “DRIP”), and 255,000 shares which were reserved for issuance under its Employee and Director Incentive Restricted Share Plan), at a price of $10.00 per share (subject to certain volume discounts), was declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933 on February 17, 2009, and on April 24, 2009 the Company commenced its initial public offering of common stock (the “Offering”). The Offering terminated on August 15, 2012.

 

The Company has filed a registration statement on Form S-11 (the “Follow-On Offering”), pursuant to which it is offering to sell a maximum of 30,000,000 shares of its common stock (exclusive of 2,500,000 shares available pursuant to its DRIP) and 255,000 shares reserved for issuance under the its Employee and Director Incentive Restricted Share Plan), at a price of $10.00 per share (subject to certain volume discounts). The Follow-On Offering was declared effective by SEC under the Securities Act of 1933 on September 27, 2012.

 

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

 

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

 

Current Environment

 

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

 

U.S. and international markets are currently experiencing increased levels of volatility due to a combination of many factors, including depressed home prices, limited access to credit markets, higher fuel prices, less consumer spending and fears of a national and global recession. The effects of the current market dislocation may persist as financial institutions continue to take the necessary steps to restructure their business and capital structures. As a result, this economic downturn has reduced demand for space and removed support for rents and property values. Since we cannot predict when the real estate markets may recover, the value of our properties may decline if current market conditions persist or worsen.

 

Our business may be affected by market and economic challenges experienced by the U.S. and global economies. These conditions may materially affect the value and performance of our properties, and may affect our ability to pay distributions, the availability or the terms of financing that we have or may anticipate utilizing, and our ability to make principal and interest payments on, or refinance, any outstanding debt when due.

 

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

 

  

Portfolio Summary –

 

Location

Year Built

Leasable Square Feet

Percentage Occupied as of March 31, 2014

Annualized Revenues based on rents as of March 31, 2014

Annualized Revenues per square foot as of March 31, 2014

Unconsolidated Affiliated Real Estate Entities:

Retail

Brownmill LLC (2 retail properties)

Old Bridge and Vauxhall, New Jersey

1962

155,928

88

%

$

2.7 million

$

17.46

 

Consolidated Properties:
Hospitality								Year to Date				Percentage Occupied for the Three Months Ended				Revenue per Available Room for the Three Months				Average Daily Rate For the Three Months Ended
		Location		Year Built				Available Rooms				March 31, 2014				Ended March 31, 2014				March 31, 2014
TownePlace Suites - Metairie		Harahan, Louisiana			2000				11,160				75	%		$	76			$	101
SpringHill Suites - Peabody		Peabody, Massachusetts			2002				14,760				47	%		$	44			$	94
Fairfield Inn - East Rutherford		East Rutherford, New Jersey			1990				12,690				59	%		$	73			$	123
TownePlace Suites - Fayetteville		Johnson/Springdale, Arkansas			2009				8,280				54	%		$	42			$	78
TownePlace Suites - Little Rock		Little Rock, Arkansas			2009				8,280				54	%		$	47			$	87

 

Annualized base rent is defined as the minimum monthly base rent due as of March 31, 2014 annualized, excluding periodic contractual fixed increases and rents calculated based on a percentage of tenants’ sales. The annualized base rent disclosed in the table above includes all concessions, abatements and reimbursements of rent to tenants.

 

Critical Accounting Policies and Estimates

 

There were no material changes during the three months ended March 31, 2014 to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Results of Operations

 

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

 

For the three months ended March 31, 2014, the Company’s consolidated results of operations included the operating results from (i) the TownePlace Suites - Metairie, (ii) the SpringHill Suites - Peabody, (iii) the Fairfield Inn – East Rutherford and (iv) the TownePlace Suites – Fayetteville and the TownePlace Suites – Little Rock (collectively, the “Arkansas Hotel Portfolio”). For the three months ended March 31, 2013 the Company’s consolidated results of operations included the operating results from (i) the TownePlace Suites - Metairie, (ii) the SpringHill Suites – Peabody and (iii) the Fairfield Inn – East Rutherford. Tthe Arkansas Hotel Portfolio was acquired on June 18, 2013.

 

For the Three Months Ended March 31, 2014 vs. March 31, 2013

 

Consolidated

 

Rental revenue

 

Rental revenue increased by $945 to $3,268 during the three months ended March 31, 2014 compared to $2,323 for the same period in 2013. The increase is primarily attributable to the acquisition of the Arkansas Hotel Portfolio as well as higher revenue at several of our hotels which underwent brand-required property improvement plans during 2013 and 2014.

 

Property operating expenses

 

Property operating expenses increased by $651 to $2,296 during the three months ended March 31, 2014 compared to $1,645 for the same period in 2013. The increase is primarily attributable to the acquisition of the Arkansas Hotel Portfolio.

 

  

Real estate taxes

 

Real estate taxes decreased by $66 to $86 during the three months ended March 31, 2014 compared to $152 for the same period in 2013. The decrease is primarily attributable to a refund in the 2014 period offset slightly by new taxes as a result of the acquisition of the Arkansas Hotel Portfolio.

 

General and administrative expenses

 

General and administrative expenses increased by $32 to $471 during the three months ended March 31, 2014 compared to $439 for the same period in 2013. The increase is primarily attributable to the acquisition of the Arkansas Hotel Portfolio partially offset by our Sponsor’s waiver of asset management fees in the first quarter of 2014 (see Note 7 of the Notes to Consolidated Financial Statements for additional information).

 

Depreciation and amortization

 

Depreciation and amortization expense increased by $188 to $564 during the three months ended March 31, 2014 compared to $376 for the same period in 2013. The increase is primarily attributable to the acquisition of the Arkansas Hotel Portfolio.

 

Interest and dividend income

 

Interest and dividend income increased by $118 to $444 during the three months ended March 31, 2014 compared to $326 for the same period in 2013. The 2014 amount consists primarily of dividend income earned on our investments in marketable securities. The 2013 amount consisted of (i) $59 of interest on the note receivable from affiliate, (ii) $161 of dividend income earned on our investments in marketable securities and (iii) $106 of interest income on our mortgage loan receivable.

 

Earnings from investments in unconsolidated affiliated entities

 

Our loss from investments in unconsolidated affiliated entities during the three months ended March 31, 2014 was $36 compared to income of $54 for the same period in 2013. Our earnings from investments in unconsolidated affiliated entities are attributable to our ownership interests in certain unconsolidated affiliated entities, which we account for under the equity method of accounting. See Note 3 of the Notes to Consolidated Financial Statements for additional information.

 

Interest expense

 

Interest expense was $321 during the three months ended March 31, 2014 compared to $193 for the same period in 2013. Interest expense during the 2014 period consisted of $316 related to our mortgage indebtedness and $5 related to our margin loan. Interest expense during the 2013 period consisted of $186 related to our mortgage indebtedness and $7 related to our margin loan. The increase is primarily attributable to the timing of our new mortgage financings during the 2013 period.

 

Noncontrolling interests

 

The income or loss allocated to noncontrolling interests relates to (i) the interest in our Operating Partnership held by our Sponsor and (ii) membership interests held by others in LVP Metairie JV LLC, and LVP East Rutherford LLC, LVP TPS Little Rock Holdings LLC and LVP TPS Fayetteville Holdings LLC.

 

Financial Condition, Liquidity and Capital Resources

 

Overview:

 

For the three months ended March 31, 2014, our primary sources of funds were (i) $11.0 million of net proceeds from the sale of shares of common stock under our Follow-On Offering, (ii) $9.7 million of proceeds from the sale of marketable securities and (iii) $0.8 million of cash contributions from noncontrolling interests. We are dependent upon future net proceeds expected to be received from our public offerings to conduct our proposed activities. The capital required to purchase real estate investments is expected to be obtained from our public offerings and from any indebtedness that we may incur in either in connection with the acquisition or the operations of any real estate investments thereafter.

 

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

 

  

Our future sources of funds will primarily consist of (i) net proceeds from our public offerings, (ii) cash flows from our operations, (iii) proceeds from our borrowings and (v) the release of funds held in restricted escrows. We currently believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.

 

We currently have mortgage indebtedness totaling $24.1 million and a margin loan of $1.8 million. We have and intend to continue to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of our independent directors and is disclosed to our stockholders. Market conditions will dictate the overall leverage limit; as such our aggregate long-term permanent borrowings may be less than 75% of aggregate fair market value of all properties. We may also incur short-term indebtedness, having a maturity of two years or less.

 

Our charter provides that the aggregate amount of borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. Market conditions will dictate the overall leverage limit; as such our aggregate borrowings may be less than 300% of net assets. As of March 31, 2014, our total borrowings aggregated $25.9 million which represented 32.0% of our net assets.

 

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

 

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

 

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

 

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

 

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

 

  

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

 

		For the Three Months Ended March 31,
		2014				2013
Asset Management Fees		$	-			$	114
Development Fees		$	140			$	-
Total		$	140			$	114

 

Pursuant to an Advisory Agreement, our Advisor is entitled to receive an asset management fee equal to 0.95% of our average invested assets, as defined. The asset management fee is payable quarterly and based on balances as of the end of each month in the quarterly period. Commencing with the quarter ended June 30, 2013, the Advisor has elected to waive or reduce its quarterly asset management fee to the extent our non-GAAP measure modified funds from operations available, or MFFO, as defined by the Investment Program Association, or IPA, for the preceding twelve months period ending on the last day of the current quarter is less than the distributions declared with respect to the same twelve month period. As a result, asset management fees of $0.1 million were waived by the Advisor during three months ended March 31, 2014.

 

In addition, total selling commissions and dealer manager fees incurred were $1,197 and $293 during the three months ended March 31, 2014 and 2013, respectively.

 

Summary of Cash Flows

 

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

 

		For the Three Months Ended March 31,
		2014				2013
Net cash provided by operating activities		$	250			$	605
Net cash (used in)/provided by investing activities			(15,250	)			191
Net cash provided by financing activities			10,556				1,213
Net change in cash and cash equivalents			(4,444	)			2,009
Cash and cash equivalents, beginning of the period			26,520				8,152
Cash and cash equivalents, end of the period		$	22,076			$	10,161

 

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

 

Our principal demands for liquidity currently are acquisition and development activities, scheduled debt service on our mortgage payable and costs associated with our public offerings. The principal sources of funding for our operations are currently the issuance of equity securities.

 

Operating activities

 

The net cash provided by operating activities of approximately $0.3 million during the 2014 period primarily related to $0.6 million of depreciation and amortization and changes in assets and liabilities of $0.3 million.

 

Investing activities

 

The net cash used by investing activities of approximately $15.3 million during the 2014 period reflects (i) $1.4 million of capital expenditures, (ii) $19.8 million purchases of marketable securities and (iii) $3.8 million for the funding of restricted escrows partially offset by (iv) $9.7 million from the sale of marketable securities.

 

Financing activities

 

The net cash provided by financing activities of approximately $10.6 million during the 2014 period primarily consists of (i) proceeds from the issuance of our common stock of $12.5 million and (ii) contributions of $0.8 million from certain noncontrolling interests partially offset by (i) the payment of selling commissions, dealer manager fees and other offering costs of $1.5 million, (ii) distributions to common stockholders of $0.6 million, (iii) payments on our margin loan and mortgages payable of $0.3 million and (iv) redemptions and cancellations of shares of common stock of $0.3 million.

 

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

 

  

Distribution Reinvestment Plan and Share Repurchase Program

 

Our DRIP provides our stockholders with an opportunity to purchase additional shares of our common stock at a discount by reinvesting distributions. As of March 31, 2014, we had approximately 2.2 million shares available for issuance under our DRIP and our DRIP price per share of common stock is $9.50. 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 certain restrictions. From our inception through December 31, 2013 we repurchased 176,540 shares of common stock and for the three months ended March 31, 2014 we repurchased 33,076 shares of common stock, pursuant to our share repurchase program. We repurchased the shares at an average price per share of $9.13 per share. We funded share repurchases for the periods noted above from the cumulative proceeds of the sale of our shares pursuant to our DRIP.

 

Our Board of Directors reserves the right to terminate either program for any reason without cause by providing written notice of termination of the DRIP to all participants or written notice of termination of the share repurchase program to all stockholders.

 

Contractual Obligations

 

The following is a summary of our estimated contractual obligations outstanding over the next five years and thereafter as of March 31, 2014.

 

		Remainder of
Contractual Obligations		2014				2015				2016				2017				2018				Thereafter				Total
Principal maturities		$	373			$	524			$	548			$	580			$	22,109			$	-			$	24,134
Interest payments			905				1,178				1,155				1,123				731				-				5,092
Total		$	1,278			$	1,702			$	1,703			$	1,703			$	22,840			$	-			$	29,226

 

In addition to the mortgage payable described above, we have a margin loan that was made available to us from a financial institution that holds custody of certain of our marketable securities. The margin loan is collateralized by the marketable securities in our account. The amounts available to us under the margin loan are at the discretion of the financial institution and not limited to the amount of collateral in our account. The amount outstanding under this margin loan was $1.8 million as of March 31, 2014 and is due on demand. The margin loan bears interest at Libor plus 0.85% (1.00% as of March 31, 2014).

 

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 indicators 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 undiscounted future 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.

 

  

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; 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, 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 gains and losses in calculating MFFO, as such gains and losses are not reflective of ongoing operations.

 

  

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 that of 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 as items which are unrealized and may not ultimately be realized. We view both gains and losses from dispositions of assets and fair value adjustments of derivatives as items 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 GAAP measurements as an indication of our performance. MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value and there is no net asset value determination during the offering stage and for a period thereafter. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO or MFFO.

 

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

 

The below table illustrates the items deducted from or added to net income/(loss) in the calculation of FFO and MFFO during the periods presented. The table discloses MFFO in the IPA recommended format and MFFO without the straight-line rent adjustment which management also uses as a performance measure. Items are presented net of non-controlling interest portions where applicable.

 

  

		For the Three Months Ended March 31,
		2014				2013
Net income/(loss)		$	33			$	(129	)
FFO adjustments:
Depreciation and amortization of real estate assets			564				376
Adjustments to equity in earnings from unconsolidated entities, net			161				172
FFO			758				419
MFFO adjustments:
Other adjustments:
Acquisition and other transaction related costs expensed(1)			153				52
Adjustments to equity in earnings from unconsolidated entities, net			7				(67	)
Amortization of above or below market leases and liabilities(2)			-				-
Accretion of discounts and amortizatio of premiums on debt investments			-				-
Mark-to-market adjustments(3)			-				-
Non-recurring gains/from extinguishment/sale of debt, derivatives or securities holdings(4)			(112	)			(10	)
MFFO			806				394
Straight-line rent(5)			-				-
MFFO - IPA recommended format		$	806			$	394
Net income/(loss)		$	33			$	(129	)
Less: (income)/loss attributable to noncontrolling interests			(5	)			11
Net income/(loss) applicable to Company's common shares		$	28			$	(118	)
Net income/(loss) per common share, basic and diluted		$	0.00			$	(0.02	)
FFO		$	758			$	419
Less: FFO attributable to noncontrolling interests			(28	)			(5	)
FFO attributable to Company's common shares		$	730			$	414
FFO per common share, basic and diluted		$	0.09			$	0.08
MFFO - IPA recommended format		$	806			$	394
Less: MFFO attributable to noncontrolling interests			(28	)			(10	)
MFFO attributable to Company's common shares		$	778			$	384
Weighted average number of common shares outstanding, basic and diluted			8,258				5,464

 

(1)

The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to investors. In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for non-listed REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition costs, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our advisor or third parties. Acquisition fees and expenses under GAAP are considered operating expenses and as expenses included in the determination of net income and income from continuing operations, both of which are performance measures under GAAP. Such fees and expenses are paid in cash, and therefore such funds will not be available to distribute to investors. Such fees and expenses negatively impact our operating performance during the period in which properties are being acquired. Therefore, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property. Acquisition fees and expenses will not be paid or reimbursed, as applicable, to our advisor even if there are no further proceeds from the sale of shares in our offering, and therefore such fees and expenses would need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties or from ancillary cash flows.

(2)

Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.

 

  

(3)

Management believes that adjusting for mark-to-market adjustments is appropriate because they are nonrecurring items that may not be reflective of ongoing operations and reflects unrealized impacts on value based only on then current market conditions, although they may be based upon current operational issues related to an individual property or industry or general market conditions.  Mark-to-market adjustments are made for items such as ineffective derivative instruments, certain marketable securities and any other items that GAAP requires we make a mark-to-market adjustment for. 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 gains or losses related to extinguishment/sale of debt, derivatives or securities holdings is appropriate because they are items that may not be reflective of ongoing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods.

(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.

 

Distributions Declared by our Board of Directors and Source of Distributions

 

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

 

		Three Months Ended March 31, 2014								Three Months Ended March 31, 2013
Distribution period:		Q1 2014				Percentage of Distributions				Q1 2013				Percentage of Distributions
Date distribution declared			March 28, 2014								March 22, 2013
Date distribution paid			April 15, 2014								April 15, 2013
Distributions paid		$	664							$	455
Distributions reinvested			659								419
Total Distributions		$	1,323							$	874
Source of distributions:
Cash flows provided by operations		$	518				39	%		$	455				52	%
Offering proceeds			146				11	%			-				0	%
Proceeds from issuance of common stock through DRIP			659				50	%			419				48	%
Total Sources		$	1,323				100	%		$	874				100	%
Cash flows provided by/(used in) operations (GAAP basis)		$	250							$	605
Number of shares (in thousands) of common stock issued pursuant to the Company's DRIP			69								44

 

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

 

		For the period April, 28, 2008
		(date of inception) through
		March 31, 2014
FFO		$	6,166
Distributions		$	13,016

 

 

 

Information Regarding Dilution

 

In connection with the public offering of shares of our common stock, we are providing information about our net tangible book value per share. Our net tangible book value per share is a mechanical calculation using amounts from our consolidated balance sheet, and is calculated as (1) total book value of our assets less the net value of intangible assets, (2) minus total liabilities less the net value of intangible liabilities, (3) divided by the total number of shares of common stock outstanding. It assumes that the value of real estate, and real estate related assets and liabilities diminish predictably over time as shown through the depreciation and amortization of real estate investments. Real estate values have historically risen or fallen with market conditions. Net tangible book value is used generally as a conservative measure of net worth that we do not believe reflects our estimated fair value per share. It is not intended to reflect the value of our assets upon an orderly liquidation of the Company in accordance with our investment objectives. Our net tangible book value reflects dilution in the value of our common stock from the issue price as a result of (i) operating losses, which reflect accumulated depreciation and amortization of real estate investments, (ii) the funding of distributions from sources other than our cash flow from operations, and (iii) fees paid in connection with our public offerings, including commissions, dealer manager fees and other offering costs. As of March 31, 2014, our net tangible book value per share was $8.70. The offering price of primary shares under our Follow-On Offering (ignoring purchase price discounts for certain categories of purchasers) as of March 31, 2014 was $10.00.

 

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

 

Subsequent Events

 

See Note 10 of the Notes to Consolidated Financial Statements for further information related to subsequent events during the period from April 1, 2014 through the date of this filing.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The primary market risk to which we are currently and expect to continue to be exposed is interest rate risk.

 

We are currently and expect to continue to 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 have been and will continue to be to limit the impact of interest rate changes on our 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, 2014, we did not have any derivative agreements outstanding.

 

As of March 31, 2014, we held marketable securities with a fair value of $18.3 million, which are available for sale for general investment purposes. We regularly review the market prices of our investments for impairment purposes. As of March 31, 2014, a hypothetical adverse 10.0% movement in market values would result in a hypothetical loss in fair value of approximately $1.8 million.

 

The following table shows our estimated principal maturities during the next five years and thereafter as of March 31, 2014:

 

		Remainder of
Contractual Obligations		2014				2015				2016				2017				2018				Thereafter				Total
Principal maturities		$	373			$	524			$	548			$	580			$	22,109			$	-			$	24,134

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted escrows, accounts receivable (included in other assets), accounts payable and accrued expenses and the margin loan approximated their fair values as of March 31, 2014 because of the short maturity of these instruments. The estimated fair value of our mortgages payable is as follows:

 

		As of March 31, 2014								As of December 31, 2013
		Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value
Mortgages payable		$	24,134			$	23,809			$	24,260			$	23,898

 

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

 

 In addition to changes in interest rates, the value of our real estate and real estate related investments is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of tenants, which may affect our ability to obtain or refinance debt in the future. As of March 31, 2014, we had no off-balance sheet arrangements.

 

  

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

 

ITEM 4. CONTROLS AND PROCEDURES.

 

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

 

There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There were no significant deficiencies or material weaknesses identified in the evaluation, and therefore, no corrective actions were taken.

 

PART II. OTHER INFORMATION:

 

ITEM 1. LEGAL PROCEEDINGS.

 

From time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes.

 

As of the date hereof, the Company is not a party to any material pending legal proceedings 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. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

 

ITEM 1A. RISK FACTORS

 

We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. For the quarter ended March 31, 2014, there were no such material developments.

 

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

 

Recent Sales of Unregistered Securities

 

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

 

Use of Offering Proceeds

 

The Company’s sponsor is David Lichtenstein (“Lichtenstein”), who does business as The Lightstone Group (the “Sponsor”) and is the majority owner of the limited liability company of that name. The Company’s advisor is Lightstone Value Plus REIT II LLC (the “Advisor”), which is wholly owned by our Sponsor.

 

The Company’s registration statement on Form S-11 (File No. 333-151532), pursuant to which it offered to sell up to 51,000,000 shares of its common stock at a price of $10.00 per share, subject to certain volume discounts, (exclusive of 6,500,000 shares which were available pursuant to its distribution reinvestment plan (the “DRIP”) at an initial purchase price of $9.50 per share and 255,000 shares which were reserved for issuance under its Employee and Director Incentive Restricted Share Plan), was declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933 on February 17, 2009, and on April 24, 2009 the Company commenced its initial public offering of common stock (the “Offering”). The Offering, which terminated on August 15, 2012, raised aggregate gross proceeds of approximately $49.8 million from the sale of approximately 5.0 million shares of common stock. After allowing for the payment of approximately $5.2 million in selling commissions and dealer manager fees and $4.5 million in organization and other offering expenses, the Offering generated aggregate net proceeds of approximately $40.1 million. In addition, through August 15, 2012 (the termination date of the Offering), the Company had issued approximately 0.3 shares of common stock under its DRIP, representing approximately $2.9 million of additional proceeds.

 

  

The Company’s registration statement on Form S-11 (File No. 333-177753) (the “Follow-On Offering”), pursuant to which it is offering to sell up to 30,000,000 shares of its common stock for $10.00 per share, subject to certain volume discounts (exclusive of 2,500,000 shares available pursuant to its DRIP at an initial purchase price of $9.50 per share and 255,000 shares reserved for issuance under its Employee and Director Incentive Restricted Share Plan) was declared effective by SEC under the Securities Act of 1933 on September 27, 2012. As of March 31, 2014, the Company had received aggregate gross proceeds of approximately $35.4 million from the sale of approximately 3.6 million shares of its common stock in its Follow-On Offering. The Company intends to sell shares of its common stock under the Follow-On Offering until the earlier of the date on which all the shares are sold, or September 27, 2014, two years from the date the Follow-On Offering was declared effective by the SEC. The Company reserves the right to reallocate the shares of common stock it is offering between the primary offering and the DRIP. Additionally, the Follow-On Offering may be terminated at any time.

 

As of March 31, 2014, the Advisor owned 20,000 shares of common stock which were issued on May 20, 2008 for $200, or $10.00 per share. In addition, as of September 30, 2009, the Company had reached the minimum offering under its Offering by receiving subscriptions of its common shares, representing gross offering proceeds of approximately $6.5 million, and effective October 1, 2009 investors were admitted as stockholders and Lightstone Value Plus REIT II LP (the “Operating Partnership”) commenced operations. Through March 31, 2014, cumulative gross offering proceeds of $85.2 million were released to the Company. The Company invested the proceeds received from the Offering and from the Advisor in the Operating Partnership, and as a result, held a 99.9% general partnership interest as of March 31, 2014 in the Operating Partnership’s common units.

 

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

 

Lightstone SLP II LLC, which is wholly owned by the Company’s Sponsor committed to purchase subordinated profits interests in the Operating Partnership (“Subordinated Profits Interests”) at a cost of $100,000 per unit for each $1.0 million in subscriptions up to ten percent of the proceeds from the primary shares under the Offering and the Follow-On Offering on a semi-annual basis beginning with the quarter ended June 30, 2010. Lightstone SLP II LLC may elect to purchase the Subordinated Profits Interests with either cash or an interest in real property of equivalent value.

 

From our inception through March 31, 2014, the Company’s Sponsor has made cash contributions of $2.4 million and elected to contribute equity interests totaling 48.6% in Brownmill, LLC (“Brownmill”), which were valued at $4.8 million, in exchange for a total of 72.0 Subordinated Profits Interests with an aggregate value of $7.2 million. The Company’s Sponsor may continue to elect to contribute interests in real property in lieu of cash in exchange for Subordinated Profits Interests in order to fulfill its semi-annual commitment. See Note 3 of the Notes to Consolidated Financial Statements for additional information on Brownmill.

 

We have and expect to continue to utilize a portion of offering proceeds towards funding dealer manager fees, selling commissions and other offering costs.

 

Below is a summary of the expenses we have incurred from April 28, 2008 (date of inception) through March 31, 2014 in connection with the issuance and distribution of registered securities.

 

(Dollars in thousands)
Type of Expense Amount
Underwriting discounts and commissions		$	8,521
Other expenses incurred and paid to non-affiliates			8,250
Total  offering expenses  incurred		$	16,771

 

From our inception date through March 31, 2014, we have used the cumulative net offering proceeds received of approximately $68.2 million, after deducting offering expenses incurred of $16.8 million, as follows:

 

(Dollars in thousands)
Purchase of investment properties, net of mortgage financings		$	26,043
Purchase of investments in unconsolidated affiliated entities			3,994
Purchase of marketable securities, net of margin loan			16,178
Cash and cash equivalents, as adjusted			14,773
Cash distributions not funded by operations			1,851
Funding of restricted escrows			5,310
Other uses (primarily timing of payables)			279
Total uses		$	68,428

 

  

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 certain restrictions. From our inception through December 31, 2013 we repurchased 176,540 shares of common stock and for the three months ended March 31, 2014 we repurchased 33,076 shares of common stock, pursuant to our share repurchase program. We repurchased the shares at an average price per share of $9.13 per share. We funded share repurchases for the periods noted above from the cumulative proceeds of the sale of our shares pursuant to our DRIP.

 

Our Board of Directors reserves the right to terminate either program for any reason without cause by providing written notice of termination of the DRIP to all participants or written notice of termination of the share repurchase program to all stockholders.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

None.

 

ITEM 5. OTHER INFORMATION

None.

 

ITEM 6. EXHIBITS

 

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

 *Filed herewith

 

  

SIGNATURES

 

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

 

	LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC.
Date: May 14, 2014	By:	/s/ David Lichtenstein
		David Lichtenstein
		Chairman and Chief Executive Officer (Principal Executive Officer)

 

Date: May 14, 2014	By:	/s/ Donna Brandin
		Donna Brandin
		Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)