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EX-32.2 - EXHIBIT 32.2 - Lightstone Value Plus Real Estate Investment Trust, Inc.v452202_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.v452202_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Lightstone Value Plus Real Estate Investment Trust, Inc.v452202_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.v452202_ex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended September 30, 2016

 

OR

 

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

 

For the transition period from                      to

 

Commission file number 000-52610

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland   20-1237795

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

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

 

(732) 367-0129

(Registrant’s Telephone Number, Including Area Code)

 

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

Yes   þ     No    ¨

 

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

Yes  þ     No ¨

 

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

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

 

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

Yes  ¨  No þ

 

As of November 7, 2016, there were approximately 25.3 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust, Inc., including shares issued pursuant to the dividend reinvestment plan.  

 

 

 

 

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

 

INDEX

 

        Page
PART I   FINANCIAL INFORMATION    
         
Item 1.   Financial Statements    
     
    Consolidated Balance Sheets as of 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/Loss (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   9
     
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   22
     
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   38
     
Item 4.   Controls and Procedures   39
     
PART II   OTHER INFORMATION    
     
Item 1.   Legal Proceedings   39
     
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   39
     
Item 3.   Defaults Upon Senior Securities   39
     
Item 4.   Mine Safety Disclosures   39
     
Item 5.   Other Information   40
     
Item 6.   Exhibits   40

 

 

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

 

   As of September 30, 2016   As of December 31, 2015 
   (Unaudited)     
Assets          
Investment property:          
Land and improvements  $60,440   $68,869 
Building and improvements   202,921    238,757 
Furniture and fixtures   17,543    17,421 
Construction in progress   65    668 
Gross investment property   280,969    325,715 
Less accumulated depreciation   (47,344)   (50,278)
Net investment property   233,625    275,437 
Investment in unconsolidated affiliated real estate entity   -    1,989 
Investments in related parties   148,621    139,809 
Cash and cash equivalents   104,452    68,459 
Marketable securities, available for sale   55,335    81,016 
Restricted escrows   4,260    7,672 
Tenant and other accounts receivable   1,974    2,078 
Mortgage receivable   4,930    5,040 
Intangible assets, net   790    1,087 
Prepaid expenses and other assets   4,199    5,557 
Total Assets  $558,186   $588,144 
Liabilities and Stockholders' Equity          
Mortgages payable, net  $183,680   $226,647 
Notes payable, net   18,625    18,609 
Accounts payable, accrued expenses and other liabilities   18,617    14,379 
Due to related parties   595    - 
Tenant allowances and deposits payable   1,252    2,030 
Distributions payable   4,471    4,528 
Deferred rental income   1,174    1,204 
Acquired below market lease intangibles, net   484    597 
Total Liabilities   228,898    267,994 
Commitments and contingencies (See Note 11)          
Stockholders' equity:          
Company's Stockholders Equity:          
Preferred shares, $0.01 par value, 10,000 shares authorized,  none issued and outstanding   -    - 
Common stock, $0.01 par value; 60,000 shares authorized, 25,321 and 25,639 shares issued and outstanding, respectively   253    256 
Additional paid-in-capital   198,892    202,068 
Accumulated other comprehensive income   22,155    18,776 
Accumulated surplus   85,302    67,961 
Total Company's stockholders' equity   306,602    289,061 
Noncontrolling interests   22,686    31,089 
Total Stockholders' Equity   329,288    320,150 
Total Liabilities and Stockholders' Equity  $558,186   $588,144 

 

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

 

 3 

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
Revenues:                    
Rental income  $9,391   $11,302   $28,559   $30,996 
Tenant recovery income   930    1,120    3,122    3,234 
Other service income   2,739    2,312    8,489    7,811 
Total revenues   13,060    14,734    40,170    42,041 
Expenses:                    
Property operating expenses   6,784    7,563    20,880    21,006 
Real estate taxes   673    860    2,387    2,566 
General and administrative costs   1,042    1,349    3,680    3,899 
Depreciation and amortization   2,705    2,955    8,595    8,572 
Total operating expenses   11,204    12,727    35,542    36,043 
Operating income   1,856    2,007    4,628    5,998 
Other income, net   6    216    142    1,048 
                     
Mark to market adjustment on derivative financial instruments   130    (255)   (282)   (407)
Interest and dividend income   4,646    3,015    14,764    8,217 
Interest expense   (3,065)   (3,811)   (10,128)   (11,360)
(Loss)/gain on sale and redemption of marketable securities (includes  loss/(gain) of $15, $6, $952 and ($41,492),  respectively, of accumulated other comprehensive income reclassifications)   (15)   (12)   (952)   34,728 
Gain on disposition of real estate   3,799    -    23,705    - 
Income from investments in unconsolidated affiliated real estate entity   -    -    -    5,804 
Net income from continuing operations   7,357    1,160    31,877    44,028 
                     
Net income from discontinued operations   -    -    -    18,731 
Net income   7,357    1,160    31,877    62,759 
                     
Less: net income attributable to noncontrolling interests   (310)   (265)   (1,166)   (4,359)
Net income attributable to Company's common shares  $7,047   $895   $30,711   $58,400 
                     
Basic and diluted net income per Company's common share:                    
Continuing operations  $0.28   $0.03   $1.21   $1.54 
Discontinued operations   -    -    -    0.72 
                     
Net income per Company’s common share, basic and diluted  $0.28   $0.03   $1.21   $2.26 
                     
Weighted average number of common shares outstanding, basic and diluted   25,379    25,793    25,479    25,874 

 

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

 

 4 

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(Amounts in thousands) (Unaudited)  

 

   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
   2016   2015   2016   2015 
                 
Net income  $7,357   $1,160   $31,877   $62,759 
                     
Other comprehensive income                    
Holding (loss)/gain on available for sale securities   (1,979)   1,945    2,713    4,057 
Reclassification adjustment for loss/(gain) included in net income   15    6    952    (41,492)
Other comprehensive income/(loss)   (1,964)   1,951    3,665    (37,435)
Comprehensive income   5,393    3,111    35,542    25,324 
                     
Less: Comprehensive income attributable to noncontrolling interests   (933)   (486)   (1,452)   (856)
Comprehensive income attributable to Company's common shares  $4,460   $2,625   $34,090   $24,468 

 

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

 

 5 

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Amounts in thousands) (Unaudited)

 

   Common   Additional
Paid-In 
   Accumulated
Other
Comprehensive
   Accumulated   Total
Noncontrolling
   Total Stockholders'   
   Shares   Amount   Capital   Income   Surplus   Interests   Equity 
                             
BALANCE, December 31, 2015   25,639   $256   $202,068   $18,776   $67,961   $31,089   $320,150 
Net income   -    -    -    -    30,711    1,166    31,877 
Other comprehensive income   -    -    -    3,379    -    286    3,665 
Distributions declared   -    -    -    -    (13,370)   -    (13,370)
Distributions paid to noncontrolling interests   -    -    -    -    -    (9,861)   (9,861)
Contributions received from noncontrolling interests   -    -    -    -    -    6    6 
Redemption and cancellation of shares   (318)   (3)   (3,176)   -    -    -    (3,179)
BALANCE, September 30, 2016   25,321   $253   $198,892   $22,155   $85,302   $22,686   $329,288 

 

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

 

 6 

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)(Unaudited)

 

   For the Nine Months Ended September 30, 
   2016   2015 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $31,877   $62,759 
Less net income – discontinued operations   -    18,731 
Net income – continuing operations   31,877    44,028 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   8,595    8,572 
Mark to market adjustment on derivative financial instruments   282    407 
Loss/(gain) on sale and redemption of marketable securities   952    (34,728)
Income from investments in unconsolidated affiliated real estate entities   -    (5,804)
Gain on disposition of real estate   (23,705)   - 
Other non-cash adjustments   427    326 
Changes in assets and liabilities:          
Decrease in prepaid expenses and other assets   97    279 
Increase in tenant and other accounts receivable   (122)   (6)
Decrease in tenant allowance and deposits payable   (634)   (27)
Increase in accounts payable and accrued expenses   2,053    2,402 
Increase/(Decrease) in due to related parties   679    (326)
Decrease in deferred rental income   (30)   (72)
Net cash provided by operating activities – continuing operations   20,471    15,051 
Net cash provided by operating activities – discontinued operations   -    1,259 
Net cash provided by operating activities   20,471    16,310 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of investment property, net   (2,557)   (4,971)
Purchase of marketable securities   -    (5,113)
Preferred investments in related parties   (51,049)   (39,336)
Proceeds from preferred investments in related parties   42,237    - 
Contributions to investment in unconsolidated affiliated real estate entity   -    (1,568)
Collections on mortgage receivable   110    104 
Proceeds from sale and redemption of marketable securities   28,395    78,217 
Distribution from investments in unconsolidated  affiliated real estate entity   1,989    15,230 
Proceeds from sale of investment property and other real estate assets   60,691    - 
Deposit/(refund) for purchase of real estate, net   -    170 
Release of restricted escrows   5,436    464 
Net cash provided by investing activities – continuing operations   85,252    43,197 
Net cash provided by investing activities – discontinued operations   -    92,425 
Net cash provided by investing activities   85,252    135,622 
CASH FLOWS FROM FINANCING ACTIVITIES:          
Mortgage payments   (62,937)   (1,676)
Payment of loan fees and expenses   (733)   (69)
Redemption and cancellation of common stock   (3,179)   (2,220)
Proceeds from mortgage financing   20,400    3,863 
Net payments on notes payable   -    (19,957)
Contributions received from noncontrolling interests   6    219 
Distributions paid to noncontrolling interests   (9,861)   (4,400)
Distributions paid to Company's common stockholders   (13,426)   (12,114)
Net cash used in financing activities – continuing operations   (69,730)   (36,354)
Net cash used in financing activities – discontinued operations   -    (34,314)
Net cash used in financing activities   (69,730)   (70,668)
Net change in cash and cash equivalents   35,993    81,264 
Cash and cash equivalents, beginning of period   68,459    54,529 
Cash and cash equivalents, end of period  $104,452   $135,793 

 

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

 

 7 

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(Amounts in thousands) (Unaudited )

 

   For the Nine Months Ended September 30, 
   2016   2015 
Supplemental disclosure of cash flow information:          
Cash paid for interest  $6,192   $9,485 
Distributions declared  $13,370   $13,549 
Value of shares issued from distribution reinvestment program  $-   $1,453 
Non-cash purchase of investment property  $16   $774 
Debt assumed by purchase on disposition  $-   $32,800 
Assignement of Minority interest loans to purchaser on disposition  $    $547 

 

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

 

 8 

 

 

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

Notes to Consolidated Financial Statements

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

 

1.Organization

 

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

 

Lightstone REIT is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT, L.P., a Delaware limited partnership formed on July 12, 2004 (the “Operating Partnership”), in which Lightstone REIT as the general partner, held a 98% interest as of September 30, 2016.

 

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

 

The Company is managed by Lightstone Value Plus REIT, LLC (the “Advisor”), an affiliate of the Lightstone Group, Inc., under the terms and conditions of an advisory agreement. The Lightstone Group, Inc. previously served as the Company’s sponsor (the “Sponsor”) during its initial public offering, which closed on October 10, 2008. Subject to the oversight of the Company’s board of directors (the “Board of Directors”), the Advisor has primary responsibility for making investment decisions and managing the Company’s day-to-day operations. Through his ownership and control of The Lightstone Group, David Lichtenstein is the indirect owner of the Advisor and the indirect owner and manager of Lightstone SLP, LLC, which has subordinated profits interests (“SLP units”) in the Operating Partnership. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT or the Operating Partnership.

 

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

 

As of September 30, 2016, on a collective basis, the Company wholly owned and consolidated the operating results and financial condition of 3 retail properties containing a total of approximately 0.7 million square feet of retail space, 14 industrial properties containing a total of approximately 1.0 million square feet of industrial space, one multi-family residential property containing a total of 194 units, and one hotel hospitality property containing 363 rooms. All of the Company’s properties are located within the United States. As of September 30, 2016, the retail properties, the industrial properties and the multi-family residential properties were 85%, 61% and 98% occupied based on a weighted-average basis, respectively. The Company’s hotel hospitality property’s average revenue per available room (“Rev PAR”) was $87 (whole dollars) and occupancy was 68% for the nine months ended September 30, 2016.

 

Discontinued Operations

 

During the first quarter of 2015, a portfolio of 11 of the Company’s hotel hospitality properties (the “LVP REIT Hotels”) met the criteria to be classified as held for sale. The operating results of the LVP REIT Hotels have been classified as discontinued operations in the consolidated statements of operations for all periods presented. (See Note 6.)

 

Noncontrolling Interests

 

As of September 30, 2016, the noncontrolling interests consist of (i) parties of the Company that hold units in the Operating Partnership and (ii) certain interests in consolidated subsidiaries. The units include SLP units, limited partner units and common units. The noncontrolling interests in consolidated subsidiaries include ownership interests in Pro-DFJV Holdings LLC (“PRO”) and 50-01 2nd St. Associates LLC (the “2nd Street Joint Venture”).

 

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

Notes to Consolidated Financial Statements

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

 

2.Summary of Significant Accounting Policies

 

Basis of Presentation

 

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

 

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

 

GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate, marketable securities, depreciable lives, and revenue recognition. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.

 

The consolidated balance sheet as of December 31, 2015 included herein has been derived from the consolidated balance sheet included in the Company's Annual Report on Form 10-K.

 

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

 

Reclassifications

 

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

 

New Accounting Pronouncements

 

In 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.

 

In June 2016, the FASB issued an accounting standards update which replaces the incurred loss impairment methodology current in use with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  The Company is currently evaluating the effect that the new guidance will have on its consolidated financial statements and disclosures. 

 

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.

 

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

Notes to Consolidated Financial Statements

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

 

In January 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update that generally requires companies to measure investments in equity securities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income. Additionally, the guidance eliminates the requirement for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. 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 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 $2.0 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.Investment in Unconsolidated Affiliated Real Estate Entity

 

1407 Broadway

 

The Company had a 49.0% ownership interest in 1407 Broadway Mezz II LLC (“1407 Broadway”) which was accounted for under the equity method. On April 30, 2015, 1407 Broadway completed the disposition of its sub-leasehold interest in a ground lease to an office building located in New York, New York to an unrelated third party for aggregate consideration of approximately $150.0 million. The Company’s share of the net proceeds, after repayment of outstanding mortgage indebtedness and transaction and other closing costs, was approximately $15.1 million. As of December 31, 2015, the Company’s remaining investment in 1407 Broadway was approximately $2.0 million; representing its share of 1407 Broadway’s remaining net assets, which were subsequently distributed to the Company in January 2016. As a result, the Company has no remaining investment in 1407 Broadway.

 

1407 Broadway Financial Information

 

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

 

   For the Nine
Months Ended
September 30,
 
   2015 
     
Total revenue  $13,510 
Property operating expenses   9,439 
Depreciation and amortization   2,644 
Operating income   1,427 
      
Interest expense and other, net   (1,343)
Gain on debt extinguishment   9,891 
Net (loss)/income  $9,975 
Company's share of net income/(loss) (49%)  $5,804 

 

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

Notes to Consolidated Financial Statements

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

 

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

 

   As of 
   December 31, 2015 
Cash and restricted cash  $5,964 
Total assets  $5,964 
      
Other liabilities  $556 
Member capital   5,408 
Total liabilities and members' capital  $5,964 

 

4.Marketable Securities and Fair Value Measurements

 

Marketable Securities:

 

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

 

   As of September 30, 2016 
   Adjusted Cost   Gross Unrealized Gains   Gross Unrealized
Losses
   Fair Value 
Equity Securities, primarily REITs  $1,405   $609   $(2)  $2,012 
Marco OP Units and Marco II OP Units   19,227    24,088    -    43,315 
Corporate Bonds and Preferred Equities   7,200    56    (31)   7,225 
Mortgage Backed Securities ("MBS")   3,102    -    (319)   2,783 
Total  $30,934   $24,753   $(352)  $55,335 

 

   As of December 31, 2015 
   Adjusted Cost   Gross Unrealized
 Gains
   Gross Unrealized
Losses
   Fair Value 
Equity Securities, primarily REITs  $1,405   $487   $(1)  $1,891 
Marco OP Units and Marco II OP Units   19,227    21,458    -    40,685 
Corporate Bonds and Preferred Equities   35,880    474    (1,369)   34,985 
Mortgage Backed Securities ("MBS")   3,769    -    (314)   3,455 
Total  $60,281   $22,419   $(1,684)  $81,016 

 

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

 

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

 

The Company considers the declines in market value of certain of its investments to be temporary in nature as the unrealized losses were caused primarily by changes in market interest rates or widening credit spreads. When evaluating these investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. During the three and nine months ended September 30, 2016 and 2015, the Company did not recognize any impairment charges. As of September 30, 2016, the Company does not consider any of its investments to be other-than-temporarily impaired.

 

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

Notes to Consolidated Financial Statements

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

 

The Company may sell certain of its investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management. The maturities of the Company’s MBS generally ranged from 27 years to 30 years.

 

Notes Payable

  

Margin Loan

 

The Company has access to a margin loan (the “Margin Loan”) from a financial institution that holds custody of certain of the Company’s marketable securities. The Margin Loan, which is due on demand, bears interest at Libor plus 0.85% (1.38% as of September 30, 2016) and is collateralized by the marketable securities in the Company’s account. The amounts available to the Company under the Margin Loan are at the discretion of the financial institution and not limited to the amount of collateral in its account. There were no amounts outstanding under this Margin Loan as of September 30, 2016 and December 31, 2015.

 

Line of Credit

 

On September 14, 2012, the Company entered into a non-revolving credit facility (the “Line of Credit”) with a financial institution which permits borrowings up to $25.0 million. The Line of Credit expires on June 19, 2017 and bears interest at LIBOR plus 1.35% (1.88% as of September 30, 2016). The Line of Credit is collateralized by approximately 252,000 Marco OP Units and PRO guaranteed the Line of Credit. The amount outstanding under the Line of Credit was $18.6 million as of September 30, 2016 and December 31, 2015 and is included in Notes Payable on the consolidated balance sheets. The Company currently intends to seek to extend or replace the Line of Credit on or before its expiration. If the Company is unable to extend or replace the Line of Credit, it will repay the then outstanding balance in full at the expiration date using available cash.

 

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.

 

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

Notes to Consolidated Financial Statements

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

 

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

 

   Fair Value Measurement Using     
As of September 30, 2016  Level 1   Level 2   Level 3   Total 
                 
Marketable Securities:                    
Equity Securities, primarily REITs  $2,012   $-   $-   $2,012 
Marco OP and Marco OP II Units   -    43,315    -    43,315 
Corporate Bonds and Preferred Equities   -    7,225    -    7,225 
MBS   -    2,783    -    2,783 
Total  $2,012   $53,323   $-   $55,335 

 

   Fair Value Measurement Using     
As of December 31, 2015  Level 1   Level 2   Level 3   Total 
                 
Marketable Securities:                    
Equity Securities, primarily REITs  $1,891   $-   $-   $1,891 
Marco OP and Marco OP II Units   -    40,685    -    40,685 
Corporate Bonds and Preferred Equities   -    34,985    -    34,985 
MBS   -    3,455    -    3,455 
Total  $1,891   $79,125   $-   $81,016 

 

The fair values of the Company’s investments in Corporate Bonds and Preferred Equities and MBS are measured using readily available quoted prices for similar assets. Additionally, as noted and disclosed above, the Company’s Marco OP and Marco OP II Units are ultimately exchangeable for cash or similar number of shares of Simon Stock, therefore the Company uses the quoted market price of Simon Stock to measure the fair value of the Company’s Marco OP and Marco OP II Units.

 

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

 

5.Mortgages Payable, Net

 

Mortgages payable, net consists of the following:

 

Property  Interest Rate   Weighted Average
Interest Rate as of 
September 30, 2016
   Maturity Date  Amount Due at
Maturity
   As of
 September 30, 2016
   As of
December 31, 2015
 
                        
Southeastern Michigan Multi-Family Properties               $-   $-   $38,437 
                             
Oakview Plaza   5.49%   5.49%  January 2017   25,583    25,695    26,014 
                             
Gulf Coast Industrial Portfolio   9.83%   9.83%  Due on demand   50,525    50,525    50,525 
                             
St. Augustine Outlet Center   (Matured and repaid in full on April 7, 2016)   -    -    23,875 
                             
St. Augustine Outlet Center   LIBOR + 4.50%    5.01%  August 2018   20,400    20,400    - 
                             
Gantry Park   4.48%   4.48%  November 2024   65,317    74,500    74,500 
                             
DePaul Plaza   LIBOR + 2.75%    3.21%  June 2020   13,494    14,990    15,295 
                             
Total mortgages payable        6.03%     $175,319   $186,110   $228,646 
                             
Less: Deferred financing costs                     (2,430)   (1,999)
                             
Total mortgages payable, net                    $183,680   $226,647 

 

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

Notes to Consolidated Financial Statements

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

 

Libor as of September 30, 2016 and December 31, 2015 was 0.53% and 0.42%, respectively. The Company’s loans are secured by the indicated real estate and are non-recourse to the Company.

 

The following table shows the contractually scheduled principal maturities of the Company’s mortgage debt during the next five years and thereafter as of September 30, 2016:

 

   Remainder of
2016
   2017   2018   2019   2020   Thereafter   Total 
Principal maturities  $50,739   $25,991   $21,967   $1,621   $14,924   $70,868   $186,110 
                                    
Less: Deferred financing costs                                 (2,430)
                                    
Total principal maturities, net                                $183,680 

 

Pursuant to the Company’s loan agreements, escrows in the amount of $1.9 million and $7.1 million were held in restricted escrow accounts as of September 30, 2016 and December 31, 2015, respectively. Such escrows will be released in accordance with the applicable loan agreements for payments of real estate taxes, insurance and capital improvement transactions, as required. Certain of our mortgages payable also contain clauses providing for prepayment penalties.

 

On April 11, 2016, the Company’s mortgage loan (outstanding principal balance of $23.7 million) secured by the St. Augustine Outlet Center matured and was repaid in full.

 

On May 17, 2016, the Company’s mortgage loan (outstanding principal balance of $38.2 million) secured by the Southeastern Michigan Multi-Family Properties was repaid in full in connection with the Company’s disposition of three of the four apartment communities contained in the Southeastern Michigan Multi-Family Properties (see Note 6).

 

On July 28, 2016, the Company, entered into a mortgage loan for approximately $20.4 million. The mortgage loan has a term of two years, bears interest at LIBOR+4.50% and requires monthly interest payments through its stated maturity with the entire unpaid balance due upon maturity. The mortgage loan is secured by the St. Augustine Outlet Center.

 

Certain of the Company’s debt agreements require the maintenance of certain ratios, including debt service coverage. As of September 30, 2016, the Company is in compliance with all of its debt covenants other than the debt associated with the Gulf Coast Industrial Portfolio which was placed in default by the special servicer during 2012 and is due on demand as discussed below.

 

As a result of not meeting certain debt service coverage ratios on the non-recourse mortgage indebtedness secured by the Gulf Coast Industrial Portfolio, the lender elected to retain the excess cash flow from these properties beginning in July 2011.  During the third quarter of 2012, the loan was transferred to a special servicer, who discontinued scheduled debt service payments and notified the Company that the loan was in default and although originally due in February 2017 is now due on demand.

 

Although the lender is currently not charging or being paid interest at the stated default rate, the Company is accruing default interest expense pursuant to the terms of the loan agreement. Default interest expense of $0.5 million and $1.5 million was accrued for both the three and nine months ended September 30, 2016 and 2015, respectively. As a result, cumulative accrued default interest expense of $8.6 million and $7.1 million is included in accounts payable, accrued expenses and other liabilities on our consolidated balance sheets as of September 30, 2016 and December 31, 2015, respectively.  Although the Company has had various discussions with the special servicer to restructure the terms of the loan, there can be no assurances that it will be successful in these efforts. However, the Company does not expect to pay any of the accrued default interest expense as this mortgage indebtedness is non-recourse to it.  Additionally, the Company believes the continued loss of excess cash flow from these properties and the special servicer’s placement of the non-recourse mortgage indebtedness in default will not have a material impact on its results of operations or financial position.

 

Additionally, the Company’s mortgage loan (outstanding principal balance of $25.7 million as of September 30, 2016) secured by Oakview Plaza matures in January 2017. The Company currently intends to seek to refinance and/or repay in full, using cash proceeds from the potential sale of assets or available cash, such existing indebtedness on or before its applicable stated maturity. Other than these financings, the Company has no additional significant maturities of mortgage debt over the next 12 months.

 

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

Notes to Consolidated Financial Statements

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

 

6.Dispositions and Discontinued Operations

 

Southeastern Michigan Multi-Family Properties

 

On May 17, 2016, the Company disposed of three of the four apartment communities contained in the Southeastern Michigan Multi-Family Properties to an unrelated third party for aggregate consideration of approximately $50.6 million. In connection with the disposition, the Company recorded a gain on the disposition of real estate of approximately $19.9 million during the second quarter of 2016. Approximately $38.2 million of the proceeds were used to repay in full the outstanding principal balance of the mortgage that was secured by the Southeastern Michigan Multi-Family Properties.

 

On July 26, 2016, the remaining apartment community in the Southeastern Michigan Multi-Family Properties was disposed of to the same unrelated third party for approximately $10.3 million. In connection with the disposition, the Company recorded a gain on the disposition of real estate of approximately $3.8 million during the third quarter of 2016. The complete disposition of the Southeastern Michigan Multi-Family Properties resulted in an aggregate gain on the disposition of real estate of approximately $23.7 million during the nine months ended September 30, 2016

 

The disposition of the Southeastern Michigan Multi-Family Properties did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the operating results of the Southeastern Michigan Multi-Family Properties are reflected in the Company’s results from continuing operations for all periods presented through their respective dates of disposition.

 

LVP REIT Hotels

 

During the first quarter of 2015, a portfolio of 11 of the Company’s hotel hospitality properties’ (the “LVP REIT Hotels”) met the criteria to be classified as held for sale. The operating results of the LVP REIT Hotels have been classified as discontinued operations in the consolidated statements of operations for all periods presented.  

 

During the first quarter of 2015, the Company completed the disposition of substantially all of its ownership interests in seven of the 11 hotel hospitality properties contained in the LVP REIT Hotels and recognized a gain on disposition of $14.4 million, which is included in discontinued operations on the consolidated statements of operations. During the second quarter of 2015, the Company completed the disposition of substantially all of its ownership interests in the remaining four hotel hospitality properties contained in the LVP REIT Hotels and recognized an additional gain on disposition of $2.9 million.

 

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

 

   For the Nine
Months Ended
September 30,
 
   2015 
     
Revenues  $8,000 
Operating expenses   5,742 
Operating income   2,258 
      
Interest expense and other, net   (849)
      
Gain on disposition   17,322 
Net income from discontinued operations  $18,731 

 

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

 

7.Net Earnings Per Share

 

Basic net earnings per share is calculated by dividing net income attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the applicable period. Diluted net income per share includes the potentially dilutive effect, if any, which would occur if our outstanding options to purchase our common stock were exercised. For all periods presented, the effect of these exercises had no impact on net earnings per share.

 

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

Notes to Consolidated Financial Statements

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

 

8.Related Party Transactions

 

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

 

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

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
Acquisition fees (general and administrative costs)  $-   $-   $-   $8 
Asset management fees (general and administrative costs)   562    601    1,804    2,008 
Property management fees (property operating expenses)   190    298    739    880 
Development fees and leasing commissions*   29    668    80    1,147 
Total  $781   $1,567   $2,623   $4,043 

 

* Generally, capitalized and amortized over the estimated useful life of the associated asset.

 

Lightstone SLP, LLC, an affiliate of the Company’s Sponsor, has purchased SLP units which are included in noncontrolling interests in the consolidated balance sheets. These SLP units, the purchase price of which will be repaid only after stockholders receive a stated preferred return and their net investment, entitle Lightstone SLP, LLC to a portion of any regular distributions made by the Operating Partnership.

 

During both the three months and nine months ended September 30, 2016 and 2015, distributions of $0.5 million and $1.6 million, respectively, were declared and paid on the SLP units.

 

The Company’s Sponsor, has a 19.17% membership interest in PRO, a subsidiary of the Operating Partnership, which is accounted for as noncontrolling interests. During 2015, PRO received aggregate proceeds of approximately $36.1 million related to its redemptions of certain Marco OP Units and Marco II OP Units. During the first quarter of 2016, PRO distributed these proceeds to its members, of which $29.2 million and $6.9 million were the Company’s and Sponsor’s share, respectively.

 

Preferred Investments

 

The Company has entered into several agreements with various related party entities that provide for it to make preferred contributions pursuant to certain instruments (the “Preferred Investments”) that entitle the Company to certain prescribed monthly preferred distributions. The Preferred Investments had an aggregate balance of $147.1 million and $138.3 million as of September 30, 2016 and December 31, 2015, respectively, and are classified as held-to-maturity securities, recorded at cost and included in investments in related parties on the consolidated balance sheets. The fair value of these investments approximated their carrying values based on market rates for similar instruments. During the nine months ended September 30, 2016, the Company made $51.0 million of additional contributions and redeemed $42.2 million (the 365 Bond Street Preferred Investment) of the Preferred Investments and as of September 30, 2016, remaining contributions of up to $70.4 million were unfunded. Additionally, during the three and nine months ended September 30, 2016, the Company recognized investment income of $4.0 million and $12.2 million, respectively, and during the three and nine months ended September 30, 2015, the Company recognized investment income of $1.9 million and $4.7 million, respectively, which is included in interest and dividend income on the consolidated statements of operations.

 

The Preferred Investments are summarized as follows:

 

       Preferred
Investment Balance
   Unfunded
Contributions
   Investment Income 
       As of
September 30,
   As of
December 31,
   As of
September 30,
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
Preferred Investments  Dividend Rate    2016   2015   2016   2016   2015   2016   2015 
365 Bond Street   12%  $-   $42,237   $-   $-   $1,295   $2,252   $3,784 
40 East End Avenue   8% to 12%   30,000    28,768    -    613    588    1,795    856 
30-02 39th Avenue   9% to 12%   15,600    7,301    34,400    436    44    1,009    44 
485 7th Avenue   12%   60,000    60,000    -    1,840    -    5,480    - 
East 11th Street   12%   35,000    -    22,500    1,073    -    1,675    - 
Miami Moxy   12%   6,500    -    13,500              -      
Total Preferred Investments       $147,100   $138,306   $70,400   $3,962   $1,927   $12,211   $4,684 

 

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

Notes to Consolidated Financial Statements

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

 

East 11th Street Preferred Investment

 

On April 21, 2016, the Company entered into an agreement with various related party entities that provides for it to make contributions of up to $40.0 million in an affiliate of its Sponsor (the “East 11th Street Developer”) which owns two residential buildings located at 112-120 East 11th Street and 85 East 10th Street in New York, NY. The East 11th Street Developer is developing a hotel at 112-120 East 11th Street (the “East 11th Street Project”). Development of the East 11th Street Project is expected to be substantially complete during the first quarter of 2019.  These contributions are made pursuant to an instrument, the “East 11th Street Preferred Investment,” that entitles the Company to monthly preferred distributions at a rate of 12% per annum. Upon the consummation of certain capital transactions the Company may redeem its investment in the East 11th Street Preferred Investment. Additionally, the East 11th Street Developer may redeem the Company’s investment at any time or upon the consummation of any capital transaction. Any redemption by the Company or the East 11th Street Developer under the East 11th Street Preferred Investment will be made at an amount equal to the amount invested by the Company plus a 12.0% annual cumulative, pre-tax, non-compounded return on the aggregate amount invested by the Company. On September 30, 2016, the Company and the East 11th Street Developer amended the East 11th Street Preferred Investment so that Company’s total aggregate contributions would increase by $17.5 million to $57.5 million.

 

The Company made aggregate contributions of $35.0 million during the nine months ended September 30, 2016, which are classified as a held-to-maturity security and is recorded at cost, leaving a remaining unfunded contribution of up to $22.5 million as of September 30, 2016.

 

Miami Moxy Preferred Investment

 

On September 30, 2016, the Company entered into an agreement with various related party entities that provides for it to make contributions of up to $20.0 million in an affiliate of its Sponsor (the “Miami Moxy Developer”) which owns the property located at 915 through 955 Washington Avenue in Miami Beach, Florida, on which the Miami Moxy Developer is constructing a 205 room Marriott Moxy hotel (the “Miami Moxy”). These contributions are made pursuant to an instrument, the Miami Moxy Preferred Investment, that entitles the Company to monthly preferred distributions at a rate of 12% per annum. Upon the consummation of certain capital transactions the Company may redeem its investment in the Miami Moxy Preferred Investment. Additionally, the Miami Moxy Developer may redeem the Company’s investment at any time or upon the consummation of any capital transaction. Any redemption by the Company or the Miami Moxy Developer under the Miami Moxy Preferred Investment will be made at an amount equal to the amount invested by the Company plus a 12.0% annual cumulative, pre-tax, non-compounded return on the aggregate amount invested by the Company.

 

The Company made its initial contribution of $6.5 million on September 30, 2016, which is classified as a held-to-maturity security and is recorded at cost, leaving a remaining unfunded contribution of up to $13.5 million as of September 30, 2016.

 

9.Financial Instruments

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted escrows, tenants’ and other accounts receivable, interest receivable from related parties, accounts payable and accrued expenses and due to related parties approximated their fair values because of the short maturity of these instruments. The estimated fair value of the notes payable (line of credit) approximated its carrying value ($18.6 million) because of its floating interest rate. The carrying amount reported in the consolidated balance sheets for the mortgage receivable approximated its fair value based upon current market information that would have been used by a market participant to estimate the fair value of such loan.

 

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

 

   As of September 30, 2016   As of December 31, 2015 
   Carrying Amount   Estimated Fair
Value
   Carrying Amount   Estimated Fair
Value
 
Mortgages payable  $186.1   $186.3   $228.6   $227.1 

 

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

 

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

Notes to Consolidated Financial Statements

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

 

10.Segment Information

 

The Company currently operates in four business segments as of September 30, 2016: (i) retail real estate (the “Retail Segment”), (ii) multi-family residential real estate (the “Multi-family Residential Segment”), (iii) industrial real estate (the “Industrial Segment”) and (iv) hospitality (the “Hospitality Segment”). The Company’s Advisor and its affiliates provide leasing, property and facilities management, acquisition, development, construction and tenant-related services for its portfolio. The Company’s revenues for the three and nine months ended September 30, 2016 and 2015 were exclusively derived from activities in the United States. No revenues from foreign countries were received or reported. The Company had no long-lived assets in foreign locations as of September 30, 2016 and December 31, 2015. The accounting policies of the segments are the same as those described in Note 2: Summary of Significant Accounting Policies of the Company’s December 31, 2015 Annual Report on Form 10-K. Unallocated assets, revenues and expenses relate to corporate related accounts, including the Company’s Preferred Investments in Related Parties (see Note 8).

 

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

 

As discussed in Note 6, the results of operations presented below exclude the LVP REIT Hotels due to their classification as discontinued operations for all periods presented. The LVP REIT Hotels were previously included in the Company’s Hospitality Segment.

 

Selected results of operations for the three and nine months ended September 30, 2016 and 2015, and total assets as of September 30, 2016 and December 31, 2015 regarding the Company’s operating segments are as follows:

 

   For the Three Months Ended September 30, 2016 
   Retail   Multi-Family   Industrial   Hospitality   Unallocated   Total 
                         
Total revenues  $2,904   $2,283   $1,341   $6,532   $-   $13,060 
                               
Property operating expenses   811    536    523    4,913    1    6,784 
Real estate taxes   356    32    208    77    -    673 
General and administrative costs   (9)   8    1    64    978    1,042 
Net operating income/(loss)   1,746    1,707    609    1,478    (979)   4,561 
                               
Depreciation and amortization   1,161    420    415    709    -    2,705 
Operating income/(loss)  $585   $1,287   $194   $769   $(979)  $1,856 
                               
As of September 30, 2016:                              
Total Assets  $101,172   $73,944   $50,864   $26,211   $305,995   $558,186 

 

   For the Three Months Ended September 30, 2015 
   Retail   Multi-Family   Industrial   Hospitality   Unallocated   Total 
                         
Total revenues  $2,911   $4,367   $1,584   $5,872   $-   $14,734 
                               
Property operating expenses   1,011    1,474    527    4,550    1    7,563 
Real estate taxes   356    265    168    71    -    860 
General and administrative costs   10    49    (3)   85    1,208    1,349 
Net operating income/(loss)   1,534    2,579    892    1,166    (1,209)   4,962 
                               
Depreciation and amortization   1,155    726    401    673    -    2,955 
Operating income/(loss)  $379   $1,853   $491   $493   $(1,209)  $2,007 
                               
As of December 31, 2015:                              
Total Assets  $107,835   $113,600   $49,815   $26,825   $290,069   $588,144 

 

 19 

 

 

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

Notes to Consolidated Financial Statements

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

 

   For the Nine Months Ended September 30, 2016 
   Retail   Multi-Family   Industrial   Hospitality   Unallocated   Total 
                         
Total revenues  $8,546   $10,405   $4,115   $17,104   $-   $40,170 
                               
Property operating expenses   2,648    3,064    1,543    13,623    2    20,880 
Real estate taxes   1,079    463    607    238    -    2,387 
General and administrative costs   54    54    87    235    3,250    3,680 
Net operating income/(loss)   4,765    6,824    1,878    3,008    (3,252)   13,223 
                               
Depreciation and amortization   3,468    1,790    1,237    2,100    -    8,595 
Operating income/(loss)  $1,297   $5,034   $641   $908   $(3,252)  $4,628 

 

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

 

11.Commitments and Contingencies

 

Legal Proceedings

 

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

 

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

 

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

 

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

 

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

 

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

Notes to Consolidated Financial Statements

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

 

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

 

Loan Collection Guaranties

 

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

 

12.Subsequent Events

 

Distribution Payment

 

On October 14, 2016, the distribution for the three-month period ending September 30, 2016 of $4.5 million was paid in cash. The entire distribution was paid from cash flows provided from operations.

 

Distribution Declaration

 

On November 14, 2016, the Board 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, 2016 to shareholders of record as of December 31, 2016.

 

 21 

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

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

 

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

 

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

 

Forward-Looking Statements

 

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

 

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

 

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

 

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

  

Overview

 

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

 

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

 

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

 

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

 

Current Environment

 

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

 

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

 

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

 

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Portfolio Summary –

 

   Location  Year Built (Range of
years built)
  Leasable Square
Feet
   Percentage Occupied as
of September 30, 2016
 Annualized Revenues based
on rents at
September 30, 2016
  Annualized Revenues per
square foot at September
30, 2016
 
Wholly Owned and Consolidated Real Estate Properties:                        
                         
Retail                        
St. Augustine Outlet Center  St. Augustine, FL  1998   335,455    83.8%$ 4.1 million  $14.41 
Oakview Plaza  Omaha, NE  1999 - 2005   176,774    84.1%$ 2.2 million  $14.73 
DePaul Plaza  Bridgeton, MO  1985   187,090    88.4%$ 1.9 million  $11.71 
      Retail Total   699,319    85.1%        
                         
Industrial                        
7 Flex/Office/Industrial Buildings within the Gulf Coast Industrial Portfolio  New Orleans, LA  1980-2000   339,700    63.8%$ 2.5 million  $11.31 
4 Flex/Industrial Buildings within the Gulf Coast Industrial Portfolio  San Antonio, TX  1982-1986   484,369    76.6%$ 1.6 million  $4.44 
3 Flex/Industrial Buildings within the Gulf Coast Industrial Portfolio  Baton Rouge, LA  1985-1987   182,792    15.1%$ 0.3 million  $10.14 
                         
      Industrial Total   1,006,861    61.1%        

 

Multi - Family Residential  Location  Year Built (Range of
years built)
   Leasable Units   Percentage Occupied as
of September 30, 2016
   Annualized Revenues based
on rents at
September 30, 2016
   Annualized Revenues per
unit at September 30, 2016
 
                             
Gantry Park (Multi-Family Apartment Building)  Queens, NY   2013    199    97.5%  $8.3 million   $42,803 

 

   Location  Year Built   Year to date
Available Rooms
   Percentage Occupied as
of September 30, 2016
   Revenue per Available
Room ("RevPAR") for the
Nine Months Ended
September 30, 2016
   Average Daily Rate For
the Six Months Ended
September 30, 2016
 
Hospitality Property:                            
                             
DoubleTree - Danvers  Danvers, Massachusetts   1976    99,462    67.6%  $86.61   $128.04 

 

Annualized revenue is defined as the minimum monthly payments 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 three 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

 

Dispositions

 

Southeastern Michigan Multi-Family Properties

 

On May 17, 2016, the Company disposed of three of the four apartment communities contained in the Southeastern Michigan Multi-Family Properties to an unrelated third party for aggregate consideration of approximately $50.6 million. In connection with the disposition, the Company recorded a gain on the disposition of real estate of approximately $19.9 million during the second quarter of 2016. Approximately $38.2 million of the proceeds were used to repay in full the outstanding principal balance of the mortgage that was secured by the Southeastern Michigan Multi-Family Properties.

 

On July 26, 2016, the remaining apartment community in the Southeastern Michigan Multi-Family Properties was disposed of to the same unrelated third party for approximately $10.3 million. In connection with the disposition, the Company recorded a gain on the disposition of real estate of approximately $3.8 million during the third quarter of 2016. The complete disposition of the Southeastern Michigan Multi-Family Properties resulted in an aggregate gain on the disposition of real estate of approximately $23.7 million during the nine months ended September 30, 2016.

 

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The disposition of the Southeastern Michigan Multi-Family Properties did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the operating results of the Southeastern Michigan Multi-Family Properties are reflected in the Company’s results from continuing operations for all periods presented through their respective dates of disposition. The Southeastern Michigan Properties were included in our Multi-Family Residential Segment.

 

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

 

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

 

Consolidated

 

Revenues

 

Our revenues are comprised of rental revenues, tenant recovery income and other service income. Total revenues decreased by approximately $1.6 million to $13.1 million for the three months ended September 30, 2016 compared to $14.7 million for the same period in 2015. See “Segment Results of Operations for the Three Months Ended September 30, 2016 compared to September 30, 2015” for additional information on revenues by segment.

 

Property operating expenses

 

Property operating expenses decreased by approximately $0.8 million to $6.8 million for the three months ended September 30, 2016 compared to $7.6 million for the same period in 2015. This decrease primarily reflects lower expenses of approximately $1.0 million in our Multi-Family Residential Segment principally due to the sale of the Southeastern Michigan Multi-Family Properties partially offset by higher property expenses of $0.4 million for the DoubleTree – Danvers (Hospitality Segment) resulting from increased occupancy levels during the 2016 period.

 

Real estate taxes

 

Real estate taxes expense decreased by approximately $0.2 million to $0.7 million for the three months ended September 30, 2016 compared to $0.9 million the same period in 2015. This decrease primarily reflects lower expenses resulting from the disposition of the Southeastern Michigan Multi-Family Properties.

 

General and administrative expenses

 

General and administrative expenses expense decreased by approximately $0.3 million to $1.0 million for the three months ended September 30, 2016 compared to $1.3 million the same period in 2015.  This decrease primarily reflects lower professional fees during the 2016 period.

 

Depreciation and amortization

 

Depreciation and amortization expense decreased by approximately $0.3 million to $2.7 million for the three months ended September 30, 2016 compared to $3.0 million the same period in 2015.  This decrease primarily reflects lower depreciation expenses resulting from the disposition of the Southeastern Michigan Multi-Family Properties.

 

Interest and dividend income

 

Interest and dividend income increased by approximately $1.6 million to $4.6 million for the three months ended September 30, 2016 compared to $3.0 million the same period in 2015. The increase was primarily attributable to higher investment income of $2.0 million from our Preferred Investments (see Note 8 of the Notes to Consolidated Financial Statements) partially offset by lower interest and dividend income of $0.4 million from our investments in marketable securities, resulting principally from the sales of corporate bonds and preferred equities during 2016.

 

Interest expense

 

Interest expense, including amortization of deferred financing costs, decreased by approximately $0.7 million to $3.1 million for the three months ended September 30, 2016 compared to $3.8 million for the same period in 2015. The decrease is primarily attributable to (i) the repayment in full of the mortgage secured by the Southeastern Michigan Multi-Family Properties (in May 2016) and (ii) the payoff of the existing mortgage (April 2016) and subsequent new mortgage (August 2016) secured by the St. Augustine Outlet Center (see Note 5 of the Notes to Consolidated Financial Statements).

 

 25 

 

 

Gain on disposition of real estate

 

During the third quarter of 2016 we recognized a gain on disposition of real estate of approximately $3.8 million related to the sale of the remaining apartment community contained in our Southeastern Michigan Multi-Family Properties. 

 

Noncontrolling interests

 

The net earnings allocated to noncontrolling interests relates to (i) the interests in the Operating Partnership held by our Sponsor as well as common units held by our limited partners (ii) the interest in PRO-DFJV Holdings LLC (“PRO”) held by our Sponsor and (iii) the ownership interests in 50-01 2nd St Associates LLC (the “2nd Street Joint Venture”) held by our Sponsor and other affiliates. 

 

Segment Results of Operations for the Three Months Ended September 30, 2016 compared to September 30, 2015

 

Retail Segment

 

   For the Three Months Ended September 30,   Variance Increase/(Decrease) 
   2016   2015   $   % 
   (unaudited)         
Revenues  $2,904   $2,911   $(7)   -0.2%
NOI   1,746    1,534    212    13.8%
Average Occupancy Rate for period   85.9%   88.8%        -2.9%

 

The following table represents lease expirations for the Retail Segment as of September 30, 2016:

 

Retail Segment

 

Lease
Expiration
Year
  Number of
Expiring
Leases
   GLA of Expiring
Leases (Sq. Ft.)
   Annualized Base
Rent of Expiring
Leases ($)
   Percent of
Total GLA
   Percent of Total
Annualized
Base Rent
 
2016   5    9,355    141,101    1.7%   1.8%
2017   10    25,965    340,543    4.6%   4.3%
2018   12    90,217    1,541,896    16.1%   19.7%
2019   17    76,530    1,490,707    13.6%   19.0%
2020   11    204,457    2,297,004    36.4%   29.3%
2021   6    45,564    654,717    8.1%   8.4%
2022   1    4,800    75,600    0.9%   1.0%
2023   1    28,000    479,920    5.0%   6.1%
2024   1    1,163    51,821    0.2%   0.7%
2025   6    47,301    699,461    8.4%   8.9%
Thereafter   2    28,687    56,382    5.1%   0.7%
    72    562,039    7,829,152    100.0%   100.0%

 

As of September 30, 2016, we had two tenants, Kohl’s Inc. and Dick’s Sporting Goods, Inc., each with one store, representing approximately 14.6% and 6.4%, respectively, of the total GLA in our Retail Segment. Additionally, as of that date, we did not have any other tenants whose GLA was 5% or more of the total GLA in our Retail Segment.

 

Revenues and NOI were relatively flat for three months ended September 30, 2016 compared to the same period in 2015.

 

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Multi-Family Residential Segment

 

   For the Three Months Ended September 30,   Variance Increase/(Decrease) 
   2016   2015   $   % 
   (unaudited)         
Revenues  $2,283   $4,367   $(2,084)   -47.7%
NOI   1,707    2,579    (872)   -33.8%
Average Occupancy Rate for period   64.7%   94.6%        -29.9%

 

Revenues and NOI decreased for the three months ended September 30, 2016 compared to the same period in 2015 primarily as a result of the disposition of the Southeastern Michigan Multi-Family Properties (three apartment communities sold in May 2016 and the one remaining apartment community sold in July 2016). Revenues and NOI decreased by approximately $2.1 million and $0.9 million, respectively, for the three months ended September 30, 2016 compared to the same period in 2015 for the Southeastern Michigan Multi-Family Properties. Revenues and NOI were mostly unchanged for Gantry Park, our only remaining multi-family residential property.

 

Industrial Segment

 

   For the Three Months Ended September 30,   Variance Increase/(Decrease) 
   2016   2015   $   % 
   (unaudited)         
Revenues  $1,341   $1,584   $(243)   -15.3%
NOI   609    892    (283)   -31.7%
Average Occupancy Rate for period   61.4%   74.0%        -12.6%

 

The following table represents lease expirations for our Industrial Segment as of September 30, 2016:

 

Industrial Segment

 

Lease
Expiration
Year
  Number of
Expiring
Leases
   GLA of Expiring
Leases (Sq. Ft.)
   Annualized Base
Rent of Expiring
Leases ($)
   Percent of
Total GLA
   Percent of Total
Annualized
Base Rent
 
2016   9    50,076    448,095    8.1%   10.2%
2017   34    169,525    979,414    27.5%   22.4%
2018   26    197,535    1,462,446    32.1%   33.4%
2019   15    85,028    393,012    13.8%   9.0%
2020   10    106,611    1,041,961    17.3%   23.8%
2021   2    6,667    54,719    1.1%   1.2%
Thereafter   -    -    -    0.0%   0.0%
    96    615,442    4,379,647    100.0%   100.0%

 

As of September 30, 2016, we did not have any tenants whose GLA was 5% or more of the total GLA in our Industrial Segment.

 

Revenues and NOI decreased for the three months ended September 30, 2016 compared to the same period in 2015 primarily as a result of the lower average occupancy rate during the 2016 period.

 

Hospitality Segment

 

   For the Three Months Ended September 30,   Variance Increase/(Decrease) 
   2016   2015   $   % 
   (unaudited)         
Revenues  $6,532   $5,872   $660    11.2%
NOI   1,478    1,166    312    26.8%
Average Occupancy Rate for period   84.8%   82.4%        2.4%
Rev PAR  $113.56   $106.61   $6.95    6.5%

 

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Revenues and NOI increased during the three months ended September 30, 2016 compared to the same period in 2015 resulting from increased occupancy levels and RevPAR during the period.

 

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

 

Consolidated

 

Revenues

 

Our revenues are comprised of rental revenues, tenant recovery income and other service income. Total revenues decreased by approximately $1.8 million to $40.2 million for the nine months ended September 30, 2016 compared to $42.0 million for the same period in 2015. See “Segment Results of Operations for the Nine Months Ended September 30, 2016 compared to September 30, 2015” for additional information on revenues by segment.

 

Property operating expenses

 

Property operating expenses decreased by approximately $0.1 million to $20.9 million for the nine months ended September 30, 2016 compared to $21.0 million for the same period in 2015. This decrease primarily reflects lower expenses of approximately $1.0 million in our Multi-Family Residential Segment principally due to the sale of the Southeastern Michigan Multi-Family Properties partially offset by higher property expenses of $0.8 million for the DoubleTree – Danvers (Hospitality Segment) resulting from increased occupancy levels during the 2016 period .

 

Real estate taxes

 

Real estate taxes expenses decreased by approximately $0.2 million to $2.4 million for the nine months ended September 30, 2016 compared to $2.6 million for the same period in 2015. This decrease primarily reflects lower expenses resulting from the disposition of the Southeastern Michigan Multi-Family Properties.

 

General and administrative expenses

 

General and administrative expenses decreased by approximately $0.2 million to $3.7 million for the nine months ended September 30, 2016 compared to $3.9 million for the same period in 2015. This decrease primarily reflects lower professional fees during the 2016 period.

 

Depreciation and amortization

 

Depreciation and amortization expenses remained unchanged at $8.6 million for both the nine months ended September 30, 2016 and 2015, respectively.

 

Interest and dividend income

 

Interest and dividend income increased by approximately $6.6 million to $14.8 million for the nine months ended September 30, 2016 compared to $8.2 million the same period in 2015. The increase was primarily attributable to higher investment income of $7.5 million from our Preferred Investments (see Note 8 of the Notes to Consolidated Financial Statements) partially offset by lower interest and dividend income of $1.0 million from our investments in marketable securities, resulting principally from the redemption of Marco OP Units during 2015 and the sale of corporate bonds and preferred securities during 2016.

 

Interest expense

 

Interest expense, including amortization of deferred financing costs, decreased by approximately $1.3 million to $10.1 million for the nine months ended September 30, 2016 compared to $11.4 million for the same period in 2015. The decrease is primarily attributable to (i) the repayment in full of the mortgage secured by the Southeastern Michigan Multi-Family Properties (in May 2016) and (ii) the payoff of the existing mortgage (April 2016) and subsequent new mortgage (August 2016) secured by the St. Augustine Outlet Center (see Note 5 of the Notes to Consolidated Financial Statements).

 

Gain on disposition of real estate

 

During the nine months ended September 30, 2016 we recognized a gain on disposition of real estate of approximately $23.7 million related to the sale of the Southeastern Michigan Multi-Family Properties.

 

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Loss/gain on sale and redemption of marketable securities

 

Loss/gain on sale and redemption of marketable securities decreased by approximately $35.7 million to a loss of $1.0 million for the nine months ended September 30, 2016 compared to a gain of $34.7 million for the same period in 2015. During the nine months ended September 30, 2015 we recognized a gain on sale and redemption of marketable securities of approximately $34.4 million primarily attributable to the redemption of 383,000 Marco OP Units.

 

Income from investment in unconsolidated affiliated real estate entity

 

This account represents our portion of the earnings associated with our ownership interest in an investment in an unconsolidated affiliated real estate entity, which we accounted for under the equity method of accounting. Our income from investment in unconsolidated affiliated real estate entity of $5.8 million during the nine months ended September 30, 2016 was primarily the result of the Company’s portion of the gain that resulted when the unconsolidated affiliated real estate entity completed the disposition of its sub-leasehold interest in a ground lease to an office building in April 2015.

 

Noncontrolling interests

 

The net earnings allocated to noncontrolling interests relates to (i) the interests in the Operating Partnership held by our Sponsor as well as common units held by our limited partners (ii) the interest in PRO held by our Sponsor and (iii) the ownership interests in the 2nd Street Joint Venture held by our Sponsor and other affiliates.

 

Segment Results of Operations for the Nine Months Ended September 30, 2016 compared to September 30, 2015

 

Retail Segment

 

   For the Nine Months Ended September 30,   Variance Increase/(Decrease) 
   2016   2015   $   % 
   (unaudited)         
Revenues  $8,546   $8,487   $59    0.7%
NOI   4,765    4,553    212    4.7%
Average Occupancy Rate for period   86.6%   84.8%        1.8%

 

Revenues and NOI increased for the nine months ended September 30, 2016 compared to the same period in 2015 primarily as a result of the increase in the average occupancy rate during the 2016 period.

 

Multi-Family Residential Segment

 

   For the Nine Months Ended September 30,   Variance Increase/(Decrease) 
   2016   2015   $   % 
   (unaudited)         
Revenues  $10,405   $13,016   $(2,611)   -20.1%
NOI   6,824    7,987    (1,163)   -14.6%
Average Occupancy Rate for period   86.0%   94.8%        -8.8%

 

Revenues and NOI decreased for the nine months ended September 30, 2016 compared to the same period in 2015 primarily as a result of the disposition of the Southeastern Michigan Multi-Family Properties (three apartment communities sold in May 2016 and the one remaining apartment community sold in July 2016). Revenues and NOI decreased by approximately $2.9 million and $1.3 million, respectively, for the nine months ended September 30, 2016 compared to the same period in 2015 for the Southeastern Michigan Multi-Family Properties. Revenues and NOI increased slightly for Gantry Park, our only remaining multi-family residential property.

 

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Industrial Segment

 

   For the Nine Months Ended September 30,   Variance Increase/(Decrease) 
   2016   2015   $   % 
   (unaudited)         
Revenues  $4,115   $4,727   $(612)   -12.9%
NOI   1,878    2,850    (972)   -34.1%
Average Occupancy Rate for period   62.1%   75.4%        -13.3%

 

Revenues and NOI decreased for the nine months ended September 30, 2016 compared to the same period in 2015 primarily as a result of the lower average occupancy rate during the 2016 period.

 

Hospitality Segment

 

   For the Nine Months Ended September 30,   Variance Increase/(Decrease) 
   2016   2015   $   % 
   (unaudited)         
Revenues  $17,104   $15,811   $1,293    8.2%
NOI   3,008    2,757    251    9.1%
Average Occupancy Rate for period   67.6%   63.8%        3.8%
Rev PAR  $86.61   $80.72   $5.89    7.3%

 

Revenues and NOI increased during the nine months ended September 30, 2016 compared to the same period in 2015 resulting from increased occupancy levels and RevPAR during the 2016 period.

 

Financial Condition, Liquidity and Capital Resources  

 

Overview:

 

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

 

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

 

We currently have $186.1 million of outstanding mortgage debt and an $18.6 million outstanding under a line of credit. We have and intend to continue to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to our stockholders. We may also incur short-term indebtedness, having a maturity of two years or less.

 

Our charter provides that the aggregate amount of borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. As of September 30, 2016, our total borrowings of $204.7 million represented 54% of net assets.

 

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

 

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

 

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

 

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

 

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

 

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

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
Acquisition fees (general and administrative costs)  $-   $-   $-   $8 
Asset management fees (general and administrative costs)   562    601    1,804    2,008 
Property management fees (property operating expenses)   190    298    739    880 
Development fees and leasing commissions*   29    668    80    1,147 
Total  $781   $1,567   $2,623   $4,043 

 

* Generally, capitalized and amortized over the estimated useful life of the associated asset.

 

As of September 30, 2016, we had approximately $104.5 million of cash and cash equivalents on hand and $55.3 million of marketable securities, available for sale.

 

Summary of Cash Flows

 

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

 

   For the Nine Months Ended September 30, 
   2016   2015 
 (unaudited) 
Cash flows provided by operating activities  $20,471   $16,310 
Cash flows provided by investing activities   85,252    135,622 
Cash flows used in financing activities   (69,730)   (70,668)
Net change in cash and cash equivalents   35,993    81,264 
           
Cash and cash equivalents, beginning of the period   68,459    54,529 
Cash and cash equivalents, end of the period  $104,452   $135,793 

 

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

 

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Operating activities

 

Net cash flows provided by operating activities of $20.5 million for the nine months ended September 30, 2016 consists of the following:

 

·cash inflows of approximately $18.4 million from our net income from continuing operations after adjustment for non-cash items; and

 

·cash inflows of approximately $2.1 million associated with the net changes in operating assets and liabilities.

 

Investing activities

 

The net cash provided by investing activities of $85.3 million for the nine months ended September 30, 2016 consists primarily of the following:

 

·purchases of investment property of approximately $2.6 million;

 

·release of restricted escrows of approximately $5.4 million;

 

·net preferred equity investments in related parties of $8.8 million;

 

·proceeds from the disposition of investment property and other real estate assets of $60.7 million;

 

·proceeds from the sale and redemption of marketable securities of $28.4 million; and

 

·distributions from our investment in 1407 Broadway of $2.0 million.

 

Financing activities

 

The net cash used by financing activities of approximately $69.7 million for the nine months ended September 30, 2016 is primarily related to the following:

 

·distributions to our common shareholders of $13.4 million;

 

·redemptions and cancellation of common stock of $3.2 million;

 

·aggregate distributions to our noncontrolling interests of $9.9 million

 

·proceeds from mortgage financing of $20.4 million; and

 

·debt principal payments $62.9 million and loan fees and expenses of $0.7 million

 

Preferred Investments

 

We have entered into several agreements with various related party entities that provide for us to make preferred contributions pursuant to certain instruments (the “Preferred Investments”) that entitle us to monthly preferred distributions. The Preferred Investments had an aggregate balance of $147.1 million and $138.3 million as of September 30, 2016 and December 31, 2015, respectively, and are classified as held-to-maturity securities, recorded at cost and included in investments in related parties on the consolidated balance sheets. During the nine months ended September 30, 2016, we made $51.0 million of additional contributions and redeemed $42.2 million of the Preferred Investments (the 365 Bond Street Preferred Investment) and as of September 30, 2016, remaining contributions of up to $70.4 million were unfunded.

 

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The Preferred Investments are summarized as follows:

 

       Preferred
Investment Balance
   Unfunded
Contributions
   Investment Income 
       As of
September 30,
   As of
December 31,
   As of
September 30,
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
Preferred Investments  Dividend Rate   2016   2015   2016   2016   2015   2016   2015 
365 Bond Street   12%  $-   $42,237   $-   $-   $1,295   $2,252   $3,784 
40 East End Avenue   8% to 12%   30,000    28,768    -    613    588    1,795    856 
30-02 39th Avenue   9% to 12%   15,600    7,301    34,400    436    44    1,009    44 
485 7th Avenue   12%   60,000    60,000    -    1,840    -    5,480    - 
East 11th Street   12%   35,000    -    22,500    1,073    -    1,675    - 
Miami Moxy   12%   6,500    -    13,500              -      
Total Preferred Investments       $147,100   $138,306   $70,400   $3,962   $1,927   $12,211   $4,684 

 

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 restrictions. From our inception through December 31, 2015 we repurchased approximately 3.1 million shares of common stock and for the nine months ended September 30, 2016 we repurchased approximately 317,870 shares of common stock for $10.00 per share, pursuant to our share repurchase program. 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 our contractual obligations outstanding over the next five years and thereafter as of September 30, 2016.

 

Contractual
Obligations
  Remainder of 2016   2017   2018   2019   2020   Thereafter   Total 
                             
Mortgage Payable  $50,739   $25,991    21,967   $1,621   $14,924   $70,868   $186,110 
Interest Payments1   1,583    5,033    4,527    3,767    3,485    12,304    30,699 
                                    
Total Contractual Obligations  $52,322   $31,024   $26,494   $5,388   $18,409   $83,172   $216,809 

 

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

 

Certain of our debt agreements require the maintenance of certain ratios, including debt service coverage. As of September 30, 2016, we are in compliance with all of our debt covenants; however, the debt associated with our Gulf Coast Industrial Portfolio was placed in default by the special servicer during 2012 and is due on demand as discussed below.

 

As a result of not meeting certain debt service coverage ratios on the non-recourse mortgage indebtedness secured by the Gulf Coast Industrial Portfolio, the lender elected to retain the excess cash flow from these properties beginning in July 2011.  During the third quarter of 2012, the loan was transferred to a special servicer, who discontinued scheduled debt service payments and notified us that the loan was in default and although originally due in February 2017 is now due on demand.

 

Although the lender is currently not charging or being paid interest at the stated default rate, we are accruing default interest expense pursuant to the terms of the loan agreement. Default interest expense of $0.5 million and $1.5 million was accrued for both the three and nine months ended September 30, 2016 and 2015, respectively. As a result, cumulative accrued default interest expense of approximately $8.6 million and $7.1 million is included in accounts payable, accrued expenses and other liabilities on our consolidated balance sheets as of September 30, 2016 and December 31, 2015, respectively.  Although we have had various discussions with the special servicer to restructure the terms of the loan, there can be no assurances that we will be successful in these efforts. However, we do not expect to pay any of the accrued default interest expense as this mortgage indebtedness is non-recourse to us.  Additionally, we believe the continued loss of excess cash flow from these properties and the special servicer’s placement of the non-recourse mortgage indebtedness in default will not have a material impact on our results of operations or financial position.

 

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Additionally, our mortgage loan (outstanding principal balance of $25.7 million as of September 30, 2016) secured by Oakview Plaza matures in January 2017. We currently intend to seek to refinance and/or repay in full, using cash proceeds from the potential sale of assets or available cash, such existing indebtedness on or before its applicable stated maturity. Other than these financings, we have no additional significant maturities of mortgage debt over the next 12 months.

 

Notes Payable

  

Margin Loan

 

We have access to a margin loan (the “Margin Loan”) from a financial institution that holds custody of certain of our marketable securities. The Margin Loan, which is due on demand, bears interest at Libor plus 0.85% (1.38% as of September 30, 2016) and is collateralized by the marketable securities in our account. The amounts available to us under the Margin Loan are at the discretion of the financial institution and not limited to the amount of collateral in our account. There were no amounts outstanding under the Margin Loan as of September 30, 2016 and December 31, 2016.

 

Line of Credit

 

On September 14, 2012, we entered into a non-revolving credit facility (the “Line of Credit”) with a financial institution which permits borrowings up to $25.0 million. The Line of Credit expires on June 19, 2017 and bears interest at Libor plus 1.35% (1.88% as of September 30, 2016). The Line of Credit is collateralized by approximately 252,000 Marco OP Units and PRO guaranteed the Line of Credit. The amount outstanding under the Line of Credit was $18.6 million as of September 30, 2016 and is included in Notes Payable on the consolidated balance sheets. We currently intend to seek to extend or replace the Line of Credit on or before its expiration. If we are unable to extend or replace the Line of Credit, we will repay the then outstanding balance in full at the expiration date using cash proceeds from the sale of assets or redemptions of our preferred investments in related parties.

 

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.

 

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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 

 

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The below table illustrates the items deducted in the calculation of FFO and MFFO. Items are presented net of non-controlling interest portions where applicable.

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30, 2016   September 30, 2015   September 30, 2016   September 30, 2015 
Net income  $7,357   $1,160   $31,877   $62,759 
FFO adjustments:                    
Depreciation and amortization:                    
Depreciation and amortization of real estate assets   2,705    2,955    8,595    8,572 
Equity in depreciation and amortization for
unconsolidated affiliated real estate entities
   -    -    -    1,295 
Adjustments to equity in earnings from
unconsolidated entities, net
   -    -    -    (6,097)
Gain on disposal of investment property   (3,799)   -    (23,705)   - 
Discontinued operations:                    
Gain on disposal of investment property   -    -    -    (17,547)
FFO   6,263    4,115    16,767    48,982 
MFFO adjustments:                    
Other Adjustment                    
Acquisition and other transaction related costs
expensed(1)
   -    -    20    (45)
Amortization of above or below market leases and
liabilities(2)
   (28)   (39)   (84)   (164)
Loss on debt extinguishment   -    -    2    600 
Accretion of discounts and amortization of premiums
on debt investments
   -    -    -    - 
Mark-to-market adjustments(3)   (130)   255    282    719 
Non-recurring (losses)/gains from extinguishment/sale
of debt, derivatives or securities holdings(4)
   -    -    -    - 
Loss/(gain) on sale of marketable securities   15    12    952    (34,728)
MFFO   6,120    4,343    17,939    15,364 
Straight-line rent(5)  $65   $16   $101   $(339)
MFFO - IPA recommended format(6)  $6,185   $4,359   $18,040   $15,025 
Net income  $7,357   $1,160   $31,877   $62,759 
Less: loss attributable to noncontrolling
interests
   (310)   (265)   (1,166)   (4,359)
Net income applicable to Company's common shares  $7,047   $895   $30,711   $58,400 
Net income  per common share, basic and diluted  $0.28   $0.03   $1.21   $2.26 
                     
FFO  $6,263   $4,115   $16,767   $48,982 
Less: FFO attributable to noncontrolling
interests
   (449)   (481)   (1,359)   (4,617)
FFO attributable to Company's common shares  $5,814   $3,634   $15,408   $44,365 
FFO per common share, basic and diluted  $0.23   $0.14   $0.60   $1.71 
                     
MFFO - IPA recommended format  $6,185   $4,359   $18,040   $15,025 
Less: MFFO attributable to noncontrolling
interests
   (442)   (480)   (1,372)   (1,491)
MFFO attributable to Company's common shares  $5,743   $3,879   $16,668   $13,534 
                    
Weighted average number of common shares
outstanding, basic and diluted
   25,473    25,793    25,479    25,874 

 

Notes:

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

 

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(2)

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

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30, 2016   September 30, 2015   September 30, 2016   September 30, 2015 
Gulf Coast Industrial Portfolio - Default interest expense(a)  $(541)  $(519)  $(1,538)  $(1,546)
Allocations to noncontrolling interests   10    10    30    30 
Total after allocations to noncontrolling interests  $(531)  $(509)  $(1,508)  $(1,516)

 

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

 

Excluding the impact of these unusual items from our MFFO, after taking into consideration allocations to noncontrolling interests, our adjusted MFFO would have been $6,274 and $4,388 for the three months ended September 30, 2016 and 2015, respectively and $18,176 and $15,050 for the nine months ended September 30, 2016 and 2015, respectively.

 

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

 

   From inception through 
   September 30, 2016 
     
FFO attributable to  Company’s common shares  $171,210 
Distributions paid  $176,585 

 

On October 14, 2016, the distribution for the three-month period ending September 30, 2016 of $4.5 million was paid in cash. The entire distribution was paid from cash flows provided from operations.

 

On July 15, 2016, the distribution for the three-month period ending June 30, 2016 of $4.4 million was paid in cash. The entire distribution was paid from cash flows provided from operations.

 

On April 15, 2016, the distribution for the three-month period ending March 31, 2016 of $4.5 million was paid in cash. The entire distribution was paid from cash flows provided from operations.

 

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

 

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New Accounting Pronouncements

 

See Note 2 to the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been adopted during 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 12 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. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk.

 

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

 

As of September 30, 2016, we held various marketable securities with a fair value of approximately $55.3 million, which are available for sale for general investment return purposes. We regularly review the market prices of these investments for impairment purposes. As of September 30, 2016, a hypothetical adverse 10% movement in market values would result in a hypothetical loss in fair value of approximately $5.3 million.

 

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

 

Remainder of
2016
   2017   2018   2019   2020   Thereafter   Total 
$50,739   $25,991    21,967   $1,621   $14,924   $70,868   $186,110 

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted escrows, tenants’ accounts receivable, interest receivable from related parties, accounts payable and accrued expenses and the loans due to related parties approximated their fair values because of the short maturity of these instruments. The estimated fair value of the notes payable (line of credit) approximated its carrying value ($18.6 million) because of its floating interest rate. The carrying amount reported in the consolidated balance sheets for the mortgage receivable approximated its fair value based upon current market information that would have been used by a market participant to estimate the fair value of such loan.

 

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

 

   As of September 30, 2016   As of December 31, 2015 
   Carrying Amount   Estimated Fair
Value
   Carrying Amount   Estimated Fair
Value
 
Mortgages payable  $186.1   $186.3   $228.6   $227.1 

 

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

 

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

 

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

 

ITEM 4. CONTROLS AND PROCEDURES.

 

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

 

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

 

PART II. OTHER INFORMATION:

ITEM 1. LEGAL PROCEEDINGS

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

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ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS

 

 

Exhibit

Number

 

 

Description

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

 

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SIGNATURES

 

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

 

  LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
     
Date:     November 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 and Treasurer

(Duly Authorized Officer and Principal Financial and Accounting Officer)

 

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