Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.v423960_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - Lightstone Value Plus Real Estate Investment Trust, Inc.v423960_ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - Lightstone Value Plus Real Estate Investment Trust, Inc.v423960_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.v423960_ex32-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended September 30, 2015

 

OR

 

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

 

For the transition period from                      to

 

Commission file number 000-52610

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland   20-1237795

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

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

 

(732) 367-0129

(Registrant’s Telephone Number, Including Area Code)

 

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

Yes    þ     No   ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  

Yes  þ     No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   ¨   Accelerated filer   ¨   Non-accelerated filer    þ

 

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

Yes  ¨  No þ

 

As of November 10, 2015, there were approximately 25.7 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust, Inc., including shares issued pursuant to the dividend reinvestment plan.  

 

 

 

  

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

 

INDEX

 

    Page
PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
     
  Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014 3
     
  Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2015 and 2014 4
     
  Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2015  and 2014 5
     
  Consolidated Statement of Stockholders’ Equity (unaudited) for the Nine Months Ended September 30, 2015 6
     
  Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2015 and 2014 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 40
     
Item 4. Controls and Procedures 41
     
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings 41
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
     
Item 3. Defaults Upon Senior Securities 42
     
Item 4. Mine Safety Disclosures 42
     
Item 5. Other Information 42
     
Item 6. Exhibits 42

 

2 

 

  

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 September 30, 2015   As of December 31, 2014 
   (Unaudited)     
           
Assets          
Land and improvements  $68,793   $68,606 
Building and improvements   237,614    227,427 
Furniture and fixtures   17,010    16,567 
Construction in progress   701    2,317 
Gross investment property   324,118    314,917 
Less accumulated depreciation   (47,580)   (40,166)
Net investment property   276,538    274,751 
Investment in unconsolidated affiliated real estate entity   1,989    9,846 
Investments in affiliates   75,987    36,637 
Cash and cash equivalents   135,793    54,529 
Marketable securities, available for sale   79,007    154,818 
Restricted escrows   8,922    8,809 
Tenant accounts receivable (net of allowance for doubtful accounts of $325 and $327, respectively)   1,833    1,853 
Mortgage receivable   5,075    5,179 
Intangible assets, net   1,199    1,546 
Prepaid expenses and other assets   8,670    14,366 
Assets held for sale   -    111,505 
           
Total Assets  $595,013   $673,839 
           
Liabilities and Stockholders' Equity          
Mortgages payable  $229,376   $227,189 
Notes payable   18,625    38,582 
Accounts payable, accrued expenses and other liabilities   15,518    12,293 
Due to sponsor   -    802 
Tenant allowances and deposits payable   2,550    2,314 
Distributions payable   4,548    4,566 
Deferred rental income   1,095    1,167 
Acquired below market lease intangibles, net   646    793 
Liabilities held for sale   -    70,130 
Total Liabilities   272,358    357,836 
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, 25,758 and 25,850 shares issued and outstanding, respectively   257    258 
Additional paid-in-capital   203,256    204,022 
Accumulated other comprehensive income   16,739    50,671 
Accumulated surplus   70,665    25,814 
Total Company's stockholders' equity   290,917    280,765 
Noncontrolling interests   31,738    35,238 
Total Stockholders' Equity   322,655    316,003 
Total Liabilities and Stockholders' Equity  $595,013   $673,839 

 

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 September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
                 
Revenues:                    
Rental income  $11,302   $11,812   $30,996   $32,895 
Tenant recovery income   1,120    1,272    3,234    3,507 
Other service income   2,312    2,175    7,811    7,659 
Total revenues   14,734    15,259    42,041    44,061 
Expenses:                    
Property operating expenses   7,563    7,177    21,006    21,538 
Real estate taxes   860    1,165    2,566    2,776 
General and administrative costs   1,349    1,502    3,899    4,569 
Depreciation and amortization   2,955    2,867    8,572    9,135 
Total operating expenses   12,727    12,711    36,043    38,018 
Operating income   2,007    2,548    5,998    6,043 
Other income, net   216    266    1,048    1,072 
Mark to market adjustment on derivative financial instruments   (255)   52    (407)   (111)
Interest and dividend income   3,015    7,969    8,217    11,519 
Interest expense   (3,811)   (3,941)   (11,360)   (11,767)
(Loss)/gain on sale of marketable securities (includes                    
loss/(gain) of $6, $19, ($41,492) and ($515),  respectively, of accumulated other comprehensive income reclassifications)   (12)   207    34,728    1,367 
Gain on disposition of unconsolidated affiliated real estate entities   -    4,418    -    4,418 
Gain on disposition of real estate   -    11,483    -    9,129 
Income from investments in unconsolidated affiliated real estate entity   -    418    5,804    316 
Net income from continuing operations   1,160    23,420    44,028    21,986 
                     
Net income from discontinued operations   -    1,047    18,731    4,218 
Net income   1,160    24,467    62,759    26,204 
                     
Less: net income attributable to noncontrolling interests   (265)   (1,342)   (4,359)   (1,718)
Net income attributable to Company's common shares  $895   $23,125   $58,400   $24,486 
                     
Basic and diluted net income per Company's common share:                    
Continuing operations  $0.03   $0.86   $1.54   $0.79 
Discontinued operations   -    0.04    0.72    0.16 
                     
Net income per Company’s common share, basic and diluted  $0.03   $0.90   $2.26   $0.95 
                     
Weighted average number of common shares outstanding, basic and diluted   25,793    25,785    25,874    25,772 

 

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 September 30,   For the Nine Months Ended September 30, 
   2015   2014   2015   2014 
                 
Net income  $1,160   $24,467   $62,759   $26,204 
                     
Other comprehensive income/(loss):                    
Unrealized gain /(loss) on available for sale securities   1,945    (8,255)   4,057    8,563 
Reclassification adjustment for loss/(gain) included in net income   6    19    (41,492)   (515)
                     
Other comprehensive income/(loss)   1,951    (8,236)   (37,435)   8,048 
                     
Comprehensive income   3,111    16,231    25,324    34,252 
                     
Less: Comprehensive income attributable to noncontrolling interests   (486)   (685)   (856)   (2,534)
                     
Comprehensive income attributable to Company's common shares  $2,625   $15,546   $24,468   $31,718 

 

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)

 

           Accumulated             
           Additional   Other       Total     
   Common   Paid-In   Comprehensive   Accumulated   Noncontrolling     
   Shares   Amount   Capital   Income   Surplus   Interests   Total Equity 
                             
BALANCE, December 31, 2014   25,850   $258   $204,022   $50,671   $25,814   $35,238   $316,003 
Net income   -    -    -    -    58,400    4,359    62,759 
Other comprehensive loss   -    -    -    (33,932)   -    (3,503)   (37,435)
                                    
Distributions declared   -    -    -    -    (13,549)   -    (13,549)
Distributions paid to noncontrolling interests   -    -    -    -    -    (4,400)   (4,400)
Contributions received from noncontrolling interests   -    -    -    -    -    219    219 
Redemption and cancellation of shares and noncontrolling interests   (222)   (2)   (2,218)   -    -    (175)   (2,395)
Shares issued from distribution reinvestment program   130    1    1,452    -    -    -    1,453 
BALANCE, September 30, 2015   25,758   $257   $203,256   $16,739   $70,665   $31,738   $322,655 

 

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  Nine Months Ended September 30, 
   2015   2014 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $62,759   $26,204 
Less net income – discontinued operations   18,731    4,218 
Net income – continuing operations   44,028    21,986 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   8,572    9,135 
Mark to market adjustment on derivative financial instruments   407    111 
Gain on sale of marketable securities   (34,728)   (1,367)
Income from investments in unconsolidated affiliated real estate entities   (5,804)   (316)
Gain on disposition of unconsolidated affiliated real estate entities   -    (4,418)
Gain on disposition of real estate   -    (9,129)
Other non-cash adjustments   (92)   (14)
Changes in assets and liabilities:          
Decrease in prepaid expenses and other assets   697    620 
(Increase)/decrease in tenant and other accounts receivable   (6)   465 
Increase in accounts payable and accrued expenses   2,402    2,149 
Decrease in due to sponsor   (326)   (298)
Increase/(decrease) in tenant allowance and security deposits payable   (27)   207 
(Decrease)/increase in deferred rental income   (72)   137 
Net cash provided by operating activities – continuing operations   15,051    19,268 
Net cash provided by operating activities – discontinued operations   1,259    6,556 
Net cash provided by operating activities   16,310    25,824 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of investment property   (4,971)   (2,547)
Investments in affiliates   (39,336)   (21,837)
Purchase of marketable securities   (5,113)   (21,635)
Settlement of derivative financial instrument   -    (3,543)
Contributions to investment in unconsolidated affiliated real estate entities   (1,568)   - 
Collections on mortgage receivable   104    98 
Proceeds from sale of marketable securities   78,217    32,196 
Proceeds from sale of investment property   -    37,051 
Proceeds from disposition of investment in unconsolidated affiliated real estate entity   -    4,418 
Distribution from investments in unconsolidated affiliates   15,230    663 
Deposit/(refund) for purchase of real estate, net   170    (50)
Release of restricted escrows   464    6,051 
Net cash provided by investing activities – continuing operations   43,197    30,865 
Net cash provided by investing activities – discontinued operations   92,425    3,636 
Net cash provided by investing activities   135,622    34,501 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Mortgage payments   (1,676)   (28,441)
Payment of loan fees and expenses   (69)   (70)
Redemption and cancellation of common stock   (2,220)   (5,051)
Proceeds from mortgage financing   3,863    778 
Payments on notes payable   (19,957)   (1,069)
Contributions received from noncontrolling interests   219    199 
Distributions paid to noncontrolling interests   (4,400)   (2,870)
Distributions paid to Company's common stockholders   (12,114)   (9,184)
Net cash used in financing activities – continuing operations   (36,354)   (45,708)
Net cash used in financing activities – discontinued operations   (34,314)   (8,467)
Net cash used in financing activities   (70,668)   (54,175)
           
Net change in cash and cash equivalents   81,264    6,150 
Cash and cash equivalents, beginning of period   54,529    52,899 
Cash and cash equivalents, end of period  $135,793   $59,049 

 

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 Nine Months Ended September 30, 
   2015   2014 
Supplemental disclosure of cash flow information:          
Cash paid for interest  $9,485   $12,555 
Distributions declared  $13,549   $13,498 
Value of shares issued from distribution reinvestment program  $1,453   $4,287 
Non-cash purchase of investment property  $774   $86 
Debt assumed by purchaser on disposition  $32,800   $- 
Assignment of Minority interest loans to purchaser on disposition  $547   $- 

 

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 September 30, 2015.

 

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. Subject to the oversight of the Company’s board of directors (the “Board of Directors”), the Advisor has primary responsibility for making investment decisions and managing the Company’s day-to-day operations. Through his ownership and control of The Lightstone Group, David Lichtenstein is the indirect owner of the Advisor and the indirect owner and manager of Lightstone SLP, LLC, which has subordinated profits interests in the Operating Partnership. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT or the Operating Partnership.

 

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 September 30, 2015, on a collective basis, the Company wholly or majority 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, 14 industrial properties containing a total of approximately 1.0 million square feet of industrial space, 5 multi-family residential properties containing a total of 1,216 units, and 1 hotel hospitality property containing a 363 rooms. All of the Company’s properties are located within the United States. As of September 30, 2015, the retail properties, the industrial properties and the multi-family residential properties were 90%, 73% and 94% occupied based on a weighted-average basis, respectively. The Company’s hotel hospitality property’s average revenue per available room (“Rev PAR”) was $81 (whole dollars) and occupancy was 64% for the nine months ended September 30, 2015.

 

Discontinued Operations

 

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.   We recognized a gain on disposition of approximately $1.6 million, which is included in discontinued operations during the year ended December 31, 2014. 

 

During the first quarter of 2015, a portfolio of 11 of the Company’s hotel hospitality properties’ (the “LVP REIT Hotels”) met the criteria to be classified as held for sale. The operating results of the LVP REIT Hotels have been classified as discontinued operations in the consolidated statements of operations for all periods presented.   Additionally, the associated assets and liabilities of the LVP REIT Hotels are classified as held for sale in the consolidated balance sheet as of December 31, 2014. Also, during the nine months ended September 30, 2015, the Company completed the disposition of the LVP REIT Hotels to a related party (See Note 6). We recognized a gain on disposition of approximately $17.3 million, which is included in discontinued operations during the nine months ended September 30, 2015. 

 

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

 

As of September 30, 2015, 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”) and 50-01 2nd St Associates LLC (the “2nd Street Joint Venture”).

 

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, 2014. 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 (“GAAP”) 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.

 

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, marketable securities, 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, 2014 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.

 

Reclassifications

 

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

 

New Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“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. In August 2015, the FASB decided to delay the effective date of the new revenue standard by one year. The Company is currently evaluating the requirements and impact of this update on its consolidated financial statements.

 

In April 2015, the FASB issued an accounting standards update to simplify the presentation of debt issuance costs. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This new guidance will be effective for the Company beginning January 1, 2016. The Company is currently evaluating the impact of this standard on our consolidated financial statements.

 

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)

 

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 did 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  Ownership
%
   September 30,
2015
   December 31, 2014 
1407 Broadway Mezz II, LLC ("1407 Broadway")  January 4, 2007   49.0%  $1,989   $9,846 

 

1407 Broadway

 

The Company has a 49.0% ownership in 1407 Broadway. On April 30, 2015, 1407 Broadway completed the disposition of its sub-leasehold interest in a ground lease to an office building located at 1407 Broadway Street in New York, New York to an unrelated third party for aggregate consideration of approximately $150.0 million and in connection with such disposition recorded a net gain of approximately $9.9 million during the nine months ended September 30, 2015, of which the Company’s share was approximately $5.7 million. After the repayment of outstanding mortgage indebtedness and transaction and other closing costs, 1407 Broadway paid distributions to its members aggregating $19.9 million during the nine months ended September 30, 2015, of which the Company’s share was approximately $15.1 million.

 

1407 Broadway Financial Information

 

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

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2015   2014   2015   2014 
                 
Total revenue  $-   $10,646   $13,510   $30,528 
                     
Property operating expenses   -    7,547    9,439    22,596 
Depreciation and amortization   -    1,808    2,644    5,219 
Operating income   -    1,291    1,427    2,713 
                     
Interest expense and other, net   -    (539)   (1,343)   (2,413)
                     
Gain on disposition   -    -    9,891    - 
                     
Net income  $-   $752   $9,975   $300 
                     
Company's share of net income  $-   $418   $5,804   $316 

 

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)

 

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

 

   As of   As of 
   September 30, 2015   December 31, 2014 
         
Real estate, at cost (net)  $-   $121,304 
Intangible assets   -    28 
Cash and restricted cash   5,959    8,951 
Other assets   -    22,673 
           
Total assets  $5,959   $152,956 
           
Mortgage payable  $-   $126,000 
Other liabilities   551    13,342 
Member capital   5,408    13,614 
           
Total liabilities and members' capital  $5,959   $152,956 

 

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 September 30, 2015 
   Adjusted Cost   Gross Unrealized Gains   Gross Unrealized
Losses
   Fair Value 
Equity Securities, primarily REITs  $1,405   $384   $-   $1,789 
Marco OP Units and Marco II OP Units   19,227    19,215    -    38,442 
Corporate Bonds and Preferred Equities   35,880    326    (1,154)   35,052 
Mortgage Backed Securities ("MBS")   4,024    -    (300)   3,724 
Total  $60,536   $19,925   $(1,454)  $79,007 

 

   As of December 31, 2014 
   Adjusted Cost   Gross Unrealized Gains   Gross Unrealized
Losses
   Fair Value 
Equity Securities, primarily REITs  $1,405   $367   $-   $1,772 
Marco OP Units and Marco II OP Units   51,970    55,872    -    107,842 
Corporate Bonds and Preferred Equities   40,705    898    (955)   40,648 
Mortgage Backed Securities ("MBS")   4,832    -    (276)   4,556 
Total  $98,912   $57,137   $(1,231)  $154,818 

 

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”).

 

During the nine months ended September 30, 2015, the Company redeemed an aggregate of approximately 383,000 Marco OP units with a cost basis of approximately $32.7 million for aggregate gross proceeds of approximately $67.1 million and realized aggregate gains of approximately $34.4 million, which is included in gain on sale of marketable securities on the consolidated statements of operations.

 

The Company considers the declines in market value of certain of its investments to be temporary in nature as the unrealized losses were caused primarily by changes in market interest rates or widening credit spreads. When evaluating these 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 nine months ended September 30, 2015 and 2014, the Company did not recognize any impairment charges. As of September 30, 2015, the Company does not consider any of its investments to be other-than-temporarily impaired.

 

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)

 

The Company may sell certain of its investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management. The 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% (1.04% as of September 30, 2015) 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. There were no amounts outstanding under this Margin Loan as of September 30, 2015 and $18.7 million was outstanding as of December 31, 2014 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 June 19, 2017 and bears interest at Libor plus 1.35% (1.54% as of September 30, 2015). The Line of Credit is collateralized by approximately 159,000 Marco OP Units and PRO guaranteed the Line of Credit. The amount outstanding under the Line of Credit was $18.6 million and $19.9 million as of September 30, 2015 and December 31, 2014, respectively, and is included in Notes Payable on the consolidated balance sheets.

 

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.

 

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)

 

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 September 30, 2015  Level 1   Level 2   Level 3   Total 
                 
Marketable Securities:                    
Equity Securities, primarily REITs  $1,789   $-   $-   $1,789 
Marco OP and OP II Units   -    38,442    -    38,442 
Corporate Bonds and Preferred Equities   -    35,052    -    35,052 
MBS   -    3,724    -    3,724 
Total  $1,789   $77,218   $-   $79,007 

 

   Fair Value Measurement Using     
As of December 31, 2014  Level 1   Level 2   Level 3   Total 
                 
Marketable Securities:                    
Equity Securities, primarily REITs  $1,772   $-   $-   $1,772 
Marco OP and OP II Units   -    107,842    -    107,842 
Corporate Bonds and Preferred Equities   -    40,648    -    40,648 
MBS   -    4,556    -    4,556 
Total  $1,772   $153,046   $-   $154,818 

 

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

 

5.Mortgages Payable

 

Mortgages payable consists of the following:

 

                  Loan Amount as of 
Property  Interest Rate   Weighted
Average Interest
Rate as of
September 30,
2015
   Maturity Date  Amount Due at
Maturity
   September 30, 2015   December 31, 2014 
                        
Southeastern Michigan Multi-Family Properties   5.96%   5.96%  July 2016  $38,139   $38,585   $39,012 
                             
Oakview Plaza   5.49%   5.49%  January 2017   25,583    26,120    26,425 
                             
Gulf Coast Industrial Portfolio   9.83%   9.83%  Due on demand   50,772    50,772    51,142 
                             
St. Augustine Outlet Center   6.09%   6.09%  April 2016   23,748    24,001    24,364 
                             
Gantry Park   4.48%   4.48%  November 2024   65,317    74,500    74,500 
                             
DePaul Plaza   LIBOR + 2.75%    3.06%  June 2020   13,494    15,398    11,746 
                             
Total mortgages payable        6.10%     $217,053   $229,376   $227,189 

 

Libor as of September 30, 2015 and December 31, 2014 was 0.19% and 0.17%, respectively. The Company’s loans are secured by the indicated real estate and are non-recourse to the Company.

 

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)

 

 The following table shows the contractually scheduled principal maturities of the Company’s mortgage debt during the next five years and thereafter as of September 30, 2015:

 

Remainder of
2015
   2016   2017   2018   2019   Thereafter   Total 
$51,254   $63,151   $25,991   $1,567   $1,621   $85,792   $229,376 

 

Pursuant to the Company’s loan agreements, escrows in the amount of approximately $8.9 million and $11.7 million were held in restricted escrow accounts as of September 30, 2015 and December 31, 2014, 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.

 

On June 1, 2015 the Company entered into a modification of its existing mortgage payable collateralized by DePaul Plaza. The modification increased the original amount of the loan from $13.0 million to $15.5 million, extended the maturity date from September 2017 to June 2020 and reduced the interest rate from Libor plus 3.00% to Libor plus 2.75%. The Company received approximately $3.9 million of net proceeds in connection with the modification.

 

Certain of the Company’s debt agreements require the maintenance of certain ratios, including debt service coverage. The Company 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 by the special servicer 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.  During the third quarter of 2012, the loan was transferred to a special servicer, who discontinued scheduled debt service payments and notified the Company that the loan was in default and although originally due in February 2017 is now due on demand.

 

Although the lender is currently not charging or being paid interest at the stated default rate, the Company is accruing default interest expense pursuant to the terms of the loan agreement. Default interest expense of $0.5 million was accrued for both the three months ended September 31, 2015 and 2014 and default interest expense of $1.6 million was accrued for both the nine months ended September 30, 2015 and 2014. As a result, cumulative accrued default interest expense of approximately $6.6 million and $5.0 million is included in accounts payable, accrued expenses and other liabilities on our consolidated balance sheets as of September 30, 2015 and December 31, 2014, respectively.  Although the Company has had various discussions with the special servicer to restructure the terms of the loan, there can be no assurances that it will be successful in these efforts. However, the Company does not expect to pay any of the accrued default interest expense as this mortgage indebtedness is non-recourse to it.  Additionally, the Company believes the continued loss of excess cash flow from these properties and the special servicer’s placement of the non-recourse mortgage indebtedness in default will not have a material impact on its results of operations or financial position.

 

Additionally, our mortgage loan (outstanding principal balance of $24.0 million as of September 30, 2015) secured by the St. Augustine Outlet Center matures in April 2016 and our mortgage loan (outstanding principal balance of $38.6 million as of September 30, 2015) secured by the Southeastern Michigan Multi-Family Properties matures in July 2016. The Company currently intends to seek to refinance such existing indebtedness prior to its applicable stated maturity. Other than these financings, the Company has no additional significant maturities of mortgage debt over the next 12 months.

 

6.Dispositions

 

Disposition of limited service hotels

 

On January 19, 2015, the Board of Directors of the Company provided approval for the Company to form a joint venture (the “Joint Venture”) with Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a real estate investment trust also sponsored by the Company’s Sponsor and for the Joint Venture to acquire the Company’s membership interests in up to 11 limited service hotels (the “LVP REIT Hotels”) for an aggregate of approximately $122.4 million, plus closing and other third party transaction costs. 

 

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)

  

The 11 limited service hotels consist of the following:

 

· a 151-room limited service hotel which operates as a Courtyard by Marriott (the “Courtyard – Parsippany”) located in Parsippany, New Jersey (wholly owned by the Lightstone REIT since July 30, 2012);
· a 90-room limited service hotel which operates as a Courtyard by Marriott (the “Courtyard - Willoughby”) located in Willoughby, Ohio (wholly owned by the Lightstone REIT since December 3, 2012);
· a 102-room limited service hotel which operates as a Fairfield Inn & Suites by Marriott (the “Fairfield Inn – Des Moines”) located in West Des Moines, Iowa (wholly owned by the Lightstone REIT since December 3, 2012);
· a 97-suite limited service hotel which operates as a SpringHill Suites by Marriott (the “SpringHill Suites - Des Moines”) located in West Des Moines, Iowa (wholly owned by the Lightstone REIT since December 3, 2012);
· a 82-room, Holiday Inn Express Hotel & Suites (the “Holiday Inn Express - Auburn”) located in Auburn, Alabama (wholly owned by the Lightstone REIT since January 18, 2013);
· a 121-room limited service hotel which operates as a Courtyard by Marriott (the “Courtyard - Baton Rouge”) located in Baton Rouge, Louisiana (90% owned by the Lightstone REIT since May 16, 2013);
· a 108-room limited service hotel which operates as a Residence Inn by Marriott (the “Residence Inn - Baton Rouge”) located in Baton Rouge, Louisiana (90% owned by the Lightstone REIT since May 16, 2013);
· a 130-room select service hotel which operates as a Starwood Hotel Group Aloft Hotel (the “Aloft – Rogers”) located in Rogers, Arkansas (wholly owned by the Lightstone REIT since June 18, 2013);
· a 83-room limited service hotel which operates as a Fairfield Inn & Suites by Marriott (the “Fairfield Inn – Jonesboro”) located in Jonesboro, Arkansas (95% owned by the Lightstone REIT since June 18, 2013);
· a 127-room limited service hotel which operates as a Hampton Inn (the “Hampton Inn - Miami”) located in Miami, Florida (wholly owned by the Lightstone REIT since August 30, 2013); and
· a 104-room limited service hotel which operates as a Hampton Inn & Suites (the “Hampton Inn & Suites - Fort Lauderdale”) located in Fort Lauderdale, Florida (wholly owned by the Lightstone REIT since August 30, 2013).

 

On January 29, 2015 the Company, through the Operating Partnership, entered into an agreement to form the Joint Venture with Lightstone II whereby the Company and Lightstone II have 2.5% and 97.5% membership interests in the Joint Venture, respectively. Lightstone II is the managing member. Each member may receive distributions and make future capital contributions based upon its respective ownership percentage, as required. As of September 30, 2015, the Company’s 2.5% membership interest in the Joint Venture was approximately $1.5 million, recorded at cost, and is included in investment in affiliates on the consolidated balance sheet.

 

On January 29, 2015, the Company, through a wholly owned subsidiary of the Operating Partnership, completed the disposition of its 100% memberships interests in a portfolio of five limited service hotels (the “Hotel I Portfolio”) to the Joint Venture for approximately $64.6 million, excluding transaction costs, or approximately $30.5 million, net of $34.1 million of debt which was repaid as part of the transaction, pursuant to five separate contribution agreements entered into with Lightstone II through the Joint Venture.

 

The five limited service hotels included in the Hotel I Portfolio are as follows:

 

·Courtyard – Willoughby
·Fairfield Inn - Des Moines
·SpringHill Suites - Des Moines
·Hampton Inn – Miami
·Hampton Inn & Suites - Fort Lauderdale

 

The Company’s Revolving Credit Facility was paid off upon completion of the disposition of the Hotel I Portfolio.

 

On February 11, 2015, the Company, through a wholly owned subsidiary of its Operating Partnership, completed the disposition of its 100% membership interest in the Courtyard – Parsippany and its 90% membership interest in the Residence Inn - Baton Rouge for approximately $23.4 million, excluding transaction costs, or approximately $12.2 million, net of $11.6 million of debt which was assumed by the subsidiaries of the Joint Venture as part of the transaction, pursuant to two separate contribution agreements, each dated as of February 11, 2015, entered into with Lightstone II through the Joint Venture.

 

The Courtyard – Parsippany Loan and the Residence Inn - Baton Rouge Loan were assumed by the subsidiaries of the Joint Venture as part of the transaction.

 

On June 10, 2015, the Company, through a wholly owned subsidiary of its Operating Partnership, completed the disposition of its (i) 100% membership interest in the Aloft – Rogers, (ii) 95% membership interest in the Fairfield Inn – Jonesboro and (iii) 100% membership interest in the Holiday Inn Express - Auburn for an aggregate acquisition price of approximately $28.0 million, excluding transaction costs, or approximately $12.9 million, net of $15.1 million of debt which was assumed by the subsidiaries of the Joint Venture as part of the transaction, pursuant to three separate contribution agreements, each dated as of June 10, 2015, entered into with Lightstone II through the Joint Venture.

 

16 

 

  

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)

 

The Promissory Note was assumed by the subsidiaries of the Joint Venture as part of the transaction.

 

On June 30, 2015, the Company through a wholly owned subsidiary of its Operating Partnership completed the disposition of its 90% membership interest in the Courtyard - Baton Rouge for an aggregate acquisition price of approximately $7.4 million, excluding closing and other related transaction costs or approximately $1.2 million, net of $6.1 million of debt which was assumed by the subsidiaries of the Joint Venture as part of the transaction, pursuant to a contribution agreements, dated as of June 30, 2015, entered into with Lightstone II through the Joint Venture.

 

The Courtyard – Baton Rouge Loan was assumed by the subsidiaries of the Joint Venture as part of the transaction.

 

The transactions described above represent the complete disposition of the LVP REIT Hotels by the Company previously approved by the Board of Directors. The Company recognized a gain on disposition of approximately $17.3 million, which is included in discontinued operations on the consolidated statements of operations, during the nine months ended September 30, 2015. 

 

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 were 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. The Company recognized a gain on disposition of approximately $1.6 million, which is included in discontinued operations during the nine months ended September 30, 2014.

 

The following summary presents the operating results of the LVP REIT Hotels and Crowe’s Crossing included in discontinued operations in the Consolidated Statements of Operations for the periods indicated.

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
                 
Revenues  $-   $9,416   $8,000   $27,297 
Operating expenses   -    7,476    5,742    21,832 
Operating income   -    1,940    2,258    5,465 
                     
Interest expense and other, net   -    (893)   (849)   (2,857)
Gain on disposition   -    -    17,322    1,610 
Net income from discontinued operations  $-   $1,047   $18,731   $4,218 

 

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

 

17 

 

  

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)

 

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

 

   As of 
   December 31, 2014 
Net investment property  $105,610 
Intangible assets, net   167 
Other assets   5,728 
      
Total assets held for sale  $111,505 
      
Mortgages payable  $67,155 
Accounts payable and accrued expenses   2,905 
Other liabilities   70 
      
Total liabilities held for sale  $70,130 

 

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 anti-dilutive 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. 

 

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

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
Acquisition fees  $-   $23   $8   $82 
Asset management fees   601    712    2,008    2,136 
Property management fees   298    356    880    1,045 
Development fees and leasing commissions   668    39    1,147    444 
Total  $1,567   $1,130   $4,043   $3,707 

 

Lightstone SLP, LLC, an affiliate of the Company’s Sponsor, has purchased subordinated profits interests in the Operating Partnership (“SLP units”) which are included in noncontrolling interests in the consolidated balance sheets. 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.

 

As discussed further in Note 6, the Company entered into a transaction with Lightstone II.

 

During the three and nine months ended September 30, 2015, distributions of $0.5 million and $1.6 million were declared and paid on the SLP units and are part of noncontrolling interests and from inception through September 30, 2015, cumulative distributions declared were $16.6 million, of which $16.0 million were paid.

 

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)

 

Preferred Investments

 

365 Bond Street 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, which were subsequently met during October 2014, 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 “365 Bond Street 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 September 30, 2015 and December 31, 2014, the 365 Bond Street Preferred Investment had a balance of approximately $42.2 million and $36.6 million, respectively and is classified in investments in affiliates on the consolidated balance sheets.  As of September 30, 2015, approximately $2.8 million of additional contributions were unfunded related to the 365 Bond Street Preferred Investment. During the three and nine months ended September 30, 2015, the Company recorded approximately $1.3 million and $3.8 million, respectively, of dividend income related to the 365 Bond Street Preferred Investment, which is included in interest and dividend income on the consolidated statements of operations.

 

40 East End Avenue Preferred Investment

 

On May 14, 2015, the Company entered into an agreement with various related party entities pursuant to which it committed to make contributions of up to $30.0 million, in an affiliate of its Sponsor which owns a parcel of land located at 40 East End Avenue in New York City on which it intends to construct a residential condominium project.  These contributions are made pursuant to an instrument, the “40 East End Avenue Preferred Investment,” that is entitled to monthly preferred distributions at an initial rate of 8% per annum increasing to 12% per annum upon procurement of construction financing, is redeemable at the earlier of six years from the date of the Company’s final contribution or May 14, 2023, and is classified as a held-to-maturity security and is recorded at cost.

 

The Company commenced making contributions during the second quarter of 2015 and as of September 30, 2015 the 40 East End Avenue Preferred Investment had a balance of approximately $28.8 million and is classified in investments in affiliates on the consolidated balance sheets. As of September 30, 2015, approximately $1.2 million of additional contributions were unfunded related to the 40 East End Avenue Preferred Investment. During both the three and nine months ended September 30, 2015, the Company recorded approximately $0.6 million and $0.9 million, respectively, of dividend income related to the 40 East End Avenue Preferred Investment, which is included in interest and dividend income on the consolidated statements of operations.

 

30-02 39th Avenue Preferred Investment

 

On August 14, 2015, the Company entered into certain agreements pursuant to which it committed to make aggregate preferred equity contributions (the “30-02 39th Avenue Preferred Investment”) of up to $50.0 million in various affiliates of its Sponsor which own a parcel of land located at 30-02 39th Avenue in Long Island City, Queens, New York on which they intend to construct a residential apartment project. The 30-02 39th Street Preferred Investment will be made pursuant to instruments that are entitled to monthly preferred distributions between 9% and 12% per annum, is redeemable by the Company six years from the date of the agreements, and is classified as a held-to-maturity security and is recorded at cost.

 

The Company commenced making contributions during the third quarter of 2015 and as of September 30, 2015, the 30-02 39th Avenue Preferred Investment had an outstanding balance of $3.5 million, which is classified in investments in affiliates on the consolidated balance sheet. As of September 30, 2015, an aggregate of $46.5 million of additional contributions were unfunded related to the 30-02 39th Avenue Preferred Investment. During both the three and nine months ended September 30, 2015, the Company recorded approximately $42 of dividend income related to the 30-02 39th Avenue Preferred Investment, which is included in interest and dividend income on the consolidated statements of operations.

 

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.

 

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)

 

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

 

   As of September 30, 2015   As of December 31, 2014 
   Carrying Amount   Estimated Fair
Value
   Carrying Amount   Estimated Fair
Value
 
Mortgages payable  $229,376   $231,062   $227,189   $228,261 

 

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

 

10.Segment Information

 

The Company currently operates in four business segments as of September 30, 2015: (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 nine months ended September 30, 2015 and 2014 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 September 30, 2015 and December 31, 2014. 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, 2014 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 Crowe’s Crossing and the LVP REIT Hotels due to their classification as discontinued operations for all periods presented. The LVP REIT Hotels were previously included in the Company’s Hospitality Segment and Crowe’s Crossing was previously included in the Company’s Retail Segment.

 

Selected results of operations for the three and nine months ended September 30, 2015 and 2014, and total assets as of September 30, 2015 and December 31, 2014 regarding the Company’s operating segments are as follows:

 

   For the Three Months Ended September 30, 2015 
   Retail   Multi-Family   Industrial   Hospitality   Unallocated   Total 
                         
Total revenues  $2,911   $4,367   $1,584   $5,872   $-   $14,734 
                               
Property operating expenses   1,011    1,474    527    4,550    1    7,563 
Real estate taxes   356    265    168    71    -    860 
General and administrative costs   10    49    (3)   85    1,208    1,349 
                               
Net operating income/(loss)   1,534    2,579    892    1,166    (1,209)   4,962 
                               
Depreciation and amortization   1,155    726    401    673    -    2,955 
                               
Operating income/(loss)  $379   $1,853   $491   $493   $(1,209)  $2,007 
                               
As of September 30, 2015:                              
Total Assets  $109,954   $115,957   $50,412   $27,049   $291,641   $595,013 

 

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)

 

   For the Three Months Ended September 30, 2014 
   Retail   Multi-Family   Industrial   Hospitality   Unallocated   Total 
                         
Total revenues  $2,945   $5,282   $1,897   $5,135   $-   $15,259 
                               
Property operating expenses   814    1,733    565    4,064    1    7,177 
Real estate taxes   389    510    204    62    -    1,165 
General and administrative costs   8    56    36    43    1,359    1,502 
                               
Net operating income/(loss)   1,734    2,983    1,092    966    (1,360)   5,415 
                               
Depreciation and amortization   945    867    417    638    -    2,867 
                               
Operating income/(loss)  $789   $2,116   $675   $328   $(1,360)  $2,548 
                               
As of December 31, 2014:                              
Total Assets  $105,343   $127,116   $50,635   $147,572   $243,173   $673,839 

 

   For the Nine Months Ended September 30, 2015 
   Retail   Multi Family   Industrial   Hospitality   Unallocated   Total 
                         
Total revenues  $8,487   $13,016   $4,727   $15,811   $-   $42,041 
                               
Property operating expenses   2,860    4,102    1,452    12,590    2    21,006 
Real estate taxes   1,067    796    475    228    -    2,566 
General and administrative costs   7    131    (50)   236    3,575    3,899 
                               
Net operating income/(loss)   4,553    7,987    2,850    2,757    (3,577)   14,570 
                               
Depreciation and amortization   3,187    2,192    1,205    1,988    -    8,572 
Operating income/(loss)  $1,366   $5,795   $1,645   $769   $(3,577)  $5,998 

 

   For the Nine Months Ended September 30, 2014 
   Retail   Multi Family   Industrial   Hospitality   Unallocated   Total 
                         
Total revenues  $8,498   $15,496   $5,673   $14,394   $-   $44,061 
                               
Property operating expenses   2,441    5,463    1,597    12,035    2    21,538 
Real estate taxes   776    1,190    622    188    -    2,776 
General and administrative costs   7    210    (19)   139    4,232    4,569 
                               
Net operating income/(loss)   5,274    8,633    3,473    2,032    (4,234)   15,178 
                               
Depreciation and amortization   2,970    2,936    1,329    1,900    -    9,135 
Operating income/(loss)  $2,304   $5,697   $2,144   $132   $(4,234)  $6,043 

 

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.

 

In connection with the sale of our indirectly-owned sub-leasehold interest in the office building located at 1407 Broadway, New York, New York, we resolved our previously disclosed litigation with Abraham Kamber Company as sublessor under the sublease, who had served the two notices of default on our predecessor in interest that gave rise to the litigation. Effective March 30, 2015, the litigation was dismissed in its entirety with prejudice. This matter has now been fully disposed of.

 

21 

 

  

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 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.

 

Plaintiff has appealed to the Court of Appeals, which affirmed in part and denied in part, leaving a smaller number of claims available to the Plaintiff. Plaintiff has indicated that it intends to continue to pursue these claims in the trial court. Lightstone has filed a motion of summary judgement on all counts and will continue to 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.

 

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) Grand Prairie Holdings LLC (“GPH”) and Livermore Valley Holdings LLC (“LVH” and collectively, the “Outlet Centers Transaction”). 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 October 15, 2015, the distribution for the three-month period ending September 30, 2015 of approximately $4.5 million was paid in cash. The distribution was paid from cash flows provided from operations.

 

Distribution Declaration

 

On November 13, 2015, the Board authorized and the Company declared a distribution for the three-month period ending December 31, 2015. 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 January 15, 2016 to shareholders of record as of December 31, 2015.

 

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 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.

 

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.

 

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, industrial properties and residential properties comprised of multi-family complexes.

 

23 

 

 

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.

 

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 September 30, 2015

  

Annualized Revenues based

on rents at
September 30, 2015

 

Annualized Revenues per

square foot at September

30, 2015

 
Wholly Owned and Consolidated Real Estate Properties:                        
                         
Retail                        
St. Augustine Outlet Center  St. Augustine, FL  1998   335,467    92.8%  $ 4.1 million  $13.14 
Oakview Plaza  Omaha, NE  1999 - 2005   176,774    87.0%  $ 2.3 million  $14.67 
DePaul Plaza  Bridgeton, MO  1985   187,090    87.5%  $ 1.9 million  $11.73 
      Retail Total   699,331    89.9%        
                         
Industrial                        
7 Flex/Office/Industrial Buildings within the Gulf Coast Industrial Portfolio  New Orleans, LA  1980-2000   339,700    64.1%  $ 2.5 million  $11.53 
4 Flex/Industrial Buildings within the Gulf Coast Industrial Portfolio  San Antonio, TX  1982-1986   484,369    78.8%  $ 1.8 million  $4.60 
3 Flex/Industrial Buildings within the Gulf Coast Industrial Portfolio  Baton Rouge, LA  1985-1987   182,792    72.8%  $ 0.8 million  $6.07 
      Industrial Total   1,006,861    72.7%        
                         
Multi - Family Residential  Location 

Year Built (Range of

years built)

  Leasable Units  

Percentage Occupied as

of September 30, 2015

  

Annualized Revenues based

on rents at
September 30, 2015

 

Annualized Revenues per

unit at September 30, 2015

 
Southeastern Michigan Multi-Family Properties (Four Apartment Buildings)  Southeast  MI  1965-1972   1,017    94.3%  $ 8.3 million  $8,670 
Gantry Park (Multi-Family Apartment Building)  Queens, NY  2013   199    93.5%  $  8.0 million  $43,251 
      Residential Total   1,216    94.2%        
                         
   Location  Year Built 

Year to date

Available Rooms

  

Percentage Occupied as

of September 30, 2015

  

Revenue per Available

Room for the Nine Months

Ended September 30, 2015

 

Average Daily Rate For

the Nine Months Ended

September 30, 2015

 
Hospitality Property:                        
                         
DoubleTree - Danvers  Danvers, Massachusetts  1978   99,099    63.8%  $  80.72  $126.54 

 

Annualized revenue is defined as the minimum monthly payments due as of September 30, 2015 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 September 30, 2015 to our critical accounting policies as reported in our Annual Report on Form 10-K, for the year ended December 31, 2014.

 

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.

 

Property Dispositions

 

In July 2014 we disposed of an industrial property located in Sarasota, Florida (“Sarasota”) and in September 2014 we disposed of 2 multi-family apartment buildings located in Greensboro/Charlotte, North Carolina (the “Camden Multi-Family Properties”). These dispositions did not qualify to be reported as discontinued operations.

 

25 

 

 

For the Three Months Ended September 30, 2015 vs. September 30, 2014

 

Consolidated

 

Revenues

 

Our revenues are comprised of rental revenues, tenant recovery income and other service income. Total revenues decreased by approximately $0.6 million to $14.7 million for the three months ended September 30, 2015 compared to $15.3 million for the same period in 2014. The decrease primarily reflects the property dispositions described above offset by an increase in revenue of approximately $0.7 million in our hospitality segment. See “Segment Results of Operations for the Three Months Ended September 30, 2015 compared to September 30, 2014” for additional information on revenues by segment.

 

Property operating expenses

 

Property operating expenses increased by approximately $0.4 million to $7.6 million for the three months ended September 30, 2015 compared to $7.2 million for the same period in 2014. The increase reflects higher property operating expenses of $0.2 million and $0.5 million in our Retail Segment and Hospitality Segment, respectively, partially offset by the impact resulting from the property dispositions described above.

 

Real estate taxes

 

Real estate taxes decreased by $0.3 million to $0.9 million for the three months ended September 30, 2015 compared to $1.2 million for the same period in 2014. The decrease reflects the dispositions described above.

 

General and administrative costs

 

General and administrative costs decreased by approximately $0.2 million to $1.3 million for the three months ended September 30, 2015 compared to $1.5 million for the same period in 2014. The decrease is primarily attributable to the property dispositions described above.

 

Depreciation and Amortization

 

Depreciation and amortization was relatively flat at $3.0 million for the three months ended September 30, 2015 compared to $2.9 million for the same period in 2014.

 

Interest and dividend income

 

Interest and dividend income decreased by approximately $5.0 million to $3.0 million for the three months ended September 30, 2015 compared to $8.0 million for the same period in 2014. During the third quarter of 2014, we received an aggregate non-recurring special dividend related to our Marco OP Units of $5.7 million. Excluding this special dividend, our interest and dividend income increased by $0.7 million in the 2015 period due to an aggregate $1.2 million increase in dividend income from our investments in affiliates partially offset by a $0.5 million decrease in interest and dividend income on our investments in marketable securities.

 

Interest expense

 

Interest expense, including amortization of deferred financing costs, was relatively flat at $3.8 million for the three months ended September 30, 2015 compared to $3.9 million for the same period in 2014.

 

Gain on disposition of unconsolidated affiliated real estate entities

 

During the third quarter of 2014, we received a final distribution of $4.4 million related to certain final true-ups and adjustments pursuant to the terms of the disposition of their ownership interests in an outlet center located in Grand Prairie, Texas, an outlet center located in Livermore, California and a parcel of land adjacent to the Livermore Outlet Center (the “Livermore Land Parcel” and collectively, the “Outlet Centers Transactions”) , as well as additional consideration for the Livermore Land Parcel and recognized a gain on disposition of unconsolidated affiliated real estate entities in our consolidated statements of operations.

 

Gain on disposition of real estate

 

During the third quarter of 2014 we recognized a gain on disposition of real estate of approximately $11.5 million related to the disposition of the Camden Multi-Family Properties.

 

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 an unconsolidated affiliated real estate entity, which we account for under the equity method of accounting. During the second quarter of 2015 the unconsolidated affiliated real estate entity completed the disposition of its sub-leasehold interest in a ground lease to an office building.

 

26 

 

 

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, and (iii) the ownership interests in 50-01 2nd St Associates LLC (the “2nd Street Joint Venture”) held by our Sponsor and other affiliates. 

 

Segment Results of Operations for the Three Months Ended September 30, 2015 compared to September 30, 2014

 

Retail Segment

 

   For the Three Months Ended September 30,   Variance Increase/(Decrease) 
   2015   2014   $   % 
   (unaudited)         
Revenues  $2,911   $2,945   $(34)   -1.2%
NOI   1,534    1,734    (200)   -11.5%
Average Occupancy Rate for period   88.8%   82.4%        6.4%

 

The following table represents lease expirations for the Retail Segment as of September 30, 2015:

 

Lease
Expiration
Year
  Number of
Expiring
Leases
   Gross Leaseable
Area "GLA" of
Expiring Leases
(Sq. Ft.)
   Annualized Base
Rent of Expiring
Leases ($)
   Percent of
Total GLA
   Percent of Total
Annualized
Base Rent
 
2015   5    19,271    208,640    3.4%   2.7%
2016   14    60,925    778,500    10.6%   10.0%
2017   5    10,854    168,345    1.9%   2.2%
2018   11    81,371    1,435,813    14.2%   18.4%
2019   16    72,207    1,400,672    12.6%   18.0%
2020   11    204,457    2,276,321    35.6%   29.1%
2021   2    18,764    254,032    3.3%   3.3%
2022   1    4,800    75,600    0.8%   1.0%
2023   1    28,000    479,920    4.9%   6.2%
2024   1    1,163    50,311    0.2%   0.6%
Thereafter   6    71,854    665,173    12.5%   8.5%
    73    573,666    7,793,327    100.0%   100.0%

 

Revenues decreased slightly and NOI decreased for the three months ended September 30, 2015 compared to the same period in 2014 primarily as a result of an increase in real estate taxes and property operating expenses during the 2015 period.

 

Multi-Family Residential Segment

 

   For the Three Months Ended September 30,   Variance Increase/(Decrease) 
   2015   2014   $   % 
   (unaudited)         
Revenues  $4,367   $5,282   $(915)   -17.3%
NOI   2,579    2,983    (404)   -13.5%
Average Occupancy Rate for period   94.6%   95.1%        -0.5%

 

Revenues and NOI decreased for the three months ended September 30, 2015 compared to the same period in 2014 primarily as a result of the disposal of the Camden Multi-Family Properties on September 30, 2014.

 

27 

 

 

Industrial Segment

 

   For the Three Months Ended September 30,   Variance Increase/(Decrease) 
   2015   2014   $   % 
   (unaudited)         
Revenues  $1,584   $1,897   $(313)   -16.5%
NOI   892    1,092    (200)   -18.3%
Average Occupancy Rate for period   74.0%   83.5%        -9.5%

 

The following table represents lease expirations for our Industrial Segment as of September 30, 2015:

 

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
 
2015   13    150,961    40,018    20.6%   0.9%
2016   34    217,195    1,316,444    29.7%   31.1%
2017   22    106,951    645,442    14.6%   15.2%
2018   19    149,503    1,184,382    20.4%   27.9%
2019   3    20,448    105,435    2.8%   2.5%
2020   9    87,361    950,868    11.9%   22.4%
Thereafter   -    -    -    0.0%   0.0%
    100    732,419    4,242,589    100.0%   100.0%

 

Revenues and NOI decreased for the three months ended September 30, 2015 compared to the same period in 2014 primarily as a result of the disposal of an industrial property located in Sarasota, Florida (“Sarasota”) on July 31, 2014 and the lower average occupancy rate of the remaining properties.

 

Hospitality Segment

 

   For the Three Months Ended September 30,   Variance Increase/(Decrease) 
   2015   2014   $   % 
   (unaudited)         
Revenues  $5,872   $5,135   $737    14.4%
NOI   1,166    966    200    20.7%
Average Occupancy Rate for period   82.4%   76.2%        6.2%
Rev PAR  $106.61   $88.69   $17.92    20.2%

 

Revenue and NOI increased the three months ended September 30, 2015 compared to the same period in 2014 as a result of increased average occupancy and average revenue per room over the same periods.

 

For the Nine Months Ended September 30, 2015 vs. September 30, 2014

 

Consolidated

 

Revenues

 

Our revenues are comprised of rental revenues, tenant recovery income and other service income. Total revenues decreased by approximately $2.0 million to $42.0 million for the nine months ended September 30, 2015 compared to $44.0 million for the same period in 2014. The decrease reflects the property dispositions described above partially offset by an increase of approximately $1.4 million in our Hospitality Segment. See “Segment Results of Operations for the Nine Months Ended September 30, 2015 compared to September 30, 2014” for additional information on revenues by segment.

 

28 

 

 

Property operating expenses

 

Property operating expenses decreased by approximately $0.5 million to $21.0 million for the nine months ended September 30, 2015 compared to $21.5 million for the same period in 2014. The decrease reflects the property dispositions described above partially offset by increases of approximately $0.5 million and $0.6 million in our Retail Segment and Hospitality Segment, respectively.

 

Real estate taxes

 

Real estate taxes decreased by $0.2 million to $2.6 million for the nine months ended September 30, 2015 compared to $2.8 million for the same period in 2014. The decrease reflects the dispositions described above partially offset by an increase of $0.3 million in our Retail Segment.

 

General and administrative costs

 

General and administrative costs decreased by approximately $0.7 million to $3.9 million for the nine months ended September 30, 2015 compared to $4.6 million for the same period in 2014. The decrease is primarily attributable to the property disposition described above.

 

Depreciation and Amortization

 

Depreciation and amortization expense decreased by approximately $0.5 million to $8.6 million for the nine months ended September 30, 2015 compared to $9.1 million for the same period in 2014. The decrease is primarily attributable to the property disposition described above.

 

Interest and dividend income

 

Interest and dividend income decreased by approximately $3.3 million to $8.2 million for the nine months ended September 30, 2015 compared to $11.5 million for the same period in 2014. During the third quarter of 2014, we received an aggregate non-recurring special dividend related to our Marco OP Units of $5.7 million. Excluding this special dividend, our interest and dividend income increased by $2.4 million in the 2015 period due to an aggregate $3.6 million increase in dividend income on to our investments in affiliates partially offset by a $1.2 million decrease in interest and dividend income on our investments in marketable securities.

 

Interest expense

 

Interest expense, including amortization of deferred financing costs, was relatively flat at $11.4 million for the nine months ended September 30, 2015 compared to $11.8 million for the same period in 2014.

 

Gain on disposition of unconsolidated affiliated real estate entities

 

During the third quarter of 2014, we received a final distribution of $4.4 million related to certain final true-ups and adjustments pursuant to the terms of the Outlet Centers Transactions, as well as additional consideration for the Livermore Land Parcel and recognized a gain on disposition of unconsolidated affiliated real estate entities in our consolidated statements of operations.

 

Gain on disposition of real estate

 

During the third quarter of 2014 we recognized a gain on disposition of real estate of approximately $11.5 million related to the disposition of the Camden Multi-Family Properties and 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.

 

Gain on sale of marketable securities

 

Gain on sale of marketable securities increased by approximately $33.3 million to a gain of $34.7 million for the nine months ended September 30, 2015 compared to a gain of $1.4 million for the same period in 2014. During the nine months ended September 30, 2015 we recognized an aggregate gain on sale of marketable securities of approximately $34.4 million primarily attributable to the redemption of an aggregate of approximately 383,000 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 an unconsolidated affiliated real estate entity, which we account for under the equity method of accounting. Our income from investment in unconsolidated affiliated real estate entity was $5.8 million during the nine months ended September 30, 2015 compared to a $0.3 million during the same period in 2014. The income for the nine months ended September 30, 2015 was primarily the result of the Company’s portion of the gain that resulted when the unconsolidated affiliated real estate entity completed the disposition of its sub-leasehold interest in a ground lease to an office building.

 

29 

 

 

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, and (iii) the ownership interests in 50-01 2nd St Associates LLC (the “2nd Street Joint Venture”) held by our Sponsor and other affiliates. 

 

Segment Results of Operations for the Nine Months Ended September 30, 2015 compared to September 30, 2014

 

Retail Segment

 

   For the Nine Months Ended September 30,   Variance Increase/(Decrease) 
   2015   2014   $   % 
   (unaudited)         
Revenues  $8,487   $8,498   $(11)   -0.1%
NOI   4,553    5,274    (721)   -13.7%
Average Occupancy Rate for period   84.8%   83.4%        1.4%

 

Revenues were flat and NOI decreased for the nine months ended September 30, 2015 compared to the same period in 2014 primarily as a result of an increase in real estate taxes and property operating expenses during the 2015 period.

 

Multi-Family Residential Segment

 

   For the Nine Months Ended September 30,   Variance Increase/(Decrease) 
   2015   2014   $   % 
   (unaudited)         
Revenues  $13,016   $15,496   $(2,480)   -16.0%
NOI   7,987    8,633    (646)   -7.5%
Average Occupancy Rate for period   94.8%   94.9%        -0.1%

 

Revenues and NOI decreased for the nine months ended September 30, 2015 compared to the same period in 2014 primarily as a result of the disposal of the Camden Multi-Family Properties on September 30, 2014.

 

Industrial Segment

 

   For the Nine Months Ended September 30,   Variance Increase/(Decrease) 
   2015   2014   $   % 
   (unaudited)         
Revenues  $4,727   $5,673   $(946)   -16.7%
NOI   2,850    3,473    (623)   -17.9%
Average Occupancy Rate for period   75.4%   85.0%        -9.6%

 

Revenues and NOI decreased for the nine months ended September 30, 2015 compared to the same period in 2014 primarily as a result of the disposal of an industrial property located in Sarasota, Florida (“Sarasota”) on July 31, 2014 and the lower average occupancy rate of the remaining properties.

 

30 

 

 

Hospitality Segment

 

   For the Nine Months Ended September 30,   Variance Increase/(Decrease) 
   2015   2014   $   % 
   (unaudited)         
Revenues  $15,811   $14,394   $1,417    9.8%
NOI   2,757    2,032    725    35.7%
Average Occupancy Rate for period   63.8%   58.9%        4.9%
Rev PAR  $80.72   $67.97   $12.75    18.8%

 

Revenue and NOI increased the nine months ended September 30, 2015 compared to the same period in 2014 as a result of increased average occupancy and average revenue per room over the same periods.

 

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 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 $229.4 million of outstanding mortgage debt and an $18.6 million outstanding under a line of credit. 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 September 30, 2015, our total borrowings of $248.0 million represented 66% 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.

 

31 

 

 

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 September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
Acquisition fees  $-   $23   $8   $82 
Asset management fees   601    712    2,008    2,136 
Property management fees   298    356    880    1,045 
Development fees and leasing commissions   668    39    1,147    444 
Total  $1,567   $1,130   $4,043   $3,707 

 

As of September 30, 2015, we had approximately $135.8 million of cash and cash equivalents on hand and $79.0 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 Nine Months Ended September 30, 
   2015   2014 
   (unaudited) 
Cash flows provided by operating activities  $16,310   $25,824 
Cash flows provided by investing activities   135,622    34,501 
Cash flows used in financing activities   (70,668)   (54,175)
Net change in cash and cash equivalents   81,264    6,150 
           
Cash and cash equivalents, beginning of the period   54,529    52,899 
Cash and cash equivalents, end of the period  $135,793   $59,049 

 

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.

 

Operating activities

 

Net cash flows provided by operating activities of $16.3 million for the nine months ended September 30, 2015 consists of the following:

 

·cash inflows of approximately $12.4 million from our net income from continuing operations after adjustment for non-cash items;

 

·cash inflows of approximately $2.6 million associated with the net changes in operating assets and liabilities and

 

·cash inflows of approximately $1.3 million from discontinued operations.

 

32 

 

 

Investing activities

 

The net cash provided by investing activities of $135.6 million for the nine months ended September 30, 2015 consists primarily of the following:

 

·purchases of investment property of approximately $5.0 million;

 

·funds released from restricted escrows of approximately $0.5 million;

 

·aggregate preferred equity contributions in our affiliate 365 Bond Street, 40 East End Avenue and 30-02 39th Avenue of $39.3 million;

 

·net proceeds from the sale and purchase of marketable securities of $73.1 million;

 

·distributions from our investment in 1407 Broadway of $15.2 million;

 

·contributions of $1.6 million to our Joint Venture with Lightstone II and

 

·cash inflows of approximately $92.4 million from discontinued operations, consisting primarily of net proceeds from the sale of the LVP REIT Hotels.

 

Financing activities

 

The net cash used by financing activities of approximately $70.7 million for the nine months ended September 30, 2015 is primarily related to the following:

 

·distributions to our common shareholders of $12.1 million

 

·redemptions and cancellation of common stock and noncontrolling interests of $2.2 million;

 

·distributions to our noncontrolling interests of $4.4 million;

 

·net proceeds from mortgages payable of $2.2 million;

 

·net payments on our notes payable of $20.0 million and

 

·cash outflows of approximately $34.3 million from discontinued operations, consisting primarily of repayment of mortgage indebtedness in connection with disposition of the LVP REIT Hotels.

 

Preferred Investments

 

365 Bond Street Preferred Investment

 

On March 7, 2014, we entered into an agreement with various related party entities pursuant to which we 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, which were subsequently met during October 2014, in an affiliate of our 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 “365 Bond Street Preferred Investment,” that is entitled to monthly preferred distributions at a rate of 12% per annum, is redeemable by us upon the occurrence of certain events, is classified as a held-to-maturity security and is recorded at cost. We commenced making contributions during the second quarter of 2014 and as of September 30, 2015, the 365 Bond Street Preferred Investment had a balance of approximately $42.2 million and is classified in investments in affiliates on the consolidated balance sheets. As of September 30, 2015, approximately $2.8 million of additional contributions were unfunded related to the 365 Bond Street Preferred Investment.

 

33 

 

 

40 East End Avenue Preferred Investment

 

On May 14, 2015, we entered into an agreement with various related party entities pursuant to which we committed to make contributions of up to $30.0 million, in an affiliate of our Sponsor which owns a parcel of land located at 40 East End Avenue in New York City on which it intends to construct a residential condominium project.  These contributions are made pursuant to an instrument, the “40 East End Avenue Preferred Investment,” that is entitled to monthly preferred distributions at an initial rate of 8% per annum increasing to 12% per annum upon procurement of construction financing, is redeemable at the earlier of six years from the date of the Company’s final contribution or May 14, 2023, and is classified as a held-to-maturity security and is recorded at cost. We commenced making contributions during the second quarter of 2015 and as of September 30, 2015 the 40 East End Avenue Preferred Investment had a balance of approximately $28.8 million and is classified in investments in affiliates on the consolidated balance sheets.  As of September 30, 2015, approximately $1.2 million of additional contributions were unfunded related to the 40 East End Avenue Preferred Investment.

 

30-02 39th Avenue Preferred Investment

 

On August 14, 2015, the Company entered into certain agreements pursuant to which it committed to make aggregate preferred equity contributions (the “30-02 39th Avenue Preferred Investment”) of up to $50.0 million in various affiliates of its Sponsor which own a parcel of land located at 30-02 39th Avenue in Long Island City, Queens, New York on which they intend to construct a residential apartment project. The 30-02 39th Street Preferred Investment will be made pursuant to instruments that are entitled to monthly preferred distributions between 9% and 12% per annum, is redeemable by the Company six years from the date of the agreements, and is classified as a held-to-maturity security and is recorded at cost. We commenced making contributions during the third quarter of 2015 and as of September 30, 2015, the 30-02 39th Avenue Preferred Investment had an outstanding balance of $3.5 million, which is classified in investments in affiliates on the consolidated balance sheet. As of September 30, 2015, an aggregate of $46.5 million of additional contributions were unfunded related to the 30-02 39th Avenue Preferred Investment.

 

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. On January 19, 2015, the Board of Directors suspended the Company’s DRIP effective April 15, 2015. For so long as the DRIP remains suspended, all future distributions will be in the form of cash.

 

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.

 

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 September 30, 2015.

 

Contractual
Obligations
  Remainder of 2015   2016   2017   2018   2019   Thereafter   Total 
Mortgage Payable  $51,254   $63,151    25,991   $1,567   $1,621   $85,792   $229,376 
Interest Payments1   2,269    7,128    3,944    3,787    3,721    15,766    36,615 
                                    
Total Contractual Obligations  $53,523   $70,279   $29,935   $5,354   $5,342   $101,558   $265,991 

 

1)The debt associated with the Gulf Coast Industrial Portfolio was placed in default by the special service and is due on demand and therefore no future interest payments on this debt are included in these amounts.

 

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 by the special servicer 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.  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 although originally due in February 2017 is now due on demand.

 

34 

 

 

Although the lender is currently not charging or being paid interest at the stated default rate, we are accruing default interest expense pursuant to the terms of the loan agreement. Default interest expense of $0.5 million and was accrued for both the three months ended September 31, 2015 and 2014 and default interest expense of $1.6 million and was accrued for both the nine months ended September 30, 2015 and 2014. As a result, cumulative accrued default interest expense of approximately $6.6 million and $5.0 million is included in accounts payable, accrued expenses and other liabilities on our consolidated balance sheets as of September 30, 2015 and December 31, 2014, respectively.  Although we have had various discussions with the special servicer to restructure the terms of the loan, there can be no assurances that we will be successful in these efforts. However, we do not expect to pay any of the accrued default interest expense as this mortgage indebtedness is non-recourse to us.  Additionally, we believe the continued loss of excess cash flow from these properties and the special servicer’s placement of the non-recourse mortgage indebtedness in default will not have a material impact on our results of operations or financial position.

 

Additionally, our mortgage loan (outstanding principal balance of $24.0 million as of September 30, 2015) secured by the St. Augustine Outlet Center matures in April 2016 and our mortgage loan (outstanding principal balance of $38.6 million as of September 30, 2015) secured by the Southeastern Michigan Multi-Family Properties matures in July 2016. We currently intend to seek to refinance such existing indebtedness prior to its applicable stated maturity. Other than these financings, we have no additional significant maturities of mortgage debt over the next 12 months.

 

Notes Payable

 

Margin Loan

 

We have access to a margin loan (the “Margin Loan”) from a financial institution that holds custody of certain of our marketable securities. The Margin Loan, which is due on demand, bears interest at Libor plus 0.85% (1.04% as of September 30, 2015) and is collateralized by the marketable securities in our account. The amounts available to us under the Margin Loan are at the discretion of the financial institution and not limited to the amount of collateral in our account. There were no amounts outstanding under the Margin Loan as of September 30, 2015.

 

Line of Credit

 

On September 14, 2012, we 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 June 19, 2016 and bears interest at Libor plus 3.00% (3.19% as of September 30, 2015). The Line of Credit is collateralized by approximately 159,000 Marco OP Units and PRO guaranteed the Line of Credit. The amount outstanding under the Line of Credit was $18.6 million as of September 30, 2015 and is included in Notes Payable on the consolidated balance sheets.

 

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.

 

35 

 

 

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

 

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

 

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

 

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

 

36 

 

 

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

 

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

 

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

 

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

 

37 

 

 

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

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30, 2015   September 30, 2014   September 30, 2015   September 30, 2014 
Net income  $1,160   $24,467   $62,759   $26,204 
FFO adjustments:                    
Depreciation and amortization:                    
Depreciation and amortization of real estate assets   2,955    2,867    8,572    9,135 
Equity in depreciation and amortization for unconsolidated affiliated real estate entities   -    886    1,295    2,557 
Adjustments to equity in earnings from unconsolidated entities, net   -    -    (6,097)   - 
Gain on disposal of investment property   -    (11,483)   -    (9,129)
Gain on disposal of unconsolidated affiliated real estate entities   -    (4,418)   -    (4,418)
Discontinued operations:                    
Gain on disposal of investment property   -    -    (17,547)   (1,722)
Depreciation and amortization of real estate assets   -    1,139    -    3,060 
                     
FFO   4,115    13,458    48,982    25,687 
MFFO adjustments:                    
Other Adjustment                    
Acquisition and other transaction related costs expensed(1)   -    29    (45)   136 
Amortization of above or below market leases and liabilities(2)   (39)   (75)   (164)   (182)
Loss on debt extinguishment   -    -    600    112 
Mark-to-market adjustments(3)   255    (159)   719    391 
Non-recurring (losses)/gains from extinguishment/sale of debt, derivatives or securities holdings(4)   -    -    -    - 
(Gain)/loss on sale of marketable securities   12    (207)   (34,728)   (1,367)
                     
MFFO   4,343    13,046    15,364    24,777 
Straight-line rent(5)  $16   $(310)  $(339)  $(332)
MFFO - IPA recommended format(6)  $4,359   $12,736   $15,025   $24,445 
                     
Net ncome  $1,160   $24,467   $62,759   $26,204 
Less: loss attributable to noncontrolling interests   (265)   (1,342)   (4,359)   (1,718)
Net income applicable to company's common shares  $895   $23,125   $58,400   $24,486 
Net income per common share, basic and diluted  $0.03   $0.90   $2.26   $0.95 
                     
FFO  $4,115   $13,458   $48,982   $25,687 
Less: FFO attributable to noncontrolling interests   (481)   (1,071)   (4,617)   (2,134)
FFO attributable to company's common shares  $3,634   $12,387   $44,365   $23,553 
FFO per common share, basic and diluted  $0.14   $0.48   $1.71   $0.91 
                     
MFFO - IPA recommended format  $4,359   $12,736   $15,025   $24,445 
Less: MFFO attributable to noncontrolling interests   (480)   (1,117)   (1,491)   (2,272)
MFFO attributable to company's common shares  $3,879   $11,619   $13,534   $22,173 
                     
Weighted average number of common shares outstanding, basic and diluted   25,793    25,785    25,874    25,772 

 

Notes:

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

 

38 

 

 

(2)Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.
(3)Management believes that adjusting for mark-to-market adjustments is appropriate because they are nonrecurring items that may not be reflective of ongoing operations and reflects unrealized impacts on value based only on then current market conditions, although they may be based upon current operational issues related to an individual property or industry or general market conditions. Mark-to-market adjustments are made for items such as ineffective derivative instruments, certain marketable securities and any other items that GAAP requires we make a mark-to-market adjustment for. The need to reflect mark-to-market adjustments is a continuous process and is analyzed on a quarterly and/or annual basis in accordance with GAAP.
(4)Management believes that adjusting for gains or losses related to extinguishment/sale of debt, derivatives or securities holdings is appropriate because they are items that may not be reflective of ongoing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods.
(5)Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance.
(6)Our MFFO results include certain unusual items as set forth in the table below. We believe it is helpful to our investors in understanding our operating results to both highlight them and present adjusted MFFO excluding their impact (as shown below).

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30, 2015   September 30, 2014   September 30, 2015   September 30, 2014 
Gulf Coast Industrial Portfolio - Default interest expense(a)  $(519)  $(530)  $(1,546)  $(1,572)
Special dividend on Marco OP Units(b)   -    5,685    -    5,685 
Total before allocations to noncontrolling interests   (519)   5,155    (1,546)   4,113 
Allocations to noncontrolling interests   10    (498)   30    (478)
Total after allocations to noncontrolling interests  $(509)  $4,657   $(1,516)  $3,635 

 

(a)Represents default interest expense on our non-recourse mortgage loan collateralized by our Gulf Coast Industrial Portfolio. Although the lender is currently not charging us or being paid interest at the stated default rate, we have accrued interest at the default rate pursuant to the terms of the loan agreement. Additionally, we have had various discussions with the special servicer to restructure the terms of the non-recourse mortgage loan and do not expect to pay any of the default interest.
(b)Represent the aggregate special dividend received on our Marco OP Units during the third quarter of 2014.

 

Excluding the impact of these unusual items from our MFFO, after taking into consideration allocations to noncontrolling interests, our adjusted MFFO would have been $4,388 and $6,962 for the three months ended September 31, 2015 and 2014, respectively and $15,050 and $18,538 for the nine months ended September 31, 2015 and 2014, respectively.

 

The table below presents our cumulative distributions paid and cumulative FFO attributable to the Company’s common shares:

 

   From inception through 
   September 30, 2015 
     
FFO attributable to  Company’s common shares  $151,225 
Distributions  $158,610 

 

Sources of Distribution

 

The amount of distributions paid to our stockholders in the future will be determined by our Board and is dependent on a number of factors, including funds available for payment of dividends, our financial condition, capital expenditure requirements and annual distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code.

 

The following table provides a summary of the quarterly distribution declared and the source of distribution based upon cash flows provided by operations:

 

39 

 

 

   Year to Date September 30, 2015   Three Months Ended September 30, 2015   Three Months Ended June 30, 2015   Three Months Ended March 31, 2015 
Distribution period:      Percentage of
Distributions
   Q3 2015   Percentage of
Distributions
   Q2 2015   Percentage of
Distributions
   Q1 2015   Percentage of
Distributions
 
                                 
Date distribution declared             August 14, 2015         May 13, 2015         March 27, 2015      
                                         
Date distribution paid             October 15, 2015         July 15, 2015         April 15, 2015      
                                         
Distributions paid  $13,549        $4,548        $4,522        $4,479      
Distributions reinvested   -         -         -         -      
Total Distributions  $13,549        $4,548        $4,522        $4,479      
                                         
Source of distributions:                                        
Cash flows provided by operations  $13,549    100%  $4,548    100%  $4,522    100%  $4,479    100%
Offering proceeds   -    -    -    -    -    -    -    0%
Proceeds from issuance of common stock through DRIP   -    -    -    -    -    -    -    0%
Total Sources  $13,549    100%  $4,548    100%  $4,522    100%  $4,479    100%
                                         
Cash flows provided by operations (GAAP basis)  $16,310        $6,306        $5,180        $4,824      
                                         
Number of shares (in thousands) of common stock issued pursuant to the Company's DRIP   -         -         -         -      

 

   Year to Date September 30, 2014   Three Months Ended September 30, 2014   Three Months Ended June 30, 2014   Three Months Ended March 31, 2014 
Distribution period:      Percentage of
Distributions
   Q2 2015   Percentage of
Distributions
   Q2 2015   Percentage of
Distributions
   Q1 2015   Percentage of
Distributions
 
                                 
Date distribution declared             August 8, 2015         May 14, 2014         March 28, 2014      
                                         
Date distribution paid             October 15, 2015         July 15, 2014         April 15, 2014      
                                         
Distributions paid  $9,208        $3,100        $3,075        $3,033      
Distributions reinvested   4,290         1,452         1,428         1,410      
Total Distributions  $13,498        $4,552        $4,503        $4,443      
                                         
Source of distributions:                                        
Cash flows provided by operations  $9,208    68%  $3,100    68%  $3,075    68%  $3,033    68%
Offering proceeds   -    -    -    -    -    -    -    0%
Proceeds from issuance of common stock through DRIP   4,290    32%   1,452    32%   1,428    32%   1,410    32%
Total Sources  $13,498    100%  $4,552    100%  $4,503    100%  $4,443    100%
                                         
Cash flows provided by operations (GAAP basis)  $25,824        $12,795        $7,543        $5,486      
                                         
Number of shares (in thousands) of common stock issued pursuant to the Company's DRIP   383         130         127         126      

 

New Accounting Pronouncements

 

See Note 2 to the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been adopted during 2015 and certain accounting standards that we have not yet been required to implement and may be applicable to our future operations.

 

Subsequent Events

 

See Note 12 of the Notes to Consolidated Financial Statements for further information related to subsequent events during the period from October 1, 2015 through the date of this filing.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

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

 

We may be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund the expansion and refinancing of our real estate investment portfolio and operations. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes. As of September 30, 2015, we had one interest rate swap with an insignificant intrinsic value.

 

As of September 30, 2015, we held various marketable securities with a fair value of approximately $79.0 million, which are available for sale for general investment return purposes. We regularly review the market prices of these investments for impairment purposes. As of September 30, 2015, a hypothetical adverse 10% movement in market values would result in a hypothetical loss in fair value of approximately $7.9 million.

 

40 

 

 

The following table shows the contractually scheduled principal maturities of our mortgage debt during the next five years and thereafter as of September 30, 2015:

 

Remainder of
2015
   2016   2017   2018   2019   Thereafter   Total 
$51,254   $63,151   $25,991   $1,567   $1,621   $85,792   $229,376 

 

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 of the Company’s mortgage debt is summarized as follows:

 

   As of September 30, 2015   As of December 31, 2014 
   Carrying Amount  

Estimated Fair

Value

   Carrying Amount  

Estimated Fair

Value

 
Mortgages payable  $229,376   $231,062   $227,189   $228,261 

 

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

 

In addition to changes in interest rates, the value of our real estate and real estate related investments is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of lessees, which may affect our ability to refinance our debt if necessary.

 

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

 

ITEM 4. CONTROLS AND PROCEDURES.

 

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

 

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

 

PART II. OTHER INFORMATION:

ITEM 1. LEGAL PROCEEDINGS

 

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

 

In connection with the sale of our indirectly-owned sub-leasehold interest in the office building located at 1407 Broadway, New York, New York, we resolved our previously disclosed litigation with Abraham Kamber Company as sublessor under the sublease, who had served the two notices of default on our predecessor in interest that gave rise to the litigation. Effective March 30, 2015, the litigation was dismissed in its entirety with prejudice. This matter has now been fully disposed of.

 

41 

 

 

On July 13, 2011, JF Capital Advisors, filed a lawsuit against The Lightstone Group, LLC, us 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.

 

Plaintiff has appealed to the Court of Appeals, which affirmed in part and denied in part, leaving a smaller number of claims available to the Plaintiff. Plaintiff has indicated that it intends to continue to pursue these claims in the trial court. Lightstone has filed a motion of summary judgement on all counts and will continue to 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, we are not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss.

 

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

 

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

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit

Number

 

 

Description

     
31.1*   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2*   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15 d-14(a) of the Securities Exchange Act, as amended.
32.1*   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
32.2*   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
101*   XBRL (eXtensible Business Reporting Language). The following financial information from Lightstone Value Plus Real Estate Investment Trust, Inc. on Form 10-Q for the quarter ended September 30, 2015, filed with the SEC on November 13, 2015, formatted in XBRL includes: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Operations, (3) Consolidated Statements of Comprehensive Income, (4) Consolidated Statements of Stockholders’ Equity, (5) Consolidated Statements of Cash Flows and (6) the Notes to the Consolidated Financial Statement.

 

*Filed herewith

 

42 

 

 

SIGNATURES

 

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

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE

INVESTMENT TRUST, INC.

   
Date:     November 13, 2015 By:   /s/ David Lichtenstein
  David Lichtenstein
  Chairman and Chief Executive Officer
  (Principal Executive Officer)

 

Date:     November 13, 2015 By:   /s/ Donna Brandin
  Donna Brandin
  Chief Financial Officer and Treasurer
  (Duly Authorized Officer and Principal Financial and
  Accounting Officer)

 

43