LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II INC - FORM 10-Q

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EX-32.2 - EXHIBIT 32.2 - LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II INC	v452110_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II INC	v452110_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II INC	v452110_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II INC	v452110_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2016

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

For the transition period from to

Commission file number 000-54047

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC.

(Exact Name of Registrant as Specified in Its Charter)

Maryland		83-0511223
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

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

(732) 367-0129

(Registrant’s Telephone Number, Including Area Code)

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

Yes þ No ¨

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

Yes þ No ¨

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

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨ Smaller reporting company þ

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

Yes ¨ No þ

As of November 7, 2016, there were approximately 18.4 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust II, Inc., including shares issued pursuant to the distribution reinvestment plan.

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

INDEX

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	3

	Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2016 and 2015	4

	Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2016 and 2015	5

	Consolidated Statement of Stockholders’ Equity (unaudited) for the Nine Months Ended September 30, 2016	6

	Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2016 and 2015	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4.	Controls and Procedures	27

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	28

Item 1A.	Risk Factors	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3.	Defaults Upon Senior Securities	28

Item 4.	Mine Safety Disclosures	28

Item 5.	Other Information	28

Item 6.	Exhibits	29

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

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

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

	September 30, 2016			December 31, 2015
	(unaudited)
Assets
Investment property:
Land and improvements	$	44,126		$	43,907
Building and improvements		174,105			170,136
Furniture and fixtures		38,565			36,036
Construction in progress		280			3,567
Gross investment property		257,076			253,646
Less accumulated depreciation		(22,760	)		(14,959	)
Net investment property		234,316			238,687

Investment in unconsolidated affiliated entity		6,048			6,021
Cash and cash equivalents		44,927			37,381
Marketable securities, available for sale		8,598			15,464
Restricted escrows and deposits		3,183			7,243
Notes receivable from related party		-			2,055
Prepaid expenses and other assets		5,271			4,173

Total Assets	$	302,343		$	311,024

Liabilities and Stockholders' Equity
Accounts payable and other accrued expenses	$	7,804		$	7,218
Margin loan		4,006			7,577
Mortgages payable, net		127,310			128,392
Due to related party		410			403
Distributions payable		3,254			3,279
Total liabilities		142,784			146,869

Commitments and contingencies (Note 9)

Stockholders' Equity:
Company's stockholders' equity:
Preferred shares, $0.01 par value, 10,000 shares authorized, none issued and outstanding		-			-
Common stock, $0.01 par value; 100,000 shares authorized, 18,447 and 18,586 shares issued and outstanding in 2016 and 2015, respectively		185			186
Additional paid-in-capital		157,614			158,966
Accumulated other comprehensive loss		(1,596	)		(2,464	)
Accumulated deficit		(16,769	)		(12,529	)
Total Company stockholders' equity		139,434			144,159
Noncontrolling interests		20,125			19,996

Total Stockholders' Equity		159,559			164,155

Total Liabilities and Stockholders' Equity	$	302,343		$	311,024

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

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

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

CONSOLIDATED STATEMENTS OF OPERATIONS

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

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015

Rental revenue	$	22,195		$	19,687		$	63,435		$	52,808

Expenses:
Property operating expenses		13,604			12,884			39,379			33,374
Real estate taxes		784			688			2,395			1,903
General and administrative costs		1,146			1,115			3,580			3,794
Depreciation and amortization		2,658			2,421			7,819			6,315

Total operating expenses		18,192			17,108			53,173			45,386

Operating income		4,003			2,579			10,262			7,422

Interest and dividend income		208			541			1,157			1,499

Loss on sale of marketable securities		-			-			(161	)		-
(Loss)/gain from investments in unconsolidated affiliated entities		(11	)		(42	)		28			(127	)
Interest expense		(1,961	)		(1,738	)		(5,837	)		(3,746	)
Other income/(expense), net		26			(85	)		213			161

Net income		2,265			1,255			5,662			5,209

Less: net income attributable to noncontrolling interests		(111	)		(53	)		(183	)		(129	)

Net income applicable to Company's common shares	$	2,154		$	1,202		$	5,479		$	5,080

Net income per Company's common share, basic and diluted	$	0.12		$	0.06		$	0.30		$	0.27

Weighted average number of common shares outstanding, basic and diluted		18,463			18,623			18,520			18,640

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

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands) (Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015

Net income	$	2,265		$	1,255		$	5,662		$	5,209

Other comprehensive income/(loss):
Holding gain/(loss) on available for sale securities		328			(781	)		707			(1,883	)
Reclassification adjustment for loss included in net income		-			-			161			-

Other comprehensive income/(loss)		328			(781	)		868			(1,883	)

Comprehensive income		2,593			474			6,530			3,326

Less: Comprehensive income attributable to noncontrolling interests		(111	)		(53	)		(183	)		(129	)

Comprehensive income attributable to the Company's common shares	$	2,482		$	421		$	6,347		$	3,197

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

PART I. FINANCIAL INFORMATION:

ITEM 1. FINANCIAL STATEMENTS.

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

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Amounts in thousands) (Unaudited)

							Additional									Total			Total
	Common Stock						Paid-In			Accumulated Other						Noncontrolling			Stockholder's
	Shares			Amount			Capital			Comprehensive Loss			Accumulated Deficit			Interests			Equity

BALANCE, December 31, 2015		18,586		$	186		$	158,966		$	(2,464	)	$	(12,529	)	$	19,996		$	164,155

Net income		-			-			-			-			5,479			183			5,662
Other comprehensive income		-			-			-			868			-			-			868
Distributions declared		-			-			-			-			(9,719	)		-			(9,719	)
Contribution of noncontrolling interests		-			-			-			-			-			9			9
Distributions to noncontrolling interests																	(63	)		(63	)
Redemption and cancellation of shares		(139	)		(1	)		(1,352	)		-			-			-			(1,353	)

BALANCE, September 30, 2016		18,447		$	185		$	157,614		$	(1,596	)	$	(16,769	)	$	20,125		$	159,559

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

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands) (Unaudited)

	For the Nine Months Ended September 30,
	2016			2015

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	5,662		$	5,209
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,819			6,315
Amortization of deferred financing costs		499			347
Loss on sale of marketable securities		161			-
(Gain)/loss from investment in unconsolidated affiliated entity		(28	)		127
Other non-cash adjustments		175			94
Changes in assets and liabilities, net of acquisitions:
(Increase)/decrease in prepaid expenses and other assets		(1,269	)		436
Increase in accounts payable and other accrued expenses		1,003			4,178
Increase/(decrease) in due to related party		7			(322	)

Net cash provided by operating activities		14,029			16,384

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment property, net		(3,867	)		(97,193	)
Proceeds from sale of marketable securities		7,573			-
Purchase of noncontrolling interest in a subsidiary		-			(867	)
Purchase of restricted escrow		-			(1,895	)
Funding of notes receivable from related party		(24,200	)		(20,200	)
Receipt of payments on notes receivable from related party		26,255			8,238
Contributions to unconsolidated affiliated entity		-			(2,653	)
Release of restricted escrows, net		4,060			899

Net cash provided by/(used in) investing activities		9,821			(113,671	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage financings		-			74,230
Payments on mortgages payable		(1,582	)		(688	)
Payment of loan fees and expenses		-			(1,681	)
(Payments)/proceeds on margin loan, net		(3,571	)		2,065
Proceeds from issuance of common stock		-			80
Payment of commissions and offering costs		-			(116	)
Contribution of noncontrolling interests		9			2,175
Redemption and cancellation of common shares		(1,353	)		(589	)
Distributions to noncontrolling interests		(63	)		(575	)
Distributions to common stockholders		(9,744	)		(7,315	)

Net cash (used in)/provided by financing activities		(16,304	)		67,586

Net change in cash and cash equivalents		7,546			(29,701	)
Cash and cash equivalents, beginning of year		37,381			67,502
Cash and cash equivalents, end of period	$	44,927		$	37,801

See Note 2 for supplemental cash flow information.

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

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

Notes to Consolidated Financial Statements

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

1.	*Organization*

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

The Lightstone REIT II is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT II LP (the “Operating Partnership”), a Delaware limited partnership formed on April 30, 2008, in which Lightstone REIT II as the general partner, held a 99% interest as of September 30, 2016.

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

The Company is managed by Lightstone Value Plus REIT II LLC (the “Advisor”), an affiliate of The Lightstone Group, Inc. under the terms and conditions of an advisory agreement. The Lightstone Group, Inc. previously served as the Company’s sponsor (the “Sponsor”) during its initial public offering and follow-on offering, which terminated on August 15, 2012 and September 27, 2014, respectively. Subject to the oversight of the Company’s board of directors (the “Board of Directors”), the Advisor has primary responsibility for making investment decisions and managing the Company’s day-to-day operations. Through his ownership and control of The Lightstone Group, Inc., Mr. Lichtenstein is the indirect owner of the Advisor and the indirect owner and manager of Lightstone SLP II LLC, which has subordinated profits interests in the Operating Partnership. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT II or the Operating Partnership.

The Company’s shares of common stock are not currently listed on a national securities exchange. The Company may seek to list its shares of common stock for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its shares of common stock until they are listed for trading. In the event the Company does not obtain listing prior to August 15, 2022, the tenth anniversary of the 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 corporation.

Noncontrolling Interests

The noncontrolling interests consist of (i) parties of the Company that hold units in the Operating Partnership, (ii) membership interests held by Lightstone Value Plus Real Estate Investment Trust, Inc., a REIT also sponsored by the Company’s Sponsor, in a joint venture, and (iii) the membership interests held by minority owners of certain of the Company’s hotels.

Partners of Operating Partnership

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

Lightstone SLP II LLC, which is wholly owned by the Company’s Sponsor, committed to purchase subordinated profits interests in the Operating Partnership (“Subordinated Profits Interests”) at a cost of $100,000 per unit for each $1.0 million in subscriptions up to ten percent of the proceeds from the primary shares under the initial public offering and the follow-on Offering. Lightstone SLP II LLC had the option to purchase the Subordinated Profits Interests with either cash or an interest in real property of equivalent value. From the Company’s inception through the termination of its follow-on offering, the Company’s Sponsor made cash contributions of $12.9 million and contributed equity interests totaling 48.6% in Brownmill, LLC (“Brownmill”), which were valued at $4.8 million, in exchange for a total of 177.0 Subordinated Profits Interests with an aggregate value of $17.7 million in fulfillment of its commitment.

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

Notes to Consolidated Financial Statements

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

2.	*Summary of Significant Accounting Policies*

Basis of Presentation

The consolidated financial statements include the accounts of Lightstone REIT II and its Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). As of September 30, 2016, the Lightstone REIT II had a 99% general partnership interest in the common units of the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation.

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of the Company and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. The accompanying unaudited consolidated financial statements of the Lightstone Value Plus Real Estate Investment Trust II, Inc. and its Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

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

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

Supplemental disclosure of cash flow information

	For the Nine Months Ended September 30,
	2016		2015

Cash paid for interest	$	5,339	$	2,979
Distributions declared	$	9,719	$	9,060
Value of shares issued from distribution reinvestment program	$	-	$	1,723
Debt assumed for acquisition	$	-	$	32,841
Non controlling interest assumed for acquisition	$	-	$	656
Unrealized gain/(loss) in available for sale securities	$	868	$	(1,883	)
Purchase of loan receivable	$	-	$	547
Non-cash purchase of investment property	$	84	$	536

Reclassifications

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

New Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update which provides guidance on the classification of certain cash receipts and cash payments in the statement of cash flows, including those related to debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, and distributions received from equity method investees. This guidance is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. The guidance must be adopted on a retrospective basis and must be applied to all periods presented, but may be applied prospectively if retrospective application would be impracticable. We are currently evaluating the impact, if any, that the adoption of this guidance will have on its consolidated statement of cash flows.

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

Notes to Consolidated Financial Statements

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

In January 2016, the 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 has not yet determined whether 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 date with earlier application permitted for financial statements that have not been issued. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued an accounting standards update that provides for a single five-step model to be applied to all revenue contracts with customers as well as requires additional financial statement disclosures that will enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company does not expect the adoption of this standard to have a material impact on its financial position, results of operations or cash flows.

In April 2015, the FASB issued an accounting standards update to simplify the presentation of debt issuance costs. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This new guidance was effective for the Company beginning January 1, 2016. The Company adopted this standard during the quarter ended March 31, 2016. As a result of adopting this standard on a retrospective basis, approximately $1.4 million was reclassified out of prepaid expenses and other assets and was reclassified into mortgage payable, net on the consolidated balance sheet as of December 31, 2015.

3.	*Marketable Securities, Margin Loan and Fair Value Measurements*

Marketable Securities

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

	As of September 30, 2016
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Equity Securities	$	10,194	$	-	$	(1,596	)	$	8,598

	As of December 31, 2015
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Equity Securities	$	17,928	$	63	$	(2,527	)	$	15,464

The Company has access to a margin loan from a financial institution that holds custody of certain of the Company’s marketable securities. The margin loan is collateralized by the marketable securities in the Company’s account. The amounts available to the Company under the margin loan are at the discretion of the financial institution and not limited to the amount of collateral in its account. The margin loan bears interest at Libor plus 0.85% (1.38% as of September 30, 2016).

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

Notes to Consolidated Financial Statements

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

When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. As of September 30, 2016 and December 31, 2015, the Company did not recognize any impairment charges.

Fair Value Measurements

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

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

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

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

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

As of September 30, 2016 and December 31, 2015, all of the Company’s equity securities and were classified as Level 1 assets and there were no transfers between the level classifications during the nine months ended September 30, 2016.

4.	*Notes Receivable from Related Party*

The Company had entered into various revolving promissory notes (collectively, the “Notes Receivable from Related Party”) with the operating partnership of Lightstone Value Plus Real Estate Investment Trust III, Inc. (“Lightstone III”), a REIT also sponsored by the Company’s Sponsor as discussed below. During the three and nine months ended September 30, 2016, the Company accrued interest income (included in interest and dividend income in the consolidated statements of operations) of $41 and $329, respectively, on the Notes Receivable from Related Party and $273 and $562, respectively, for the same periods in 2015.

Des Moines Note Receivable

On February 4, 2015, the Company entered into a revolving promissory note (the “Des Moines Note Receivable”) of up to $10.0 million with Lightstone III. On the same date, in connection with Lightstone III’s acquisition of a Hampton Inn hotel located in Des Moines, Iowa (the “Hampton Inn – Des Moines”), the Company funded $8.2 million under the Des Moines Note Receivable.

The Des Moines Note Receivable had a term of one year, bore interest at a floating rate of three-month Libor plus 6.0% and required quarterly interest payments through its stated maturity with the entire unpaid balance due upon maturity. Lightstone III paid the Company an origination fee of $100 in connection with the Des Moines Note Receivable and pledged its ownership interest in the Hampton Inn – Des Moines as collateral. The Des Moines Note Receivable had no outstanding balance as of December 31, 2015 and subsequently expired on February 4, 2016.

Durham Note Receivable

On May 15, 2015, the Company entered into a revolving promissory note (the “Durham Note Receivable”) of up to $13.0 million with Lightstone III. On the same date, in connection with Lightstone III’s acquisition of a Courtyard by Marriott hotel located in Durham, North Carolina (the “Courtyard - Durham”), the Company funded $12.0 million under the Durham Note Receivable.

The Durham Note Receivable had a term of one year, bore interest at a floating rate of three-month Libor plus 6.0% and required quarterly interest payments through its stated maturity with the entire unpaid balance due upon maturity. Lightstone III paid the Company an origination fee of $130 in connection with the Durham Note Receivable and pledged its ownership interest in the Courtyard - Durham as collateral. On May 2, 2016, the Durham Note Receivable was repaid in full and subsequently expired on May 15, 2016. The outstanding principal balance and remaining availability under the Durham Note Receivable were $2.1 million and $10.9 million, respectively, as of December 31, 2015.

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

Notes to Consolidated Financial Statements

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

Lansing Note Receivable

On May 2, 2016, the Company entered into a revolving promissory note (the “Lansing Note Receivable”) of up to $8.0 million with Lightstone III, of which $6.0 million was funded. The Lansing Note Receivable had a term of one year (with an option for an additional year), bore interest at a floating rate of three-month Libor plus 6.0% and required quarterly interest payments through its stated maturity with the entire unpaid balance due upon maturity. Lightstone III paid the Company an origination fee of $80, which is included in other income/(expense), net on the consolidated statement of operations, in connection with the Lansing Note Receivable and pledged its ownership interest in a Hampton Inn hotel located in Lansing, Michigan as collateral. On July 13, 2016, the Lansing Note Receivable was repaid in full and terminated.

Green Bay Note Receivable

On May 2, 2016, the Company entered into a revolving promissory note (the “Green Bay Note Receivable”) of up to $14.5 million with Lightstone III, of which $10.2 million was funded. The Green Bay Note Receivable had a term of one year (with an option for an additional year), bore interest at a floating rate of three-month Libor plus 6.0% and required quarterly interest payments through its stated maturity with the entire unpaid balance due upon maturity. Lightstone III paid the Company an origination fee of $145, which is included in other income/(expense), net on the consolidated statement of operations, in connection with the Green Bay Note Receivable and pledged its ownership interest in a SpringHill Suites hotel located in Green Bay, Wisconsin as collateral. On July 13, 2016, the Green Bay Note Receivable was repaid in full and terminated.

5.	*Mortgages payable, net*

Mortgages payable, net consisted of the following:

		Weighted Average Interest Rate
Description	Interest Rate	as of September 30, 2016			Maturity Date	Amount Due at Maturity		As of September 30, 2016			As of December 31, 2015

Promissory Note, secured by four properties	4.94%		4.94	%	August 2018	$	21,754	$	22,829		$	23,236

Revolving Loan, secured by nine properties	LIBOR + 4.95%		5.63	%	January 2018		73,616		73,616			74,230

Courtyard - Parsippany	LIBOR + 3.50%		3.95	%	August 2018		7,126		7,478			7,612

Residence Inn - Baton Rouge	5.36%		5.36	%	November 2018		3,480		3,660			3,720

Promissory Note, secured by three properties	4.94%		4.94	%	August 2018		14,008		14,701			14,962

Courtyard - Baton Rouge	5.56%		5.56	%	May 2017		5,873		5,959			6,064

Total mortgages payable			5.32	%		$	125,857	$	128,243		$	129,824

Less: Deferred financing costs									(933	)		(1,432	)

Total mortgages payable, net								$	127,310		$	128,392

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

Notes to Consolidated Financial Statements

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

Principal Maturities

The following table, based on the initial terms of the mortgages, sets forth their aggregate estimated contractual principal maturities, including balloon payments due at maturity, as of September 30, 2016:

	Remainder of
	2016		2017		2018		2019		2020		Thereafter		Total
Principal maturities	$	337	$	7,151	$	120,755	$	-	$	-	$	-	$	128,243

Less: Deferred financing costs														(933	)

Total principal maturiteis, net														127,310

Debt Compliance

Pursuant to the Company’s debt agreements, approximately $3.2 million and $2.2 million was held in restricted escrow accounts as of September 30, 2016 and December 31, 2015, respectively. Such escrows are subject to release in accordance with the applicable debt agreement for the payment of real estate taxes, insurance and capital improvements, as required. Certain of our debt agreements also contain clauses providing for prepayment penalties and require the maintenance of certain ratios, including debt service coverage and fixed leverage charge ratio. As of September 30, 2016, the Company is in compliance with respect to all of its financial debt covenants.

Additionally, the Company’s mortgage loan (outstanding principal balance of $6.0 million as of September 30, 2016) secured by the Courtyard – Baton Rouge matures in May 2017. The Company currently intends to seek to refinance and/or repay in full, using cash proceeds from the potential sale of assets, such existing indebtedness on or before its applicable stated maturity. Other than this financing, the Company has no additional significant maturities of mortgage debt over the next 12 months.

6.	*Equity*

Earnings per Share

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

7.	*Related Party Transactions*

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

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

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2016		2015		2016		2015
Development Fees	$	-	$	48	$	59	$	50
Asset Management Fees		601		568		1,786		1,447

Total	$	601	$	616	$	1,845	$	1,497

8.	*Financial Instruments*

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted escrows and deposits, prepaid expenses and other assets, accounts payable and accrued expenses, margin loan, due to/from related party, and distributions payable approximated their fair values because of the short maturity of these instruments. The estimated fair value of our mortgages payable is as follows:

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

Notes to Consolidated Financial Statements

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

	As of September 30, 2016				As of December 31, 2015
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Mortgages payable	$	128,243	$	128,931	$	129,824	$	130,255

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

9.	*Commitments and Contingencies*

Legal Proceedings

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

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, Inc. in the Supreme Court of the State of New York seeking payment for services alleged to have been rendered, and to be rendered prospectively, under theories of unjust enrichment and breach of contract. The plaintiff had a limited business arrangement with The Lightstone Group, LLC; that arrangement has been terminated. We filed a motion to dismiss the action and, on January 31, 2012, the Supreme Court dismissed the complaint in its entirety, but granted the plaintiff leave to replead two limited causes of action.

The plaintiff filed an amended complaint on May 18, 2012, bringing limited claims under theories of unjust enrichment and quantum meruit. On November 21, 2012, the court dismissed this second complaint in part, leaving only $164 (plus interest) in potential damages. The plaintiff appealed this decision and Lightstone cross-appealed arguing that the case should have been dismissed in full. The appeals court denied plaintiff’s motion and granted defendants’ motion, as a result of which all claims were dismissed on March 25, 2014. The plaintiff filed a motion requesting the right to re-appeal to the Court of Appeals, which was granted on August 1, 2014.

Plaintiff has appealed to the Court of Appeals, which affirmed in part and denied in part, leaving a smaller number of claims available to the Plaintiff. Plaintiff has indicated that it intends to continue to pursue these claims in the trial court.

While any proceeding or litigation has an element of uncertainty, management currently believes that the likelihood of an unfavorable outcome with respect to 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.

10.

Subsequent Events

Distribution Payment

On October 14, 2016, the distribution for the three-month period ending September 30, 2016 of $3.3 million was paid in cash from cash flows provided by operations.

Distribution Declaration

On November 14, 2016, the Board of Directors authorized and the Company declared a distribution for the three-month period ending December 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 or about January 15, 2017 to shareholders of record as of December 31, 2016.

PART I. FINANCIAL INFORMATION, CONTINUED:

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

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

Forward-Looking Statements

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

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

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

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

Overview

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

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

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

Current Environment

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

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

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

Portfolio Summary –

	Location	Year Built	Leasable Square Feet		Percentage Occupied as of September 30, 2016			Annualized Revenues based on rents as of September 30, 2016		Annualized Revenues per square foot as of September 30, 2016

Unconsolidated Affiliated Real Estate Entitiy:
Retail
Brownmill LLC (2 retail properties)	Old Bridge and Vauxhall, New Jersey	1962		155,928		60	%	$	2.5 million	$	16.06

Consolidated Properties:
Hospitality			Year to Date		Percentage Occupied for the Nine Months Ended			Revenue per Available Room ("RevPAR") for the Nine Months		Average Daily Rate For the Nine Months Ended
	Location	Year Built	Available Rooms		September 30, 2016			Ended September 30, 2016		September 30, 2016

TownePlace Suites - Metairie	Harahan, Louisiana	2000		33,976		83	%	$	89.18	$	107.73

SpringHill Suites - Peabody	Peabody, Massachusetts	2002		44,936		79	%	$	96.17	$	122.28

Fairfield Inn - East Rutherford	East Rutherford, New Jersey	1990		38,634		80	%	$	98.58	$	122.91

TownePlace Suites - Fayetteville	Johnson/Springdale, Arkansas	2009		25,208		72	%	$	70.87	$	98.33

TownePlace Suites - Little Rock	Little Rock, Arkansas	2009		25,208		76	%	$	60.13	$	78.88

Holiday Inn - Opelika	Opelika, Alabama	2009		23,838		71	%	$	78.36	$	110.04

Aloft - Tucson	Tucson, Arizona	1971		42,196		75	%	$	94.65	$	126.65

Hampton Inn – Fort Myers Beach	Fort Myers Beach, Florida	2001		32,880		79	%	$	108.40	$	136.73

Aloft - Philadelphia	Philadelphia, Pennsylvania	2008		37,264		72	%	$	95.53	$	131.92

Four Points by Sheraton - Philadelphia	Philadelphia, Pennsylvania	1985		48,498		83	%	$	81.39	$	98.08

Courtyard - Willoughby	Willoughby, Ohio	1999		24,660		79	%	$	99.50	$	126.36

Fairfield Inn - DesMoines	West Des Moines, Iowa	1997		27,948		75	%	$	83.58	$	110.77

SpringHill Suites - DesMoines	West Des Moines, Iowa	1999		26,578		73	%	$	78.21	$	107.83

Hampton Inn - Miami	Miami, Florida	1996		34,524		78	%	$	93.67	$	120.32

Hampton Inn & Suites - Fort Lauderdale	Fort Lauderdale, Florida	1996		28,496		78	%	$	110.85	$	142.03

Courtyard - Parsippany	Parsippany, New Jersey	2001		41,374		65	%	$	96.31	$	147.22

Residence Inn - Baton Rouge	Baton Rouge, Louisiana	2000		29,592		84	%	$	89.34	$	106.25

Holiday Inn Express - Auburn	Auburn, Alabama	2002		22,468		68	%	$	81.02	$	118.93

Aloft - Rogers	Rogers, Arkansas	2008		35,620		60	%	$	75.77	$	126.60

Fairfield Inn - Jonesboro	Jonesboro, Arkansas	2009		22,742		81	%	$	89.10	$	110.28

Courtyard - Baton Rouge	Baton Rouge, Louisiana	1997		33,154		79	%	$	82.42	$	103.94

Hospitality Total				679,794		76	%	$	89.12	$	117.42

Annualized base rent is defined as the minimum monthly base rent due as of September 30, 2016 annualized, excluding periodic contractual fixed increases and rents calculated based on a percentage of tenants’ sales. The annualized base rent disclosed in the table above includes all concessions, abatements and reimbursements of rent to tenants.

Critical Accounting Policies and Estimates

There were no material changes during the nine months ended September 30, 2016 to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2015.

Results of Operations

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

LVP REIT Hotels

In January 2015, our Board of Directors provided approval for us to form a joint venture (the “Joint Venture”) with Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”), a real estate investment trust also sponsored by our Sponsor, The Lightstone Group, and for the Joint Venture to acquire Lightstone I’s membership interests in up to 11 limited service hotels (the “LVP REIT Hotels”).

Subsequently in January 2015, we, through the Operating Partnership, entered into an agreement to form the Joint Venture with Lightstone I, whereby we and Lightstone I have 97.5% and 2.5% membership interests in the Joint Venture, respectively. We are the managing member.

1^st Quarter 2015:

In January 2015, we, through the Joint Venture, completed the acquisition of a 100.0% membership interest in a portfolio of five limited service hotels (the “Hotel I Portfolio”), which were part of the LVP REIT Hotels. The five limited service hotels included in the Hotel I Portfolio are as follows:

a Courtyard by Marriott located in Willoughby, Ohio (the “Courtyard – Willoughby”);

a Fairfield Inn & Suites by Marriott located in West Des Moines, Iowa (the “Fairfield Inn – Des Moines”);

a SpringHill Suites by Marriott located in West Des Moines, Iowa (the SpringHill Suites – Des Moines”);

a Hampton Inn located in Miami, Florida (the “Hampton Inn – Miami”); and

a Hampton Inn & Suites located in Fort Lauderdale, Florida (the “Hampton Inn & Suites – Fort Lauderdale”).

In February 2015, we, through the Joint Venture, completed the acquisition of Lightstone I’s (i) 100.0% membership interest in a Courtyard by Marriott located in Parsippany, New Jersey (the “Courtyard – Parsippany”) and (ii) 90.0% membership interest in a Residence Inn by Marriott located in Baton Rouge, Louisiana (the “Residence Inn - Baton Rouge”). These two hotels were part of the LVP REIT Hotels.

The Joint Venture’s acquisitions of Lightstone I’s membership interests in the Hotel I Portfolio, the Courtyard – Parsippany and the Residence Inn – Baton Rouge are collectively referred to as the “1^st Quarter 2015 Acquisitions”.

2^nd Quarter 2015:

In June 2015, we, through the Joint Venture, completed the acquisition of Lightstone I’s (i) 100.0% membership interest in a Holiday Inn Express Hotel & Suites located in Auburn, Alabama (the “Holiday Inn Express – Auburn”), (ii) 100.0% membership interest in an Aloft Hotel located in Rogers, Arkansas (the “Aloft – Rogers”) and (iii) 95.0% membership interest in a Fairfield Inn & Suites by Marriott located in Jonesboro, Arkansas (the “Fairfield Inn – Jonesboro” and collectively, the “Hotel II Portfolio”). These three hotels were part of the LVP REIT Hotels.

In June 2015, we, through the Joint Venture, completed the acquisition of Lightstone I’s 90.0% membership interest in a Courtyard by Marriott located in Baton Rouge, Louisiana (the “Courtyard – Baton Rouge”). This hotel was part of the LVP REIT Hotels.

The Joint Venture’s acquisitions of Lightstone I’s membership interests in the Hotel II Portfolio and the Courtyard – Baton Rouge are collectively referred to as the “2^nd Quarter 2015 Acquisitions”.

We have had no further acquisitions of properties through September 30, 2016.

For the Three Months Ended September 30, 2016 vs. September 30, 2015

Rental revenue

Rental revenue increased by $2.5 million to $22.2 million during the three months ended September 30, 2016 compared to $19.7 million for the same period in 2015 resulting from increased occupancy levels and RevPAR during the period.

Property operating expenses

Property operating expenses increased by $0.7 million to $13.6 million during the three months ended September 30, 2016 compared to $12.9 million for the same period in 2015 primarily resulting from increased occupancy expense during the period.

Real estate taxes

Real estate taxes of $0.8 million during the three months ended September 30, 2016 were relatively flat compared to $0.7 million for the same period in 2015.

General and administrative expenses

General and administrative expenses of $1.2 million during the three months ended September 30, 2016 were relatively flat compared to $1.1 million for the same period in 2015.

Depreciation and amortization

Depreciation and amortization expense increased by $0.2 million to $2.6 million during the three months ended September 30, 2016 compared to $2.4 million for the same period in 2015. .

Interest and dividend income

Interest and dividend income decreased by $0.3 million to $0.2 million during the three months ended September 30, 2016 compared to $0.5 million for the same period in 2015. The decrease is primarily attributable to the repayment in full of our notes receivable – related party (see Note 4 of the Notes to Consolidated Financial Statements).

Earnings from investment in unconsolidated affiliated entity

Our loss from investment in unconsolidated affiliated entity during the three months ended September 30, 2016 was $11 compared to a loss of $42 for the same period in 2015. Our earnings from investment in unconsolidated affiliated entity are attributable to our ownership interest in Brownmill, LLC, which we account for under the equity method of accounting.

Interest expense

Interest expense was $2.0 million during the three months ended September 30, 2016 compared to $1.7 million for the same period in 2015. Interest expense during both periods primarily consisted of interest related to our mortgage indebtedness and increased during 2016 due to the financings associated with the Joint Venture’s acquisition of the LVP REIT Hotels described above.

Noncontrolling interests

The income or loss allocated to noncontrolling interests relates to the interest in our Operating Partnership held by our Sponsor, membership interests held by Lightstone I in the Joint Venture, and the interests held by minority owners of certain of our hotels.

For the Nine Months Ended September 30, 2016 vs. September 30, 2015

Rental revenue

Rental revenue increased by $10.6 million to $63.4 million during the nine months ended September 30, 2016 compared to $52.8 million for the same period in 2015. Approximately $8.9 million of the increase is attributable to the timing of the acquisitions of the hotels described above: (i) an aggregate of $2.8 million related to the 1st Quarter 2015 Acquisitions and (ii) an aggregate of $6.1 million related to the 2^nd Quarter 2015 Acquisitions.

Property operating expenses

Property operating expenses increased by $6.0 million to $39.4 million during the nine months ended September 30, 2016 compared to $33.4 million for the same period in 2015. Approximately $5.3 million of the increase is attributable to the timing of acquisitions of the hotels described above: (i) an aggregate of $1.8 million related to the 1st Quarter 2015 Acquisitions and (ii) an aggregate of $3.5 million related to the 2^nd Quarter 2015 Acquisitions.

Real estate taxes

Real estate taxes increased by $0.5 million to $2.4 million during the nine months ended September 30, 2016 compared to $1.9 million for the same period in 2015. Approximately $0.4 million of the increase is attributable to the timing of the acquisitions of the hotels described above: (i) an aggregate of $0.2 million related to the 1^st Quarter 2015 Acquisitions and (ii) an aggregate of $0.2 million related to the 2^nd Quarter 2015 Acquisitions.

General and administrative expenses

General and administrative decreased by $0.2 million to $3.6 million during the nine months ended September 30, 2016 compared to $3.8 million for the same period in 2015. The decrease is primarily because the 2015 period included acquisition costs related to the Joint Venture’s acquisition of the LVP REIT Hotels.

Depreciation and amortization

Depreciation and amortization expense increased by $1.5 million to $7.8 million during the nine months ended September 30, 2016 compared to $6.3 million for the same period in 2015. Approximately $1.3 million of the increase is attributable to the timing of the acquisitions of the hotels described above: (i) an aggregate of $0.5 million related to the 1^st Quarter 2015 Acquisitions and (ii) an aggregate of $0.8 million related to the 2nd Quarter 2015 Acquisitions.

Interest and dividend income

Interest and dividend income decreased by $0.3 million to $1.2 million during the nine months ended September 30, 2016 compared to $1.5 million for the same period in 2015. The decrease is primarily attributable to the repayment in full of our notes receivable – related party (see Note 4 of the Notes to Consolidated Financial Statements).

Earnings from investment in unconsolidated affiliated entity

Our income from investment in unconsolidated affiliated entity during the nine months ended September 30, 2016 was $28 compared to a loss of $127 for the same period in 2015. Our earnings from investment in unconsolidated affiliated entity are attributable to our ownership interest in Brownmill, LLC, which we account for under the equity method of accounting.

Interest expense

Interest expense was $5.8 million during the nine months ended September 30, 2016 compared to $3.7 million for the same period in 2015. Interest expense during both periods primarily consisted of interest related to our mortgage indebtedness and increased during 2016 due to the financings associated with the Joint Venture’s acquisition of the LVP REIT Hotels described above.

Noncontrolling interests

Financial Condition, Liquidity and Capital Resources

Overview:

For the nine months ended September 30, 2016, our primary sources of funds were $14.0 million of cash flows from our operations, $7.6 million of proceeds from the sale of marketable securities and $4.1 million of proceeds from the release of funds held in restricted escrows.

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

We currently have mortgage indebtedness totaling $128.2 million and a margin loan of $4.0 million. We have and intend to continue to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of our independent directors and is disclosed to our stockholders. Market conditions will dictate the overall leverage limit; as such our aggregate long-term permanent borrowings may be less than 75% of aggregate fair market value of all properties. We may also incur short-term indebtedness, having a maturity of two years or less.

Our charter provides that the aggregate amount of borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. Market conditions will dictate the overall leverage limit; as such our aggregate borrowings may be less than 300% of net assets. As of September 30, 2016, our total borrowings aggregated $132.2 million which represented 73% of our net assets.

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

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

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

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

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

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

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2016		2015		2016		2015
Development Fees	$	-	$	48	$	59	$	50
Asset Management Fees		601		568		1,786		1,447
Total	$	601	$	616	$	1,845	$	1,497

Summary of Cash Flows

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

	For the Nine Months Ended September 30,
	2016			2015
Net cash provided by operating activities	$	14,029		$	16,384
Net cash provided by/(used in) investing activities		9,821			(113,671	)
Net cash (used in)/provided by financing activities		(16,304	)		67,586
Net change in cash and cash equivalents		7,546			(29,701	)
Cash and cash equivalents, beginning of the period		37,381			67,502
Cash and cash equivalents, end of the period	$	44,927		$	37,801

Our principal sources of cash flow were derived from cash flows from our operations, proceeds from the sale of marketable securities and the release of funds held in restricted escrows. In the future, we expect to continue to operate properties which should provide a relatively consistent stream of cash flow to provide us with resources to fund our operating expenses, scheduled debt service and any quarterly distributions authorized by our Board of Directors.

Our principal demands for liquidity currently are distributions and scheduled debt service on our mortgages payable.

Operating activities

The net cash provided by operating activities of approximately $14.0 million during the 2016 period primarily related to net income of $5.7 million, depreciation and amortization, amortization of deferred financing costs and other non-cash items aggregating $8.6 million offset by changes in assets and liabilities of $0.3 million.

Investing activities

The net cash provided by investing activities of approximately $9.8 million during the 2016 period primarily reflects $7.6 million of proceeds from the sale of marketable securities, the release of $4.1 million of restricted escrows, and the net repayments of $2.1 million of notes receivable –related party offset by $3.9 million of capital expenditures.

Financing activities

The net cash used in financing activities of approximately $16.3 million during the 2016 period primarily consists of (i) distributions to common stockholders of $9.7 million, (ii) payments on our mortgages payable and margin loan of $5.2 million and (ii) $1.4 million of redemptions of common shares.

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

Distribution Reinvestment Plan (“DRIP”) and Share Repurchase Program

Our DRIP provides our stockholders with an opportunity to purchase additional shares of our common stock at a discount by reinvesting distributions. Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to us, subject to certain restrictions. From our inception through December 31, 2015 we repurchased approximately 338,000 shares of common stock and for the nine months ended September 30, 2016 we repurchased 138,420 shares of common stock, pursuant to our share repurchase program. We repurchased the shares at an average price per share of $9.78 per share. We funded share repurchases for the periods noted above from the cumulative proceeds of the sale of our shares pursuant to our DRIP.

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

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

Contractual Obligations

The following is a summary of the estimated contractual obligations related to our mortgage debt over the next five years and thereafter as of September 30, 2016.

Contractual Obligations	Remainder of 2016		2017		2018		2019		2020		Thereafter		Total
Principal maturities	$	337	$	7,151	$	120,755	$	-	$	-	$	-	$	128,243
Interest payments		1,757		6,805		2,283		-		-		-		10,845
Total	$	2,094	$	13,956	$	123,038	$	-	$	-	$	-	$	139,088

In addition to the mortgage payable described above, a margin loan that was made available to us from a financial institution that holds custody of certain of our marketable securities. The margin loan is collateralized by the marketable securities in our account. The amounts available to us under the margin loan are at the discretion of the financial institution and not limited to the amount of collateral in our account. The amount outstanding under this margin loan was $4.0 million as of September 30, 2016 and is due on demand. The margin loan bears interest at Libor plus 0.85% (1.38% as of September 30, 2016).

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.

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.

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

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

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015
Net income	$	2,265		$	1,255		$	5,662		$	5,209
FFO adjustments:
Depreciation and amortization of real estate assets		2,658			2,421			7,819			6,315
Adjustments to equity in earnings from unconsolidated entities, net		146			151			444			456
FFO		5,069			3,827			13,925			11,980
MFFO adjustments:
Other adjustments:
Acquisition and other transaction related costs expensed⁽¹⁾		-			18			1			490
Adjustments to equity in earnings from unconsolidated entity, net		(4	)		(7	)		(6	)		(4	)
Amortization of above or below market leases and liabilities⁽²⁾		-			-			-			-
Mark-to-market adjustments⁽³⁾		(46	)		48			22			16
Non-recurring loss/(gain) from extinguishment/sale of debt, derivatives or securities holdings⁽⁴⁾		-			11			161			(229	)
MFFO		5,019			3,897			14,103			12,253
Straight-line rent⁽⁵⁾		-			-			-			-
MFFO - IPA recommended format	$	5,019		$	3,897		$	14,103		$	12,253

Net income	$	2,265		$	1,255		$	5,662		$	5,209
Less: income attributable to noncontrolling interests		(111	)		(53	)		(183	)		(129	)
Net income applicable to Company's common shares	$	2,154		$	1,202		$	5,479		$	5,080
Net income per common share, basic and diluted	$	0.12		$	0.06		$	0.30		$	0.27

FFO	$	5,069		$	3,827		$	13,925		$	11,980
Less: FFO attributable to noncontrolling interests		(185	)		(122	)		(403	)		(326	)
FFO attributable to Company's common shares	$	4,884		$	3,705		$	13,522		$	11,654
FFO per common share, basic and diluted	$	0.26		$	0.20		$	0.73		$	0.63

MFFO - IPA recommended format	$	5,019		$	3,897		$	14,103		$	12,253
Less: MFFO attributable to noncontrolling interests		(184	)		(123	)		(404	)		(343	)
MFFO attributable to Company's common shares	$	4,835		$	3,774		$	13,699		$	11,910

Weighted average number of common shares outstanding, basic and diluted		18,463			18,623			18,520			18,640

(1)

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

(2)

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

(3)

Management believes that adjusting for mark-to-market adjustments is appropriate because they are nonrecurring items that may not be reflective of ongoing operations and reflects unrealized impacts on value based only on then current market conditions, although they may be based upon current operational issues related to an individual property or industry or general market conditions. Mark-to-market adjustments are made for items such as ineffective derivative instruments, certain marketable securities and any other items that GAAP requires we make a mark-to-market adjustment for. The need to reflect mark-to-market adjustments is a continuous process and is analyzed on a quarterly and/or annual basis in accordance with GAAP.

(4)

Management believes that adjusting for gains or losses related to extinguishment/sale of debt, derivatives or securities holdings is appropriate because they are items that may not be reflective of ongoing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods.

(5)

Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance.

The table below presents our cumulative distributions declared and cumulative FFO attributable to our common shares:

	For the period April, 28, 2008
	(date of inception) through
	September 30, 2016

FFO	$	39,116
Distributions declared	$	41,945

On October 14, 2016, the distribution for the three-month period ending September 30, 2016 of $3.3 million was paid in cash. The entire distribution was paid from cash flows provided by operations.

On July 15, 2016, the distribution for the three-month period ending June 30, 2016 of $3.2 million was paid in cash. The entire distribution was paid from cash flows provided by operations.

On April 15, 2016, the distribution for the three-month period ending March 31, 2016 of $3.2 million was paid in cash. The distribution was paid from a combination of cash flows provided by operations ($2.6 million or 82%) and other non-operating cash ($0.6 million or 18%).

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 2016 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 10 of the Notes to Consolidated Financial Statements for further information related to subsequent events during the period from October 1, 2016 through the date of this filing.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

We are currently and expect to continue to be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund the expansion and refinancing of our real estate investment portfolio and operations. Our interest rate risk management objectives have been and will continue to be to limit the impact of interest rate changes on our earnings, prepayment penalties and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes. As of September 30, 2016, we had one interest rate swap with an insignificant intrinsic value.

As of September 30, 2016, we held marketable securities with a fair value of $8.6 million, which are available for sale for general investment purposes. We regularly review the market prices of our investments for impairment purposes. As of September 30, 2016, a hypothetical adverse 10.0% movement in market values would result in a hypothetical loss in fair value of approximately $0.9 million.

The following table shows the estimated principal maturities for our mortgage debt during the next five years and thereafter as of September 30, 2016:

	Remainder of
	2016		2017		2018		2019		2020		Thereafter		Total
Principal maturities	$	337	$	7,151	$	120,755	$	-	$	-	$	-	$	128,243

Pursuant to the Company’s debt agreements, approximately $3.2 million and $2.2 million was held in restricted escrow accounts as of September 30, 2016 and December 31, 2015, respectively. Such escrows are subject to release in accordance with the applicable debt agreement for the payment of real estate taxes, insurance and capital improvements, as required. Certain of our debt agreements also contain clauses providing for prepayment penalties and require the maintenance of certain ratios, including debt service coverage and fixed leverage charge ratio. The Company is currently in compliance with respect to all of its financial debt covenants.

	As of September 30, 2016				As of December 31, 2015
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Mortgages payable	$	128,243	$	128,931	$	129,824	$	130,255

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

In addition to changes in interest rates, the value of our real estate and real estate related investments is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of tenants, which may affect our ability to obtain or refinance debt in the future. As of September 30, 2016, we had no off-balance sheet arrangements.

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

ITEM 4. CONTROLS AND PROCEDURES.

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

There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There were no significant deficiencies or material weaknesses identified in the evaluation, and therefore, no corrective actions were taken.

PART II. OTHER INFORMATION:

ITEM 1. LEGAL PROCEEDINGS.

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

ITEM 1A. RISK FACTORS

We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. For the quarter ended September 30, 2016, there were no such material developments.

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

Recent Sales of Unregistered Securities

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit Number		Description

31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
101*		XBRL (eXtensible Business Reporting Language).The following financial information from Lightstone Value Plus Real Estate Investment Trust II, Inc. on Form 10-Q for the quarter ended September 30, 2016, filed with the SEC on November 14, 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

SIGNATURES

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

	LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC.

Date: November 14, 2016	By:	/s/ David Lichtenstein
		David Lichtenstein
		Chairman and Chief Executive Officer (Principal Executive Officer)

Date: November 14, 2016

By:

/s/ Donna Brandin

Donna Brandin

Chief Financial Officer

(Duly Authorized Officer and Principal Financial and Accounting Officer)

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II INC - FORM 10-Q - November 14, 2016

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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II INC Reports