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EXCEL - IDEA: XBRL DOCUMENT - Lightstone Value Plus Real Estate Investment Trust, Inc.Financial_Report.xls
EX-31.2 - EXHIBIT 31.2 - Lightstone Value Plus Real Estate Investment Trust, Inc.v385705_ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - Lightstone Value Plus Real Estate Investment Trust, Inc.v385705_ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.v385705_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.v385705_ex32-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended June 30, 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 000-52610

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland   20-1237795

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

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

 

(732) 367-0129

(Registrant’s Telephone Number, Including Area Code)

 

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

Yes x  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 x  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   x

 

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

Yes ¨  No x

 

As of August 8, 2014, there were approximately 25.8 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust, Inc., including shares issued pursuant to the dividend reinvestment plan.  

 

 
 

 

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

 

INDEX

 

        Page
PART I   FINANCIAL INFORMATION    
         
Item 1.   Financial Statements    
     
    Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013   3
     
    Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2014  and 2013   4
         
    Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2014  and 2013   5
         
    Consolidated Statement of Stockholders’ Equity (unaudited) for the Six Months Ended June 30, 2014   6
         
    Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2014 and 2013   7
     
    Notes to Consolidated Financial Statements   9
     
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   23
     
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   41
     
Item 4.   Controls and Procedures   42
     
PART II   OTHER INFORMATION    
     
Item 1.   Legal Proceedings   42
     
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   44
     
Item 3.   Defaults Upon Senior Securities   44
     
Item 4.   Mine Safety Disclosures   44
     
Item 5.   Other Information   44
     
Item 6.   Exhibits   44

 

 
 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

 

   As of June 30, 2014   As of December 31, 2013 
Assets  (Unaudited)     
         
Net investment property  $412,117   $414,209 
           
Investment in unconsolidated affiliated real estate entity   8,808    9,496 
Investment in affiliate   21,837    - 
Cash and cash equivalents   37,785    52,899 
Marketable securities, available for sale   153,364    146,383 
Restricted escrows   14,447    20,145 
Tenant accounts receivable (net of allowance for doubtful accounts of $153 and $194, respectively)   3,291    3,366 
Mortgage receivable   5,244    5,310 
Intangible assets, net   1,964    1,964 
Prepaid expenses and other assets   13,975    16,280 
Assets held for sale   -    7,709 
Total Assets  $672,832   $677,761 
           
Liabilities and Stockholders' Equity          
Mortgages payable  $292,471   $295,278 
Notes payable   39,320    40,186 
Accounts payable, accrued expenses and other liabilities   16,955    18,381 
Due to sponsor   645    973 
Tenant allowances and deposits payable   2,082    1,777 
Distributions payable   4,499    4,525 
Deferred rental income   1,746    1,414 
Acquired below market lease intangibles, net   891    989 
Liabilities held for sale   -    6,113 
Total Liabilities   358,609    369,636 
           
Commitments and contingencies (See Note 11)          
           
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; 60,000 shares authorized, 25,709 and 25,635 shares issued and outstanding, respectively   257    256 
Additional paid-in-capital   202,303    211,447 
Accumulated other comprehensive income   48,861    34,050 
Accumulated surplus   15,417    23,002 
Total Company's stockholders' equity   266,838    268,755 
Noncontrolling interests   47,385    39,370 
Total Stockholders' Equity   314,223    308,125 
Total Liabilities and Stockholders' Equity  $672,832   $677,761 

 

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

 

3
 

  

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2014   2013   2014   2013 
                 
Revenues:                
Rental income  $20,282   $14,051   $38,203   $25,107 
Tenant recovery income   995    1,213    2,235    2,458 
Other service income   3,150    2,533    6,189    4,899 
                     
Total revenues   24,427    17,797    46,627    32,464 
                     
Expenses:                    
Property operating expenses   13,229    9,767    25,744    18,423 
Real estate taxes   1,053    1,196    2,405    2,233 
General and administrative costs   1,516    2,990    3,299    5,227 
Depreciation and amortization   4,219    2,451    8,189    4,815 
Total operating expenses   20,017    16,404    39,637    30,698 
Operating income   4,410    1,393    6,990    1,766 
Other income, net   591    781    887    1,027 
                     
Mark to market adjustment on derivative financial instruments   (178)   (11)   (217)   (1,510)
Interest and dividend income   2,083    3,376    3,552    6,925 
Interest expense   (4,903)   (3,784)   (9,799)   (7,458)
(Loss)/gain on sale of marketable securities (includes                    
loss/(gain) of $14, ($11,106), ($534), and ($11,112),  respectively,               
 accumulated other comprehensive income reclassifications)   (7)   13,806    1,160    13,817 
Loss on disposition of real estate   (2,354)   -    (2,354)   - 
Gain on disposition of unconsolidated affiliated real estate entities   -    -    -    1,200 
Income/(loss) from investments in unconsolidated affiliated real estate entities   33    288    (102)   (1,798)
Net (loss)/income from continuing operations   (325)   15,849    117    13,969 
                     
Net income from discontinued operations   -    378    1,620    503 
Net (loss)/income   (325)   16,227    1,737    14,472 
                     
Less: net income attributable to noncontrolling interests   (224)   (1,221)   (376)   (1,484)
Net (loss)/income attributable to Company's common shares  $(549)  $15,006   $1,361   $12,988 
                     
Basic and diluted net (loss)/income per Company's common share:                    
Continuing operations  $(0.02)  $0.49   $(0.01)  $0.41 
Discontinued operations   -    0.01    0.06    0.02 
                     
Net (loss)/income per Company’s common share, basic and diluted  $(0.02)  $0.50   $0.05   $0.43 
                     
Weighted average number of common shares outstanding, basic and diluted   25,785    30,152    25,766    30,137 

 

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

 

4
 

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands) (Unaudited)  

 

   For the Three Months Ended June 30,   For the Six Months Ended June 30, 
   2014   2013   2014   2013 
                 
Net (loss)/income  $(325)  $16,227   $1,737   $14,472 
                     
Other comprehensive income/(loss):                    
Unrealized gain/(loss) on available for sale
securities
   8,435    (1,994)   16,818    (380)
Reclassification adjustment for loss/(gain)
included in net (loss)/income
   14    (11,106)   (534)   (11,112)
                     
Other comprehensive income/(loss)   8,449    (13,100)   16,284    (11,492)
Comprehensive income   8,124    3,127    18,021    2,980 
                     
Less: Comprehensive income attributable to
noncontrolling interests
   (987)   (305)   (1,848)   (621)
                     
Comprehensive income attributable to
Company's common shares
  $7,137   $2,822   $16,173   $2,359 

 

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

 

5
 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Amounts in thousands) (Unaudited)

 

   Common       Accumulated Other             
           Additional Paid-In   Comprehensive       Total Noncontrolling     
   Shares   Amount   Capital   Income   Accumulated Surplus   Interests   Total Equity 
                             
                             
BALANCE, December 31, 2013   25,635    256    211,447    34,050    23,002    39,370   $308,125 
Net income   -    -    -    -    1,361    376    1,737 
Other comprehensive income   -    -    -    14,811    -    1,473    16,284 
                                    
Distributions declared   -    -    -    -    (8,946)   -    (8,946)
Distributions paid to noncontrolling interests   -    -    -    -    -    (1,395)   (1,395)
Contributions received from noncontrolling interests   -    -    -    -    -    14    14 
Redemption and cancellation of shares and noncontrolling
interests
   (181)   (2)   (12,000)   -    -    7,547    (4,455)
Shares issued from distribution reinvestment program   255    3    2,856    -    -    -    2,859 
BALANCE, June 30, 2014   25,709    257    202,303    48,861    15,417    47,385   $314,223 

 

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

 

6
 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)(Unaudited)

 

   For the Six Months Ended June 30, 
    2014   2013 
         
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net income  $1,737   $14,472 
Less net income – discontinued operations   1,620    503 
Net income – continuing operations   117    13,969 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   8,189    4,815 
Mark to market adjustment on derivative financial instruments   217    1,510 
Gain on sale of marketable securities   (1,160)   (13,817)
Gain on disposition of unconsolidated affiliated real estate entities   -    (1,200)
Loss from investments in unconsolidated affiliated real estate entities   102    1,798 
Loss on disposition of real estate   2,354    - 
Other non-cash adjustments   (10)   (1,438)
Changes in assets and liabilities:          
Decrease in prepaid expenses and other assets   912    1,638 
Decrease/(increase) in tenant and other accounts receivable   45    (982)
Increase in tenant allowance and security deposits payable   241    206 
Increase in accounts payable and accrued expenses   1,974    143 
Decrease in due to Sponsor   (328)   (337)
Decrease/(increase) in deferred rental income   332    (264)
Net cash provided by operating activities – continuing operations   12,985    6,041 
Net cash provided by operating activities – discontinued operations   44    1,066 
Net cash provided by operating activities   13,029    7,107 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of investment property, net   (8,146)   (70,926)
Investment in affiliate   (21,837)   - 
Purchase of marketable securities   (12,633)   (5,192)
Settlement of derivative financial instrument   (3,543)   - 
Payments on note payable   -    (2,340)
Contributions to investment in unconsolidated affiliated real estate entities   -    (12,639)
Collections on mortgage receivable   66    19,563 
Proceeds from sale of marketable securities   23,097    39,554 
Proceeds from disposition of investments in unconsolidated          
affiliated real estate entities   -    1,200 
Distribution from investments in unconsolidated affiliates   585      
Deposit for purchase of real estate, net   50    (1,363)
Release of restricted escrows   6,738    4,555 
Net cash used in investing activities – continuing operations   (15,623)   (27,588)
Net cash provided by/(used in) investing activities – discontinued operations   9,007    (515)
Net cash used in investing activities   (6,616)   (28,103)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Mortgage payments   (3,584)   (862)
Payment of loan fees and expenses   (71)   (750)
Redemption and cancellation of common stock   (4,455)   (1,876)
Proceeds from mortgage financing   778    36,143 
Net payments on notes payable   (866)   (21,064)
Loans to affiliates   -    (4,701)
Contributions received from noncontrolling interests   14    1,451 
Distributions paid to noncontrolling interests   (1,395)   (5,998)
Distributions paid to Company's common stockholders   (6,113)   (7,197)
Net cash used in financing activities – continuing operations   (15,692)   (4,854)
Net cash used in financing activities – discontinued operations   (5,835)   (481)
Net cash used in financing activities   (21,527)   (5,335)
           
Net change in cash and cash equivalents   (15,114)   (26,331)
Cash and cash equivalents, beginning of period   52,899    98,805 
Cash and cash equivalents, end of period  $37,785   $72,474 

 

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

 

7
 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(Amounts in thousands) (Unaudited )

  

   For the Six Months Ended June 30, 
   2014   2013 
Supplemental disclosure of cash flow information:
Cash paid for interest  $7,299   $4,834 
Distributions declared  $8,946   $10,469 
Value of shares issued from distribution reinvestment program  $2,859   $3,311 
Non-cash purchase of investment property  $97   $6,901 

 

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

8
 

 

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

Notes to Consolidated Financial Statements

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

 

  1.

Organization

 

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

 

Lightstone REIT is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT, L.P., a Delaware limited partnership formed on July 12, 2004 (the “Operating Partnership”), in which Lightstone REIT as the general partner, held a 98% interest as of June 30, 2014.

 

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

 

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

 

The Company’s stock is not currently listed on a national securities exchange. The Company may seek to list its stock for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its shares of common stock until they are listed for trading. In the event the Company does not obtain listing prior to October 10, 2018 (the tenth anniversary of the completion of its initial public offering,) its charter requires that the Board of Directors must either (i) seek stockholder approval of an extension or amendment of this listing deadline; or (ii) seek stockholder approval to adopt a plan of liquidation of the corporation.

 

As of June 30, 2014, on a collective basis, the Company (i) wholly owned and consolidates the operating results and financial condition of 3 retail properties containing a total of approximately 0.7 million square feet of retail space, 15 industrial properties containing a total of approximately 1.3 million square feet of industrial space, 7 multi-family residential properties containing a total of 1,784 units, and 12 hotel hospitality properties containing a total of 1,557 rooms, (ii) majority owned and consolidates the operating results and financial condition of 1 residential development project, and (iii) owned an interest accounted for under the equity method of accounting in 1 office property containing a total of approximately 1.1 million square feet of office space. All of the Company’s properties are located within the United States. As of June 30, 2014, the retail properties, the industrial properties, the multi-family residential properties and the office property were 84.5%, 85.5%, 95.2% and 79.7% occupied based on a weighted-average basis, respectively. Its hotel hospitality properties’ average revenue per available room (“Rev PAR”) was $74.19 and occupancy was 63.9%, respectively for the three months ended June 30, 2014.

 

During the year ended December 31, 2013 the Company disposed of two Extended Stay Hotels located in Houston, Texas (the “Houston Extended Stay Hotels”) and a retail shopping center (“Everson Pointe”) located in Snellville, Georgia. The operating results of the Houston Extended Stay Hotels and Everson Pointe have been classified as discontinued operations in the consolidated statements of operations for all periods presented.

 

On January 22, 2014 the Company disposed of Crowe’s Crossing Shopping Center, (“Crowe’s Crossing”) a retail shopping center located in Stone Mountain, Georgia. The operating results of Crowe’s Crossing have been classified as discontinued operations in the consolidated statements of operations for all periods presented.  Additionally, the associated assets and liabilities of Crowe’s Crossing have been classified as held for sale in the consolidated balance sheet as of December 31, 2013.

 

Noncontrolling Interests

 

As of June 30, 2014, the noncontrolling interests consist of (i) parties of the Company that hold units in the Operating Partnership and (ii) certain interests in consolidated subsidiaries. The units include SLP units, limited partner units and Common Units. The noncontrolling interests in consolidated subsidiaries include ownership interests in Pro-DFJV Holdings LLC (“PRO”), 50-01 2nd St Associates LLC (the “2nd Street Joint Venture”), and the interests held by minority owners of certain of our hotels.

 

9
 

 

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

Notes to Consolidated Financial Statements

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

 

Noncontrolling Interests - Redemption of Series A Preferred Units and Repayment of Notes Receivable

 

On January 2, 2014, the Operating Partnership redeemed all of the then remaining outstanding 50,100 Series A preferred units in the Operating Partnership (the “Series A Preferred Units”), held by the Arbor Mill Run JRM, LLC, a Delaware limited liability company, Arbor National CJ, LLC, a New York limited liability company, Prime Holdings LLC, a Delaware limited liability company , TRAC Central Jersey LLC, a Delaware limited liability company, Central Jersey Holdings II, LLC, a New York limited liability company and JT Prime LLC, a Delaware limited liability company (collectively, the “Contributing Parties”), at their liquidation preference of approximately $50.1 million and the Contributing Parties simultaneously repaid the remaining notes receivable due from the Contributing Parties aggregating approximately $47.4 million in full.

 

  2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

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

 

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of the Company and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. The unaudited interim consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. The accompanying unaudited consolidated financial statements of Lightstone Value Plus Real Estate Investment Trust, Inc. and its Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 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 consolidated balance sheet as of December 31, 2013 included herein has been derived from the consolidated balance sheet included in the Company's Annual Report on Form 10-K.

 

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

 

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 Holiday Inn Express - Auburn, the Courtyard - Baton Rouge, the Residence Inn - Baton Rouge, the Aloft – Rogers, the Fairfield Inn – Jonesboro, the Hampton Inn - Miami and the Hampton Inn & Suites - Fort Lauderdale) had been acquired on January 1, 2013. Such pro forma results are not necessarily indicative of the results that actually would have occurred had these acquisitions been completed on January 1, 2013, nor are they indicative of the future operating results of the combined company.

 

   For the Three Months
Ended June 30, 2013
   For the Six Months
Ended June 30, 2013
 
Pro forma rental revenue  $21,551   $40,583 
Pro forma net income  $15,438   $13,769 
Pro forma net income per Company's common share, basic and diluted  $0.51   $0.46 

 

10
 

 

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

Notes to Consolidated Financial Statements

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

 

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 issued an accounting standards update providing new guidance on the requirements for reporting discontinued operations. 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 Company adopted this standard during the quarter ended June 30, 2014. 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.

 

In May 2014, the FASB issued an accounting standards update that completes the joint effort by the FASB and International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards. The update applies to all companies that enter into contracts with customers to transfer goods or services and is effective for us for interim and annual reporting periods beginning after December 15, 2016. Early application is not permitted and companies have the choice to apply the update either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying the update at the date of initial application (January 1, 2017) and not adjusting comparative information. The Company is currently evaluating the requirements and impact of this update on its consolidated financial statements.

 

3. Investment in Unconsolidated Affiliated Real Estate Entity

 

The entity discussed 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 control this entity. A summary of the Company’s investment in unconsolidated affiliated real estate entity is as follows:

 

          As of 
Real Estate Entity  Date Acquired  Ownershipw %   June 30, 2014   December 31, 2013 
1407 Broadway Mezz II, LLC ("1407 Broadway")  January 4, 2007   49.0%  $8,808   $9,496 

 

1407 Broadway

 

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

 

On March 11, 2013, 1407 Broadway completed a restructuring of its outstanding non-recourse mortgage note payable with a then outstanding principal balance of approximately $127.3 million with Swedbank AB. In connection with the restructuring, 1407 Broadway made a principal pay down of approximately $1.3 million, bringing the new loan balance to $126.0 million, and extended the maturity of the loan to January 12, 2023. Additionally, during the year ended December 31, 2013, 1407 Broadway’s members made capital contributions aggregating $16.1 million, of which $13.5 million was placed initially into a capital reserve account with the lender pursuant to the terms of the restructuring. As a result of the Company’s capital contributions which totaled $12.1 million, it commenced recording equity earnings in the first quarter of 2013. The Company’s equity earnings for the three and six months ended June 30, 2013 includes an adjustment to record previously unrecorded losses aggregating $5.2 million through December 31, 2012.

 

11
 

 

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

Notes to Consolidated Financial Statements

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

 

1407 Broadway Financial Information

 

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

 

   For the Three Months Ended June 30,   For the Six Months Ended June 30, 
   2014   2013   2014   2013 
                 
Total revenue  $9,900   $9,256   $19,882   $18,943 
                     
Property operating expenses   7,041    6,602    15,049    13,828 
Depreciation and amortization   1,745    1,385    3,411    2,775 
Operating income   1,114    1,269    1,422    2,340 
                     
Interest expense and other, net   (1,165)   (681)   (1,874)   (2,871)
                     
Gain on debt extinguishment   -    -    -    7,494 
                     
Net (loss)/income  $(51)  $588   $(452)  $6,963 
                     
Company's share of net income/(loss) (49%)  $33   $288   $(102)  $(1,798)

 

* The six months ended June 30, 2013 includes an adjustment of $5,210 for previously unrecorded losses.

 

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

 

   As of   As of 
   June 30, 2014   December 31, 2013 
         
Real estate, at cost (net)  $119,581   $114,188 
Intangible assets   55    249 
Cash and restricted cash   10,916    18,437 
Other assets   20,879    19,969 
           
Total assets  $151,431   $152,843 
           
Mortgage payable  $126,000   $126,000 
Other liabilities   13,542    14,503 
Member capital   11,889    12,340 
           
Total liabilities and members' capital  $151,431   $152,843 

 

4. Marketable Securities and Fair Value Measurements

 

Marketable Securities:

 

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

 

   As of June 30, 2014 
   Adjusted Cost   Gross Unrealized Gains   Gross Unrealized
Losses
   Fair Value 
Equity Securities, primarily REITs  $1,405   $216   $-   $1,621 
Marco OP Units and Marco II OP Units   51,970    52,239    -    104,209 
Corporate Bonds and Preferred Equities   40,068    1,778    (276)   41,570 
Mortgage Backed Securities ("MBS")   6,210    -    (246)   5,964 
Total  $99,653   $54,233   $(522)  $153,364 

 

12
 

 

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

Notes to Consolidated Financial Statements

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

 

   As of December 31, 2013 
   Adjusted Cost   Gross Unrealized Gains   Gross Unrealized Losses   Fair Value 
Equity Securities, primarily REITs  $10,059   $555   $-   $10,614 
Marco OP Units and Marco II OP Units   51,970    37,736    -    89,706 
Corporate Bonds and Preferred Equities   39,576    675    (1,307)   38,944 
Mortgage Backed Securities ("MBS")   7,352    -    (233)   7,119 
Total  $108,957   $38,966   $(1,540)  $146,383 

 

The Marco OP Units and the Marco II OP Units are exchangeable for a similar number of common operating partnership units (“Simon OP Units”) of Simon Property Group, L.P., (“Simon OP”), the operating partnership of Simon Property Group, Inc. (“Simon”). Subject to the various conditions, the Company may elect to exchange the Marco OP Units and/or the Marco II OP Units to Simon OP Units which must be immediately delivered to Simon in exchange for cash or similar number of shares of Simon’s common stock (“Simon Stock”).

 

All of the MBS were issued by various U.S. government-sponsored enterprises (Freddie Mac and Fannie Mae). The Company considers the declines in market value of its investment portfolio to be temporary in nature. The unrealized losses on the Company’s investments were caused primarily by changes in market interest rates or widening credit spreads. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. During the three and six months ended June 30, 2014 and 2013, the Company did not recognize any impairment charges. As of June 30, 2014, the Company does not consider any of its investments to be other-than-temporarily impaired.

 

The Company may sell certain of its investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management. For the three and six months ended June 30, 2014 the Company realized $7 of gross losses and $1.2 million of gross gains, related to sales of securities and early redemptions of MBS by the security issuer and for both the three and six months ended June 30, 2013 the Company realized $13.8 million of gross gains related primarily to the sale of 156,000 Marco OP units. The maturities of the Company’s MBS generally ranged from 27 years to 30 years.

 

Notes Payable

  

Margin Loan

 

The Company has access to a margin loan (the “Margin Loan”) from a financial institution that holds custody of certain of the Company’s marketable securities. The Margin Loan, which is due on demand, bears interest at Libor plus 0.85% (1.00% as of June 30, 2014) and is collateralized by the marketable securities in the Company’s account. The amounts available to the Company under the Margin Loan are at the discretion of the financial institution and not limited to the amount of collateral in its account. The amount outstanding under this Margin Loan is $19.4 million and $20.3 million as of June 30, 2014 and December 31, 2013, respectively, and is included in Notes Payable on the consolidated balance sheets.

 

Line of Credit

 

On September 14, 2012, the Company entered into a non-revolving credit facility (the “Line of Credit”) with a financial institution which permits borrowings up to $25.0 million. The Line of Credit expires on December 13, 2014 and bears interest at Libor plus 3.00% (3.15% as of June 30, 2014). The Line of Credit is collateralized by 440,311 Marco OP Units and PRO guaranteed the Line of Credit.

 

The amount outstanding under the Line of Credit is $19.9 million as of both June 30, 2014 and December 31, 2013 and is included in Notes Payable on the consolidated balance sheets.

 

13
 

 

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

Notes to Consolidated Financial Statements

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

 

Fair Value Measurements

 

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

 

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

 

    Level 1 – Quoted prices in active markets for identical assets or liabilities.
       
    Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
       
    Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

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

 

   Fair Value Measurement Using     
As of June 30, 2014  Level 1   Level 2   Level 3   Total 
                 
Marketable Securities:                
Equity Securities, primarily REITs  $1,621   $-   $-   $1,621 
Marco OP and OP II Units   -    104,209    -    104,209 
Corporate Bonds and Preferred Equities   -    41,570    -    41,570 
MBS   -    5,964    -    5,964 
Total  $1,621   $151,743   $-   $153,364 

 

   Fair Value Measurement Using     
As of December 31, 2013  Level 1   Level 2   Level 3   Total 
                 
Marketable Securities:                
Equity Securities, primarily REITs  $10,614   $-   $-   $10,614 
Marco OP and OP II Units   -    89,706    -    89,706 
Corporate Bonds and Preferred Equities   -    38,944    -    38,944 
MBS   -    7,119    -    7,119 
Total  $10,614   $135,769   $-   $146,383 

 

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

 

14
 

 

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

Notes to Consolidated Financial Statements

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

 

  5. Mortgages Payable

 

Mortgages payable consists of the following:

 

                Loan Amount as of 
Property  Interest Rate  Weighted
Average Interest
Rate as of June
30, 2014
  Maturity Date  Amount Due at
Maturity
   June 30, 2014   December 31,
2013
 
                      
Southeastern Michigan Multi-Family Properties  5.96%  5.96%  July 2016  $38,139   $39,285   $39,555 
                         
Oakview Plaza  5.49%  5.49%  January 2017   25,583    26,620    26,814 
                         
Gulf Coast Industrial Portfolio  9.83%  9.83%  Due on demand   51,790    51,790    51,902 
                         
Camden Multi-Family Properties (Two Individual Loans)  5.44%  5.44%  December 2014   26,334    26,508    26,718 
                         
St. Augustine Outlet Center  6.09%  6.09%  April 2016   23,748    24,596    24,824 
                         
Gantry Park  Libor + 3.50%  3.93%  September 2016   44,318    44,318    43,540 
                         
DePaul Plaza  Libor + 3.00%  3.16%  September 2017   11,147    11,855    11,964 
                         
Courtyard - Parsippany  Libor + 3.50%  3.66%  August 2018   7,126    7,866    7,947 
                         
Courtyard - Baton Rouge  5.56%  5.56%  May 2017   5,873    6,262    6,325 
                         
Residence Inn - Baton Rouge  5.36%  5.36%  December 2018   2,706    3,832    5,990 
                         
Promissory Note (cross-collateralized by three hotels)  4.94%  4.94%  August 2018   14,008    15,462    15,622 
                         
Revolving Credit Facility (cross-collateralized by five hotels)  Libor + 4.95%  5.18%  May 2016   34,077    34,077    34,077 
                         
                         
Total mortgages payable     5.92%     $284,849   $292,471   $295,278 

 

Libor as of June 30, 2014 and December 31, 2013 was 0.16% and 0.17%, respectively. Our loans are secured by the indicated real estate and are non-recourse to the Company.

 

 The following table shows the contractually scheduled principal maturities during the next five years and thereafter as of June 30, 2014 in the Consolidated Balance Sheets:

 

Remainder of
2014
   2015   2016   2017   2018   Thereafter   Total 
$79,532   $2,581   $142,286   $43,651   $24,421   $-   $292,471 

 

Pursuant to the Company’s loan agreements, escrows in the amount of approximately $12.1 million and $11.5 million were held in restricted escrow accounts as of June 30, 2014 and December 31, 2013, respectively. Such escrows will be released in accordance with the applicable loan agreements for payments of real estate taxes, insurance and capital improvement transactions, as required. Certain of our mortgages payable also contain clauses providing for prepayment penalties.

 

Certain of the Company’s debt agreements require the maintenance of certain ratios, including debt service coverage. The Company believes it is currently in compliance with all of its debt covenants other than the debt associated with the Gulf Coast Industrial Portfolio which was placed in default during 2012 and is due on demand as discussed below.

 

15
 

 

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

Notes to Consolidated Financial Statements

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

 

As a result of not meeting certain debt service coverage ratios on the non-recourse mortgage indebtedness secured by the Gulf Coast Industrial Portfolio, the lender elected to retain the excess cash flow from these properties beginning in July 2011 until such time as the required coverage ratios are met for two successive quarters.  During the third quarter of 2012, the loan was transferred to a special servicer, who discontinued scheduled debt service payments and notified us that the loan was in default and due on demand.

 

Although the lender is currently not charging or being paid interest at the stated default rate, an aggregate $4.0 million of default interest has been accrued through June 30, 2014 pursuant to the terms of the loan agreement. Default interest of $0.6 million and $1.1 million was accrued for the three and six months ended June 30, 2014 and default interest of $0.5 million and $1.1 million was accrued and for the three and six months ended June 30, 2013. As a result, accrued default interest of approximately $4.0 million and $2.9 million is included in accounts payable, accrued expenses and other liabilities on our consolidated balance sheets as of June 30, 2014 and December 31, 2013, respectively.  We are currently engaged in discussions with the special servicer to restructure the loan and do not expect to pay the default interest as this mortgage indebtedness is non-recourse to us.  We believe the continued loss of excess cash flow from these properties and the placement of the non-recourse mortgage indebtedness in default will not have a material impact on our results of operations or financial position.

 

  6. Assets and Liabilities Held for Sale, Assets and Liabilities Disposed of and Discontinued Operations

 

During the year ended December 31, 2013 the Company disposed of the Houston Extended Stay Hotels and Everson Pointe for approximately $27.0 million. In connection with the disposition, the Company repaid in full the then outstanding mortgage indebtedness of approximately $11.1 million. The operating results of the Houston Extended Stay Hotels and Everson Pointe, through their respective dates of disposition, have been classified as discontinued operations in the consolidated statements of operations for all periods presented. These transactions resulted in a fourth quarter aggregate gain on disposition of $2.0 million.

 

During the fourth quarter of 2013, Crowe’s Crossing met the criteria to be classified as held for sale. The operating results of Crowe’s Crossing have been classified as discontinued operations in the consolidated statements of operations for all periods presented.  Additionally, the associated assets and liabilities of Crowe’s Crossing are classified as held for sale in the consolidated balance sheet as of December 31, 2013.

 

On January 22, 2014 the Company disposed of Crowe’s Crossing for approximately $9.3 million. In connection with the disposition, the Company repaid in full the then outstanding mortgage indebtedness of approximately $5.8 million, which was scheduled to mature in September 2015. The Company recognized a gain on disposition of approximately $1.6 million, which is included in discontinued operations during the three months ended June 30, 2014.

 

During the second quarter of 2014, our industrial property located in Sarasota, Florida (“Sarasota”) met the criteria to be classified as held for sale and the Company recorded an estimated loss on the disposition of real estate of approximately $2.4 million. The estimated loss was based on the initial contractual purchase price less estimated closing costs. Sarasota was subsequently disposed of on July 31, 2014 for approximately $5.3 million. Any adjustment to the estimated loss will be recorded during the third quarter of 2014. As disclosed in Note 1, during the second quarter of 2014 the Company adopted an accounting standards update that provided new guidance on the requirements for reporting a discontinued operation. The disposal of Sarasota does not qualify to be reported as a discontinued operation. Additionally, because Sarasota’s associated assets and liabilities of $5.3 million and $0.1 million, respectively, were not material, the Company did not classify them as held for sale in the consolidated balance sheet as of June 30, 2014.

 

16
 

 

The following summary presents the operating results of the Houston Extended Stay Hotels, Everson Pointe and Crowe’s Crossing included in discontinued operations in the Consolidated Statements of Operations for the periods indicated.

 

   For the Three Months Ended June 30,   For the Six Months Ended June 30, 
   2014   2013   2014   2013 
                 
Revenues  $-   $1,676   $58   $3,149 
                     
Operating expenses   -    1,048    29    2,142 
Operating income   -    628    29    1,007 
                     
Interest expense and other, net   -    (250)   (19)   (504)
                     
Gain on disposition   -    -    1,610    - 
                     
Net income from discontinued operations  $-   $378   $1,620   $503 

 

Cash flows generated from discontinued operations are presented separately on the Company’s consolidated statements of cash flows.

 

The following summary presents the major components of assets and liabilities held for sale, of as the date indicated.

 

   As of 
   December 31, 2013 
     
Net investment property  $6,622 
Intangible assets, net   525 
Other assets   562 
      
Total assets held for sale  $7,709 
      
Mortgages payable  $5,834 
Accounts payable and accrued expenses   41 
Other liabilities   238 
      
Total liabilities held for sale  $6,113 

 

  7.

Net Earnings Per Share

 

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

 

  8. Related Party Transactions    

 

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

 

17
 

 

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

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2014   2013   2014   2013 
Acquisition fees  $27   $940   $59   $1,256 
Asset management fees   711    637    1,424    1,258 
Property management fees   341    433    689    855 
Development fees and leasing commissions   241    415    405    789 
Total  $1,320   $2,425   $2,577   $4,158 

 

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

 

During the three and six months ended June 30, 2014, distributions of $0.5 million and $1.0 million were declared and paid on the SLP units and are part of noncontrolling interests. Since inception through June 30, 2014, cumulative distributions declared were $13.9 million, of which $13.4 million were paid. See Note 3 for other related party transactions.

 

Preferred Investment

  

On March 7, 2014, the Company entered into an agreement with various related party entities pursuant to which it committed to make contributions of up to $35.0 million, with an additional contribution of up to $10.0 million subject to the satisfaction of certain conditions, in an affiliate of its Sponsor which owns a parcel of land located at 365 Bond Street in Brooklyn, New York on which it is constructing a residential apartment project.  These contributions are made pursuant to an instrument, the “Preferred Investment,” that is entitled to monthly preferred distributions at a rate of 12% per annum, is redeemable by the Company upon the occurrence of certain events, is classified as a held-to-maturity security and is recorded at cost.

 

The Company commenced making contributions during the second quarter of 2014 and as of June 30, 2014, the Preferred Investment had a balance of approximately $21.8 million and is classified as investment in affiliate on the consolidated balance sheet.  During the second quarter, the Company recorded approximately $409 of dividend income related to the Preferred Investment, which is included in interest and dividend income on the consolidated statement of operations, and accrued dividends receivable related to the Preferred Investment, which is included in prepaid expenses and other assets on the consolidated balance sheet, was approximately $215 as of June 30, 2014.

 

  9. Financial Instruments

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted escrows, tenants’ accounts receivable, accounts payable and accrued expenses and the notes payable approximated their fair values because of the short maturity of these instruments. The carrying amount reported in the consolidated balance sheets for the mortgage receivable approximated its fair value based upon current market information that would have been used by a market participant to estimate the fair value of such loan.

 

The estimated fair value (in millions) of the Company’s mortgage debt is summarized as follows:

 

   As of June 30, 2014   As of December 31, 2013 
   Carrying Amount   Estimated Fair
Value
   Carrying Amount   Estimated Fair
Value
 
Mortgages payable  $292.5   $291.6   $295.3   $292.8 

 

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

 

18
 

 

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

Notes to Consolidated Financial Statements

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

 

  10. Segment Information

 

The Company currently operates in four business segments as of June 30, 2014: (i) retail real estate (the “Retail Segment”), (ii) multi-family residential real estate (the “Multi-family Residential Segment”), (iii) industrial real estate (the “Industrial Segment”) and (iv) hospitality (the “Hospitality Segment”). The Company’s advisor and its affiliates provide leasing, property and facilities management, acquisition, development, construction and tenant-related services for its portfolio. The Company’s revenues for the three and six months ended June 30, 2014 and 2013 were exclusively derived from activities in the United States. No revenues from foreign countries were received or reported. The Company had no long-lived assets in foreign locations as of June 30, 2014 and December 31, 2013. The accounting policies of the segments are the same as those described in Note 2: Summary of Significant Accounting Policies of the Company’s December 31, 2013 Annual Report on Form 10-K. Unallocated assets, revenues and expenses relate to corporate related accounts.

 

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

 

As discussed in Note 6, the results of operations presented below exclude the Houston Extended Stay Hotels, Everson Pointe and Crowe’s Crossing due to their classification as discontinued operations for all periods presented. The Houston Extended Stay Hotels were previously included in the Company’s hospitality segment and Everson Pointe and Crowe’s Crossing were previously included in the Company’s retail segment.

 

Selected results of operations for the three and six months ended June 30, 2014 and 2013, and total assets as of June 30, 2014 and December 31, 2013 regarding the Company’s operating segments are as follows:

 

   For the Three Months Ended June 30, 2014 
   Retail   Multi-Family   Industrial   Hospitality   Unallocated   Total 
Total revenues  $2,701   $5,295   $1,898   $14,533   $-   $24,427 
                               
Property operating expenses   860    1,778    520    10,071    -    13,229 
Real estate taxes   48    335    209    461    -    1,053 
General and administrative costs   (21)   58    1    144    1,334    1,516 
                               
Net operating income/(loss)   1,814    3,124    1,168    3,857    (1,334)   8,629 
                               
Depreciation and amortization   1,063    1,046    453    1,657    -    4,219 
                               
Operating income/(loss)  $751   $2,078   $715   $2,200   $(1,334)  $4,410 
                               
As of June 30, 2014:                              
Total Assets  $105,236   $145,847   $57,958   $153,499   $210,292   $672,832 

 

   For the Three Months Ended June 30, 2013 
   Retail   Multi-Family   Industrial   Hospitality   Unallocated   Total 
                         
Total revenues  $2,944    3,274    1,853    9,726    -   $17,797 
                               
Property operating expenses   760    1,415    455    7,134    3    9,767 
Real estate taxes   328    311    197    360    -    1,196 
General and administrative costs   23    63    19    56    2,829    2,990 
                               
Net operating income/(loss)   1,833    1,485    1,182    2,176    (2,832)   3,844 
                               
Depreciation and amortization   982    441    463    565    -    2,451 
                               
Operating income/(loss)  $851   $1,044   $719   $1,611   $(2,832)  $1,393 
                               
As of December 31, 2013:                              
Total Assets  $114,817   $145,582   $59,937   $150,923   $206,502   $677,761 

 

19
 

 

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

Notes to Consolidated Financial Statements

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

 

   For the Six Months Ended June 30, 2014 
   Retail   Multi Family   Industrial   Hospitality   Unallocated   Total 
                         
Total revenues  $5,553   $10,214   $3,776   $27,084   $-   $46,627 
                               
Property operating expenses   1,627    3,730    1,032    19,354    1    25,744 
Real estate taxes   387    680    418    920    -    2,405 
General and administrative costs   (1)   153    (55)   311    2,891    3,299 
                               
Net operating income/(loss)   3,540    5,651    2,381    6,499    (2,892)   15,179 
                               
Depreciation and amortization   2,025    2,069    912    3,183    -    8,189 
Operating income/(loss)  $1,515   $3,582   $1,469   $3,316   $(2,892)  $6,990 

 

   For the Six Months Ended June 30, 2013 
   Retail   Multi Family   Industrial   Hospitality   Unallocated   Total 
                         
Total revenues  $5,896   $6,509   $3,577   $16,482   $-   $32,464 
                               
Property operating expenses   1,538    2,866    905    13,108    6    18,423 
Real estate taxes   672    497    397    667    -    2,233 
General and administrative costs   20    119    12    126    4,950    5,227 
                               
Net operating income/(loss)   3,666    3,027    2,263    2,581    (4,956)   6,581 
                               
Depreciation and amortization   1,982    873    916    1,044    -    4,815 
Operating income/(loss)  $1,684   $2,154   $1,347   $1,537   $(4,956)  $1,766 

 

  11. 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.

 

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

 

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

 

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

 

20
 

 

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

Notes to Consolidated Financial Statements

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

 

On April 12, 2012, the Supreme Court, New York County decided in favor of the Company with respect to all matters before the Court. Sublessor filed a Notice of Appeal on June 7, 2012 and, after fully briefing the issues, the parties argued the appeal on January 30, 2013.  On February 21, 2013, the Appellate Division, First Department rendered its decision largely affirming the lower court’s determination.  The Appellate Division did determine that there were two 2007 defaults that had not been cured and that the assignment of the sublease had occurred at a time when defaults existed.  The Appellate Division determined that the remedy for such defaults was not a forfeiture of the sublease.  Instead, the Appellate Division remanded to the lower court with direction that the lower court fashion a remedy short of forfeiture.  Recently, the Sublessor has sent a letter claiming that the Appellate Division order “lifted” the Yellowstone Injunction, a procedure in New York law whereby a tenant in a commercial premises has a right to stay the time to cure, and demanding a cure within thirty (30) days. We have rejected that claim because the Appellate Division decision expressly remanded the case with a direction that the Supreme Court fashion a remedy other than forfeiture of the alleged defaults, and requested a conference from the lower court. On December 10, 2013, the parties appeared before Justice James and engaged in oral argument. The court determined that Kamber failed to provide evidence of its losses relating to the prior defaults or prohibited assignment, and therefore, only nominal damages should be awarded. However, the court provided that Kamber receive one month’s ground rent plus interest accrued from 2007, an amount totaling over $1 million and a clear disconnect from the court’s intent to award “nominal” damages. The Company filed a motion requesting that the court reconsider its award based on the court’s own premise of nominal damages.

 

On July 13, 2011, JF Capital Advisors, filed a lawsuit against The Lightstone Group, LLC, the Company, and Lightstone Value Plus Real Estate Investment Trust II, Inc. in the Supreme Court of the State of New York seeking payment for services alleged to have been rendered, and to be rendered prospectively, under theories of unjust enrichment and breach of contract. The plaintiff had a limited business arrangement with The Lightstone Group, LLC; that arrangement has been terminated. We filed a motion to dismiss the action and, on January 31, 2012, the Supreme Court dismissed the complaint in its entirety, but granted the plaintiff leave to replead two limited causes of action.

 

The plaintiff filed an amended complaint on May 18, 2012, bringing limited claims under theories of unjust enrichment and quantum meruit. On November 21, 2012, the court dismissed this second complaint in part, leaving only $164 (plus interest) in potential damages. The plaintiff appealed this decision and Lightstone cross-appealed arguing that the case should have been dismissed in full. The appeals court denied plaintiff’s motion and granted defendants’ motion, as a result of which all claims were dismissed on March 25, 2014. The plaintiff filed a motion requesting the right to re-appeal to the Court of Appeals, which was granted on August 1, 2014. Lightstone continues to believe that these claims to be without merit and will defend the case vigorously.

 

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

 

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

 

Outlet Centers Transactions

 

The Company previously held ownership interests in GPH and Livermore Valley Holdings LLC (“LVH”). On December 4, 2012, GPH, LVH and certain of their subsidiaries (collectively, the “Holding Entities”) completed the disposition of their ownership interests in an outlet center located in Grand Prairie, Texas (the “Grand Prairie Outlet Center”), an outlet center located in Livermore, California (the “Livermore Valley Outlet Center”) and a parcel of land adjacent to the Livermore Outlet Center (the “Livermore Land Parcel” and collectively, the “Outlet Centers Transactions”) to Simon and certain of its affiliates (collectively, the “Simon Parties”). Pursuant to the terms of the Outlet Centers Transactions, the aggregate consideration received at closing is subject to certain true-ups and adjustments, including a final valuation of the Grand Prairie Outlet Center and the Livermore Valley Outlet Center, based on their aggregate net operating income, as defined, during calendar year 2013. Furthermore, the Holding Entities, subject to the satisfaction of certain conditions, may (i) receive $5.0 million of additional consideration for the Livermore Land Parcel or (ii) elect to repurchase the Livermore Land Parcel for $35.0 million. During the first quarter of 2013, the Holding Entities received an additional $3.0 million, of which the Company’s share was $1.2 million, related to the disposition of its ownership interest in the Grand Prairie Outlet Center resulting from the satisfaction of certain conditions. All remaining true-ups and adjustments are now expected to be finalized and paid in the third quarter of 2014 along with the additional consideration for the Livermore Land Parcel and the Company expects to record an additional gain on the disposition of real estate for its pro rata share of such items.

 

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

Notes to Consolidated Financial Statements

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

 

Loan Collection Guaranties

 

The Operating Partnership and PRO (collectively, the “LVP Parties”) have provided and will continue to have the opportunity to provide guaranties of collection (the “Loan Collection Guaranties”) with respect to draws made under revolving credit facilities (or indebtedness incurred to refinance the revolving credit facilities) by Simon in connection with the closing of certain contribution transactions related to the LVP Parties’ ownership interests in (i) Mill Run LLC (“Mill Run”) and Prime Outlets Acquisition Company (“POAC” and collectively, the “POAC/Mill Run Transaction”) and (ii) GPH and LVH, . The Loan Collection Guaranties are required for at least four years following the closings of POAC/Mill Run Transaction and the Outlet Centers Transaction, which closed on August 30, 2010 and December 4, 2012, respectively. Under the terms of the Loan Collection Guaranties, the LVP Parties are obligated to make payments in respect of principal and interest due under the revolving credit facilities after Simon OP has failed to make payments, the amounts outstanding under the revolving credit facilities have been accelerated, and the lender have failed to collect the full amounts outstanding under the revolving credit facilities after exhausting other remedies. The maximum amounts of the Loan Collection Guaranties will be reduced by the extent of any payments of principal made by Simon OP or other cash proceeds recovered by the lenders.

 

12. Subsequent Events

 

Distribution Payment

 

On July 15, 2014, the distribution for the three-month period ending June 30, 2014 of approximately $4.5 million was paid in full using a combination of cash and approximately 0.1 million shares of the Company’s common stock issued pursuant to the Company’s Distribution Reinvestment Program (“DRIP”), at a discounted price of $11.21 per share. The distribution was paid from cash flows provided from operations (approximately $3.1 million or 68%) and excess cash proceeds from the issuance of common stock through the Company’s DRIP (approximately $1.4 million or 32%).

  

Distribution Declaration

 

On August 8, 2014, the Board authorized and the Company declared a distribution for the three-month period ending September 30, 2014. The distribution will be calculated based on shareholders of record each day during this three-month period at a rate of $0.0019178 per day, and will equal a daily amount that, if paid each day for a 365-day period, would equal a 7.0% annualized rate based on a share price of $10.00. The distribution will be paid in cash on October 15, 2014 to shareholders of record as of September 30, 2014. The shareholders have an option to elect the receipt of shares under the Company’s DRIP.

 

22
 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

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

 

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

 

As discussed in Note 6 to the Consolidated Financial Statements, the results of operations presented below exclude two Extended Stay Hotels located in Houston, Texas (the “Houston Extended Stay Hotels”), a retail shopping center (“Everson Pointe”) located in Snellville, Georgia and a retail shopping center (“Crowe’s Crossing”) located in Stone Mountain, Georgia due to their classification as discontinued operations. The Houston Extended Stay Hotels were previously included in the Company’s hospitality segment and Everson Pointe and Crowe’s Crossing were previously included in the Company’s retail segment.

 

Forward-Looking Statements

 

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

 

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

 

Risks and other factors that might cause differences, some of which could be material, include, but are not limited to, economic and market conditions, competition, tenant or joint venture partner(s) bankruptcies, changes in governmental, tax, real estate and zoning laws and regulations, failure to increase tenant occupancy and operating income, rejection of leases by tenants in bankruptcy, financing and development risks, construction and lease-up delays, cost overruns, the level and volatility of interest rates, the rate of revenue increases versus expense increases, the financial stability of various tenants and industries, the failure of the Company (defined herein) to make additional investments in real estate properties, the failure to upgrade our tenant mix, restrictions in current financing arrangements, the failure to fully recover tenant obligations for common area maintenance (“CAM”), insurance, taxes and other property expenses, the failure of the Company to continue to qualify as a real estate investment trust (“REIT”), the failure to refinance debt at favorable terms and conditions, an increase in impairment charges, loss of key personnel, failure to achieve earnings/funds from operations targets or estimates, conflicts of interest with the Advisor, Sponsor and their affiliates, failure of joint venture relationships, significant costs related to environmental issues as well as other risks listed from time to time in this Form 10-Q, our Form 10-K and in the Company’s other reports filed with the SEC.

 

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

  

Overview

 

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

 

23
 

 

Lightstone REIT has and may continue to acquire and operate in the future commercial, residential and hospitality properties, principally in the United States. Principally through the Operating Partnership, our acquisitions have included both portfolios and individual properties. Our commercial holdings consist of retail (primarily multi-tenant shopping centers), lodging (primarily select service hotels), industrial properties and residential properties comprised of multi-family complexes.

 

As discussed in Notes 1 and 6 of the Notes to Consolidated Financial Statements, the results of operations presented below exclude certain properties due to their classification as discontinued operations.

 

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

 

Current Environment

 

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

 

U.S. and 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.

 

24
 

 

Portfolio Summary –

 

   Location  Year Built (Range of
years built)
  Leasable Square
Feet
   Percentage Occupied as
of June 30, 2014
   Annualized Revenues based
on rents at
June 30, 2014
  Annualized Revenues per
square foot at June 30,
2014
 
Wholly Owned and Consolidiated Real Estate Properties:                        
                         
Retail                        
St. Augustine Outlet Center  St. Augustine, FL  1998   330,246    85.4%   $4.0 million  $14.33 
Oakview Plaza  Omaha, NE  1999 - 2005   176,774    87.0%   $2.3 million  $15.05 
DePaul Plaza  Bridgeton, MO  1985   187,090    80.7%   $1.7 million  $11.47 
      Retail Total   694,110    84.5%        
                         
Industrial                        
7 Flex/Office/Industrial Buildings within the Gulf Coast Industrial Portfolio  New Orleans, LA  1980-2000   255,230    75.1%   $2.8 million  $11.07 
4 Flex/Industrial Buildings within the Gulf Coast Industrial Portfolio  San Antonio, TX  1982-1986   393,193    81.2%   $1.8 million  $4.59 
3 Flex/Industrial Buildings within the Gulf Coast Industrial Portfolio  Baton Rouge, LA  1985-1987   171,573    93.9%   $1.1 million  $6.61 
Sarasota  Sarasota, FL  1992   280,242    100.0%   $0.6 million  $1.99 
      Industrial Total   1,100,238    85.5%        

 

Multi - Family Residential  Location  Year Built (Range of
years built)
  Leasable Units   Percentage Occupied as
of June 30, 2014
   Annualized Revenues based
on rents at
June 30, 2014
  Annualized Revenues per
unit at June 30, 2014
 
Southeastern Michigan Multi-Family Properties (Four Apartment Buildings)  Southeast  MI  1965-1972   1,017    95.8%   $8.0 million  $8,259 
Camden Multi-Family Properties (Two Apartment Communities)  Greensboro/Charlotte, NC  1984-1985   568    93.0%   $4.2 million  $7,936 
Gantry Park (Multi-Family Apartment Building)  Queens, NY  2013   199    99.0%   $7.6 million  $38,770 
       Residential Total   1,784    95.2%        

 

   Location  Year Built  Year to date
Available Rooms
   Percentage Occupied as
of June 30, 2014
   Revenue per Available
Room for the Three
Months Ended June
30, 2014
   Average Daily Rate For
the Three Months Ended
June 30, 2014
 
Wholly-Owned and Consolidated Hospitality Properties:                      
                       
DoubleTree - Danvers  Danvers, Massachusetts  1978   65,703    50.1%  $57.44   $114.58 
                           
Courtyard - Parsippany  Parsippany, New Jersey  2001   27,331    51.8%  $72.57   $140.21 
                           
Courtyard - Willoughby  Willoughby, Ohio  1999   16,290    73.3%  $90.03   $122.83 
                           
Fairfield Inn - DesMoines  West Des Moines, Iowa  1997   18,462    66.4%  $65.38   $98.43 
                           
SpringHill Suites - DesMoines  West Des Moines, Iowa  1999   17,557    68.5%  $70.48   $102.89 
                           
Holiday Inn Express - Auburn  Auburn, Alabama  2002   14,842    62.2%  $66.34   $106.59 
                           
Courtyard - Baton Rouge  Baton Rouge, Lousiana  1997   21,901    70.6%  $72.74   $103.04 
                           
Residence Inn - Baton Rouge  Baton Rouge, Lousiana  2000   19,548    51.9%  $56.50   $108.92 
                           
Aloft - Rogers  Rogers, Arkansas  2008   23,530    62.2%  $71.09   $114.31 
                           
Fairfield Inn - Jonesboro  Jonesboro, Arkansas  2009   15,023    75.6%  $69.92   $92.47 
                           
Hampton Inn - Miami  Miami, Florida  1996   22,806    86.4%  $110.34   $127.71 
                           
Hampton Inn & Suites - Fort Lauderdale  Fort Lauderdale, Florida  1996   18,824    86.2%  $123.09   $142.84 
                           
       Hospitality Total   281,817    63.9%  $74.19   $116.11 

 

   Location  Year Built  Leasable Square
Feet
   Percentage Occupied as
of June 30, 2014
   Annualized Revenues based
on rents at
June 30, 2014
   Annualized Revenues per
square foot at June 30,
2014
 
Unconsolidated Affiliated Real Estate Entities-Office:                          
1407 Broadway(1)  New York, NY  1952   1,114,695    79.7%  $38.50   $43.36 

 

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

 

25
 

 

Annualized revenue is defined as the minimum monthly payments due as of June 30, 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 June 30, 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

 

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

 

Our operating results for the 2014 and 2013 periods were significantly impacted by (i) the timing of various hotel acquisitions (included in our Hospitality Segment), as set forth below, and (ii) the completion of construction of Gantry Park (included in our Multi-Family Residential Segment) and commencement of its operations during the third quarter of 2013. On January 18, 2013, we acquired a Holiday Inn Express Hotel & Suites (the “Holiday Inn Express - Auburn”) located in Auburn, Alabama. On May 16, 2013, we acquired a portfolio comprised of two hotels located in Baton Rouge, Louisiana (the “Courtyard - Baton Rouge” and the “Residence Inn - Baton Rouge”, or collectively, the “Baton Rouge Hotel Portfolio”). On June 18, 2013, we acquired a portfolio comprised of two hotels, one located in Rogers, Arkansas (the “Aloft - Rogers”) and the other in Jonesboro, Arkansas (the “Fairfield Inn - Jonesboro”, or collectively, the “Arkansas Hotel Portfolio”). On August 30, 2013, we acquired a portfolio comprised of two hotels located in South Florida (the “Hampton Inn - Miami” and the “Hampton Inn & Suites - Fort Lauderdale”, or collectively, the “Florida Hotel Portfolio”).

 

For the Three Months Ended June 30, 2014 vs. June 30, 2013

 

Consolidated

 

Revenues

 

Our revenues are comprised of rental revenues, tenant recovery income and other service income. Total revenues increased by approximately $6.6 million to $24.4 million for the three months ended June 30, 2014 compared to $17.8 million for the same period in 2013. The increase primarily reflects higher revenues in our Hospitality Segment of $4.8 million and our Multi-Family Residential Segment of $2.0 million. See “Segment Results of Operations for the Three Months Ended June 30, 2014 compared to June 30, 2013” for additional information on revenues by segment.

 

Property operating expenses

 

Property operating expenses increased by approximately $3.5 million to $13.2 million for the three months ended June 30, 2014 compared to $9.8 million the same period in 2013. The increase consists of approximately $2.9 million and $0.4 million related to our Hospitality Segment and our Multi-Family Residential Segment, respectively. These segments were impacted by the timing of our hotel acquisitions and Gantry Park.

 

Real estate taxes

 

Real estate taxes were relatively flat for the three months ended June 30, 2014 compared to the same period in 2013.

 

General and administrative expenses

 

General and administrative expenses decreased by approximately $1.5 million to $1.5 million for the three months ended June 30, 2014 compared to $3.0 million the same period in 2013. The decrease is primarily attributable to acquisition costs incurred in the 2013 period as a result of our hotel acquisitions noted above.

 

26
 

 

Depreciation and Amortization

 

Depreciation and amortization expense increased by approximately $1.7 million to $4.2 million for the three months ended June 30, 2014 compared to $2.5 million the same period in 2013. The increase was primarily due to the timing of our hotel acquisitions noted above and Gantry Park.

 

Interest and dividend income

 

Interest and dividend income decreased by approximately $1.3 million to $2.1 million for the three months ended June 30, 2014 compared to $3.4 million the same period in 2013. The decrease was primarily attributable to the repayment in full of a second mortgage loan receivable held by LVP Rego Park, LLC (the “Rego Park Joint Venture”) in June 2013 as well as the elimination of interest income accruing on our Notes Receivable due from Noncontrolling Interests for periods subsequent to June 26, 2013.

 

Interest expense

 

Interest expense, including amortization of deferred financing costs, increased by approximately $1.1 million to $4.9 million for the three months ended June 30, 2014 compared to $3.8 million for the same period in 2013. The increase is primarily attributable to the timing of certain new borrowings throughout 2013.

 

Loss/(gain) on sale of marketable securities

 

During the three months ended June 30, 2013 we recognized a gain on sale of marketable securities of approximately $13.8 million primarily attributable to the sale of 156,000 Marco OP Units.

 

Income/(loss) from investment in unconsolidated affiliated real estate entity

 

This account represents our portion of the earnings associated with our ownership interest in an investment in unconsolidated affiliated real estate entity, which we account for under the equity method of accounting. Income from investment in unconsolidated affiliated real estate entity was $33 during the three months ended June 30, 2014 compared to income of $0.3 million during the same period in 2013. See Note 3 of the Notes to Consolidated Financial Statements for additional information.

 

Loss on disposition of real estate

 

During the second quarter of 2014 we recognized an estimated loss on disposition of real estate of approximately $2.4 million related to our industrial property in Sarasota, Florida. See Note 6 of the Notes to Consolidated Financial Statements for additional information.

 

Noncontrolling interests

 

The net earnings allocated to noncontrolling interests relates to (i) the interests in the Operating Partnership held by our Sponsor as well as common units held by our limited partners (ii) the interest in PRO-DFJV Holdings LLC (“PRO”) held by our Sponsor, (iii) the 10.0% interest in the Rego Park Joint Venture previously held by Lightstone Value Plus Real Estate Investment Trust II, Inc., (iv) the ownership interests in 50-01 2nd St Associates LLC (the “2nd Street Joint Venture”) held by our Sponsor and other affiliates and (v) the interests held by minority owners of certain of our hotels. .

 

Segment Results of Operations for the Three Months Ended June 30, 2014 compared to June 30, 2013

 

Retail Segment

  

   For the Three Months Ended June 30,   Variance Increase/(Decrease) 
   2014   2013   $   % 
   (unaudited)         
Revenues  $2,701   $2,944   $(243)   -8.3%
NOI   1,814    1,833    (19)   -1.0%
Average Occupancy Rate for period   84.6%   83.0%        1.6%

 

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The following table represents lease expirations for the Retail Segment as of June 30, 2014:

 

Lease
Expiration
Year
  Number of
Expiring
Leases
   GLA of Expiring
Leases (Sq. Ft.)
   Annualized Base
Rent of Expiring
Leases ($)
   Percent of
Total GLA
   Percent of Total
Annualized
Base Rent
 
2014   10    32,946    428,695    6.1%   5.8%
2015   13    129,071    1,787,840    23.9%   24.1%
2016   10    51,789    724,602    9.6%   9.8%
2017   4    9,437    139,155    1.8%   1.9%
2018   11    84,433    1,279,010    15.7%   17.3%
2019   14    65,575    1,285,231    12.2%   17.3%
2020   5    117,957    984,814    21.9%   13.3%
2021   2    18,764    253,444    3.5%   3.4%
2022   -    -    -    -    - 
2023   1    28,000    479,920    5.2%   6.5%
Thereafter   1    1,163    48,846    0.1%   0.6%
    71    539,135    7,411,557    100.0%   100.0%

  

Revenues and NOI decreased slightly for the three months ended June 30, 2014 compared to the same period in 2013 primarily as a result of a slight decrease in the average revenue per square foot during the 2014 period.

 

Multi-Family Residential Segment

 

   For the Three Months Ended June 30,   Variance Increase/(Decrease) 
   2014   2013   $   % 
   (unaudited)         
Revenues  $5,295   $3,274   $2,021    61.7%
NOI   3,124    1,485    1,639    110.4%
Average Occupancy Rate for period   95.5%   95.1%        0.4%

 

Revenues increased $2.0 million accompanied by an increase in NOI of $1.6 million while the average occupancy rate increased slightly for the three months ended June 30, 2014 compared to the same period in 2013. The increases in revenue and NOI are primarily attributable to the operations of Gantry Park. The construction of Gantry Park was substantially completed and its associated assets were placed into service during the third quarter of 2013.

 

Industrial Segment

 

   For the Three Months Ended June 30,   Variance Increase/(Decrease) 
   2014   2013   $   % 
   (unaudited)         
Revenues  $1,898   $1,853   $45    2.4%
NOI   1,168    1,182    (14)   -1.2%
Average Occupancy Rate for period   85.1%   84.3%        0.8%

 

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The following table represents lease expirations for our Industrial Segment as of June 30, 2014:

 

Industrial Segment                
                     
Lease
Expiration
Year
  Number of
Expiring
Leases
   GLA of Expiring
Leases (Sq. Ft.)
   Annualized Base
Rent of Expiring
Leases ($)
   Percent of
Total GLA
   Percent of Total
Annualized
Base Rent
 
2014   26    199,024    444,584    18.1%   9.6%
2015   27    562,732    2,202,550    51.1%   47.6%
2016   31    204,180    860,003    18.6%   18.6%
2017   10    58,277    354,978    5.3%   7.7%
2018   11    76,025    765,115    6.9%   16.5%
Thereafter   -    -    -    -    - 
    105    1,100,238    4,627,230    100.0%   100.0%

 

Revenues, NOI and average occupancy decreased remained relatively flat for the three months ended June 30, 2014 compared to the same period in 2013.

 

Hospitality Segment

 

   For the Three Months Ended June 30,   Variance Increase/(Decrease) 
   2014   2013   $   % 
   (unaudited)         
Revenues  $14,533   $9,726   $4,807    49.4%
NOI   3,857    2,176    1,681    77.3%
Average Occupancy Rate for period   71.7%   67.8%        3.9%
Rev PAR  $80.39   $75.61   $4.78    6.3%

 

The revenues in our Hospitality Segment increased by approximately $4.8 million for the three months ended June 30, 2014 compared to the same period in 2013. The increase is primarily attributable to the timing of our hotel acquisitions noted above.

 

NOI in our Hospitality Segment increased by approximately $1.7 million for the three months ended June 30, 2014 compared to the same period in 2013. The increase is primarily attributable to the timing of our hotel acquisitions noted above.

 

For the Six Months Ended June 30, 2014 vs. June 30, 2013

 

Consolidated

 

Revenues

 

Our revenues are comprised of rental revenues, tenant recovery income and other service income. Total revenues increased by approximately $14.1 million to $46.6 million for the six months ended June 30, 2014 compared to $32.5 million for the same period in 2013. The increase primarily reflects higher revenues in our Hospitality Segment of $10.6 million and our Multi-Family Residential Segment of $3.7 million. See “Segment Results of Operations for the Six months Ended June 30, 2014 compared to June 30, 2013” for additional information on revenues by segment.

 

Property operating expenses

 

Property operating expenses increased by approximately $7.3 million to $25.7 million for the six months ended June 30, 2014 compared to $18.4 million the same period in 2013. The increase consists of approximately $6.2 million and $0.9 million related to our Hospitality Segment and our Multi-Family Residential Segment, respectively. These segments were impacted by the timing of our hotel acquisitions and Gantry Park .

 

Real estate taxes

 

Real estate taxes were relatively flat for the six months ended June 30, 2014 compared to the same period in 2013.

 

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General and administrative expenses

 

General and administrative expenses decreased by approximately $1.9 million to $3.3 million for the six months ended June 30, 2014 compared to $5.2 million the same period in 2013. The decrease is primarily attributable to lower acquisition related costs during the 2014 period.

 

Depreciation and Amortization

 

Depreciation and amortization expense increased by approximately $3.4 million to $8.2 million for the six months ended June 30, 2014 compared to $4.8 million the same period in 2013. The increase was primarily due to the timing of our hotel acquisitions and Gantry Park.

 

Mark to market adjustment on derivative financial instruments

 

During the six months ended June 30, 2014 and 2013, we recorded mark to market adjustments on derivative financial instruments of $0.2 million and $1.5 million, respectively. The mark to market adjustments during the 2013 period primarily represented the change in the fair values of a collar entered into to protect the value of a portion of our Marco OP Units within a certain specified range through December 2013.

 

Interest and dividend income

 

Interest and dividend income decreased by approximately $3.3 million to $3.6 million for the six months ended June 30, 2014 compared to $6.9 million the same period in 2013. The decrease was primarily attributable to the repayment in full of a second mortgage loan receivable held by LVP Rego Park, LLC (the “Rego Park Joint Venture”) in June 2013 as well as the elimination of interest income accruing on our Notes Receivable due from Noncontrolling Interests for periods subsequent to June 26, 2013.

 

Interest expense

 

Interest expense, including amortization of deferred financing costs, increased by approximately $2.3 million to $9.8 million for the six months ended June 30, 2014 compared to $7.5 million for the same period in 2013. The increase is primarily attributable to the timing of certain new borrowings throughout 2013.

 

Loss/(gain) on sale of marketable securities

 

Loss/(gain) on sale of marketable securities decreased by approximately $12.6 million to $1.2 million for the six months ended June 30, 2014 compared to $13.8 million the same period in 2013. During the six months ended June 30, 2013 we recognized a gain on sale of marketable securities of approximately $13.8 million primarily attributable to the sale of 156,000 Marco OP Units.

 

Loss from investment in unconsolidated affiliated real estate entity

 

This account represents our portion of the earnings associated with our ownership interest in an investment in unconsolidated affiliated real estate entity, which we account for under the equity method of accounting. Our loss from investment in unconsolidated affiliated real estate entity was $0.1 million during the six months ended June 30, 2014 compared to a loss of $1.8 million during the same period in 2013. See Note 3 of the Notes to Consolidated Financial Statements for additional information.

 

Gain on disposition of unconsolidated affiliated real estate entities

 

During the first quarter of 2013, we received an additional $1.2 million related to the 2012 disposition of our ownership interest in Grand Prairie Holdings LLC resulting from the satisfaction of certain conditions and recognized a gain on disposition of unconsolidated affiliated real estate entities in our consolidated statements of operations.

 

Loss on disposition of real estate

 

During the second quarter of 2014 we recognized an estimated loss on disposition of real estate of approximately $2.4 million related to our industrial property in Sarasota, Florida. See Note 6 of the Notes to Consolidated Financial Statements for additional information.

 

  Noncontrolling interests

 

The net earnings allocated to noncontrolling interests relates to (i) the interests in the Operating Partnership held by our Sponsor as well as common units held by our limited partners (ii) the interest in PRO-DFJV Holdings LLC (“PRO”) held by our Sponsor, (iii) the 10.0% interest in the Rego Park Joint Venture previously held by Lightstone Value Plus Real Estate Investment Trust II, Inc., (iv) the ownership interests in 50-01 2nd St Associates LLC (the “2nd Street Joint Venture”) held by our Sponsor and other affiliates and (v) the interests held by minority owners of certain of our hotels.

 

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Segment Results of Operations for the Six months Ended June 30, 2014 compared to June 30, 2013

 

Retail Segment

 

   For the Six Months Ended June 30,   Variance Increase/(Decrease) 
   2014   2013   $   % 
   (unaudited)         
Revenues  $5,553   $5,896   $(343)   -5.8%
NOI   3,540    3,666    (126)   -3.4%
Average Occupancy Rate for period   83.9%   83.4%        0.5%

 

Revenues and NOI decreased slightly for the six months ended June 30, 2014 compared to the same period in 2013 primarily as a result of a slight decrease in the average revenue per square foot during the 2014 period.

 

Multi-Family Residential Segment

 

   For the Six Months Ended June 30,   Variance Increase/(Decrease) 
   2014   2013   $   % 
   (unaudited)         
Revenues  $10,214   $6,509   $3,705    56.9%
NOI   5,651    3,027    2,624    86.7%
Average Occupancy Rate for period   94.7%   95.1%        -0.4%

 

Revenues increased $3.7 million accompanied by an increase in NOI of $2.6 million while the average occupancy rate decreased slightly for the six months ended June 30, 2014 compared to the same period in 2013. The increases in revenue and NOI are primarily attributable to the operations of Gantry Park. The construction of Gantry Park was substantially completed and its associated assets were placed into service during the third quarter of 2013.

 

Industrial Segment

 

   For the Six Months Ended June 30,   Variance Increase/(Decrease) 
   2014   2013   $   % 
   (unaudited)         
Revenues  $3,776   $3,577   $199    5.6%
NOI   2,381    2,263    118    5.2%
Average Occupancy Rate for period   85.8%   83.6%        2.2%

 

Revenues and NOI increased slightly for the six months ended June 30, 2014 compared to the same period in 2013 primarily as a result of the higher average occupancy during the 2014 period.

 

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Hospitality Segment

 

   For the Six Months Ended June 30,   Variance Increase/(Decrease) 
   2014   2013   $   % 
   (unaudited)         
Revenues  $27,084   $16,482   $10,602    64.3%
NOI   6,499    2,581    3,918    151.8%
Average Occupancy Rate for period   63.9%   60.3%        3.6%
Rev PAR  $74.19   $66.79   $7.40    11.1%

 

The revenues in our Hospitality Segment increased by approximately $10.6 million for the six months ended June 30, 2014 compared to the same period in 2013. The increase is primarily attributable to the timing of our hotel acquisitions noted above.

 

NOI in our Hospitality Segment increased by $3.9 million for the six months ended June 30, 2014 compared to the same period in 2013. This increase is primarily attributable to the timing of our hotel acquisitions noted above.

 

Financial Condition, Liquidity and Capital Resources   

 

Overview:

 

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

 

We expect to meet our short-term liquidity requirements generally through working capital and proceeds from our distribution reinvestment plan and borrowings. We believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.

 

We currently have $292.5 million of outstanding mortgage debt, a $19.9 million line of credit and a $19.4 million margin loan. Additionally, we have $10.9 million available to us under our revolving credit facility (the “Revolving Credit Facility”). We have and intend to continue to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to our stockholders. We may also incur short-term indebtedness, having a maturity of two years or less.

 

Our charter provides that the aggregate amount of borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. As of June 30, 2014, our total borrowings of $331.8 million represented 92% of net assets.

 

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

 

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

 

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

 

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

 

In addition to meeting working capital needs and distributions to our stockholders, our capital resources are used to make certain payments to our Advisor and our Property Manager, included payments related to asset acquisition fees and asset management fees, the reimbursement of acquisition related expenses to our Advisor and property management fees. We also reimburse our Advisor and its affiliates for actual expenses it incurs for administrative and other services provided to us. Additionally, the Operating Partnership may be required to make distributions to Lightstone SLP, LLC, an affiliate of the Advisor.

 

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

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2014   2013   2014   2013 
Acquisition fees  $27   $940   $59   $1,256 
Asset management fees   711    637    1,424    1,258 
Property management fees   341    433    689    855 
Development fees and leasing commissions   241    415    405    789 
Total  $1,320   $2,425   $2,577   $4,158 

  

As of June 30, 2014, we had approximately $37.8 million of cash and cash equivalents on hand and $153.4 million of marketable securities, available for sale.

 

Summary of Cash Flows

 

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

 

   For the Six Months Ended June 30, 
   2014   2013 
   (unaudited) 
Cash flows provided by operating activities  $13,029   $7,107 
Cash flows used in investing activities   (6,616)   (28,103)
Cash flows used in financing activities   (21,527)   (5,335)
Net change in cash and cash equivalents   (15,114)   (26,331)
           
Cash and cash equivalents, beginning of the period   52,899    98,805 
Cash and cash equivalents, end of the period  $37,785   $72,474 

 

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

 

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Operating activities

 

Net cash flows provided by operating activities of $13.0 million for the six months ended June 30, 2014 consists of the following:

 

·cash inflows of approximately $9.8 million from our net income from continuing operations after adjustment for non-cash items; and

 

·cash inflows of approximately $3.2 million associated with the net changes in operating assets and liabilities.

 

 

Investing activities

 

The net cash used in investing activities from of $6.6 million for the six months ended June 30, 2014 consists primarily of the following:

 

·purchases of investment property of approximately $8.1 million;

 

·final settlement payment for Marco OP Units Collar of $3.5 million;

 

·funds released primarily for the collateral requirement on the collar for our Marco OP Units of approximately $6.7 million;

 

·aggregate preferred equity contributions in our affiliate 365 Bond Street of $21.8 million;

 

·net proceeds from the sale and purchase of marketable securities of $10.5 million; and

 

·cash inflows of approximately $9.0 million from discontinued operations, consisting primarily of net proceeds from the sale of Crowe’s Crossing.

 

Financing activities

 

The net cash used by financing activities of approximately $21.5 million for the six months ended June 30, 2014 is primarily related to the following:

 

·distributions to our common shareholders of $6.1 million

 

·redemptions and cancellation of common stock and noncontrolling interests of $4.5 million;

 

·distributions to our noncontrolling interests of $1.4 million;

 

·net payments on our notes payable of $0.9 million and net proceeds from mortgage financing of $0.8 million;

 

·debt principal payments $3.6 million; and

 

·cash outflows of approximately $5.8 million from discontinued operations, consisting primarily of repayment of mortgage indebtedness in connection with disposition of Crowe’s Crossing.

 

The following summarizes our indebtedness maturing in 2014 and our current intentions:

 

Gulf Coast Industrial Portfolio

 

Our non-recourse mortgage of approximately $51.8 million, secured by the Gulf Coast Industrial Portfolio, which was originally due in February 2017, is in default and therefore, due on demand. We are in discussions with the lender to potentially modify or restructure the loan. No assurance can be made that we will be successful in such efforts. See “Contractual Obligations” below for additional information.

 

Camden Multi-Family Properties

 

Our two individual non-recourse mortgages aggregating approximately $26.6 million, secured by the Camden Multi-Family Properties are scheduled to mature in December 2014. We are currently evaluating our options with respect to these properties and may seek to refinance or extend these mortgages or potentially dispose of the properties. No assurances can be made that we will be successful in such efforts. See “Contractual Obligations” below for additional information.

 

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Preferred Investment

 

On March 7, 2014, the Company entered into an agreement with various related party entities pursuant to which it committed to make contributions of up to $35.0 million, with an additional investment of up to $10.0 million subject to the satisfaction of certain conditions, in an affiliate of its Sponsor which owns a parcel of land located at 365 Bond Street in Brooklyn, New York on which it is constructing a residential apartment project. These contributions are made pursuant to an instrument, the “Preferred Investment,” that is entitled to monthly preferred distributions at a rate of 12% per annum, is redeemable by the Company upon the occurrence of certain events, is classified as a held-to-maturity security and is recorded at cost. The Company commenced making contributions during the second quarter of 2014 and as of June 30, 2014, the Preferred Investment had a balance of approximately $21.8 million and is classified as investment in affiliate on the consolidated balance sheet. 

 

Distribution Reinvestment Plan and Share Repurchase Program

 

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

 

Contractual Obligations  

 

The following is a summary of our contractual obligations outstanding over the next five years and thereafter as of June 30, 2014.

 

Contractual Obligations  Remainder of 2014   2015   2016   2017   2018   Thereafter   Total 
Mortgage Payable  $79,532   $2,581    142,286   $43,651   $24,421   $-   $292,471 
Interest Payments1,2   6,124    10,654    7,299    1,718    789    -    26,584 
                                    
Total Contractual Obligations  $85,656   $13,235   $149,585   $45,369   $25,210   $-   $319,055 

 

1)These amounts represent future interest payments related to mortgage payable obligations based on the fixed and variable interest rates specified in the associated debt agreements. All variable rate debt agreements are based on the one-month rate. For purposes of calculating future interest amounts on variable interest rate debt the one-month rate as of June 30, 2014 was used.
2)The debt associated with the Gulf Coast Industrial Portfolio is in default and due on demand and therefore no future interest payments on this debt are included in these amounts.

 

We have access to a margin loan and line of credit from a financial institution that holds custody of certain of the our marketable securities. The aggregate amount outstanding on both the margin loan and line of credit was $39.3 million as of June 30, 2014, and is due on demand.

 

We have a $45.0 million Revolving Credit Facility that allows us to designate properties as collateral that allow us to borrow up to a 60.0% loan-to-value ratio of the properties. The initial loan of $14.2 million under the Revolving Credit Facility was secured by the Courtyard - Willoughby, the Fairfield Inn - Des Moines and the SpringHill Suites - Des Moines. During the third quarter of 2013 we borrowed an additional $19.9 million under the Revolving Credit Facility and pledged the Florida Hotel Portfolio as additional collateral under the Revolving Credit Facility. The outstanding balance of the Revolving Credit Facility was $34.1 million as of June 30, 2014 and the remaining amount available under the Revolving Credit Facility was $10.9 million.

 

Certain of our debt agreements require the maintenance of certain ratios, including debt service coverage. We are currently in compliance with all of our debt covenants; however, the debt associated with our Gulf Coast Industrial Portfolio was placed in default during 2012 and is due on demand as discussed below.

 

As a result of not meeting certain debt service coverage ratios on the non-recourse mortgage indebtedness secured by the Gulf Coast Industrial Portfolio, the lender elected to retain the excess cash flow from these properties beginning in July 2011 until such time as the required coverage ratios are met for two successive quarters.  During the third quarter of 2012, the loan was transferred to a special servicer, who discontinued scheduled debt service payments and notified us that the loan was in default and due on demand.

 

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Although the lender is currently not charging or being paid interest at the stated default rate, an aggregate $4.0 million of default interest has been accrued through June 30, 2014 pursuant to the terms of the loan agreement. Default interest of $0.6 million and $1.1 million was accrued for the three and six months ended June 30, 2014 and default interest of $0.5 million and $1.1 million was accrued and for the three and six months ended June 30, 2013. As a result, accrued default interest of approximately $4.0 million and $2.9 million is included in accounts payable, accrued expenses and other liabilities on our consolidated balance sheets as of June 30, 2014 and December 31, 2013, respectively.  We are currently engaged in discussions with the special servicer to restructure the loan and do not expect to pay the default interest as this mortgage indebtedness is non-recourse to us.  We believe the continued loss of excess cash flow from these properties and the placement of the non-recourse mortgage indebtedness in default will not have a material impact on our results of operations or financial position.

 

Noncontrolling Interests - Redemption of Series A Preferred Units and Repayment of Notes Receivable

 

On January 2, 2014, our Operating Partnership redeemed all of the then remaining outstanding 50,100 Series A preferred units in the Operating Partnership (the “Series A Preferred Units”), held by the Arbor Mill Run JRM, LLC, a Delaware limited liability company, Arbor National CJ, LLC, a New York limited liability company, Prime Holdings LLC, a Delaware limited liability company , TRAC Central Jersey LLC, a Delaware limited liability company, Central Jersey Holdings II, LLC, a New York limited liability company and JT Prime LLC, a Delaware limited liability company (collectively, the “Contributing Parties”), at their liquidation preference of approximately $50.1 million and the Contributing Parties simultaneously repaid the remaining notes receivable due from the Contributing Parties aggregating approximately $47.4 million in full.

 

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.

 

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

 

Management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. We will use the proceeds raised in our offering to acquire properties, and we intend to begin the process of achieving a liquidity event (i.e., listing of our common stock on a national exchange, a merger or sale of the company or another similar transaction) within seven to ten years after the proceeds from the primary offering are fully invested. Thus, we will not continuously purchase assets and will have a limited life. Due to the above factors and other unique features of publicly regi