Lightstone Value Plus Real Estate Investment Trust III, Inc. - FORM 10-Q

Attached files

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EX-32.2 - EXHIBIT 32.2 - Lightstone Value Plus Real Estate Investment Trust III, Inc.	v472464_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - Lightstone Value Plus Real Estate Investment Trust III, Inc.	v472464_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Lightstone Value Plus Real Estate Investment Trust III, Inc.	v472464_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Lightstone Value Plus Real Estate Investment Trust III, Inc.	v472464_ex31-1.htm
EX-10.1 - EXHIBIT 10.1 - Lightstone Value Plus Real Estate Investment Trust III, Inc.	v472464_ex10-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2017

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 000-55619

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC.

(Exact Name of Registrant as Specified in Its Charter)

Maryland

46-1140492

(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, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company þ
	Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 August 1, 2017, there were approximately 13.7 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust III, Inc., including shares issued pursuant to the dividend reinvestment plan.

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

INDEX

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016	3

	Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2017 and 2016	4

	Consolidated Statement of Stockholders’ Equity (unaudited) for the Six Months Ended June 30, 2017	5

	Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2017 and 2016	6

	Notes to Consolidated Financial Statements (unaudited)	7

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4.	Controls and Procedures	26

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 3.	Defaults Upon Senior Securities	28

Item 4.	Mine Safety Disclosures	28

Item 5.	Other Information	28

Item 6.	Exhibits	28

PART I. FINANCIAL INFORMATION:

ITEM 1. FINANCIAL STATEMENTS.

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

CONSOLIDATED BALANCE SHEETS

	June 30, 2017			December 31, 2016
	(Unaudited)
Assets

Investment property:
Land and improvements	$	22,284,030		$	22,283,209
Building and improvements		103,143,518			103,080,704
Furniture and fixtures		15,846,099			15,133,479
Construction in progress		668,670			130,249
Gross investment property		141,942,317			140,627,641
Less accumulated depreciation		(6,474,756	)		(3,862,125	)
Net investment property		135,467,561			136,765,516

Investment in unconsolidated affiliated real estate entity		19,293,939			-
Cash		50,424,596			55,064,507
Restricted escrows		1,034,047			851,441
Accounts receivable and other assets		2,802,969			2,634,675
Total Assets	$	209,023,112		$	195,316,139


Liabilities and Stockholders' Equity

Accounts payable and other accrued expenses	$	3,773,669		$	2,684,346
Mortgages payable, net		86,889,146			86,870,343
Due to related parties		130,735			109,532
Distributions payable		673,964			583,113
Total liabilities		91,467,514			90,247,334

Commitments and Contingencies

Stockholders' Equity:

Company's stockholders' equity:
Preferred stock, $0.01 par value; 50,000,000 shares authorized, none issued and outstanding		-			-
Common stock, $0.01 par value; 200,000,000 shares authorized, 13,666,491 and 11,656,877 shares issued and outstanding, respectively		136,665			116,569
Additional paid-in-capital		117,449,602			99,309,774
Subscription receivable		-			(105,000	)
Accumulated deficit		(12,123,159	)		(6,345,110	)
Total Company stockholders' equity		105,463,108			92,976,233

Noncontrolling interests		12,092,490			12,092,572
Total Stockholders' Equity		117,555,598			105,068,805
Total Liabilities and Stockholders' Equity	$	209,023,112		$	195,316,139

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

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

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

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016

Revenues	$	8,984,519		$	4,953,528		$	16,705,116		$	6,924,973

Expenses:
Property operating expenses		5,221,527			2,802,497			10,019,911			4,101,638
Real estate taxes		361,252			217,901			724,399			317,255
General and administrative costs		615,164			893,906			1,054,877			1,498,834
Depreciation and amortization		1,326,783			613,436			2,651,746			891,752
Total operating expenses		7,524,726			4,527,740			14,450,933			6,809,479


Operating income		1,459,793			425,788			2,254,183			115,494
Loss from investment in unconsolidated affiliated real estate entity		(813,170	)		-			(1,325,877	)		-
Interest expense		(1,384,544	)		(287,473	)		(2,729,855	)		(377,437	)

Other expense, net		(37,308	)		(871	)		(70,300	)		(2,224	)

Net (loss)/income		(775,229	)		137,444			(1,871,849	)		(264,167	)

Less: net loss/(income) attributable to noncontrolling interests		9			(8	)		22			2
Net (loss)/income applicable to Company's common shares	$	(775,220	)	$	137,436		$	(1,871,827	)	$	(264,165	)


Net (loss)/income per Company's common shares, basic and diluted	$	(0.06	)	$	0.02		$	(0.14	)	$	(0.05	)

Weighted average number of common shares outstanding, basic and diluted		13,662,457			6,686,377			13,129,718			5,765,835

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

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

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

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

	Common Shares
	Common Shares			Amount			Additional Paid-In Capital			Subscription Receivable			Accumulated Deficit			Total Noncontrolling Interests			Total Equity

BALANCE, December 31, 2016		11,656,877		$	116,569		$	99,309,774		$	(105,000	)	$	(6,345,110	)	$	12,092,572		$	105,068,805

Net loss		-			-			-			-			(1,871,827	)		(22	)		(1,871,849	)
Distributions declared		-			-			-			-			(3,906,222	)		-			(3,906,222	)
Distributions paid to noncontrolling interests		-			-			-			-			-			(60	)		(60	)
Proceeds from offering		1,897,374			18,974			18,820,260			105,000			-			-			18,944,234
Selling commissions and dealer manager fees		-			-			(1,759,714	)		-			-			-			(1,759,714	)
Other offering costs		-			-			17,499			-			-			-			17,499
Shares issued from distribution reinvestment program		118,988			1,190			1,129,196			-			-			-			1,130,386
Redemption and cancellation of shares		(6,748	)		(68	)		(67,413	)		-			-			-			(67,481	)

BALANCE, June 30, 2017		13,666,491		$	136,665		$	117,449,602		$	-		$	(12,123,159	)	$	12,092,490		$	117,555,598

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

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Six Months Ended June 30,
	2017			2016

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,871,849	)	$	(264,167	)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss from investment in unconsolidated affiliated real estate entity		1,325,877			-
Depreciation and amortization		2,651,746			891,752
Amortization of deferred financing costs		225,841			89,167
Other non-cash adjustments		20,918			2,935
Changes in assets and liabilities:
Increase in accounts receivable and other assets		(228,328	)		(507,514	)
Increase in accounts payable and other accrued expenses		1,122,653			1,566,032
Increase in due to related party		21,203			99,899
Net cash provided by operating activities		3,268,061			1,878,104

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment property		(1,305,644	)		(42,170,113	)
Investment in unconsolidated affiliated real estate entity		(20,619,816	)		-
Refundable escrow deposits		-			(3,000,000	)
Funding of restricted escrows		(182,606	)		-
Cash used in investing activities		(22,108,066	)		(45,170,113	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving promissory notes payable - related party		-			24,200,000
Payments on mortgage payable		(211,438	)		-
Payments on revolving promissory notes payable - related party		-			(10,055,281	)
Refund/(payment) of loan fees and expenses		4,400			(475,000	)
Proceeds from issuance of common stock		18,944,234			28,972,810
Payment of commissions and offering costs		(1,784,576	)		(4,320,812	)
Contributions from noncontrolling interests		-			10,390,870
Distributions to noncontrolling interests		(60	)		(60	)
Distributions to common stockholders		(2,684,985	)		(1,118,696	)
Redemption and cancellation of common shares		(67,481	)		(50,790	)
Net cash provided by financing activities		14,200,094			47,543,041

Net change in cash		(4,639,911	)		4,251,032
Cash, beginning of year		55,064,507			6,747,401
Cash, end of period	$	50,424,596		$	10,998,433

Supplemental cash flow information for the periods indicated is as follows:
Cash paid for interest	$	2,488,162		$	114,645
Distributions declared, but not paid	$	673,964		$	342,682
Commissions and other offering costs accrued but not paid	$	67,178		$	380,269
Subscription receivable	$	-		$	87,305
Value of shares issued from distribution reinvestment program	$	1,130,386		$	449,338
Application of deposit to acquisition of investment property	$	-		$	1,000,000
Investment property acquired but not paid	$	9,032		$	81,626

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

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

Notes to Consolidated Financial Statements

(Unaudited)

Organization

Lightstone Value Plus Real Estate Investment Trust III, Inc. (‘‘Lightstone REIT III’’), incorporated on October 5, 2012, in Maryland, elected to qualify to be taxed as a real estate investment trust (‘‘REIT’’) for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2015. The Company has and will continue to seek to acquire hotels and other commercial real estate assets primarily located in the United States. All such properties may be acquired and operated by the Company alone or jointly with another party. The Company may also originate or acquire mortgage loans secured by real estate.

The Lightstone REIT III is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business will be conducted through Lightstone Value Plus REIT III LP, a Delaware limited partnership (the ‘‘Operating Partnership’’).

Lightstone REIT III 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 Lightstone REIT III, its Operating Partnership or the Company as required by the context in such pronoun used.

Lightstone REIT III sold 20,000 Common Shares to Lightstone Value Plus REIT III LLC, a Delaware limited liability company (the ‘‘Advisor’’), an entity majority owned by David Lichtenstein, on December 24, 2012, for $10.00 per share. Mr. Lichtenstein also is a majority owner of the equity interests of Lightstone REIT III’s sponsor, The Lightstone Group, LLC (the ‘‘Sponsor’’). 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, Mr. Lichtenstein is the indirect owner of the Advisor and the indirect owner and manager of Lightstone SLP III LLC, which has subordinated participation interests in the Operating Partnership. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT III or the Operating Partnership.

Lightstone REIT III invested the proceeds received from the Advisor in the Operating Partnership, and as a result, held a 99% general partnership interest as of June 30, 2017 in the Operating Partnership’s partner units.

The Company’s registration statement on Form S-11 (the “Offering”), pursuant to which it offered to sell up to 30,000,000 shares of its common stock, par value $0.01 per share, (which may be referred to herein as ‘‘shares of common stock’’ or as ‘‘Common Shares’’) for an initial offering price of $10.00 per share, subject to certain volume and other discounts (the “Primary Offering”) (exclusive of 10,000,000 shares available pursuant to its distribution reinvestment plan (the “DRIP”) which were offered at a discounted price equivalent to 95% of the Primary Offering price per Common Share) was declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933 on July 15, 2014. On June 30, 2016, the Company adjusted the offering price to $9.50 per Common Share in its Primary Offering, which was equal to the Company’s estimated net asset value (“NAV”) per Common Share as of March 31, 2016, and effective July 25, 2016, the Company’s offering price was adjusted to $10.00 per Common Share in its Primary Offering, which was equal to the estimated NAV per Common Share as of June 30, 2016. Our estimated NAV per Common Share remained unchanged at $10.00 as of both September 30, 2016 and December 31, 2016, respectively.

The Offering, which terminated on March 31, 2017, raised aggregate gross proceeds of approximately $131.7 million from the sale of approximately 13.7 million shares of common stock (including $2.0 million in Common Shares at a purchase price of $9.00 per Common Share to an entity 100% owned by David Lichtenstein, who also owns a majority interest in the Company’s Sponsor). After including the purchase of an aggregate of $12.1 million of Subordinated Participation Interests by the Special Limited Partner and allowing for the payment of approximately $12.2 million in selling commissions and dealer manager fees and $4.8 million in organization and other offering expenses, the Offering generated aggregate net proceeds of approximately $126.8 million.

On April 21, 2017, the Company’s board of directors approved the termination of the DRIP effective May 15, 2017. Previously, the Company’s stockholders had an option to elect the receipt of shares of the Company’s common stock in lieu of cash distributions under the Company’s DRIP, however, all future distributions will be in the form of cash. In addition, through May 15, 2017 (the termination date of the DRIP), the Company had issued approximately 0.3 million shares of common stock under its DRIP, representing approximately $3.2 million of additional proceeds under the Offering.

As of June 30, 2017, on a collective basis, the Company wholly owned and consolidated the operating results and financial condition of nine hospitality properties, or select services hotels, containing a total of 999 rooms. Additionally, as of June 30, 2017, the Company held a 22.5% ownership interest in RP Maximus Cove, LLC (the “Cove Joint Venture”), an affiliated real estate entity that owns and operates The Cove at Tiburon (“the Cove”), a multi-family residential property containing 281 units (see Note 3) that the Company does not consolidate but rather accounts for under the equity method of accounting. All of the Company’s properties are located within the United States. As of June 30, 2017, the hospitality properties’ average revenue per available room (“RevPAR”) was $89.37 and occupancy was 73% for the six months ended June 30, 2017. Additionally, as of June 30, 2017, the Cove was 86.8% occupied.

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

Notes to Consolidated Financial Statements

(Unaudited)

The Company has no employees. The Company has retained the Advisor to manage its affairs on a day-to-day basis. Beacon Property Management Limited Liability Company and Paragon Retail Property Management LLC (the ‘‘Property Managers’’), both affiliates of the Sponsor, may serve as property managers and/or the Company may utilize third-party property managers. Orchard Securities, LLC (the ‘‘Dealer Manager’’), a third-party not affiliated with the Company, the Sponsor or the Advisor, served as the dealer manager of the Offering until their termination on March 31, 2017, as a result of the termination of the Offering. In addition to the Property Managers, the Advisor is also an affiliate of the Sponsor. These related parties receive compensation and fees for services related to the investment and management of the Company’s assets.

Noncontrolling Interests

Partners of Operating Partnership

On July 16, 2014, the Advisor contributed $2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The limited partner has the right to convert operating partnership units into cash or, at the option of the Company, an equal number of common shares of the Company, as allowed by the limited partnership agreement.

Lightstone SLP III LLC (the ‘‘Special Limited Partner’’), a Delaware limited liability company of which Mr. Lichtenstein is the majority owner, is a special limited partner in the Operating Partnership and committed to make a significant equity investment (the “Contribution Agreement”) in the Company of up to $36.0 million, which was equivalent to 12.0% of the $300.0 million maximum amount of the Offering. The Operating Partnership issued one Subordinated Participation Interest for each $50,000 in cash or interests in real property of equivalent value that the Special Limited Partner contributed. In connection with the termination of the Offering, on March 31, 2017, the Company and the Sponsor terminated the Contribution Agreement and as result of the termination, the Sponsor is no longer obligated to purchase Subordinated Participation Interests.

Through March 31, 2017 (the termination date of the Offering), the Special Limited Partner purchased an aggregate of approximately 242 Subordinated Participation Interests in consideration of $12.1 million. The Subordinated Participation Interests may be entitled to receive liquidation distributions upon the liquidation of Lightstone REIT III.

Summary of Significant Accounting Policies

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, 2016. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. The accompanying unaudited consolidated financial statements of the Lightstone Value Plus Real Estate Investment Trust III, Inc. and its Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

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

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

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

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

Notes to Consolidated Financial Statements

(Unaudited)

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Lightstone REIT III and the Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). As of June 30, 2017, Lightstone REIT III had a 99% general partnership interest in the common units of the Operating Partnership. All inter-company accounts and transactions have been eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary.

Pro-Forma Financial Information

The following table provides unaudited pro forma results of operations for the periods indicated, as if the Company’s acquisitions of the Hampton Inn – Lansing (acquired on March 10, 2016), Courtyard – Warwick (acquired on March 23, 2016), SpringHill Suites – Green Bay (acquired on May 2, 2016), Home2 Suites Hotel Portfolio (acquired on August 2, 2016), Fairfield Inn – Austin (acquired on September 16, 2016), Staybridge Suites – Austin (acquired on October 7, 2016) and its 22.5% membership interest in the RP Maximus Cove, L.L.C. (acquired on January 31, 2017 - See Note 3) had all occurred at the beginning of the earliest period presented. Such pro forma results are not necessarily indicative of the results that actually would have occurred had these acquisitions been completed on the dates indicated, nor are they indicative of the future operating results of the combined company.

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016
Pro forma rental revenue	$	8,984,519		$	9,009,026		$	16,705,116		$	16,787,686
Pro forma net loss (1)	$	(775,220	)	$	(44,430	)	$	(2,141,215	)	$	(546,209	)

Pro forma net loss per Company's common share, basic and diluted (1)	$	(0.06	)	$	(0.01	)	$	(0.16	)	$	(0.19	)

(1)

Includes acquisition related expenses of $733,426 and $1,199,266 for the three and six months ended June 30, 2016 in connection with the acquisition of the Hampton Inn — Lansing, the Courtyard – Warwick and the SpringHill Suites – Green Bay.

New Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance that clarifies the definition of a business and assists in the evaluation of whether a transaction will be accounted for as an acquisition of an asset or as a business combination. The guidance provides a test to determine when a set of assets and activities acquired is not a business. When substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. Under the updated guidance, an acquisition of a single property will likely be treated as an asset acquisition as opposed to a business combination and associated transaction costs will be capitalized rather than expensed as incurred. Additionally, assets acquired, liabilities assumed, and any noncontrolling interest will be measured at their relative fair values. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the requirements and impact of this update on its consolidated financial statements.

In November 2016, the FASB issued guidance that requires amounts that are generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for public companies for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted and the pronouncement requires a retrospective transition method of adoption. This guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2016, the 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. This guidance will not have a material impact on the Company’s consolidated financial statements.

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

Notes to Consolidated Financial Statements

(Unaudited)

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 consolidated financial position, results of operations or cash flows.

The Company has reviewed and determined that other recently issued accounting pronouncements will not have a material impact on its financial position, results of operations and cash flows, or do not apply to its current operations.

Investment in Unconsolidated Affiliated Real Estate Entity

The entity listed below is partially owned by the Company. The Company accounts for this investment under the equity method of accounting as the Company exercises significant influence, but does not exercise financial and operating control, and is not considered to be the primary beneficiary of this entity. A summary of the Company’s investment in the unconsolidated affiliated entity is as follows:

As of

Entity

Date of

Ownership

Ownership %

June 30,

2017

December 31,

2016

RP Maximus Cove, L.L.C. (the “Cove Joint Venture”)

January 31, 2017

22.50%

19,293,939

The Cove Joint Venture

On January 31, 2017, the Company, through a subsidiary of the Operating Partnership, REIT III COVE LLC (“REIT III Cove”) and REIT IV COVE LLC (“REIT IV Cove”), a wholly owned subsidiary of Lightstone Real Estate Income Trust, Inc. (“Lightstone IV”), a real estate investment trust also sponsored by the Sponsor and a related party, collectively, the “Assignees”, entered into an Assignment and Assumption Agreement (the “Assignment”) with another of the Lightstone IV’s wholly owned subsidiaries, REIT COVE LLC (the “Assignor”). Under the terms of the Assignment, the Assignees were assigned the rights and obligations of the Assignor with respect to that certain Sale and Purchase Agreement (the “Purchase Agreement”), dated September 29, 2016, made between the Assignor, as the purchaser, LSG Cove LLC (“LSG Cove”), an affiliate of the Sponsor and a related party, and Maximus Cove Investor LLC (“Maximus”), an unrelated third party (collectively, the “Buyer”), and RP Cove, L.L.C (the “Seller”) an unrelated third party, pursuant to which the Buyer would acquire the Seller’s membership interest in RP Maximus Cove, L.L.C. (the “Cove Joint Venture”) for approximately $255.0 million (the “Cove Transaction”). The Cove Joint Venture owns and operates The Cove at Tiburon (“the Cove”), a 281-unit, luxury waterfront multifamily rental property located in Tiburon, California. Prior to entering into the Cove Transaction, Maximus previously owned a separate noncontrolling interest in the Joint Venture.

On January 31, 2017, REIT IV Cove, REIT III Cove, LSG Cove, and Maximus (the “Members”) completed the Cove Transaction for aggregate consideration of approximately $255.0 million, which consisted of $80 million of cash and $175 million of proceeds from a loan from a financial institution to the Cove Joint Venture. The Company paid approximately $20.0 million for a 22.5% membership interest in the Joint Venture. In connection with the acquisition, the Company paid the Advisor an acquisition fee of $573,750, equal to 1.0% of the Company’s pro-rata share of the contractual purchase price which has been included in investment in unconsolidated affiliated real estate entity on the consolidated balance sheets.

The Company’s interest in the Cove Joint Venture is a non-managing interest. The Company determined that the Cove Joint Venture is a variable interest entity (“VIE”) and because the Company exerts significant influence over but does not control the Cove Joint Venture, it will account for its ownership interest in the Cove Joint Venture in accordance with the equity method of accounting. All distributions of earnings from the Cove Joint Venture will be made on a pro rata basis in proportion to each Members’ equity interest percentage. Any distributions in excess of earnings from the Cove Joint Venture will be made to the Members pursuant to the terms of the Cove Joint Venture’s operating agreement. An affiliate of Maximus is the asset manager of the Cove and receives certain fees as defined in the Property Management Agreement for the management of the Cove. The Company commenced recording its allocated portion of profit or losses and cash distributions beginning as of January 31, 2017 with respect to its membership interest of 22.5% in the Cove Joint Venture.

In connection with the closing of the Cove Transaction, the Cove Joint Venture simultaneously entered into a $175.0 million loan (the “Loan”) initially scheduled to mature on January 31, 2020 with two, one-year extension options, subject to certain conditions. The Loan requires monthly interest payments through its maturity date. The Loan bears interest at Libor plus 3.85% through its initial maturity and Libor plus 4.15% during each of the extension periods. The Loan is collateralized by the Cove and an affiliate of the Sponsor (the “Guarantor”) has guaranteed the Cove Joint Venture‘s obligation to pay the outstanding balance of the Loan up to approximately $43.8 million (the “Loan Guarantee”). The Members have agreed to reimburse the Guarantor for any balance that may become due under the Loan Guarantee, of which the Company’s share is up to approximately $10.9 million.

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

Notes to Consolidated Financial Statements

(Unaudited)

Starting in 2013, the Cove has been undergoing an extensive refurbishment which is substantially completed. The Members intend to use remaining proceeds from the Loan and to invest additional capital if necessary to complete the remainder of the refurbishment. The Guarantor provided an additional guarantee of up to approximately $13.4 million (the “Refurbishment Guarantee”) to provide the necessary funds to complete the remaining renovations as defined in the Loan. The Members have agreed to reimburse the Guarantor for any balance that may become due under the Refurbishment Guarantee, of which the Company’s share is up to approximately $3.3 million.

The Company has determined that the fair value of both the Loan Guarantee and the Refurbishment Guarantee are immaterial.

The Cove Joint Venture Condensed Financial Information

The Company’s carrying value of its interest in the Cove Joint Venture differs from its share of member’s equity reported in the condensed balance sheet of the Cove Joint Venture due to the Company’s basis of its investment in excess of the historical net book value of the Cove Joint Venture. The Company’s additional basis allocated to depreciable assets is being recognized on a straight-line basis over the lives of the appropriate assets.

The following table represents the unaudited condensed income statement for the Cove Joint Venture:

(amounts in thousands)	For the Three Months Ended June 30, 2017			For the Period January 31, 2017 (date of investment) through June 30, 2017
Revenue	$	3,127		$	5,201

Property operating expenses		1,268			1,901
General and administrative costs		16			142
Depreciation and amortization		2,381			3,964
Operating loss		(538	)		(806	)

Interest expense and other, net		(2,278	)		(3,756	)
Net loss	$	(2,816	)	$	(4,562	)
Company's share of net loss (22.50%)	$	(633	)	$	(1,027	)
Additional depreciation and amortization expense ⁽¹⁾		(180	)		(299	)
Company's loss from investment	$	(813	)	$	(1,326	)

The following table represents the unaudited condensed balance sheet for the Cove Joint Venture:

	As of
(amounts in thousands)	June 30, 2017

Real estate, at cost (net)	$	152,813
Cash and restricted cash		3,262
Other assets		1,161
Total assets	$	157,236

Mortgage payable, net	$	173,116
Other liabilities		1,662
Members' deficit ⁽¹⁾		(17,542	)
Total liabilities and members' deficit	$	157,236

(1)

Additional depreciation and amortization expense relates to the difference between the Company’s basis in the Cove Joint Venture and the amount of the underlying equity in net assets of the Cove Joint Venture.

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

Notes to Consolidated Financial Statements

(Unaudited)

Mortgage payable, net

Mortgages payable, net consists of the following:

		Weighted Average Interest Rate
Description	Interest Rate	as of June 30, 2017	Maturity Date	Amount Due at Maturity		As of June 30, 2017			As of December 31, 2016

Revolving Credit Facility, secured by seven properties	LIBOR + 4.95%	6.08%	July 2019	$	59,696,000	$	59,696,000		$	59,696,000

Promissory Note, secured by two properties	4.73%	4.73%	October 2021		26,127,572		28,120,442			28,331,880

Total mortgages payable		5.65%		$	85,823,572	$	87,816,442		$	88,027,880

Less: Deferred financing costs							(927,296	)		(1,157,537	)

Total mortgage payable, net						$	86,889,146		$	86,870,343

Principal Maturities

The following table, based on the initial terms of the mortgage, sets forth their aggregate estimated contractual principal maturities, including balloon payments due at maturity, as of June 30, 2017:

	Remainder of
	2017		2018		2019		2020		2021		Thereafter		Total
Principal maturities	$	212,814	$	445,052	$	60,162,871	$	486,092	$	26,509,613	$	-	$	87,816,442

Less: Deferred financing costs														(927,296	)

Total principal maturities, net													$	86,889,146

Debt Compliance

The Revolving Credit Facility requires the maintenance of certain ratios, including debt service coverage and fixed leverage charge ratio. The Company is currently in compliance with respect to all of its financial debt covenants.

Selling Commissions, Dealer Manager Fees and Other Offering Costs

Selling commissions and dealer manager fees were paid to the Dealer Manager, pursuant to various agreements which were terminated on March 31, 2017 as a result of the termination of the Offering, and other third-party offering costs such as registration fees, due diligence fees, marketing costs, and professional fees are accounted for as a reduction against additional paid-in capital (“APIC”) as costs are incurred. Organizational costs are expensed as general and administrative costs. The following table represents the selling commissions and dealer manager fees and other offering costs for the periods indicated:

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2017			2016		2017			2016
Selling commissions and dealer manager fees	$	(1,748	)	$	1,116,252	$	1,759,714		$	2,728,129
Other offering costs	$	(61,767	)	$	367,127	$	(17,499	)	$	491,487

Since the Company’s inception through March 31, 2017 (the termination date of the Offering), it has incurred approximately $12.2 million in selling commissions and dealer manager fees and $4.8 million of other offering costs in connection with the public offering of its shares of common stock.

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

Notes to Consolidated Financial Statements

(Unaudited)

Earnings per Share

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

Related Party Transactions

Due to related parties and other transactions

In addition to certain agreements with the Sponsor (see Note 1) and Dealer Manager (see Note 5), the Company has agreements with the Advisor to pay certain fees in exchange for services performed by the Advisor and/or its affiliated entities. Additionally, the Company’s ability to secure financing and its real estate operations are dependent upon its Advisor and its affiliates to perform such services as provided in these agreements.

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2017		2016		2017		2016
Acquisition Fees (general and administrative costs)	$	-	$	182,500	$	573,750	$	411,500
Asset Management Fees (general and administrative costs)		320,572		-		322,618		-

Total	$	320,572	$	182,500	$	896,368	$	411,500

The acquisition fee for the Cove Joint Venture of $573,750 was capitalized and included in unconsolidated affiliated real estate entity on the consolidated balance sheets.

From time to time, the Company may purchase title insurance from an agency in which its Sponsor owns a 50% limited partnership interest (the “Affiliated Title Insurance Agency”). Because the Affiliated Title Insurance Agency receives fees for providing title insurance, our Advisor may face a conflict of interest when considering the terms of purchasing title insurance from the Affiliated Title Insurance Agency. However, before the Company purchases any title insurance, an independent title consultant with more than 25 years of experience in the title insurance industry reviews the transaction, and performs market research and competitive analysis on our behalf. During the three and six months ended June 30, 2016 the Company paid $4,250 and $39,125, respectively, to the Affiliated Title Insurance Agency.

Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash, deposits, accounts receivable and other assets, accounts payable and other accrued expenses and due to/from related parties approximated their fair values because of the short maturity of these instruments.

The estimated fair value of our mortgages payable is as follows:

As of June 30, 2017

As of December 31, 2016

Carrying

Amount

Estimated

Fair Value

Carrying

Amount

Estimated

Fair Value

Mortgages payable

87,816,442

87,156,248

88,027,880

87,252,072

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

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. As of the date hereof, we are not a party to any material pending legal proceedings.

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

Notes to Consolidated Financial Statements

(Unaudited)

10.

Distributions

Distribution Payments

On May 15, 2017, June 15, 2017 and July 14, 2017, the Company paid distributions for the months ended April 30, 2017, May 31, 2017 and June 30, 2017, respectively, of $2,043,824. The distributions were paid in cash. The distributions were paid from a combination of cash flows provided by operations ($2,019,879 or 99%) and offering proceeds ($23,945 or 1%).

Distribution Declaration

On August 8, 2017, the Board of Directors authorized and the Company declared a distribution for each month during the three-month period ending December 31, 2017. The distributions will be calculated based on shareholders of record each day during the month at a rate of $0.00164383 per day, and will equal a daily amount that, if paid each day for a 365-day period, would equal a 6.0% annualized rate based on a share price of $10.00 payable on or about the 15th day following each month end to stockholders of record at the close of business on the last day of the prior month.

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 III, 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 III, Inc., a Maryland corporation, and, as required by context, Lightstone Value Plus REIT III, L.P., which we collectively refer to as the “Operating Partnership”.

Forward-Looking Statements

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

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

Risks and other factors that might cause differences, some of which could be material, include, but are not limited to, economic and market conditions, competition, tenant or joint venture partner(s) bankruptcies, our lack of operating history, the availability of cash flows from operations to pay distributions, changes in governmental, tax, real estate and zoning laws and regulations, failure to increase tenant occupancy and operating income, rejection of leases by tenants in bankruptcy, financing and development risks, construction and lease-up delays, cost overruns, the level and volatility of interest rates, the rate of revenue increases versus expense increases, the financial stability of various tenants and industries, the failure of the Company to make additional investments in real estate properties, the failure to upgrade our tenant mix, restrictions in current financing arrangements, the failure to fully recover tenant obligations for common area maintenance, insurance, taxes and other property expenses, the 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 and the Sponsor and their affiliates, failure of joint venture relationships, significant costs related to environmental issues as well as other risks listed from time to time in this Form 10-Q, our form 10-K, our Registration Statements on Form S-11, as the same may be amended and supplemented from time to time, and in 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 III, Inc. (the “Lightstone REIT III”) and Lightstone Value Plus REIT III, 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 III, its Operating Partnership or the Company as required by the context in which such pronoun is used. Lightstone REIT III elected to qualify and be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2015.

Principally through our Operating Partnership, we have and expect to continue to seek to acquire hotels and other commercial real estate assets primarily located in the United States. Our acquisitions may include both portfolios and individual properties and may be acquired and operated by us alone or jointly with another party. We may also originate or acquire mortgage loans secured by real estate.

Our registration statement on Form S-11 (the “Offering”), pursuant to which we offered to sell up to 30,000,000 shares of our common stock, par value $0.01 per share, (which may be referred to herein as ‘‘shares of common stock’’ or as ‘‘Common Shares’’) for an initial offering price of $10.00 per share, subject to certain volume and other discounts (the “Primary Offering”) (exclusive of 10,000,000 shares available pursuant to its distribution reinvestment plan (the “DRIP”) which were offered at a discounted price equivalent to 95% of the Primary Offering price per Common Share) was declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933 on July 15, 2014. On June 30, 2016, we adjusted the offering price to $9.50 per Common Share in its Primary Offering, which was equal to our estimated net asset value (“NAV”) per Common Share as of March 31, 2016, and effective July 25, 2016, our offering price was adjusted to $10.00 per Common Share in our Primary Offering, which was equal to the estimated NAV per Common Share as of June 30, 2016. Our estimated NAV per Common Share remained unchanged at $10.00 as of both September 30, 2016 and December 31, 2016, respectively.

We sold 20,000 Common Shares to Lightstone Value Plus REIT III LLC, a Delaware limited liability company (the ‘‘Advisor’’), an entity majority owned by David Lichtenstein, on December 24, 2012, for $10.00 per share. Mr. Lichtenstein also is a majority owner of the equity interests of our sponsor, The Lightstone Group, LLC (the ‘‘Sponsor’’).

Through March 31, 2017 (the termination date of the Offering), the Special Limited Partner has purchased an aggregate of approximately 242 Subordinated Participation Interests in consideration of $12.1 million. The Subordinated Participation Interests may be entitled to receive liquidation distributions upon the liquidation of Lightstone REIT III.

We have no employees. We have retained the Advisor to manage our affairs on a day-to-day basis. Beacon Property Management Limited Liability Company and Paragon Retail Property Management LLC (the ‘‘Property Managers’’), both affiliates of the Sponsor, may serve as property managers and/or we may utilize third-party property managers. Orchard Securities, LLC (the ‘‘Dealer Manager’’), a third-party not affiliated with us, our Sponsor or our Advisor, served as the dealer manager of the Offering until their termination on March 31, 2017 as a result of the termination of the Offering. In addition to Property Managers, the Advisor is also an affiliate of our Sponsor. These related parties will receive compensation and fees for services related to the investment and management of our assets. These entities will receive fees during our offering, acquisition, operational and liquidation stages.

Current Environment

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

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

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

Portfolio Summary –

Consolidated Properties:
				Year to Date	Percentage Occupied for the Six Months Ended		Revenue per Available Room for the Six Months Ended		Average Daily Rate for the Six Months Ended
	Location	Year Built	Date Acquired	Available Rooms	June 30, 2017		June 30, 2017		June 30, 2017

Hampton Inn – Des Moines	Des Moines, Iowa	1987	2/4/2015	21,720		63%	$	81.20	$	128.60
										.
Courtyard - Durham	Durham, North Carolina	1996	5/15/2015	26,426		71%	$	71.71	$	100.94

Hampton Inn – Lansing	Lansing, Michigan	2013	3/10/2016	15,566		76%	$	101.12	$	133.11
										.
Courtyard - Warwick	Warwick, Rhode Island	2003	3/23/2016	16,652		76%	$	97.78	$	128.10

SpringHill Suites - Green Bay	Green Bay, Wisconsin	2007	5/2/2016	22,987		65%	$	81.08	$	125.58

Home2 Suites – Salt Lake	Salt Lake City, Utah	2013	8/2/2016	22,625		81%	$	93.39	$	115.31

Home2 Suites – Tukwila	Tukwila, Washington	2015	8/2/2016	25,159		86%	$	119.72	$	139.63

Fairfield Inn – Austin	Austin, Texas	2014	9/13/2016	15,204		67%	$	78.60	$	118.17

Staybridge Suites – Austin	Austin, Texas	2009	10/7/2016	14,480		71%	$	77.00	$	109.19

			Total	180,819		73%	$	89.37	$	122.34

Unconsolidated Affiliated Real Estate Entity:

Multi - Family Residential

Location

Year Built

Leasable Units

Percentage Occupied as of June 30, 2017

Annualized Revenues based
on rents at June 30, 2017

Annualized Revenues per
unit at June 30, 2017

The Cove (Multi-Family Complex)

Tiburon, California

1967

281

87%

$13.5 million

55,221

Critical Accounting Policies and Estimates

There were no material changes during the six months ended June 30, 2017 to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2016.

Results of Operations

During 2016, we acquired the Hampton Inn – Lansing on March 10, 2016, the Courtyard – Warwick on March 23, 2016, the SpringHill Suites – Green Bay on May 2, 2016, the Home2 Suites Hotel Portfolio on August 2, 2016, the Fairfield Inn – Austin on September 13, 2016 and the Staybridge Suites – Austin on October 7, 2016. Additionally, we acquired a 22.5% membership in RP Maximus Cove,, L.L.C. (the “Cove Joint Venture”) on January 31, 2017 (see Note 3 of the Notes to Consolidated Financial Statements). The Cove Joint Venture owns and operates The Cove at Tiburon (“the Cove”), a 281-unit, luxury waterfront multifamily rental property located in Tiburon, California. We wholly own and consolidate our nine hospitality properties and account for our 22.5% interest in the Cove Joint Venture under the equity method of accounting as of June 30, 2017. The operating results of these investments are reflected in our consolidated statements of operations commencing from their respective dates of acquisition.

Comparison of the Three Months Ended June 30, 2017 vs. June 30, 2016

Consolidated

The rental revenue, property operating expenses, real estate taxes and depreciation and amortization for the three months ended June 30, 2016 is attributable to the Hampton Inn – Des Moines, the Courtyard – Durham, the Hampton Inn – Lansing and the Courtyard – Warwick and the SpringHill Suites – Green Bay beginning on May 2, 2016. The rental revenue, property operating expenses, real estate taxes and depreciation and amortization for the three months ended June 30, 2017 is attributable to all nine of our hospitality properties.

Rental revenue

Rental revenue increased by $4.0 million to $9.0 million during the three months ended June 30, 2017 compared to $5.0 million for the same period in 2016. Substantially all of the $4.0 million increase was attributable to the hotels acquired during or subsequent to the 2016 period.

Property operating expenses

Property operating expenses increased by $2.4 million to $5.2 million during the three months ended June 30, 2017 compared to $2.8 million for the same period in 2016. Substantially all of the $2.4 million increase was attributable to the hotels acquired during or subsequent to the 2016 period.

Real estate taxes

Real estate taxes increased by $143,351 to $361,252 during the three months ended June 30, 2017 compared to $217,901 for the same period in 2016. Substantially all of the increase was attributable to the hotels acquired during or subsequent to the 2016 period.

General and administrative expense

General and administrative expense decreased by $278,742 to $615,164 during the three months ended June 30, 2017 compared to $893,906 for the same period in 2016. The decrease reflects lower acquisition fees and acquisition-related costs and a decrease in accounting, legal and corporate filing fees in the 2017 period.

Depreciation and amortization

Depreciation and amortization expense increased by $713,347 to $1,326,783 during the three months ended June 30, 2017 compared to $613,436 for the same period in 2016. Substantially all of the $0.7 million increase was attributable to the hotels acquired during or subsequent to the 2016 period.

Earnings from investment in unconsolidated affiliated real estate entity

Our loss from investment in unconsolidated affiliated real estate entity during three months ended June 30, 2017 was $813,170. Our loss from investment in unconsolidated affiliated real estate entity is attributable to our ownership interest in the Cove Joint Venture. Commencing on January 31, 2017, which was the date that we acquired our interest, we account for our ownership interest in the Cove Joint Venture under the equity method of accounting.

Interest expense

Interest expense was $1,384,544 during the three months ended June 30, 2017 compared to $287,473 for the same period in 2016. Interest expense is attributable to financings associated with our hotels.

Comparison of the Six Months Ended June 30, 2017 vs. June 30, 2016

Consolidated

The rental revenue, property operating expenses, real estate taxes and depreciation and amortization for the six months ended June 30, 2016 is attributable to the Hampton Inn – Des Moines and the Courtyard – Durham and for the Hampton Inn – Lansing beginning on March 10, 2016, the Courtyard – Warwick beginning on March 23, 2016 and the SpringHill Suites – Green Bay beginning on May 2, 2016. The rental revenue, property operating expenses, real estate taxes and depreciation and amortization for the six months ended June 30, 2017 is attributable to all nine of our hospitality properties.

Rental revenue

Rental revenue increased by $9.8 million to $16.7 million during the six months ended June 30, 2017 compared to $6.9 million for the same period in 2016. Substantially all of the $9.8 million increase was attributable to the hotels acquired during or subsequent to the 2016 period.

Property operating expenses

Property operating expenses increased by $5.9 million to $10.0 million during the six months ended June 30, 2017 compared to $4.1 million for the same period in 2016. Substantially all of the $5.9 million increase was attributable to the hotels acquired during or subsequent to the 2016 period.

Real estate taxes

Real estate taxes increased by $407,144 to $724,399 during the six months ended June 30, 2017 compared to $317,255 for the same period in 2016. Substantially all of the increase was attributable to the hotels acquired during or subsequent to the 2016 period.

General and administrative expense

General and administrative expense decreased by $443,957 to $1,054,877 during the six months ended June 30, 2017 compared to $1,498,834 for the same period in 2016. The decrease reflects lower acquisition fees and acquisition-related costs and a decrease in accounting, legal and corporate filing fees in the 2017 period.

Depreciation and amortization

Depreciation and amortization expense increased by $1,759,994 to $2,651,746 during the six months ended June 30, 2017 compared to $891,752 for the same period in 2016. Substantially all of the $1.7 million increase was attributable to the hotels acquired during or subsequent to the 2016 period.

Earnings from investment in unconsolidated affiliated real estate entity

Our loss from investment in unconsolidated affiliated real estate entity during six months ended June 30, 2017 was $1,325,877. Our loss from investment in unconsolidated affiliated real estate entity is attributable to our ownership interest in the Cove Joint Venture. Commencing on January 31, 2017, which was the date that we acquired our interest, we account for our ownership interest in the Cove Joint Venture under the equity method of accounting.

Interest expense

Interest expense was $2,729,855 during the six months ended June 30, 2017 and compared to $377,437 for the same period in 2016. Interest expense is attributable to financings associated with our hotels.

Financial Condition, Liquidity and Capital Resources

Overview:

For the six months ended June 30, 2017, our primary sources of funds were $18.9 million of proceeds from our sale of shares of common stock under our Offering and $3.3 million of cash flows from operations.

We have and intend to continue to utilize leverage either in connection with acquiring our properties or subsequent to their acquisition. The number of different properties we will acquire will be affected by numerous factors, including, the amount of funds available to us. When interest rates on mortgage loans are high or financing is otherwise unavailable on terms that are satisfactory to us, we may purchase certain properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time.

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

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

Our charter provides that the aggregate amount of our borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. Market conditions will dictate our overall leverage limit; as such our aggregate borrowings may be less than 300% of net assets. As of June 30, 2017, our total borrowings were approximately $87.8 million which represented 71% of our net assets.

On January 31, 2017, the Cove Joint Venture entered into a $175.0 million loan (the “Loan”) initially scheduled to mature on January 31, 2020 with two, one-year extension options, subject to certain conditions. The Loan requires monthly interest payments through its maturity date. The Loan bears interest at Libor plus 3.85% through its initial maturity and Libor plus 4.15% during each of the extension periods. The Loan is collateralized by The Cove and an affiliate of the Sponsor (the “Guarantor”) has guaranteed the Cove Joint Venture‘s obligation to pay the outstanding balance of the Loan up to approximately $43.8 million (the “Loan Guarantee”). The members of the Cove Joint venture have agreed to reimburse the Guarantor for any balance that may become due under the Loan Guarantee, of which our share is up to approximately $10.9 million.

Starting in 2013, the Cove has been undergoing an extensive refurbishment which is substantially completed. The members of the Cove Joint venture intend to use remaining proceeds from the Loan and to invest additional capital if necessary to complete the remainder of the refurbishment. The Guarantor provided an additional guarantee of up to approximately $13.4 million (the “Refurbishment Guarantee”) to provide the necessary funds to complete the remaining renovations as defined in the Loan. The members of the Cove Joint venture have agreed to reimburse the Guarantor for any balance that may become due under the Refurbishment Guarantee, of which our share is up to approximately $3.3 million.

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

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

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

In addition to making investments in accordance with our investment objectives, we have used and expect to continue use our capital resources to make certain payments to our Advisor. During our organizational and offering stage, we made payments to our Dealer Manager for selling commissions and the dealer manager fee, and payments to our Advisor for the reimbursement of organization and other offering costs.

Selling commissions and dealer manager fees were paid to the Dealer Manager or soliciting dealers, as applicable, pursuant to various agreements, and other third-party offering costs such as registration fees, due diligence fees, marketing costs, and professional fees are accounted for as a reduction against additional paid-in capital as costs are incurred. Any organizational costs are accounted for as general and administrative costs. The following table represents the selling commissions and dealer manager fees and other offering costs for the periods indicated:

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2017			2016		2017			2016
Selling commissions and dealer manager fees	$	(1,748	)	$	1,116,252	$	557,302		$	2,728,129
Other offering costs	$	(61,767	)	$	367,127	$	(17,499	)	$	491,487

During the acquisition and development stage, payments may include asset acquisition fees and financing coordination fees, and the reimbursement of acquisition related expenses to our Advisor. During the operational stage, we will pay our Property Managers and/or other third party property managers a property management fee and our Advisor an asset management fee or asset management participation or construction management fees. We will also reimburse our Advisor and its affiliates for actual expenses it incurs for administrative and other services provided to us. Upon liquidation of assets, we may pay our Advisor or its affiliates a real estate disposition commission. Additionally, our Operating Partnership may be required to make distributions to Lightstone SLP III LLC, an affiliate of the Advisor.

Summary of Cash Flows

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

	For the Six Months Ended June 30,
	2017			2016

Net cash provided by operating activities	$	3,268,061		$	1,878,104
Net cash used in investing activities		(22,108,066	)		(45,170,113	)
Net cash provided by financing activities		14,200,094			47,543,041
Net change in cash		(4,639,911	)		4,251,032
Cash, beginning of year		55,064,507			6,747,401
Cash, end of the period	$	50,424,596		$	10,998,433

Our principal sources of cash flow were derived from proceeds received from our Offering and operating cash flows provided by our properties. In the future, we expect our properties will provide us with a relatively consistent stream of cash flow to sufficiently fund our operating expenses, any scheduled debt service and any monthly distributions authorized by our Board of Directors.

Our principal demands for liquidity currently are expected to be acquisition and development activities, including contributions to our investment in unconsolidated affiliated real estate entity, and scheduled debt service. The principal sources of funding for our operations are currently expected to be available cash on hand, operating cash flows and financings.

Operating activities

The net cash provided by operating activities of $3.3 million during the six months ended June 30, 2017 consisted of our net loss of $1.9 million adjusted for depreciation and amortization, amortization of deferred financing costs and other non-cash items aggregating $4.2 million and net changes in operating assets and liabilities of $1.0 million.

Investing activities

The cash used in investing activities of $22.1 million during the six months ended June 30, 2017 primarily consisted of approximately $20.6 million related to the acquisition of our 22.5% interest in the Cove Joint Venture, capital expenditures of $1.3 million and $0.2 million funding of restricted escrows.

Financing activities

The net cash provided by financing activities of $14.2 million during the six months ended June 30, 2017 consisted of $18.9 million of offering proceeds, partially offset by the payment of $1.8 million of commissions and offering costs, $0.2 million in payments on our mortgages payable and cash distributions of $2.7 million to our common stockholders.

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.

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. The Offering provides for 10.0 million shares available for issuance under our DRIP at a discounted price equivalent to 95% of the Primary Offering price per share. Through May 15, 2017 (the termination date of the DRIP), 339,835 shares of common stock had been issued under our DRIP.

Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to us, subject to certain restrictions. From our date of inception through December 31, 2016 we repurchased 34,358 shares of common stock, pursuant to our share repurchase program. We repurchased the shares at an average price per share of $9.99 per share. For the six months ended June 30, 2017, 6,748 shares of common stock have been repurchased under our share repurchase program at an average price per share of $10.00 per share. We funded share repurchases for the periods noted above from the cumulative proceeds of the sale of our shares pursuant to our DRIP.

On April 21, 2017, the Board of Directors approved the termination of our DRIP effective May 15, 2017. All future distributions will be in the form of cash.

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

Contractual Obligations

The following is a summary of the estimated contractual obligations related to our mortgage payable over the next five years and thereafter as of June 30, 2017.

	Remainder of
Contractual Obligations	2017		2018		2019		2020		2021		Thereafter		Total
Principal maturities	$	212,814	$	445,052	$	60,162,871	$	486,092	$	26,509,613	$	-	$	87,816,442
Interest payments		2,570,190		5,110,594		3,627,792		1,287,576		1,051,196		-		13,647,348
Total	$	2,783,004	$	5,555,646	$	63,790,663	$	1,773,668	$	27,560,809	$	-	$	101,463,790

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 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 (the "IPA"), an industry trade group, 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 both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP.

We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline") issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction-related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses (which includes costs incurred in connection with strategic alternatives), amounts relating to deferred rent receivables and amortization of market lease and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. 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 other 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 to the White Paper or the Practice Guidelines or the SEC or another regulatory body could standardize the allowable adjustments across the publicly registered, non-listed REIT industry, and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.

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 June 30,						For the Six Months Ended June 30,
	2017			2016			2017			2016
Net (loss)/income	$	(775,229	)	$	137,444		$	(1,871,849	)	$	(264,167	)
FFO adjustments:
Depreciation and amortization of real estate assets		1,326,783			613,436			2,651,746			891,752
Adjustments to equity earnings from unconsolidated affiliated real estate entity		715,336			-			1,191,437			-
FFO		1,266,890			750,880			1,971,334			627,585
MFFO adjustments:

Acquisition and other transaction related costs expensed		39,000			733,426			154,391			1,199,266
MFFO		1,305,890			1,484,306			2,125,725			1,826,851
Straight-line rent⁽¹⁾		-			-			-			-
MFFO - IPA recommended format	$	1,305,890		$	1,484,306		$	2,125,725		$	1,826,851

Net (loss)/income	$	(775,229	)	$	137,444		$	(1,871,849	)	$	(264,167	)
Less: net loss/(income) attributable to noncontrolling interests		9			(8	)		22			2
Net (loss)/income applicable to Company's common shares	$	(775,220	)	$	137,436		$	(1,871,827	)	$	(264,165	)
Net (loss)/income per common share, basic and diluted	$	(0.06	)	$	0.02		$	(0.14	)	$	(0.05	)

FFO	$	1,266,890		$	750,880		$	1,971,334		$	627,585
Less: FFO attributable to noncontrolling interests		(22	)		(25	)		(36	)		(25	)
FFO attributable to Company's common shares	$	1,266,868		$	750,855		$	1,971,298		$	627,560
FFO per common share, basic and diluted	$	0.09		$	0.11		$	0.15		$	0.11

MFFO - IPA recommended format	$	1,305,890		$	1,484,306		$	2,125,725		$	1,826,851
Less: MFFO attributable to noncontrolling interests		(22	)		(46	)		(38	)		(62	)
MFFO attributable to Company's common shares	$	1,305,868		$	1,484,260		$	2,125,687		$	1,826,789

Weighted average number of common shares
outstanding, basic and diluted		13,662,457			6,686,377			13,129,718			5,756,835

(1)

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.

Distributions Declared by our Board of Directors and Source of Distributions

The following table provides a summary of our quarterly distributions declared during the periods presented. The amount of distributions paid to our stockholders in the future will be determined by our Board of Directors 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.

	Year to Date June 30, 2017				Three Months Ended June 30, 2017				Three Months Ended March 31, 2017
Distribution period:			Percentage of Distributions		Q2 2017		Percentage of Distributions		Q1 2017		Percentage of Distributions

Date distribution declared					March 27, 2017				November 14, 2016

Date distribution paid					May 15, 2017, June 15, 2017, & July 14, 2017				February 15, 2017, March 15, 2017, & April 14, 2017

Distributions paid	$	3,042,150			$	2,043,824			$	998,326
Distributions reinvested		864,072				-				864,072
Total Distributions	$	3,906,222			$	2,043,824			$	1,862,398

Source of distributions:
Cash flows provided by operations	$	3,042,150		78%	$	2,019,879		99%	$	998,326		54%
Offering proceeds		-		0%		23,945		1%		-		0%
Proceeds from issuance of common stock through DRIP		864,072		22%		-		0%		864,072		46%
Total Sources	$	3,906,222		100%	$	2,043,824		100%	$	1,862,398		100%

Cash flows provided by operations (GAAP basis)	$	3,268,061			$	2,019,879			$	1,248,182

Number of shares of common stock issued pursuant to the Company's DRIP		90,955				-				90,955

	Year to Date June 30, 2016				Three Months Ended June 30, 2016				Three Months Ended March 31, 2016
Distribution period:			Percentage of Distributions		Q2 2016		Percentage of Distributions		Q1 2016		Percentage of Distributions

Date distribution declared					May 2, 2016				November 13, 2015 & March 14, 2016

Date distribution paid					May 16, 2016, June 15, 2016, & July 15, 2016				February 15, 2016, March 15, 2016, & April 14, 2016

Distributions paid	$	1,188,844			$	825,940			$	362,904
Distributions reinvested		533,619				174,361				359,258
Total Distributions	$	1,722,463			$	1,000,301			$	722,162

Source of distributions:
Cash flows provided by operations	$	1,188,844		69%	$	825,940		83%	$	242,327		34%
Offering proceeds		-		0%		-		-		120,577		17%
Proceeds from issuance of common stock through DRIP		533,619		31%		174,361		17%		359,258		49%
Total Sources	$	1,722,463		100%	$	1,000,301		100%	$	722,162		100%

Cash flows provided by operations (GAAP basis)	$	1,878,104			$	1,635,777			$	242,327

Number of shares of common stock issued pursuant to the Company's DRIP		57,126				19,309				37,817

The table below presents our cumulative FFO attributable to the Company's common shares:

	For the period October 5, 2012
	(date of inception) through
	June 30, 2017
FFO attributable to Company's common shares	$	5,303,528
Distributions Paid	$	8,978,957

New Accounting Pronouncements

See Note 2 of the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been issued or adopted during 2017, if any, and certain accounting standards that we have not yet been required to implement and may be applicable to our future operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

We are currently and expect to continue to be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund the expansion and refinancing of our real estate investment portfolio and operations. Our interest rate risk management objectives have been and will continue to be to limit the impact of interest rate changes on our earnings, prepayment penalties and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes. As of June 30, 2017, we did not have any derivative agreements outstanding.

The following table shows the estimated principal maturities for our mortgage debt during the next five years and thereafter as of June 30, 2017:

	Remainder of
Contractual Obligations	2017		2018		2019		2020		2021		Thereafter		Total
Principal maturities	$	212,814	$	445,052	$	60,162,871	$	486,092	$	26,509,613	$	-	$	87,816,442

The carrying amounts reported in the consolidated balance sheets for cash, deposits, accounts receivable (included in prepaid expenses and other assets) and accounts payable and accrued expenses approximated their fair values because of the short maturity of these instruments.

The estimated fair value of our mortgages payable is as follows:

As of June 30, 2017

As of December 31, 2016

Carrying

Amount

Estimated

Fair Value

Carrying

Amount

Estimated

Fair Value

Mortgages payable

87,816,442

87,156,248

88,027,880

87,252,072

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

Our mortgage payable requires the maintenance of certain ratios, including debt service coverage and fixed leverage charge ratio. We are currently in compliance with respect to all of our financial debt covenants.

As of June 30, 2017, approximately $59.7 million, or 68%, of our debt, is a variable rate instrument (not subject to an interest rate cap or swap) and our interest expense associated with this instrument is, therefore, subject to changes in market interest rates. A 1% adverse movement (increase in Libor or Prime rate) would increase annual interest expense by approximately $0.6 million

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 which may affect our ability to obtain or refinance debt in the future. As of June 30, 2017, we had no off-balance sheet arrangements.

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

ITEM 4. CONTROLS AND PROCEDURES.

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

There have been no changes in our internal control over financial reporting that occurred during 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, the Company may become subject to legal proceedings, claims or disputes.

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

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

Recent Sales of Unregistered Securities

During the period covered by this Form 10-Q, the Company did not sell any unregistered securities.

Use of Offering Proceeds

The Company’s sponsor is David Lichtenstein (“Lichtenstein”), who does business as The Lightstone Group, LLC (the “Sponsor”) and is the majority owner of the limited liability company of that name. The Company’s advisor is Lightstone Value Plus REIT III LLC (the “Advisor”), which is wholly owned by its Sponsor.

The Company’s registration statement on Form S-11 (the “Offering”), pursuant to which it offered to sell up to 30,000,000 shares of its common stock, par value $0.01 per share, (which may be referred to herein as ‘‘shares of common stock’’ or as ‘‘Common Shares’’) for an initial offering price of $10.00 per share, subject to certain volume and other discounts (the “Primary Offering”) (exclusive of 10,000,000 shares available pursuant to its distribution reinvestment plan (the “DRIP”) which were offered at a discounted price equivalent to 95% of the Primary Offering price per Common Share) was declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933 on July 15, 2014. On June 30, 2016, the Company adjusted the offering price to $9.50 per Common Share in its Primary Offering, which was equal to the Company’s estimated net asset value (“NAV”) per Common Share as of March 31, 2016, and effective July 25, 2016, the Company’s offering price was adjusted to $10.00 per Common Share in its Primary Offering, which is equal to the estimated NAV per Common Share as of June 30, 2016. Our estimated NAV per Common Share remained unchanged at $10.00 as of both September 30, 2016 and December 31, 2016, respectively.

On December 24, 2012, the Company sold 20,000 Common Shares to the Advisor for $10.00 per share.

Lightstone SLP III LLC (the ‘‘Special Limited Partner’’), a Delaware limited liability company of which Mr. Lichtenstein is the majority owner, is a special limited partner in the Operating Partnership and committed to make a significant equity investment (the “Contribution Agreement”) in the Company of up to $36.0 million, which was equivalent to 12.0% of the $300.0 million maximum amount of the Offering. The Operating Partnership issued one Subordinated Participation Interest for each $50,000 in cash or interests in real property of equivalent value that the Special Limited Partner contributed. In connection with the termination of the Offering, on March 31, 2017, the Company and the Sponsor terminated the Contribution Agreement and as result of the termination, the Sponsor is no obligated to purchase Subordinated Participation Interests.

Below is a summary of the expenses the Company has incurred from October 5, 2012 (date of inception) through its termination on March 31, 2017 in connection with the issuance and distribution of registered securities.

Type of Expense Amount
Underwriting discounts and commissions	$	12,189,116
Other expenses incurred and paid to non-affiliates		4,764,408
Total offering expenses incurred	$	16,953,524

From the Company’s inception date through March 31, 2017 (the termination date of the Offering), it has used the cumulative net offering proceeds received of approximately $126.8 million (including the purchase of an aggregate of $12.1 million of Subordinated Participation Interests by the Special Limited Partner), after deducting the offering costs incurred of $17.0 million, as follows:

Purchase of investment properties, net of financings	$	75,973,022
Cash and cash equivalents, as adjusted		49,022,537
Cash distributions not funded by operations		445,491
Funding of restricted escrows		1,034,047
Other uses (primarily timing of payables)		390,349

Total uses	$	126,865,446

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit Number		Description

10.1*		Amended and Restated Limited Liability Company Operating Agreement of RP Maximus Cove, L.L.C. by and among REIT III Cove LLC, REIT IV Cove LLC, LSG Cove LLC And Maximus Cove Investor LLC
31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
101*		XBRL (eXtensible Business Reporting Language). The following financial information from Lightstone Value Plus Real Estate Investment Trust III, Inc. on Form 10-Q for the quarter ended June 30, 2017, filed with the SEC on August 14, 2017, formatted in XBRL includes: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Operations, (3) Consolidated Statements of Stockholders’ Equity, (4) Consolidated Statements of Cash Flows, and (5) the Notes to the Consolidated Financial Statement.

*Filed herewith

SIGNATURES

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

	LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC.

Date: August 14, 2017	By:	/s/ David Lichtenstein
		David Lichtenstein
		Chairman and Chief Executive Officer (Principal Executive Officer)

Date: August 14, 2017

By:

/s/ Donna Brandin

Donna Brandin

Chief Financial Officer

(Duly Authorized Officer and Principal Financial and Accounting Officer)

Lightstone Value Plus Real Estate Investment Trust III, Inc. - FORM 10-Q - August 14, 2017

Attached files

Lightstone Value Plus Real Estate Investment Trust III, Inc. Reports