Attached files
| file | filename |
|---|---|
| EX-31.2 - EXHIBIT 31.2 - Lightstone Value Plus Real Estate Investment Trust, Inc. | v433527_ex31-2.htm |
| EX-32.1 - EXHIBIT 32.1 - Lightstone Value Plus Real Estate Investment Trust, Inc. | v433527_ex32-1.htm |
| EX-21.1 - EXHIBIT 21.1 - Lightstone Value Plus Real Estate Investment Trust, Inc. | v433527_ex21-1.htm |
| EX-32.2 - EXHIBIT 32.2 - Lightstone Value Plus Real Estate Investment Trust, Inc. | v433527_ex32-2.htm |
| EX-31.1 - EXHIBIT 31.1 - Lightstone Value Plus Real Estate Investment Trust, Inc. | v433527_ex31-1.htm |
| EX-23.1 - EXHIBIT 23.1 - Lightstone Value Plus Real Estate Investment Trust, Inc. | v433527_ex23-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For The Fiscal Year Ended December 31, 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 333-117367
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Maryland | 20-1237795 |
| (State or other jurisdiction | (I.R.S. Employer Identification No.) |
| of incorporation or organization) |
| 1985 Cedar Bridge Avenue, Suite 1, Lakewood, NJ | 08701 |
| (Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: 732-367-0129
Securities registered under Section 12(b) of the Exchange Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
| None | None |
Securities registered under Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There is no established market for the Registrant’s common shares. As of June 30, 2015, the last business day of the most recently completed second quarter, there were 25.8 million shares of the registrant’s common stock held by non-affiliates of the registrant. On March 22, 2016 the board of directors of the Registrant approved an estimated value per share of the Registrant’s common stock of $11.80 per share (after allocations to the holder of subordinated profits interests in our operating partnership) derived from the estimated value of the Registrant’s assets less the estimated value of the Registrant’s liabilities, divided by the number of shares outstanding, all as of September 30, 2015. For a full description of the methodologies used to value the Registrant’s assets and liabilities in connection with the calculation of the estimated value per share, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information.” As of March 15, 2016, there were 25.5 million shares of common stock held by non-affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
None.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
Table of Contents
| 1 |
Special Note Regarding Forward-Looking Statements
This annual report on Form 10-K, together with other statements and information publicly disseminated by Lightstone Value Plus Real Estate Investment Trust, Inc. (the “Lightstone REIT”) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Lightstone REIT intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Lightstone REIT ’s future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond the Lightstone REIT’s control and which could materially affect actual results, performances or achievements. Factors which may cause actual results to differ materially from current expectations include, but are not limited to, (i) general economic and local real estate conditions, (ii) the inability of major tenants to continue paying their rent obligations due to bankruptcy, insolvency or general downturn in their business, (iii) financing risks, such as the inability to obtain equity, debt, or other sources of financing on favorable terms, (iv) changes in governmental laws and regulations, (v) the level and volatility of interest rates and foreign currency exchange rates, (vi) the availability of suitable acquisition opportunities and (vii) increases in operating costs. Accordingly, there is no assurance that the Lightstone REIT’s expectations will be realized.
All forward-looking statements should be read in light of the factors identified herein at Part 1, Item 1A as well as in the “Risk Factors” section of the Registration Statement on Form S-11 (File No. 333-117367) of the Lightstone REIT filed with the Securities and Exchange Commission (the “SEC”), as the same may be amended and supplemented from time to time.
General Description of Business
Structure
The Lightstone REIT is a Maryland corporation, formed on June 8, 2004 and subsequently qualified as a real estate investment trust (“REIT”) during year ending December 31, 2006. The 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.
The Lightstone REIT is structured as an umbrella partnership real estate investment trust, (“UPREIT”), and substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT, L.P. (the “Operating Partnership”), a Delaware limited partnership formed on July 12, 2004. The Lightstone REIT as the general partner, held a 98% interest in the Operating Partnership as of December 31, 2015 (See Noncontrolling Interests below for discussion of other owners of the Operating Partnership).
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 in this annual report refers to the Lightstone REIT, its Operating Partnership or the Company as required by the context in which such pronoun is used.
The Lightstone REIT is managed by Lightstone Value Plus REIT, LLC (the “Advisor”), an affiliate of The Lightstone Group (the “Sponsor”), under the terms and conditions of an advisory agreement. The Sponsor and Advisor are majority owned and controlled by David Lichtenstein, the Chairman of our Board of Directors and its Chief Executive Officer.
We own and manage a diversified (by geographical location and by type and size of property) portfolio of commercial and residential properties located throughout the United States. We have acquired fee interests in multi-tenant, community, power and lifestyle shopping centers, and in malls located in highly trafficked retail corridors, high-barrier to entry markets, and sub-markets with constraints on the amount of additional property supply. Additionally, we have acquired fee interests in lodging properties located near major transportation arteries in urban and suburban areas; multi-tenant industrial properties located near major transportation arteries and distribution corridors; and market-rate, middle market multi-family residential properties at a discount to replacement cost.
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We operate within four operating segments which are our Retail Segment, Multi-Family Residential Segment, Industrial Segment and Hospitality Segment. The Unallocated amounts include our investments in real estate companies which are not wholly owned as well as our corporate operations. As of December 31, 2015, on a collective basis, we (i) wholly or majority owned and consolidated the operating results and financial condition of 3 retail properties containing a total of approximately 0.7 million square feet of gross leasable area (“GLA”), 14 industrial properties containing a total of approximately 1.0 million square feet of GLA, 5 multi-family residential properties containing a total of 1,216 units, and 1 hotel hospitality property containing 363 rooms. All of our properties are located within the United States. As of December 31, 2015, the retail properties, the industrial properties and the multi-family residential properties were 90%, 62% and 96% occupied based on a weighted-average basis, respectively. The hospitality property’s average revenue per available room was $79 and occupancy was 62% for the year ended December 31, 2015.
Disposition of limited service hotels
On January 19, 2015, our board of directors provided us with the approval to form a joint venture (the “Joint Venture”) with Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a related party REIT also sponsored by our Sponsor and for the Joint Venture to acquire our membership interests in a portfolio of 11 of our hotel hospitality properties (the “LVP REIT Hotels”) for an aggregate of approximately $122.4 million, plus closing and other third party transaction costs.
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 us 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 us 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 us 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 us since December 3, 2012); |
| · | a 82-room, Holiday Inn Express Hotel & Suites (the “Holiday Inn Express - Auburn”) located in Auburn, Alabama (wholly owned by us 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 us 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 us 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 us 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 us 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 us 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 us since August 30, 2013). |
During 2015, we, through our Operating Partnership, completed the disposition of the LVP REIT Hotels in a series of transactions. The operating results of the LVP REIT Hotels are classified as discontinued operations in the consolidated statements of operations through their respective dates of disposition 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 sheets for all periods presented through their respective dates of disposition. We recognized an aggregate gain on disposition of approximately $17.3 million, which is included in discontinued operations on the consolidated statements of operations, during the year ended December 31, 2015. Additionally, we account for our 2.5% membership interest in the Joint Venture under the cost method and as of December 31, 2015, its carrying value of $1.5 million is included in investment in related parties on the consolidated balance sheets.
Other Transactions
During the year ended December 31, 2013, we disposed of two Extended Stay Hotels located in Houston, Texas (the “Houston Extended Stay Hotels”) and a retail shopping center (“Everson Pointe”) located in Snellville, Georgia. The operating results of the Houston Extended Stay Hotels and Everson Pointe have been classified as discontinued operations in the consolidated statements of operations through their respective dates of disposition for all periods presented. Additionally, the associated assets and liabilities of the Houston Extended Stay Hotels and Everson Pointe are classified as held for sale in the consolidated balance sheets for all periods presented through their respective dates of disposition. These transactions resulted in a fourth quarter gain on disposition of $2.0 million, which is included in discontinued operations for the year ended December 31, 2013.
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During the year ended December 31, 2014, we 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 are classified as discontinued operations in the consolidated statements of operations for all periods presented through its date of disposition. Additionally, the associated assets and liabilities of the Crowe’s Crossing are classified as held for sale in the consolidated balance sheets for all periods presented through its date of disposition. We recognized a gain on disposition of approximately $1.7 million, which is included in discontinued operations during the year ended December 31, 2014.
Additionally, during the year ended December 31, 2014 we disposed of an industrial property located in Sarasota, Florida (“Sarasota”) for approximately $5.3 million and recorded a loss on the disposition of real estate of approximately $2.4 million related to this disposition. Also, during the year ended December 31, 2014, we disposed of 2 multi-family apartment buildings located in Greensboro/Charlotte, North Carolina (the “Camden Multi-Family Properties”) for approximately $32.4 million and recorded a gain on the disposition of real estate of approximately $11.5 million related to this disposition. The dispositions of Sarasota and the Camden Multi-Family Properties did not qualify to be reported as discontinued operations and therefore, their operating results are reflected in our results from operations for all periods presented through their respective dates of disposition.
Noncontrolling Interest – Partners of Operating Partnership
On July 6, 2004, the Advisor contributed $2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The limited partner has the right to convert operating partnership units into cash or, at our option, an equal number of our common shares, as allowed by the limited partnership agreement.
Through March 31, 2009, Lightstone SLP, LLC, an affiliate of the Advisor, purchased an aggregate of $30.0 million of special general partner interests (“SLP Units”) in the Operating Partnership at a cost of $100,000 per unit and none thereafter.
In addition, during years ended December 31, 2008 and 2009, the Operating Partnership issued at total of (i) 497,209 units of common limited partnership interest in the Operating Partnership (“Common Units”) and (ii) 93,616 Series A preferred limited partnership units in the Operating Partnership (the “Series A Preferred Units”) with an aggregate liquidation preference of $93.6 million collectively to Arbor Mill Run JRM, LLC, a Delaware limited liability company, Arbor National CJ, LLC, a New York limited liability company, Prime Holdings LLC, a Delaware limited liability company, TRAC Central Jersey LLC, a Delaware limited liability company, Central Jersey Holdings II, LLC, a New York limited liability company and JT Prime LLC, a Delaware limited liability company, in exchange for an aggregate 36.80% membership interest in Mill Run LLC (“Mill Run”) and an aggregate 40.00% membership interest in Prime Outlets Acquisition Company (“POAC”). The membership interests in Mill Run and POAC were subsequently disposed of during the third quarter of 2010. Additionally, the Operating Partnership redeemed an aggregate 43,516 Series A Preferred Units, with a liquidation preference of approximately $43.5 million, during the third quarter of 2013. On January 2, 2014, the Operating Partnership redeemed all of the then remaining outstanding 50,100 Series A Preferred Units, at their liquidation preference of approximately $50.1 million.
Operating Partnership Activity
Through our Operating Partnership, we have and will continue to acquire and operate commercial, residential, and hospitality properties and make real estate-related investments, principally in the United States. Our commercial holdings currently consist of retail (primarily multi-tenant shopping centers), lodging and industrial properties. All such properties have been and will continue to be acquired and operated by us alone or jointly with others. Since inception, we have completed the following significant property and investments transactions:
Property and Investments Transactions
| · | St. Augustine Outlet Center: In March 2006, we completed the acquisition of an outlet center located in St. Augustine, Florida (the “St. Augustine Outlet Center”). In 2007, we purchased an adjacent 8.5-acre parcel of undeveloped land, including certain development rights, and used a portion of it to expand the St. Augustine Center, which was completed during 2008. |
| · | Southeastern Michigan Multi-Family Properties: In June 2006 we completed the acquisition of four multi-family apartment communities in Southeast Michigan (collectively, the “Southeastern Michigan Multi-Family Properties”). |
| · | Oakview Plaza: In December 2006, we completed the acquisition of a retail power center and parcel of land in Omaha, Nebraska (collectively, “Oakview Plaza”). |
| · | 1407 Broadway: In January 2007, we acquired a 49.0% ownership investment in 1407 Broadway Mezz II, LLC (“1407 Broadway”), which had a sub-leasehold interest (the “Sub-Leasehold Interest”) in a ground lease to an office building located at 1407 Broadway Street in New York, New York. 1407 Broadway subsequently sold the Sub-Leasehold Interest in April 2015. |
| · | Gulf Coast Industrial Portfolio: In February 2007, we purchased a portfolio of industrial properties (collectively, the” Gulf Coast Industrial Portfolio”) located in New Orleans, Louisiana (seven properties), Baton Rouge, Louisiana (three properties) and San Antonio, Texas (four properties). |
| · | Brazos Crossing: In June 2007, we purchased a land parcel in Lake Jackson, Texas, on which we subsequently completed the development of Brazos Crossing during the first quarter of 2008. We subsequently sold Brazos Crossing in July 2012. |
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| · | Camden Multi-Family Properties: In November 2007, we purchased the Camden Multi-Family Properties initially consisting of five apartment communities located in Tampa, Florida (one property), Charlotte, North Carolina (two properties) and Greensboro, North Carolina (two properties). In 2010, we subsequently disposed of three of the apartment communities (one located in Tampa, Florida, one located in Charlotte, North Carolina and one located in Greensboro, North Carolina) through foreclosure transactions. In September 2014 we sold the remaining two apartment communities. |
| · | Houston Extended Stay Hotels: In October 2007, we purchased the Houston Extended Stay Hotels, which we subsequently sold in December 2013. |
| · | Sarasota: In November 2007, we purchased Sarasota, which we subsequently sold in July 2014. |
| · | Park Avenue: In April 2008, we made a contribution in exchange for membership interests in a wholly owned subsidiary of Park Avenue Funding, LLC, an affiliated real estate lending company (“Park Avenue”). During 2010, we received our final redemption payments from Park Avenue and no longer have any investment in Park Avenue. |
| · | Mill Run: In March 2008, we acquired a 22.54% ownership interest in Mill Run, which owned two retail properties located in Orlando, Florida, and in August 2009, we acquired an additional 14.26% ownership interest in Mill Run. We disposed of all of our ownership interests in Mill Run in August 2010. |
| · | POAC: In March 2009, we acquired a 25.0% ownership interest in POAC, which owned a portfolio of 18 retail outlet malls located throughout the Unites States, Grand Prairie Holdings LLC (“GPH”) and Livermore Holdings LLC (“LVH”). In August 2009, we acquired an additional 15.0% ownership interest in POAC. We disposed of all of our ownership interests in POAC, excluding GPH and LVH, in August 2010. We subsequently disposed of 50.0% of our ownership interests in both GPH and LVH in December 2011 and our remaining 50.0% ownership interests in both GPH and LVH in December 2012. |
| · | Everson Pointe: In December 2010, we acquired Everson Pointe, which we subsequently sold in December 2013. |
| · | DoubleTree - Danvers: In March 2011, we (i) acquired, through a joint venture partnership with Lightstone II (the “CP Boston Joint Venture”), an 80.0% ownership interest in a hotel and water park (the “CP Boston Property”) located in Danvers, Massachusetts, and in February 2012, we acquired the remaining 20.0% membership interest in the CP Boston Joint Venture and as a result, now have a 100.0% membership interest. During 2012, the CP Boston Property was rebranded to a DoubleTree Suites by Hilton and is now referred to as the “DoubleTree – Danvers.” |
| · | Rego Park Joint Venture: In April 2011, we acquired, through a joint venture partnership (the “Rego Park Joint Venture”), a 90.0% ownership interest in a second mortgage loan secured by a residential apartment complex located in Queens, New York. In June 2013, all amounts due under the mortgage loan owned by the Rego Park Joint Venture were paid in full and subsequently distributed to its members. |
| · | Mortgage Loan Receivable: In June 2011, we acquired a mortgage loan secured by a Holiday Inn Express hotel located in East Brunswick, New Jersey. |
| · | Gantry Park: In August 2011, we acquired, through a joint venture partnership (the “2nd Street Joint Venture”), an initial 75.0% ownership interest in a fee interest in land located at 50-01 2nd Street in Long Island City, Queens, New York. During the third quarter of 2012, we put approximately 15.8% of our membership interest in the 2nd Street Joint Venture back to our Sponsor and other related parties and as a result, now have an approximately 59.2% membership interest in the 2nd Street Joint Venture. The land acquired by the 2nd Street Joint Venture was purchased for the development of a residential project (the “2nd Street Project” or “Gantry Park”) whose construction was substantially completed and its associated assets were placed in service during the third quarter of 2013. |
| · | Crowe’s Crossing: In October 2011, we acquired Crowe’s Crossing, which we subsequently sold in January 2014. |
| · | Courtyard – Parsippany: In October 2011, we acquired a mortgage loan secured by a Courtyard by Marriott hotel located in Parsippany, New Jersey (the “Courtyard – Parsippany”). We subsequently took title to the Courtyard - Parsippany through a restructuring of the mortgage loan in July 2012. We contributed our interest in the Courtyard – Parsippany to the Joint Venture in February 2015. |
| · | DePaul Plaza: In November 2011, we acquired a retail center located in Bridgeton, Missouri (“DePaul Plaza”) |
| · | The Hotel Portfolio: In December 2012, we acquired a portfolio comprised of three hotels, consisting of two hotels located in West Des Moines, Iowa (the “Fairfield Inn - Des Moines” and the “SpringHill Suites - Des Moines”) and one hotel located in Willoughby, Ohio (the “Courtyard - Willoughby” and collectively, the “Hotel Portfolio”). We subsequently contributed our interests in the Hotel Portfolio to the Joint Venture in January 2015. |
| · | Holiday Inn Express – Auburn: In January 2013, we acquired a Holiday Inn Express Hotel & Suites (the “Holiday Inn Express - Auburn”) located in Auburn, Alabama. We subsequently contributed our interest in Holiday Inn Express - Auburn to the Joint Venture in June 2015. |
| · | Baton Rouge Hotel Portfolio: In May 2013, we acquired a portfolio comprised of two hotels located in Baton Rouge, Louisiana (the “Courtyard - Baton Rouge” and the “Residence Inn - Baton Rouge”, collectively the “Baton Rouge Hotel Portfolio”). We subsequently contributed our interests in the Courtyard - Baton Rouge and the Residence Inn – Baton Rouge to the Joint Venture in February 2015 and June 2015, respectively. |
| · | Arkansas Hotel Portfolio: In June 2013, we acquired a portfolio comprised of two hotels located in Jonesboro, Arkansas (the Fairfield Inn – Jonesboro) and Rogers, Arkansas (the “Aloft – Rogers”, collectively, the “Arkansas Hotel Portfolio”). We subsequently contributed our interests in the Arkansas Hotel Portfolio to the Joint Venture in June 2015. |
| · | Florida Hotel Portfolio: In August 2013, we acquired a portfolio comprised of two hotels located in Miami, Florida (the “Hampton Inn - Miami”) and Fort Lauderdale, Florida (the “Hampton Inn & Suites - Fort Lauderdale”, collectively the “Florida Hotel Portfolio”). We subsequently contributed our interests in the Florida Hotel Portfolio to the Joint Venture in January 2015. |
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| · | Investments in Related parties: |
| o | 365 Bond Preferred Investment – In March 2014, we entered into an agreement with various related party entities that provides for us 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 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 entitles us 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. During 2014, we made aggregate contributions of approximately $36.6 million for the 365 Bond Preferred Investment. During 2015, we made additional contributions aggregating $5.6 million for the 365 Bond Preferred Investment and as a result, the 365 Bond Preferred Investment, which is included in investments in related parties on our consolidated balance sheets, had a balance of approximately $42.2 million as of December 31, 2015. |
| o | 40 East End Avenue Preferred Investment – In May 2015, we entered into an agreement with various related parties that provides for us 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 is constructing a residential condominium project. These contributions are made pursuant to an instrument, the “40 East End Avenue Preferred Investment,” that entitles us to monthly preferred distributions at an initial rate of 8% per annum increasing to 12% per annum upon procurement of construction financing, and is redeemable at the earlier of six years from the date of our final contribution or May 14, 2023. During 2015, we made aggregate contributions of approximately $28.8 million for the 40 East End Avenue Preferred Investment, which is included in investments in related parties on our consolidated balance sheets as of December 31, 2015. |
| o | 30-02 39th Avenue Preferred Investment – In August 2015, we entered into an agreement with various related parties that provides for us to make aggregate contributions (the “30-02 39th Avenue Preferred Investment”) of up to $50.0 million in various affiliates of our Sponsor which own a parcel of land located at 30-02 39th Avenue in Long Island City, Queens, New York on which they are constructing a residential apartment project. The 30-02 39th Street Preferred Investment will be made pursuant to instruments that entitle us to monthly preferred distributions between 9% and 12% per annum, and is is redeemable by us upon the occurrence of certain events. During 2015, we made aggregate contributions of approximately $7.3 million for the 30-02 39th Avenue Preferred Investment, which is included in investments in related parties on our consolidated balance sheets as of December 31, 2015. |
| o | 485 7th Avenue Preferred Investment – In December 2015, we entered into an agreement with various related parties that provides for us to make contributions (the “485 7th Avenue Preferred Investment”) of up to $60.0 million in an affiliate of our Sponsor which owns a parcel of land located at 485 7th Avenue, New York, New York on which they are developing a 612-room Marriott Moxy hotel. The 485 7th Avenue Preferred Investment was made pursuant to an instrument that entitles us to monthly preferred distributions at a rate of 12% per annum and is redeemable by us upon the occurrence of certain events. During 2015, we made aggregate contributions of approximately $60.0 million for the 485 7th Avenue Preferred Investment, which is included in investments in related parties on our consolidated balance sheets as of December 31, 2015. |
Related Party
Our business is managed by the Advisor, an affiliate of our Sponsor, under the terms and conditions of an advisory agreement. Our Sponsor and Advisor are owned and controlled by David Lichtenstein, the Chairman of our Board of Directors. Our Sponsor is one of the largest private residential and commercial real estate owners and operators in the United States today, with a diversified portfolio of over 100 properties containing approximately 10,285 multifamily units, approximately 257,000 square feet of office space, 1.5 million square feet of industrial space, 25 hotels and 3.3 million square feet of retail space. The residential, office, industrial, hotel and retail properties are located in 21 states. Based in New York, and supported by regional offices in New Jersey and Maryland, our Sponsor employs approximately 383 staff and professionals including a senior management team with approximately 24 years on average of industry experience. Our Sponsor has extensive experience in the areas of investment selection, underwriting, due diligence, portfolio management, asset management, property management, leasing, disposition, finance, accounting and investor relations. Our Sponsor is also the Sponsor of (i) Hamilton National Income Trust, Inc. (“HNIT”), (ii) Lightstone II, (iii) Lightstone Value Plus Real Estate Investment Trust III, Inc. (“Lightstone III”) and (iv) Lightstone Real Estate Income Trust Inc. (“Lightstone IV” and collectively, “Sponsor’s Other Public Programs”), all programs with similar investment objectives as ours.
Acquired properties and development activities may be managed by affiliates of Lightstone Value Plus REIT Management LLC (the “Property Manager”).
Our Advisor and Property Manager are each related parties. Each of these entities receives compensation and fees for services for the investment and management of our assets. These entities receive fees during our offering (which was completed on October 10, 2008), acquisition, operational and liquidation stages. The compensation levels during the acquisition and operational stages are based on the cost of acquired properties and the annual revenue earned from such properties, and other such fees outlined in each of the respective agreements.
Primary Investment Objectives
Our primary investment objectives are:
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| · | Capital appreciation; and |
| · | Income without subjecting principal to undue risk. |
Acquisition and Investment Policies
We have, to date, acquired residential and commercial properties principally, all of which are located in the continental United States and made real estate-related investments. Our acquisitions include both portfolios and individual properties. Our current commercial holdings consist of retail (primarily multi-tenant shopping centers), lodging and industrial properties and our residential properties are principally comprised of ’‘Class B’’ multi-family complexes. Additionally, we have made certain preferred equity investments in related parties.
We may acquire the following types of real estate interests:
| · | Fee interests in market-rate, middle market multifamily properties at a discount to replacement cost located either in emerging markets or near major metropolitan areas. We will attempt to identify those sub-markets with job growth opportunities and demand demographics which support potential long-term value appreciation for multifamily properties. |
| · | Fee interests in well-located, multi-tenant, community, power and lifestyle shopping centers and malls located in highly trafficked retail corridors, in selected high-barrier to entry markets and submarkets. We will attempt to identify those sub-markets with constraints on the amount of additional property supply will make future competition less likely. |
| · | Fee interests in improved, multi-tenant, industrial properties located near major transportation arteries and distribution corridors with limited management responsibilities. |
| · | Fee interests in improved, multi-tenant, office properties located near major transportation arteries in urban and suburban areas. |
| · | Fee interests in lodging properties located near major transportation arteries in urban and suburban areas. |
All of the properties are owned by subsidiary limited partnerships or limited liability companies. These subsidiaries are single-purpose entities that we created to own a single property, and each have no assets other than the property it owns. These entities represent a useful means of shielding our Operating Partnership from liability under state laws and will make the underlying properties easier to transfer. However, tax law disregards single-member LLCs and so it will be as if the Operating Partnership owns the underlying properties for tax purposes. Use of single-purpose entities in this manner is customary for REITs. Our independent directors are not required to approve all transactions involving the creation of subsidiary limited liability companies and limited partnerships that we use for investment in properties on our behalf. These subsidiary arrangements are intended to ensure that no environmental or other liabilities associated with any particular property can be attributed against other properties that the Operating Partnership or we will own. The limited liability aspect of a subsidiary’s form will shield parent and affiliated (but not subsidiary) companies, including the Operating Partnership and us, from liability assessed against it. No additional fees are imposed upon the REIT by the subsidiary companies’ managers and these subsidiaries are not affected our stockholders’ voting rights.
We have not and do not intend to make significant investments in single family residential properties; leisure home sites; farms; ranches; timberlands; unimproved properties not intended to be developed; or mining properties.
Not more than 10% of our total assets may be invested in unimproved real property. For purposes of this paragraph, “unimproved real properties” does not include properties acquired for the purpose of producing rental or other operating income, properties under construction and properties for which development or construction is planned within one year. Additionally, we do not invest in contracts for the sale of real estate unless in recordable form and appropriately recorded.
Although we are not limited as to the geographic area where we may conduct our operations, we have invested and will continue to invest in properties located near the existing operations of our Sponsor, in order to achieve economies of scale where possible.
Financing Strategy and Policies
We utilize leverage when acquiring our properties. The number of different properties we acquire are affected by numerous factors, including, the amount of funds available to us. When interest rates on mortgage loans are high or financing is otherwise unavailable on terms that are satisfactory to us, we may purchase certain properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time. We intend 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.
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Our charter provides that the aggregate amount of borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. As of December 31, 2015, our total borrowings represented 66% of net assets.
We have financed our property acquisitions through a variety of means, including but not limited to individual non-recourse mortgages and through the exchange of an interest in the property for limited partnership units of the Operating Partnership. Generally, though not exclusively, we intend to seek to finance our investments with debt which will be on a non-recourse basis. However, we may, secure recourse financing or provide a guarantee to lenders, if we believe this may result in more favorable terms. We had $247.3 million in outstanding debt obligations as of December 31, 2015.
Distribution Objectives
U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles in the United States, or GAAP) determined without regard to the deduction for dividends paid and excluding any net capital gain. In order to continue to qualify for REIT status, we may be required to make distributions in excess of cash available.
Distributions are at the discretion of the Board of Directors. We commenced quarterly distributions beginning February 1, 2006. We have generally paid such distributions through a combination of cash proceeds from sale our common stock, as well as cash from operations and through issuance of common shares from our distribution reinvestment program (“DRIP”). We may continue to pay such distributions from borrowings if we have not generated sufficient cash flow from our operations to fund such distributions. Our ability to pay regular distributions and the size of these distributions will depend upon a variety of factors. For example, our borrowing policy permits us to incur short-term indebtedness, having a maturity of two years or less, and we may have to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. We cannot assure that regular distributions will continue to be made or that we will maintain any particular level of distribution that we have established or may establish.
We are an accrual basis taxpayer, and as such our REIT taxable income could be higher than the cash available to us. We may therefore borrow to make distributions, which could reduce the cash available to us, in order to distribute 90% of REIT taxable income as a condition to our election to be taxed as a REIT. These distributions made with borrowed funds may constitute a return of capital to stockholders. “Return of capital” refers to distributions to investors in excess of net income. To the extent that distributions to stockholders exceed earnings and profits, such amounts constitute a return of capital for U.S. federal income tax purposes, although such distributions might not reduce stockholders’ aggregate invested capital. Because our earnings and profits are reduced for deprecation and other non-cash items, it is likely that a portion of each distribution will constitute a tax deferred return of capital for U.S. federal income tax purposes.
Beginning February 1, 2006, our Board of Directors declared quarterly distributions in the amount of $0.0019178 per share per day payable to stockholders of record at the close of business each day during the applicable period. The annualized rate declared was equal to 7%, which represents the annualized rate of return on an investment of $10.00 per share attributable to these daily amounts, if paid for each day for a 365 day period (the “Annualized Rate”). Subsequently, our Board of Directors has declared regular quarterly distributions at the Annualized Rate, with the exception of the three-month period ended June 30, 2010. The distributions for the three-month period ended June 30, 2010 were at an aggregate annualized rate of 8% based upon a share price of $10.00. Through December 31, 2015, we have paid aggregate distributions in the amount of $163.2 million, which includes cash distributions paid to stockholders and common stock issued under our DRIP.
Total distributions declared during the years ended December 31, 2015, 2014 and 2013 were $18.1 million, $18.1 million and $19.8 million, respectively.
On March 22, 2016, our Board of Directors declared the quarterly distribution for the three-month period ended March 31, 2016 in the amount of $0.0019178 per share per day payable to stockholders of record on the close of business on the last day of the quarter, which is payable on April 15, 2016.
DRIP, Share Repurchase Program and Tender Offers
Our DRIP provided 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.
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Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares back to us, subject to restrictions. From our inception through December 31, 2014 we redeemed approximately 2.8 million common shares at an average price per share of $9.29 per share. During 2015, we redeemed approximately 0.3 million common shares or 100% of redemption requests received during the period, at an average price per share of $10.00 per share.
On February 14, 2013, our Board of Directors approved an increase to the price for all purchases under our share repurchase program from $9.00 to $10.00 per share. Previously the purchase price was $9.00 per share, except in the case of the death of the stockholder, whereby the purchase price per common share was the lesser of the actual amount paid by the stockholder to acquire the shares or $10.00 per share.
Our Board of Directors, at its sole discretion, has the power to terminate the share repurchase program after the end of the offering period, change the price per share under the share repurchase program or reduce the number of shares purchased under the program, if it determines that the funds allocated to the share repurchase program are needed for other purposes, such as the acquisition, maintenance or repair of properties, or for use in making a declared distribution. A determination by our Board of Directors to eliminate or reduce the share repurchase program requires the unanimous affirmative vote of the independent directors.
Tender Offer
2013 Offer
We commenced a tender offer on May 1, 2013, pursuant to which we offered to acquire up to 4.7 million shares of our common stock (the “Shares”) from the holders (“Holders”) of the shares at a purchase price equal to $10.60 per share, in cash, less any applicable withholding taxes and without interest, upon the terms and subject to the conditions set forth in an offer to purchase and in the related letter of transmittal, (which together, as amended, constitute the “2013 Offer”).
On August 6, 2013, we completed the 2013 Offer repurchasing from the Holders approximately 4.7 million Shares for approximately $50.0 million. The 2013 Offer expired on July 15, 2013 and all payments for the shares repurchased were subsequently distributed to the Holders. A total of approximately 5.0 million shares of our common stock were properly tendered and not withdrawn, of which we purchased approximately 4.7 million shares , in accordance with the proration provisions of the 2013 Offer, from tendering stockholders at a price of $10.60 per share, or an aggregate amount of approximately $50.0 million.
Tax Status
We elected to be taxed as a REIT in conjunction with the filing of our 2005 U.S. federal income tax return. If we remain qualified as a REIT, we generally will not be subject to U.S. federal income tax on our net taxable income that we distribute currently to our stockholders. To maintain our REIT qualification under the Internal Revenue Code of 1986, as amended, or the Code, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles in the United States of America, or GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If we fail to remain qualified for taxation as a REIT in any subsequent year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify as a REIT. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. As of December 31, 2015 and 2014, we had no material uncertain income tax positions and our net operating loss carry forward was $12.7 million, for which we have recorded a full valuation allowance. Additionally, even if we qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income.
To maintain our qualification as a REIT, we engage in certain activities such as providing real estate-related services through wholly-owned taxable REIT subsidiaries (“TRSs”). As such, we are subject to U.S. federal and state income and franchise taxes from these activities.
Competition
The retail, lodging, office, industrial and residential real estate markets are highly competitive. We compete in all of our markets with other owners and operators of retail, lodging, office, industrial and residential real estate. The continued development of new retail, lodging, office, industrial and residential properties has intensified the competition among owners and operators of these types of real estate in many market areas in which we intend to operate. We compete based on a number of factors that include location, rental rates, security, suitability of the property’s design to prospective tenants’ needs and the manner in which the property is operated and marketed. The number of competing properties in a particular market could have a material effect on our occupancy levels, rental rates and on the operating expenses of certain of our properties.
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In addition, we compete with other entities engaged in real estate investment activities to locate suitable properties to acquire and to locate tenants and purchasers for our properties. These competitors include other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, governmental bodies and other entities. There are other REITs with asset acquisition objectives similar to ours that may be organized in the future. Some of these competitors, including larger REITs, have substantially greater marketing and financial resources than we have and generally may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of tenants. In addition, these same entities seek financing through similar channels to those sought by us. Therefore, we compete for institutional investors in a market where funds for real estate investment may decrease.
Competition from these and other third party real estate investors may limit the number of suitable investment opportunities available to us. It may also result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms.
We believe that our Sponsor’s experience, coupled with our financing, professionalism, diversity of properties and reputation in the industry enable us to compete with the other real estate investment companies.
Because we are organized as an UPREIT, we are well positioned within the industries in which we intend to operate to offer existing property owners the opportunity to contribute their properties to us in tax-deferred transactions using our operating partnership units as transactional currency. As a result, we have a competitive advantage over most of our competitors that are structured as traditional REITs and non-REITs in pursuing acquisitions with tax-sensitive sellers.
Environmental
As an owner of real estate, we are subject to various environmental laws of federal, state and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired directly or indirectly in the future.
Employees
We do not have employees. We entered into an advisory agreement with our Advisor on April 22, 2005, pursuant to which our 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 our Advisor fees for services related to the investment and management of our assets, and we reimburse our Advisor for certain expenses incurred on our behalf.
Available Information
We electronically file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and proxy statements, with the SEC. Stockholders may obtain copies of our filings with the SEC, free of charge, from the website maintained by the SEC at http://www.sec.gov, or at the SEC’s Public Reference Room at 100 F. Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our office is located at 1985 Cedar Bridge Avenue, Lakewood, NJ 08701. Our telephone number is (732) 367-0129. Our website is www.lightstonecapitalmarkets.com.
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Set forth below are the risk factors that we believe are material to our investors. This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements on page 3. If any of the risk events described below actually occurs, our business, financial condition or results of operations could be adversely affected.
Risks Related to the Common Stock
Distributions to stockholders may be reduced or not made at all.
Distributions are based principally on cash available from our properties. The amount of cash available for distributions is affected by many factors, such as the operating performance of the properties we acquire, our ability to buy properties with proceeds from the disposition of our retail outlet assets, and many other variables. We may not be able to pay or maintain distributions or increase distributions over time. Therefore, we cannot determine what amount of cash will be available for distributions. Some of the following factors, which we believe are the material factors that can affect our ability to make distributions, are beyond our control, and a change in any one factor could adversely affect our ability to pay future distributions:
| • | Cash available for distributions may be reduced if we are required to make capital improvements to properties. |
| • | Cash available to make distributions may decrease if the assets we acquire or investments we make have lower cash flows than expected. |
| • | Until we invest any proceeds received from the dispositions of our properties, sales and redemptions of our marketable securities, and sales, redemptions or repayments of our real estate-related investments, we may invest in lower yielding short-term instruments, which could result in a lower yield on stockholders’ investment. |
| • | Some of the properties we may acquire or investments we may make may be adversely affected by adverse market conditions. If our properties or investments are adversely affected by adverse market conditions, our cash flows from operations will decrease and we will have less cash available for distributions. |
| • | In connection with future property acquisitions, we may issue additional shares of common stock and/or operating partnership units or interests in the entities that own our properties. We cannot predict the number of shares of common stock, units or interests that we may issue, or the effect that these additional shares might have on cash available for distributions to stockholders. If we issue additional shares, that issuance could reduce the cash available for distributions to stockholders. |
| • | We make distributions to our stockholders to comply with the distribution requirements of the Internal Revenue Code of 1986, as amended, or the Code, and to eliminate, or at least minimize, exposure to U.S. federal income taxes and the nondeductible REIT excise tax. Differences in timing between the receipt of income and the payment of expenses, and the effect of required debt payments, could require us to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the U.S. federal income tax benefits associated with qualifying as a REIT. |
Distributions paid from sources other than our cash flow from operations will cause us to have fewer funds available for the acquisition of properties and real estate-related investments and may dilute your interest in us, which may adversely affect your overall return.
We have in the past, and may in the future, pay distributions, both to stockholders and to Lightstone SLP, LLC, from sources other than from our cash flow from operations. For the year ended December 31, 2015, our cash flow from operations of approximately $21.1 million was in excess of our distributions of approximately $20.2 million declared during such period (consisting of $18.1 million to stockholders and $2.1 million to Lightstone SLP, LLC) and for the year ended December 31, 2014, our cash flow from operations of approximately $27.9 million was in excess of our distributions of approximately $20.2 million declared during such period (consisting of $18.1 million to stockholders and $2.1 million to Lightstone SLP, LLC) and for the year ended December 31, 2013, our cash flow from operations of approximately $17.1 million was a shortfall of approximately $4.8 million, or 22%, of our distributions of approximately $21.9 million declared during such period (consisting of $19.8 million to stockholders and $2.1 million to Lightstone SLP, LLC). If we fund distributions from sources other than cash flow from operations, we will have less funds available for acquiring properties or real estate-related investments. Our inability to acquire additional properties or real estate-related investments may have a negative effect on our ability to generate sufficient cash flow from operations to pay distributions. As a result, the return you realize on your investment may be reduced. Additionally, we may fund our distributions from borrowings, the sale of assets, or the sale of additional securities if we do not generate sufficient cash flow from operations to pay distributions. Funding distributions from borrowings could restrict the amount we can borrow for investments, which may affect our profitability. Funding distributions with the sale of assets may affect our ability to generate cash flows. Funding distributions from the sale of additional securities could dilute your interest in us if we sold shares of our preferred or common stock to third-party investors. Payment of distributions from these sources would restrict our ability to generate sufficient cash flow from operations or would affect the distributions payable to you upon a liquidity event, which may have an adverse effect on your investment.
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Our operations could be restricted if we become subject to the Investment Company Act of 1940.
We are not registered, and do not intend to register ourselves or any of our subsidiaries, as an investment company under the Investment Company Act. If we or any of our subsidiaries become obligated to register as an investment company, the registered entity would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:
| • | limitations on capital structure; |
| • | restrictions on specified investments; |
| • | prohibitions on transactions with affiliates; and |
| • | compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations. |
We intend to conduct our operations, directly and through wholly or majority-owned subsidiaries, so that we and each of our subsidiaries are exempt from registration as an investment company under the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is deemed to be an “investment company” if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a Company is deemed to be an “investment company” if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or propose to acquire “investment securities” having a value exceeding 40% of the value of its total assets on an unconsolidated basis, which we refer to as the “40% test.”
Since we will be primarily engaged in the business of acquiring real estate, we believe that we and most, if not all, of our wholly and majority-owned subsidiaries will not be considered investment companies under either Section 3(a)(1)(A) or Section 3(a)(1)(C) of the Investment Company Act. If we or any of our wholly or majority-owned subsidiaries would ever inadvertently fall within one of the definitions of “investment company,” we intend to rely on the exception provided by Section 3(c)(5)(C) of the Investment Company Act.
Under Section 3(c)(5)(C), the SEC staff generally requires us to maintain at least 55% of its assets directly in qualifying assets and at least 80% of the entity’s assets in qualifying assets and in a broader category of real estate related assets to qualify for this exception. Mortgage-related securities may or may not constitute such qualifying assets, depending on the characteristics of the mortgage-related securities, including the rights that we have with respect to the underlying loans. Our ownership of mortgage-related securities, therefore, is limited by provisions of the Investment Company Act and SEC staff interpretations.
The method we use to classify our assets for purposes of the Investment Company Act will be based in large measure upon no-action positions taken by the SEC staff in the past. These no-action positions were issued in accordance with factual situations that may be substantially different from the factual situations we may face, and a number of these no-action positions were issued more than ten years ago. No assurance can be given that the SEC staff will concur with our classification of our assets. In addition, the SEC staff may, in the future, issue further guidance that may require us to re-classify our assets for purposes of qualifying for an exclusion from regulation under the Investment Company Act. If we are required to re-classify our assets, we may no longer be in compliance with the exclusion from the definition of an “investment company” provided by Section 3(c)(5)(C) of the Investment Company Act.
A change in the value of any of our assets could cause us or one or more of our wholly or majority-owned subsidiaries to fall within the definition of “investment company” and negatively affect our ability to maintain our exemption from regulation under the Investment Company Act. To avoid being required to register as an investment company under the Investment Company Act, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income- or loss-generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy.
If we were required to register as an investment company but fail to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
The price of our common stock is subjective and may not bear any relationship to what a stockholder could receive if it was sold.
Our Board of Directors determined the current net asset value of the common stock at $11.80 per share after allocations to the holder of SLPs as of September 30, 2015. This value is based upon an estimated amount, which reflects, among other things, the impact of the recent trends in the economy and the real estate industry, we determined would be received if our properties and other assets were sold as of the close of our fiscal year. Because this is only an estimate, we may subsequently revise any annual valuation that is provided. It is possible that:
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| • | This value may not actually be realized by us or by our stockholders upon liquidation; |
| • | Stockholders may not realize this value if they were to attempt to sell their common stock; or |
| • | This value may not reflect the price at which our common stock would or could trade if it were listed on a national stock exchange or included for quotation on a national market system. |
Our common stock is not currently listed on an exchange or trading market and is illiquid.
There is currently no public trading market for the shares. Subsequent to the close of our initial public offering in October 2008, our common stock has not been listed on a stock exchange. Accordingly, we do not expect a public trading market for our shares to develop. We may never list the shares for trading on a national stock exchange or include the shares for quotation on a national market system. The absence of an active public market for our shares could impair your ability to sell our stock at a profit or at all. Therefore, our shares should be purchased as a long term investment only.
Your percentage of ownership may become diluted if we issue new shares of stock.
Stockholders have no rights to buy additional shares of stock in the event we issue new shares of stock. We may issue common stock, convertible debt or preferred stock pursuant to a subsequent public offering or a private placement, upon exercise of options, pursuant to our DRIP or to sellers of properties we directly or indirectly acquire instead of, or in addition to, cash consideration. We may also issue common stock upon the exercise of the warrants issued and to be issued to participating broker-dealers. Stockholders who do not participate in any future stock issues will experience dilution in the percentage of the issued and outstanding stock they own.
The special general partner interests entitle Lightstone SLP, LLC, which is directly owned and controlled by our Sponsor, to certain payments and distributions that will significantly reduce the distributions available to stockholders after a 7% return.
Lightstone SLP, LLC receives returns on its special general partner interests that are subordinated to stockholders’ 7% return on their net investment. Distributions to stockholders will be reduced after they have received this 7% return because of the payments and distributions to Lightstone SLP, LLC in connection with its special general partner interests. In addition, we may eventually repay Lightstone SLP, LLC up to $30.0 million for its investment in the special general partner interests, which will result in a smaller pool of assets available for distribution to stockholders.
Conflicts of Interest
There are conflicts of interest between the Advisor, our property managers and their affiliates and us.
David Lichtenstein, our Sponsor, is the founder of The Lightstone Group, LLC, which he majority owns and does business in his individual capacity under that name. Through The Lightstone Group, Mr. Lichtenstein controls and indirectly owns our Advisor, our property managers, and their affiliates, except for us. Our Advisor does not advise any entity other than us. However, employees of our Advisor are also employed by the advisors to our Sponsor’s Other Public Programs. Mr. Lichtenstein is one of our directors and The Lightstone Group or an affiliated entity controlled by Mr. Lichtenstein employs each of our officers. As a result, our operation and management may be influenced or affected by conflicts of interest arising out of our relationship with our affiliates.
There is competition for the time and services of the personnel of our Advisor and its affiliates.
Our Sponsor and its affiliates may compete with us for the time and services of the personnel of our Advisor and its other affiliates in connection with our operation and the management of our assets. Specifically, employees of our Sponsor, the Advisor and our property managers will face conflicts of interest relating to time management and the allocation of resources and investment opportunities.
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We do not have employees.
Likewise, our Advisor will rely on the employees of the Sponsor and its affiliates to manage and operate our business. The Sponsor is not restricted from acquiring, developing, operating, managing, leasing or selling real estate through entities other than us and will continue to be actively involved in operations and activities other than our operations and activities. The Sponsor currently controls and/or operates other entities that own properties in many of the markets in which we may seek to invest. The Sponsor spends a material amount of time managing these properties and other assets unrelated to our business. Our business may suffer as a result because we lack the ability to manage it without the time and attention of our Sponsor’s employees.
Our Sponsor and its affiliates are general partners and Sponsors of other real estate programs having investment objectives and legal and financial obligations similar to ours. Because the Sponsor and its affiliates have interests in other real estate programs and also engage in other business activities, they may have conflicts of interest in allocating their time and resources among our business and these other activities. Our officers and directors, as well as those of the Advisor, may own equity interests in entities affiliated with our Sponsor from which we may buy properties. These individuals may make substantial profits in connection with such transactions, which could result in conflicts of interest. Likewise, such individuals could make substantial profits as the result of investment opportunities allocated to entities affiliated with the Sponsor other than us. As a result of these interests, they could pursue transactions that may not be in our best interest. Also, if our Sponsor suffers financial or operational problems as the result of any of its activities, whether or not related to our business, the ability of our Sponsor and its affiliates, our Advisor and property manager to operate our business could be adversely impacted.
Certain related parties who provide services to us may be engaged in competitive activities.
Our Advisor, property managers and their respective affiliates may, in the future, be engaged in other activities that could result in potential conflicts of interest with the services that they will provide to us. In addition, the Sponsor may compete with us for both the acquisition and/or refinancing of properties of a type suitable for our investment after 75% of the total gross proceeds from our initial public offering have been invested or committed for investment in real properties, which occurred during the year ended December 31, 2009.
Our Sponsor’s Other Public Programs may be engaged in competitive activities.
Our Advisor, property managers and their respective affiliates through activities of our Sponsor’s Other Public Programs may be engaged in other activities that could result in potential conflicts of interest with the services that they will provide to us, including our Sponsor’s Other Public Programs may compete with us for both the acquisition and/or refinancing of properties of a type suitable for our investment.
If we invest in joint ventures, the objectives of our partners may conflict with our objectives.
In accordance with one of our acquisition strategies, we may make investments in joint ventures or other partnership arrangements between us and affiliates of our Sponsor or with unaffiliated third parties. Investments in joint ventures which own real properties may involve risks otherwise not present when we purchase real properties directly. For example, our co-venturer may file for bankruptcy protection, may have economic or business interests or goals which are inconsistent with our interests or goals, or may take actions contrary to our instructions, requests, policies or objectives. Among other things, actions by a co-venturer might subject real properties owned by the joint venture to liabilities greater than those contemplated by the terms of the joint venture or other adverse consequences.
These diverging interests could result in, among other things, exposing us to liabilities of the joint venture in excess of our proportionate share of these liabilities. The partition rights of each owner in a jointly owned property could reduce the value of each portion of the divided property. Moreover, there is an additional risk that the co-venturers may not be able to agree on matters relating to the property they jointly own. In addition, the fiduciary obligation that our Sponsor or our Board of Directors may owe to our partner in an affiliated transaction may make it more difficult for us to enforce our rights.
We may purchase real properties from persons with whom affiliates of our Advisor have prior business relationships.
If we purchase properties from third parties who have sold, or may sell, properties to our Advisor or its affiliates, our Advisor will experience a conflict between our current interests and its interest in preserving any ongoing business relationship with these sellers.
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Property management services are being provided by related parties.
Our property managers are owned by our Sponsor, and are thus subject to an inherent conflict of interest. In addition, our Advisor may face a conflict of interest when determining whether we should dispose of any property we own that is managed by one of our property managers because the property manager may lose fees associated with the management of the property. Specifically, because the property managers will receive significant fees for managing our properties, our Advisor may face a conflict of interest when determining whether we should sell properties under circumstances where the property managers would no longer manage the property after the transaction. As a result of this conflict of interest, we may not dispose of properties when it would be in our best interests to do so.
Our Advisor and its affiliates receive commissions, fees and other compensation based upon our investments.
Some compensation is payable to our Advisor whether or not there is cash available to make distributions to our stockholders. To the extent this occurs, our Advisor and its affiliates benefit from us retaining ownership of our assets and leveraging our assets, while our stockholders may be better served by sale or disposition or not leveraging the assets. In addition, the Advisor’s ability to receive fees and reimbursements depends on our continued investment in real properties. Therefore, the interest of the Advisor and its affiliates in receiving fees may conflict with the interest of our stockholders in earning income on their investment in our common stock. Because asset management fees payable to our Advisor are based on total assets under management, including assets purchased using debt; our Advisor may have an incentive to incur a high level of leverage in order to increase the total amount of assets under management.
Our Sponsor may face conflicts of interest in connection with the management of our day-to-day operations and in the enforcement of agreements between our Sponsor and its affiliates.
The property managers and the Advisor will manage our day-to-day operations and properties pursuant to management agreements and an advisory agreement. These agreements were not negotiated at arm’s length and certain fees payable by us under such agreements are paid regardless of our performance. Our Sponsor and its affiliates may be in a conflict of interest position as to matters relating to these agreements. Examples include the computation of fees and reimbursements under such agreements, the enforcement and/or termination of the agreements and the priority of payments to third parties as opposed to amounts paid to our Sponsor’s affiliates. These fees may be higher than fees charged by third parties in an arm’s length transaction as a result of these conflicts.
Title insurance services are being provided by a related party. From time to time, The Lightstone Group purchases title insurance from an agent in which our Sponsor owns a fifty percent limited partnership interest. Because this title insurance agent receives significant fees for providing title insurance, our Advisor may face a conflict of interest when considering the terms of purchasing title insurance from this agent. However, prior to the purchase by The Lightstone Group of any title insurance, an independent title consultant with more than 25 years of experience in the title insurance industry reviews the transaction, and performs market research and competitive analysis on our behalf. This process results in terms similar to those that would be negotiated at an arm’s-length basis.
We may compete with other entities affiliated with our Sponsor for tenants.
Our Sponsor and its affiliates, as well as our Sponsor’s Other Public Programs are not prohibited from engaging, directly or indirectly, in any other business or from possessing interests in any other business venture or ventures, including businesses and ventures involved in the acquisition, development, ownership, management, leasing or sale of real estate projects. Our Sponsor, its affiliates or our Sponsor’s Other Public Programs may own and/or manage properties in most if not all geographical areas in which we expect to acquire real estate assets. Therefore, our properties may compete for tenants with other properties owned and/or managed by our Sponsor and its affiliates. Our Sponsor may face conflicts of interest when evaluating tenant opportunities for our properties and other properties owned and/or managed by the Sponsor, its affiliates and our Sponsor’s Other Public Programs and these conflicts of interest may have a negative impact on our ability to attract and retain tenants.
Members of our Board of Directors are also on the Board of Directors of our Sponsor’s Other Public Programs
Certain of our directors are also directors of our Sponsor’s Other Public Programs. Accordingly, these directors owe fiduciary duties to those entities and their stockholders. The duties of our directors to those entities may influence the judgment of our Board of Directors when considering issues that may affect us. For example, we are permitted to enter into a joint venture or preferred equity investment with those entities for the acquisition of property or real estate-related investments. Decisions of our Board of Directors regarding the terms of those transactions may be influenced by our directors’ duties to those entities and their stockholders. In addition, decisions of our Board of Directors regarding the timing of our property sales could be influenced by concerns that the sales would compete with those of those entities.
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Risks Related to our Organization, Structure and Management
Limitations on Changes in Control (Anti-Takeover Provisions).
Our organizational structure makes us a difficult takeover target. Certain provisions in our charter, bylaws, operating partnership agreement, advisory agreement and Maryland law may have the effect of discouraging a third party from making an acquisition proposal and could thereby depress the price of our stock and inhibit a management change. Provisions that may have an anti-takeover effect and inhibit a change in our management include the following listed below.
There are ownership limits and restrictions on transferability and ownership in our charter.
In order for us to qualify as a REIT, no more than 50% of the outstanding shares of our stock may be beneficially owned, directly or indirectly, by five or fewer individuals at any time during the last half of each taxable year. To make sure that we will not fail to qualify as a REIT under this “closely held” test, among other purposes, our charter provides that, subject to some exceptions, no person may beneficially or constructively own, or be deemed to beneficially or constructively own by virtue of attribution provisions of the Code, (i) more than 9.8% in value of our aggregate outstanding shares of capital stock or (ii) capital stock to the extent that such ownership would result in us being “closely held” within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year). Our Board of Directors may exempt a person from the 9.8% ownership limit upon such conditions as the Board of Directors may direct. However, our Board of Directors may not grant an exemption from the 9.8% ownership limit to any proposed transferee if it would result in the termination of our status as a REIT.
This restriction may:
| • | have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock; or |
| • | compel a stockholder who had acquired more than 9.8% of our stock to dispose of the additional shares and, as a result, to forfeit the benefits of owning the additional shares. |
Our charter permits our Board of Directors to issue preferred stock with terms that may discourage a third party from acquiring us. Our charter authorizes us to issue additional authorized but unissued shares of common stock or preferred stock. In addition, our Board of Directors may classify or reclassify any unissued shares of common stock or preferred stock and may set the preferences, rights and other terms of the classified or reclassified shares. Our Board of Directors could establish a series of Preferred Stock that could delay or prevent a transaction or a change in control that might involve a premium price for the common stock or otherwise be in the best interest of our stockholders.
If our Advisor loses or is unable to obtain key personnel, our ability to implement our investment strategies could be hindered, which could adversely affect our ability to make distributions and the value of your investment.
Our success depends to a significant degree upon the contributions of certain of our executive officers and other key personnel of our Advisor. In particular, we depend on the skills and expertise of David Lichtenstein, the architect of our investment strategies. Neither we nor our Advisor has employment agreements with any of our key personnel, including Mr. Lichtenstein and we cannot guarantee that all, or any particular one, of our employees will remain affiliated with us or our Advisor. If any of our key personnel were to cease their affiliation with our Advisor, our operating results could suffer.
Further, we do not intend to separately maintain key person life insurance that would provide us with proceeds in the event of death or disability of Mr. Lichtenstein or any of our key personnel. We believe our future success depends upon our Advisor’s ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for such personnel is intense, and we cannot assure you that our Advisor will be successful in attracting and retaining such skilled personnel. If our Advisor loses or is unable to obtain the services of key personnel, our ability to implement our investment strategies could be delayed or hindered, and the value of your investment may decline.
The operating partnership agreement contains provisions that may discourage a third party from acquiring us.
A limited partner in the Operating Partnership has the option to exchange his or her limited partnership units for cash or, at our option, shares of our common stock. Those exchange rights are generally not exercisable until the limited partner has held those limited partnership units for more than one year. However, if we or the Operating Partnership propose to engage in any merger, consolidation or other combination with or into another person or a sale of all or substantially all of our assets, or a liquidation, or any reclassification, recapitalization or change of common and preferred stock into which a limited partnership common unit may be exchanged, each holder of a limited partnership unit will have the right to exchange the partnership unit into cash or, at our option, shares of common stock, prior to the stockholder vote on the transaction. As a result, limited partnership unit holders who timely exchange their units prior to the record date for the stockholder vote on any transaction will be entitled to vote their shares of common stock with respect to the transaction. The additional shares that might be outstanding as a result of these exchanges of limited partnership units may deter an acquisition proposal.
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Maryland law may discourage a third party from acquiring us.
Certain provisions of Maryland law restrict mergers and other business combinations and provide that holders of control shares of a Maryland corporation acquired in a control share acquisition have limited voting rights. The business combination statute could have the effect of discouraging offers from third parties to acquire us, and increasing the difficulty of successfully completing this type of offer. The control share statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer. Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our stock; however, this provision may be amended or eliminated at any time in the future.
Management and Policy Changes
Our rights and the rights of our stockholders to take action against the directors and our Advisor are limited.
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the best interests of the corporation and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Subject to the restrictions discussed below, our charter, in the case of our directors, officers, employees and agents, and the advisory agreement, in the case of our Advisor, require us to indemnify our directors, officers, employees and agents and our Advisor for actions taken on our behalf, in good faith and in our best interest and without negligence or misconduct or, in the case of independent directors, without gross negligence or willful misconduct. As a result, the stockholders and we may have more limited rights against our directors, officers, employees and agents, and our Advisor than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents or our Advisor in some cases.
Stockholders have limited control over changes in our policies.
Our Board of Directors determines our major policies, including our investment objectives, financing, growth, debt capitalization, REIT qualification and distributions. Subject to the investment objectives and limitations set forth in our charter, our Board of Directors may amend or revise these and other policies. Although stockholders will have limited control over changes in our policies, our charter requires the concurrence of a majority of our outstanding stock in order for the Board of Directors to amend our charter (except for amendments that do not adversely affect stockholders’ rights, preferences and privileges), sell all or substantially all of our assets other than in the ordinary course of business or in connection with our liquidation or dissolution, cause our merger or other reorganization, or dissolve or liquidate us, other than before our initial investment in property.
Certain related parties will receive substantial fees prior to the payment of distributions to our stockholders.
We have paid and will continue to pay substantial compensation to our Advisor, Property Manager, management and their affiliates and their employees. We have paid and will continue to pay various types of compensation to affiliates of our Sponsor and such affiliates’ employees, including salaries, and other cash compensation. In addition, our Advisor and Property Manager receive compensation for acting, respectively, as our Advisor and Property Manager. In general, this compensation is dependent on our success or profitability. These payments are payable before the payment of dividends to the stockholders and none of these payments are subordinated to a specified return to the stockholders. Also, our Property Manager receives compensation under the Management Agreement though, in general, this compensation would be dependent on our gross revenues. In addition, other related parties may from time to time provide services to us if and as approved by the disinterested directors. It is possible that we could obtain such goods and services from unrelated persons at a lesser price.
We may not be reimbursed by our Advisor for certain operational stage expenses.
Our Advisor may be required to reimburse us for certain operational stage expenses. In the event our Advisor’s net worth or cash flow is not sufficient to cover these expenses, we will not be reimbursed. This may adversely affect our financial condition and our ability to pay distributions.
Limitations on Liability and Indemnification
The liability of directors and officers is limited.
Our directors and officers will not be liable to us or our stockholders for monetary damages unless the director or officer actually received an improper benefit or profit in money, property or services, or is adjudged to be liable to us or our stockholders based on a finding that his or her action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding.
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Our directors are also required to act in good faith in a manner believed by them to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. A director who performs his or her duties in accordance with the foregoing standards should not be liable to us or any other person for failure to discharge his obligations as a director. We are permitted to purchase and maintain insurance or provide similar protection on behalf of any directors, officers, employees and agents, including our Advisor and its affiliates, against any liability asserted which was incurred in any such capacity with us or arising out of such status, except as limited by our charter. This may result in us having to expend significant funds, which will reduce the available cash for distribution to our stockholders.
We may indemnify our directors, officers and agents against loss.
Under our charter, we will, under specified conditions, indemnify and pay or reimburse reasonable expenses to our directors, officers, employees and other agents, including our Advisor and its affiliates, against all liabilities incurred in connection with their serving in such capacities, subject to the limitations set forth in our charter. We may also enter into any contract for indemnity and advancement of expenses in this regard. This may result in us having to expend significant funds, which will reduce the available cash for distribution to our stockholders.
Risks Associated with our Properties and the Market
Real Estate Investment Risks
Operating risks.
Our cash flows from real estate investments may become insufficient to pay our operating expenses and to cover the distributions we have paid and/or declared.
We intend to rely primarily on our cash flow from our investments to pay our operating expenses and to make distributions to our stockholders. The cash flow from equity investments in commercial and residential properties depends on the amount of revenue generated and expenses incurred in operating the properties. If the properties we invest in fail to generate revenue that is sufficient to meet operating expenses, debt service, and capital expenditures, our income and ability to make distributions to stockholders will be adversely affected. We cannot assure you that we will be able to maintain sufficient cash flows to fund operating expenses and debt service payments and dividend at any particular level, if at all. The sufficiency of cash flow to fund future dividend payments will depend on the performance of our real property investments.
Economic conditions may adversely affect our income.
A commercial or residential property’s income and value may be adversely affected by national and regional economic conditions, local real estate conditions such as an oversupply of properties or a reduction in demand for properties, availability of “for sale” properties, competition from other similar properties, our ability to provide adequate maintenance, insurance and management services, increased operating costs (including real estate taxes), the attractiveness and location of the property and changes in market rental rates. A rise in energy costs could result in higher operating costs, which may affect our results from operations. Our income will be adversely affected if a significant number of tenants are unable to pay rent or if our properties cannot be rented on favorable terms. Additionally, if tenants of properties that we lease on a triple-net basis fail to pay required tax, utility and other impositions, we could be required to pay those costs, which would adversely affect funds available for future acquisitions or cash available for distributions. Our performance is linked to economic conditions in the regions where our properties will be located and in the market for residential, office, retail and industrial space generally. Therefore, to the extent that there are adverse economic conditions in those regions, and in these markets generally, that impact the applicable market rents, such conditions could result in a reduction of our income and cash available for distributions and thus affect the amount of distributions we can make to you.
The profitability of our acquisitions is uncertain.
We have acquired properties selectively. Acquisition of properties entails risks that investments will fail to perform in accordance with expectations. In undertaking these acquisitions, we will incur certain risks, including the expenditure of funds on, and the devotion of management’s time to, transactions that may not come to fruition. Additional risks inherent in acquisitions include risks that the properties will not achieve anticipated occupancy levels and that estimates of the costs of improvements to bring an acquired property up to standards established for the market position intended for that property may prove inaccurate.
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Real estate investments are illiquid.
Because real estate investments are relatively illiquid, our ability to vary our portfolio promptly in response to economic or other conditions will be limited. In addition, certain significant expenditures, such as debt service, real estate taxes, and operating and maintenance costs generally are not reduced in circumstances resulting in a reduction in income from the investment. The foregoing and any other factor or event that would impede our ability to respond to adverse changes in the performance of our investments could have an adverse effect on our financial condition and results of operations.
Rising expenses could reduce cash flow and funds available for future acquisitions.
Properties we invest in are subject to increases in tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance, administrative and other expenses. While some of our properties are leased on a triple-net basis or require the tenants to pay a portion of the expenses, renewals of leases or future leases may not be negotiated on that basis, in which event we will have to pay those costs. If we are unable to lease properties on a triple-net basis or on a basis requiring the tenants to pay all or some of the expenses, we would be required to pay those costs, which could adversely affect funds available for future acquisitions or cash available for distributions.
We will depend on tenants who lease from us on a triple-net basis to pay the appropriate portion of expenses.
If the tenants that lease on a triple-net basis fail to pay required tax, utility and other impositions, we could be required to pay those costs for properties we invest in, which would adversely affect funds available for future acquisitions or cash available for distributions. If we lease properties on a triple-net basis, we run the risk of tenant default or downgrade in the tenant’s credit, which could lead to default and foreclosure on the underlying property.
If we purchase assets at a time when the commercial and residential real estate market is experiencing substantial influxes of capital investment and competition for properties, the real estate we purchase may not appreciate or may decrease in value.
The commercial and residential real estate markets from time to time experience a substantial influx of capital from investors. This substantial flow of capital, combined with significant competition for real estate, may result in inflated purchase prices for such assets. To the extent we purchase real estate in such an environment, we are subject to the risk that if the real estate market ceases to attract the same level of capital investment in the future as it is currently attracting, or if the number of companies seeking to acquire such assets decreases, our returns will be lower and the value of our assets may not appreciate or may decrease significantly below the amount we paid for such assets.
The bankruptcy or insolvency of a major commercial tenant would adversely impact us.
Any or all of the commercial tenants in a property we invest in, or a guarantor of a commercial tenant’s lease obligations, could be subject to a bankruptcy proceeding. The bankruptcy or insolvency of a significant commercial tenant or a number of smaller commercial tenants would have an adverse impact on our income and our ability to pay dividends because a tenant or lease guarantor bankruptcy could delay efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. Such an event could cause a decrease or cessation of rental payments that would mean a reduction in our cash flow and the amount available for distributions to stockholders.
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Generally, under bankruptcy law, a tenant has the option of continuing or terminating any un-expired lease. In the event of a bankruptcy, there is no assurance that the tenant or its trustee will continue our lease. If a given lease, or guaranty of a lease, is not assumed, our cash flow and the amounts available for distributions to stockholders may be adversely affected. If the tenant continues its current lease, the tenant must cure all defaults under the lease and provide adequate assurance of its future performance under the lease. If the tenant terminates the lease, we will lose future rent under the lease and our claim for past due amounts owing under the lease will be treated as a general unsecured claim and may be subject to certain limitations. General unsecured claims are the last claims paid in a bankruptcy and therefore this claim could be paid only in the event funds were available, and then only in the same percentage as that realized on other unsecured claims. While the bankruptcy of any tenant and the rejection of its lease may provide us with an opportunity to lease the vacant space to another more desirable tenant on better terms, there can be no assurance that we would be able to do so.
The terms of new leases may adversely impact our income.
Even if the tenants of the properties we invest in do renew their leases, or we relet the units to new tenants, the terms of renewal or reletting may be less favorable than current lease terms. If the lease rates upon renewal or reletting are significantly lower than expected rates, then our results of operations and financial condition will be adversely affected. As noted above, certain significant expenditures associated with each equity investment in real estate (such as mortgage payments, real estate taxes and maintenance costs) are generally not reduced when circumstances result in a reduction in rental income.
We may depend on commercial tenants for our revenue and therefore our revenue may depend on the success and economic viability of our commercial tenants. Our reliance on single or significant commercial tenants in certain buildings may decrease our ability to lease vacated space.
Our financial results will depend in part on leasing space in the properties we acquire to tenants on economically favorable terms. A default by a commercial tenant, the failure of a guarantor to fulfill its obligations or other premature termination of a lease, or a commercial tenant’s election not to extend a lease upon its expiration could have an adverse effect on our income, general financial condition and ability to pay distributions. Therefore, our financial success is indirectly dependent on the success of the businesses operated by the commercial tenants of our properties.
Lease payment defaults by commercial tenants would most likely cause us to reduce the amount of distributions to stockholders. In the event of a tenant default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-letting our property. A default by a significant commercial tenant or a substantial number of commercial tenants at any one time on lease payments to us would cause us to lose the revenue associated with such lease(s) and cause us to have to find an alternative source of revenue to meet mortgage payments and prevent a foreclosure if the property is subject to a mortgage. As a result, lease payment defaults by tenants could reduce our profitability and may cause us to reduce the amount of distributions to stockholders.
Even if the tenants of our properties do renew their leases or we relet the units to new tenants, the terms of renewal or reletting may be less favorable than current lease terms. If the lease rates upon renewal or reletting are significantly lower than expected rates, then our results of operations and financial condition will be adversely affected. Commercial tenants may have the right to terminate their leases upon the occurrence of certain customary events of default and, in other circumstances, may not renew their leases or, because of market conditions, may be able to renew their leases on terms that are less favorable to us than the terms of the current leases. If a lease is terminated, there is no assurance that we will be able to lease the property for the rent previously received or sell the property without incurring a loss. Therefore, the weakening of the financial condition of a significant commercial tenant or a number of smaller commercial tenants and vacancies caused by defaults of tenants or the expiration of leases may adversely affect our operations.
A property that incurs a vacancy could be difficult to re-lease.
A property may incur a vacancy either by the continued default of a tenant under its lease or the expiration of one of our leases. If we terminate any lease following a default by a lessee, we will have to re-lease the affected property in order to maintain our qualification as a REIT. If a tenant vacates a property, we may be unable either to re-lease the property for the rent due under the prior lease or to re-lease the property without incurring additional expenditures relating to the property. In addition, we could experience delays in enforcing our rights against, and collecting rents (and, in some cases, real estate taxes and insurance costs) due from a defaulting tenant. Any delay we experience in re-leasing a property or difficulty in re-leasing at acceptable rates may reduce cash available to make distributions to our stockholders.
In many cases, tenant leases contain provisions giving the tenant the exclusive right to sell particular types of merchandise or provide specific types of services within the particular retail center, or limit the ability of other tenants to sell such merchandise or provide such services. When re-leasing space after a vacancy is necessary, these provisions may limit the number and types of prospective tenants for the vacant space.
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We also may have to incur substantial expenditures in connection with any re-leasing. A number of the properties we invest in may be specifically suited to the particular needs of our tenants. Therefore, we may have difficulty obtaining a new tenant for any vacant space we have in our properties, particularly if the floor plan of the vacant space limits the types of businesses that can use the space without major renovation. If the vacancy continues for a long period of time, we may suffer reduced revenues resulting in less cash dividends to be distributed to stockholders. As noted above, certain significant expenditures associated with each equity investment (such as mortgage payments, real estate taxes and maintenance costs) are generally not reduced when circumstances cause a reduction in income from the investment. The failure to re-lease or to re-lease on satisfactory terms could result in a reduction of our income, funds from operations and cash available for distributions and thus affect the amount of distributions to stockholders. In addition, the resale value of the property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property.
We may be unable to sell a property if or when we decide to do so.
We may give some commercial tenants the right, but not the obligation, to purchase their properties from us beginning a specified number of years after the date of the lease. Some of our leases also generally provide the tenant with a right of first refusal on any proposed sale provisions. These policies may lessen the ability of our Advisor and our Board of Directors to freely control the sale of the property.
Although we may grant a lessee a right of first offer or option to purchase a property, there is no assurance that the lessee will exercise that right or that the price offered by the lessee in the case of a right of first offer will be adequate. In connection with the acquisition of a property, we may agree on restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. Even absent such restrictions, the real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We may not be able to sell any property for the price or on the terms set by us, and prices or other terms offered by a prospective purchaser may not be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. We may be required to expend funds to correct defects or to make improvements before a property can be sold. We may not have funds unavailable to correct such defect or to make such improvements.
We may not make a profit if we sell a property.
The prices that we can obtain when we determine to sell a property will depend on many factors that are presently unknown, including the operating history, tax treatment of real estate investments, demographic trends in the area and available financing. There is a risk that we will not realize any significant appreciation on our investment in a property. Accordingly, stockholders’ ability to recover all or any portion of stockholders’ investment under such circumstances will depend on the amount of funds so realized and claims to be satisfied there from.
We may incur liabilities in connection with properties we acquire.
Our anticipated acquisition activities are subject to many risks. We may acquire properties or entities that are subject to liabilities or that have problems relating to environmental condition, state of title, physical condition or compliance with zoning laws, building codes, or other legal requirements. In each case, our acquisition may be without any recourse, or with only limited recourse, with respect to unknown liabilities or conditions. As a result, if any liability were asserted against us relating to those properties or entities, or if any adverse condition existed with respect to the properties or entities, we might have to pay substantial sums to settle or cure it, which could adversely affect our cash flow and operating results. However, some of these liabilities may be covered by insurance. In addition, we intend to perform customary due diligence regarding each property or entity we acquire. We also will attempt to obtain appropriate representations and indemnities from the sellers of the properties or entities we acquire, although it is possible that the sellers may not have the resources to satisfy their indemnification obligations if a liability arises. Unknown liabilities to third parties with respect to properties or entities acquired might include:
| • | liabilities for clean-up of undisclosed environmental contamination; |
| • | claims by tenants, vendors or other persons dealing with the former owners of the properties; |
| • | liabilities incurred in the ordinary course of business; and |
| • | claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties. |
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Competition with third parties in acquiring and operating properties may reduce our profitability and the return on stockholders’ investment.
We compete with many other entities engaged in real estate investment activities, many of which have greater resources than we do. Specifically, there are numerous commercial developers, real estate companies, real estate investment trusts and U.S. institutional and foreign investors that operate in the markets in which we may operate, that will compete with us in acquiring residential, office, retail, industrial and other properties that will be seeking investments and tenants for these properties. Many of these entities have significant financial and other resources, including operating experience, allowing them to compete effectively with us.
Competitors with substantially greater financial resources than us may generally be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of entities in which investments may be made or risks attendant to a geographic concentration of investments. In addition, those competitors that are not REITs may be at an advantage to the extent they can utilize working capital to finance projects, while we (and our competitors that are REITs) will be required by the annual distribution provisions under the Internal Revenue Code to distribute significant amounts of cash from operations to our stockholders.
Demand from third parties for properties that meet our investment objectives could result in an increase of the price of such properties. If we pay higher prices for properties, our profitability may be reduced and stockholders may experience a lower return on stockholders’ investment. In addition, our properties may be located in close proximity to other properties that will compete against our properties for tenants. Many of these competing properties may be better located and/or appointed than the properties that we will acquire, giving these properties a competitive advantage over our properties, and we may, in the future, face additional competition from properties not yet constructed or even planned. This competition could adversely affect our business. The number of competitive properties could have a material effect on our ability to rent space at our properties and the amount of rents charged.
We could be adversely affected if additional competitive properties are built in locations competitive with our properties, causing increased competition for residential renters, retail customer traffic and creditworthy commercial tenants. In addition, our ability to charge premium rental rates to tenants may be negatively impacted. This increased competition may increase our costs of acquisitions or lower the occupancies and the rent we may charge tenants. This could result in decreased cash flow from tenants and may require us to make capital improvements to properties, which we would not have otherwise made, thus affecting cash available for distributions to stockholders.
We may not have control over costs arising from rehabilitation of properties.
We may elect to acquire properties, which may require rehabilitation. In particular, we may acquire affordable properties that we will rehabilitate and convert to market rate properties. Consequently, we intend to retain independent general contractors to perform the actual physical rehabilitation work and will be subject to risks in connection with a contractor’s ability to control rehabilitation costs, the timing of completion of rehabilitation, and a contractor’s ability to build in conformity with plans and specifications.
We will be subject to the general market risks associated with real estate construction and development.
Our financial performance will depend on the successful development and redevelopment of properties that are owned by entities in which we make preferred equity investments. As a result, we will be subject to the general market risks of real estate development and redevelopment, including weather conditions, the price and availability of materials used, environmental liabilities and zoning laws, and numerous other factors that may materially and adversely affect the success of the projects. If the market softens, the developer may require additional funding and such funding may not be available. In addition, if the market softens, the amount of capital required to be advanced and the required marketing time for such development or redevelopment may both increase, and the developer’s incentive to complete a particular real estate development or redevelopment may decrease. Furthermore, the downside risks of development and redevelopment property investments may be greater than the downside risks of other property investments, and may be more severely impacted by downturns in the economy. Such circumstances may reduce our profitability and the return on your investment.
Our operating results may be negatively affected by potential development and construction delays and resultant increased costs and risks.
We may provide financing or make preferred equity investments to entities that will develop and construct improvements to land or existing buildings at a fixed contract price. We will be subject to risks relating to uncertainties associated with rezoning for development and environmental concerns of governmental entities or community groups and our borrower’s or investee’s ability to control land development costs or to build infrastructure in conformity with plans, specifications and timetables deemed necessary by builders. In cases where we have extended debt financing, a developer’s failure to perform may necessitate legal action by us to compel performance. Performance also may be affected or delayed by conditions beyond such developer’s control. These and other such factors can result in increased costs to the developer that may make it difficult for the developer to make interest payments or to pay preferred dividends to us. Furthermore, we must rely upon projections of the fair market value of property post-development or post-redevelopment, as applicable, when evaluating whether to make loans or preferred equity investments. If our projections are inaccurate, our return on investment could suffer.
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We may incur losses as result of defaults by the purchasers of properties we sell in certain circumstances.
If we decide to sell any of our properties, we will use our best efforts to sell them for cash. However, we may sell our properties by providing financing to purchasers. When we provide financing to purchasers, we will bear the risk of default by the purchaser and will be subject to remedies provided by law. There are no limitations or restrictions on our ability to take purchase money obligations. We may incur losses as a result of such defaults, which may adversely affect our available cash and our ability to make distributions to stockholders.
We may experience energy shortages and allocations.
There may be shortages or increased costs of fuel, natural gas, water, electric power or allocations thereof by suppliers or governmental regulatory bodies in the areas where we purchase properties, in which event the operation of our properties may be adversely affected. Increased costs of fuel may reduce discretionary spending on luxury retail items, which may adversely affect our retail tenants if we purchase retail properties. Our revenues will be dependent upon payment of rent by retailers, which may be particularly vulnerable to uncertainty in the local economy and rising costs of energy for their customers. Such adverse economic conditions could affect the ability of our tenants to pay rent, which could have a material adverse effect on our operating results and financial condition, as well as our ability to pay distributions to you.
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We may acquire properties with lockout provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.
We may acquire properties in exchange for operating partnership units and agree to restrictions on sales or refinancing, called “lock-out” provisions that are intended to preserve favorable tax treatment for the owners of such properties who sell them to us. Lockout provisions may restrict sales or refinancings for a certain period in order to comply with the applicable government regulations. Lockout provisions could materially restrict us from selling or otherwise disposing of or refinancing properties. This would affect our ability to turn our investments into cash and thus affect cash available to return capital to stockholders. Lockout provisions could impair our ability to take actions during the lockout period that would otherwise be in the best interests of our stockholders and, therefore, might have an adverse impact on the value of the shares, relative to the value that would result if the lockout provisions did not exist. In particular, lockout provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.
Changes in applicable laws may adversely affect the income and value of our properties.
The income and value of a property may be affected by such factors as environmental, rent control and other laws and regulations, changes in applicable general and real estate tax laws (including the possibility of changes in the federal income tax laws or the lengthening of the depreciation period for real estate) and interest rates, the availability of financing, acts of nature (such as hurricanes and floods) and other factors beyond our control.
Retail Industry Risks
Our retail properties are subject to the various risks discussed above. In addition, they are subject to the risks discussed below.
Retail conditions may adversely affect our income.
A retail property’s revenues and value may be adversely affected by a number of factors, many of which apply to real estate investment generally, but which also include trends in the retail industry and perceptions by retailers or shoppers of the safety, convenience and attractiveness of the retail property. In addition, to the extent that the investing public has a negative perception of the retail sector, the value of our common stock may be negatively impacted.
Some of our leases provide for base rent plus contractual base rent increases. A number of our retail leases also include a percentage rent clause for additional rent above the base amount based upon a specified percentage of the sales our tenants generate. Under those leases that contain percentage rent clauses, our revenue from tenants may increase as the sales of our tenants increase. Generally, retailers face declining revenues during downturns in the economy. As a result, the portion of our revenue that we may derive from percentage rent leases could decline upon a general economic downturn.
Our revenue may be impacted by the success and economic viability of our anchor retail tenants. Our reliance on single or significant tenants in certain buildings may decrease our ability to lease vacated space.
In the retail sector, any tenant occupying a large portion of the GLA of a retail center, a tenant of any of the triple-net single-user retail properties outside the primary geographical area of investment, commonly referred to as an anchor tenant, or a tenant that is our anchor tenant at more than one retail center, may become insolvent, may suffer a downturn in business, or may decide not to renew its lease. Any of these events would result in a reduction or cessation in rental payments to us and would adversely affect our financial condition.
A lease termination by an anchor tenant could result in lease terminations or reductions in rent by other tenants whose leases permit cancellation or rent reduction if another tenant’s lease is terminated. We may own properties where the tenants may have rights to terminate their leases if certain other tenants are no longer open for business. These “co-tenancy” provisions may also exist in some leases where we own a portion of a retail property and one or more of the anchor tenants leases space in that portion of the center not owned or controlled by us. If such tenants were to vacate their space, tenants with co-tenancy provisions would have the right to terminate their leases with us or seek a rent reduction from us. In such event, we may be unable to re-lease the vacated space.
Similarly, the leases of some anchor tenants may permit the anchor tenant to transfer its lease to another retailer. The transfer to a new anchor tenant could cause customer traffic in the retail center to decrease and thereby reduce the income generated by that retail center. A lease transfer to a new anchor tenant could also allow other tenants to make reduced rental payments or to terminate their leases at the retail center. In the event that we are unable to re-lease the vacated space to a new anchor tenant, we may incur additional expenses in order to re-model the space to be able to re-lease the space to more than one tenant.
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Competition with other retail channels may reduce our profitability and the return on stockholders’ investment.
Retail tenants will face potentially changing consumer preferences and increasing competition from other forms of retailing, such as discount shopping centers, outlet centers, upscale neighborhood strip centers, catalogues, discount shopping clubs, internet and telemarketing. Other retail centers within the market area of properties we invest in will compete with our properties for customers, affecting their tenants’ cash flows and thus affecting their ability to pay rent. In addition, tenants’ rent payments may be based on the amount of sales revenue that they generate. If these tenants experience competition, the amount of their rent may decrease and our cash flow will decrease.
Residential Industry Risks
Our residential properties are subject to the various risks discussed above. In addition, they are subject to the risks discussed below.
The short-term nature of our residential leases may adversely impact our income.
If residents of properties we invest in decide not to renew their leases upon expiration, we may not be able to relet their units. Because substantially all of our residential leases are for apartments, they generally are for terms of no more than one or two years. If we are unable to promptly renew the leases or relet the units then our results of operations and financial condition will be adversely affected. Certain significant expenditures associated with each equity investment in real estate (such as mortgage payments, real estate taxes and maintenance costs) are generally not reduced when circumstances result in a reduction in rental income.
An economic downturn could adversely affect the residential industry and may affect operations for the residential properties that we acquire.
As a result of the effects of the current economic downturn, including increased unemployment rates, the residential industry may experience a significant decline in business caused by a reduction in overall renters. The current economic downturn and increase in unemployment rates may have an adverse effect on our operations if the tenants occupying the residential and office properties we acquire cease making rent payments to us or if there a change in spending patterns resulting in reduced traffic at the retail properties we acquire. Moreover, low residential mortgage interest rates could accompany an economic downturn and encourage potential renters to purchase residences rather than lease them. The residential properties we acquire may experience declines in occupancy rate due to any such decline in residential mortgage interest rates.
Lodging Industry Risks
We may be subject to the risks common to the lodging industry.
Our hotels are subject to all of the risks common to the hotel industry and subject to market conditions that affect all hotel properties. These risks could adversely affect hotel occupancy and the rates that can be charged for hotel rooms as well as hotel operating expenses, and generally include:
| • | increases in supply of hotel rooms that exceed increases in demand; |
| • | increases in energy costs and other travel expenses that reduce business and leisure travel; |
| • | reduced business and leisure travel due to continued geo-political uncertainty, including terrorism; |
| • | adverse effects of declines in general and local economic activity; |
| • | adverse effects of a downturn in the hotel industry; and |
| • | risks generally associated with the ownership of hotels and real estate, as discussed below. |
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We do not have control over the market and business conditions that affect the value of our lodging properties, and adverse changes with respect to such conditions could have an adverse effect on our results of operations, financial condition and cash flows. Hotel properties, including extended stay hotels, are subject to varying degrees of risk generally common to the ownership of hotels, many of which are beyond our control, including the following:
| • | increased competition from other existing hotels in our markets; |
| • | new hotels entering our markets, which may adversely affect the occupancy levels and average daily rates of our lodging properties; |
| • | declines in business and leisure travel; |
| • | increases in energy costs, increased threat of terrorism, terrorist events, airline strikes or other factors that may affect travel patterns and reduce the number of business and leisure travelers; |
| • | increases in operating costs due to inflation and other factors that may not be offset by increased room rates; |
| • | changes in, and the related costs of compliance with, governmental laws and regulations, fiscal policies and zoning ordinances; and |
| • | adverse effects of international, national, regional and local economic and market conditions. |
Adverse changes in any or all of these factors could have an adverse effect on our results of operations, financial condition and cash flows, thereby adversely impacting our ability to service debt and to make distributions to our stockholders.
Third-Party management of lodging properties can adversely affect our properties.
Our lodging properties will be operated by a third-party management company and could be adversely affected if that third-party management company, or its affiliated brands, experiences negative publicity or other adverse developments, such as financial disagreements between the third-party manager and the owner, disagreements about marketing between the third-party manager and the owner and the third-party manager’s brand falls out of favor.
As a REIT, we cannot directly operate our lodging properties.
We cannot and will not directly operate our lodging properties and, as a result, our results of operations, financial position, and ability to service debt and our ability to make distributions to stockholders are dependent on the ability of our third-party management companies and our tenants to operate our hotel properties successfully. In order for us to satisfy certain REIT qualification rules, we cannot directly operate any lodging properties we may acquire or actively participate in the decisions affecting their daily operations. Instead, through a taxable REIT subsidiary, or taxable REIT subsidiary (“TRS”) lessee, we must enter into management agreements with a third-party management company, or we must lease our lodging properties to third-party tenants on a triple-net lease basis. We cannot and will not control this third-party management company or the tenants who operate and are responsible for maintenance and other day-to-day management of our lodging properties, including, but not limited to, the implementation of significant operating decisions. Thus, even if we believe our lodging properties are being operated inefficiently or in a manner that does not result in satisfactory operating results, we may not be able to require the third-party management company or the tenants to change their method of operation of our lodging properties. Our results of operations, financial position, cash flows and our ability to service debt and to make distributions to stockholders are, therefore, dependent on the ability of our third-party management company and tenants to operate our lodging properties successfully.
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We will rely on a third-party hotel management company to establish and maintain adequate internal controls over financial reporting at our lodging properties. In doing this, the property manager should have policies and procedures in place which allows them to effectively monitor and report to us the operating results of our lodging properties which ultimately are included in our consolidated financial statements. Because the operations of our lodging properties ultimately become a component of our consolidated financial statements, we evaluate the effectiveness of the internal controls over financial reporting at all of our properties, including our lodging properties, in connection with the certifications we provide in our quarterly and annual reports on Form 10-Q and Form 10-K, respectively, pursuant to the Sarbanes Oxley Act of 2002. However, we will not control the design or implementation of or changes to internal controls at any of our lodging properties. Thus, even if we believe that our lodging properties are being operated without effective internal controls, we may not be able to require the third-party management company to change its internal control structure. This could require us to implement extensive and possibly inefficient controls at a parent level in an attempt to mitigate such deficiencies. If such controls are not effective, the accuracy of the results of our operations that we report could be affected. Accordingly, our ability to conclude that, as a company, our internal controls are effective is significantly dependent upon the effectiveness of internal controls that our third-party management company will implement at our lodging properties. While we do not consider it likely, it is possible that we could have a significant deficiency or material weakness as a result of the ineffectiveness of the internal controls at one or more of our lodging properties.
If we replace a third-party management company or tenant, we may be required by the terms of the relevant management agreement or lease to pay substantial termination fees, and we may experience significant disruptions at the affected lodging properties. While it is our intent to enter into management agreements with a third-party management company or tenants with substantial prior lodging experience, we may not be able to make such arrangements in the future. If we experience such disruptions, it may adversely affect our results of operations, financial condition and our cash flows, including our ability to service debt and to make distributions to our stockholders.
Our use of the taxable REIT subsidiary structure will increase our expenses.
A TRS structure subjects us to the risk of increased lodging operating expenses. The performance of our TRS lessees is based on the operations of our lodging properties. Our operating risks include not only changes in hotel revenues and changes to our TRS lessees’ ability to pay the rent due to us under the leases, but also increased hotel operating expenses, including, but not limited to, the following cost elements:
| • | wage and benefit costs; |
| • | repair and maintenance expenses; | |
| • | energy costs; |
| • | property taxes; |
| • | insurance costs; and |
| • | other operating expenses. |
Any increases in one or more these operating expenses could have a significant adverse impact on our results of operations, cash flows and financial position.
Failure to properly structure our TRS leases could cause us to incur tax penalties.
A TRS structure subjects us to the risk that the leases with our TRS lessees do not qualify for tax purposes as arms-length which would expose us to potentially significant tax penalties. Our TRS lessees will incur taxes or accrue tax benefits consistent with a “C” corporation. If the leases between us and our TRS lessees were deemed by the Internal Revenue Service to not reflect an arms-length transaction as that term is defined by tax law, we may be subject to tax penalties as the lessor that would adversely impact our profitability and our cash flows.
Failure to maintain franchise licenses could decrease our revenues.
Our inability or that of our third-party management company or our third-party tenants to maintain franchise licenses could decrease our revenues. Maintenance of franchise licenses for our lodging properties is subject to maintaining our franchisor’s operating standards and other terms and conditions. Franchisors periodically inspect lodging properties to ensure that we, our third-party tenants or our third-party management company maintain their standards. Failure by us or one of our third-party tenants or our third-party management company to maintain these standards or comply with other terms and conditions of the applicable franchise agreement could result in a franchise license being canceled. If a franchise license terminates due to our failure to make required improvements or to otherwise comply with its terms, we may also be liable to the franchisor for a termination fee. As a condition to the maintenance of a franchise license, our franchisor could also require us to make capital expenditures, even if we do not believe the capital improvements are necessary, desirable, or likely to result in an acceptable return on our investment. We may risk losing a franchise license if we do not make franchisor-required capital expenditures.
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If our franchisor terminates the franchise license, we may try either to obtain a suitable replacement franchise or to operate the lodging property without a franchise license. The loss of a franchise license could materially and adversely affect the operations or the underlying value of the lodging property because of the loss associated with the brand recognition and/or the marketing support and centralized reservation systems provided by the franchisor. A loss of a franchise license for any of our lodging properties could materially and adversely affect our results of operations, financial condition and our cash flows, including our ability to service debt and make distributions to our stockholders.
Risks associated with employing hotel employees.
We will generally be subject to risks associated with the employment of hotel employees. Any lodging properties we acquire will be leased to a wholly-owned TRS entity and be subject to management agreements with a third-party manager to operate the properties that we do not lease to a third party under a net lease. Hotel operating revenues and expenses for these properties will be included in our consolidated results of operations. As a result, although we do not directly employ or manage the labor force at our lodging properties, we are subject to many of the costs and risks generally associated with the hotel labor force. Our third-party manager will be responsible for hiring and maintaining the labor force at each of our lodging properties and for establishing and maintaining the appropriate processes and controls over such activities. From time to time, the operations of our lodging properties may be disrupted through strikes, public demonstrations or other labor actions and related publicity. We may also incur increased legal costs and indirect labor costs as a result of the aforementioned disruptions, or contract disputes or other events. Our third-party manager may be targeted by union actions or adversely impacted by the disruption caused by organizing activities. Significant adverse disruptions caused by union activities and/or increased costs affiliated with such activities could materially and adversely affect our results of operations, financial condition and our cash flows, including our ability to service debt and make distributions to our stockholders.
Travel and hotel industries have been affected by economic slowdowns, terrorist attacks and other world events.
We cannot presently determine the impact that future events such as military or police activities in the U.S. or foreign countries, future terrorist activities or threats of such activities, natural disasters or health epidemics could have on our business. Our business and lodging properties may continue to be affected by such events, including our hotel occupancy levels and average daily rates, and, as a result, our revenues may decrease or not increase to levels we expect. In addition, other terrorist attacks, natural disasters, health epidemics, acts of war or other significant military activity could have additional adverse effects on the economy in general, and the travel and lodging industry in particular. These factors could have a material adverse effect on our results of operations, financial condition, and cash flows, thereby impacting our ability to service debt and ability to make distributions to our stockholders.
Hotel industry is very competitive.
The hotel industry is intensely competitive, and, as a result, if our third-party management company and our third-party tenants are unable to compete successfully or if our competitors’ marketing strategies are more effective, our results of operations, financial condition, and cash flows including our ability to service debt and to make distributions to our stockholders, may be adversely affected. The hotel industry is intensely competitive. Our lodging properties compete with other existing and new hotels in their geographic markets. Since we do not operate our lodging properties, our revenues depend on the ability of our third-party management company and our-third party tenants to compete successfully with other hotels in their respective markets. Some of our competitors have substantially greater marketing and financial resources than we do. If our third-party management company and our third-party tenants are unable to compete successfully or if our competitors’ marketing strategies are effective, our results of operations, financial condition, ability to service debt and ability to make distributions to our stockholders may be adversely affected.
Hotel industry is seasonal which can adversely affect our hotel properties.
The hotel industry is seasonal in nature, and, as a result, our lodging properties may be adversely affected. The seasonality of the hotel industry can be expected to cause quarterly fluctuations in our revenues. In addition, our quarterly earnings may be adversely affected by factors outside our control, such as extreme or unexpectedly mild weather conditions or natural disasters, terrorist attacks or alerts, outbreaks of contagious diseases, airline strikes, economic factors and other considerations affecting travel. To the extent that cash flows from operations are insufficient during any quarter, due to temporary or seasonal fluctuations in revenues, we may attempt to borrow in order to make distributions to our stockholders or be required to reduce other expenditures or distributions to stockholders.
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Expanding use of internet travel websites by customers can adversely affect our profitability.
The increasing use of internet travel intermediaries by consumers may cause fluctuations in operating performance during the year and otherwise adversely affect our profitability and cash flows. Our third party hotel management company will rely upon Internet travel intermediaries such as Travelocity.com, Expedia.com, Orbitz.com, Hotels.com and Priceline.com to generate demand for our lodging properties. As Internet bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from our third-party management company. Moreover, some of these Internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. Consumers may eventually develop brand loyalties to their reservations system rather than to our third-party management company and/or our brands, which could have an adverse effect on our business because we will rely heavily on brand identification. If the amount of sales made through Internet intermediaries increases significantly and our third-party management company and our third-party tenants fail to appropriately price room inventory in a manner that maximizes the opportunity for enhanced profit margins, room revenues may flatten or decrease and our profitability may be adversely affected.
Industrial Industry Risks
Potential liability as the result of and the cost of compliance with, environmental matters is greater if we invest in industrial properties or lease our properties to tenants that engage in industrial activities.
Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances.
We may invest in properties historically used for industrial, manufacturing and commercial purposes. Some of these properties are more likely to contain, or may have contained, underground storage tanks for the storage of petroleum products and other hazardous or toxic substances. All of these operations create a potential for the release of petroleum products or other hazardous or toxic substances.
Leasing properties to tenants that engage in industrial, manufacturing, and commercial activities will cause us to be subject to increased risk of liabilities under environmental laws and regulations. The presence of hazardous or toxic substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such property as collateral for future borrowings.
Our industrial properties are subject to fluctuations in manufacturing activity in the United States.
Our industrial properties may be adversely affected if manufacturing activity decreases in the United States. Trade agreements with foreign countries have given employers the option to utilize less expensive non-US manufacturing workers. The outsourcing of manufacturing functions could lower the demand for our industrial properties. Moreover, an increase in the cost of raw materials or decrease in the demand of housing could cause a slowdown in manufacturing activity, such as furniture, textiles, machinery and chemical products, and our profitability may be adversely affected.
Office Industry Risks
The loss of anchor tenants for our office properties could adversely affect our profitability.
We may acquire office properties and, as with our retail properties, we are subject to the risk that tenants may be unable to make their lease payments or may decline to extend a lease upon its expiration. A lease termination by a tenant that occupies a large area of space in one of our office properties (commonly referred to as an anchor tenant) could impact leases of other tenants. Other tenants may be entitled to modify the terms of their existing leases in the event of a lease termination by an anchor tenant or the closure of the business of an anchor tenant that leaves its space vacant, even if the anchor tenant continues to pay rent. Any such modifications or conditions could be unfavorable to us as the property owner and could decrease rents or expense recoveries. In the event of default by an anchor tenant, we may experience delays and costs in enforcing our rights as landlord to recover amounts due to us under the terms of our agreements with those parties.
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Declines in overall activity in our markets may adversely affect the performance of our office properties.
Rental income from office properties fluctuates with general market and economic conditions. Our office properties may be adversely affected during periods of diminished economic growth and a decline in white-collar employment. We may experience a decrease in occupancy and rental rates accompanied by increases in the cost of re-leasing space (including for tenant improvements) and in uncollectible receivables. Early lease terminations may significantly contribute to a decline in occupancy of our office properties and may adversely affect our profitability. While lease termination fees increase current period income, future rental income may be diminished because, during periods in which market rents decline, it is unlikely that we will collect from replacement tenants the full contracted amount which had been payable under the terminated leases.
Risks Related to Real Estate-Related Investments
Risks Associated with Investments in Mezzanine and Mortgage Loans
Our Advisor does not have substantial experience investing in mezzanine and mortgage loans, which could result in losses to us.
Neither our Advisor nor any of its affiliates have substantial experience investing in mezzanine or mortgage loans. If we make or acquire such loans, or participations in them, we may not have the necessary expertise to maximize the return on our investment in these types of loans.
The risk of default on mezzanine and mortgage loans is caused by many factors beyond our control, and our ability to recover our investment in foreclosure may be limited.
The default risk on mezzanine and mortgage loans is caused by factors beyond our control, including local and other economic conditions affecting real estate values, interest rate changes, rezoning and failure by the borrower to maintain the property. We do not know whether the values of the property securing the loans will remain at the levels existing on the dates of origination of the loans. If the values of the underlying properties drop, our risk will increase because of the lower value of the security associated with such loans.
In the event that there are defaults under these loans, we may not be able to quickly repossess and sell the properties securing such loans. An action to foreclose on a property securing a loan is regulated by state statutes and regulations and is subject to many delays and expenses typical of any foreclosure action. In the event of default by a mortgagor, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us on the loan, which could reduce the value of our investment in the defaulted loan.
The mezzanine loans in which we may invest involve greater risks of loss than senior loans secured by income-producing real properties.
We may invest in mezzanine loans that take the form of subordinated loans secured by second mortgages on the underlying real property or loans secured by a pledge of the ownership interests of either the entity owning the real property or the entity that owns the interest in the entity owning the real property. These types of investments involve a higher degree of risk than long-term senior mortgage lending secured by income producing real property because the investment may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of the entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt. As a result, we may not recover some or all of our investment.
Our mortgage or mezzanine loans will be subject to interest rate fluctuations, which could reduce our returns as compared to market interest rates and reduce the value of the loans in the event we sell them.
If we invest in fixed-rate, long-term mortgage or mezzanine loans and interest rates rise, the loans could yield a return lower than then-current market rates. If interest rates decrease, we will be adversely affected to the extent that mortgage or mezzanine loans are prepaid, because we may not be able to make new loans at the previously higher interest rate. If we invest in variable-rate loans and interest rates decrease, our revenues will also decrease. Fluctuations in interest rates adverse to our loans could adversely affect our returns on such loans.
The liquidation of our assets may be delayed as a result of our investment in mortgage or mezzanine loans, which could delay distributions to our stockholders.
The mezzanine and mortgage loans we may purchase will be illiquid investments due to their short life, their unsuitability for securitization and the greater difficulty of recoupment in the event of a borrower’s default. If we enter into mortgage or mezzanine loans with terms that expire after the date we intend to have sold all of our properties, any intended liquidation of us may be delayed beyond the time of the sale of all of our properties until all mortgage or mezzanine loans expire or are sold.
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Risks Related to Investments in Real Estate-Related Securities
We may invest in various types of real estate-related securities.
We may invest in real estate-related securities, including securities issued by other real estate companies, mortgage-backed securities (“MBS”) or collateralized debt obligations (“CDOs”). We may also invest in real estate-related securities of both publicly traded and private real estate companies. Neither we nor our Advisor may have the expertise necessary to maximize the return on our investment in real estate-related securities. If our Advisor determines that it is advantageous to us to make the types of investments in which our Advisor or its affiliates do not have experience, our Advisor intends to employ persons, engage consultants or partner with third parties that have, in our Advisor’s opinion, the relevant expertise necessary to assist our Advisor in evaluating, making and administering such investments.
Investments in real estate-related securities will be subject to specific risks relating to the particular issuer of the securities and may be subject to the general risks of investing in subordinated real estate securities, which may result in losses to us.
Our investments in real estate-related securities will involve special risks relating to the particular issuer of the securities, including the financial condition and business outlook of the issuer. Issuers of real estate-related securities generally invest in real estate or real estate-related assets and are subject to the inherent risks associated with real estate-related investments including risks relating to rising interest rates.
Real estate-related securities are often unsecured and also may be subordinated to other obligations of the issuer. As a result, investments in real estate-related securities are subject to risks of (1) limited liquidity in the secondary trading market in the case of unlisted or thinly traded securities, (2) substantial market price volatility resulting from changes in prevailing interest rates in the case of traded equity securities, (3) subordination to the prior claims of banks and other senior lenders to the issuer, (4) the operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause the issuer to reinvest redemption proceeds in lower yielding assets, (5) the possibility that earnings of the issuer may be insufficient to meet its debt service and distribution obligations and (6) the declining creditworthiness and potential for insolvency of the issuer during periods of rising interest rates and economic slowdown or downturn. These risks may adversely affect the value of outstanding real estate-related securities and the ability of the issuers thereof to repay principal and interest or make distribution payments.
The mortgage loans in which we may invest and the mortgage loans underlying the mortgage backed securities in which we may investment will be subject to delinquency, foreclosure and loss, which could result in losses to us.
Commercial mortgage loans are secured by multifamily or other types of commercial property, and are subject to risks of delinquency and foreclosure and risks of loss that are greater than similar risks associated with loans made on the security of single family residential property. The ability of a borrower to repay a loan secured by a property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. Net operating income of an income producing property can be affected by, among other things: tenant mix, success of tenant businesses, property management decisions, property location and condition, competition from comparable types of properties, changes in laws that increase operating expense or limit rents that may be charged, any need to address environmental contamination at the property, the occurrence of any uninsured casualty at the property, changes in national, regional or local economic conditions and/or specific industry segments, declines in regional or local real estate values, declines in regional or local rental or occupancy rates, increases in interest rates, real estate tax rates and other operating expenses, changes in governmental rules, regulations and fiscal policies, including environmental legislation, acts of God, terrorism, social unrest and civil disturbances.
In the event of any default under a mortgage loan held directly by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our cash flow from operations and limit amounts available for distribution to our stockholders. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy process which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan.
The MBS and CDOs in which we may invest are subject to several types of risks.
MBS are bonds which evidence interests in, or are secured by, a single mortgage loan or a pool of mortgage loans. CDOs are a type of collateralized debt obligation that is backed by commercial real estate assets, such as MBS, mortgage loans, B-notes, or mezzanine paper. Accordingly, the MBS and CDOs we invest in are subject to all the risks of the underlying mortgage loans.
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In a rising interest rate environment, the value of MBS and CDOs may be adversely affected when payments on underlying mortgages do not occur as anticipated, resulting in the extension of the security’s effective maturity and the related increase in interest rate sensitivity of a longer-term instrument. The value of MBS and CDOs may also change due to shifts in the market’s perception of issuers and regulatory or tax changes adversely affecting the mortgage securities markets as a whole. In addition, MBS and CDOs are subject to the credit risk associated with the performance of the underlying mortgage properties. In certain instances, third party guarantees or other forms of credit support can reduce the credit risk.
MBS and CDOs are also subject to several risks created through the securitization process. Subordinate MBS and CDOs are paid interest only to the extent that there are funds available to make payments. To the extent the collateral pool includes a large percentage of delinquent loans, there is a risk that interest payment on subordinate MBS and CDOs will not be fully paid. Subordinate securities of MBS and CDOs are also subject to greater credit risk than those MBS and CDOs that are more highly rated.
If we use leverage in connection with our investment in MBS or CDOs, the risk of loss associated with this type of investment will increase.
We may use leverage in connection with our investment in MBS or CDOs. Although the use of leverage may enhance returns and increase the number of investments that can be made, it may also substantially increase the risk of loss. There can be no assurance that leveraged financing will be available to us on favorable terms or that, among other factors, the terms of such financing will parallel the maturities of the underlying securities acquired. Therefore, such financing may mature prior to the maturity of the MBS or CDOs acquired by us. If alternative financing is not available, we may have to liquidate assets at unfavorable prices to pay off such financing. We may utilize repurchase agreements as a component of our financing strategy. Repurchase agreements economically resemble short-term, variable-rate financing and usually require the maintenance of specific loan-to-collateral value ratios. If the market value of the MBS or CDOs subject to a repurchase agreement decline, we may be required to provide additional collateral or make cash payments to maintain the loan to collateral value ratio. If we are unable to provide such collateral or cash repayments, we may lose our economic interest in the underlying securities.
Investments in real estate-related preferred equity securities involve a greater risk of loss than traditional debt financing.
We may invest in real estate-related preferred equity securities, which may involve a higher degree of risk than traditional debt financing due to several factors, including that such investments are subordinate to traditional loans and are not secured by property underlying the investment. If the issuer defaults on our investment, we would only be able to take action against the entity in which we have an interest, not the property owned by such entity underlying our investment. As a result, we may not recover some or all of our investment, which could result in losses to us.
Market conditions and the risk of further market deterioration may cause a decrease in the value of our real estate securities.
The U.S. credit markets and the sub-prime residential mortgage market have previously experienced and could in the future experience severe dislocations and liquidity disruptions. Sub-prime mortgage loans have previously experienced and could in the future experience increased rates of delinquency, foreclosure and loss. These and other related events have a significant impact on the capital markets associated not only with sub-prime mortgage-backed securities and asset-backed securities and CDOs, but also with the U.S. credit and financial markets as a whole.
We may invest in any real estate securities, including MBS and CDOs, that contain assets that could be classified as sub-prime residential mortgages. The values of many of these securities are sensitive to the volatility of the credit markets, and many of these securities may be adversely affected by future developments. In addition, to the extent there is turmoil in the credit markets, it has the potential to materially affect both the value of our real estate related securities investments and/or the availability or the terms of financing that we may anticipate utilizing in order to leverage our real estate related securities investments.
Market volatility may make the valuation of these securities more difficult, particularly the MBS and CDO assets. Management’s estimate of the value of these investments incorporates a combination of independent pricing of agency and third-party dealer valuations, as well as comparable sales transactions. However, the methodologies that we will use in valuing individual investments are generally based on a variety of estimates and assumptions specific to the particular investments, and actual results related to the investments therefore often vary materially from such assumptions or estimates.
Because there is significant uncertainty in the valuation of, or in the stability of the value of, certain of these securities holdings, the fair values of such investments as reflected in our results of operations may not reflect the prices that we would obtain if such investments were actually sold. Furthermore, due to market events, many of these investments are subject to rapid changes in value caused by sudden developments which could have a material adverse effect on the value of these investments.
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A portion of our real estate securities investments may be illiquid and we may not be able to adjust our portfolio in response to changes in economic and other conditions.
Certain of the real estate securities that we may purchase in the future in connection with privately negotiated transactions may not be registered under the relevant securities laws, resulting in a prohibition against their sale, transfer pledge or other disposition except in a transaction exempt from the registration requirements of those laws. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited.
Interest rate and related risks may cause the value of our real estate securities investments to be reduced.
Interest rate risk is the risk that fixed income securities will decline in value because of changes in market interest rates. Generally, when market interest rates rise, the market value of such securities will decline, and vice versa. Our investment in such securities means that the net asset value and market price of the common shares may tend to decline if market interest rates rise.
During periods of rising interest rates, the average life of certain types of securities may be extended because of slower than expected principal payments. This may lock in a below-market interest rate, increase the security’s duration and reduce the value of the security. This is known as extension risk. During periods of declining interest rates, an issuer may be able to exercise an option to prepay principal earlier than scheduled, which is generally known as call or prepayment risk. If this occurs, we may be forced to reinvest in lower yielding securities. This is known as reinvestment risk. An issuer may redeem an obligation if the issuer can refinance the debt at a lower cost due to declining interest rates or an improvement in the credit standing of the issuer. These risks may reduce the value of our real estate securities investments.
Real Estate Financing Risks
General Financing Risks
We have incurred mortgage indebtedness and other borrowings, which may increase our business risks.
We acquired and intend to continue to acquire properties subject to existing financing or by borrowing new funds. In addition, we incur or increase our mortgage debt by obtaining loans secured by selected or all of the real properties to obtain funds to acquire additional real properties. We may also borrow funds if necessary to satisfy the requirement that we distribute to stockholders as dividends at least 90% of our annual REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain, or otherwise as is necessary or advisable to assure that we maintain our qualification as a REIT for U.S. federal income tax purposes.
We incur mortgage debt on a particular real property if we believe the property’s projected cash flow is sufficient to service the mortgage debt. However, if there is a shortfall in cash flow, requiring us to use cash from other sources to make the mortgage payments on the property, then the amount available for distributions to stockholders may be affected. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and our loss of the property securing the loan, which is in default.
For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. We may, in some circumstances, give a guaranty on behalf of an entity that owns one of our properties. In these cases, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, there is a risk that more than one real property may be affected by a default.
Our mortgage debt contains clauses providing for prepayment penalties. If a lender invokes these penalties upon the sale of a property or the prepayment of a mortgage on a property, the cost to us to sell the property could increase substantially, and may even be prohibitive. This could lead to a reduction in our income, which would reduce cash available for distribution to stockholders and may prevent us from borrowing more money. Moreover, our financing arrangements involving balloon payment obligations involve greater risks than financing arrangements whose principal amount is amortized over the term of the loan. At the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell the property at a price sufficient to make the balloon payment.
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If we have insufficient working capital reserves, we will have to obtain financing from other sources.
We have established working capital reserves that we believe are adequate to cover our cash needs. However, if these reserves are insufficient to meet our cash needs, we may have to obtain financing to fund our cash requirements. Sufficient financing may not be available or, if available, may not be available on economically feasible terms or on terms acceptable to us. If mortgage debt is unavailable at reasonable rates, we will not be able to place financing on the properties, which could reduce the number of properties we can acquire and the amount of distributions per share.
If we place mortgage debt on the properties, we run the risk of being unable to refinance the properties when the loans come due, or of being unable to refinance on favorable terms. If interest rates are higher when the properties are refinanced, our income could be reduced, which would reduce cash available for distribution to stockholders and may prevent us from borrowing more money. Additional borrowing for working capital purposes will increase our interest expense, and therefore our financial condition and our ability to pay distributions may be adversely affected.
We may not have funding or capital resources for future improvements.
When a commercial tenant at a property we invest in does not renew its lease or otherwise vacates its space in such properties, it is likely that, in order to attract one or more new tenants, we will be required to expend substantial funds for leasing costs, tenant improvements and tenant refurbishments to the vacated space. We will incur certain fixed operating costs during the time the space is vacant as well as leasing commissions and related costs to re-lease the vacated space. We may also have similar future capital needs in order to renovate or refurbish any of our properties for other reasons.
Also, in the event we need to secure funding sources in the future but are unable to secure such sources or are unable to secure funding on terms we feel are acceptable, we may be required to defer capital improvements or refurbishment to a property. This may cause such property to suffer from a greater risk of obsolescence or a decline in value and/or produce decreased cash flow as the result of our inability to attract tenants to the property. If this happens, we may not be able to maintain projected rental rates for affected properties, and our results of operations may be negatively impacted. Or, we may be required to secure funding on unfavorable terms.
We may be adversely affected by limitations in our charter on the aggregate amount we may borrow.
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.
That limitation could have adverse business consequences such as:
| • | limiting our ability to purchase additional properties; |
| • | causing us to lose our REIT status if additional borrowing was necessary to pay the required minimum amount of cash distributions to our stockholders to maintain our status as a REIT; |
| • | causing operational problems if there are cash flow shortfalls for working capital purposes; and |
| • | resulting in the loss of a property if, for example, financing was necessary to repay a default on a mortgage. |
Our debt financing for acquisitions is frequently determined from appraised values in lieu of acquisition cost. As appraisal values are typically greater than acquisition cost for the type of value assets we seek to acquire, our debt can be expected to exceed certain leverage limitations defined in our charter. Our Board, including all of its independent directors, has approved and will continue to approve any leverage exceptions as required by our Articles of Incorporation.
Any excess borrowing over the 300% level will be disclosed to stockholders in our next quarterly report, along with justification for such excess. As of December 31, 2015, our total borrowings represented 66% of net assets.
Lenders may require us to enter into restrictive covenants relating to our operations.
In connection with obtaining financing, a bank or other lender could impose restrictions on us affecting our ability to incur additional debt and our distribution and operating policies. Loan documents we enter into may contain negative covenants limiting our ability to, among other things, further mortgage our properties, discontinue insurance coverage or replace Lightstone Value Plus REIT, LLC as our Advisor. In addition, prepayment penalties imposed by banks or other lenders could affect our ability to sell properties when we want.
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If lenders are not willing to make loans to our Sponsor because of previous defaults on some of the Sponsor’s properties, lenders may be less inclined to make loans to us and we may not be able to obtain financing for any future acquisitions.
Certain of our Sponsor’s program and non-program properties were adversely affected by market conditions and their impact on the real estate market. For example, increased unemployment and the resulting decrease in business travel has adversely affected the occupancy rates and revenues per room at our Sponsor’s lodging properties. After an analysis of these factors and other factors, taking into account increased costs of borrowing, dislocations in the credit markets and that certain properties were not generating sufficient cash flow to cover their fixed costs, the Sponsor elected to stop paying payments on the non-recourse debt obligations for certain program and non-program properties. As a result, lenders may be less willing to make loans to our Sponsor or its affiliates. If lenders are unwilling to make loans to us, we may be unable to purchase certain properties or may be required to defer capital improvements or refurbishments to our properties. Additionally, sellers of real property may be less inclined to enter into negotiations with us if they believe that we may be unable to obtain financing. The inability to purchase certain properties may negatively affect our ability to generate funds from operations. Additionally, the inability to improve our properties may cause such property to suffer from a greater risk of obsolescence or a decline in value, which could result in a decrease in our cash flow from the inability to attract tenants.
Financing Risks on the Property Level
Some of our mortgage loans may have “due on sale” provisions.
In purchasing properties subject to financing, we may obtain financing with “due-on-sale” and/or “due-on-encumbrance” clauses. Due-on-sale clauses in mortgages allow a mortgage lender to demand full repayment of the mortgage loan if the borrower sells the mortgaged property. Similarly, due-on-encumbrance clauses allow a mortgage lender to demand full repayment if the borrower uses the real estate securing the mortgage loan as security for another loan.
These clauses may cause the maturity date of such mortgage loans to be accelerated and such financing to become due. In such event, we may be required to sell our properties on an all-cash basis, to acquire new financing in connection with the sale, or to provide seller financing. It is not our intent to provide seller financing, although it may be necessary or advisable for us to do so in order to facilitate the sale of a property. It is unknown whether the holders of mortgages encumbering our properties will require such acceleration or whether other mortgage financing will be available. Such factors will depend on the mortgage market and on financial and economic conditions existing at the time of such sale or refinancing.
Lenders may be able to recover against our other properties under our mortgage loans.
We will seek secured loans (which are nonrecourse) to acquire properties. However, only recourse financing may be available, in which event, in addition to the property securing the loan, the lender may look to our other assets for satisfaction of the debt. Thus, should we be unable to repay a recourse loan with the proceeds from the sale or other disposition of the property securing the loan, the lender could look to one or more of our other properties for repayment. Also, in order to facilitate the sale of a property, we may allow the buyer to purchase the property subject to an existing loan whereby we remain responsible for the debt.
Our mortgage loans may charge variable interest.
Some of our mortgage loans may be subject to fluctuating interest rates based on certain index rates, such as the prime rate. Future increases in the index rates would result in increases in debt service on variable rate loans and thus reduce funds available for acquisitions of properties and dividends to the stockholders.
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Insurance Risks
We may suffer losses that are not covered by insurance.
If we suffer losses that are not covered by insurance or that are in excess of insurance coverage, we could lose invested capital and anticipated profits. We intend to cause comprehensive insurance to be obtained for our properties, including casualty, liability, fire, extended coverage and rental loss customarily obtained for similar properties in amounts which our Advisor determines are sufficient to cover reasonably foreseeable losses, with policy specifications and insured limits that we believe are adequate and appropriate under the circumstances. Some of our commercial tenants may be responsible for insuring their goods and premises and, in some circumstances, may be required to reimburse us for a share of the cost of acquiring comprehensive insurance for the property, including casualty, liability, fire and extended coverage customarily obtained for similar properties in amounts which our Advisor determines are sufficient to cover reasonably foreseeable losses. Material losses may occur in excess of insurance proceeds with respect to any property as insurance proceeds may not provide sufficient resources to fund the losses. However, there are types of losses, generally of a catastrophic nature, such as losses due to wars, earthquakes, floods, hurricanes, pollution, environmental matters, mold or, in the future, terrorism which are either uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments.
Material losses may occur in excess of insurance proceeds with respect to any property, as insurance proceeds may not provide sufficient resources to fund the losses. However, there are types of losses, generally of a catastrophic nature, such as losses due to wars, earthquakes, floods, hurricanes, pollution, environmental matters, mold or, in the future, terrorism which are either uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments.
Insurance companies have recently begun to exclude acts of terrorism from standard coverage. Terrorism insurance is currently available at an increased premium, and it is possible that the premium will increase in the future or that terrorism coverage will become unavailable. However, mortgage lenders in some cases have begun to insist that commercial owners purchase specific coverage against terrorism as a condition for providing loans. We intend to obtain terrorism insurance if required by our lenders, but the terrorism insurance that we obtain may not be sufficient to cover loss for damages to our properties as a result of terrorist attacks. In addition, we may not be able to obtain insurance against the risk of terrorism because it may not be available or may not be available on terms that are economically feasible. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses.
There is no assurance that we will have adequate coverage for such losses. If such an event occurred to, or caused the destruction of, one or more of our properties, we could lose both our invested capital and anticipated profits from such property. In addition, certain losses resulting from these types of events are uninsurable and others may not be covered by our terrorism insurance. Terrorism insurance may not be available at a reasonable price or at all.
In December 2007, the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) was enacted into law and as a result of subsequent amendments, TRIPRA currently extends the federal terrorism insurance backstop through 2020. The government backstop the extension provides, contributes to the continued stabilization of the terrorism insurance market place allowing us the opportunity to secure coverage at commercially reasonable rates, and thus mitigate certain of the risks described above.
In addition, many insurance carriers are excluding asbestos-related claims from standard policies, pricing asbestos endorsements at prohibitively high rates or adding significant restrictions to this coverage. Because of our inability to obtain specialized coverage at rates that correspond to the perceived level of risk, we may not obtain insurance for acts of terrorism or asbestos-related claims. We will continue to evaluate the availability and cost of additional insurance coverage from the insurance market. If we decide in the future to purchase insurance for terrorism or asbestos, the cost could have a negative impact on our results of operations. If an uninsured loss or a loss in excess of insured limits occurs on a property, we could lose our capital invested in the property, as well as the anticipated future revenues from the property and, in the case of debt that is recourse to us, would remain obligated for any mortgage debt or other financial obligations related to the property. Any loss of this nature would adversely affect us. Although we intend to adequately insure our properties, there is no assurance that we will successfully do so.
Compliance with Laws
The costs of compliance with environmental laws and regulations may adversely affect our income and the cash available for any distributions.
All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and aboveground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal.
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Under various federal, state and local laws, ordinances and regulations, a current or previous owner, developer or operator of real estate may be liable for the costs of removal or remediation of hazardous or toxic substances at, on, under or in its property. The costs of removal or remediation could be substantial. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent such property or to use the property as collateral for future borrowing.
Environmental laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous or toxic materials. Even if more than one person may have been responsible for the contamination, each person covered by the environmental laws may be held responsible for all of the clean-up costs incurred. In addition, third parties may sue the owner or operator of a site for damages and costs resulting from environmental contamination arising from that site. The presence of hazardous or toxic materials, or the failure to address conditions relating to their presence properly, may adversely affect the ability to rent or sell the property or to borrow using the property as collateral.
Persons who dispose of or arrange for the disposal or treatment of hazardous or toxic materials may also be liable for the costs of removal or remediation of such materials, or for related natural resource damages, at or from an off-site disposal or treatment facility, whether or not the facility is or ever was owned or operated by those persons. In addition, environmental laws today can impose liability on a previous owner or operator of a property that owned or operated the property at a time when hazardous or toxic substances were disposed on, or released from, the property. A conveyance of the property, therefore, does not relieve the owner or operator from liability.
There may be potential liability associated with lead-based paint arising from lawsuits alleging personal injury and related claims. Typically, the existence of lead paint is more of a concern in residential units than in commercial properties. Although a structure built prior to 1978 may contain lead-based paint and may present a potential for exposure to lead, structures built after 1978 are not likely to contain lead-based paint.
Property values may also be affected by the proximity of such properties to electric transmission lines. Electric transmission lines are one of many sources of electro-magnetic fields (“EMFs”) to which people may be exposed. Research completed regarding potential health concerns associated with exposure to EMFs has produced inconclusive results. Notwithstanding the lack of conclusive scientific evidence, some states now regulate the strength of electric and magnetic fields emanating from electric transmission lines and other states have required transmission facilities to measure for levels of EMFs.
On occasion, lawsuits have been filed (primarily against electric utilities) that allege personal injuries from exposure to transmission lines and EMFs, as well as from fear of adverse health effects due to such exposure. This fear of adverse health effects from transmission lines has been considered both when property values have been determined to obtain financing and in condemnation proceedings. We may not, in certain circumstances, search for electric transmission lines near our properties, but are aware of the potential exposure to damage claims by persons exposed to EMFs.
Recently, indoor air quality issues, including mold, have been highlighted in the media and the industry is seeing mold claims from lessees rising. To date, we have not incurred any material costs or liabilities relating to claims of mold exposure or abating mold conditions. However, due to the recent increase in mold claims and given that the law relating to mold is unsettled and subject to change, we could incur losses from claims relating to the presence of, or exposure to, mold or other microbial organisms, particularly if we are unable to maintain adequate insurance to cover such losses. We may also incur unexpected expenses relating to the abatement of mold on properties that we may acquire.
Limited quantities of asbestos-containing materials are present in various building materials such as floor coverings, ceiling texture material, acoustical tiles and decorative treatments. Environmental laws govern the presence, maintenance and removal of asbestos. These laws could be used to impose liability for release of, and exposure to, hazardous substances, including asbestos-containing materials, into the air. Such laws require that owners or operators of buildings containing asbestos (1) properly manage and maintain the asbestos, (2) notify and train those who may come into contact with asbestos and (3) undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building. Such laws may impose fines and penalties on building owners or operators who fail to comply with these requirements. These laws may allow third parties to seek recovery from owners or operators of real properties for personal injury associated with exposure to asbestos fibers. As the owner of our properties, we may be potentially liable for any such costs.
There is no assurance that properties, which we acquire in the future, will not have any material environmental conditions, liabilities or compliance concerns. Accordingly, we have no way of determining at this time the magnitude of any potential liability to which we may be subject arising out of environmental conditions or violations with respect to the properties we own.
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The costs of compliance with laws and regulations relating to our residential properties may adversely affect our income and the cash available for any distributions.
Various laws, ordinances, and regulations affect multi-family residential properties, including regulations relating to recreational facilities, such as activity centers and other common areas. We intend for our properties to have all material permits and approvals to operate. In addition, rent control laws may also be applicable to any of the properties.
Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations, stricter interpretation of existing laws or the future discovery of environmental contamination may require material expenditures by us. Future laws, ordinances or regulations may impose material environmental liabilities, and the current environmental condition of our properties might be affected by the operations of the tenants, by the existing condition of the land, by operations in the vicinity of the properties, such as the presence of underground storage tanks, or by the activities of unrelated third parties.
These laws typically allow liens to be placed on the affected property. In addition, there are various local, state and federal fire, health, life-safety and similar regulations which we may be required to comply with, and which may subject us to liability in the form of fines or damages for noncompliance.
Any newly acquired or developed multi-family residential properties must comply with Title II of the Americans with Disabilities Act (the “ADA”) to the extent that such properties are “public accommodations” and/or “commercial facilities” as defined by the ADA. Compliance with the ADA requires removal of structural barriers to handicapped access in certain public areas of the properties where such removal is “readily achievable.” We intend for our properties to comply in all material respects with all present requirements under the ADA and applicable state laws.
We will attempt to acquire properties, which comply with the ADA or place the burden on the seller to ensure compliance with the ADA. We may not be able to acquire properties or allocate responsibilities in this manner. Noncompliance with the ADA could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages to private litigants. The cost of defending against any claims of liability under the ADA or the payment of any fines or damages could adversely affect our financial condition and affect cash available to return capital and the amount of distributions to stockholders.
The Fair Housing Act (the FHA) requires, as part of the Fair Housing Amendments Act of 1988, apartment communities first occupied after March 13, 1990 to be accessible to the handicapped. Noncompliance with the FHA could result in the imposition of fines or an award of damages to private litigants. We intend for any of our properties that are subject to the FHA to be in compliance with such law. The cost of defending against any claims of liability under the FHA or the payment of any fines or damages could adversely affect our financial condition.
Changes in applicable laws and regulations may adversely affect the income and value of our properties.
The income and value of a property may be affected by such factors as environmental, rent control and other laws and regulations and changes in applicable general and real estate tax laws (including the possibility of changes in the federal income tax laws or the lengthening of the depreciation period for real estate). For example, the properties we will acquire will be subject to real and personal property taxes that may increase as property tax rates change and as the properties are assessed or reassessed by taxing authorities. We anticipate that most of our leases will generally provide that the property taxes or increases therein, are charged to the lessees as an expense related to the properties that they occupy. As the owner of the properties, however, we are ultimately responsible for payment of the taxes to the government. If property taxes increase, our tenants may be unable to make the required tax payments, ultimately requiring us to pay the taxes. In addition, we will generally be responsible for property taxes related to any vacant space. If we purchase residential properties, the leases for such properties typically will not allow us to pass through real estate taxes and other taxes to residents of such properties. Consequently, any tax increases may adversely affect our results of operations at such properties.
Failure to comply with applicable laws and regulations where we invest could result in fines, suspension of personnel of our Advisor, or other sanctions. Compliance with new laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures, which could reduce the available cash flow for distributions to our stockholders. Additionally, future laws, ordinances or regulations may impose material environmental liability, which may have a material adverse effect on our results of operations.
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Risks Related to General Economic Conditions and Terrorism
If we invest our capital in marketable securities of real estate-related companies pending an acquisition of real estate, our profits may be adversely affected by the performance of the specific investments we make.
A resolution passed by our Board of Directors allows us from time to time to invest up to 30% of our available cash in marketable securities of real estate related companies. Issuers of real estate securities generally invest in real estate or real estate related assets and are subject to the inherent risks associated with real estate related investments discussed below, including risks relating to rising interest rates or volatility in the credit markets. Our investments in marketable securities of real estate related companies will involve special risks relating to the particular issuer of securities, including the financial condition and business outlook of the issuer. Substantial market price volatility caused by general economic or market conditions, including disruptions in the credit markets, may require us to mark down the value of these investments, and our profits and results of operations may be adversely affected.
Adverse economic conditions have negatively affected our returns and profitability.
The timing, length and severity of any economic slowdown that the nation experiences cannot be predicted with certainty. Since we may liquidate within ten years after August 2009, when the proceeds from our initial public offering were fully invested, there is a risk that depressed economic conditions at that time could cause cash flow and appreciation upon the sale of our properties, if any, to be insufficient to allow sufficient cash remaining after payment of our expenses for a significant return on stockholders’ investment.
It is possible that the economic impact of terrorist attacks may have an adverse effect on the ability of the tenants of our properties to pay rent. In addition, insurance on our real estate may become more costly and coverage may be more limited due to such events. The instability of the U.S. economy may also reduce the number of suitable investment opportunities available to us and may slow the pace at which those investments are made. In addition, armed hostilities and further acts of terrorism may directly impact our properties.
These developments may subject us to increased risks and, depending on their magnitude, could have a material adverse effect on our business and stockholders’ investment.
Current state of debt markets could limit our ability to obtain financing which may have a material adverse impact on our earnings and financial condition.
The commercial real estate debt markets have experienced volatility as a result of certain factors including the tightening of underwriting standards by lenders and credit rating agencies and the significant inventory of unsold Collateralized Mortgage Backed Securities in the market. Credit spreads for major sources of capital have widened significantly as investors have demanded a higher risk premium. This results in lenders increasing the cost for debt financing. Should the overall cost of borrowings increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of our acquisitions. This may result in our acquisitions generating lower overall economic returns and potentially reducing cash flow available for distribution.
Dislocations in the debt markets may reduce the amount of capital that is available to finance real estate, which, in turn, (a) will no longer allow real estate investors to rely on capitalization rate compression to generate returns and (b) may slow real estate transaction activity, all of which may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition and operations of real properties and mortgage loans. Investors will need to focus on market-specific growth dynamics, operating performance, asset management and the long-term quality of the underlying real estate.
In addition, the state of the debt markets could have an impact on the overall amount of capital investing in real estate which may result in price or value decreases of real estate assets.
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U.S. Federal Income Tax Risks
Stockholders’ investment has various U.S. federal income tax risks.
Stockholders should consult their own tax advisors concerning the effects of U.S. federal, state and local income tax law on an investment and on stockholders’ individual tax situation.
If we fail to maintain our qualification as a REIT, our dividends will not be deductible to us, and our income will be subject to taxation. We intend to maintain our qualification as a REIT under the Internal Revenue Code, which will afford us significant tax advantages. The requirements to maintain this qualification, however, are complex. If we fail to meet these requirements, our dividends will not be deductible to us and we will have to pay a corporate level tax on our income. This would substantially reduce our cash available to pay distributions and stockholders’ yield on stockholders’ investment. In addition, tax liability might cause us to borrow funds, liquidate some of our investments or take other steps, which could negatively affect our operating results.
Moreover, if our REIT status is terminated because of our failure to meet a technical REIT test or if we voluntarily revoke our election, we would be disqualified from electing treatment as a REIT for the four taxable years following the year in which REIT status is lost. This could materially and negatively affect stockholders’ investment by causing a loss of common stock value.
Stockholders may have tax liability on distributions that they elect to reinvest in common stock but would not receive the cash from such distributions to pay such tax liability.
If stockholders participate in our DRIP, such stockholders will be deemed to have received, and for U.S. federal income tax purposes will be taxed on, the amount reinvested in common stock to the extent the amount reinvested was not a tax-free return of capital. As a result, unless a stockholder is a tax-exempt entity, it may have to use funds from other sources to pay its tax liability on the value of the common stock received.
The opinion of Proskauer Rose LLP regarding our status as a REIT does not guarantee our ability to remain a REIT.
We believe that we have qualified as a REIT commencing with our taxable year ending December 31, 2006. Our qualification as a REIT depends upon our ability to meet, through investments, actual operating results, distributions and satisfaction of specific stockholder rules, the various tests imposed by the Internal Revenue Code. Our legal counsel, Proskauer Rose LLP will not review these operating results or compliance with the qualification standards. We may not satisfy the REIT requirements in the future. Also, this opinion represents Proskauer Rose LLP’s legal judgment based on the law in effect as of the date of our prospectus and is not binding on the Internal Revenue Service or the courts, and could be subject to modification or withdrawal based on future legislative, judicial or administrative changes to the federal income tax laws, any of which could be applied retroactively, which could result in our disqualification as a REIT.
Failure to qualify as a REIT or to maintain such qualification could materially and negatively impact stockholders’ investment and its yield to stockholders by causing a loss of common share value and by substantially reducing our cash available to pay distributions.
If the Operating Partnership fails to maintain its status as a partnership, its income may be subject to taxation.
We intend to maintain the status of the Operating Partnership as a partnership for U.S. federal income tax purposes. However, if the Internal Revenue Service were to successfully challenge the status of the Operating Partnership as a partnership for such purposes, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that the Operating Partnership could make to us. This would also result in our failing to qualify as a REIT, and becoming subject to a corporate level tax on our own income. This would substantially reduce our cash available to pay distributions and the yield on stockholders’ investment. In addition, if any of the partnerships or limited liability companies through which the Operating Partnership owns its properties, in whole or in part, loses its characterization as a partnership for U.S. federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to the Operating Partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain our REIT qualification.
Even REITS may be subject to U.S. federal, state and local taxes.
Even if we qualify and maintain our status as a REIT, we may become subject to U.S. federal income taxes and related state and local taxes. For example, if we have net income from a “prohibited transaction,” such income will be subject to a 100% tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain net capital gain we earn from the sale or other disposition of our property and pay income tax directly on such income. This will result in our stockholders being treated for tax purposes as though they had received their proportionate shares of such retained income and paid the tax on it directly.
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However, to the extent we have already paid income taxes directly on such income; our stockholders will also be credited with their proportionate share of such taxes already paid by us. Stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability unless they file U.S. federal income tax returns and thereon seek a refund of such tax. We may also be subject to state and local taxes on our income or property, either directly or at the level of the Operating Partnership or at the level of the other companies through which we indirectly own our assets such as our TRSs, which are subject to full U.S. federal, state and local corporate-level income taxes. Any taxes we pay directly or indirectly will reduce our cash available for distribution to our stockholders.
As a result, we may not be able to continue to satisfy the REIT requirements, and it may cease to be in our best interests to continue to do so in the future.
Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on your investment.
For so long as we qualify as a REIT, our ability to dispose of property during the first few years following acquisition may be restricted to a substantial extent as a result of our REIT qualification. Under applicable provisions of the Code regarding prohibited transactions by REITs, while we qualify as a REIT, we will be subject to a 100% penalty tax on any gain recognized on the sale or other disposition of any property (other than foreclosure property) that we own, directly or through any subsidiary entity, including our Operating Partnership, but generally excluding our TRSs, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of trade or business. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. While we qualify as a REIT, we avoid the 100% prohibited transaction tax by (1) conducting activities that may otherwise be considered prohibited transactions through a TRS (but such TRS will incur income taxes), (2) conducting our operations in such a manner so that no sale or other disposition of an asset we own, directly or through any subsidiary, will be treated as a prohibited transaction or (3) structuring certain dispositions of our properties to comply with a prohibited transaction safe harbor available under the Code for properties held for at least two years. However, no assurance can be given that any particular property we own, directly or through any subsidiary entity, including our Operating Partnership, but generally excluding our TRSs, will not be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business.
We may choose to make distributions in our own stock, in which case you may be required to pay income taxes in excess of the cash dividends you receive.
In connection with our qualification as a REIT, we are required to distribute at least 90% of our taxable income (excluding net capital gains) to our stockholders. In order to satisfy this requirement, we may distribute taxable dividends that are payable in cash and shares of our common stock at the election of each stockholder. Generally, under IRS Revenue Procedure 2010-12, up to 90% of any such taxable dividend with respect to the taxable years 2010 and 2011 could be payable in our common stock. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current or accumulated earnings and profits for U.S. federal income tax purposes. As a result, U.S. stockholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. Accordingly, U.S. stockholders receiving a distribution of our shares may be required to sell shares received in such distribution or may be required to sell other stock or assets owned by them, at a time that may be disadvantageous, in order to satisfy any tax imposed on such distribution. If a U.S. stockholder sells the stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock, by withholding or disposing of part of the shares in such distribution and using the proceeds of such disposition to satisfy the withholding tax imposed. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, such sale may put downward pressure on the price of our common stock.
Further, while Revenue Procedure 2010-12 generally applies only to taxable dividends payable in a combination of cash and stock with respect to the taxable years 2010 and 2011, it is unclear whether and to what extent we will be able to pay taxable dividends in cash and stock in later years. Moreover, various tax aspects of such a taxable cash/stock dividend are uncertain and have not yet been addressed by the IRS. No assurance can be given that the IRS will not impose additional requirements in the future with respect to taxable cash/stock dividends, including on a retroactive basis, or assert that the requirements for such taxable cash/stock dividends have not been met.
Future changes in the income tax laws could adversely affect our profitability.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure you that any such changes will not adversely affect the taxation of our stockholders. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. You are urged to consult with your tax advisor with respect to the impact of recent legislation on your investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares. You also should note that our counsel’s tax opinion is based upon existing law, applicable as of the date of its opinion, all of which will be subject to change, either prospectively or retroactively.
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Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S. federal income tax purposes as a corporation. As a result, our charter provides our Board of Directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the vote of our stockholders. Our Board of Directors has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS:
None applicable.
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| Leasable | Percentage Occupied for | Annualized Revenues based | Annualized Revenues per | |||||||||||||||
| Year Built | Square | the Year Ended | on rents at | square foot December 31, | ||||||||||||||
| Location | (Range of years built) | Feet | December 31, 2015 | December 31, 2015 | 2015 | |||||||||||||
| Wholly Owned and Consolidiated Real Estate Properties: | ||||||||||||||||||
| Retail: | ||||||||||||||||||
| St. Augustine Outlet Center | St. Augustine, FL | 1998 | 335,460 | 91.9 | % | $4.0 million | $ | 13.10 | ||||||||||
| Oakview Plaza | Omaha, NE | 1999 - 2005 | 176,774 | 87.0 | % | $2.3 million | $ | 14.67 | ||||||||||
| DePaul Plaza | Bridgeton, MO | 1985 | 187,090 | 88.4 | % | $1.9 million | $ | 11.79 | ||||||||||
| Retail Total | 699,324 | 89.7 | % | |||||||||||||||
| Industrial: | ||||||||||||||||||
| 7 Flex/Industrial Buildings within the Gulf Coast Industrial Portfolio | New Orleans, LA | 1980-2000 | 339,700 | 63.5 | % | $2.5 million | $ | 11.46 | ||||||||||
| 4 Flex/Industrial Buildings within the Gulf Coast Industrial Portfolio | San Antonio, TX | 1982-1986 | 484,369 | 80.0 | % | $1.8 million | $ | 4.57 | ||||||||||
| 3 Flex/Industrial Buildings within the Gulf Coast Industrial Portfolio | Baton Rouge, LA | 1985-1987 | 182,792 | 13.2 | % | $0.2 million | $ | 10.13 | ||||||||||
| Industrial Total | 1,006,861 | 62.3 | % | |||||||||||||||
| Percentage Occupied for | Annualized Revenues based | Annualized Revenues per | ||||||||||||||||
| Year Built | Leasable | the Year Ended | on rents at | unit | ||||||||||||||
| Location | (Range of years built) | Units | December 31, 2015 | December 31, 2015 | December 31, 2015 | |||||||||||||
| Multi-Family Residential: | ||||||||||||||||||
| Southeastern Michigan Multi-Family Properties (Four Apartment Buildings) | Southeast MI | 1965-1972 | 1,017 | 96.0 | % | $8.4 million | $ | 8,638 | ||||||||||
| Gantry Park (Multi-Family Apartment Building) | Queens, NY | 2014 | 199 | 96.5 | % | $8.1 million | $ | 42,437 | ||||||||||
| Residential Total | 1,216 | 96.1 | % | |||||||||||||||
| Year to date | Percentage Occupied for | Revenue per Available | Average Daily Rate for the | |||||||||||||||||
| Available | the Year Ended | Room through | Year Ended December 31, | |||||||||||||||||
| Location | Year Built | Rooms | December 31, 2015 | December 31, 2015 | 2015 | |||||||||||||||
| Wholly-Owned and Consolidated Hospitality Property: | ||||||||||||||||||||
| DoubleTree - Danvers | Danvers, Massachusetts | 1978 | 132,495 | 61.9 | % | $ | 78.98 | $ | 127.49 | |||||||||||
Annualized revenue is defined as the minimum monthly payments due as of December 31, 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.
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.
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.
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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.
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 4. Mine Safety Disclosures
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES:
Shareholder Information
As of March 15, 2016, we had approximately 25.5 million common shares outstanding, held by a total of 7,094 stockholders. The number of stockholders is based on the records of DST Systems Inc., which serves as our registrar and transfer agent.
Market Information
The Company’s shares of common stock are not currently listed on a national securities exchange. The Company may seek to list its shares of common stock for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares of common stock at this time. The Company does not anticipate that there would be any market for its shares of common stock until they are listed for trading. In the event the Company does not obtain listing prior to the tenth anniversary of the completion or termination of its 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 Company.
Tender Offer
August 6, 2013 we completed a tender offer repurchasing from our shareholders approximately 4.7 million shares of our common stock at a price of $10.60 per share, or an aggregate amount of approximately $50 million. Approximately 5.0 million shares of common stock were properly tendered and not withdrawn prior to the tender offer’s expiration on July 31, 2013 and, in accordance with the proration provisions applicable to the tender offer, approximately 4.7 million shares were repurchased.
Net Asset Value
On March 22, 2016, our Board of Directors determined and approved our estimated net asset value of approximately $360.0 million and resulting estimated net asset values per share of our common stock of (i) $13.71 before allocations to an affiliate of our sponsor, The Lightstone Group, LLC (the “Sponsor”), as holder of subordinated profits interests in our Operating Partnership (“SLPs”) and (ii) $11.80 after allocations to the holder of SLPs, both as of September 30, 2015. As of the date of this filing, although our Board of Directors has not approved and we have not sought stockholder approval to adopt a formal plan of liquidation of the Company, certain distributions may be payable to the holder of the SLPs in connection with a liquidation event. Accordingly, we are presenting our estimated net asset value per common share on both a “before” and “after” hypothetical liquidation event basis. The “after” hypothetical liquidation event basis reflects an estimate of the distributions which would be payable upon our liquidation to the holder of the SLPs. Additionally, we believe there have been no material changes between September 30, 2015 and the date of this filing to the net values of our assets and liabilities that existed as of September 30, 2015, other than those already reflected in the valuation and disclosed herein. We are providing these estimated net asset values per share of common stock to assist broker-dealers that participated in our initial public offering in meeting their customer account statement reporting obligation under the National Association of Securities Dealers (“NASD”) Conduct Rule 2340 as required by the Financial Industry Regulatory Authority (“FINRA”) and to assist plan fiduciaries in their requirement to determine the fair market value of plan assets.
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Process and Methodology
The estimated net asset values per share of our common stock were determined after consultation with Lightstone Value Plus REIT, LLC, our advisor (the “Advisor”) and Robert A. Stanger & Co, Inc. (“Stanger”), an independent third-party valuation firm. The engagement of Stanger was approved by our Board of Directors. Stanger prepared appraisal reports (the “Stanger Appraisal Reports”), summarizing key inputs and assumptions, on 19 of the 35 properties (collectively, the “Stanger Appraised Properties”) in which we held ownership interests as of September 30, 2015. The Stanger Appraised Properties consist of (i) two properties in our Retail Segment - the St. Augustine Outlet Center and DePaul Plaza; (ii) four properties in our Multi-Family Residential Segment - the Southeastern Michigan Multi-Family Properties; (iii) a parcel of land located next to Oakview Plaza; and (iv)12 hospitality properties – the DoubleTree – Danvers property (our Hospitality Segment) and our ownership interest in 11 select services hotels, or hospitality properties, owned by an unconsolidated joint venture (the “Joint Venture”). The Joint Venture was formed between us and the operating partnership of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a real estate investment trust also sponsored by our Sponsor, in which we and Lightstone II have 2.5% and 97.5% ownership interests. Stanger also prepared a net asset value report (the “NAV Report”) which estimates the net asset values per share of our common stock as of September 30, 2015. The NAV Report relied upon the Stanger Appraisal Reports for the Stanger Appraised Properties, an appraisal report prepared by another independent third-party valuation firm for Gantry Park Landing, one of our multi-family residential properties (the “Gantry Park Appraisal”), the outstanding principal balance of the non-recourse mortgage indebtedness on both the Gulf Coast Industrial Portfolio (14 industrial properties) and Oakview Plaza (a retail property), Stanger’s estimated value of our mortgage notes payable and other debt both receivable and payable, Stanger’s value opinion with respect to our ownership interest in the Joint Venture and our other investments in related parties, Stanger’s estimate of the distributions which would be due to the holder of the SLPs assuming our hypothetical liquidation, and the Advisor’s estimate of the value of our other assets and liabilities, to calculate estimated net asset values per share of our common stock, all as of September 30, 2015.
The table below sets forth the calculation of our estimated net asset value and resulting estimated net asset values per share of common stock both “before” and “after” estimated distributions which would be payable to the holder of SLPs assuming a hypothetical liquidation event as of September 30, 2015, as well as the comparable calculations as of September 30, 2014 and 2013, respectively. Certain amounts are reflected net of noncontrolling interests, as applicable. Dollar and share amounts are presented in thousands, except per share data.
| As of September 30, 2015 | As of September 30, 2014 | As of September 30, 2013 | ||||||||||||||||||||||
| Value | Per Share | Value | Per Share | Value | Per Share | |||||||||||||||||||
| Net Assets: | ||||||||||||||||||||||||
| Real Estate Properties | $ | 303,250 | $ | 11.55 | $ | 426,754 | $ | 16.24 | $ | 434,281 | $ | 16.68 | ||||||||||||
| Non-Real Estate Assets: | ||||||||||||||||||||||||
| Cash and cash equivalents | 127,812 | 56,908 | 38,224 | |||||||||||||||||||||
| Investments in related parties | 76,232 | 21,837 | - | |||||||||||||||||||||
| Marketable equity securities | 75,848 | 138,984 | 138,491 | |||||||||||||||||||||
| Restricted escrows | 8,793 | 12,926 | 39,521 | |||||||||||||||||||||
| Mortgage loans receivable | 5,075 | 5,212 | 5,341 | |||||||||||||||||||||
| Other assets | 5,160 | 8,896 | 13,802 | |||||||||||||||||||||
| Net assets held for disposition | - | - | 9,521 | |||||||||||||||||||||
| Total non-real estate assets | 298,920 | 11.39 | 244,763 | 9.32 | 244,900 | 9.41 | ||||||||||||||||||
| Total Assets | 602,170 | 22.94 | 671,517 | 25.56 | 679,181 | 26.09 | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||
| Mortgage notes payable | (199,800 | ) | (246,233 | ) | (278,518 | ) | ||||||||||||||||||
| Notes payable | (18,625 | ) | (39,113 | ) | (41,783 | ) | ||||||||||||||||||
| Other liabilities | (23,158 | ) | (24,629 | ) | (48,080 | ) | ||||||||||||||||||
| Total liabilities | (241,583 | ) | (9.20 | ) | (309,975 | ) | (11.80 | ) | (368,381 | ) | (14.15 | ) | ||||||||||||
| Other Non-Controlling Interests | (617 | ) | (0.03 | ) | (617 | ) | (0.02 | ) | (3,744 | ) | (0.14 | ) | ||||||||||||
| Net Asset Value before Allocations to Subordinated | ||||||||||||||||||||||||
| Profits Interests | 359,970 | $ | 13.71 | 360,925 | $ | 13.74 | $ | 307,056 | $ | 11.80 | ||||||||||||||
| Allocations to Subordinated Profits Interests assuming a Hypothetical Liquidation(1) | (50,226 | ) | (1.91 | ) | (50,455 | ) | (1.92 | ) | (35,027 | ) | (1.35 | ) | ||||||||||||
| Net Asset Value assuming a Hypothetical Liquidation | $ | 309,744 | $ | 11.80 | $ | 310,470 | $ | 11.82 | $ | 272,029 | $ | 10.45 | ||||||||||||
Notes:
| (1) | These estimated net asset values and resulting net asset values per share of common stock reflect the estimated distributions which would be payable upon our liquidation to the holder of SLPs, assuming a hypothetical liquidation event at the indicated valuation date and amount. |
| (2) | Includes approximately 0.5 million shares of our common stock assuming the conversion of an equal number of common units of limited partnership interest in our Operating Partnership (“common units”). |
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Independent Valuation Firm:
Stanger was selected by our Board of Directors to appraise the Stanger Appraised Properties and prepare the NAV Report. Stanger is engaged in the business of appraising commercial real estate properties and is not affiliated with us or the Advisor. The compensation we paid to Stanger was based on the scope of work and not on the appraised values of our real estate properties. The appraisals were performed in accordance with the Code of Ethics and the Uniform Standards of Professional Appraisal Practice, or USPAP, the real estate appraisal industry standards created by The Appraisal Foundation. The Stanger Appraisal Reports were reviewed, approved, and signed by an individual with the professional designation of MAI licensed in the state where each real property is located. The use of the reports is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. In preparing its reports, Stanger did not, and was not requested to, solicit third-party indications of interest for our common stock in connection with possible purchases thereof or the acquisition of all or any part of us.
Stanger collected reasonably available material information that it deemed relevant in appraising our real estate properties. Stanger relied in part on property-level information provided by the Advisor, including (i) property historical and projected operating revenues and expenses; (ii) property lease agreements and/or lease abstracts; and (iii) information regarding recent or planned capital expenditures.
In conducting their investigation and analyses, Stanger took into account customary and accepted financial and commercial procedures and considerations as they deemed relevant. Although Stanger reviewed information supplied or otherwise made available by us or the Advisor for reasonableness, they assumed and relied upon the accuracy and completeness of all such information and of all information supplied or otherwise made available to them by any other party and did not independently verify any such information. Stanger has assumed that any operating or financial forecasts and other information and data provided to or otherwise reviewed by or discussed with Stanger were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of our management, our Board of Directors, and/or the Advisor. Stanger relied on us to advise them promptly if any information previously provided became inaccurate or was required to be updated during the period of their review.
In performing its analyses, Stanger made numerous other assumptions as of various points in time with respect to industry performance, general business, economic, and regulatory conditions, and other matters, many of which are beyond their control and our control. Stanger also made assumptions with respect to certain factual matters. For example, unless specifically informed to the contrary, Stanger assumed that we have clear and marketable title to each real estate property appraised, that no title defects exist, that any improvements were made in accordance with law, that no hazardous materials are present or were present previously, that no significant deed restrictions exist, and that no changes to zoning ordinances or regulations governing use, density, or shape are pending or being considered. Furthermore, Stanger’s analyses, opinions, and conclusions were necessarily based upon market, economic, financial, and other circumstances and conditions existing as of or prior to the date of the Stanger Appraisal Reports, and any material change in such circumstances and conditions may affect Stanger’s analyses and conclusions. The Stanger Appraisal Reports contain other assumptions, qualifications, and limitations that qualify the analyses, opinions, and conclusions set forth therein. Furthermore, the prices at which our real estate properties may actually be sold could differ from Stanger’s analyses.
Stanger is actively engaged in the business of appraising commercial real estate properties similar to those owned by us in connection with public security offerings, private placements, business combinations, and similar transactions. We do not believe that there are any material conflicts of interest between Stanger, on the one hand, and us, the Sponsor, the Advisor, and our affiliates, on the other hand. Our Advisor engaged Stanger on behalf of our Board of Directors to deliver their reports to assist in the net asset value calculation and Stanger received compensation for those efforts. In addition, we agreed to indemnify Stanger against certain liabilities arising out of this engagement. In the two years prior to the date of this filing, Stanger was previously engaged by us for appraisal and valuation services in connection with our financial reporting requirements. Stanger has received usual and customary fees in connection with those services. Stanger may from time to time in the future perform other services for us and our Sponsor or other affiliates of the Sponsor, so long as such other services do not adversely affect the independence of Stanger as certified in the applicable Appraisal Reports.
Although Stanger considered any comments received from us and the Advisor relating to their reports, the final appraised values of the Stanger Appraised Properties were determined by Stanger. The reports are addressed to our Board of Directors to assist our Board of Directors in calculating an estimated value per share of our common stock. The reports are not addressed to the public, may not be relied upon by any other person to establish an estimated value per share of our common stock, and do not constitute a recommendation to any person to purchase or sell any shares of our common stock.
Our goal in calculating our estimated net asset value is to arrive at values that are reasonable and supportable using what we deem to be appropriate valuation methodologies and assumptions. The reports, including the analysis, opinions, and conclusions set forth in such reports, are qualified by the assumptions, qualifications, and limitations set forth in the respective reports. The following is a summary of our valuation methodologies used to value our assets and liabilities by key component:
Real Estate Properties: We have ownership interests in both consolidated and unconsolidated investments in real estate properties (the “Real Estate Properties”). As of September 30, 2015, on a collective basis, we wholly or majority-owned and consolidated the operating results and financial condition of three retail properties containing a total of approximately 0.7 million square feet of retail space (the “Retail Segment”), 14 industrial properties containing a total of approximately 1.0 million square feet of industrial space (the “Industrial Segment”), five multi-family residential properties containing a total of 1,216 units (the “Multi-family Residential Segment”), and one hospitality property containing 363 rooms (the “Hospitality Segment”). Additionally, as of September 30, 2015, we held a 49.0% ownership interest in 1407 Broadway Mezz II, LLC (“1407 Broadway”), an affiliated real estate entity which we account for under the equity method of accounting and which we include in our Real Estate Properties. We also have a 2.5% ownership interest in the Joint Venture, which we account for under the cost method of accounting, which is included in our “Investments in Related Parties” below.
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As described above, we engaged Stanger to provide an appraisal of the Stanger Appraised Properties consisting of 19 of the 35 properties in which we held ownership interests as of September 30, 2015. The Stanger Appraised Properties consist of (i) two properties in our Retail Segment – the St. Augustine Outlet Center and DePaul Plaza; (ii) four properties in our Multi-Family Residential Segment – the Southeastern Michigan Multi-Family Properties; (iii) a parcel of land located next to Oakview Plaza; and (iv) 12 hospitality properties – the DoubleTree – Danvers property (our Hospitality Segment) and our ownership interests in 11 select services hotels, or hospitality properties, owned by the Joint Venture. We engaged another independent third-party valuation firm to provide the Gantry Park Appraisal. In preparing the appraisal reports, Stanger and the other independent third-party valuation firm, among other things:
| • | performed a site visit of each property in connection with this assignment or other assignments; |
| • | interviewed our officers or the Advisor’s personnel to obtain information relating to the physical condition of each appraised property, including known environmental conditions, status of ongoing or planned property additions and reconfigurations, and other factors for such leased properties; |
| • | reviewed lease agreements for those properties subject to a long-term lease and discussed with us or the Advisor certain lease provisions and factors on each property; and |
| • | reviewed the acquisition criteria and parameters used by real estate investors for properties similar to the subject properties, including a search of real estate data sources and publications concerning real estate buyer’s criteria, discussions with sources deemed appropriate, and a review of transaction data for similar properties. |
Stanger and the other independent third-party valuation firm employed the income approach and the sales comparison approach to estimate the value of the appraised properties. The income approach involves an economic analysis of the property based on its potential to provide future net annual income. As part of the valuation, a discounted cash flow analysis (“DCF Analysis”) and direct capitalization analysis was used in the income approach to determine the value of our interest in the portfolio. The indicated value by the income approach represents the amount an investor may pay for the expectation of receiving the net cash flow from the property.
The direct capitalization analysis is based upon the net operating income of the property capitalized at an appropriate capitalization rate for the property based upon property characteristics and competitive position and market conditions at the date of the appraisal.
In applying the DCF Analysis, pro forma statements of operations for the property including revenues and expenses are analyzed and projected over a multi-year period. The property is assumed to be sold at the end of the multi-year holding period. The reversion value of the property which can be realized upon sale at the end of the holding period is calculated based on the capitalization of the estimated net operating income of the property in the year of sale, utilizing a capitalization rate deemed appropriate in light of the age, anticipated functional and economic obsolescence and competitive position of the property at the time of sale. Net proceeds to owners are determined by deducting appropriate costs of sale. The discount rate selected for the DCF Analysis is based upon estimated target rates of return for buyers of similar properties.
The sales comparison approach utilizes indices of value derived from actual or proposed sales of comparable properties to estimate the value of the subject property. The appraiser analyzed such comparable sale data as was available to develop a market value conclusion for the subject property.
Stanger prepared the Stanger Appraisal Reports and the other independent third-party valuation firm prepared the Gantry Park Appraisal, summarizing key inputs and assumptions, for each of the appraised properties using financial information provided by us and our Advisor. From such review, Stanger and the other independent third-party valuation firm selected the appropriate cash flow discount rate, residual discount rate, and terminal capitalization rate in the DCF Analysis, the appropriate capitalization rate in the direct capitalization analysis and the appropriate price per unit in the sales comparison analysis. As for those properties consolidated on our financials, and for which we do not own 100% of the ownership interest, the property value was adjusted to reflect our ownership interest in such property after consideration of the distribution priorities associated with such property. Gantry Park Landing was included in the NAV Report at the “as is” value in the Gantry Park Appraisal.
The estimated values for our investments in real estate may or may not represent current market values and do not equal the book values of our real estate investments in accordance with U.S. GAAP. Our consolidated investments in real estate are currently carried in our consolidated financial statements at their amortized cost basis, adjusted for any loss impairments and bargain purchase gains recognized to date. Our unconsolidated investments in real estate are accounted for under the equity method of accounting in our consolidated financial statements.
As of September 30, 2015, our ownership interests in our Real Estate Properties were valued at $303.3 million, including among others, (i) the Gulf Coast Industrial Portfolio, comprised of 14 industrial properties located in New Orleans, Louisiana, San Antonio, Texas and Baton Rouge, Louisiana, which was valued at $50.8 million and (ii) Oakview Plaza, a retail property located in Omaha, Nebraska, which was valued at $26.1 million and (iii) our 49.0% non-managing membership interest in 1407 Broadway, which was valued at $2.0 million.
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With respect to the Gulf Coast Industrial Portfolio, the loan has been placed in default by the special servicer and we believe the outstanding principal balance of the corresponding mortgage indebtedness of $50.8 million that we do not expect to pay exceeds the estimated fair value of the underlying collateral as of September 30, 2015 and therefore, for valuation purposes its net asset value was deemed to be zero which was accomplished by establishing that the estimated fair value of this portfolio of properties was equal to its associated mortgage debt of $50.8 million. This mortgage loan is nonrecourse to us and we are not required to fund any operating shortfalls and/or refinancing shortfalls.
With respect to Oakview Plaza, we believe the outstanding principal balance of its corresponding mortgage indebtedness of $26.1 million exceeded the estimated fair value of the underlying collateral as of September 30, 2015 and therefore, for valuation purposes its net asset value was deemed to be zero which was accomplished by establishing that the estimated fair value of this property was equal to its associated mortgage debt of $26.1 million. This mortgage loan is nonrecourse to us and we are not required to fund any operating shortfalls and/or refinancing shortfalls.
We have a 49.0% membership interest 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. As of September 30, 2015, the estimated fair value of our membership interest in 1407 Broadway was approximately $2.0 million, which is equivalent to our carrying value and represents our estimated share of its remaining net current assets which were subsequently distributed to us during the first quarter of 2016.
Excluding (i) the Gulf Coast Industrial Portfolio, (ii) Oakview Plaza, (iii) our ownership interest in the Joint Venture (see “Investments in Related Parties” below), and (iv) 1407 Broadway, the following summarizes the key assumptions that were used in the discounted cash flow models to estimate the value of the remaining eight properties included in our Real Estate Properties (by operating segment), as of September 30, 2015:
| Multi-Family | Hospitality | |||||||||||||||
| Retail Segment | Residential Segment | Segment | Total | |||||||||||||
| (2 properties) | (5 properties) | (1 property) | (8 properties) | |||||||||||||
| Weighted-average: | ||||||||||||||||
| Exit capitalization rate | 8.16 | % | 6.23 | % | 8.25 | % | 7.07 | % | ||||||||
| Discount rate | 8.97 | % | 7.93 | % | 10.25 | % | 8.58 | % | ||||||||
| Annual market rent growth rate | 1.11 | % | 3.00 | % | 3.86 | % | 2.62 | % | ||||||||
| Annual net operating income growth rate | 4.23 | % | 3.00 | % | 5.39 | % | 3.71 | % | ||||||||
| Holding period (in years) | 10.0 | 10.0 | 10.0 | 10.0 | ||||||||||||
While we believe that the assumptions made by Stanger and the other independent third-party valuation firm are reasonable, a change in these assumptions would impact the calculations of the estimated value of these eight properties included in our Real Estate Properties. Assuming all other factors remain unchanged, the following table summarizes the estimated change in the values (dollars in thousands) of these eight properties included in our Real Estate Properties (by operating segment) which would result from a 25 basis point increase or decrease in exit capitalization rates and discount rates:
| Multi-Family | Hospitality | |||||||||||||||
| Retail Segment | Residential Segment | Segment | Total | |||||||||||||
| (2 properties) | (5 properties) | (1 property) | (8 properties) | |||||||||||||
| Increase of 25 basis points | ||||||||||||||||
| Exit capitalization rate | $ | (954 | ) | $ | (2,838 | ) | $ | (513 | ) | $ | (4,305 | ) | ||||
| Discount rate | (1,067 | ) | (4,247 | ) | (605 | ) | (5,919 | ) | ||||||||
| Decrease of 25 basis points: | ||||||||||||||||
| Exit capitalization rate | $ | 1,014 | $ | 3,120 | $ | 545 | $ | 4,679 | ||||||||
| Discount rate | 1,092 | 4,648 | 619 | 6,359 | ||||||||||||
As of September 30, 2015, the aggregate estimated value of our interests in the Real Estate Properties was approximately $303.3 million and the aggregate cost of our Real Estate Properties was approximately $260.0 million, including $26.7 million of capital and tenant improvements invested subsequent to acquisition. The estimated value of our Real Estate Properties compared to the original acquisition price plus subsequent capital improvements through September 30, 2015, results in an estimated overall increase in the real estate value of 16.6%.
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Cash and Cash Equivalents: The estimated values of our cash and cash equivalents approximate their carrying values due to their short maturities.
Investments in Related Parties: As of September 30, 2015, we had various investments in related parties, which were classified as investments in affiliates in our consolidated balance sheets, as follows:
| · | We hold a 2.5% non-managing ownership interest in the Joint Venture, which we account for under the cost method of accounting. In a series of transactions consummated during the first half of 2015, the Joint Venture acquired our ownership interests in a portfolio of 11 select services hotels, or hospitality properties. As of September 30, 2015, the estimated fair value of our ownership interest in the Joint Venture was approximately $1.7 million compared to our carrying value of approximately $1.5 million, based on a hypothetical liquidation of the estimated value of the Joint Venture’s net assets. |
| · | We have entered into agreements with various related party entities pursuant to which we have made aggregate contributions of $74.5 million to affiliates of our Sponsor which are developing certain residential projects located in the New York metropolitan area. These contributions are made pursuant to instruments (the “Preferred Investments”) that entitle us to monthly preferred distributions at rates ranging from 8% to 12% per annum and are classified as held-to-maturity securities and are recorded at cost. As of September 30, 2015, the aggregate estimated value of our Preferred Investments of $74.5 million approximated their carrying values based on market rates for similar instruments. |
Marketable Securities: The estimated values of our marketable securities are primarily based on level 2 inputs. Level 2 inputs are inputs 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. All of our marketable securities measured using Level 2 inputs were valued based on a market approach using readily available quoted market prices for similar assets.
Restricted Escrows: The estimated values of our restricted escrows approximate their carrying values due to their short maturities.
Mortgage Loans Receivable: The values of our mortgage loans receivable are estimated by applying a discounted cash flow analysis over the remaining expected lives of the investments, excluding any potential transaction costs. The cash flow estimates used in the analysis during the term of the investments are based on the investments’ contractual cash flows, which we anticipate to receive. The expected cash flows for the loans are discounted at rates that we expect a market participant would require for instruments with similar characteristics, including remaining loan term, loan–to–value ratios, type of collateral, current performance, credit enhancements and other factors.
Other Assets: Our other assets consist of tenant accounts receivable and prepaid expenses and other assets. The estimated values of these items approximate their carrying values due to their short maturities. Certain other items, primarily straight-line rent receivable, intangibles and deferred costs, have been eliminated for the purpose of the valuation because those items are already considered in our valuation of the respective investments in real estate properties or financial instruments.
Mortgage Notes Payable: The values for our mortgage loans were estimated using a discounted cash flow analysis, which used inputs based on the remaining loan terms and estimated current market interest rates for mortgage loans with similar characteristics, including remaining loan term and loan-to-value ratios. The current market interest rate was generally determined based on market rates for available comparable debt. The estimated current market interest rates for mortgage loans ranged from 2.99% to 9.97%.
Notes Payable: The estimated value of our notes payable, which consist of our margin loan (no outstanding balance as of September 30, 2015) and revolving line of credit (approximately $18.6 million outstanding as of September 30, 2015), approximates their carrying values because of their short maturities.
Other Liabilities: Our other liabilities consist of our accounts payable and accrued expenses, amounts due to our Sponsor, tenant allowances and deposits payable, distributions payable and deferred rental income. The carrying values of these items were considered to equal their fair value due to their short maturities. Certain other items, primarily intangibles, have been eliminated for the purpose of the valuation because those items are already considered in our valuation of the respective Real Estate Properties or financial instruments.
Other Noncontrolling Interests: Our other noncontrolling interests consist of accrued distributions on common units and SLPs.
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Limitations of Estimated Values per Share of Common Stock
As mentioned above, we are providing these estimated net asset values per share of common stock (i) to assist broker-dealers that participated in our initial public offering in meeting their customer account statement reporting obligations which require them to include a valuation per share of common stock in their customer account statements pursuant to NASD Conduct Rule 2340, and (ii) to assist plan fiduciaries in their requirement to determine the fair market value of plan assets. The current fair values of our shares of common stock may be higher or lower than these valuations. There currently is no public market for our shares of common stock and we do not expect one to develop. We currently have no plans to list our shares of common stock on a national securities exchange or over-the-counter market, or to include our shares of common stock for quotation on any national securities market. Accordingly, it is not possible to determine the market value of our shares of common stock. Privately negotiated sales and sales through intermediaries currently are the only means available to a stockholder to liquidate an investment in shares of our common stock. During the period January 1, 2009 through September 30, 2015, we purchased shares of our common stock through our share redemption program and pursuant to our issuer tender offers of $9.80 and $10.60 per share of common stock, dated October 3, 2011 and May 1, 2013, respectively. In addition, we previously issued shares of our common stock through our distribution reinvestment program, which was suspended by our Board of Directors effective April 15, 2015.
As with any valuation methodology, our methodology is based upon a number of estimates and assumptions that may not be accurate or complete. Further, different parties with different property-specific and general real estate and capital market assumptions, estimates, judgments and standards could derive different estimated net asset values per share of common stock, which could be significantly different from the estimated net asset values per share of common stock determined by our Board of Directors. The estimated net asset values per share of common stock determined by our Board of Directors do not represent the fair value of our assets less liabilities in accordance with U.S. GAAP, and such estimated net values per share of common stock are not a representation, warranty or guarantee that:
| · | a stockholder would be able to resell his or her shares of common stock at either estimated net asset value; |
| · | a stockholder would ultimately realize distributions per share of common stock equal to either estimated net asset value per share of common stock upon liquidation of our assets and settlement of our liabilities or a sale of the Company; |
| · | our shares of common stock would trade at either estimated net asset value per share of common stock on a national securities exchange; |
| · | an independent third-party appraiser or other third-party valuation firm would agree with either estimated net asset value per share of common stock; or |
| · | the methodology used to estimate our net asset values per share of common stock would be acceptable to FINRA or under the Employee Retirement Income Security Act with respect to their respective requirements. |
Neither FINRA, the Internal Revenue Service nor the Department of Labor provides any guidance on the methodology an issuer must use to determine its estimated net asset value per share. As with any valuation methodology, our methodology is based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive different estimated net asset values per share of common stock, and these differences could be significant. The estimated net asset values per share of common stock are not audited and do not represent the fair value of our assets less our liabilities in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), nor do they represent an actual liquidation value of our assets and liabilities or the amount shares of common stock would trade at on a national securities exchange. As of the date of this filing, although we have not sought stockholder approval to adopt a plan of liquidation of the Company, certain distributions may be payable to the holder of SLPs in connection with a liquidation event. Accordingly, we are presenting our estimated net asset value per share of common stock both “before” and “after” estimated allocations to the holder of SLPs assuming a hypothetical liquidation event. Our estimated net asset value per common share “before” allocations to the holder of SLPs is based on the estimated value of our assets less the estimated value of our liabilities divided by the number of our diluted shares of common stock outstanding, all as of the date indicated. Our estimated net asset value per common share “after” allocations to the holder of SLPs is based on the estimated value of our assets less the estimated value of our liabilities less the estimated distributions which would be payable to the holder of SLPs assuming a hypothetical liquidation event divided by the number of our diluted shares of common stock outstanding, all as of the date indicated. Our estimated net asset values per share of common stock do not reflect a discount for the fact we are externally managed, nor do they reflect a real estate portfolio premium/discount versus the sum of the individual property values. Our estimated net asset values per share of common stock do not take into account any estimated penalties that could apply upon the prepayment of certain of our debt obligations or the impact of restrictions on the assumption of certain debt. The net asset value of our shares of common stock will fluctuate over time as a result of, among other things, future acquisitions or dispositions of assets, developments related to individual assets and the management of those assets and changes in the real estate and capital markets. Different parties using different assumptions and estimates could derive a different net asset value and resulting estimated net asset values per share of our common stock, and these differences could be significant. Markets for real estate and real estate-related investments can fluctuate and values are expected to change in the future. We currently plan to continue to update our estimated net asset value and resulting estimated net asset values per share of common stock on at least an annual basis.
Share Repurchase Program
Our share repurchase program may provide eligible stockholders with limited, interim liquidity by enabling them to sell shares back to us, subject to restrictions and applicable law. A selling stockholder must be unaffiliated with us, and must have beneficially held the shares for at least one year prior to offering the shares for sale to us through the share repurchase program. Subject to the limitations described in the Registration Statement, we will also redeem shares upon the request of the estate, heir or beneficiary of a deceased stockholder.
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The prices at which stockholders who have held shares for the required one-year period may sell shares back to us at the lesser of (i) the share price as determined by our Board of Directors or (ii) the purchase price per share if purchased at a reduced price.
On February 14, 2014, our Board of Directors approved an increase to the price for all purchases under our share repurchase program from $9.00 to $10.00 per share. Previously the purchase price was $9.00 per share, except in the case of the death of the stockholder, whereby the purchase price per common share was the lesser of the actual amount paid by the stockholder to acquire the shares or $10.00 per share.
A stockholder must have beneficially held the shares for at least one year prior to offering them for sale to us through the share repurchase program, although if a stockholder redeems all of its shares our Board of Directors has the discretion to exempt shares purchased pursuant to the distribution reinvestment plan from this one year requirement. Other affiliates will not be eligible to participate in share repurchase program.
Pursuant to the terms of the share repurchase program, we will make repurchases, if requested, at least once quarterly. Subject to funds being available, we will limit the number of shares repurchased during any calendar year to two (2.0%) of the weighted average number of shares outstanding during the prior calendar year. Funding for the share repurchase program will come exclusively from proceeds we receive from the sale of shares under our distribution reinvestment plan and other operating funds, if any, as the Board of Directors, at its sole discretion, may reserve for this purpose.
Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares back to us, subject to restrictions. From our inception through December 31, 2014 we redeemed approximately 2.8 million common shares at an average price per share of $9.29 per share. During 2015, we redeemed approximately 0.3 million common shares or 100% of redemption requests received during the period, at an average price per share of $10.00 per share.
Our Board of Directors, at its sole discretion, has the power to terminate the share repurchase program after the end of the offering period, change the price per share under the share repurchase program or reduce the number of shares purchased under the program, if it determines that the funds allocated to the share repurchase program are needed for other purposes, such as the acquisition, maintenance or repair of properties, or for use in making a declared distribution. A determination by our Board of Directors to eliminate or reduce the share repurchase program requires the unanimous affirmative vote of the independent directors.
Distributions
U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with GAAP) determined without regard to the deduction for distributions paid and excluding any net capital gains. In order to continue to qualify for REIT status, we may be required to make distributions in excess of cash available.
Distributions are at the discretion of the Board of Directors. We commenced quarterly distributions beginning February 1, 2006. We have generally paid such distributions through a combination of cash proceeds from sale our common stock, as well as cash from operations and through issuance of common shares from our DRIP. We may continue to pay such distributions from borrowings if we have not generated sufficient cash flow from our operations to fund such distributions. Our ability to pay regular distributions and the size of these distributions will depend upon a variety of factors. For example, our borrowing policy permits us to incur short-term indebtedness, having a maturity of two years or less, and we may have to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. We cannot assure that regular distributions will continue to be made or that we will maintain any particular level of distribution that we have established or may establish.
We are an accrual basis taxpayer, and as
such our REIT taxable income could be higher than the cash available to us. We may therefore borrow to make distributions, which
could reduce the cash available to us, in order to distribute 90% of REIT taxable income as a condition to our election to be
taxed as a REIT. These distributions made with borrowed funds may constitute a return of capital to stockholders. “Return
of capital” refers to distributions to investors in excess of net income. To the extent that distributions to stockholders
exceed earnings and profits, such amounts constitute a return of capital for U.S. federal income tax purposes, although such distributions
might not reduce stockholders’ aggregate invested capital. Because our earnings and profits are reduced for deprecation
and other non-cash items, it is likely that a portion of each distribution will constitute a tax deferred return of capital for
U.S. federal income tax purposes.
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Distributions Declared by our Board of Directors and Source of Distributions
Beginning February 1, 2006, our Board of Directors declared quarterly distributions in the amount of $0.0019178 per share per day payable to stockholders of record at the close of business each day during the applicable period. The annualized rate declared was equal to 7%, which represents the annualized rate of return on an investment of $10.00 per share attributable to these daily amounts, if paid for each day for a 365 day period (the “Annualized Rate”). Subsequently, our Board of Directors has declared regular quarterly distributions at the Annualized Rate, with the exception of the three-month period ended June 30, 2010. The distributions for the three-month period ended June 30, 2010 were at an aggregate annualized rate of 8% based on the share price of $10.00. Through December 31, 2015, we have paid aggregate distribution in the amount of $163.2 million, which includes cash distributions paid to stockholders and common stock issued under our DRIP.
Total dividends declared during the years ended December 31, 2015, 2014 and 2013 were $18.1 million, $18.1 million and $19.8 million, respectively.
The following tables (amounts in thousands) provide a summary of the quarterly distributions declared and the source of distributions for the periods indicated:
| Year
Ended December 31, 2015 | Three
Months Ended December 31, 2015 | Three
Months Ended September 30, 2015 | Three
Months Ended June 30, 2015 | Three
Months Ended March 31, 2015 | ||||||||||||||||||||||||||||||||||||
| Percentage of | Percentage of | Percentage of | Percentage of | Percentage of | ||||||||||||||||||||||||||||||||||||
| Distributions | Q42015 | Distributions | Q3 2015 | Distributions | Q2 2015 | Distributions | Q1 2015 | Distributions | ||||||||||||||||||||||||||||||||
| Distribution period: | ||||||||||||||||||||||||||||||||||||||||
| Date distribution declared | November 13, 2015 | August 14, 2015 | May 13, 2015 | March 27, 2015 | ||||||||||||||||||||||||||||||||||||
| Date distribution paid | January 15, 2016 | October 15, 2015 | July 15, 2015 | April 15, 2015 | ||||||||||||||||||||||||||||||||||||
| Distributions paid | $ | 18,077 | $ | 4,528 | $ | 4,548 | $ | 4,522 | $ | 4,479 | ||||||||||||||||||||||||||||||
| Distributions reinvested | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Total Distributions | $ | 18,077 | $ | 4,528 | $ | 4,548 | $ | 4,522 | $ | 4,479 | ||||||||||||||||||||||||||||||
| Source of distributions: | ||||||||||||||||||||||||||||||||||||||||
| Cash flows provided by operations | $ | 18,077 | 100 | % | $ | 4,528 | 100 | % | $ | 4,548 | 100 | % | $ | 4,522 | 100 | % | $ | 4,479 | 100 | % | ||||||||||||||||||||
| Cash other than cash flows provided by operations | - | 0 | % | - | 0 | % | - | 0 | % | - | 0 | % | - | 0 | % | |||||||||||||||||||||||||
| Proceeds from issuance of common stock through DRIP | - | 0 | % | - | 0 | % | - | 0 | % | - | 0 | % | - | 0 | % | |||||||||||||||||||||||||
| Total Sources | $ | 18,077 | 100 | % | $ | 4,528 | 100 | % | $ | 4,548 | 100 | % | $ | 4,522 | 100 | % | $ | 4,479 | 100 | % | ||||||||||||||||||||
| Cash flows provided by/(used in) operations (GAAP basis) | $ | 21,098 | $ | 4,788 | $ | 6,306 | $ | 5,180 | $ | 4,824 | ||||||||||||||||||||||||||||||
| Year
Ended December 31, 2014 | Three
Months Ended December 31, 2014 | Three
Months Ended September 30, 2014 | Three Months Ended June 30, 2014 | Three Months Ended March 31, 2014 | ||||||||||||||||||||||||||||||||||||
| Percentage of | Percentage of | Percentage of | Percentage of | Percentage of | ||||||||||||||||||||||||||||||||||||
| Distributions | Q4 2014 | Distributions | Q3 2014 | Distributions | Q2 2014 | Distributions | Q1 2014 | Distributions | ||||||||||||||||||||||||||||||||
| Distribution period: | ||||||||||||||||||||||||||||||||||||||||
| Date distribution declared | November 14, 2014 | August 8, 2014 | May 14, 2014 | March 28, 2014 | ||||||||||||||||||||||||||||||||||||
| Date distribution paid | January 15, 2015 | October 15, 2014 | July 15, 2014 | April 15, 2014 | ||||||||||||||||||||||||||||||||||||
| Distributions paid | $ | 12,321 | $ | 3,113 | $ | 3,100 | $ | 3,075 | $ | 3,033 | ||||||||||||||||||||||||||||||
| Distributions reinvested | 5,743 | 1,453 | 1,452 | 1,428 | 1,410 | |||||||||||||||||||||||||||||||||||
| Total Distributions | $ | 18,064 | $ | 4,566 | $ | 4,552 | $ | 4,503 | $ | 4,443 | ||||||||||||||||||||||||||||||
| Source of distributions: | ||||||||||||||||||||||||||||||||||||||||
| Cash flows provided by operations | $ | 12,321 | 68 | % | $ | 2,123 | 46 | % | $ | 3,100 | 68 | % | $ | 3,075 | 68 | % | $ | 3,033 | 68 | % | ||||||||||||||||||||
| Cash other than cash flows provided by operations | 0 | % | 990 | 22 | % | - | 0 | % | - | 0 | % | - | 0 | % | ||||||||||||||||||||||||||
| Proceeds from issuance of common stock through DRIP | 5,743 | 32 | % | 1,453 | 32 | % | 1,452 | 32 | % | 1,428 | 32 | % | 1,410 | 32 | % | |||||||||||||||||||||||||
| Total Sources | $ | 18,064 | 100 | % | $ | 4,566 | 100 | % | $ | 4,552 | 100 | % | $ | 4,503 | 100 | % | $ | 4,443 | 100 | % | ||||||||||||||||||||
| Cash flows provided by/(used in) operations (GAAP basis) | $ | 27,947 | $ | 2,123 | $ | 12,795 | $ | 7,543 | $ | 5,486 | ||||||||||||||||||||||||||||||
| Number of shares (in thousands) of common stock issued pursuant to the Company’s DRIP | 513 | 130 | 130 | 127 | 126 | |||||||||||||||||||||||||||||||||||
| 52 |
| Year
Ended December 31, 2013 | Three
Months Ended December 31, 2013 | Three
Months Ended September 30, 2013 | Three
Months Ended June 30, 2013 | Three
Months Ended March 31, 2013 | ||||||||||||||||||||||||||||||||||||
| Percentage of | Percentage of | Percentage of | Percentage of | Percentage of | ||||||||||||||||||||||||||||||||||||
| Distributions | Q4 2013 | Distributions | Q3 2013 | Distributions | Q2 2013 | Distributions | Q1 2013 | Distributions | ||||||||||||||||||||||||||||||||
| Distribution period: | ||||||||||||||||||||||||||||||||||||||||
| Date distribution declared | November 14, 2013 | August 12, 2013 | May 10, 2013 | March 22, 2013 | ||||||||||||||||||||||||||||||||||||
| Date distribution paid | January 15, 2014 | October 15, 2013 | July 15, 2013 | April 15, 2013 | ||||||||||||||||||||||||||||||||||||
| Distributions paid | $ | 13,521 | $ | 3,076 | $ | 3,286 | $ | 3,595 | $ | 3,564 | ||||||||||||||||||||||||||||||
| Distributions reinvested | 6,268 | 1,426 | 1,532 | 1,670 | 1,640 | |||||||||||||||||||||||||||||||||||
| Total Distributions | $ | 19,789 | $ | 4,502 | $ | 4,818 | $ | 5,265 | $ | 5,204 | ||||||||||||||||||||||||||||||
| Source of distributions: | ||||||||||||||||||||||||||||||||||||||||
| Cash flows provided by operations | $ | 13,521 | 68 | % | $ | 1,956 | 43 | % | $ | 3,286 | 68 | % | $ | 3,595 | 68 | % | $ | 2,197 | 42 | % | ||||||||||||||||||||
| Cash other than cash flows provided by operations | - | 0 | % | 1,120 | 25 | % | - | 0 | % | - | 0 | % | 1,367 | 26 | % | |||||||||||||||||||||||||
| Proceeds from issuance of common stock through DRIP | 6,268 | 32 | % | 1,426 | 32 | % | 1,532 | 32 | % | 1,670 | 32 | % | 1,640 | 32 | % | |||||||||||||||||||||||||
| Total Sources | $ | 19,789 | 100 | % | $ | 4,502 | 100 | % | $ | 4,818 | 100 | % | $ | 5,265 | 100 | % | $ | 5,204 | 100 | % | ||||||||||||||||||||
| Cash flows provided by/(used in) operations (GAAP basis) | $ | 17,109 | $ | 1,956 | $ | 8,046 | $ | 4,910 | $ | 2,197 | ||||||||||||||||||||||||||||||
| Number of shares (in thousands) of common stock issued pursuant to the Company’s DRIP | 559 | 127 | 137 | 149 | 146 | |||||||||||||||||||||||||||||||||||
On March 22, 2016, our Board of Directors declared the quarterly distribution for the three-month period ended March 31, 2016 in the amount of $0.0019178 per share per day payable to stockholders of record on the close of business on the last day of the quarter, which is payable on April 15, 2016.
Recent Sales of Unregistered Securities
During the period covered by this Form 10-K, we did not sell any equity securities that were not registered under the Securities Act of 1933.
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ITEM 6. SELECTED FINANCIAL DATA:
The following selected consolidated financial data are qualified by reference to and should be read in conjunction with our Consolidated Financial Statements and Notes thereto and “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.
| (In Thousands, Except Per Share Amounts) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
| Operating Data: | ||||||||||||||||||||
| Revenues | $ | 55,850 | $ | 57,289 | $ | 49,526 | $ | 44,596 | $ | 40,030 | ||||||||||
| Gain on disposition of unconsolidated affiliated real estate entities | - | 4,418 | 1,200 | 120,607 | 28,109 | |||||||||||||||
| Income/(loss) from investments in affiliated real estate entities | 5,804 | 821 | (1,524 | ) | 728 | (184 | ) | |||||||||||||
| Net income from continuing operations | 45,961 | 21,927 | 13,971 | 112,544 | 8,944 | |||||||||||||||
| Net income/(loss) from discontinued operations | 18,731 | 278 | 2,331 | 7,402 | (835 | ) | ||||||||||||||
| Net income | 64,692 | 22,205 | 16,302 | 119,946 | 8,109 | |||||||||||||||
| Less: net income attributable to noncontrolling interest | (4,468 | ) | (1,329 | ) | (1,388 | ) | (11,625 | ) | (2,509 | ) | ||||||||||
| Net income applicable to Company’s common shares | $ | 60,224 | $ | 20,876 | $ | 14,914 | $ | 108,321 | $ | 5,600 | ||||||||||
| Basic and diluted net income/(loss) per Company’s common share | ||||||||||||||||||||
| Continuing operations | $ | 1.60 | $ | 0.80 | $ | 0.45 | $ | 3.37 | $ | 0.21 | ||||||||||
| Discontinued operations | 0.73 | 0.01 | 0.08 | 0.25 | (0.03 | ) | ||||||||||||||
| Basic and diluted income/(loss) per Company’s common shares | $ | 2.33 | $ | 0.81 | $ | 0.53 | $ | 3.62 | $ | 0.18 | ||||||||||
| Distributions declared for Company’s common shares | $ | 18,077 | $ | 18,064 | $ | 19,789 | $ | 21,026 | $ | 22,160 | ||||||||||
| Weighted average common shares outstanding - basic and diluted | 25,828 | 25,795 | 28,310 | 29,941 | 31,648 | |||||||||||||||
| Balance Sheet Data: | ||||||||||||||||||||
| Assets held for sale | $ | - | $ | 111,505 | $ | 122,053 | $ | 68,889 | $ | 39,650 | ||||||||||
| Total assets | 590,159 | 673,839 | 677,761 | 719,640 | 564,356 | |||||||||||||||
| Long-term obligations | 247,271 | 265,771 | 265,503 | 261,125 | 219,932 | |||||||||||||||
| Liabilities held for sale | - | 70,130 | 78,758 | 19,208 | 25,500 | |||||||||||||||
| Company’s stockholder’s equity | 289,061 | 280,765 | 268,755 | 344,499 | 226,541 | |||||||||||||||
| Other financial data: | ||||||||||||||||||||
| Funds from operations (FFO) attributable to Company’s common shares (1) | $ | 48,942 | $ | 28,971 | $ | 31,730 | $ | 598 | $ | (2,338 | ) | |||||||||
| 1) | For more information about FFO and MFFO, including a reconciliation to our GAAP net income for each period reported, please see Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Funds from Operations and Modified Funds from Operations.” |
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
You should read the following discussion and analysis together with our consolidated financial statements and notes thereto included in this Annual Report on Form 10-K. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see “Special Note Regarding Forward-Looking Statements” above for a description of these risks and uncertainties. Dollar amounts are presented in thousands, except per share data and where indicated in millions.
Overview
The Lightstone REIT, (together with the Operating Partnership (as defined below), the “Company”, also referred to as “we”, “our” or “us” herein) has and may continue to acquire and operate in the future, commercial, residential and hospitality properties and make real estate-related investments, principally in the United States. Our acquisitions and investments are, principally conducted through the Operating Partnership, and may include both portfolios and individual properties. Our commercial holdings currently consist of retail (primarily multi-tenant shopping centers), lodging and industrial properties and our residential properties are principally comprised of ’‘Class B’’ multi-family complexes. All such properties have been and will continue to be acquired and operated by us alone or jointly with others.
As discussed in Note 2 to the 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 entered into an advisory agreement dated April 22, 2005 with Lightstone Value Plus REIT LLC, a Delaware limited liability company, which we refer to as the “Advisor,” pursuant to which the Advisor supervises and manages our day-to-day operations and selects our real estate and real estate related investments, subject to oversight by our Board of Directors. We pay the Advisor fees for services related to the investment and management of our assets, and we reimburse the Advisor for certain expenses incurred on our behalf.
Beginning with the year ended December 31, 2006, we qualified to be taxed as a real estate investment trust (a “REIT”), under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our ordinary taxable income to stockholders. As a REIT, we generally will not be subject to U.S. federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, it will then be subject to federal income taxes on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. As of December 31, 2015, we continue to comply with the requirements for maintaining our REIT status.
To maintain our qualification as a REIT, we engage in certain activities such as providing real estate-related services through taxable REIT subsidiaries (“TRSs”). As such, we are subject to U.S. federal and state income and franchise taxes from these activities.
Acquisitions and Investment Strategy
We have acquired or may acquire fee interests in multi-tenant, community, power and lifestyle shopping centers, and in malls located in highly trafficked retail corridors, high-barrier to entry markets, and sub- markets with constraints on the amount of additional property supply. We have also acquired or may acquire mid-scale, limited services lodging properties and multi-tenant industrial properties located near major transportation arteries and distribution corridors; multi-tenant office properties located near major transportation arteries; and market-rate, middle market multi-family properties at a discount to replacement cost. Additionally, we have made or may make real estate-related investments including certain preferred equity investments in related parties. We do not intend to invest in single family residential properties; leisure home sites; farms; ranches; timberlands; unimproved properties not intended to be developed; or mining properties.
Investments in real estate are made through the purchase of all or part of a fee simple ownership, or all or part of a leasehold interest. We may also purchase limited partnership interests, limited liability company interests and other equity securities. We may also enter into joint ventures with related parties for the acquisition, development or improvement of properties as well as general partnerships, co-tenancies and other participations with real estate developers, owners and others for the purpose of developing, owning and operating real properties. We will not enter into a joint venture to make an investment that we would not be permitted to make on our own. Not more than 10% of our total assets will be invested in unimproved real property. For purposes of this paragraph, “unimproved real properties” does not include properties acquired for the purpose of producing rental or other operating income, properties under construction and properties for which development or construction is planned within one year.
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Current Environment
Our operating results are impacted by the health of the North American economies. Our business and financial performance, including collection of our accounts receivable, recoverability of assets including investments, may be adversely affected by current and future economic conditions, such as a reduction in the availability of credit, financial markets volatility, and recession.
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-K.
Critical Accounting Estimates and Policies
General.
Our consolidated financial statements, included in this annual report, include our accounts, the Operating Partnership (over which we exercise financial and operating control). All inter-company balances and transactions have been eliminated in consolidation.
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of our financial statements requires us to make estimates and judgments about the effects of matters or future events that are inherently uncertain. These estimates and judgments may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
On an ongoing basis, we evaluate our estimates, including contingencies and litigation. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
To assist in understanding our results of operations and financial position, we have identified our critical accounting policies and discussed them below. These accounting policies are most important to the portrayal of our results and financial position, either because of the significance of the financial statement items to which they relate or because they require our management’s most difficult, subjective or complex judgments.
Revenue Recognition and Valuation of Related Receivables.
Our revenue, which is comprised largely of rental income, includes rents that tenants pay in accordance with the terms of their respective leases reported on a straight-line basis over the initial term of the lease. Since our leases may provide for rental increases at specified intervals, straight-line basis accounting requires us to record as an asset, and include in revenue, unbilled rent that we only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. Accordingly, we determine, in our judgment, to what extent the unbilled rent receivable applicable to each specific tenant is collectible. We review unbilled rent receivables on a quarterly basis and take into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collection of unbilled rent with respect to any given tenant is in doubt, we record an increase in our allowance for doubtful accounts or record a direct write-off of the specific rent receivable, which has an adverse effect on our net income for the year in which the allowance is increased or the direct write-off is recorded and decreases our total assets and stockholders’ equity. Revenues from the operations of the hotel are recognized when the services are provided.
In addition, we will defer the recognition of contingent rental income, such as percentage rents, until the specific target which triggers the contingent rental income is achieved. Cost recoveries from tenants will be included in tenant reimbursement income in the period the related costs are incurred.
Investments in Real Estate.
We generally record investments in real estate at cost and capitalize improvements and replacements when they extend the useful life or improve the efficiency of the asset. We expense costs of ordinary repairs and maintenance as incurred. We compute depreciation using the straight-line method over the estimated useful lives of the applicable real estate asset. We generally use estimated useful lives of up to thirty-nine years for buildings and improvements, five to ten years for furniture and fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
We make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because, if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
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We record assets and groups of assets and liabilities which comprise disposal groups as “held for sale” when all of the following criteria are met: a decision has been made to sell, the assets are available for sale immediately, the assets are being actively marketed at a reasonable price in relation to the current fair value, a sale has been or is expected to be concluded within twelve months of the balance sheet date, and significant changes to the plan to sell are not expected. The assets and disposal groups held for sale are valued at the lower of book value or fair value less disposal costs. Once assets are classified as held for sale, we cease recording depreciation expense on those assets. Additionally, we record the operating results and cash flows related to these assets and liabilities as discontinued operations in the Consolidated Statements of Operations and Consolidated Statements of Cash Flows, respectively, for all periods presented, if the operations and cash flows of the disposal group is expected to be eliminated from ongoing operations as a result of the disposal and we will not have any significant continuing involvement in the operations of the disposal group after disposal.
When circumstances such as adverse market conditions indicate a possible impairment of the value of a property, we will review the recoverability of the property’s carrying value. The review of recoverability is based on our estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. Our forecast of these cash flows considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, we record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the property.
We make subjective assessments as to whether there are impairments in the values of our investments in real estate. We evaluate our ability to collect both interest and principal related to any real estate related investments in which we may invest. If circumstances indicate that such investment is impaired, we reduce the carrying value of the investment to its net realizable value. Such reduction in value will be reflected as a charge to operations in the period in which the determination is made.
Real Estate Purchase Price Allocation.
The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, and certain liabilities such as assumed debt and contingent liabilities based in each case on their fair values. Purchase accounting is applied to assets and liabilities related to real estate entities acquired based upon the percentage of interest acquired. Fees incurred related to acquisitions are expensed as incurred within general and administrative costs within the consolidated statements of operations.
Upon acquisition of real estate operating properties, we estimate the fair value of acquired tangible assets and identified intangible assets and liabilities and assumed debt and contingent liabilities at the date of acquisition, based upon an evaluation of information and estimates available at that date. Based on these estimates, we evaluate the existence of goodwill or a gain from a bargain purchase and allocate the initial purchase price to the applicable assets, liabilities and noncontrolling interest, if any. As final information regarding fair value of the assets acquired and liabilities assumed and noncontrolling interest is received and estimates are refined, appropriate adjustments are made to the purchase price allocation. The allocations are finalized as soon as all the information necessary is available and in no case later than within twelve months from the acquisition date.
We allocate the purchase price of an acquired property to tangible assets based on the estimated fair values of those tangible assets assuming the building was vacant. We record above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease including consideration of any bargain renewal periods. We amortize capitalized above-market lease values as a reduction of rental income over the remaining non-cancelable terms of the respective leases. We amortize any capitalized below-market lease values as an increase to rental income over the initial term and any fixed-rate or below-market renewal periods in the respective leases.
We measure the aggregate fair value of other intangible assets acquired based on the difference between (1) the property valued with existing in-place leases adjusted to market rental rates and (2) the property valued as if vacant. The fair value of in-place leases will include direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals which will be avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and will be estimated based upon independent appraisals and management’s consideration of current market costs to execute a similar leases. These direct costs will be included in intangible lease assets in the accompanying consolidated balance sheet and will be amortized over the remaining terms of the respective lease.
We amortize the value of in-place leases to expense over the initial term of the respective leases. The value of customer relationship intangibles will be amortized to expense over the initial term in the respective leases, but in no event will the amortization period for intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense.
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Unconsolidated Affiliated Real Estate Entities.
We evaluate all joint venture arrangements for consolidation. We consider the percentage interest in the joint venture, evaluation of control and whether a variable interest entity (“VIE”) exists when determining if the investment qualifies for consolidation.
For those investments in affiliated real estate entities which do not meet the criteria for consolidation, we record these investments in unconsolidated real estate entities using the equity or cost method of accounting. Under the equity method, the investment is recorded initially at cost, and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. The net income or loss of each investor is allocated in accordance with the provisions of the applicable operating agreements of the real estate entities. The allocation provisions in these agreements may differ from the ownership interest held by each investor. Differences between the carrying amount of our investment in the respective joint venture and our share of the underlying equity of such unconsolidated entities are amortized over the respective lives of the underlying assets as applicable. These items are reported as a single line item in the consolidated statements of operations as income or loss from investments in unconsolidated affiliated real estate entities. Under the cost method of accounting, the investment is recorded initially at cost, and subsequently adjusted for cash contributions and distributions resulting from any capital events. Dividends earned from the underlying entities are recorded as interest income.
On a quarterly basis, we assess whether the value of our investments in unconsolidated real estate entities has been impaired. An investment is impaired only if management’s estimate of the fair value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary. The ultimate realization of our investment in partially owned entities is dependent on a number of factors including the performance of that entity and market conditions. If we determine that a decline in the value of a partially owned entity is other than temporary, we record an impairment charge.
Accounting for Derivative Financial Investments and Hedging Activities.
We may enter into derivative financial instrument transactions in order to mitigate interest rate risk on a related financial instrument. We may designate these derivative financial instruments as hedges and apply hedge accounting. We record all derivative instruments at fair value on the consolidated balance sheet.
Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, will be considered cash flow hedges. We will formally document all relationships between hedging instruments and hedged items, as well as our risk- management objective and strategy for undertaking each hedge transaction. We will periodically review the effectiveness of each hedging transaction, which involves estimating future cash flows. Cash flow hedges will be accounted for by recording the fair value of the derivative instrument on the consolidated balance sheet as either an asset or liability, with a corresponding amount recorded in accumulated other comprehensive income within stockholders’ equity. Amounts will be reclassified from other comprehensive income (loss) to the consolidated statement of operations in the period or periods the hedged forecasted transaction affects earnings. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, will be considered fair value hedges. The effective portion of the derivatives gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. The change in fair value of derivative instruments which have not been formally documented as effective hedges will be reported as a gain or loss in other, net within the consolidated statement of operations.
Inflation
We will be exposed to inflation risk as income from long-term leases is expected to be the primary source of our cash flows from operations. Our long-term leases are expected to contain provisions to mitigate the adverse impact of inflation on our operating results. Such provisions will include clauses entitling us to receive scheduled base rent increases and base rent increases based upon the consumer price index. In addition, our leases are expected to require tenants to pay a negotiated share of operating expenses, including maintenance, real estate taxes, insurance and utilities, thereby reducing our exposure to increases in cost and operating expenses resulting from inflation.
Treatment of Management Compensation, Expense Reimbursements and Operating Partnership Participation Interest
Management of our operations is outsourced to our Advisor and certain other affiliates of our Sponsor. Fees related to each of these services are accounted for based on the nature of such service and the relevant accounting literature. Fees for services performed that represent our period costs are expensed as incurred. Such fees include acquisition fees associated with the purchase of interests in affiliated real estate entities; asset management fees paid to our Advisor and property management fees paid to our Property Manager. These fees are expensed or capitalized to the basis of acquired assets, as appropriate.
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Our Property Manager may also perform fee-based construction management services for both our re-development activities and tenant construction projects. These fees are considered incremental to the construction effort and will be capitalized to the associated real estate project as incurred. Costs incurred for tenant construction will be depreciated over the shorter of their useful life or the term of the related lease. Costs related to redevelopment activities will be depreciated over the estimated useful life of the associated project.
Leasing activity at our properties has also been outsourced to our Property Manager. Any corresponding leasing fees we pay are capitalized and amortized over the life of the related lease.
Expense reimbursements made to both our Advisor and Property Manager will be expensed or capitalized to the basis of acquired assets, as appropriate.
Income Taxes
We elected to be taxed as a REIT in conjunction with the filing of our 2005 U.S. federal income tax return. If we remain qualified as a REIT, we generally will not be subject to U.S. federal income tax on our net taxable income that we distribute currently to our stockholders. To maintain our REIT qualification under the Internal Revenue Code of 1986, as amended, or the Code, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles in the United States of America, or GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If we fail to remain qualified for taxation as a REIT in any subsequent year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify as a REIT. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. As of December 31, 2015 and 2014, we had no material uncertain income tax positions and our net operating loss carry forward was $12.7 million. Additionally, even if we qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income.
To maintain our qualification as a REIT, we engage in certain activities through taxable REIT subsidiaries (“TRSs”). As such, we are subject to U.S. federal and state income and franchise taxes from these activities.
Results of Operations
Our primary financial measure for evaluating each of our properties is net operating income (“NOI”). NOI represents rental income 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 building (“Sarasota”) located in Sarasota, Florida and in September 2014, we disposed of two 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 and therefore, their operating results are reflected in our results of operations for all periods presented through their respective dates of disposition.
Comparison of the year ended December 31, 2015 versus the year ended December 31, 2014
Consolidated
Revenues
Our revenues are comprised of rental revenues, tenant recovery income and other service income. Total revenues decreased by approximately $1.4 million to $55.9 million for the year ended December 31, 2015 compared to $57.3 million for the same period in 2014. The change reflects decreases of $2.3 million and $1.1 million in our Multi-Family Segment and Industrial Segment, respectively, partially offset by increases of approximately $1.9 million and $0.1 million in our Hospitality Segment and Retail Segment, respectively.
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Excluding a $3.7 million reduction in revenues resulting from the property dispositions discussed above, our revenues would have increased by approximately $2.3 million during the year ended December 31, 2015 compared to the same period in 2014. This increase reflects higher revenues of $1.9 million for the DoubleTree – Danvers (Hospitality Segment) resulting from increased occupancy levels during the 2015 period and higher revenues of $0.7 million for Gantry Park (included in our Multi-Family Residential Segment) resulting from increased rental rates in the 2015 period; partially offset by lower revenues of $0.7 million for our Gulf Coast Industrial Portfolio (included in our Industrial Segment) resulting from reduced occupancy levels in the 2015 period. Revenues for all of our other properties had a net increase of $0.4 million during the year ended December 31, 2015 compared to the same period in 2014.
See “Segment Results of Operations for the Year Ended December 31, 2015 compared to December 31, 2014” for additional information on revenues by segment.
Property operating expenses
Property operating expenses increased by approximately $0.3 million to $28.3 million for the year ended December 31, 2015 compared to $28.0 million for the same period in 2014. Excluding a $1.8 million reduction in property operating expenses resulting from the property dispositions discussed above, our property operating expenses would have increased by approximately $2.1 million during the year ended December 31, 2015 compared to the same period in 2014. This increase reflects higher property expenses of (i) $1.1 million for the DoubleTree – Danvers (Hospitality Segment) resulting from increased occupancy levels during the 2015 period; (ii) $0.5 million for the St. Augustine Outlet Center (included in our Retail Segment) primarily attributable to increased marketing costs; and (iii) $0.2 million for Gantry Park (included in our Multi-Family Residential Segment) mainly due to higher repairs and maintenance costs, utility costs and property management fees. Property operating expense for all of our other properties had a net increase of $0.3 million during the year ended December 31, 2015 compared to the same period in 2014.
Real estate taxes
Real estate taxes decreased by $0.1 million to $3.5 million for the year ended December 31, 2015 compared to $3.6 million for the same period in 2014. Excluding a $0.3 million reduction in real estate taxes resulting from the property dispositions discussed above, our real estate taxes would have increased by approximately $0.2 million during the year ended December 31, 2015 compared to the same period in 2014. This increase is primarily attributable to higher real estate taxes for Oakview Plaza (included in our Retail Segment) during the 2015 period.
General and administrative costs
General and administrative costs decreased by approximately $1.7 million to $5.0 million for the year ended December 31, 2015 compared to $6.7 million for the same period in 2014. The decrease reflects reduced asset management fees and acquisition fees and related expenses during the 2015 period.
Depreciation and Amortization
Depreciation and amortization expense decreased by approximately $0.5 million to $11.5 million for the year ended December 31, 2015 compared to $12.0 million for the same period in 2014. Excluding a $0.4 million reduction in depreciation and amortization resulting from the property dispositions discussed above, our depreciation and amortization would have been relatively flat with a decrease of approximately $0.1 million during the year ended December 31, 2015 compared to the same period in 2014.
Interest and dividend income
Interest and dividend income decreased by approximately $2.7 million to $11.3 million for the year ended December 31, 2015 compared to $14.0 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 $3.0 million in the 2015 period due to an aggregate $4.8 million increase in dividend income from our investments in related parties partially offset by a $1.8 million decrease in interest and dividend income from our investments in marketable securities due to the sale of Marco OP Units.
Interest expense
Interest expense, including amortization of deferred financing costs, decreased by approximately $0.4 million to $15.1 million for the year ended December 31, 2015 compared to $15.5 million for the same period in 2014. Excluding a $1.1 million reduction in interest expense resulting from the property dispositions discussed above, our interest expense would have increased by approximately $0.7 million during the year ended December 31, 2015 compared to the same period in 2014. The increase reflects the refinancing of Gantry Park during the third quarter of 2014, at which time we increased its borrowing levels.
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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 year ended December 31, 2014, we recognized a net gain on disposition of real estate of $9.1 million which consisted of a third quarter gain of approximately $11.5 million related to the disposition of the Camden Multi-Family Properties and a second quarter loss of approximately $2.4 million related to the disposition of Sarasota.
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 year ended December 31, 2015 compared to a gain of $1.4 million for the same period in 2014. During the year ended December 31, 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 1407 Broadway, 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 year ended December 31, 2015 compared to a $0.8 million during the same period in 2014. The income for the year ended December 31, 2015 was primarily the result of the Company’s portion of the gain that resulted when 1407 Broadway completed the disposition of its sub-leasehold interest in a ground lease to an office building.
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 related parties.
Segment Results of Operations for the Year Ended December 31, 2015 compared to December 31, 2014
Retail Segment
| For the Years Ended December 31, | Variance Increase/(Decrease) | |||||||||||||||
| 2015 | 2014 | $ | % | |||||||||||||
| (unaudited) | ||||||||||||||||
| Revenues | $ | 11,482 | $ | 11,412 | $ | 70 | 0.6 | % | ||||||||
| NOI | 6,103 | 6,816 | (713 | ) | -10.5 | % | ||||||||||
| Average Occupancy Rate for period | 86.0 | % | 83.0 | % | 3.0 | % | ||||||||||
The following table represents lease expirations for the Retail Segment as of December 31, 2015:
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Retail Segment
| Lease | Number of | Annualized Base | Percent of Total | |||||||||||||||||
| Expiration | Expiring | GLA of Expiring | Rent of Expiring | Percent of | Annualized | |||||||||||||||
| Year | Leases | Leases (Sq. Ft.) | Leases ($) | Total GLA | Base Rent | |||||||||||||||
| 2016 | 17 | 72,407 | 882,307 | 12.6 | % | 11.4 | % | |||||||||||||
| 2017 | 6 | 14,409 | 168,345 | 2.5 | % | 2.2 | % | |||||||||||||
| 2018 | 10 | 78,895 | 1,362,522 | 13.8 | % | 17.6 | % | |||||||||||||
| 2019 | 16 | 72,207 | 1,402,938 | 12.6 | % | 18.1 | % | |||||||||||||
| 2020 | 11 | 204,457 | 2,276,321 | 35.7 | % | 29.4 | % | |||||||||||||
| 2021 | 3 | 22,998 | 359,462 | 4.0 | % | 4.6 | % | |||||||||||||
| 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 | % | |||||||||||||
| 2025 | 6 | 47,301 | 693,173 | 8.3 | % | 8.9 | % | |||||||||||||
| Thereafter | 1 | 26,153 | - | 4.6 | % | 0.0 | % | |||||||||||||
| 73 | 572,790 | 7,750,899 | 100.0 | % | 100.0 | % | ||||||||||||||
As of December 31, 2015, we had two tenants, Kohl’s Inc. and Dick’s Sporting Goods, Inc., each with one store, representing approximately 14.6% and 6.4%, respectively, of the total GLA in our Retail Segment. Additionally, as of that date, we did not have any other tenants whose GLA was 5% or more of the total GLA in our Retail Segment.
Revenues were flat and NOI decreased for the year ended December 31, 2015 compared to the same period in 2014 primarily as a result of increases in real estate taxes and property operating expenses during the 2015 period.
Multi-Family Residential Segment
| For the Years Ended December 31, | Variance Increase/(Decrease) | |||||||||||||||
| 2015 | 2014 | $ | % | |||||||||||||
| (unaudited) | ||||||||||||||||
| Revenues | $ | 17,479 | $ | 19,774 | $ | (2,295 | ) | -11.6 | % | |||||||
| NOI | 10,801 | 11,281 | (480 | ) | -4.3 | % | ||||||||||
| Average Occupancy Rate for period | 95.1 | % | 94.7 | % | 0.4 | % | ||||||||||
Revenues and NOI decreased for the year ended December 31, 2015 compared to the same period in 2014 primarily as a result of the disposal of the Camden Multi-Family Properties in September 2014 partially offset by higher revenues and NOI for Gantry Park.
Industrial Segment
| For the Years Ended December 31, | Variance Increase/(Decrease) | |||||||||||||||
| 2015 | 2014 | $ | % | |||||||||||||
| (unaudited) | ||||||||||||||||
| Revenues | $ | 6,242 | $ | 7,398 | $ | (1,156 | ) | -15.6 | % | |||||||
| NOI | 3,442 | 4,513 | (1,071 | ) | -23.7 | % | ||||||||||
| Average Occupancy Rate for period | 72.0 | % | 84.4 | % | -12.4 | % | ||||||||||
The following table represents lease expirations for our Industrial Segment as of December 31, 2015:
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Industrial Segment
| Lease | Number of | Annualized Base | Percent of Total | |||||||||||||||||
| Expiration | Expiring | GLA of Expiring | Rent of Expiring | Percent of | Annualized | |||||||||||||||
| Year | Leases | Leases (Sq. Ft.) | Leases ($) | Total GLA | Bas e Rent | |||||||||||||||
| 2016 | 39 | 240,447 | 751,337 | 38.3 | % | 19.8 | % | |||||||||||||
| 2017 | 23 | 112,279 | 696,085 | 17.9 | % | 18.4 | % | |||||||||||||
| 2018 | 20 | 153,103 | 1,211,371 | 24.4 | % | 31.9 | % | |||||||||||||
| 2019 | 3 | 20,448 | 107,685 | 3.3 | % | 2.8 | % | |||||||||||||
| 2020 | 10 | 98,611 | 1,003,518 | 15.7 | % | 26.5 | % | |||||||||||||
| 2021 | 1 | 2,766 | 22,128 | 0.4 | % | 0.6 | % | |||||||||||||
| Thereafter | - | - | - | - | - | |||||||||||||||
| 96 | 627,654 | 3,792,124 | 100.0 | % | 100.0 | % | ||||||||||||||
As of December 31, 2015, we did not have any tenants whose GLA was 5% or more of the total GLA in our Industrial Segment.
Revenues and NOI decreased for the year ended December 31, 2015 compared to the same period in 2014 primarily as a result of the disposal of Sarasota in July 2014 and the lower average occupancy rate of the remaining properties during the 2015 period.
Hospitality Segment
| For the Years Ended December 31, | Variance Increase/(Decrease) | |||||||||||||||
| 2015 | 2014 | $ | % | |||||||||||||
| (unaudited) | ||||||||||||||||
| Revenues | $ | 20,647 | $ | 18,705 | $ | 1,942 | 10.4 | % | ||||||||
| NOI | 3,233 | 2,522 | 711 | 28.2 | % | |||||||||||
| Average Occupancy Rate for period | 61.9 | % | 56.8 | % | 5.1 | % | ||||||||||
| Rev PAR | $ | 78.98 | $ | 65.94 | $ | 13.04 | 19.8 | % | ||||||||
Revenue and NOI increased for the year ended December 31, 2015 compared to the same period in 2014 as a result of increased average occupancy and average revenue per room over the same periods.
Comparison of the year ended December 31, 2014 versus the year ended December 31, 2013
Consolidated
Revenues
Our revenues are comprised of rental revenues, tenant recovery income and other service income. Total revenues increased by approximately $7.8 million to $57.3 million for the year ended December 31, 2014 compared to $49.5 million for the same period in 2013. The increase primarily reflects higher revenues at our DoubleTree – Danvers ( Hospitality Segment) of $2.9 million and our Multi-Family Residential Segment of $5.2 million. See “Segment Results of Operations for the year ended December 31, 2014 compared to December 31, 2013” for additional information on revenues by segment.
Property operating expenses
Property operating expenses increased by approximately $0.5 million to $28.0 million for the year ended December 31, 2014 compared to $27.5 million the same period in 2013. The increase consists of approximately $0.2 million and $0.4 million related to our Retail Segment and our Multi-Family Residential Segment, respectively.
Real estate taxes
Real estate taxes remained flat for the year ended December 31, 2014 compared to the same period in 2013.
General and administrative expenses
General and administrative expenses remained flat for the year ended December 31, 2014 compared to the same period in 2013.
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Depreciation and Amortization
Depreciation and amortization expense increased by approximately $2.7 million to $12.0 million for the year ended December 31, 2014 compared to $9.3 million the same period in 2013. The increase was primarily due to Gantry Park and property improvements completed at our DoubleTree - Danvers.
Interest and dividend income
Interest and dividend income increased by approximately $3.8 million to $14.0 million for the year ended December 31, 2014 compared to $10.2 million the same period in 2013. The increase was attributable to a special dividend received on our Marco OP Units aggregating approximately $5.7 million and $1.9 million in dividend income from our 365 Bond Preferred Investment partially offset by the loss of $1.7 million of interest income as a result of the repayment in full of a second mortgage loan receivable held by LVP Rego Park, LLC (the “Rego Park Joint Venture”) in June 2013 as well as the elimination of $1.7 million of interest income accruing on our Notes Receivable due from Noncontrolling Interests for periods subsequent to June 26, 2013.
Interest expense
Interest expense, including amortization of deferred financing costs, increased by approximately $0.6 million to $15.5 million for the year ended year ended December 31, 2014 compared to $14.9 million for the same period in 2013. The increase is primarily attributable to the timing of certain new borrowings throughout 2013.
Gain/(loss) on sale of marketable securities
We had a gain on sale of marketable securities of approximately $1.4 million for the year ended December 31, 2014 compared to $14.1 million for the same period in 2013. During the year ended December 31, 2013 we recognized a gain on sale of marketable securities of approximately $13.8 million primarily attributable to the sale of 156,000 Marco OP Units.
Gain on disposition of unconsolidated affiliated real estate entities
During the first quarter of 2013, we received an additional $1.2 million related to the 2012 disposition of our ownership interest in GPH resulting from the satisfaction of certain conditions and recognized a gain on disposition of unconsolidated affiliated real estate entities in our consolidated statements of operations.
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 2012 Outlet Centers Transaction, including 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.
Income/(loss) from investment in unconsolidated affiliated real estate entity
This account represents our portion of the earnings associated with our ownership interest in an investment in unconsolidated affiliated real estate entity, which we account for under the equity method of accounting. Our income from investment in unconsolidated affiliated real estate entity was $0.8 million during the year ended December 31, 2014 compared to a loss of $1.5 million during the same period in 2013. See Note 3 of the Notes to Consolidated Financial Statements for additional information.
Gain on disposition of real estate, net
During the year ended December 31, 2014 we recognized a net gain on disposition of real estate of approximately $9.1 million consisting of an approximately $11.5 million gain related to the disposition of the Camden Multi-Family Properties and an approximately $2.4 million loss related to the disposition of Sarasota. See Note 10 of the Notes to Consolidated Financial Statements for additional information.
Noncontrolling interests
The net earnings allocated to noncontrolling interests relates to (i) the interests in the Operating Partnership held by our Sponsor as well as common units held by our limited partners (ii) the interest in PRO-DFJV Holdings LLC (“PRO”) held by our Sponsor, (iii) the 10.0% interest in the Rego Park Joint Venture previously held by Lightstone Value Plus Real Estate Investment Trust II, Inc. and (iv) the ownership interests in 50-01 2nd St Associates LLC (the “2nd Street Joint Venture”) held by our Sponsor and other related parties.
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Segment Results of Operations for the Year Ended December 31, 2014 compared to December 31, 2013
Retail Segment
| For the Years Ended December 31, | Variance Increase/(Decrease) | |||||||||||||||
| 2014 | 2013 | $ | % | |||||||||||||
| Revenues | $ | 11,412 | $ | 11,808 | $ | (396 | ) | -3.4 | % | |||||||
| NOI | 6,816 | 7,238 | (422 | ) | -5.8 | % | ||||||||||
| Average Occupancy Rate for period | 83.0 | % | 83.8 | % | -0.8 | % | ||||||||||
Revenues and NOI decreased slightly for the year ended December 31, 2014 compared to the same period in 2013. This decrease can be attributed to lower average occupancy for the period.
Multi-Family Residential Segment
| For the Years Ended December 31, | Variance Increase/(Decrease) | |||||||||||||||
| 2014 | 2013 | $ | % | |||||||||||||
| Revenues $ | 19,774 | $ | 14,599 | $ | 5,175 | 35.4 | % | |||||||||
| NOI | 11,281 | 6,784 | 4,497 | 66.3 | % | |||||||||||
| Average Occupancy Rate for period | 94.7 | % | 94.0 | % | 0.7 | % | ||||||||||
Revenues increased $5.2 million accompanied by an increase in NOI of $4.5 million while the average occupancy rate remained increased slightly for the year ended December 31, 2014 compared to the same period in 2013. The increases in revenue and NOI are primarily attributable to the operations of Gantry Park. The construction of Gantry Park was substantially completed and its associated assets were placed into service during the third quarter of 2013.
Industrial Segment
| For the Years Ended December 31, | Variance Increase/(Decrease) | |||||||||||||||
| 2014 | 2013 | $ | % | |||||||||||||
| Revenues | $ | 7,398 | $ | 7,267 | $ | 131 | 1.8 | % | ||||||||
| NOI | 4,513 | 4,304 | 209 | 4.9 | % | |||||||||||
| Average Occupancy Rate for period | 82.1 | % | 80.8 | % | 1.3 | % | ||||||||||
Revenues and NOI increased slightly for the year ended December 31, 2014 compared to the same period in 2013 primarily as a result of the higher average occupancy during the 2014 period.
Hospitality Segment
| For the Years Ended December 31, | Variance Increase/(Decrease) | |||||||||||||||
| 2014 | 2013 | $ | % | |||||||||||||
| Revenues | $ | 18,705 | $ | 15,852 | $ | 2,853 | 18.0 | % | ||||||||
| NOI | 2,522 | (376 | ) | 2,898 | -770.7 | % | ||||||||||
| Average Occupancy Rate for period | 56.8 | % | 50.0 | % | 6.8 | % | ||||||||||
| Rev PAR | $ | 65.94 | $ | 55.52 | $ | 10.42 | 18.8 | % | ||||||||
The revenues and NOI in our Hospitality Segment both increased by approximately $2.9 million for the year ended December 31, 2014 compared to the same period in 2013 as a result of increased average occupancy and average revenue per room over the same periods
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Financial Condition, Liquidity and Capital Resources
Overview:
Rental revenue, interest and dividend income 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 $228.6 million of outstanding mortgage debt and an $18.6 million margin loan. We have and intend to continue to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to our stockholders. We may also incur short-term indebtedness, having a maturity of two years or less.
Our charter provides that the aggregate amount of borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. As of December 31, 2015, our total borrowings 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 at maturity 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 have access to borrowings under a margin loan and line of credit collateralized by the securities held with the financial institution that provided the margin loan and line of credit as well as a portion of our Marco OP Units. These loans are due on demand and any outstanding balance must be paid upon the liquidation of securities.
Any future properties that we may acquire may be funded through a combination of borrowings and the proceeds received from the disposition of certain of our commercial assets. These borrowings may consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. Such mortgages may be put in place either at the time we acquire a property or subsequent to our purchasing a property for cash. In addition, we may acquire properties that are subject to existing indebtedness where we choose to assume the existing mortgages. Generally, though not exclusively, we intend to seek to encumber our properties with debt, which will be on a non-recourse basis. This means that a lender’s rights on default will generally be limited to foreclosing on the property. However, we may, at our discretion, secure recourse financing or provide a guarantee to lenders if we believe this may result in more favorable terms. When we give a guaranty for a property owning entity, we will be responsible to the lender for the satisfaction of the indebtedness if it is not paid by the property owning entity.
We may also obtain lines of credit to be used to acquire properties. 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, including payments related to asset acquisition fees and asset management fees, the reimbursement of acquisition related expenses to our Advisor and property management fees. We also reimburse our Advisor and its affiliates for actual expenses it incurs for administrative and other services provided to us. Additionally, the Operating Partnership may be required to make distributions to Lightstone SLP, LLC, an affiliate of the Advisor.
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The following table represents the fees incurred associated with the payments to our Advisor and our Property Manager:
| For the Years Ended | ||||||||||||
| December 31, | December 31, | December 31, | ||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Acquisition fees | $ | 8 | $ | 204 | $ | 2,172 | ||||||
| Asset management fees | 2,427 | 2,913 | 2,608 | |||||||||
| Property management fees | 1,185 | 1,350 | 1,391 | |||||||||
| Development fees and leasing commissions | 344 | 552 | 2,495 | |||||||||
| Total | $ | 3,964 | $ | 5,019 | $ | 8,666 | ||||||
Our charter states that our operating expenses, excluding offering costs, property operating expenses and real estate taxes, as well as acquisition fees and non cash related items (“Qualified Operating Expenses”) are to be less than the greater of 2% of our average invested net assets or 25% of net income. For the year ended December 31, 2015, our Qualified Operating Expenses were less than the greater of 2% of our average invested net assets or 25% of net income.
In addition, our charter states that our acquisition fees and expenses shall not exceed 6% of the contractual purchase price or in the case of a mortgage, 6% of funds advanced unless approved by a majority of the independent directors. For the year ended December 31, 2015, the acquisition fees and acquisition expenses were less than 6% of each of the contract prices.
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:
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 31, 2015 | December 31, 2014 | December 31, 2013 | ||||||||||
| Cash flows provided by operating activities | $ | 21,098 | $ | 27,947 | $ | 17,109 | ||||||
| Cash flows provided by investing activities | 70,952 | 15,792 | (47,447 | ) | ||||||||
| Cash flows used in financing activities | (78,120 | ) | (42,109 | ) | (15,568 | ) | ||||||
| Net change in cash and cash equivalents | 13,930 | 1,630 | (45,906 | ) | ||||||||
| Cash and cash equivalents, beginning of the year | 54,529 | 52,899 | 98,805 | |||||||||
| Cash and cash equivalents, end of the year | $ | 68,459 | $ | 54,529 | $ | 52,899 | ||||||
Our principal sources of cash flow are derived from the operation of our rental properties, interest and dividend income on our marketable securities and real estate-related investments, as well as loan proceeds and distributions received from related parties. We intend that our properties and real estate-related investments will provide a relatively consistent stream of cash flow that provides us with resources to fund operating expenses, debt service and quarterly distributions.
Our principal demands for liquidity are (i) our property operating expenses, (ii) real estate taxes, (iii) insurance costs, (iv) leasing costs and related tenant improvements, (v) capital expenditures, (vi) acquisition and development activities, including our investments in related parties, (vii) 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 and other loans.
Operating activities
Net cash flows provided by operating activities of $21.1 million for the year ended December 31, 2015 consists of the following:
| · | cash inflows of approximately $17.1 million from our net income from continuing operations after adjustment for non-cash items; |
| · | cash inflows of approximately $2.7 million associated with the net changes in operating assets and liabilities; and |
| · | cash inflows of approximately $1.3 million from discontinued operations. |
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Investing activities
The net cash provided by investing activities of $71.0 million for the year ended December 31, 2015 consists primarily of the following:
| · | net purchases of investment property and other assets of approximately $6.6 million; |
| · | funds released from restricted escrows of approximately $0.9 million; |
| · | aggregate contributions to our investments in related parties of $103.2 million; |
| · | net proceeds from the sale and purchase of marketable securities of $73.3 million; |
| · | net 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 $78.1 million for the year ended December 31, 2015 is primarily related to the following:
| · | distributions to our common shareholders of $16.7 million |
| · | redemptions and cancellation of common stock and noncontrolling interests of $3.4 million; |
| · | distributions to our noncontrolling interests of $5.4 million; |
| · | net proceeds from mortgages payable of $1.4 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. |
Contractual Obligations
The following is a summary of our contractual obligations outstanding over the next five years and thereafter as of December 31, 2015.
| Contractual Obligations | 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | |||||||||||||||||||||
| Mortgage Payable | $ | 113,675 | $ | 25,991 | $ | 1,567 | $ | 1,621 | $ | 14,924 | $ | 70,868 | $ | 228,646 | ||||||||||||||
| Interest Payments 1,2 | 7,163 | 3,978 | 3,820 | 3,753 | 3,478 | 12,304 | 34,496 | |||||||||||||||||||||
| Total Contractual Obligations | $ | 120,838 | $ | 29,969 | $ | 5,387 | $ | 5,374 | $ | 18,402 | $ | 83,172 | $ | 263,142 | ||||||||||||||
| 1) | These amounts represent future interest payments related to mortgage payable obligations based on the fixed and variable interest rates specified in the associated debt agreement. All variable rate debt agreements are based on the one month LIBOR rate. For purposes of calculating future interest amounts on variable interest rate debt the one month LIBOR rate as of December 31, 2015 was used. |
| 2) | The debt associated with the Gulf Coast Industrial Portfolio was placed in default by the special servicer and is due on demand and therefore no future interest payments on this debt are included in these amounts. |
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We have access to a margin loan and line of credit from a financial institution that holds custody of certain of the Company’s marketable securities. The margin loan had no outstanding balance as of December 31, 2015 and the amount outstanding on the line of credit was $18.6 million as of December 31, 2015, which is due on demand.
Certain of our debt agreements require the maintenance of certain ratios, including debt service coverage.
We are currently in compliance with all of our financial debt covenants; however, the debt associated with the Gulf Coast Industrial Portfolio was placed in default during 2012 and is due on demand as discussed below.
As a result of not meeting certain debt service coverage ratios on the non-recourse mortgage indebtedness secured by the Gulf Coast Industrial Portfolio, the lender elected to retain the excess cash flow from these properties beginning in July 2011. 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.
Although the lender is currently not charging or being paid interest at the stated default rate, approximately $2.1 million, $2.1 million and $2.2 million of default interest was accrued during the years ended December 31, 2015, 2014 and 2013, respectively, pursuant to the terms of the loan agreement. As a result, accrued default interest of approximately $7.1 million and $5.0 million is included in accounts payable, accrued expenses and other liabilities on our consolidated balance sheet as of December 31, 2015 and 2014, respectively. We are currently engaged in discussions with the special servicer to restructure the loan and do not expect to pay the default interest as this mortgage indebtedness is non-recourse to us. We believe the continued loss of excess cash flow from these properties and the placement of the non-recourse mortgage indebtedness in default will not have a material impact on our results of operations or financial position
Additionally, our mortgage loan (outstanding principal balance of $23.9 million as of December 31, 2015) secured by the St. Augustine Outlet Center matures in April 2016, our mortgage loan (outstanding principal balance of $38.4 million as of December 31, 2015) secured by the Southeastern Michigan Multi-Family Properties matures in July 2016 and our mortgage loan (outstanding principal balance of $26.0 million as of December 31, 2015) secured by the Oakview Plaza matures in January 2017. 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.
365 Bond Street Preferred Investment
In March 2014, we entered into an agreement with various related party entities that provides for us 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 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 entitles us 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 December 31, 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 related parties on the consolidated balance sheets. As of December 31, 2015, approximately $2.8 million of additional contributions were unfunded related to the 365 Bond Street Preferred Investment. During the years ended December 31, 2015 and 2014, we recorded approximately $5.1 million and $1.9 million, respectively, of investment 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
In May 2015, we entered into an agreement with various related party entities that provides for us 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 is constructing a residential condominium project. These contributions are made pursuant to an instrument, the “40 East End Avenue Preferred Investment,” that entitles us 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 our final contribution or May 14, 2023, 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 December 31, 2015 the 40 East End Avenue Preferred Investment had a balance of approximately $28.8 million and is classified in investments in related parties on the consolidated balance sheets. As of December 31, 2015, approximately $1.2 million of additional contributions were unfunded related to the 40 East End Avenue Preferred Investment. During the year ended December 31, 2015, we recorded approximately $1.4 million of investment income related to the 40 East End Avenue Preferred Investment, which is included in interest and dividend income on the consolidated statements of operations.
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30-02 39th Avenue Preferred Investment
In August 2015, we entered into certain agreements that provides for us to make aggregate 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 are constructing a residential apartment project. The 30-02 39th Street Preferred Investment will be made pursuant to instruments that entitle us to monthly preferred distributions between 9% and 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 third quarter of 2015 and as of December 31, 2015, the 30-02 39th Avenue Preferred Investment had an outstanding balance of $7.3 million, which is classified in investments in related parties on the consolidated balance sheet. As of December 31, 2015, an aggregate of $42.7 million of additional contributions were unfunded related to the 30-02 39th Avenue Preferred Investment. During the year ended December 31, 2015, we recorded approximately $0.2 million of investment income related to the 30-02 39th Avenue Preferred Investment, which is included in interest and dividend income on the consolidated statements of operations.
485 7th Avenue Preferred Investment
In December 2015, we entered into an agreement with various related party entities that provides for us to make aggregate contributions (the “485 7th Avenue Preferred Investment”) of up to $60.0 million in an affiliate of our Sponsor which owns a parcel of land located at 485 7th Avenue, New York, New York on which they are developing a 612-room Marriott Moxy hotel. The 485 7th Avenue Preferred Investment was made pursuant to an instrument that entitles us to monthly preferred distributions at a rate of 12% per annum and is redeemable by us upon the occurrence of certain events. The 485 7th Avenue Preferred Investment is classified as a held-to-maturity security and is recorded at cost.
We contributed $60.0 million to the 485 7th Avenue Preferred Investment in December 2015, which is classified in investments in related parties on the consolidated balance sheet. During the year ended December 31, 2015, we recorded $20 of investment income related to the 485 7th Avenue Preferred Investment, which is included in interest and dividend income on the consolidated statements of operations.
Redemption of Series A Preferred Units and Repayment of Notes Receivable due from Noncontrolling Interests
On September 30, 2013, as a result of various agreements (collectively, the “Series A Agreement”) between and amongst (i) the Operating Partnership and certain of its subsidiaries and affiliates (the “Operating Partnership Parties”) and (ii) Arbor JRM, Arbor CJ, AR Prime, TRAC, Central Jersey and JT Prime (collectively, the “Contributing Parties”) and certain of their subsidiaries and affiliates (collectively, the “Series A Parties”), the Operating Partnership redeemed an aggregate 43,516 Series A Preferred Units, held by the Contributing Parties, at their liquidation preference of approximately $43.5 million and agreed to extend the redemption of the aggregate remaining outstanding 50,100 Series A Preferred Units, held by the Contributing Parties, at their liquidation preference of approximately $50.1 million to January 2, 2014. Furthermore, the Contributing Parties simultaneously repaid approximately $41.1 million of notes receivable (the “Contributing Parties Loans”) representing the proportionate share of total loans issued to the Contributing Parties which secured by their Series A Preferred Units and Common Units. As a result, the Contributing Parties Loans were approximately $47.4 million as of December 31, 2013, which had to be repaid in full upon redemption of the remaining outstanding Series A Preferred Units.
Pursuant to the terms of the Series A Agreement, the Series A Parties provided a full release to the Operating Partnership Parties for any and all claims, both asserted or unasserted, through September 30, 2013. However, the release does not affect the rights of the Contributing Parties in respect of any subsequent claims relating to their remaining outstanding Common Units or then outstanding Series A Preferred Units. Additionally, the Series A Preferred Units, which were entitled to receive cumulative preferential distributions equal to an annual rate of 4.6316%, if and when declared, were no longer entitled to distributions for periods subsequent to June 26, 2013 and the Contributing Parties Loans, which provided for interest payable semi-annually at a annual rate of 4.00%, no longer accrued interest for periods subsequent to June 26, 2013. The Series A Preferred Units initially had no mandatory redemption or maturity date and were not redeemable by the Operating Partnership prior to June 26, 2013.
On January 2, 2014, the Operating Partnership redeemed the remaining outstanding 50,100 Series A Preferred Units, held by the Contributing Parties, at their liquidation preference of approximately $50.1 million and the Contributing Parties simultaneously repaid the remaining Contributing Parties Loans aggregating approximately $47.4 million in full.
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.
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Because of these factors, the National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has published a standardized measure of performance known as funds from operations (“FFO”), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT’s operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards set forth in the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the “White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding gains or losses from sales of property and real estate related impairments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.
We believe that the use of FFO 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.
Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT’s definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.
Because of these factors, the Investment Program Association (“IPA”), an industry trade group, has published a standardized measure of performance known as modified funds from operations (“MFFO”), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that, when compared year over year, both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it 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. MFFO is not equivalent to our net income or loss as determined under GAAP.
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 (the “Practice Guideline”) issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction-related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude the following items:
| • | acquisition fees and expenses; non-cash amounts related to straight-line rent and the amortization of above- or below-market and in-place intangible lease assets and liabilities (which are adjusted in order to reflect such payments from an accrual basis of accounting under GAAP to a cash basis of accounting); |
| • | amortization of a premium and accretion of a discount on debt investments; |
| • | non-recurring impairment of real estate-related investments; |
| • | realized gains (losses) from the early extinguishment of debt; |
| • | realized gains (losses) on the extinguishment or sales of hedges, foreign exchange, securities and other derivative holdings except where the trading of such instruments is a fundamental attribute of our business; |
| • | unrealized gains (losses) from fair value adjustments on real estate securities, including CMBS and other securities, interest rate swaps and other derivatives not deemed hedges and foreign exchange holdings; |
| • | unrealized gains (losses) from the consolidation from, or deconsolidation to, equity accounting; |
| • | adjustments related to contingent purchase price obligations; and |
| • | adjustments for consolidated and unconsolidated partnerships and joint ventures calculated to reflect MFFO on the same basis as above. |
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Certain of the above adjustments are also made to reconcile net income (loss) to net cash provided by (used in) operating activities, such as for the amortization of a premium and accretion of a discount on debt and securities investments, amortization of fees, any unrealized gains (losses) on derivatives, securities or other investments, as well as other adjustments.
MFFO excludes non-recurring impairment of real estate-related investments. We assess the credit quality of our investments and adequacy of reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. We consider the estimated net recoverable value of a loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive situation of the region where the borrower does business.
We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, 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 properties and once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.
Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not 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 determined under GAAP 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. FFO and MFFO 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 methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.
Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates
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The below table illustrates the items deducted in the calculation of FFO and MFFO. Items are presented net of non-controlling interest portions where applicable.
| For the Years Ended | ||||||||||||
| December 31, 2015 | December 31, 2014 | December 31, 2013 | ||||||||||
| Net income | $ | 64,692 | $ | 22,205 | $ | 16,302 | ||||||
| FFO adjustments: | ||||||||||||
| Depreciation and amortization: | ||||||||||||
| Depreciation and amortization of real estate assets | 11,544 | 12,038 | 9,314 | |||||||||
| Equity in depreciation and amortization for unconsolidated affiliated real estate entities | 1,295 | 3,435 | 2,838 | |||||||||
| Adjustments to equity in earnings from unconsolidated entities, net | - | - | 5,210 | |||||||||
| Gain on disposal of investment property | - | (9,114 | ) | (363 | ) | |||||||
| Gain on disposal of unconsolidated affiliated real estate entities | (6,097 | ) | (4,418 | ) | (1,200 | ) | ||||||
| Discontinued operations: | ||||||||||||
| Depreciation and amortization of real estate assets | - | 4,212 | 3,569 | |||||||||
| Impairment loss on long-lived assets held for sale | - | 4,456 | - | |||||||||
| Gain on disposal of investment property | (17,547 | ) | (1,722 | ) | (2,021 | ) | ||||||
| FFO | 53,887 | 31,092 | 33,649 | |||||||||
| MFFO adjustments: | ||||||||||||
| Other adjustments: | ||||||||||||
| Acquisition and other transaction related costs expensed(1) | (45 | ) | 314 | 3,944 | ||||||||
| Noncash adjustments: | ||||||||||||
| Amortization of above or below market leases and liabilities(2) | (203 | ) | (257 | ) | (303 | ) | ||||||
| Loss/(gain) on debt extinguishment | 600 | 479 | (3,672 | ) | ||||||||
| Mark to market adjustments (3) | 535 | 645 | (664 | ) | ||||||||
| Amortization of discount on debt investment | - | - | (1,057 | ) | ||||||||
| Non-recurring (gains)/losses from extinguishment/sale of debt, derivatives or securities holdings(4) | - | - | - | |||||||||
| Gain on sale of marketable securities | (34,710 | ) | (1,445 | ) | (14,124 | ) | ||||||
| MFFO | 20,064 | 30,828 | 17,773 | |||||||||
| Straight-line rent (5) | (294 | ) | (482 | ) | (423 | ) | ||||||
| MFFO - IPA recommended format (6) | $ | 19,770 | $ | 30,346 | $ | 17,350 | ||||||
| Net income | $ | 64,692 | $ | 22,205 | $ | 16,302 | ||||||
| Less: income attributable to noncontrolling interests | (4,468 | ) | (1,329 | ) | (1,388 | ) | ||||||
| Net income applicable to company’s common shares | $ | 60,224 | $ | 20,876 | $ | 14,914 | ||||||
| Net income per common share, basic and diluted | $ | 2.33 | $ | 0.81 | $ | 0.53 | ||||||
| FFO | $ | 53,887 | $ | 31,092 | $ | 33,649 | ||||||
| Less: FFO attributable to noncontrolling interests | (4,945 | ) | (2,121 | ) | (1,919 | ) | ||||||
| FFO attributable to company’s common shares | $ | 48,942 | $ | 28,971 | $ | 31,730 | ||||||
| FFO per common share, basic and diluted | $ | 1.89 | $ | 1.12 | $ | 1.12 | ||||||
| MFFO - IPA recommended format | $ | 19,770 | $ | 30,346 | $ | 17,350 | ||||||
| Less: MFFO attributable to noncontrolling interests | (1,810 | ) | (2,848 | ) | (715 | ) | ||||||
| MFFO attributable to company’s common shares | $ | 17,960 | $ | 27,498 | $ | 16,635 | ||||||
| Weighted average number of common shares outstanding, basic and diluted | 25,828 | 25,795 | 28,310 | |||||||||
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. |
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| (2) | Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate. |
| (3) | Management believes that adjusting for mark-to-market adjustments is appropriate because they are nonrecurring items that may not be reflective of ongoing operations and reflects unrealized impacts on value based only on then current market conditions, although they may be based upon current operational issues related to an individual property or industry or general market conditions. The need to reflect mark-to-market adjustments is a continuous process and is analyzed on a quarterly and/or annual basis in accordance with GAAP. |
| (4) | Management believes that adjusting for 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 Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Gulf Coast Industrial Portfolio - Default interest expense(a) | $ | (2,064 | ) | $ | (2,096 | ) | $ | (2,242 | ) | |||
| 1407 Broadway - Default interest expense(b) | - | - | (606 | ) | ||||||||
| Special dividend on Marco OP Units(c) | - | 5,685 | - | |||||||||
| Total before allocations to noncontrolling interests | (2,064 | ) | 3,589 | (2,848 | ) | |||||||
| Allocations to noncontrolling interests | 40 | (607 | ) | (50 | ) | |||||||
| Total after allocations to noncontrolling interests | $ | (2,024 | ) | $ | 2,982 | $ | (2,898 | ) | ||||
| (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 are engaged in discussions with the lender to restructure the non-recourse mortgage loan and do not expect to pay the default interest. |
| (b) | Represents our proportionate share of default interest expense related to the non-recourse mortgage indebtedness of our unconsolidated investment in 1407 Broadway which was incurred and unpaid during the first quarter of 2013 but subsequently waived by the lender in connection with the completion of a loan extension in March 2013. The waiver of such default interest was reflected in the gain on extinguishment of debt. |
| (c) | 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 $20.0 million, $24.5 million and $19.5 million for the years ended December 31, 2015, 2014 and 2013, respectively.
The table below presents our cumulative distributions paid and cumulative FFO:
| From inception through | ||||
| December 31, 2015 | ||||
| FFO | $ | 155,802 | ||
| Distributions Paid | $ | 163,158 | ||
For the year ended December 31, 2015, we paid cash distributions of $18.1 million. FFO for the year ended December 31, 2015 was $48.9 million and cash flow from operations was $21.1 million. For the year ended December 31, 2014, we paid distributions of $18.0 million, including $12.3 million of distributions paid in cash and $5.7 million of distributions reinvested through our dividend reinvestment plan. FFO for the year ended December 31, 2014 was $29.0 million and cash flow from operations was $27.9 million. For the year ended December 31, 2013, we paid distributions of $20.6 million, including $14.1 million of distributions paid in cash and $6.5 million of distributions reinvested through our dividend reinvestment plan. FFO for the year ended December 31, 2013 was $31.7 million and cash flow from operations was $17.1 million. See the reconciliation of FFO to net income above.
Lightstone SLP, LLC and SLP Units
Lightstone SLP, LLC, an affiliate of our Sponsor, has purchased SLP units in the Operating Partnership. These SLP units, the purchase price of which will be repaid only after stockholders receive a stated preferred return and their net investment, will entitle Lightstone SLP, LLC to a portion of any regular distributions made by the Operating Partnership.
Since inception through December 31, 2015, cumulative SLP Unit distributions declared were $17.1 million, of which $16.6 million have been paid. Such distributions, paid current at a 7% annualized rate of return to Lightstone SLP, LLC through December 31, 2015, with the exception of the distribution related to the three months ended June 30, 2010, which was paid at an 8% annualized rate will always be subordinated until stockholders receive a stated preferred return. (See Note 15 of the notes to consolidated financial statements for further information related to the SLP Units)
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The initial and subsequent stockholder return thresholds are measured purely based on distributions. The initial and subsequent return thresholds are not based on any measure of the Company’s performance or changes in NAV. Subsequent distributions to the SLP units are not limited to any specific measure of available cash; however, SLP units will receive no distributions until after stockholders receive a 7% cumulative return calculated purely based on distributions. The source of the distributions to the SLP units has been from operating cash flow, issuance of shares under our DRIP and excess cash other than operating cash flow.
New Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been adopted during 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 20 of the Notes to Consolidated Financial Statements for further information related to subsequent events during the period from January 1, 2016 through March 24, 2016.
ITEM 7A. 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 December 31, 2015, we had one interest rate swap with an insignificant intrinsic value.
We also hold equity and debt securities for general investment return purposes. We regularly review the market prices of these investments for impairment purposes. As of December 31, 2015, a hypothetical adverse 10% movement in market values would result in a hypothetical loss in fair value of approximately $8.1 million.
The following table shows the mortgage payable obligations maturing during the next five years and thereafter at December 31, 2015:
| 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | Estimated Fair Value | |||||||||||||||||||||||||
| Mortgages Payable | $ | 113,675 | 25,991 | 1,567 | 1,621 | 14,924 | 70,868 | $ | 228,646 | $ | 227,115 | |||||||||||||||||||||
As of December 31, 2015, approximately $33.9 million, or 14%, of our debt, is a variable rate instrument and our interest expense associated with this instrument is, therefore, subject to changes in market interest rates. A 1% adverse movement (increase in Libor or Prime rate) would increase annual interest expense by approximately $0.2 million.
The estimated fair value (in millions) of our debt is summarized as follows:
| As of December 31, 2015 | As of December 31, 2014 | |||||||||||||||
| Estimated Fair | Estimated Fair | |||||||||||||||
| Carrying Amount | Value | Carrying Amount | Value | |||||||||||||
| Mortgages payable | $ | 228.6 | $ | 227.1 | $ | 227.2 | $ | 228.3 | ||||||||
The fair value of the mortgages payable was determined by discounting the future contractual interest and principal payments by estimated current market interest rates.
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In addition to changes in interest rates, the value of our real estate and real estate related investments is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of lessees, which may affect our ability to refinance our debt if necessary. As of December 31, 2015, we had no off-balance sheet arrangements.
We cannot predict the effect of adverse changes in interest rates on our debt and, therefore, our exposure to market risk, nor can we provide any assurance that long-term debt will be available at advantageous pricing. Consequently, future results may differ materially from the estimated adverse changes discussed above.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Lightstone Value Plus Real Estate Investment Trust, Inc. and Subsidiaries
(a Maryland corporation)
Schedules not filed:
All schedules other than the one listed in the Index have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Lightstone Value Plus Real Estate Investment Trust, Inc.
We have audited the accompanying consolidated balance sheets of Lightstone Value Plus Real Estate Investment Trust, Inc. and Subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income /(loss), stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2015. The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lightstone Value Plus Real Estate Investment Trust, Inc. and Subsidiaries as of December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
In connection with our audit of the consolidated financial statements referred to above, we also audited Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2015. In our opinion, this financial schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information stated therein.
/s/ EisnerAmper LLP
Iselin, New Jersey
March 24, 2016
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
| As of December 31, 2015 | As of December 31, 2014 | |||||||
| Assets | ||||||||
| Net investment property | $ | 275,437 | $ | 274,751 | ||||
| Investment in unconsolidated affiliated real estate entity | 1,989 | 9,846 | ||||||
| Investment in related parties | 139,809 | 36,637 | ||||||
| Cash and cash equivalents | 68,459 | 54,529 | ||||||
| Marketable securities, available for sale | 81,016 | 154,818 | ||||||
| Restricted escrows | 7,672 | 8,809 | ||||||
| Tenant and other accounts receivable (net of allowance for doubtful accounts of $181 and $327, respectively) | 2,078 | 1,853 | ||||||
| Mortgage receivable | 5,040 | 5,179 | ||||||
| Intangible assets, net | 1,087 | 1,546 | ||||||
| Prepaid expenses and other assets | 7,572 | 14,366 | ||||||
| Assets held for sale | - | 111,505 | ||||||
| Total Assets | $ | 590,159 | $ | 673,839 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Mortgages payable | $ | 228,646 | $ | 227,189 | ||||
| Notes payable | 18,625 | 38,582 | ||||||
| Accounts payable, accrued expenses and other liabilities | 14,379 | 12,293 | ||||||
| Due to related parties | - | 802 | ||||||
| Tenant allowances and deposits payable | 2,030 | 2,314 | ||||||
| Distributions payable | 4,528 | 4,566 | ||||||
| Deferred rental income | 1,204 | 1,167 | ||||||
| Acquired below market lease intangibles, net | 597 | 793 | ||||||
| Liabilities held for sale | - | 70,130 | ||||||
| Total Liabilities | 270,009 | 357,836 | ||||||
| Commitments and contingencies (See Note 19) | ||||||||
| 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, 25,639 and 25,850 shares issued and outstanding, respectively | 256 | 258 | ||||||
| Additional paid-in-capital | 202,068 | 204,022 | ||||||
| Accumulated other comprehensive income | 18,776 | 50,671 | ||||||
| Accumulated surplus | 67,961 | 25,814 | ||||||
| Total Company’s stockholders’ equity | 289,061 | 280,765 | ||||||
| Noncontrolling interests | 31,089 | 35,238 | ||||||
| Total Stockholders’ Equity | 320,150 | 316,003 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 590,159 | $ | 673,839 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 79 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Revenues: | ||||||||||||
| Rental income | $ | 41,249 | $ | 42,612 | $ | 35,911 | ||||||
| Tenant recovery income | 4,418 | 4,709 | 5,123 | |||||||||
| Other service income | 10,183 | 9,968 | 8,492 | |||||||||
| Total revenues | 55,850 | 57,289 | 49,526 | |||||||||
| Expenses: | ||||||||||||
| Property operating expenses | 28,280 | 27,992 | 27,471 | |||||||||
| Real estate taxes | 3,521 | 3,617 | 3,557 | |||||||||
| General and administrative costs | 5,009 | 6,707 | 6,713 | |||||||||
| Depreciation and amortization | 11,544 | 12,038 | 9,314 | |||||||||
| Total operating expenses | 48,354 | 50,354 | 47,055 | |||||||||
| Operating income | 7,496 | 6,935 | 2,471 | |||||||||
| Mark to market adjustment on derivative financial instruments | (223 | ) | (199 | ) | 487 | |||||||
| Interest and dividend income | 11,317 | 13,972 | 10,246 | |||||||||
| Interest expense | (15,145 | ) | (15,492 | ) | (14,931 | ) | ||||||
| Gain on disposition of unconsolidated affiliated real estate entities | - | 4,418 | 1,200 | |||||||||
| Gain on disposition of real estate, net | - | 9,114 | 363 | |||||||||
| Gain on sale of marketable securities | 34,710 | 1,445 | 14,124 | |||||||||
| Income/(loss) from investments in unconsolidated affiliated real estate entities | 5,804 | 821 | (1,524 | ) | ||||||||
| Other income, net | 2,002 | 913 | 1,535 | |||||||||
| Net income from continuing operations | 45,961 | 21,927 | 13,971 | |||||||||
| Net income from discontinued operations | 18,731 | 278 | 2,331 | |||||||||
| Net income | 64,692 | 22,205 | 16,302 | |||||||||
| Less: net income attributable to noncontrolling interests | (4,468 | ) | (1,329 | ) | (1,388 | ) | ||||||
| Net income attributable to Company’s common shares | $ | 60,224 | $ | 20,876 | $ | 14,914 | ||||||
| Basic and diluted earnings per Company’s common share: | ||||||||||||
| Continuing operations | $ | 1.60 | $ | 0.80 | $ | 0.45 | ||||||
| Discontinued operations | 0.73 | 0.01 | 0.08 | |||||||||
| Net earnings per Company’s common share | $ | 2.33 | $ | 0.81 | $ | 0.53 | ||||||
| Weighted average number of common shares outstanding, basic and diluted | 25,828 | 25,795 | 28,310 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 80 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME /(LOSS)
(Amounts in thousands)
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Net income | $ | 64,692 | $ | 22,205 | $ | 16,302 | ||||||
| Other comprehensive (loss)/income: | ||||||||||||
| Unrealized gain/(loss) on available for sale securities | 6,289 | 18,948 | (6,239 | ) | ||||||||
| Reclassification adjustment for gain included in net income | (41,460 | ) | (468 | ) | (11,164 | ) | ||||||
| Other comprehensive(loss)/income | (35,171 | ) | 18,480 | (17,403 | ) | |||||||
| Comprehensive income/(loss) | 29,521 | 40,685 | (1,101 | ) | ||||||||
| Less: Comprehensive income attributable to noncontrolling interests | (1,192 | ) | (3,188 | ) | (142 | ) | ||||||
| Comprehensive income/(loss) attributable to the Company’s common shares | $ | 28,329 | $ | 37,497 | $ | (1,243 | ) | |||||
The accompanying notes are an integral part of these consolidated financial statements.
| 81 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in thousands)
| Accumulated | ||||||||||||||||||||||||||||
| Common | Additional | Other | Total | |||||||||||||||||||||||||
| Shares | Amount | Paid-In Capital | Comprehensive Income | Accumulated Surplus | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||
| BALANCE, December 31, 2012 | $ | 30,049 | 300 | $ | 266,115 | $ | 50,207 | $ | 27,877 | $ | 40,657 | $ | 385,156 | |||||||||||||||
| Net income | - | - | - | - | 14,914 | 1,388 | 16,302 | |||||||||||||||||||||
| Other comprehensive loss | - | - | - | (16,157 | ) | - | (1,246 | ) | (17,403 | ) | ||||||||||||||||||
| Distributions declared | - | - | - | - | (19,789 | ) | - | (19,789 | ) | |||||||||||||||||||
| Distributions paid to noncontrolling interests | - | - | - | - | - | (8,789 | ) | (8,789 | ) | |||||||||||||||||||
| Contributions received from noncontrolling interests | - | - | - | - | - | 885 | 885 | |||||||||||||||||||||
| Redemption and cancellation of shares and noncontrolling interests | (5,008 | ) | (50 | ) | (61,152 | ) | - | - | 6,475 | (54,727 | ) | |||||||||||||||||
| Shares issued from distribution reinvestment program | 594 | 6 | 6,484 | - | - | - | 6,490 | |||||||||||||||||||||
| BALANCE, December 31, 2013 | 25,635 | 256 | 211,447 | 34,050 | 23,002 | 39,370 | 308,125 | |||||||||||||||||||||
| Net income | - | - | - | - | 20,876 | 1,329 | 22,205 | |||||||||||||||||||||
| Other comprehensive income | - | - | - | 16,621 | - | 1,859 | 18,480 | |||||||||||||||||||||
| Distributions declared | - | - | - | - | (18,064 | ) | - | (18,064 | ) | |||||||||||||||||||
| Distributions paid to noncontrolling interests | - | - | - | - | - | (15,082 | ) | (15,082 | ) | |||||||||||||||||||
| Contributions received from noncontrolling interests | - | - | - | - | - | 215 | 215 | |||||||||||||||||||||
| Redemption and cancellation of shares and noncontrolling interests | (297 | ) | (3 | ) | (13,159 | ) | - | - | 7,547 | (5,615 | ) | |||||||||||||||||
| Shares issued from distribution reinvestment program | 512 | 5 | 5,734 | - | - | - | 5,739 | |||||||||||||||||||||
| BALANCE, December 31, 2014 | 25,850 | 258 | 204,022 | 50,671 | 25,814 | 35,238 | 316,003 | |||||||||||||||||||||
| Net income | - | - | - | - | 60,224 | 4,468 | 64,692 | |||||||||||||||||||||
| Other comprehensive loss | - | - | - | (31,895 | ) | - | (3,276 | ) | (35,171 | ) | ||||||||||||||||||
| Distributions declared | - | - | - | - | (18,077 | ) | - | (18,077 | ) | |||||||||||||||||||
| Distributions paid to noncontrolling interests | - | - | - | - | - | (5,393 | ) | (5,393 | ) | |||||||||||||||||||
| Contributions received from noncontrolling interests | - | - | - | - | - | 227 | 227 | |||||||||||||||||||||
| Redemption and cancellation of shares and noncontrolling interests | (341 | ) | (3 | ) | (3,406 | ) | - | - | (175 | ) | (3,584 | ) | ||||||||||||||||
| Shares issued from distribution reinvestment program | 130 | 1 | 1,452 | - | - | - | 1,453 | |||||||||||||||||||||
| BALANCE, December 31, 2015 | $ | 25,639 | 256 | $ | 202,068 | $ | 18,776 | $ | 67,961 | $ | 31,089 | $ | 320,150 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 82 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net income | $ | 64,692 | $ | 22,205 | $ | 16,302 | ||||||
| Less net income - discontinued operations | 18,731 | 278 | 2,331 | |||||||||
| Net income - continuing operations | 45,961 | 21,927 | 13,971 | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 11,544 | 12,038 | 9,314 | |||||||||
| Gain on sale of marketable securities available for sale | (34,710 | ) | (1,445 | ) | (14,124 | ) | ||||||
| Gain on disposition of unconsolidated affiliated real estate entities | - | (4,418 | ) | (1,200 | ) | |||||||
| Gain on disposition of real estate | - | (9,114 | ) | (363 | ) | |||||||
| Loss on debt extinguishment | - | 367 | - | |||||||||
| Mark to market adjustment on derivative financial instruments | 223 | 199 | (487 | ) | ||||||||
| Amortization of discount on mortgage receivable | - | - | (1,057 | ) | ||||||||
| (Income)/loss from investments in unconsolidated affiliated real estate entities | (5,804 | ) | (821 | ) | 1,524 | |||||||
| Other non-cash adjustments | (41 | ) | 77 | (16 | ) | |||||||
| Changes in assets and liabilities: | ||||||||||||
| Decrease/(increase) in prepaid expenses and other assets | 1,164 | (448 | ) | 3,772 | ||||||||
| (Increase)/decrease in tenant and other accounts receivable | (341 | ) | 625 | (790 | ) | |||||||
| Increase in tenant allowance and deposits payable | 20 | 127 | 672 | |||||||||
| Increase in accounts payable, accrued expenses and other liabilities | 2,125 | 1,384 | 466 | |||||||||
| Decrease in due to related parties | (339 | ) | (171 | ) | (48 | ) | ||||||
| Increase/(decrease) in deferred rental income | 37 | (242 | ) | 565 | ||||||||
| Net cash provided by operating activities - continuing operations | 19,839 | 20,085 | 12,199 | |||||||||
| Net cash provided by operating activities - discontinued operations | 1,259 | 7,862 | 4,910 | |||||||||
| Net cash provided by operating activities | 21,098 | 27,947 | 17,109 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Purchase of investment property, net | (12,751 | ) | (7,247 | ) | (45,985 | ) | ||||||
| Purchase of marketable securities available for sale | (5,113 | ) | (21,635 | ) | (12,068 | ) | ||||||
| Proceeds from sale of marketable securities available for sale | 78,454 | 33,125 | 48,836 | |||||||||
| Settlement of derivative financial instrument | - | (3,543 | ) | (20,362 | ) | |||||||
| Proceeds from disposition of investments in unconsolidated affiliated real estate entities | - | 4,418 | 1,200 | |||||||||
| Collections on mortgage receivable | 139 | 131 | 19,623 | |||||||||
| Deposits for purchase of real estate, net of refunds | 170 | (50 | ) | 2,200 | ||||||||
| Contributions to investment in unconsolidated affiliated real estate entity | (1,568 | ) | - | (12,639 | ) | |||||||
| Investments in related parties | (103,158 | ) | (36,637 | ) | - | |||||||
| Payments on loans due to related parties | - | - | (2,340 | ) | ||||||||
| Distribution from investments in unconsolidated affiliated real estate entities | 15,230 | 470 | 1,186 | |||||||||
| Release of restricted escrows | 922 | 6,550 | 25,782 | |||||||||
| Proceeds from sale of investment property | 6,202 | 37,051 | - | |||||||||
| Net cash (used in)/provided by investing activities - continuing operations | (21,473 | ) | 12,633 | 5,433 | ||||||||
| Net cash provided by/(used in) investing activities - discontinued operations | 92,425 | 3,159 | (52,880 | ) | ||||||||
| Net cash provided by/(used in) investing activities | 70,952 | 15,792 | (47,447 | ) | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Proceeds from mortgage financing | 3,863 | 75,278 | 100,236 | |||||||||
| Mortgage payments | (2,406 | ) | (73,405 | ) | (2,555 | ) | ||||||
| Payment of loan fees and expenses | (69 | ) | (971 | ) | (1,277 | ) | ||||||
| Payment of notes payable | (19,957 | ) | (1,600 | ) | (23,000 | ) | ||||||
| Redemption and cancellation of common shares | (3,409 | ) | (5,615 | ) | (54,727 | ) | ||||||
| Contributions received from noncontrolling interests | 227 | 215 | 885 | |||||||||
| Distributions paid to noncontrolling interests | (5,393 | ) | (15,082 | ) | (8,789 | ) | ||||||
| Distributions paid to Company’s stockholders | (16,662 | ) | (12,284 | ) | (14,079 | ) | ||||||
| Net cash used infinancing activities - continuing operations | (43,806 | ) | (33,464 | ) | (3,306 | ) | ||||||
| Net cash used in financing activities - discontinued operations | (34,314 | ) | (8,645 | ) | (12,262 | ) | ||||||
| Net cash used in by financing activities | (78,120 | ) | (42,109 | ) | (15,568 | ) | ||||||
| Net change in cash and cash equivalents | 13,930 | 1,630 | (45,906 | ) | ||||||||
| Cash and cash equivalents, beginning of year | 54,529 | 52,899 | 98,805 | |||||||||
| Cash and cash equivalents, end of year | $ | 68,459 | $ | 54,529 | $ | 52,899 | ||||||
See Note 2 for supplemental cash information.
The accompanying notes are an integral part of these consolidated financial statements
| 83 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
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 real estate investment trust, or UPREIT, and substantially all of the Company’s 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”), Lightstone REIT as the general partner, held a 98% interest as of December 31, 2015 (See Noncontrolling Interests below for discussion of other owners of the Operating Partnership).
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, under the terms and conditions of an advisory agreement. The Lightstone Group previously served as the Company’s sponsor (the “Sponsor”) during its initial public offering, which closed on October 10, 2008. The Sponsor and Advisor are owned and controlled by David Lichtenstein, the Chairman of the Company’s board of directors (the “Board”) and it’s 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 December 31, 2015, on a collective basis, the Company wholly or majority owned and consolidated the operating results and financial condition of three 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, five multi-family residential properties containing a total of 1,216 units, and one hotel hospitality property containing 363 rooms. All of the Company’s properties are located within the United States. As of December 31, 2015, the retail properties, the industrial properties and the multi-family residential properties were 90%, 62%, and 96% occupied based on a weighted-average basis, respectively, and its hotel hospitality property’s average revenue per available room (“RevPAR”) was $79 (whole dollars) and occupancy was 62% for the year ended December 31, 2015.
Discontinued Operations
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, through its date of disposition, have been classified as discontinued operations in the consolidated statements of operations for all periods presented. Additionally, the associated assets and liabilities of the Hotel Portfolio are classified as held for sale in the consolidated balance sheet as of December 31, 2014.
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, through its date of disposition, have been classified as discontinued operations in the consolidated statements of operations for all periods presented.
During the year ended December 31, 2013, the Company disposed of two Extended Stay Hotels located in Houston, Texas (the “Houston Extended Stay Hotels”) and a retail shopping center (“Everson Pointe”) located in Snellville, Georgia. The operating results of the Houston Extended Stay Hotels and Everson Pointe, through their respective dates of disposition, have been classified as discontinued operations in the consolidated statements of operations for all periods presented.
| 84 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Noncontrolling Interests – Partners of Operating Partnership
On July 6, 2004, the Advisor contributed $2 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The limited partner has the right to convert operating partnership units into cash or, at the option of the Company, an equal number of shares of common stock of the Company, as allowed by the limited partnership agreement.
In connection with the Company’s initial public offering, through March 2009 Lightstone SLP, LLC, an affiliate of the Advisor, purchased an aggregate of $30.0 million of special general partner interests (“SLP Units”) in the Operating Partnership at a cost of $100,000 per unit.
In addition, during years ended December 31, 2008 and 2009, the Operating Partnership issued at total of (i) 497,209 units of common limited partnership interest in the Operating Partnership (“Common Units”) and (ii) 93,616 Series A preferred limited partnership units in the Operating Partnership (the “Series A Preferred Units”) with an aggregate liquidation preference of $93.6 million collectively to Arbor Mill Run JRM, LLC, a Delaware limited liability company (“Arbor JRM”), Arbor National CJ, LLC, a New York limited liability company (“Arbor CJ”), Prime Holdings LLC, a Delaware limited liability company (“AR Prime”) TRAC Central Jersey LLC, a Delaware limited liability company (“TRAC”), Central Jersey Holdings II, LLC, a New York limited liability company (“Central Jersey”) and JT Prime LLC, a Delaware limited liability company (“JT Prime”), in exchange for an aggregate 36.8% membership interest in Mill Run, LLC (“Mill Run”) and an aggregate 40.0% membership interest in Prime Outlets Acquisition Company (“POAC”). The membership interests in Mill Run and POAC were subsequently disposed of during the third quarter of 2010. Additionally, the Operating Partnership redeemed an aggregate 43,516 Series A Preferred Units, with a liquidation preference of approximately $43.5 million, during the third quarter of 2013. On January 2, 2014, the Operating Partnership redeemed all of the then remaining outstanding 50,100 Series A Preferred Units, at their liquidation preference of approximately $50.1 million.
See Note 14 for further discussion of noncontrolling interests.
Operating Partnership Activity
Acquisitions and Investments:
Through its Operating Partnership, the Company has and will continue to seek to acquire and operate commercial, residential, and hospitality properties, principally in the United States. The Company’s commercial holdings consist of retail (primarily multi-tenanted shopping centers), lodging and industrial. All such properties have been or will be acquired and operated by the Company alone or jointly with another party.
Related Parties:
Properties acquired and development activities have been and may continue to be managed by affiliates of Lightstone Value Plus REIT Management LLC (collectively, the “Property Managers”).
The Company’s Advisor and Property Managers are each related parties. Each of these entities has received and will continue to receive compensation and fees for services related to the investment and management of the Company’s assets. These entities have and will continue to receive fees during the Company’s acquisition, operational and liquidation stages. The compensation levels during our acquisition and operational stages are based on the contractual purchase price of the acquired properties and the annual revenue earned from such properties, and certain other fees (See Note 15).
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and the Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). As of December 31, 2015, Lightstone REIT had a 98% general partnership interest in the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation.
| 85 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate, depreciable lives, and revenue recognition. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.
Investments in entities where the Company has the ability to exercise significant influence, but does not exercise financial and operating control, and is not considered to be the primary beneficiary of a variable interest entity will be accounted for using the equity method. Investments in entities where the Company has virtually no influence will be accounted for using the cost method.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. All cash equivalents are held in money market funds. To date, the Company has not experienced any losses on its cash and cash equivalents.
Supplemental cash flow information for the periods indicated is as follows:
| For the Years Ended | ||||||||||||
| December 31, 2015 | December 31, 2014 | December 31, 2013 | ||||||||||
| Cash paid for interest | $ | 12,889 | $ | 16,810 | $ | 15,632 | ||||||
| Distributions declared | $ | 18,077 | $ | 18,064 | $ | 19,789 | ||||||
| Value of shares issued from distribution reinvestment program | $ | 1,453 | $ | 5,739 | $ | 6,490 | ||||||
| Non cash purchase of investment property | $ | 320 | $ | 776 | $ | 1,035 | ||||||
| Debt assumed by joint venture in connection with disposition | $ | 32,800 | $ | - | $ | - | ||||||
| Assignment of minority interest loans to joint venture in connection with disposition | $ | 547 | $ | - | $ | - | ||||||
Marketable Securities
Marketable securities consist of equity and debt securities that are designated as available-for-sale and are recorded at fair value. Unrealized holding gains or losses are reported as a component of accumulated other comprehensive income/(loss). Realized gains or losses resulting from the sale of these securities are determined based on the specific identification of the securities sold. An impairment charge is recognized when the decline in the fair value of a security below the amortized cost basis is determined to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the duration and severity of any decline in fair value below our amortized cost basis, any adverse changes in the financial condition of the issuers’ and its intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. The Board has authorized the Company from time to time to invest the Company’s available cash in marketable securities of real estate related companies. The Board has approved investments of marketable securities of real estate companies up to 30% of the Company’s total assets to be made at the Company’s discretion, subject to compliance with any REIT or other restrictions.
Revenue Recognition
Minimum rents are recognized on a straight-line accrual basis, over the terms of the related leases. The capitalized above-market lease values and the capitalized below-market lease values are amortized as an adjustment to rental income over the initial lease term, including any below-market renewal periods taken into account. Percentage rents, which are based on commercial tenants’ sales, are recognized once the sales reported by such tenants exceed any applicable breakpoints as specified in the tenants’ leases. Recoveries from commercial tenants for real estate taxes, insurance and other operating expenses, and from residential tenants for utility costs, are recognized as revenues in the period that the applicable costs are incurred. Room revenue for the hotel properties are recognized as stays occur, using the accrual method of accounting. Amounts paid in advance are deferred until stays occur. Other service income consists of revenues from food and beverage services, water park admissions and arcade income and is recognized when consumed.
| 86 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Tenant Accounts Receivable
The Company makes estimates of the uncollectability of its accounts receivable related to base rents, expense reimbursements and other revenues. The Company analyzes accounts receivable and historical bad debt levels, customer credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, tenants in bankruptcy are analyzed and estimates are made in connection with the expected recovery of pre-petition and post-petition claims. The Company’s reported net income or loss is directly affected by management’s estimate of the collectability of accounts receivable.
Mortgages Receivable
From time to time, we may make investments in mortgage loans. Mortgage loans are secured, in part, by mortgages recorded against the underlying properties which are not owned by us. Mortgage loans are carried at cost, net of any premiums or discounts which are accreted or amortized over the life of the related loan receivable utilizing the effective interest method. Premiums or discounts are no longer accreted or amortized for loans that are in default. We evaluate the collectability of both interest and principal of each of these loans quarterly to determine whether the value has been impaired. A loan is deemed to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, the amount of the loss accrual is calculated by comparing the carrying amount of the loan held for investment to its estimated realizable value.
Investments in Real Estate
Accounting for Acquisitions
The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based in each case on their fair values. Purchase accounting is applied to assets and liabilities related to real estate entities acquired based upon the percentage of interest acquired. Fees incurred related to acquisitions are expensed as incurred within general and administrative costs within the consolidated statements of operation. Transaction costs incurred related to the Company’s investment in unconsolidated real estate entities, accounted for under the equity method of accounting, are capitalized as part of the cost of the investment.
Upon the acquisition of real estate operating properties, the Company estimates the fair value of acquired tangible assets and identified intangible assets and liabilities and assumed debt at the date of acquisition, based on evaluation of information and estimates available at that date. Based on these estimates, the Company evaluates the existence of goodwill or a gain from a bargain purchase and allocates the initial purchase price to the applicable assets, liabilities and noncontrolling interests, if any. As final information regarding fair value of the assets acquired, liabilities assumed and noncontrolling interests is received and estimates are refined, appropriate adjustments are made to the purchase price allocation. The allocations are finalized as soon as all the information necessary is available and in no case later than within twelve months from the acquisition date.
In determining the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease including consideration of any bargain renewal periods. The capitalized above-market lease values and the capitalized below-market lease values are amortized as an adjustment to rental income over the initial non-cancelable lease term, including any below-market renewal periods taken into account.
The aggregate fair value of in-place leases is determined by evaluating various factors, including an estimate of carrying costs during the expected lease-up periods, current market conditions and similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, legal and other related costs. The fair value assigned to this intangible asset is amortized over the remaining estimated lease term. Optional renewal periods are not considered.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
The aggregate fair value of other acquired intangible assets includes tenant relationships. Factors considered by management in assigning a value to these relationships include: assumptions of probability of lease renewals, investment in tenant improvements, leasing commissions and an approximate time lapse in rental income while a new tenant is located. The fair value assigned to this intangible asset is amortized over the remaining estimated lease term.
Impairment Evaluation
Management evaluates the recoverability of its investments in real estate assets at the lowest identifiable level, the individual property level. Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value.
The Company evaluates the long-lived assets on a quarterly basis and will record an impairment charge when there is an indicator of impairment and the undiscounted projected cash flows are less than the carrying amount for a particular property. The estimated cash flows used for the impairment analysis and the determination of estimated fair value are based on the Company’s plans for the respective assets and the Company’s views of market and economic conditions. The estimates consider matters such as current and historical rental rates, occupancies for the respective properties and comparable properties, and recent sales data for comparable properties. Changes in estimated future cash flows due to changes in the Company’s plans or views of market and economic conditions could result in recognition of impairment losses, which, under the applicable accounting guidance, could be substantial.
Assets and Liabilities Held for Sale and Discontinued Operations
Assets and groups of assets and liabilities which comprise disposal groups are classified as “held for sale” when all of the following criteria are met: a decision has been made to sell, the assets are available for sale immediately, the assets are being actively marketed at a reasonable price in relation to the current fair value, a sale has been or is expected to be concluded within twelve months of the balance sheet date, and significant changes to the plan to sell are not expected. Assets and disposal groups held for sale are valued at the lower of book value or fair value less disposal costs. Assets held for sale are not depreciated.
Additionally, if the disposal group represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results then the operating results and cash flows related to these assets and liabilities are included in discontinued operations in the consolidated statements of operations and consolidated statements of cash flows, respectively, for all periods presented, as long as the operations and cash flows of the disposal group is expected to be eliminated from ongoing operations as a result of the disposal and the Company will not have any significant continuing involvement in the operations of the disposal group after disposal.
Depreciation and Amortization
Depreciation expense is computed based on the straight-line method over the estimated useful life of the applicable real estate asset. We generally use estimated useful lives of up to thirty-nine years for buildings and improvements and five to ten years for furniture and fixtures. Expenditures for tenant improvements and construction allowances paid to commercial tenants are capitalized and amortized over the initial term of each lease. Expenditures for ordinary maintenance and repairs are charged to expense as incurred.
Deferred Costs
The Company capitalizes initial direct costs associated with financing and leasing activities. The costs are capitalized upon the execution of the loan or lease and amortized over the initial term of the corresponding loan or lease. Amortization of deferred loan costs begins in the period during which the loan was originated using the effective interest method over the term of the loan. Deferred leasing costs are not amortized to expense until the earlier of the store opening date or the date the tenant’s lease obligation begins.
Investments in Unconsolidated Entities
The Company evaluates all joint venture arrangements and investments in entities for consolidation. The percentage interest in the joint venture or investment in entities, evaluation of control and whether a variable interest entity (“VIE”) exists are all considered in determining if the arrangement qualifies for consolidation.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
The Company accounts for its investments in unconsolidated entities using the equity or cost method of accounting, as appropriate. Under the equity method, the cost of an investment is adjusted for the Company’s share of equity in net income or loss beginning on the date of acquisition and reduced by distributions received. The income or loss of each joint venture investor is allocated in accordance with the provisions of the applicable operating agreements. The allocation provisions in these agreements may differ from the ownership interest held by each investor. Differences between the carrying amount of the Company’s investment in the respective joint venture and the Company’s share of the underlying equity of such unconsolidated entities are amortized over the respective lives of the underlying assets as applicable. These items are reported as a single line item in the consolidated statements of operations as income or loss from investments in unconsolidated entities. Under the cost method of accounting, the dividends earned from the underlying entities are recorded to interest income.
The Company continuously reviews its investment in unconsolidated entities for other than temporary declines in market value. Any decline that is not considered temporary will result in the recording of an impairment charge to the investment.
Income Taxes
The Company made an election in 2006 to be taxed as a real estate investment trust (a “REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), beginning with its first taxable year, which ended December 31, 2005.
The Company elected and qualified to be taxed as a REIT in conjunction with the filing of its 2005 U.S. federal tax return. To maintain its status as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its ordinary taxable income to stockholders. As a REIT, the Company generally will not be subject to U.S. federal income tax on taxable income that it distributes to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will then be subject to U.S. federal income taxes on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to stockholders. Through December 31, 2015, the Company has complied with the requirements for maintaining its REIT status.
The Company has net operating loss carryforwards of $12.7 million for U.S. federal income tax purposes through the year ended December 31, 2015. The availability of such loss carryforwards will begin to expire in 2026. As the Company does not consider it likely that it will realize any future benefit from its loss carry-forward, any deferred asset resulting from the final determination of its tax loss carryforwards will be fully offset by a valuation allowance of the same amount.
The Company engages in certain activities through taxable REIT subsidiaries (“TRSs”). As such, the Company may be subject to U.S. federal and state income taxes and franchise taxes from these activities.
As of December 31, 2015, the Company had no material uncertain income tax positions.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, restricted escrows, tenants’ accounts receivable, interest receivable from related parties, accounts payable and accrued expenses and loans due to related parties approximate their fair values because of the short maturity of these instruments. The estimated fair value of the notes payable (line of credit) approximated its carrying value ($18.6 million) because of its floating interest rate. The carrying amount of the mortgages receivable approximates their fair value based upon current market information that would have been used by a market participant to estimate the fair value of such loan.
The estimated fair value (in millions) of the Company’s debt is summarized as follows:
| As of December 31, 2015 | As of December 31, 2014 | |||||||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
| Mortgages payable | $ | 228.6 | $ | 227.1 | $ | 227.2 | $ | 228.3 | ||||||||
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
The fair value of the mortgages payable was determined by discounting the future contractual interest and principal payments by estimated current market interest rates.
Accounting for Derivative Financial Investments and Hedging Activities.
The Company may enter into derivative financial instrument transactions in order to mitigate interest rate risk on a related financial instrument. The Company may designate these derivative financial instruments as hedges and apply hedge accounting. The Company records all derivative instruments at fair value on the consolidated balance sheet.
Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, will be considered cash flow hedges. The Company will formally document all relationships between hedging instruments and hedged items, as well as our risk- management objective and strategy for undertaking each hedge transaction. The Company will periodically review the effectiveness of each hedging transaction, which involves estimating future cash flows. Cash flow hedges will be accounted for by recording the fair value of the derivative instrument on the consolidated balance sheet as either an asset or liability, with a corresponding amount recorded in other accumulated comprehensive income (loss) within stockholders’ equity. Amounts will be reclassified from other comprehensive income (loss) to the consolidated statements of operations in the period or periods the hedged forecasted transaction affects earnings. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, will be considered fair value hedges. The effective portion of the derivatives gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. The change in fair value of derivative instruments which have not been formally documented as effective hedges will be reported as a gain or loss within the consolidated statement of operations.
Stock-Based Compensation
The Company had a stock-based incentive award plan for the independent directors of its Board. This plan expired in April 2015. Awards were granted at fair market value on the date of the grant with fair value estimated using the Black-Scholes-Merton option valuation model, which incorporates assumptions surrounding the volatility, dividend yield, the risk-free interest rate, expected life, and the exercise price as compared to the underlying stock price on the grant date. The tax benefits, if any, associated with these share-based payments are classified as financing activities in the consolidated statement of cash flows. For the years ended December 31, 2015, 2014 and 2013, the Company had no material compensation costs related to the incentive award plan.
Concentration of Risk
The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on its cash and cash equivalents.
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. Dilutive 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 was anti-dilutive and, therefore, dilutive net income per share is equivalent to basic net income
per share.
New Accounting Pronouncements
In January 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update that generally requires companies to measure investments in equity securities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income. The new guidance must be applied using a modified-retrospective approach and is effective for periods beginning after December 15, 2017 and early adoption is not permitted. The Company does not expect the adoption of this guidance will have a material impact on its financial statements.
In September 2015, the FASB issued an accounting standards update to simplify the accounting for adjustments made to provisional amounts during the measurement period of a business combination. The amendment requires the acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective with earlier application permitted for financial statements that have not been issued. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued an accounting standards update that completes the joint effort by the FASB and International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards. The update applies to all companies that enter into contracts with customers to transfer goods or services and is effective for us for interim and annual reporting periods beginning after December 15, 2016. Early application is not permitted and companies have the choice to apply the update either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying the update at the date of initial application (January 1, 2017) and not adjusting comparative information. 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 financial statements. The Company does not expect the adoption of this standard to have a material impact on our financial position, results of operations or cash flows.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
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. The SEC staff noted that this update did not address situations where a company has debt issuance costs related to line-of-credit arrangements. As a result, the FASB issued an additional update which states that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. This new guidance will be effective for the Company beginning January 1, 2016. The Company does not expect the adoption of this standard to have a material impact on our financial position, results of operations or cash flows.
Reclassifications
Certain prior period amounts may have been reclassified to conform to the current year presentation.
3. 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 related party real estate investment trust also sponsored by the Company’s Sponsor and for the Joint Venture to acquire the Company’s membership interests in the LVP REIT Hotels for an aggregate of approximately $122.4 million, plus closing and other third party transaction costs.
The LVP REIT Hotels are comprised of the following 11 limited service hotels:
| · | 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. The Company accounts for its 2.5% membership interest in the Joint Venture under the cost method of accounting. As of December 31, 2015, the carrying value of the Company’s 2.5% membership interest in the Joint Venture was approximately $1.5 million, recorded at cost, which is included in investment in related parties on the consolidated balance sheets.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
The LVP REIT Hotels were contributed to the Joint Venture in a series of transactions during 2015 as discussed below.
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 that was collateralized by the Hotel I Portfolio and had a balance of $34.1 million, 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 100.0% membership interest in the Courtyard – Parsippany and its 90.0% membership interest in the Residence Inn - Baton Rouge for approximately $23.4 million, excluding transaction costs, or approximately $12.2 million, net of an aggregate of $11.6 million of mortgage debt (the “Courtyard – Parsippany Loan” and the “Residence Inn – Baton Rouge Loan) 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 mortgage debt (the “Promissory Note”) 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.
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 90.0% 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 mortgage debt (the “Courtyard – Baton Rouge Loan”) which was assumed by the subsidiaries of the Joint Venture as part of the transaction, pursuant to a contribution agreement, 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 an aggregate gain on disposition of approximately $17.3 million, which is included in discontinued operations on the consolidated statements of operations, during the year ended December 31, 2015.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
4. Dispositions of Investments in Unconsolidated Affiliated Real Estate Entities
During the first quarter of 2013, the Company received an additional $1.2 million related to the 2012 disposition of its ownership interest in Grand Prairie Holdings LLC (“GPH”), which developed an outlet center located in Grand Prairie, Texas, resulting from the satisfaction of certain conditions and recognized a gain on disposition of unconsolidated affiliated real estate entities in its consolidated statements of operations.
During the third quarter of 2014, the Company received an additional $4.4 million, related to the final true-ups and adjustments pursuant to the terms of a transaction related to the 2012 disposition of its ownership interests in GPH and Livermore Valley Holdings LLC (“LVH”). LVP developed an outlet center located in Livermore Valley, California, and also owned a parcel of land adjacent to the outlet center. As a result, the Company recorded a gain on disposition of unconsolidated affiliated real estate entities of $4.4 million during the year ended December 31, 2014.
5. Investments in Unconsolidated Affiliated Real Estate Entity
The entity discussed below is partially owned by the Company. The Company accounts for this investment under the equity method of accounting as the Company exercises significant influence, but does not control this entity. A summary of the Company’s investment in unconsolidated affiliated real estate entity is as follows:
| As of | ||||||||||||||
| Real Estate Entity | Date Acquired | Ownership % | December 31, 2015 | December 31, 2014 | ||||||||||
| 1407 Broadway Mezz II LLC (“1407 Broadway”) | January 4, 2007 | 49.0 | % | $ | 1,989 | $ | 9,846 | |||||||
| Total Investment in unconsolidated affiliated real estate entity | $ | 1,989 | $ | 9,846 | ||||||||||
1407 Broadway Mezz II LLC
As of December 31, 2015, the Company has a 49.0% ownership in 1407 Broadway Mezz II LLC (“1407 Broadway”), which had a sub-leasehold interest (the “Sub-leasehold Interest”) in a ground lease to an office building located at 1407 Broadway Street in New York, New York. On April 30, 2015, 1407 Broadway completed the disposition of its Sub-leasehold Interest 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 year ended December 31, 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 year ended December 31, 2015, of which the Company’s share was approximately $15.1 million. Additionally, during the first quarter of 2105, the Company made a contribution of $1.6 million to 1407 Broadway.
The Company’s equity earnings for the year ended December 31, 2013 include (i) an adjustment to record previously unrecorded losses aggregating $5.2 million through December 31, 2012 and (ii) $3.7 million of earnings representing its pro rata share of 1407 Broadway’s net income for year ended December 31, 2013. Additionally, during the year ended December 31, 2014, the Company received distributions from 1407 Broadway aggregating $0.5 million.
1407 Broadway Financial Information
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
The following table represents the unaudited condensed income statements for 1407 Broadway:
| For the Year Ended December 31, 2015 | For the Year Ended December 31, 2014 | For the Year Ended December 31, 2013 | ||||||||||
| Total revenue | $ | 13,510 | $ | 41,159 | $ | 37,737 | ||||||
| Property operating expenses | 9,439 | 29,608 | 28,797 | |||||||||
| Depreciation and amortization | 2,644 | 7,011 | 5,792 | |||||||||
| Operating income | 1,427 | 4,540 | 3,148 | |||||||||
| Interest expense and other, net | (1,343 | ) | (3,266 | ) | (3,495 | ) | ||||||
| Gain on disposition | 9,891 | - | - | |||||||||
| Gain on debt extinguishment | - | - | 7,494 | |||||||||
| Net income | $ | 9,975 | $ | 1,274 | $ | 7,147 | ||||||
| Company’s share of net earnings | $ | 5,804 | $ | 821 | $ | (1,524 | ) | |||||
The Company’s share of earnings for the year ended December 31, 2013 includes an adjustment of $5,210 for previously unrecorded losses through December 31, 2012.
The following table represents the unaudited condensed balance sheets for 1407 Broadway:
| As of | As of | |||||||
| December 31, 2015 | December 31, 2014 | |||||||
| Real estate, at cost (net) | $ | - | $ | 121,304 | ||||
| Intangible assets | - | 28 | ||||||
| Cash and restricted cash | 5,964 | 8,951 | ||||||
| Other assets | - | 22,673 | ||||||
| Total assets | $ | 5,964 | $ | 152,956 | ||||
| Mortgage payable | $ | - | $ | 126,000 | ||||
| Other liabilities | 556 | 13,342 | ||||||
| Member capital | 5,408 | 13,614 | ||||||
| Total liabilities and members’ capital | $ | 5,964 | $ | 152,956 | ||||
6. Preferred Investments
365 Bond Street Preferred Investment
In March 2014, the Company entered into an agreement with various related party entities that provides for us 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 December 31, 2015 and 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 related parties on the consolidated balance sheets. As of December 31, 2015, approximately $2.8 million of additional contributions were unfunded related to the 365 Bond Street Preferred Investment. During the years ended December 31, 2015 and 2014, the Company recorded approximately $5.1 million and $1.9 million, respectively, of investment income related to the 365 Bond Street Preferred Investment, which is included in interest and dividend income on the consolidated statements of operations.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
40 East End Avenue Preferred Investment
In May 2015, the Company entered into an agreement with various related party entities that provides for us 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. As of December 31, 2015, construction financing had not been procured and the monthly preferred distributions rate was 8%.
The Company commenced making contributions during the second quarter of 2015 and as of December 31, 2015 the 40 East End Avenue Preferred Investment had a balance of approximately $28.8 million and is classified in investments in related parties on the consolidated balance sheets. As of December 31, 2015, approximately $1.2 million of additional contributions were unfunded related to the 40 East End Avenue Preferred Investment. During the year ended December 31, 2015, the Company recorded approximately $1.4 million of investment 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
In August 2015, the Company entered into certain agreements that provide for us to make aggregate 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 us upon the occurrence of certain events, 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 December 31, 2015, the 30-02 39th Avenue Preferred Investment had an outstanding balance of $7.3 million, which is classified in investments in related parties on the consolidated balance sheet. As of December 31, 2015, an aggregate of $42.7 million of additional contributions were unfunded related to the 30-02 39th Avenue Preferred Investment. During the year ended December 31, 2015, the Company recorded approximately $0.2 million of investment income related to the 30-02 39th Avenue Preferred Investment, which is included in interest and dividend income on the consolidated statements of operations.
485 7th Avenue Preferred Investment
In December 2015, the Company entered into an agreement with various related party entities that provides for us to contributions (the “485 7th Avenue Preferred Investment”) of up to $60.0 million in an affiliate of its Sponsor which owns a parcel of land located at 485 7th Avenue, New York, NY on which they intend to develop a 612-room Marriott Moxy hotel. The 485 7th Avenue Preferred Investment was made pursuant to an instrument that entitles the Company to monthly preferred distributions at a rate of 12% per annum and is redeemable by the Company upon the occurrence of certain events. The 485 7th Avenue Preferred Investment is classified as a held-to-maturity security and is recorded at cost.
The Company contributed the entire $60.0 million to the 485 7th Avenue Preferred Investment in December 2015, which is classified in investments in related parties on the consolidated balance sheet. During the year ended December 31, 2015, the Company recorded $20 of investment income related to the 485 7th Avenue Preferred Investment, which is included in interest and dividend income on the consolidated statements of operations.
7. Mortgages Receivable
Participation in a Joint Venture Acquisition of a Second Mortgage Loan
On April 12, 2011, LVP Rego Park, LLC (the “Rego Park Joint Venture”), in which the Company and Lightstone II had 90.0% and 10.0% ownership interests, respectively, acquired a $19.5 million, nonrecourse second mortgage note (the “Second Mortgage Loan”) for approximately $15.1 million from an unaffiliated third party. The purchase price reflected a discount of approximately $4.4 million to the outstanding principal balance. The Company’s share of the aggregate purchase price was approximately $13.6 million. Additionally, in connection with the purchase, the Company’s Advisor received an acquisition fee equal to 2.75% of its portion of the acquisition price, or approximately $0.4 million. The Company’s portion of the acquisition was funded with cash. Beginning on April 12, 2011, the Company consolidated the operating results and financial condition of the Rego Park Joint Venture and accounted for the ownership interest of Lightstone II as a noncontrolling interest. The Second Mortgage Loan was recorded in mortgages receivable on the consolidated balance sheet.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
The Second Mortgage Loan was originated by the Seller in May 2008 with an original principal balance of $19.5 million, was due May 31, 2013 and was collateralized by a 417 unit apartment complex located in Queens, New York. The Second Mortgage Loan bore interest at a fixed rate of 5.0% per annum with monthly interest only payments of approximately $0.1 million through maturity. The Rego Park Joint Venture accreted the discount using the effective interest rate method through maturity. On June 27, 2013 all amounts due to the Rego Park Joint Venture related to the Second Mortgage Loan were repaid in full. During the year ended December 31, 2013 $1.1 million of the discount was amortized into interest income.
During the year ended December 31, 2013, the Rego Park Joint Venture made final distributions of all of its assets of approximately $21.0 million, to its members, of which approximately $2.1 million was distributed to Lightstone II.
Senior Mortgage - Holiday Inn Express Hotel & Suites East Brunswick (the “Holiday Inn - East Brunswick”)
On June 21, 2011, the Company acquired an $8.8 million, senior mortgage note (the “Senior Mortgage”) for approximately $5.6 million from, an unaffiliated third party. The purchase price reflected a discount of approximately $3.2 million to the outstanding principal balance. Additionally, in connection with the purchase, the Company’s Advisor received an acquisition fee equal to 2.75% of the acquisition price, or approximately $0.2 million. The acquisition was funded with cash. The Senior Mortgage is recorded in mortgages receivable on the consolidated balance sheet.
The Senior Mortgage, which was originated by Banc of America in July 2007 with an original principal balance of $9.1 million, is due August 2017 and collateralized by the Holiday Inn –East Brunswick. The Senior Mortgage bears interest at a fixed rate of 6.33% per annum with scheduled monthly principal and interest payments of approximately $56 through maturity. The Senior Mortgage was transferred to special servicing on February 1, 2010 due to a payment default (the Senior Mortgage is in payment default for payments since January 1, 2010). Since the Senior Mortgage is in default, the aforementioned discount is not being amortized.
Since the Senior Mortgage is in default, the borrower is required to transfer any excess cash to the Company on a monthly basis. The Company applies the cash receipts method of income recognition, whereby the Company will recognize any excess cash, after the required funding for taxes and insurance and other escrow related disbursements, as interest income until such time as the borrower is current on all amounts owed to the Company for interest and then any remaining cash will be applied to outstanding principal.
During the years ended December 31, 2015, 2014 and 2013, exclusive of the aforementioned loan discount amortization, the Company recognized approximately $0.5 million, $0.5 million and $1.2 million of interest income, respectively, from its Mortgages Receivable.
8. Supplementary Financial Information
Investment property consists of the following:
| As of | As of | |||||||
| December 31, 2015 | December 31, 2014 | |||||||
| Investment property: | ||||||||
| Land and improvements | $ | 68,869 | $ | 68,606 | ||||
| Building and improvements | 238,757 | 227,427 | ||||||
| Furniture and fixtures | 17,421 | 16,567 | ||||||
| Construction in progress | 668 | 2,317 | ||||||
| Gross investment property | 325,715 | 314,917 | ||||||
| Less accumulated depreciation | (50,278 | ) | (40,166 | ) | ||||
| Net investment property | $ | 275,437 | $ | 274,751 | ||||
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Accounts payable, accrued expenses and other liabilities consist of the following:
| As of | As of | |||||||
| December 31, 2015 | December 31, 2014 | |||||||
| Accounts payable and accrued expenses | $ | 4,807 | $ | 5,225 | ||||
| Accrued real estate taxes | 610 | 963 | ||||||
| Accrued interest payable | 1,340 | 572 | ||||||
| Accrued default interest payable | 7,117 | 5,052 | ||||||
| Fair value of derivative financial instruments | 157 | - | ||||||
| Other liabilities | 348 | 481 | ||||||
| $ | 14,379 | $ | 12,293 | |||||
9. 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 December 31, 2015 | ||||||||||||||||
| Adjusted Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Equity Securities, primarily REITs | $ | 1,405 | $ | 487 | $ | (1 | ) | $ | 1,891 | |||||||
| Marco OP Units and Marco II OP Units | 19,227 | 21,458 | - | 40,685 | ||||||||||||
| Corporate Bonds and Preferred Equities | 35,880 | 474 | (1,369 | ) | 34,985 | |||||||||||
| Mortgage Backed Securities (“MBS”) | 3,769 | - | (314 | ) | 3,455 | |||||||||||
| Total | $ | 60,281 | $ | 22,419 | $ | (1,684 | ) | $ | 81,016 | |||||||
| 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 | |||||||||||
| 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 Inc.”). 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 Inc. in exchange for cash or similar number of shares of Simon Inc.’s common stock (“Simon Stock”).
During the year ended December 31, 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.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
During the year ended December 31, 2014, the Company received a special dividend on its Marco OP Units aggregating approximately $5.7 million, which is included in interest and dividend income on the consolidated statement of operations.
During the year ended December 31, 2013, the Company redeemed an aggregate of approximately 156,000 Marco OP units with a cost basis of approximately $13.6 million for gross proceeds of approximately $27.5 million and realized aggregate gains of approximately $13.9 million, which is included in gain on sale of marketable securities, for the year ended December 31, 2013 on the consolidated statements of operations and the Company exchanged 69,691 Marco II OP Units for 69,691 shares of Simon Stock.
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. At their respective dates of acquisition, the maturities of the Company’s MBS generally ranged from 27 year to 30 years.
The Company considers the declines in market value of certain investments in its investment portfolio to be temporary in nature. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. During the years ended December 31, 2015, 2014 and 2013, the Company did not recognize any impairment charges. As of December 31, 2015, the Company does not consider any of its investments to be other-than-temporarily impaired.
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% (1.27% as of December 31, 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 December 31, 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% (1.77% as of December 31, 2015). The Line of Credit is collateralized by approximately 252,000 Marco OP Units and Pro DFJV Holdings LLC (“PRO”), a Delaware limited liability company wholly owned by the Company (see Note 14), guaranteed the Line of Credit.
The amount outstanding under the Line of Credit was $18.6 million and $19.9 million as of December 31, 2015 and 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. |
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
| • | Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| • | Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Marketable securities, available for sale, measured at fair value on a recurring basis as of the dates indicated are as follows:
| Fair Value Measurement Using | ||||||||||||||||
| As of December 31, 2015 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Marketable Securities: | ||||||||||||||||
| Equity Securities, primarily REITs | $ | 1,891 | $ | - | $ | - | $ | 1,891 | ||||||||
| Marco OP and OP II Units | - | 40,685 | - | 40,685 | ||||||||||||
| Corporate Bonds and Preferred Equities | - | 34,985 | - | 34,985 | ||||||||||||
| MBS | - | 3,455 | - | 3,455 | ||||||||||||
| Total | $ | 1,891 | $ | 79,125 | $ | - | $ | 81,016 | ||||||||
| 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 fair values of the Company’s investments in Corporate Bonds and Preferred Equities and MBS are measured using readily available quoted prices for similar assets. Additionally, as noted and disclosed above, the Company’s Marco OP and OP II units are ultimately exchangeable for cash or similar number of shares of Simon Stock, therefore the Company uses the quoted market price of Simon Stock to measure the fair value of the Company’s Marco OP and OP II units.
The Company did not have any other significant financial assets or liabilities, which would require revised valuations that are recognized at fair value.
10. Dispositions and Discontinued Operations
Dispositions
On July 31, 2014, the Company disposed of an industrial property located in Sarasota, Florida (“Sarasota”) for approximately $5.3 million. During the second quarter of 2014, the Company recorded a loss on the disposition of real estate of approximately $2.4 million related to this disposition.
On September 30, 2014, the Company disposed of two multi-family apartment buildings located in Greensboro/Charlotte, North Carolina (the “Camden Multi-Family Properties”) for approximately $32.4 million. During the third quarter of 2014, the Company recorded a gain on the disposition of real estate of approximately $11.5 million related to this disposition.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Effective January 1, 2014, the Company adopted an accounting standards update that provided new guidance on the requirements for reporting a discontinued operation. As a result, the dispositions of Sarasota and the Camden Multi-Family Properties did not qualify to be reported as discontinued operations since the dispositions did not represent a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the operating results of Sarasota and the Camden Multi-Family Properties are reflected in the Company’s results from continuing operations for all periods presented through their respective dates of disposition.
Discontinued Operations
During the year ended December 31, 2013 the Company disposed of the Houston Extended Stay Hotels and Everson Pointe for approximately $27.0 million. In connection with the disposition, the Company repaid in full the then outstanding mortgage indebtedness of approximately $11.1 million. These transactions resulted in a fourth quarter aggregate gain on disposition of $2.0 million, which is included in discontinued operations for the year ended 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 $1.7 million, which is included in discontinued operations during the year ended December 31, 2014.
During 2015, the Company disposed of the LVP REIT Hotels for approximately $122.4 million. The Company recognized an aggregate gain on disposition of approximately $17.3 million, which is included in discontinued operations during the year ended December 31, 2015. (See Note 3)
The operating results of the LVP REIT Hotels, Crowe’s Crossing, Everson Pointe, and the Houston Extended Stay Hotels, through their respective dates of disposition, 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.
The following summary presents the associated assets and liabilities classified as held for sale in the consolidated balance sheets for the LVP REIT Hotels as of December 31, 2014:
| 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 | ||
The following summary presents the aggregate operating results, through their respective dates of disposition, of the LVP REIT Hotels, Crowe’s Crossing, Everson Pointe, and the Houston Extended Stay Hotels included in discontinued operations in the consolidated statements of operations for the periods indicated.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
| For the Years Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| Revenue | $ | 8,000 | $ | 36,266 | $ | 30,434 | ||||||
| Operating expenses | 5,742 | 33,770 | 27,169 | |||||||||
| Operating income | 2,258 | 2,496 | 3,265 | |||||||||
| Interest expense and other, net | (849 | ) | (3,894 | ) | (2,955 | ) | ||||||
| Gain on disposition of real estate | 17,322 | 1,676 | 2,021 | |||||||||
| Net income from discontinued operations | $ | 18,731 | $ | 278 | $ | 2,331 | ||||||
Cash flows generated from discontinued operations are presented separately in the consolidated statements of cash flows.
11. Mortgages Payable
Mortgages payable consists of the following:
| Loan Amount as of | ||||||||||||||||||||||
| Property | Interest Rate | Weighted Average Interest Rate as of December 31, 2015 | Maturity Date | Amount Due at Maturity | December 31, 2015 | December 31, 2014 | ||||||||||||||||
| Southeastern Michigan Multi-Family Properties | 5.96 | % | 5.96 | % | July 2016 | $ | 38,139 | $ | 38,437 | $ | 39,012 | |||||||||||
| Oakview Plaza | 5.49 | % | 5.49 | % | January 2017 | 25,583 | 26,014 | 26,425 | ||||||||||||||
| Gulf Coast Industrial Portfolio | 9.83 | % | 9.83 | % | Due on demand | 50,525 | 50,525 | 51,142 | ||||||||||||||
| St. Augustine Outlet Center | 6.09 | % | 6.09 | % | April 2016 | 23,748 | 23,875 | 24,364 | ||||||||||||||
| Gantry Park | 4.48 | % | 4.48 | % | November 2024 | 65,317 | 74,500 | 74,500 | ||||||||||||||
| DePaul Plaza | Libor + 2.75% | 3.03 | % | June 2020 | 13,494 | 15,295 | 11,746 | |||||||||||||||
| Total mortgages payable | 6.10 | % | $ | 216,806 | $ | 228,646 | $ | 227,189 | ||||||||||||||
Libor as of December 31, 2015 and 2014 was 0.42% and 0.17%, respectively. Our loans are secured by the indicated real estate and are non-recourse to the Company.
The following table shows our contractually scheduled principal maturities during the next five years and thereafter as of December 31, 2015:
| 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | ||||||||||||||||||||
| $ | 113,675 | $ | 25,991 | $ | 1,567 | $ | 1,621 | $ | 14,924 | $ | 70,868 | $ | 228,646 | |||||||||||||
Pursuant to the Company’s loan agreements, escrows in the amount of approximately $7.1 million and $11.7 million were held in restricted escrow accounts as of December 31, 2015 and 2014, respectively. Escrows held in restricted escrow accounts are included in restricted escrows on the consolidated balance sheets. Such escrows will be released in accordance with the applicable loan agreements for payments of real estate taxes, insurance and capital improvement transactions, as required. Certain of our mortgages payable also contain clauses providing for prepayment penalties.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
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 financial 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 of approximately $2.1 million, $2.1 million and $2.2 million was accrued during the years ended December 31, 2015, 2014 and 2013, respectively. As a result, cumulative accrued default interest expense of approximately $7.1 million and $5.0 million is included in accounts payable, accrued expenses and other liabilities on our consolidated balance sheets as of December 31, 2015 and 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 $23.9 million as of December 31, 2015) secured by the St. Augustine Outlet Center matures in April 2016, our mortgage loan (outstanding principal balance of $38.4 million as of December 31, 2015) secured by the Southeastern Michigan Multi-Family Properties matures in July 2016 and our mortgage loan (outstanding principal balance of $26.0 million as of December 31, 2015) secured by the Oakview Plaza matures in January 2017. 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.
St. Augustine Outlet Center Loan
For the mortgage payable related to the St. Augustine Outlet Center, Lightstone Holdings, LLC (the “Guarantor”), a company wholly owned by the Sponsor, has guaranteed to the extent of a $27.2 million mortgage loan on the St. Augustine Outlet center, the payment of losses that the lender may sustain as a result of fraud, misappropriation, misuse of loan proceeds or other acts of misconduct by the Company and/or its principals or affiliates. Such losses are recourse to the Guarantor under the guaranty regardless of whether the lender has attempted to procure payment from the Company or any other party. Further, in the event of the Company’s voluntary bankruptcy, reorganization or insolvency, or the interference by the Company or its affiliates in any foreclosure proceedings or other remedy exercised by the lender, the Guarantor has guaranteed the payment of any unpaid loan amounts. The Company has agreed, to the maximum extent permitted by its Charter, to indemnify Guarantor for any liability that it incurs under this guaranty.
12. Distributions Payable
On November 13, 2015, the Board declared a distribution for the three-month period ending December 31, 2015. The distribution was 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 December 31, 2015 distribution was paid in cash on January 15, 2016.
On November 14, 2014, the Board declared a distribution for the three-month period ending December 31, 2014. The distribution was 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 December 31, 2014 distribution was paid in full on January 15, 2015 using a combination of cash ($3.1 million) and shares ($1.5 million) which represents 0.1 million shares of the Company’s common stock issued pursuant to the Company’s distribution reinvestment program (“DRIP”), at a price of $10.12 per share.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
13. Company’s Stockholder’s Equity
Preferred Shares
Shares of preferred stock may be issued in the future in one or more series as authorized by the Company’s Board. Prior to the issuance of shares of any series, the Board is required by the Company’s charter to fix the number of shares to be included in each series and the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each series. Because the Company’s Board has the power to establish the preferences, powers and rights of each series of preferred stock, it may provide the holders of any series of preferred stock with preferences, powers and rights, voting or otherwise, senior to the rights of holders of our common stock. The issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of the Company’s common stock. As of December 31, 2015 and 2014, the Company had no outstanding preferred shares.
Common Shares
All of the common stock offered by the Company will be duly authorized, fully paid and nonassessable. Subject to the preferential rights of any other class or series of stock and to the provisions of its charter regarding the restriction on the ownership and transfer of shares of our stock, holders of the Company’s common stock will be entitled to receive distributions if authorized by the Board and to share ratably in the Company’s assets available for distribution to the stockholders in the event of a liquidation, dissolution or winding-up.
Each outstanding share of the Company’s common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors. There is no cumulative voting in the election of directors, which means that the holders of a majority of the outstanding common stock can elect all of the directors then standing for election, and the holders of the remaining common stock will not be able to elect any directors.
Holders of the Company’s common stock have no conversion, sinking fund, redemption or exchange rights, and have no preemptive rights to subscribe for any of its securities. Maryland law provides that a stockholder has appraisal rights in connection with some transactions. However, the Company’ charter provides that the holders of its stock do not have appraisal rights unless a majority of the Board determines that such rights shall apply. Shares of the Company’s common stock have equal dividend, distribution, liquidation and other rights.
Under its charter, the Company cannot make some material changes to its business form or operations without the approval of stockholders holding at least a majority of the shares of our stock entitled to vote on the matter. These include (1) amendment of its charter, (2) its liquidation or dissolution, (3) its reorganization, and (4) its merger, consolidation or the sale or other disposition of its assets. Share exchanges in which the Company is the acquirer, however, do not require stockholder approval.
Distributions, Share Repurchase Program and Tender Offers
Beginning February 1, 2006, the Company’s Board declared quarterly distributions in the amount of $0.0019178 per share per day payable to stockholders of record at the close of business each day during the applicable period. The annualized rate declared was equal to 7%, which represents the annualized rate of return on an investment of $10.00 per share attributable to these daily amounts, if paid for each day for a 365 day period (the “Annualized Rate”). Subsequently, the Company’s Board has declared regular quarterly distributions at the Annualized Rate, with the exception of the three-month period ended June 30, 2010. The distributions for the three-month period ended June 30, 2010 were at an aggregate annualized rate of 8% based on the share price of $10.00.
Through January 19, 2015, the Company’s stockholders had the option to elect the receipt of shares in lieu of cash under the Company’s DRIP. Our DRIP Registration Statement on Form S-3D was filed and became effective under the Securities Act of 1933 on July 12, 2012. On January 19, 2015, the Board of Directors suspended the Company’s DRIP effective April 15, 2015. As of December 31, 2015, approximately 8.4 million shares remain available for issuance under our DRIP. For so long as the DRIP remains suspended, all future distributions will be in the form of cash.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
The amount of distributions distributed 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 distributions, the Company’s financial condition, capital expenditure requirements and annual distribution requirements needed to maintain the Company’s status as a REIT under the Internal Revenue Code.
Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares back to us, subject to restrictions. During 2013, we redeemed approximately 0.3 million common shares at an average price per share of $9.19 per share. During 2014, we redeemed approximately 0.3 million common shares at an average price per share of $9.91 per share. During 2015, we redeemed approximately 0.3 million common shares at an average price per share of $10.00 per share.
Stock-Based Compensation
The Company previously adopted a stock option plan under which its independent directors were eligible to receive annual nondiscretionary awards of nonqualified stock options. This plan expired in April 2015. The Company’s stock option plan was designed to enhance its profitability and value for the benefit of its stockholders by enabling it to offer independent directors stock based incentives, thereby creating a means to raise the level of equity ownership by such individuals in order to attract, retain and reward such individuals and strengthen the mutuality of interests between such individuals and our stockholders.
The Company authorized and reserved 75,000 shares of its common stock for issuance under its stock option plan. The Board could make appropriate adjustments to the number of shares available for awards and the terms of outstanding awards under the Company’s stock option plan to reflect any change in its capital structure or business, stock dividend, stock split, recapitalization, reorganization, merger, consolidation or sale of all or substantially all of our assets.
The Company’s stock option plan provided for the automatic grant of a nonqualified stock option through April 2015 to each of its independent directors, without any further action by the Board of Directors or the stockholders, to purchase 3,000 shares of the Company’s common stock on the date of each annual stockholder’s meeting. At each of our annual stockholder meetings, beginning in 2007, options were granted to each of our three independent directors. As of December 31, 2015, options to purchase 75,000 shares of stock were outstanding, 63,000 were fully vested. The options have exercise prices between $9.80 per share and $11.80 per share with a weighted average exercise price of $10.56 per share. Compensation expense associated with our stock option plan was not material for the years ended December 31, 2015, 2014 and 2013. Through December 31, 2015, there were no forfeitures related to stock options previously granted.
The exercise price for all stock options granted under the stock option plan were initially fixed at $10 per share until the termination of the Company’s initial public offering which occurred in October 2008, and thereafter the exercise price for stock options granted to the independent directors was equal to the fair market value of a share on the last business day preceding the annual meeting of stockholders. The term of each such option will be 10 years from the date of grant. Options granted to non-employee directors will vest and become exercisable on the second anniversary of the date of grant, provided that the independent director is a director on the Board on that date. Notwithstanding any other provisions of the Company’s stock option plan to the contrary, no stock option issued pursuant thereto may be exercised if such exercise would jeopardize the Company’s status as a REIT under the Internal Revenue Code.
14. Noncontrolling Interests
The noncontrolling interests consist of (i) parties of the Company that hold units in the Operating Partnership, (ii) notes receivable from noncontrolling interests (see below) and (iii) certain interests in consolidated subsidiaries. The units include SLP Units, limited partner units, Series A Preferred Units (see below) and Common Units. The noncontrolling interests in consolidated subsidiaries include or included ownership interests in PRO (see below), the Rego Park Joint Venture (see Note 7) and the 2nd Street Joint Venture (see below).
Share Description
See Note 15 for discussion of rights related to SLP Units. The limited partner and Common Units of the Operating Partnership have similar rights as those of the Company’s stockholders including distribution rights.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Redemption of Series A Preferred Units and Repayment of Notes Receivable due from Noncontrolling Interests
On September 30, 2013, as a result of various agreements (collectively, the “Series A Agreement”) between and amongst (i) the Operating Partnership and certain of its subsidiaries and affiliates (the “Operating Partnership Parties”) and (ii) Arbor JRM, Arbor CJ, AR Prime, TRAC, Central Jersey and JT Prime (collectively, the “Contributing Parties”) and certain of their subsidiaries and affiliates (collectively, the “Series A Parties”), the Operating Partnership redeemed an aggregate 43,516 Series A Preferred Units, held by the Contributing Parties, at their liquidation preference of approximately $43.5 million and agreed to extend the redemption of the aggregate remaining outstanding 50,100 Series A Preferred Units, held by th e Contributing Parties, at their liquidation preference of approximately $50.1 million to January 2, 2014. Furthermore, the Contributing Parties simultaneously repaid approximately $41.1 million of notes receivable (the “Contributing Parties Loans”) representing the proportionate share of total loans issued to the Contributing Parties which was secured by their Series A Preferred Units and Common Units. As a result, the remaining outstanding balance of the Contributing Parties Loans was approximately $47.4 million, which had to be repaid in full upon redemption of the remaining outstanding Series A Preferred Units.
Pursuant to the terms of the Series A Agreement, the Series A Parties provided a full release to the Operating Partnership Parties for any and all claims, both asserted or unasserted, through September 30, 2013. However, the release did not affect the rights of the Contributing Parties in respect of any subsequent claims relating to their remaining outstanding Common Units and then outstanding Series A Preferred Units. Additionally, the Series A Preferred Units, which were entitled to receive cumulative preferential distributions equal to an annual rate of 4.6316%, if and when declared, were no longer entitled to distributions for periods subsequent to June 26, 2013 and the Contributing Parties Loans, which provided for interest payable semi-annually at an annual rate of 4.00%, no longer accrued interest for periods subsequent to June 26, 2013. The Series A Preferred Units initially had no mandatory redemption or maturity date and were not redeemable by the Operating Partnership prior to June 26, 2013.
On January 2, 2014, the Operating Partnership redeemed the remaining outstanding 50,100 Series A Preferred Units, held by the Contributing Parties, at their liquidation preference of approximately $50.1 million and the Contributing Parties simultaneously repaid the remaining Contributing Parties Loans aggregating approximately $47.4 million in full.
Distributions
During the years ended December 31, 2015, 2014 and 2013, the Company paid distributions to noncontrolling interests of $5.4 million, $15.1 million and $8.8 million, respectively. As of December 31, 2015 and 2014, the total distributions declared and not paid to noncontrolling interests was $0.6 million (paid on January 15, 2016) and $0.6 million (paid on January 15, 2015), respectively.
Noncontrolling Interest of Subsidiary within the Operating Partnership
On August 25, 2009, the Operating Partnership acquired an additional 15.0% membership interest in POAC and an additional 14.26% membership interest in Mill Run. In connection with the transactions, the Advisor earned an acquisition fee equal to 2.75% of the gross contractual purchase price, which was approximately $6.9 million ($5.6 million and $1.3 million related POAC and Mill Run, respectively). On August 25, 2009, the Operating Partnership contributed its investments of the 15.0% membership interest in POAC and the 14.26% membership interest in Mill Run to PRO in exchange for a 99.99% managing membership interest in PRO. In addition, the Company contributed $2,900 (in whole dollars) for a 0.01% non-managing membership interest in PRO. As the Operating Partnership is the managing member with control, PRO is consolidated into the results and financial position of the Company. On September 15, 2009, the Advisor accepted, in lieu of payment of $6.9 million for the acquisition fee, a 19.17% (approximately $6.9 million divided by the sum of $29.0 million plus approximately $6.9 million, or approximately $35.6 million) profit membership interest in PRO and assigned its rights to receive payment to the Sponsor, who assigned the same to David Lichtenstein. Under the terms of the operating agreement of PRO, the 19.17% profit membership interest was not entitled to receive any distributions until the Operating Partnership and the Company had received distributions equivalent to their aggregate initial capital contributions of $29.0 million, and then the 19.17% profit membership interest would receive distributions of approximately $6.9 million. Thereafter, any remaining distributions are split between the three members in proportion to their respective profit interests. In connection with PRO’s disposition of its membership interests in POAC and Mill Run in August 2010, the Company first received its aggregate initial capital contributions of $29.0 million and then David Lichtenstein received approximately $6.9 million. As a result, all subsequent distributions from PRO have been split between the three members in proportion to their respective profit interests.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Consolidated Joint Venture
On August 18, 2011, the Operating Partnership and its Sponsor formed the 2nd Street Joint Venture to own and operate the 50-01 2nd Street Associates, LLC (the “2nd Street Owner”). The Operating Partnership initially owned a 75.0% membership interest in the 2nd Street Joint Venture (the “2nd Street JV Interest”). The 2nd Street JV Interest is a managing membership interest. The Sponsor initially had a 25.0% non-managing membership interest with certain consent rights with respect to major decisions. Contributions are allocated in accordance with each investor’s ownership percentage. Profit and cash distributions, if any, will be allocated in accordance with each investor’s ownership percentage. In addition, the 2nd Street JV Interest had a put option (the “Put”) whereby the Operating Partnership could put its interest to the Sponsor through August 18, 2012 in exchange for the dollar value of its capital contributions as of the date of exercise. On August 14, 2012, the Operating Partnership exercised the Put pursuant to which it would transfer approximately 15.8% of its membership interest to the Sponsor and other related parties effective upon obtaining the Gantry Park Construction Loan (see Note 11 for additional information) for Gantry Park. The Gantry Park Construction Loan closed and the Sponsor and other related parties subsequently reimbursed the Operating Partnership approximately $4.3 million. As of December 31, 2015, the Operating Partnership owned an approximately 59.2% managing membership interest in the 2nd Street Joint Venture and the Sponsor and other related parties owned an aggregate 40.8% non-managing membership interest. As the Operating Partnership through the 2nd Street Joint Venture Interest has the power to direct the activities of the 2nd Street Joint Venture that most significantly impact the performance, beginning August 18, 2011, the Company has consolidated the operating results and financial condition of the 2nd Street Joint Venture and has accounted for the ownership interests of the Sponsor and other related parties as noncontrolling interests.
On August 18, 2011, the 2nd Street Owner, which is wholly owned by the 2nd Street Joint Venture, acquired a parcel of land located in Queens, New York for approximately $19.3 million from an unaffiliated third party. The 2nd Street Joint Venture contributed approximately $19.3 million in cash to the 2nd Street Owner to fund the land acquisition. In connection with the acquisition of the land, the 2nd Street Owner also obtained a $13.5 million interim loan (the “Interim Loan”). During the second quarter of 2012, the 2nd Street Owner commenced construction of Gantry Park, a residential project comprised of 199 apartment units, on the acquired land. On September 28, 2012 the 2nd Street Owner entered into the Gantry Park Construction Loan and used proceeds advanced at closing to repay the Interim Loan in full. Construction of Gantry Park was substantially completed during the fourth quarter of 2013 and the associated assets were placed in service.
On November 19, 2014, the 2nd Street Joint Venture entered into a $74.5 million non-recourse mortgage loan (the “Gantry Park Mortgage Loan”) with CIBC. The Gantry Park Mortgage Loan has a term of ten years with a maturity date of November 1, 2024, bears interest at 4.48%, and requires monthly interest-only payments for the first three years and monthly principal and interest payments pursuant to a 30-year amortization schedule thereafter. The Gantry Park Mortgage Loan is collateralized by Gantry Park. A portion of the proceeds from Gantry Park Mortgage Loan were used to repay the Gantry Park Construction Loan in full and to make a distribution of approximately $11.5 million to the Sponsor and other related parties for their respective share of the remaining proceeds.
15. Related Party Transactions
The Company has agreements with the Advisor and its Property Managers to pay certain fees, as follows, in exchange for services performed by these entities and other related parties. The Company’s ability to secure financing and subsequent real estate operations are dependent upon its Advisor, Property Managers, and their affiliates to perform such services as provided in these agreements.
| Fees | Amount | |
| Acquisition Fee | The Advisor is paid an acquisition fee equal to 2.75% of the gross contractual purchase price (including any mortgage assumed) of each property purchased. The Advisor is also reimbursed for expenses that it incurs in connection with the purchase of a property. The acquisition fee and expenses for any particular property, including amounts payable to related parties, will not exceed, in the aggregate 5% of the gross contractual purchase price (including mortgage assumed) of the property. |
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
| Property Management - Residential/Retail | The Property Managers are paid a monthly management fee of up to 5% of the gross revenues from residential, hospitality and retail properties. The Company pays the Property Managers a separate fee for i) the development of, ii) the one-time initial rent-up or iii) the leasing-up of newly constructed properties in an amount not to exceed the fee customarily charged in arm’s length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area. | |
| Property Management - Office/Industrial | The Property Managers are paid monthly property management and leasing fees of up to 4.5% of gross revenues from office and industrial properties. In addition, the Lightstone REIT pays the Property Managers a separate fee for the one-time initial rent-up or leasing-up of newly constructed properties in an amount not to exceed the fee customarily charged in arm’s length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area. | |
| Asset Management Fee | The Advisor or its affiliates is paid an asset management fee of 0.55% of the Company’s average invested assets, as defined, payable quarterly in an amount equal to 0.1375 of 1% of average invested assets as of the last day of the immediately preceding quarter. | |
| Reimbursement of Other expenses | For any year in which the Company qualifies as a REIT, the Advisor must reimburse the Company for the amounts, if any, by which the total operating expenses, the sum of the advisor asset management fee plus other operating expenses paid during the previous fiscal year exceed the greater of 2% of average invested assets, as defined, for that fiscal year, or, 25% of net income for that fiscal year. Items such as property operating expenses, depreciation and amortization expenses, interest payments, taxes, non-cash expenditures, the special liquidation distribution, the special termination distribution, organization and offering expenses, and acquisition fees and expenses are excluded from the definition of total operating expenses, which otherwise includes the aggregate expense of any kind paid or incurred by the Company. | |
| The Advisor or its affiliates are reimbursed for expenses that may include costs of goods and services, administrative services and non-supervisory services performed directly for the Company by independent parties. |
Lightstone SLP, LLC, an affiliate of our Sponsor, has purchased SLP Units in the Operating Partnership. These SLP Units, the purchase price of which will be repaid only after stockholders receive a stated preferred return and their net investment, will entitle Lightstone SLP, LLC to a portion of any regular distributions made by the Operating Partnership. Since our inception through March 31, 2010, cumulative distributions declared to Lightstone SLP, LLC were $4.9 million, all of which had been paid as of April 2010. For the three months ended June 30, 2010, the Operating Partnership did not declare a distribution related to the SLP Units as the distribution to the stockholders was less than 7% for this period. On August 30, 2010, the Company declared additional distributions to the stockholders to bring the annualized distribution to at least 7%. As such, the Company as of August 30, 2010 recommenced declaring distribution to Lightstone SLP, LLC at the 7% annualized rate, except for the three months ended June 30, 2010 which was at an 8% annualized rate which represents the same rate paid to the stockholders.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
During each of the years ended December 31, 2015, 2014 and 2013, distributions of $2.1 million were declared and distributions of $2.1 million were paid related to the SLP Units and are part of noncontrolling interests. Since inception through December 31, 2015, cumulative distributions declared were $17.1 million, of which $16.6 million have been paid. Such distributions, paid currently at a 7% annualized rate of return to Lightstone SLP, LLC through December 31, 2015, with the exception of the distribution related to the three months ended June 30, 2010, which was paid at an 8% annualized rate will always be subordinated until stockholders receive a stated preferred return, as described below.
The SLP Units will also entitle Lightstone SLP, LLC to a portion of any liquidating distributions made by the Operating Partnership. The value of such distributions will depend upon the net sale proceeds upon the liquidation of the Lightstone REIT and, therefore, cannot be determined at the present time. Liquidating distributions to Lightstone SLP, LLC will always be subordinated until stockholders receive a distribution equal to their initial investment plus a stated preferred return, as described below:
| Operating Stage | ||
| Distributions | Amount of Distribution | |
| 7% Stockholder Return Threshold | Once a cumulative non-compounded return of 7% per year on their net investment is realized by stockholders, Lightstone SLP, LLC is eligible to receive available distributions from the Operating Partnership until it has received an amount equal to a cumulative non-compounded return of 7% per year on the purchase price of the special general partner interests. “Net investment” refers to $10 per share, less a pro rata share of any proceeds received from the sale or refinancing of the Lightstone REIT’s assets. | |
| 12% Stockholder Return Threshold | Once a cumulative non-compounded return of 12% per year is realized by stockholders on their net investment (including amounts equaling a 7% return on their net investment as described above), 70% of the aggregate amount of any additional distributions from the Operating Partnership will be payable to the stockholders, and 30% of such amount will be payable to Lightstone SLP, LLC. | |
| Returns in Excess of 12% | After the 12% return threshold is realized by stockholders and Lightstone SLP, LLC, 60% of any remaining distributions from the Operating Partnership will be distributable to stockholders, and 40% of such amount will be payable to Lightstone SLP, LLC. |
| Liquidating Stage Distributions |
Amount of Distribution | |
| 7% Stockholder Return Threshold | Once stockholders have received liquidation distributions, and a cumulative non-compounded 7% return per year on their initial net investment, Lightstone SLP, LLC will receive available distributions until it has received an amount equal to its initial purchase price of the special general partner interests plus a cumulative non-compounded return of 7% per year. | |
| 12% Stockholder Return Threshold | Once stockholders have received liquidation distributions [in an amount equal to their net investment] plus a cumulative non-compounded return of 12% per year on their initial net investment (including amounts equaling a 7% return on their net investment as described above), 70% of the aggregate amount of any additional distributions from the Operating Partnership will be payable to the stockholders, and 30% of such amount will be payable to Lightstone SLP, LLC. | |
| Returns in Excess of 12% | After stockholders and Lightstone LP, LLC have received liquidation distributions [in an amount equal to their net investment] plus a cumulative non-compounded return of 12% per year on their initial net investment, 60% of any remaining distributions from the Operating Partnership will be distributable to stockholders, and 40% of such amount will be payable to Lightstone SLP, LLC. |
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
The Company, pursuant to the related party arrangements described above, has recorded the following amounts in operating expenses, except for development fees and leasing commissions which were capitalized, for the years indicated:
| For the Year Ended | ||||||||||||
| December 31, 2015 | December 31, 2014 | December 31, 2013 | ||||||||||
| Acquisition fees (general and administrative costs) | $ | 8 | $ | 204 | $ | 2,172 | ||||||
| Asset management fees (general and administrative costs) | 2,427 | 2,913 | 2,608 | |||||||||
| Property management fees (property operating expenses) | 1,185 | 1,350 | 1,391 | |||||||||
| Development fees and leasing commissions* | 344 | 552 | 2,495 | |||||||||
| Total | $ | 3,964 | $ | 5,019 | $ | 8,666 | ||||||
* Generally, capitalized and amortized over the estimated useful life of the associated asset.
See Notes 3, 4, 5, 6, 7 and 14 for other related party transactions.
16. Future Minimum Rentals
As of December 31, 2015, the approximate fixed future minimum rental from the Company’s commercial real estate properties are as follows:
| 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | ||||||||||||||||||||
| $ | 11,608 | $ | 9,796 | $ | 8,058 | $ | 5,710 | $ | 3,001 | $ | 6,072 | $ | 44,245 | |||||||||||||
Pursuant to the lease agreements, tenants of the property may be required to reimburse the Company for some or the entire portion of the particular tenant’s pro rata share of the real estate taxes and operating expenses of the property. Such amounts are not included in the future minimum lease payments above, but are included in tenant recovery income on the accompanying consolidated statements of operations.
17. Segment Information
The Company currently operates in four business segments as of December 31, 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 and third-party management companies provide leasing, property and facilities management, acquisition, development, construction and tenant-related services for its portfolio. The Company’s revenues for the years ended December 31, 2015, 2014 and 2013 were exclusively derived from activities in the United States. No revenues from foreign countries were received or reported. The Company had no long-lived assets in foreign locations as of December 31, 2015, 2014 and 2013. The accounting policies of the segments are the same as those described in Note 2, excluding depreciation and amortization. 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.
The results of operations presented below exclude the LVP REIT Hotels, Crowe’s Crossing, Everson Pointe, and the Houston Extended Stay Hotels due to their classification as discontinued operations (see Notes 1 and 10). Prior to their classification as discontinued operations, the results of operations of LVP REIT Hotels and the Houston Extended Stay Hotels were previously included in the Hospitality Segment and Crowe’s Crossing and Everson Pointe were previously included in the Retail Segment.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Selected results of operations regarding the Company’s operating segments are as follows:
| For the Year Ended December 31, 2015 | ||||||||||||||||||||||||
| Retail | Multi-Family Residential | Industrial | Hospitality | Unallocated | Total | |||||||||||||||||||
| Total revenues | $ | 11,482 | $ | 17,479 | $ | 6,242 | $ | 20,647 | $ | - | $ | 55,850 | ||||||||||||
| Property operating expenses | 3,969 | 5,450 | 2,050 | 16,809 | 2 | 28,280 | ||||||||||||||||||
| Real estate taxes | 1,401 | 1,062 | 758 | 300 | - | 3,521 | ||||||||||||||||||
| General and administrative costs | 9 | 166 | (8 | ) | 305 | 4,537 | 5,009 | |||||||||||||||||
| Net operating income/(loss) | 6,103 | 10,801 | 3,442 | 3,233 | (4,539 | ) | 19,040 | |||||||||||||||||
| Depreciation and amortization | 4,343 | 2,920 | 1,613 | 2,668 | - | 11,544 | ||||||||||||||||||
| Operating income/(loss) | $ | 1,760 | $ | 7,881 | $ | 1,829 | $ | 565 | (4,539 | ) | $ | 7,496 | ||||||||||||
| Total purchase of investment property | $ | 8,918 | $ | 1,192 | $ | 929 | $ | 1,712 | $ | - | $ | 12,751 | ||||||||||||
| As of December 31, 2015: | ||||||||||||||||||||||||
| Total Assets | $ | 108,044 | $ | 115,353 | $ | 49,852 | $ | 26,825 | $ | 290,085 | $ | 590,159 | ||||||||||||
| For the Year Ended December 31, 2014 | ||||||||||||||||||||||||
| Retail | Multi-Family Residential | Industrial | Hospitality | Unallocated | Total | |||||||||||||||||||
| Total revenues | $ | 11,412 | $ | 19,774 | $ | 7,398 | $ | 18,705 | $ | - | $ | 57,289 | ||||||||||||
| Property operating expenses | 3,427 | 6,732 | 2,114 | 15,717 | 2 | 27,992 | ||||||||||||||||||
| Real estate taxes | 1,150 | 1,456 | 761 | 250 | - | 3,617 | ||||||||||||||||||
| General and administrative costs | 19 | 305 | 10 | 216 | 6,157 | 6,707 | ||||||||||||||||||
| Net operating income/(loss) | 6,816 | 11,281 | 4,513 | 2,522 | (6,159 | ) | 18,973 | |||||||||||||||||
| Depreciation and amortization | 4,034 | 3,684 | 1,773 | 2,547 | - | 12,038 | ||||||||||||||||||
| Operating income/(loss) | $ | 2,782 | $ | 7,597 | $ | 2,740 | $ | (25 | ) | (6,159 | ) | $ | 6,935 | |||||||||||
| Total purchase of investment property | $ | 2,545 | $ | 2,112 | $ | 899 | $ | 1,691 | $ | - | $ | 7,247 | ||||||||||||
| As of December 31, 2014: | ||||||||||||||||||||||||
| Total Assets | $ | 105,343 | $ | 127,116 | $ | 50,635 | $ | 147,572 | $ | 243,173 | $ | 673,839 | ||||||||||||
| For the Year Ended December 31, 2013 | ||||||||||||||||||||||||
| Retail | Multi-Family Residential | Industrial | Hospitality | Unallocated | Total | |||||||||||||||||||
| Total revenues | $ | 11,808 | $ | 14,599 | $ | 7,267 | $ | 15,852 | $ | - | $ | 49,526 | ||||||||||||
| Property operating expenses | 3,204 | 6,323 | 2,098 | 15,840 | 6 | 27,471 | ||||||||||||||||||
| Real estate taxes | 1,327 | 1,145 | 821 | 264 | - | 3,557 | ||||||||||||||||||
| General and administrative costs | 39 | 347 | 44 | 124 | 6,159 | 6,713 | ||||||||||||||||||
| Net operating income/(loss) | 7,238 | 6,784 | 4,304 | (376 | ) | (6,165 | ) | 11,785 | ||||||||||||||||
| Depreciation and amortization | 3,928 | 2,465 | 2,016 | 905 | - | 9,314 | ||||||||||||||||||
| Operating income/(loss) | $ | 3,310 | $ | 4,319 | $ | 2,288 | $ | (1,281 | ) | (6,165 | ) | $ | 2,471 | |||||||||||
| Total purchase of investment property | $ | 365 | $ | 38,656 | $ | 1,177 | $ | 5,787 | $ | - | $ | 45,985 | ||||||||||||
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
18. Quarterly Financial Data (Unaudited)
The following table presents selected unaudited quarterly financial data for each quarter during the years indicated. The operating results of certain properties are classified as discontinued operations (see Notes 1 and 10 for additional information):
| 2015 | ||||||||||||||||||||
| Year ended | Quarter ended | Quarter ended | Quarter ended | Quarter ended | ||||||||||||||||
| December 31, | December 31, | September 30, | June 30, | March 31, | ||||||||||||||||
| Total revenue | $ | 55,850 | $ | 13,809 | $ | 14,734 | $ | 14,476 | $ | 12,831 | ||||||||||
| Net income from continuing operation | 45,961 | 1,933 | 1,160 | 35,690 | 7,178 | |||||||||||||||
| Net income from discontinued operations | 18,731 | - | - | 4,126 | 14,605 | |||||||||||||||
| Net income | 64,692 | 1,933 | 1,160 | 39,816 | 21,783 | |||||||||||||||
| Less income attributable to noncontrolling interest | (4,468 | ) | (109 | ) | (265 | ) | (3,467 | ) | (627 | ) | ||||||||||
| Net income applicable to Company’s common shares | 60,224 | 1,824 | 895 | 36,349 | 21,156 | |||||||||||||||
| Basic and diluted net income per Company’s share: | ||||||||||||||||||||
| Continuing operations | 1.60 | 0.07 | 0.03 | 1.24 | 0.26 | |||||||||||||||
| Discontinued operations | 0.73 | - | - | 0.16 | 0.56 | |||||||||||||||
| Net income per common share, basic and diluted | $ | 2.33 | $ | 0.07 | $ | 0.03 | $ | 1.40 | $ | 0.82 | ||||||||||
| 2014 | ||||||||||||||||||||
| Year ended | Quarter ended | Quarter ended | Quarter ended | Quarter ended | ||||||||||||||||
| December 31, | December 31, | September 30, | June 30, | March 31, | ||||||||||||||||
| Total revenue | $ | 57,289 | $ | 13,228 | $ | 15,259 | $ | 14,916 | $ | 13,886 | ||||||||||
| Net income/(loss) from continuing operation | 21,927 | (59 | ) | 23,420 | (1,339 | ) | (95 | ) | ||||||||||||
| Net loss/(income) from discontinued operations | 278 | (3,940 | ) | 1,047 | 1,014 | 2,157 | ||||||||||||||
| Net income/(loss) | 22,205 | (3,999 | ) | 24,467 | (325 | ) | 2,062 | |||||||||||||
| Less (income)/loss attributable to noncontrolling interest | (1,329 | ) | 389 | (1,342 | ) | (224 | ) | (152 | ) | |||||||||||
| Net income/(loss) applicable to Company’s common shares | 20,876 | (3,610 | ) | 23,125 | (549 | ) | 1,910 | |||||||||||||
| Basic and diluted net income/(loss) per Company’s share: | ||||||||||||||||||||
| Continuing operations | 0.80 | 0.01 | 0.86 | (0.06 | ) | (0.01 | ) | |||||||||||||
| Discontinued operations | 0.01 | (0.15 | ) | 0.04 | 0.04 | 0.08 | ||||||||||||||
| Net income/(loss) per common share, basic and diluted | $ | 0.81 | $ | (0.14 | ) | $ | 0.90 | $ | (0.02 | ) | $ | 0.07 | ||||||||
19. Commitments and Contingencies
Legal Proceedings
From time to time in the ordinary course of business, the Lightstone REIT may become subject to legal proceedings, claims or disputes.
In connection with the sale of its Sub-leasehold Interest, 1407 Broadway resolved the previously disclosed litigation with Abraham Kamber Company as sublessor under the sublease, who had served the two notices of default on the 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.
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.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
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.
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. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.
Tax Protection Agreements
In connection with the contribution of certain ownership interests in Mill Run (the “Mill Run Interest”) and certain ownership interests in POAC (the “POAC Interest”), our Operating Partnership entered into certain tax protection agreements (the “POAC/Mill Run Tax Protection Agreements”) with each of Arbor JRM, Arbor CJ, AR Prime, TRAC, Central Jersey and JT Prime (collectively, the “Contributors”). Under the POAC/Mill Run Tax Protection Agreements, our Operating Partnership was required to indemnify each of Arbor JRM, Arbor CJ, TRAC and Central Jersey with respect to Mill Run’s properties (the “Mill Run Properties”), and AR Prime and JT Prime, with respect to POAC’s properties (the “POAC Properties”), from June 26, 2008 for Arbor JRM, Arbor CJ and AR Prime and from August 25, 2009 for TRAC, Central Jersey and JT Prime to June 26, 2013 for, among other things, certain income tax liability that would result from the income or gain which Arbor JRM, Arbor CJ, TRAC, Central Jersey on the one hand, or AR Prime, JT Prime, on the other hand, would recognize upon the Operating Partnership’s failure to maintain the current level of debt encumbering the Mill Run Properties or the POAC Properties, respectively, or the sale or other disposition by the Operating Partnership of the Mill Run Properties, the Mill Run Interest, the POAC Properties, or the POAC Interest (each, an “Indemnifiable Event”). Under the terms of the POAC/Mill Run Tax Protection Agreements, our Operating Partnership was indemnifying the Contributors for certain income tax liabilities based on income or gain which the Contributors were deemed to be required to include in their gross income for federal or state income tax purposes (assuming the Contributors were subject to tax at the highest regional, U.S. federal, state and local tax rates imposed on individuals residing in New York City) as a result of an Indemnifiable Event. This indemnity covered income taxes, interest and penalties and was required to be made on a “grossed up” basis that effectively would have resulted in the Contributors receiving the indemnity payment on a net, after-tax basis. The amount of the potential tax indemnity to the Contributors under the POAC/Mill Run Tax Protection Agreements, including a gross-up for taxes on any such payment, using current tax rates, was estimated to be approximately $95.7 million. The POAC/Mill Run Tax Protection Agreements expired on June 26, 2013. In connection with the partial redemption of Series A Preferred Units and the partial repayment of notes receivable from noncontrolling interests completed on September 30, 2013, any potential liability to the Company under the POAC/Mill Run Tax Protection Agreements was fully released. See Note 14 for additional information.
Each of the POAC/Mill Run Tax Protection Agreements imposed certain restrictions upon our Operating Partnership relating to transactions involving the Mill Run Properties and the POAC Properties which could have resulted in taxable income or gain to the Contributors. Our Operating Partnership could not dispose or transfer any of the Mill Run Properties or any of the POAC Properties without first proving that the Operating Partnership possessed the requisite liquidity, including the proceeds from any such transaction, to make any payments that would have come due pursuant to the POAC/Mill Run Tax Protection Agreements. However, our Operating Partnership could have taken the following actions: (i) (A) as to the POAC Properties, commencing with the period one year and thirty-one days following the date of the POAC/Mill Run Tax Protection Agreements, our Operating Partnership could have sold on an annual basis part or all of any of the POAC Properties with an aggregate value of ten percent or less of the total value of the POAC Properties as of the date of contribution (and any amounts of the ten percent value not sold could have been applied to sales in future years); and (B) as to the Mill Run Properties either the same ten percent test as set forth above in (i)(A) with respect to the Mill Run Properties or the sale of the property then known as Designer Outlet Center; and (ii) our Operating Partnership could have entered into a non-recognition transaction with either the consent of the Contributors or an opinion from an independent law or accounting firm advising that it is “more likely than not” that the transaction would not give rise to current taxable income or gain.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
On December 8, 2009, the Company, the Operating Partnership and PRO, (collectively, the LVP Parties”) entered into a definitive agreement (the “Contribution Agreement”) with Simon Inc. and certain of its affiliates (collectively, “Simon”) providing for the disposition of a substantial portion of the Company’s portfolio of retail properties at that time to Simon, including (i) the St. Augustine Center, which is wholly owned, (ii) a 40.0% aggregate interest in its investment in POAC, which included the POAC Properties, GPH and LVH and (iii) a 36.8% aggregate interest in Mill Run, which included the Mill Run Properties. On June 28, 2010, the Contribution Agreement was amended to remove the previously contemplated dispositions of the St. Augustine Outlet Center, GPH and LVH. The transactions contemplated by the Contribution Agreement are referred to herein as the “POAC/Mill Run Transaction.” On August 30, 2010, the LVP Parties completed POAC/Mill Run Transaction and contemporaneously entered into a tax matters agreement with Simon. Additionally, the Company was advised by an independent law firm that it was “more likely than not” that the POAC/Mill Run Transaction did not give rise to current taxable income or loss. Accordingly, the Company believed the POAC/Mill Run Transaction was a non-recognition transaction and not an Indemnifiable Event under the POAC/Mill Run Tax Protection Agreements. Pursuant to the terms of the tax matters agreement, Simon generally may not engage in a transaction that could result in the recognition of the “built-in gain” with respect to POAC and Mill Run at the time of the closing for specified periods of up to eight years following the closing date. Simon has a number of obligations with respect to the allocation of partnership liabilities to the LVP Parties. For example, Simon agreed to maintain certain of the outstanding mortgage loans that are secured by POAC Properties and Mill Run Properties until their respective maturities, and the LVP Parties have provided and will continue to have the opportunity to provide guaranties of collection with respect to a revolving credit facility (or indebtedness incurred to refinance the revolving credit facility) for at least four years following the closing of the POAC/Mill Run Transaction. The LVP Parties were also given the opportunity to enter into agreements to make specified capital contributions to Simon OP in the event that it defaults on certain of its indebtedness. If Simon breaches its obligations under the tax matters agreement, Simon will be required to indemnify the LVP Parties for certain taxes that they are deemed to incur, including taxes relating to the recognition of “built-in gains” with respect to POAC Properties and Mill Run Properties, and gains recognized as a result of a reduction in the allocation of partnership liabilities. These indemnification payments will be “grossed up” such that the amount of the payments will equal, on an after-tax basis, the tax liability deemed incurred because of the breach.
Simon generally is required to indemnify the LVP Parties and certain affiliates of the Lightstone Group for liabilities and obligations under the POAC/Mill Run Tax Protection Agreements relating to the contributions of the Mill Run Interest and the POAC Interest (see POAC/Mill Run Tax Protection Agreements above) that are caused by Simon OP’s and Simon’s actions subsequent to the closing of the POAC/Mill Run Transaction (the “Indemnified Liabilities”). The Company and its Operating Partnership were required to indemnify Simon OP and Simon for all liabilities and obligations under the POAC/Mill Run Tax Protection Agreements other than the Indemnified Liabilities through March 1, 2012, of which there were none.
On December 9, 2011 and December 4, 2012, GPH, LVH and certain of their subsidiaries (collectively, the “Holding Entities”) completed the disposition of their ownership interests in the Grand Prairie Outlet Center, the Livermore Valley Outlet Center and a parcel of land adjacent to the Livermore Valley Outlet Center (collectively, the “Outlet Centers Transactions”) to Simon pursuant to the terms of the . In connection with the closing of the Outlet Centers Transactions, the Holdings Entities, the Company, the Operating Partnership, PRO and certain affiliates of the Sponsor (collectively, the “Outlet Centers Parties”) entered into a tax matters agreement with Simon pursuant to which Simon generally may not engage in a transaction that could result in the recognition of the “built-in gain” with respect to the Grand Prairie Outlet Center and the Livermore Valley Outlet Center at the time of the closing for specified periods of up to eight years following the closing date. Simon has a number of obligations with respect to the allocation of partnership liabilities to the Outlet Centers Parties For example, Simon agreed to maintain a debt level of no less than the cash portion of the proceeds from the Outlet Centers Transaction until at least the fourth anniversary of the closing, and the Outlet Centers Parties have provided and will continue to have the opportunity to provide guaranties of collection with respect to a revolving credit facility (or indebtedness incurred to refinance the revolving credit facility) for at least four years following the closing of the Outlet Centers Transactions. The Outlet Centers Parties were also given the opportunity to enter into agreements to make specified capital contributions to Simon OP in the event that it defaults on certain of its indebtedness. If Simon breaches its obligations under the tax matters agreement, Simon will be required to indemnify the Outlet Centers Parties for certain taxes that they are deemed to incur, including taxes relating to the recognition of “built-in gains” with respect to the Grand Prairie Outlet Center and the Livermore Valley Outlet Center, and gains recognized as a result of a reduction in the allocation of partnership liabilities. These indemnification payments will be “grossed up” such that the amount of the payments will equal, on an after-tax basis, the tax liability deemed incurred because of the breach.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2015, 2014 and 2013
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Loan Collection Guaranties
In connection with the closing of the POAC/Mill Run Transaction and the Outlet Centers Transactions, the LVP Parties have provided loan collection guaranties (the “Loan Collection Guaranties”) with respect to the draws under a revolving credit facility made by Simon in connection with the closing of the POAC/Mill Run Transaction and the Outlet Centers Transactions. 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 amount outstanding under the revolving credit facilities has been accelerated, and the lenders have failed to collect the full amount outstanding under the revolving credit facilities after exhausting other remedies.
20. Subsequent Events
Distribution Declaration
On March 22, 2016, the Company declared a distribution for the three-month period ending March 31, 2016. 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 April 15, 2016 to shareholders of record as of March 31, 2016.
| 114 |
Real Estate and Accumulated Depreciation
December 31, 2015
| Initial Cost (A) | Gross
amount at which carried at end of period | |||||||||||||||||||||||||||||||||||||
| Net Costs | ||||||||||||||||||||||||||||||||||||||
| Buildings and | Capitalized & | Buildings and | ||||||||||||||||||||||||||||||||||||
| Improvements | Impairments | Improvements | ||||||||||||||||||||||||||||||||||||
| and Furniture | Subsequent to | Land and | and Furniture | Accumulated | Date | Depreciable | ||||||||||||||||||||||||||||||||
| Encumbrance | Land | and Fixtures | Acquisition | Improvement | and Fixtures | Total (B) | Depreciation (C) | Acquired | Life (D) | |||||||||||||||||||||||||||||
| St. Augustine Outlet Center St. Augustine, FL | $ | 23,875 | $ | 11,206 | $ | 42,103 | $ | 10,605 | $ | 10,954 | $ | 52,960 | $ | 63,914 | $ | (10,976 | ) | 3/29/2006 & 10/2/2007 | (D) | |||||||||||||||||||
| Southeastern Michigan Multi-Family Properties Southeastern, Michigan | 38,437 | 8,051 | 34,298 | 4,132 | 8,511 | 37,970 | 46,481 | (10,063 | ) | 6/29/2006 | (D) | |||||||||||||||||||||||||||
| Oakview Plaza Omaha, Nebraska | 26,014 | 6,706 | 25,463 | 1,945 | 7,485 | 26,629 | 34,114 | (6,958 | ) | 12/21/2006 | (D) | |||||||||||||||||||||||||||
| Gulfcoast Industrial Portfolio New Orleans/Baton Rouge, Louisiana & San Antonio, Texas | 50,525 | 12,767 | 51,649 | (6,236 | ) | 12,941 | 45,239 | 58,180 | (10,079 | ) | 2/1/2007 | (D) | ||||||||||||||||||||||||||
| Crowne Plaza Boston Hotel Boston, M assachusetts | - | 2,400 | 7,612 | 21,082 | 3,331 | 27,763 | 31,094 | (6,712 | ) | 3/21/2011 | (D) | |||||||||||||||||||||||||||
| Ganrty Park, 50-01 2nd St Long Island City, New York | 74,500 | 19,656 | 51,724 | 660 | 19,678 | 52,362 | 72,040 | (3,659 | ) | 8/18/2011 | (D) | |||||||||||||||||||||||||||
| Plaza at DePaul Bridgeton, Missouri | 15,295 | 6,050 | 12,424 | 1,418 | 5,969 | 13,923 | 19,892 | (1,831 | ) | 11/22/2011 | (D) | |||||||||||||||||||||||||||
| Total | $ | 228,646 | $ | 66,836 | $ | 225,273 | $ | 33,606 | $ | 68,869 | $ | 256,846 | $ | 325,715 | $ | (50,278 | ) | |||||||||||||||||||||
| 115 |
Notes to Schedule III:
(A) The initial cost to the Company represents the original purchase price of the property, including amounts incurred subsequent to acquisition which were contemplated at the time the property was acquired.
(B) Reconciliation of total real estate owned:
| For the years ended December 31, | ||||||||||||
| Reconciliation of total real estate owned: | 2015 | 2014 | 2013 | |||||||||
| Balance at beginning of year | $ | 314,917 | $ | 340,805 | $ | 304,076 | ||||||
| Improvements | 11,311 | 6,222 | 37,177 | |||||||||
| Disposals | (513 | ) | (32,110 | ) | (448 | ) | ||||||
| Balance at end of year | $ | 325,715 | $ | 314,917 | $ | 340,805 | ||||||
(C) Reconciliation of accumulated depreciation:
| For the years ended December 31, | ||||||||||||
| Reconciliation of accumulated depreciation | 2015 | 2014 | 2013 | |||||||||
| Balance at beginning of year | $ | 40,166 | $ | 33,966 | $ | 26,220 | ||||||
| Depreciation expense | 10,595 | 10,442 | 8,236 | |||||||||
| Disposals | (483 | ) | (4,100 | ) | (207 | ) | ||||||
| Balance at end of year | $ | 50,278 | $ | 40,166 | $ | 33,966 | ||||||
(D) Depreciation is computed based upon the following estimated lives:
| Buildings and improvements | 15-39 years | |||
| Furniture and fixtures | 5-10 years |
(E) The table and schedules above reflect the Company’s properties as of December 31, 2015. The table and schedules exclude properties classified as held for sale or disposed of.
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PART II. CONTINUED:
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:
None
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. As of December 31, 2015, we conducted an evaluation under the supervision and with the participation of the Advisor’s management, including our Chairman and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chairman and Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2015 that our disclosure controls and procedures were adequate and effective.
Management’s Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system is a process designed by, or under the supervision of, our Chairman and Chief Executive Officer and Chief Financial Officer and effected by our Board, management and other personnel to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes policies and procedures that:
| • | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and disposition of assets; |
| • | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with the authorization of our management and directors; and |
| • | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. |
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this assessment, they used the control criteria framework of the Committee of Sponsoring Organizations, or COSO, of the Treadway Commission published in its report entitled Internal Control—Integrated Framework (2013). Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2015.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The following table presents certain information as of March 15, 2016 concerning each of our directors serving in such capacity:
| Principal Occupation and | Year Term of | Served as a | ||||||
| Name | Age | Positions Held | Office Will Expire | Director Since | ||||
| David Lichtenstein | 55 | Chief Executive Officer, President and Chairman of the Board of Directors | 2016 | 2004 | ||||
| George R. Whittemore | 66 | Director | 2016 | 2006 | ||||
| Miriam B. Weinstein | 44 | Director | 2016 | 2015 | ||||
| Yehuda “Judah” L. Angster | 33 | Director | 2016 | 2015 |
David Lichtenstein is the Chairman of our Board of Directors and our Chief Executive Officer, and is the Chief Executive Officer of our Advisor. Mr. Lichtenstein founded both American Shelter Corporation and The Lightstone Group. From 1988 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of The Lightstone Group, directing all aspects of the acquisition, financing and management of a diverse portfolio of multi-family, lodging, retail and industrial properties located in 20 states, and Puerto Rico. From April 2008 to present, Mr. Lichtenstein has served as the Chairman of the board of directors and Chief Executive Officer of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”) and Lightstone Value Plus REIT II LLC, its advisor. From October 2012 to the present, Mr. Lichtenstein has served as the Chairman of the board of directors of Lightstone Value Plus Real Estate Investment Trust III, Inc. (“Lightstone III”) and from April 2013 to the present, as the Chief Executive Officer of Lightstone III and of Lightstone Value Plus REIT III LLC. From September 2014 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone Real Estate Income Trust Inc., (“Lightstone IV”), and as Chief Executive Officer of Lightstone Real Estate Income LLC, its advisor. From June 2015 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Hamilton National Income Trust, Inc. (“HNIT”) and Chief Executive Officer of Hamilton National Income Trust LLC, its advisor. Mr. Lichtenstein was the president and/or director of certain subsidiaries of Extended Stay Hotels, Inc. (“Extended Stay”) that filed for Chapter 11 protection with Extended Stay. Extended Stay and its subsidiaries filed for bankruptcy protection on June 15, 2009 so they could reorganize their debts in the face of looming amortization payments. Extended Stay emerged from bankruptcy on October 8, 2010. Mr. Lichtenstein is no longer affiliated with Extended Stay. From July 2015 to the present, Mr. Lichtenstein has served as a member of the Board of Directors of the New York City Economic Development Corporation. Mr. Lichtenstein is a member of the International Council of Shopping Centers and the National Association of Real Estate Investment Trusts, Inc., and industry trade group, as well as, a member of the Board of Directors of Touro College and New York Medical College. Mr. Lichtenstein has been selected to serve as a director due to his extensive experience and networking relationships in the real estate industry, along with his experience in acquiring and financing real estate properties.
George R. Whittemore is one of our independent directors. From April 2008 to the present, Mr. Whittemore has served as a member of the board of directors of Lightstone II and from December 2013 to present, has served as a member of the board of directors of Lightstone III. Mr. Whittemore also presently serves as a Director of Village Bank Financial Corporation in Richmond, Virginia, a publicly traded company. Mr, Whittemore previously served as a Director of Condor Hospitality, Inc. in Norfolk, Nebraska, a publicly traded company, from November 1994 to Match 2016. Mr. Whittemore previously served as a Director and Audit Committee Chairman of Prime Group Realty Trust from July 2005 until December 2012. Mr. Whittemore previously served as President and Chief Executive Officer of Condor Hospitality Trust, Inc. from November 2001 until August 2004 and as Senior Vice President and Director of both Anderson & Strudwick, Incorporated, a brokerage firm based in Richmond, Virginia, and Anderson & Strudwick Investment Corporation, from October 1996 until October 2001. Mr. Whittemore has also served as a Director, President and Managing Officer of Pioneer Federal Savings Bank and its parent, Pioneer Financial Corporation, from September 1982 until August 1994, and as President of Mills Value Adviser, Inc., a registered investment advisor. Mr. Whittemore is a graduate of the University of Richmond. Mr. Whittemore has been selected to serve as an independent director due to his extensive experience in accounting, banking, finance and real estate.
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Miriam B. Weinstein is one of our independent directors. Since 2003, Ms. Weinstein has been a sole practitioner attorney who focuses on the practice of real estate law. Particular areas of Ms. Weinstein’s expertise are transactional real estate, land use and commercial leases. Prior to establishing her law practice, in January 2003, Ms. Weinstein was an associate at the Law Office of Abraham M. Penzer in Lakewood, NJ. Ms. Weinstein practiced law at the law firm Greenbaum, Rowe, Smith in Woodbridge, NJ from September 2000 to May 2002. Ms. Weinstein earned her J.D. from the Rutgers Law School in May 2000. Ms. Weinstein earned a Bachelors of Economics from Hunter College, New York, NY. Ms. Weinstein is licensed to practice law in New Jersey and New York. Ms. Weinstein has been selected to serve as an independent director due to her extensive experience in transactional real estate, land use and commercial leases.
Yehuda “Judah” L. Angster is our is one
of our independent directors. Mr. Angster is currently the Chief Executive Officer of CastleRock Equity Group in Florham Park,
NJ. Before joining CastleRock Equity Group in June of 2015, Mr. Angster was the Vice President of Global Development for PCS Wireless,
LLC in Florham Park NJ beginning in September 2012. Mr. Angster was the Internal Counsel for Empire Bank from June 2009 to September
2012. Mr. Angster earned his J.D. from the Pace University School of Law in May 2009. Mr. Angster earned a Bachelor of Talmudic
Law from Tanenbaum Educational Center, Rockland, NY. Mr. Angster is licensed to practice law in New Jersey and New York.
Mr. Angster has been selected to serve as an independent director due to his extensive experience in global business development
and real estate transactions.
Executive Officers:
The following table presents certain information as of March 15, 2016 concerning each of our executive officers serving in such capacities:
| Name | Age | Principal Occupation and Positions Held | ||
| David Lichtenstein | 55 | Chief Executive Officer and Chairman of the Board of Directors | ||
| Mitchell Hochberg | 63 | President | ||
| Joseph Teichman | 42 | General Counsel | ||
| Donna Brandin | 59 | Chief Financial Officer and Treasurer |
David Lichtenstein for biographical information about Mr. Lichtenstein, see ’‘Management — Directors.”
Mitchell Hochberg is our President and has also served as President and Chief Operating Officer of Lightstone II since December 2013. Mr. Hochberg also serves as the President of our sponsor. From April 2013 to the present, Mr. Hochberg has served as President and Chief Operating Officer of Lightstone III and its advisor. From September 2014 to the present, Mr. Hochberg has served as President and Chief Operating Officer of Lightstone IV and its advisor. From June 2015 to the present, Mr. Hochberg has served President and Chief Operating Officer of HNIT its advisor. Prior to joining The Lightstone Group in August 2012, Mr. Hochberg served as principal of Madden Real Estate Ventures, a real estate investment, development and advisory firm specializing in hospitality and residential projects from 2007 to August 2012 when it combined with our sponsor. Mr. Hochberg held the position of President and Chief Operating Officer of Ian Schrager Company, a developer and manager of innovative luxury hotels and residential projects in the United States from early 2006 to early 2007 and prior to that Mr. Hochberg founded Spectrum Communities, a developer of luxury residential neighborhoods in the Northeast in 1985 where for 20 years he served as its President and Chief Executive Officer. Additionally, Mr. Hochberg serves on the board of directors of Belmond Ltd and through October 2014 served on the board of directors and as Chairman of the board of directors of Orleans Homebuilders, Inc. Mr. Hochberg received his law degree from Columbia University School of Law where he was a Harlan Fiske Stone Scholar and graduated magna cum laude from New York University College of Business and Public Administration with a Bachelor of Science degree in accounting and finance.
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Joseph E. Teichman is our General Counsel and also serves as General Counsel of Lightstone II, Lightstone III, Lightstone IV and HNIT and their respective advisors. Mr. Teichman also serves as Executive Vice President and General Counsel of our Advisor and Sponsor. Prior to joining us in January 2007, Mr. Teichman practiced law at the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP in New York, NY from September 2001 to January 2007. Mr. Teichman earned his J.D. from the University of Pennsylvania Law School in May 2001. Mr. Teichman earned a B.A. from Beth Medrash Govoha, Lakewood, NJ. Mr. Teichman is licensed to practice law in New York and New Jersey. Mr. Teichman was also a director and officer of certain subsidiaries of Extended Stay that filed for Chapter 11 protection with Extended Stay. Extended Stay and its subsidiaries filed for bankruptcy protection on June 15, 2009 so they could reorganize their debts in the face of looming amortization payments. Extended Stay emerged from bankruptcy on October 8, 2010. Mr. Teichman is no longer affiliated with Extended Stay. Mr. Teichman is also a member of the Board of Directors of Yeshiva Orchos Chaim, Lakewood, NJ.
Donna Brandin is our Chief Financial Officer and Treasurer since August 2008 and also serves as Chief Financial Officer and Treasurer of Lightstone II, Lightstone III, Lightstone IV and HNIT. Ms. Brandin also serves as the Executive Vice President, Chief Financial Officer and Treasurer of our Sponsor and as the Chief Financial Officer and Treasurer of our Advisor and the advisors of Lightstone II, Lightstone III, Lightstone IV and HNIT. Prior to joining the Lightstone Group in April of 2008, Ms. Brandin held the position of Executive Vice President and Chief Financial Officer of US Power Generation from September 2007 through November 2007 and before that was the Executive Vice President and Chief Financial Officer of Equity Residential, the largest publicly traded apartment REIT in the country from August 2004 to September 2007. Prior to joining Equity Residential, Ms. Brandin held the position of Senior Vice President and Treasurer for Cardinal Health, Inc. from June 2000 through August 2004. Prior to 2000, Ms. Brandin held various executive-level positions at Campbell Soup, Emerson Electric Company and Peabody Holding Company Ms. Brandin earned her Masters in Finance at St. Louis University and is a certified public accountant.
Section 16 (a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires each director, officer and individual beneficially owning more than 10% of our common stock to file initial statements of beneficial ownership (Form 3) and statements of changes in beneficial ownership (Forms 4 and 5) of our common stock with the Securities Exchange Commission (“SEC”). Officers, directors and greater than 10% beneficial owners are required by SEC rules to furnish us with copies of all such forms they file. Based solely on a review of the copies of such forms furnished to us during and with respect to the fiscal year ended December 31, 2015, or written representations that no additional forms were required, we believe that all of our officers and directors and persons that beneficially own more than 10% of the outstanding shares of our common stock complied with these filing requirements in 2015.
Information Regarding Audit Committee
Our Board of Directors (the Board”) established an audit committee in April 2005. The charter of audit committee is available at www.lightstonecapitalmarkets.com/sec-filings or in print to any shareholder who requests it c/o Lightstone Value Plus REIT, 1985 Cedar Bridge Avenue, Lakewood, NJ 08701. Our audit committee consists of George R. Whittemore, Miriam Weinstein and Yehuda “Judah” L. Angster, each of whom is “independent” within the meaning of the NYSE listing standards. The Board determined that Mr. Whittemore is qualified as an audit committee financial expert as defined in Item 401 (h) of Regulation S-K. For more information regarding the relevant professional experience of Mr. Whittemore, Ms. Weinstein and Mr. Angster, see “Directors”.
Code of Conduct and Ethics
We have adopted a Code of Conduct and Ethics that applies to all of our executive officers and directors, including but not limited to, our principal executive officer and principal financial officer. Our Code of Conduct and Ethics can be found at www.lightstonecapitalmarkets.com/sec-filings.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Executive Officers
We currently have no employees. Our Advisor performs our day-to-day management functions. Our executive officers are all employees of the Advisor. We do not pay any of these individuals for serving in their respective positions.
Compensation of Board
We pay each of our independent directors an annual fee of $40,000.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Executive Officers:
The following table presents certain information as of March 15, 2016 concerning each of our directors and executive officers serving in such capacities:
| Name and Business Address (where required) of Beneficial Owner | Number of Shares of Common Stock of the Company Beneficially Owned | Percent of All Common Shares of the Company | ||||||
| David Lichtenstein | 20,000 | 0.08 | % | |||||
| George R. Whittemore | - | - | ||||||
| Miriam Weinstein | - | - | ||||||
| Yehuda “Judah” L. Angster | - | - | ||||||
| Mitchell Hotchberg | - | - | ||||||
| Joseph Teichman | - | - | ||||||
| Donna Brandin | - | - | ||||||
| Our directors and executive officers as a group (7 persons) | 20,000 | 0.08 | % | |||||
EQUITY COMPENSATION PLAN INFORMATION
We previously adopted a stock option plan under which our independent directors were eligible to receive annual nondiscretionary awards of nonqualified stock options. This plan expired in April 2015. Our stock option plan was designed to enhance our profitability and value for the benefit of our stockholders by enabling us to offer independent directors stock-based incentives, thereby creating a means to raise the level of equity ownership by such individuals in order to attract, retain and reward such individuals and strengthen the mutuality of interests between such individuals and our stockholders.
We authorized and reserved 75,000 shares of our Common Stock for issuance under our stock option plan. The Board of Directors could make appropriate adjustments to the number of shares available for awards and the terms of outstanding awards under our stock option plan to reflect any change in our capital structure or business, stock dividend, stock split, recapitalization, reorganization, merger, consolidation or sale of all or substantially all of our assets.
Our stock option plan provided for the automatic grant of a nonqualified stock option through April 2015 to each of our independent directors, without any further action by our Board of Directors or the stockholders, to purchase 3,000 shares of our Common Stock on the date of each annual stockholders meeting. The exercise price for all stock options granted under our stock option plan was equal to the fair market value of a share on the last business day preceding the annual meeting of stockholders. The term of each such option was 10 years. Options granted to non-employee directors will vest and become exercisable on the second anniversary of the date of grant, provided that the independent director is a director on the Board of Directors on that date. At each of our annual stockholder meetings, beginning in July 2007, options were granted to each of our independent directors. As of December 31, 2015, options to purchase 75,000 shares of stock were outstanding at a weighted average exercise price of $10.56 per share and 63,000 were fully vested at an exercise price of $10.00 per share.
Notwithstanding any other provisions of our stock option plan to the contrary, no stock option issued pursuant thereto may be exercised if such exercise would jeopardize our status as a REIT under the Internal Revenue Code.
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The following table sets forth information regarding securities authorized for issuance under our Employee and Director Incentive Share Plan as of December 31, 2015:
| Number of Securities | ||||||||||||
| Number of | Remaining Available | |||||||||||
| Securities to be | For Future Issuance | |||||||||||
| Issued Upon | Weighted-Average | Under Equity | ||||||||||
| Exercise of | Exercise Price of | Compensation Plans | ||||||||||
| Outstanding | Outstanding | (Excluding | ||||||||||
| Options, Warrants | Options, Warrants | Securities Reflected | ||||||||||
| Plan Category | and Rights | and Rights | in Column (a)) | |||||||||
| (a) | (b) | (c) | ||||||||||
| Equity Compensation Plans approved by security holders | 75,000 | $ | 10.56 | 0 | ||||||||
| Equity Compensation Plans not approved by security holders | N/A | N/A | N/A | |||||||||
| Total | 75,000 | $ | 10.56 | 0 | ||||||||
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
David Lichtenstein serves as the Chairman of our Board, our Chief Executive Officer and our President. Our Advisor and affiliated property managers (collectively, our “Property Managers”) are wholly or majority owned and controlled by our Sponsor, The Lightstone Group, which is wholly owned by Mr. Lichtenstein. On April 22, 2005, we entered into agreements with our Advisor and Property Managers to pay certain fees, as described below, in exchange for services performed by these and other affiliated entities. As the indirect owner of those entities, Mr. Lichtenstein benefits from fees and other compensation that they receive pursuant to these agreements.
Property Managers
Our Property Managers manage certain of the properties we have acquired and may manage additional properties we acquire. We also use other unaffiliated third-party property managers, principally for the management of our hospitality properties.
We have agreed to pay our Property Managers a monthly management fee of up to 5% of the gross revenues from our residential, hospitality and retail properties. In addition, for the management and leasing of our office and industrial properties, we pay to our Property Managers, property management and leasing fees of up to 4.5% of gross revenues from our office and industrial properties. We may pay our Property Managers a separate fee for i) the development of, ii) the one-time initial rent-up or iii) leasing-up of newly constructed properties in an amount not to exceed the fee customarily charged in arm’s length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area. Our Property Manager will also be paid a monthly fee for any extra services equal to no more than that which would be payable to an unrelated party providing the services. We have recorded the following amounts related to the Property Managers for the years ended December 31, 2015, 2014 and 2013:
| (in thousands) | 2015 | 2014 | 2013 | |||||||||
| Property management fees | $ | 1,185 | $ | 1,350 | $ | 1,391 | ||||||
| Development fees and leasing commissions | 344 | 552 | 2,495 | |||||||||
| Total | $ | 1,529 | $ | 1,902 | $ | 3,886 | ||||||
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Advisor
We have agreed to pay our Advisor an acquisition fee equal to 2.75% of the gross contractual purchase price (including any mortgage indebtedness assumed) of each property we purchase and reimburse our Advisor for expenses that it incurs in connection with the purchase of a property. We anticipate that acquisition expenses will typically be between 1% and 1.5% of a property’s purchase price, and acquisition fees and expenses are capped at 5% of the gross contract purchase price of a property. The Advisor is also paid an advisor asset management fee of 0.55% of our average invested assets and we reimburse some expenses of the Advisor. We have recorded the following amounts related to the Advisor for the years ended December 31, 2015, 2014 and 2013:
| (in thousands) | 2015 | 2014 | 2013 | |||||||||
| Acquisition fees | $ | 8 | $ | 204 | $ | 2,172 | ||||||
| Asset management fees | 2,427 | 2,913 | 2,608 | |||||||||
| Total | $ | 2,435 | $ | 3,117 | $ | 4,780 | ||||||
Sponsor
On April 22, 2005, the Operating Partnership entered into an agreement with Lightstone SLP, LLC pursuant to which the Operating Partnership has issued special general partner interests to Lightstone SLP, LLC in an amount equal to all expenses, dealer manager fees and selling commissions that we incurred in connection with our organization and the initial public offering of our common stock. Through December 31, 2015, Lightstone SLP, LLC had contributed $30.0 million to the Operating Partnership in exchange for special general partner interests. As the sole member of our Sponsor, which wholly owns Lightstone SLP, LLC, Mr. Lichtenstein is the indirect, beneficial owner of such special general partner interests and will thus receive an indirect benefit from any distributions made in respect thereof.
These special general partner interests will entitle Lightstone SLP, LLC to a portion of any regular and liquidation distributions that we make to stockholders, but only after stockholders have received a stated preferred return. Although the actual amounts are dependent upon results of operations and, therefore, cannot be determined at the present time, distributions to Lightstone SLP, LLC, as holder of the special general partner interests, could be substantial.
From time to time, Lightstone purchases title insurance from an agent in which our Sponsor owns a 50.0% limited partnership interest. Because this title insurance agent receives significant fees for providing title insurance, our Advisor may face a conflict of interest when considering the terms of purchasing title insurance from this agent. However, prior to the purchase by Lightstone of any title insurance, an independent title consultant with more than 25 years of experience in the title insurance industry reviews the transaction, and performs market research and competitive analysis on our behalf. This process results in terms similar to those that would be negotiated at an arm’s-length basis.
In January 2007, the Company, through LVP 1407 Broadway LLC, a wholly owned subsidiary of the Operating Partnership, entered into a joint venture with an affiliate of its Sponsor, in which the Company and the Sponsor have 49.0% and 51.0% ownership interests, respectively, in 1407 Broadway Mezz II LLC (“1407 Broadway”). The Company accounts for its investment in 1407 Broadway under the equity method of accounting as the Company exercises significant influence, but does not control this entity. At the same time, 1407 Broadway acquired a sub-leasehold interest (the Sub-leasehold Interest”) in a ground lease to an office building located at 1407 Broadway, New York, New York. The seller of the Sub-leasehold Interest was not an affiliate of the Company, its Sponsor or its subsidiaries. The property, a 42 story office building built in 1952, fronts on Broadway, 7th Avenue and 39th Street in midtown Manhattan. The ground lease, dated as of January 14, 1954, provides for multiple renewal rights, with the last renewal period expiring on December 31, 2048. The Sub-leasehold Interest runs concurrently with the ground lease.
On April 30, 2015, 1407 Broadway completed the disposition of the Sub-leasehold Interest 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 year ended December 31, 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 year ended December 31, 2015, of which the Company’s share was approximately $15.1 million.
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Preferred Investments
365 Bond Street Preferred Investment
In March 2014, the Company entered into an agreement with an entity in which David Lichtenstein, the Chairman of our Board and our Chief Executive Officer, indirectly owns a majority residual interest, that provides for us 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 the 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 December 31, 2015 and 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 related parties on the consolidated balance sheets. As of December 31, 2015, approximately $2.8 million of additional contributions were unfunded related to the 365 Bond Street Preferred Investment. During the years ended December 31, 2015 and 2014, the Company recorded approximately $5.1 million and $1.9 million, respectively, of investment 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
In May 2015, the Company entered into an agreement with an entity in which David Lichtenstein, the Chairman of our Board and our Chief Executive Officer, indirectly owns a majority residual interest, that provides for us 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, is classified as a held-to-maturity security and is recorded at cost. As of December 31, 2015, construction financing had not been procured and the monthly preferred distributions rate was 8%.
The Company commenced making contributions during the second quarter of 2015 and as of December 31, 2015 the 40 East End Avenue Preferred Investment had a balance of approximately $28.8 million and is classified in investments in related parties on the consolidated balance sheets. As of December 31, 2015, approximately $1.2 million of additional contributions were unfunded related to the 40 East End Avenue Preferred Investment. During the year ended December 31, 2015, the Company recorded approximately $1.4 million of investment 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 with entities in which David Lichtenstein, the Chairman of our Board and our Chief Executive Officer, indirectly owns a majority residual interest, that provides for us to make aggregate 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 us upon the occurrence of certain events, 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 December 31, 2015, the 30-02 39th Avenue Preferred Investment had an outstanding balance of $7.3 million, which is classified in investments in related parties on the consolidated balance sheet. As of December 31, 2015, an aggregate of $42.7 million of additional contributions were unfunded related to the 30-02 39th Avenue Preferred Investment. During the year ended December 31, 2015, the Company recorded approximately $0.2 million of investment income related to the 30-02 39th Avenue Preferred Investment, which is included in interest and dividend income on the consolidated statements of operations.
485 7th Avenue Preferred Investment
In December 2015, the Company entered into an agreement with an entity in which David Lichtenstein, the Chairman of our Board and our Chief Executive Officer, indirectly owns a majority residual interest, that provides for us to make contributions (the “485 7th Avenue Preferred Investment”) of up to $60.0 million in an affiliate of its Sponsor which owns a parcel of land located at 485 7th Avenue, New York, New York on which they intend to develop a 612-room Marriott Moxy hotel. The 485 7th Avenue Preferred Investment was made pursuant to an instrument that entitles the Company to monthly preferred distributions at a rate of 12% per annum and is redeemable by the Company upon the occurrence of certain events. The 485 7th Avenue Preferred Investment is classified as a held-to-maturity security and is recorded at cost.
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The Company contributed the entire $60.0 million to the 485 7th Avenue Preferred Investment in December 2015, which is classified in investments in related parties on the consolidated balance sheet. During the year ended December 31, 2015, the Company recorded $20,000 of investment income related to the 485 7th Avenue Preferred Investment, which is included in interest and dividend income on the consolidated statements of operations.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accounting Firm Fees
The following table presents the aggregate fees billed to the Company for the years ended December 31, 2015 and 2014 by the Company’s principal accounting firms:
| (in thousands) | 2015 | 2014 | ||||||
| Audit Fees (a) | $ | 396 | $ | 394 | ||||
| Audit-Related Fees (b) | 18 | 68 | ||||||
| Tax Fees (c) | 338 | 335 | ||||||
| Total Fees | $ | 752 | $ | 797 | ||||
| a) | Fees for audit services in 2015 and 2014 consisted of the audit of the Company’s annual consolidated financial statements, interim reviews of the Company’s quarterly consolidated financial statements and services normally provided in connection with statutory and regulatory filings including registration statement consents. | |
| b) | Fees for audit related services related to audits of entities or subsidiaries that the Company already owns, has acquired or proposed to acquire. |
| c) | Fees for tax services. |
In considering the nature of the services provided by the independent auditor, the audit committee determined that such services are compatible with the provision of independent audit services. The audit committee discussed these services with the independent auditor and the Company’s management to determine that they are permitted under the rules and regulations concerning auditor independence promulgated by the SEC to implement the related requirements of the Sarbanes-Oxley Act of 2002, as well as the American Institute of Certified Public Accountants.
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PART III, CONTINUED:
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT COMMITTEE REPORT
To the Directors of Lightstone Value Plus Real Estate Investment Trust, Inc.:
We have reviewed and discussed with management Lightstone Value Plus Real Estate Investment Trust, Inc.’s audited consolidated financial statements as of and for the year ended December 31, 2015.
We have discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, “Communication with Audit Committees,” (Codification of Statements of Auditing Standards, August 2, 2007 AU 380), as amended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T.
We have received and reviewed the written disclosures and the letter from the independent auditors required by the Public Company Accounting Oversight Board Rule 3526, Communication with Audit Committees Concerning Independence and have discussed with the auditors the auditors’ independence.
Based on the reviews and discussions referred to above, we recommend to the Board that the consolidated financial statements referred to above be included in Lightstone Value Plus Real Estate Investment Trust, Inc.’s Annual Report on consolidated Form 10-K for the year ended December 31, 2015.
Audit Committee
George R. Whittemore
Miriam B. Weinstein
Yehuda “Judah” L. Angster
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INDEPENDENT DIRECTORS’ REPORT
To the Stockholders of Lightstone Value Plus Real Estate Investment Trust, Inc.:
We have reviewed the Company’s policies and determined that they are in the best interest of the Company’s stockholders. Set forth below is a discussion of the basis for that determination.
General
The Company’s primary objective is to achieve capital appreciation with a secondary objective of income without subjecting principal to undue risk. The Company intends to achieve this goal primarily through acquisitions of real estate properties and other real estate-related investments.
The Company, to date, has acquired residential and commercial properties principally, all of which are located in the United States and made real estate-related investments. The Company’s acquisitions include both portfolios and individual properties. The Company current commercial holdings consist of retail (primarily multi-tenanted shopping centers), lodging and industrial properties. Additionally, the Company has made certain preferred equity investments in related parties.
The following is descriptive of the Company’s:
Acquisition and investment policies:
| • | Reflecting a flexible operating style, the Company’s portfolio is likely to be diverse and include properties of different types (such as retail, lodging, office, industrial and residential properties); both passive and active investments; real estate-related investments (such as preferred equity investments) and joint venture transactions. The portfolio is likely to be determined largely by the purchase opportunities that the market offers, whether on an upward or downward trend. This is in contrast to those funds that are more likely to hold investments of a single type, usually as outlined in their charters. | |
| • | The Company may invest in properties that are not sold through conventional marketing and auction processes. The Company’s investments may be at a dollar cost level lower than levels that attract those funds that hold investments of a single type. | |
| • | The Company may be more likely to make investments that are in need of rehabilitation, redirection, remarketing and/or additional capital investment. | |
| • | The Company may place major emphasis on a bargain element in its purchases, and often on the individual circumstances and motivations of the sellers. The Company will search for bargains that become available due to circumstances that occur when real estate cannot support the mortgages securing the property. | |
| • | The Company intends to pursue returns in excess of the returns targeted by real estate investors who target a single type of property investment. |
Financing Policies
The Company intends to utilize leverage to acquire its properties. The number of different properties the Company will acquire will be affected by numerous factors, including, the amount of funds available to us. When interest rates on mortgage loans are high or financing is otherwise unavailable on terms that are satisfactory to the Company, the Company may purchase certain properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time. There is no limitation on the amount the Company may invest in any single property or on the amount the Company can borrow for the purchase of any property.
The Company intends to limit its 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 the Company’s stockholders. The Company may also incur short-term indebtedness, having a maturity of two years or less. By operating on a leveraged basis, the Company will have more funds available for investment in properties. This will allow the Company to make more investments than would otherwise be possible, resulting in a more diversified portfolio. Although the Company’s liability for the repayment of indebtedness is expected to be limited to the value of the property securing the liability and the rents or profits derived therefrom, the Company’s use of leveraging increases the risk of default on the mortgage payments and a resulting foreclosure of a particular property. To the extent that the Company does not obtain mortgage loans on the Company’s properties, the Company’s ability to acquire additional properties will be restricted. The Company will endeavor to obtain financing on the most favorable terms available.
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Policy on Sale or Disposition of Properties
The Company’s Board will determine whether a particular property should be sold or otherwise disposed of after considering the relevant factors, including performance or projected performance of the property and market conditions, with a view toward achieving its principal investment objectives.
The Company currently intends to hold its properties for a minimum of seven to ten years prior to selling them. After seven to ten years, the Company’s Board may decide to liquidate the Company, list its shares on a national stock exchange, sell its properties individually or merge or otherwise consolidate the Company with a publicly-traded REIT. Alternatively, the Company may merge with, or otherwise be acquired by, the Sponsor or its affiliates. The Company may, however, sell properties prior to such time and if so, may invest the proceeds from any sale, financing, refinancing or other disposition of its properties into additional properties. Alternatively, the Company may use these proceeds to fund maintenance or repair of existing properties or to increase reserves for such purposes. The Company may choose to reinvest the proceeds from the sale, financing and refinancing of its properties to increase its real estate assets and its net income. Notwithstanding this policy, the Board, in its discretion, may distribute all or part of the proceeds from the sale, financing, refinancing or other disposition of all or any of the Company’s properties to the Company’s stockholders. In determining whether to distribute these proceeds to stockholders, the Board will consider, among other factors, the desirability of properties available for purchase, real estate market conditions, the likelihood of the listing of the Company’s shares on a national securities exchange and compliance with the applicable requirements under federal income tax laws.
When the Company sells a property, it intends to obtain an all-cash sale price. However, the Company may take a purchase money obligation secured by a mortgage on the property as partial payment, and there are no limitations or restrictions on the Company’s ability to take such purchase money obligations. The terms of payment to the Company will be affected by custom in the area in which the property being sold is located and the then prevailing economic conditions. If the Company receives notes and other property instead of cash from sales, these proceeds, other than any interest payable on these proceeds, will not be available for distributions until and to the extent the notes or other property are actually paid, sold, refinanced or otherwise disposed. Therefore, the distribution of the proceeds of a sale to the stockholders may be delayed until that time. In these cases, the Company will receive payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years.
Independent Directors
George R. Whittemore
Miriam B. Weinstein
Yehuda “Judah” L. Angster
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
Annual Report on Form 10-K
For the fiscal year ended December 31, 2015
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report on Form 10-K or incorporated by reference herein:
| EXHIBIT NO. | DESCRIPTION | |
| 3.1(1) | Amended and Restated Charter of Lightstone Value Plus Real Estate Investment Trust, Inc. | |
| 3.2(2) | Amended and Restated Bylaws of Lightstone Value Plus Real Estate Investment Trust, Inc. | |
| 4.1(3) | Amended and Restated Agreement of Limited Partnership of Lightstone Value Plus REIT LP | |
| 10.2(2) | Advisory Agreement by and among Lightstone Value Plus Real Estate Investment Trust, Inc., Lightstone Value Plus REIT LP and Lightstone Value Plus REIT LLC. | |
| 10.3(2) | Management Agreement, by and among Lightstone Value Plus Real Estate Investment Trust, Inc., Lightstone Value Plus REIT LP and Lightstone Value Plus REIT Management LLC. | |
| 10.4(2) | Form of the Company’s Stock Option Plan. | |
| 10.5(2) | Form of Indemnification Agreement by and between The Lightstone Group and the directors and executive officers of Lightstone Value Plus Real Estate Investment Trust, Inc. | |
| 21.1* | Subsidiaries of the Registrant | |
| 23.1* | Consent of Robert A. Stanger & Co., Inc. | |
| 31.1* | Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2* | Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1* | Certification Pursuant to Rule 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2* | Certification Pursuant to Rule 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101* | XBRL (eXtensible Business Reporting Language). The following financial information from Lightstone Value Plus Real Estate Investment Trust, Inc. on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 24, 2016, 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. |
| (1) | Incorporated by reference from Lightstone Value Plus Real Estate Investment Trust, Inc.’s Amended Registration Statement on Form S-11/A (File No. 333-166930), filed with the Securities and Exchange Commission on October 19, 2010. |
| (2) | Incorporated by reference from Lightstone Value Plus Real Estate Investment Trust, Inc.’s Registration Statement on Form S-11 (File No. 333-166930), filed with the Securities and Exchange Commission on May 18, 2010. |
| (3) | Incorporated by reference from Lightstone Value Plus Real Estate Investment Trust, Inc.’s Post-Effective Amendment No. 1 to its Registration Statement on Form S-11 (File No. 333-117367), filed with the Securities and Exchange Commission on May 23, 2005. |
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Pursuant to the requirements of Section 13 or 15(d) 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: March 24, 2016 | By: | /s/ David Lichtenstein |
| David Lichtenstein | ||
| Chief Executive Officer and Chairman of the Board | ||
| (Principal Executive Officer) | ||
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
| NAME | CAPACITY | DATE | ||
| /s/ David Lichtenstein | Chief Executive Officer and Chairman of the Board | March 24, 2016 | ||
| David Lichtenstein | (Principal Executive Officer) | |||
| /s/ Donna Brandin | Chief Financial Officer and Treasurer | March 24, 2016 | ||
| Donna Brandin | (Principal Financial Officer and Principal | |||
| /s/ George R. Whittemore | Director | March 24, 2016 | ||
| George R. Whittemore | ||||
| /s/ Miriam Weinstein | Director | March 24, 2016 | ||
| Miriam Weinstein | ||||
| /s/ Yehuda L. Angster | Director | March 24, 2016 | ||
| Yehuda L. Angster |
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