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 March 31, 2021

 

OR

 

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

 

For the transition period from                      to

 

Commission file number 000-54047

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

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

 

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

 

(732) 367-0129

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

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 ☑     No ☐

 

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted 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 ☑     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.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☑	Smaller reporting company	☑
		Emerging growth company	☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐     No ☑

 

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. ☐

 

As of May 10, 2021, there were approximately 17.4 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust II, Inc., including shares issued pursuant to the distribution reinvestment plan.  

 

 

 

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

 

INDEX

 

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020	1
	Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020	2
	Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2021 and 2020	3
	Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2021 and 2020	4
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 4.	Controls and Procedures	31
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	32

 

 

PART I. FINANCIAL INFORMATION:

 

ITEM 1. FINANCIAL STATEMENTS.

 

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

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

 

		March 31, 2021				December 31, 2020
		(unaudited)
Assets
Investment property:
Land and improvements		$	36,699			$	36,689
Building and improvements			203,566				203,561
Furniture and fixtures			36,033				36,010
Construction in progress			163				77
Gross investment property			276,461				276,337
Less accumulated depreciation			(53,956	)			(51,269	)
Net investment property			222,505				225,068
Investments in unconsolidated affiliated entities			15,339				15,359
Cash and cash equivalents			14,701				15,348
Marketable securities, available for sale			6,859				6,902
Restricted cash			4,581				3,075
Accounts receivable and other assets			3,963				2,836
Total Assets		$	267,948			$	268,588
Liabilities and Stockholders’ Equity
Accounts payable and other accrued expenses		$	8,653			$	7,859
Margin loan			2,526				2,599
Mortgages payable, net			136,115				136,400
Notes payable			7,089				3,343
Due to related party			544				618
Total liabilities			154,927				150,819
Commitments and contingencies
Stockholders’ Equity:
Company’s stockholders’ equity:
Preferred shares, $0.01 par value, 10.0 million shares authorized,  none issued and outstanding			-				-
Common stock, $0.01 par value; 100.0 million shares authorized, 17.4 million shares issued and outstanding			174				174
Additional paid-in-capital			147,100				147,100
Accumulated other comprehensive income			60				82
Accumulated deficit			(45,830	)			(41,186	)
Total Company stockholders’ equity			101,504				106,170
Noncontrolling interests			11,517				11,599
Total Stockholders’ Equity			113,021				117,769
Total Liabilities and Stockholders’ Equity		$	267,948			$	268,588

 

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

 

 

PART I. FINANCIAL INFORMATION, CONTINUED: 

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(unaudited)

 

		For the Three Months Ended March 31,
		2021				2020
Revenues		$	7,447			$	13,245
Expenses:
Property operating expenses			5,906				9,988
Real estate taxes			927				882
General and administrative costs			1,265				1,206
Depreciation and amortization			2,692				2,645
Total operating expenses			10,790				14,721
Operating loss			(3,343	)			(1,476	)
Interest and dividend income			70				143
Interest expense			(1,346	)			(1,817	)
Loss on sale of marketable securities, available for sale			-				(245	)
Earnings from investments in unconsolidated affiliated entities			(83	)			(516	)
Other expense, net			(30	)			(14	)
Net loss			(4,732	)			(3,925	)
Less: net loss attributable to noncontrolling interests			88				74
Net loss applicable to Company’s common shares		$	(4,644	)		$	(3,851	)
Net loss per Company’s common share, basic and diluted		$	(0.27	)		$	(0.22	)
Weighted average number of common shares outstanding, basic and diluted			17,430				17,445

 

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

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Amounts in thousands)

(unaudited)

 

		For the Three Months Ended March 31,
		2021				2020
Net loss		$	(4,732	)		$	(3,925	)
Other comprehensive loss:
Holding loss on marketable securities, available for sale			(22	)			(1,165	)
Reclassification adjustment for loss included in net loss			-				245
Other comprehensive loss:			(22	)			(920	)
Comprehensive loss			(4,754	)			(4,845	)
Less: Comprehensive loss attributable to noncontrolling interests			88				74
Comprehensive loss attributable to the Company’s common shares		$	(4,666	)		$	(4,771	)

  

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

 

 

PART I. FINANCIAL INFORMATION, CONTINUED: 

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in thousands)

(unaudited)

 

										Additional				Accumulated Other												Total
		Common Stock								Paid-In				Comprehensive				Accumulated				Noncontrolling				Stockholders’
		Shares				Amount				Capital				Loss				Deficit				Interests				Equity
BALANCE, December 31, 2019			17,512			$	175			$	147,924			$	172			$	(19,863	)		$	12,214			$	140,622
Net loss			-				-				-				-				(3,851	)			(74	)			(3,925	)
Other comprehensive loss			-				-				-				(920	)			-				-				(920	)
Contributions of noncontrolling interests			-				-				-				-				-				45				45
Distributions to noncontrolling interests			-				-				-				-				-				(327	)			(327	)
Redemption and cancellation of shares			(82	)			(1	)			(824	)			-				-				-				(825	)
BALANCE, March 31, 2020			17,430			$	174			$	147,100			$	(748	)		$	(23,714	)		$	11,858			$	134,670

 

										Additional				Accumulated Other												Total
		Common Stock								Paid-In				Comprehensive				Accumulated				Noncontrolling				Stockholders’
		Shares				Amount				Capital				Loss				Deficit				Interests				Equity
BALANCE, December 31, 2020			17,430			$	174			$	147,100			$	82			$	(41,186	)		$	11,599			$	117,769
Net loss			-				-				-				-				(4,644	)			(88	)			(4,732	)
Other comprehensive loss			-				-				-				(22	)			-				-				(22	)
Contributions of noncontrolling interests			-				-				-				-				-				6				6
BALANCE, March 31, 2021			17,430			$	174			$	147,100			$	60			$	(45,830	)		$	11,517			$	113,021

 

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

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(unaudited)

 

		For the Three Months Ended March 31,
		2021				2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(4,732	)		$	(3,925	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			2,692				2,645
Amortization of deferred financing costs			103				103
Loss on sale of marketable securities, available for sale			-				245
Earnings from investments in unconsolidated affiliated entities			83				516
Other non-cash adjustments			46				45
Changes in assets and liabilities:
Increase in accounts receivable and other assets			(1,157	)			(240	)
Increase/(decrease) in accounts payable and other accrued expenses			794				(230	)
(Decrease)/increase in due to related party			(74	)			4
Net cash used in operating activities			(2,245	)			(837	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment property			(125	)			(2,192	)
Proceeds from the sale of marketable debt securities			-				1,819
Contributions to unconsolidated affiliated entity			(68	)			-
Distributions from unconsolidated affiliated entities			6				79
Net cash used in investing activities			(187	)			(294	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on mortgages payable			(52	)			(48	)
Payment on margin loan			(73	)			(2,043	)
Proceeds received from notes payable			3,746				-
Payment of loan fees and expenses			(336	)			-
Redemption and cancellation of common shares			-				(824	)
Distributions to noncontrolling interests			-				(327	)
Contributions of noncontrolling interests			6				45
Distributions to common stockholders			-				(3,065	)
Net cash provided by/(used in) financing activities			3,291				(6,262	)
Net change in cash, cash equivalents and restricted cash			859				(7,393	)
Cash, cash equivalents and restricted cash, beginning of year			18,423				30,216
Cash, cash equivalents and restricted cash, end of period		$	19,282			$	22,823
Supplemental cash flow information for the periods indicated is as follows:
Cash paid for interest		$	1,108			$	1,732
Holding loss on marketable securities, available for sale		$	22			$	920
Investment property acquired but not paid		$	-			$	613
The following is a summary of the Company’s cash, cash equivalents, and restricted cash total as presented in our statements of cash flows for the periods presented:
Cash		$	14,701			$	13,806
Restricted cash			4,581				9,017
Total cash and restricted cash		$	19,282			$	22,823

  

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

 

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

1.

Structure

 

Lightstone Value Plus Real Estate Investment Trust II, Inc. (‘‘Lightstone REIT II’’), is a Maryland corporation, formed on April 28, 2008, which elected to qualify as a real estate investment trust (‘‘REIT’’) for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2009.

 

Lightstone REIT II 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 II LP, a Delaware limited partnership (the ‘‘Operating Partnership’’). As of March 31, 2021, Lightstone REIT II held an approximately 99% general partnership interest in the Operating Partnership’s common units.

 

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

 

The Company has and will continue to seek to acquire a diverse portfolio of real estate assets and real estate-related investments, including hotels, other commercial and/or residential properties, 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. Although the Company expects that most of its investments will be of these types, it may invest in whatever types of real estate-related investments that it believes are in its best interests.

 

The Company currently has one operating segment. As of March 31, 2021, we (i) majority owned and consolidated the operating results and financial condition of 14 limited service hotels containing a total of 1,802 rooms, (ii) held an unconsolidated 48.6% membership interest in Brownmill, LLC (the “Brownmill Joint Venture”), an affiliated entity that owns two retail properties, and (iii) held an unconsolidated 50.0% membership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”), an affiliated real estate entity that owns and operates a 183-room limited service hotel located in Long Island City, New York (the “Hilton Garden Inn – Long Island City”). The Company accounts for its membership interests in the Brownmill Joint Venture and the Hilton Garden Inn Joint Venture under the equity method of accounting.

 

As of March 31, 2021, seven of our consolidated limited service hotels are held in a joint venture (the “Joint Venture”) formed between us and Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”), a related party REIT also sponsored by The Lightstone Group, LLC. The Company and Lightstone I have 97.5% and 2.5% membership interests in the Joint Venture, respectively. Additionally, as of March 31, 2021, certain of our consolidated hotels also have ownership interests held by unrelated minority owners. The membership interests of Lightstone I and the unrelated minority owners are accounted for as noncontrolling interests.

 

The Company’s advisor is Lightstone Value Plus REIT II LLC (the “Advisor”), which is majority owned by David Lichtenstein. On May 20, 2008, the Advisor contributed $2 to the Operating Partnership in exchange for 200 limited partner common units in the Operating Partnership. The Advisor also owns 20,000 shares of the Company’s common stock (“Common Shares”) which were issued on May 20, 2008 for $200, or $10.00 per share. Mr. Lichtenstein also is a majority owner of the equity interests of the Lightstone Group, LLC. The Lightstone Group, LLC served as the Company’s sponsor (the ‘‘Sponsor’’) during its initial public offering (the “Offering”) and follow-on offering (the “Follow-on Offering”, and collectively, “the Offerings”), which terminated on August 15, 2012 and September 27, 2014, respectively. The Advisor, pursuant to the terms of an advisory agreement, together with the Company’s board of directors (the “Board of Directors”), is primarily responsible for making investment decisions on behalf of the Company and managing its day-to-day operations. Through his ownership and control of the Lightstone Group, LLC, Mr. Lichtenstein is the indirect owner and manager of Lightstone SLP II LLC, a Delaware limited liability company (the “Associate General Partner”), which has subordinated profits interests in the Operating Partnership which were acquired for aggregate consideration of $17.7 million in connection with the Company’s Offerings. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT II or the Operating Partnership.

 

The Company does not have any employees. The Advisor receives compensation and fees for services related to the investment and management of the Company’s assets.

 

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

The Company’s Advisor has certain affiliates which may manage the properties the Company acquires. However, the Company also contracts with other unaffiliated third-party property managers, principally for the management of its hospitality properties.

 

The Company’s Common Shares are not currently listed on a national securities exchange. The Company may seek to list its Common Shares for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its Common Shares until they are listed for trading. In the event the Company does not obtain listing prior to September 27, 2024, which is the tenth anniversary of the termination of its Follow-On Offering, its charter requires that the Board of Directors must either (i) seek stockholder approval of an extension or amendment of this listing deadline; or (ii) seek stockholder approval to adopt a plan of liquidation of the corporation.

 

 Noncontrolling Interests

 

Limited Partner

 

On May 20, 2008, the Advisor contributed $2 to the Operating Partnership in exchange for 200 limited partner common units in the Operating Partnership. The Advisor has the right to convert limited partner common units into cash or, at the Company’s option, an equal number of Common Shares.

 

Associate General Partner

 

In connection with the Company’s Offerings, which concluded on September 27, 2014, the Associate General Partner contributed (i) cash of approximately $12.9 million and (ii) equity interests totaling 48.6% in the Brownmill Joint Venture, which were valued at $4.8 million, to the Operating Partnership in exchange for 177.0 Subordinated Profits Interests in the Operating Partnership with an aggregate value of $17.7 million.

 

As the indirect majority owner of the Associate General Partner, Mr. Lichtenstein is the beneficial owner of a 99% interest in such Subordinated Profits Interests and thus receives an indirect benefit from any distributions made in respect thereof.

 

These Subordinated Profits Interests may entitle the Associate General Partner to a portion of any regular and liquidation distributions that the Company makes to its stockholders, but only after its stockholders have received a stated preferred return. There have been no distributions declared on the Subordinated Profits Interests for quarterly periods after March 31, 2020. Since the Company’s inception, the cumulative distributions declared and paid on the Subordinated Profits Interests were $7.9 million. Any future distributions on the Subordinated Profits Interests will always be subordinated until stockholders receive a stated preferred return, as described above.

  

Other Noncontrolling Interests in Consolidated Subsidiaries

 

Other noncontrolling interests consist of the (i) membership interest in the Joint Venture held by Lightstone I and (ii) membership interests held by minority owners in certain of the Company’s hotels.

 

The Advisor and its affiliates and Associate General Partner are related parties of the Company. Certain of these entities are entitled to compensation and fees for services related to the investment, management and disposition of the Company’s assets during its acquisition, operational and liquidation stages. The compensation levels during the Company’s acquisition and operational stages are based on the cost of acquired properties/investments and the annual revenue earned from such properties/investments, and other such fees and reimbursements as outlined in each of the respective agreements.

 

2.	Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of Lightstone REIT II and its Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). As of March 31, 2021, Lightstone REIT II had a 99% general partnership interest in the common units of the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation. 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.

 

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

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, 2020. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. The accompanying unaudited consolidated financial statements of the Lightstone Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

 

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

 

The consolidated balance sheet as of December 31, 2020 included herein has been derived from the consolidated balance sheet included in the Company’s Annual Report on Form 10-K.

 

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

 

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.

 

Revenue Recognition

 

The following table represents the total revenues from hotel operations on a disaggregated basis:

 

		For the Three Months ended March 31,
		2021				2020
Revenues
Room		$	7,212			$	12,451
Food, beverage and other			235				794
Total revenues		$	7,447			$	13,245

 

COVID-19 Pandemic Operations and Liquidity Update

 

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic leading many countries, including the United States, particularly at the individual state level, to subsequently impose various degrees of restrictions and other measures, including, but not limited to, mandatory temporary closures, quarantine guidelines, limitations on travel, and “shelter in place” rules in an effort to reduce its duration and the severity of its spread. Although the COVID-19 pandemic has continued to evolve, most of these previously imposed restrictions and other measures have now been reduced and/or lifted. However, the COVID-19 pandemic remains highly unpredictable and dynamic and its duration and extent is likely dependent on numerous developments such as the regulatory approval, mass production, administration and ultimate effectiveness of vaccines, as well as the timeline to achieve a level of sufficient herd immunity amongst the general population. Accordingly, the COVID-19 pandemic may continue to have negative effects on the overall health of the U.S. economy for the foreseeable future. 

 

The extent to which the Company’s business may be affected by the ongoing COVID-19 pandemic will largely depend on both current and future developments, all of which are highly uncertain and cannot be reasonably predicted. As a result of the COVID-19 pandemic, room demand for the Company’s consolidated and unconsolidated hotels began to significantly decline in March 2020 and while there has been slight sequential improvement since then; room demand continues to be substantially below historical levels. Since March 2020, the COVID-19 pandemic has had a significant negative impact on the Company’s operations, financial position and cash flow and the Company currently expects that it will continue to do so for the foreseeable future. The Company cannot currently estimate if and when room demand will fully recover to pre-pandemic levels for its hotels. Additionally, the Company has an unconsolidated 48.6% membership interest in the Brownmill Joint Venture, which owns two retail properties located in New Jersey that have been subject to various restrictions. If the Brownmill Joint Venture’s retail properties are negatively impacted for an extended period because its tenants are unable to pay their rent, the Company’s equity earnings and the carrying value of its investment in the Brownmill Joint Venture could be materially and adversely impacted.

 

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

In light of the past, present and potential future impact of the COVID-19 pandemic on the operating results of its hotels, the Company has taken various actions to preserve its liquidity, including the following:

 

●

The Company implemented cost reduction strategies for all of its hotels, leading to reductions in certain operating expenses and capital expenditures.

 

●

Amendments to Revolving Credit Facility –

 

On June 2, 2020, the Company’s revolving credit facility (the “Revolving Credit Facility”) was amended to provide for (i) the deferral of the six monthly debt service payments aggregating $2.6 million for the period from April 1, 2020 through September 30, 2020, which are now due on November 15, 2021; (ii) a 100 bps reduction in the interest rate spread to LIBOR + 2.15%, subject to a 3.00% floor, for the six-month period from September 1, 2020 through February 28, 2021; (iii) the Company pre-funding $2.5 million into a cash collateral reserve account to cover the six monthly debt service payments due from October 1, 2020 through March 1, 2021; and (iv) a waiver of all financial covenants for quarter-end periods before June 30, 2021.

 

Subsequently, on March 31, 2021, the Revolving Credit Facility was further amended providing for (i) the Company to pledge the membership interests in another hotel as additional collateral within 45 days, (ii) the Company to fund an additional $2.5 million into the cash collateral reserve account; (iii) a waiver of all financial covenants for quarter-end periods through September 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods beginning December 31, 2021 through March 31, 2023; (iv) an extension of the maturity date from May 17, 2021 to September 15, 2022 upon completion of the pledge of the additional collateral; (v) one additional one-year extension option at the lender’s sole discretion; and (vi) certain limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.

 

On May 13, 2021, the Company pledged the additional collateral and extended the maturity date of the Revolving Credit Facility to September 15, 2022.

 

See Note 6 for additional information.

 

●

In April 2020, the Company’s hotels received $3.3 million from loans provided under the federal Paycheck Protection Program (“PPP Loans”). Subsequently, during the first quarter of 2021, the Company’s hotels received an additional $3.7 million from PPP Loans. See Note 7 for additional information.

 

●

On March 19, 2020, the Board of Directors determined to suspend regular quarterly distributions and, as a result, has not declared any distributions on the Company’s Common Shares or the Subordinated Profits Interests since the suspension. Additionally, on March 19, 2020, the Board of Directors approved the suspension of all redemptions under the Company’s shareholder redemption program.

 

●

The Company had $7.2 million of funds previously held in escrow with a qualified intermediary to facilitate a potential like-kind exchange transaction in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended, released to it in May 2020.

 

●

The Hilton Garden Inn Joint Venture has obtained various amendments to its non-recourse mortgage loan secured by the Hilton Garden Inn – Long Island City. See Note 4 for additional information.

 

The Company believes that these actions, along with its available on hand cash and cash equivalents, restricted cash and marketable securities will provide it with sufficient liquidity to meet its obligations for at least 12 months from the date of issuance of these financial statements.

 

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

New Accounting Pronouncements

 

The Company has reviewed and determined that 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.

 

3.	Investments in Unconsolidated Affiliated Entities

 

The entities listed below are partially owned by the Company. The Company accounts for these investments under the equity method of accounting as the Company exercises significant influence, but does not exercise financial and operating control over these entities. A summary of the Company’s investments in the unconsolidated affiliated entities is as follows:

 

								As of
Entity		Date of Ownership		Ownership %				March 31, 2021				December 31, 2020
Brownmill		Various			48.58	%		$	4,937			$	4,710
Hilton Garden Inn Joint Venture		March 27, 2018			50.00	%			10,402				10,649
Total investments in unconsolidated affiliated real estate entities								$	15,339			$	15,359

 

Brownmill Joint Venture

 

During 2010 through 2012, the Company entered into various contribution agreements with Lightstone Holdings LLC (‘‘LGH’’), a wholly-owned subsidiary of the Sponsor, pursuant to which LGH contributed to the Company an aggregate 48.6% membership interest in the Brownmill Joint Venture in exchange for the Company issuing an aggregate of 48 units of Subordinated Profits Interests, at $100,000 per unit (at an aggregate total value of $4.8 million), to Lightstone SLP II LLC.

 

As of March 31, 2021, the Company owns a 48.6% membership interest in the Brownmill Joint Venture, which is a non-managing interest. An affiliate of the Company’s Sponsor is the majority owner and manager of the Brownmill Joint Venture. Profit and cash distributions are allocated in accordance with each investor’s ownership percentage. The Company accounts for its investment in the Brownmill Joint Venture in accordance with the equity method of accounting. During the three months ended March 31, 2021, the Company made contributions to the Brownmill Joint Venture aggregating $68. During the three months ended March 31, 2021 and 2020, the Company received distributions from the Brownmill Joint Venture aggregating $6 and $35, respectively.

 

The Brownmill Joint Venture owns two retail properties known as Browntown Shopping Center, located in Old Bridge, New Jersey, and Millburn Mall, located in Vauxhaull, New Jersey, which collectively, are referred to as the “Brownmill Properties.”

 

Brownmill Joint Venture Financial Information

 

The Company’s carrying value of its interest in the Brownmill Joint Venture differs from its share of member’s equity reported in the condensed balance sheet of the Brownmill Joint Venture due to the Company’s basis of its investment in excess of the historical net book value of the Brownmill 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.

 

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

The following table represents the condensed income statements for the Brownmill Joint Venture for the periods indicated:

 

		For the Three Months Ended March 31,
		2021				2020
Revenue		$	1,050			$	925
Property operating expenses			305				652
Depreciation and amortization			176				165
Operating income			569				108
Interest expense and other, net			(166	)			(169	)
Net income/(loss)		$	403			$	(61	)
Company’s share of earnings		$	196			$	(30	)
Additional depreciation and amortization expense (1)			(31	)			(31	)
Company’s earnings from investment		$	165			$	(61	)

 

1)

Additional depreciation and amortization expense relates to the amortization of the difference between the cost of the interest in Brownmill and the amount of the underlying equity in net assets of Brownmill.

 

The following table represents the condensed balance sheets for Brownmill:

 

		As of				As of
		March 31, 2021				December 31, 2020
Real estate, at cost (net)		$	14,176			$	14,234
Cash and restricted cash			1,156				1,038
Other assets			1,448				1,279
Total assets		$	16,780			$	16,551
Mortgage payable		$	13,773			$	13,834
Other liabilities			777				1,018
Members’ capital			2,230				1,699
Total liabilities and members’ capital		$	16,780			$	16,551

 

Hilton Garden Inn Joint Venture

 

On March 27, 2018, the Company and Lightstone Value Plus Real Estate Investment Trust III, Inc. (“Lightstone REIT III”), a related party REIT also sponsored by the Company’s Sponsor, acquired, through the Hilton Garden Inn Joint Venture, a 183-room, limited-service hotel located at 29-21 41^st Avenue, Long Island City, New York (the “Hilton Garden Inn - Long Island City”) from an unrelated third party, for aggregate consideration of $60.0 million, which consisted of $25.0 million of cash and $35.0 million of proceeds from a loan from a financial institution (the “Hilton Garden Inn Mortgage”), excluding closing and other related transaction costs. The Company and Lightstone REIT III each have a 50.0% membership interest in the Hilton Garden Inn Joint Venture.

 

The Company paid $12.9 million for a 50.0% membership interest in the Hilton Garden Inn Joint Venture. The Company’s membership interest in the Hilton Garden Inn Joint Venture is a co-managing interest. The Company accounts for its membership interest in the Hilton Garden Inn Joint Venture in accordance with the equity method of accounting because it exerts significant influence over but does not control the Hilton Garden Inn Joint Venture.  All capital contributions and distributions of earnings from the Hilton Garden Inn Joint Venture are made on a pro rata basis in proportion to each member’s equity interest percentage. Any distributions in excess of earnings from the Hilton Garden Inn Joint Venture are made to the members pursuant to the terms of the Hilton Garden Inn Joint Venture’s operating agreement. The Company commenced recording its allocated portion of profit/loss and cash distributions beginning as of March 27, 2018 with respect to its membership interest of 50.0% in the Hilton Garden Inn Joint Venture.

 

In light of the impact of the COVID-19 pandemic on the operating results of the Hilton Garden Inn – Long Island City, the Hilton Garden Inn Joint Venture has entered into certain amendments with respect to the Hilton Garden Inn Mortgage as discussed below.

 

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

On June 2, 2020, the Hilton Garden Inn Mortgage was amended to provide for (i) the deferral of the six monthly debt service payments aggregating $0.9 million for the period from April 1, 2020 through September 30, 2020 until March 27, 2023; (ii) a 100 bps reduction in the interest rate spread to LIBOR + 2.15%, subject to a 4.03% floor, for the six-month period from September 1, 2020 through February 28, 2021; (iii) the Hilton Garden Inn Joint Venture pre-funding $1.2 million into a cash collateral reserve account to cover the six monthly debt service payments due from October 1, 2020 through March 1, 2021; and (iv) waiver of all financial covenants for quarter-end periods before June 30, 2021.

 

Additionally, on April 7, 2021, the Hilton Garden Inn Joint Venture and the lender further amended the terms of the Hilton Garden Inn Mortgage to provide for (i) the Hilton Garden Inn Joint Venture to make a principal paydown of $1.7 million; (ii) the Hilton Garden Inn Joint Venture to fund an additional $0.7 million into the cash collateral reserve account; (iii) a waiver of all financial covenants for quarter-end periods through September 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods beginning December 31, 2021 through December 31, 2022; (iv) a 11-month interest-only payment period from May 1, 2021 through March 31, 2022; and (v) certain restrictions on distributions to the members of the Hilton Garden Inn Joint Venture during the interest-only payment period.

 

Subsequent to the Company’s acquisition of its 50.0% membership interest in the Hilton Garden Joint Venture through March 31, 2021, it has made an aggregate of $1.5 million of additional capital contributions and received aggregate distributions of $1.5 million. All of these additional capital contributions and distributions were made prior to 2021.

 

Hilton Garden Inn Joint Venture Financial Information

 

The following table represents the condensed income statements for the Hilton Garden Inn Joint Venture for the period indicated:

 

		For the Three Months Ended March 31, 2021				For the Three Months Ended March 31, 2020
Revenues		$	1,419			$	1,540
Property operating expenses			872				1,344
General and administrative costs			10				18
Depreciation and amortization			635				630
Operating loss			(98	)			(452	)
Interest expense			(397	)			(457	)
Net loss		$	(495	)		$	(909	)
Company’s share of net loss (50.00%)		$	(248	)		$	(455	)

 

The following table represents the condensed balance sheets for the Hilton Garden Inn Joint Venture:

 

		As of				As of
		March 31, 2021				December 31, 2020
Investment property, net		$	54,214			$	54,826
Cash			2,081				885
Other assets			552				1,211
Total assets		$	56,847			$	56,922
Mortgage payable, net		$	35,239			$	34,988
Other liabilities			1,375				1,207
Members’ capital			20,233				20,727
Total liabilities and members’ capital		$	56,847			$	56,922

 

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

4.	Marketable Securities, Fair Value Measurements and Margin Loan

 

Marketable Securities

 

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

 

		As of March 31, 2021
		Adjusted Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Marketable Securities:
Equity securities:
Preferred Equities		$	3,620			$	81			$	-			$	3,701
Debt securities:
Corporate Bonds			3,098				60				-				3,158
Total		$	6,718			$	141			$	-			$	6,859

 

		As of December 31, 2020
		Adjusted Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Marketable Securities:
Equity securities:
Preferred Equities		$	3,620			$	102			$	-			$	3,722
Debt securities:
Corporate Bonds			3,098				82				-				3,180
Total		$	6,718			$	184			$	-			$	6,902

 

When evaluating its investments in marketable debt securities for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the marketable debt security before recovery of its amortized cost basis. During the three months ended March 31, 2021 and 2020, the Company did not recognize any impairment charges on its investments in marketable debt securities. As of March 31, 2021, the Company had no investments in marketable debt securities with unrealized losses.

 

The Company may sell certain of its investments in marketable debt securities prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management.

 

Fair Value Measurements

 

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

 

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

 

	●	Level 1 – Quoted prices in active markets for identical assets or liabilities.
	●	Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
	●	Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

As of March 31, 2021 and December 31, 2020, the Company’s preferred equities and corporate bonds were classified as Level 2 assets and there were no transfers between the level classifications. There were no transfers between the level classifications during the three months ended March 31, 2021.

 

The fair values of the Company’s investments in preferred equities and corporate bonds are measured using readily available quoted prices for similar assets.

 

The following table summarizes the estimated fair value of our investments in marketable debt securities with stated contractual maturity dates, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities:

 

		As of March 31, 2021
Due in 1 year		$	-
Due in 1 year through 5 years			3,158
Due in 5 year through 10 years			-
Due after 10 years			-
Total		$	3,158

 

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

 

Margin loan

 

The Company has access to a margin loan from a financial institution that holds custody of certain of the Company’s marketable securities. The margin loan is collateralized by the marketable securities in the Company’s account. The amounts available to the Company under the margin loan are at the discretion of the financial institution and not limited to the amount of collateral in its account.  The amount outstanding under this margin loan was $2.5 million and $2.6 million as of March 31, 2021 and December 31, 2020, respectively, and is due on demand. The margin loan bears interest at LIBOR + 0.85% (0.96% as of March 31, 2021).

 

5.	Mortgages payable, net

 

Mortgages payable, net consisted of the following:

 

				Weighted Average Interest Rate
Description		Interest Rate		as of March 31, 2021				Maturity Date		Amount Due at Maturity				As of March 31, 2021				As of December 31, 2020
Revolving Credit Facility		LIBOR + 3.15% (floor of 4.00%)			3.36	%		September 2022		$	123,045			$	123,045			$	123,045
Courtyard – Paso Robles		5.49%			5.49	%		November 2023			13,022				13,567				13,619
Total mortgages payable					3.57	%				$	136,067				136,612				136,664
Less: Deferred financing costs															(497	)			(264	)
Total mortgages payable, net														$	136,115			$	136,400

 

Revolving Credit Facility

 

The Company, through certain subsidiaries, has a non-recourse Revolving Credit Facility with a financial institution. The Revolving Credit Facility provides the Company with a line of credit of up to $140.0 million pursuant to which it may designate properties as collateral that allow borrowings up to a 65.0% loan-to-value ratio subject to also meeting certain financial covenants, including a prescribed minimum debt yield. The Revolving Credit Facility provides for monthly interest-only payments and the entire principal balance is due upon its expiration.

 

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

The Revolving Credit Facility, which was entered into on May 17, 2018, had an initial maturity date of May 17, 2021,which was subject to certain options to extend at the sole discretion of the lender. The initial interest rate on the Revolving Credit Facility was LIBOR + 3.50% until it was reduced to LIBOR + 3.15% effective March 31, 2019. 

 

On June 2, 2020, the Company and the lender agreed to certain changes to the terms of Revolving Credit Facility, including (i) the deferral of monthly debt service for payments aggregating $2.6 million for the period from April 1, 2020 through September 30, 2020, which are now due on November 15, 2021; (ii) subject to certain conditions, the interest rate spread may be reduced by 100 bps to LIBOR + 2.15%, subject to a 3.00% floor, for the six-month period beginning September 1, 2020 through February 28, 2021; (iii) the Company deposited $2.5 million into a cash collateral account (which is classified as restricted cash on the consolidated balance sheets) to be applied against the monthly debt service payments due from October 1, 2020 through March 1, 2021; and (iv) waiver of all financial covenants for periods before June 30, 2021.

 

Subsequently, on March 31, 2021, the Revolving Credit Facility was further amended providing for (i) the Company to pledge its membership interest in another hotel as additional collateral within 45 days, (ii) the Company to fund an additional $2.5 million into the cash collateral reserve account (which was included in restricted cash on the Company’s consolidated balance sheet as of March 31, 2021); (iii) a waiver of all financial covenants for quarter-end periods through September 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods beginning December 31, 2021 through March 31, 2023; (iv) an extension of the maturity date from May 17, 2021 to September 15, 2022 upon completion of the pledge of the additional collateral; (v) one additional one-year extension option at the lender’s sole discretion; and (vi) certain limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.  

 

On May 13, 2021, the Company pledged the additional collateral and extended the maturity date of the Revolving Credit Facility to September 15, 2022.

 

As of March 31, 2021, 12 of the Company’s hotel properties were pledged as collateral under the Revolving Credit Facility and the outstanding principal balance was $123.0 million. Additionally, no additional borrowings were available under the Revolving Credit Facility as of March 31, 2021.

 

Courtyard – Paso Robles Mortgage Loan

 

In connection with the Company’s acquisition of the Courtyard – Paso Robles on December 14, 2017, it assumed the Courtyard – Paso Robles Mortgage Loan. The Courtyard – Paso Robles Mortgage Loan matures in November 2023, bears interest at a fixed rate of 5.49% and requires monthly principal and interest payments of $79 through its stated maturity with a balloon payment of $13.0 million due at maturity. The Courtyard – Paso Robles Mortgage Loan had an outstanding balance of $13.6 million as of March 31, 2021.

 

On October 28, 2020, the servicer of the Courtyard – Paso Robles Mortgage Loan agreed to waive the minimum debt yield financial covenant for all periods through June 30, 2021.

 

Principal Maturities

 

The following table, based on the terms of the mortgages, sets forth their aggregate estimated contractual principal maturities, including balloon payments due at maturity, as of March 31, 2021, after taking into consideration the extension of the maturity of the Revolving Credit Facility:

 

		2021				2022				2023				2024				2025				Thereafter				Total
Principal maturities		$	148			$	123,256			$	13,208			$	-			$	-			$	-			$	136,612
Less: deferred financing costs																											(497	)
Total principal maturities, net																										$	136,115

 

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

Pursuant to the Company’s loan agreements, escrows in the amount of $4.6 million and $3.1 million were held in restricted cash accounts as of March 31, 2021 and December 31, 2020, respectively. Such escrows will be released in accordance with the applicable loan agreements for payments of real estate taxes, debt service payments, insurance and capital improvement transactions, as required. Certain of our debt agreements also contain clauses providing for prepayment penalties.

 

6.

Notes Payable

 

During April 2020, the Company, through various subsidiaries (each such entity, a “Borrower”), received aggregate funding of $3.3 million through loans (the “PPP Loans”) originated under the federal Paycheck Protection Program, which was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration.  During the first quarter of 2021, the Borrower received an additional aggregate funding of $3.7 million of PPP Loans. The PPP Loans each have a term of five years and provide for an interest rate of 1.00%.  The payment of principal and interest on the PPP Loan is deferred until the day that the forgiven amount is remitted to the lender (approximately five months after the forgiveness application is submitted to the lender, unless the Borrower appeals a denial of forgiveness) or ten months after the end of the Borrower’s covered period, whichever is earlier. Pursuant to the terms of the CARES Act, the proceeds of the PPP Loans may be used for payroll costs, mortgage interest, rent or utility costs.  

 

The promissory note for each of the PPP Loans contains customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note.   Under the terms of the CARES Act, each Borrower can apply for and be granted forgiveness for all or a portion of the PPP Loans.  Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act.  Although the Company intends for each Borrower to apply for loan forgiveness, no assurance can be given that any Borrower will ultimately obtain forgiveness under any relevant PPP Loan, in whole or in part. In the event all or any portion of the PPP Loans is forgiven, the amount forgiven is applied to outstanding principal, and would be recorded as income. As of March 31, 2021 and December 31, 2020, the PPP Loans had an outstanding balance of $7.1 million and $3.3 million, respectively, and are classified as Notes Payable on the consolidated balance sheets.

 

7.

Equity

 

Distributions on Common Shares

 

On March 19, 2020, the Company’s Board of Directors determined to suspend regular quarterly distributions and, as a result, has not declared any distributions on the Company’s Common Shares since the suspension.

 

Future distributions declared on the Company’s Common Shares, if any, will be at the discretion of the Board of Directors based on their analysis of the Company’s performance over the previous periods and expectations of performance for future periods. The Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, revenues and other sources of income, operating and interest expenses and the Company’s ability to refinance near-term debt as well as the IRS’s annual distribution requirement that REITs distribute no less than 90% of their taxable income. The Company cannot assure that any future distributions will be made or that it will maintain any particular level of distributions that it has previously established or may establish.

 

Share Repurchase Program

 

The Company’s share repurchase program may provide its stockholders with limited, interim liquidity by enabling them to sell their Common Shares back to the Company, subject to restrictions.

 

On March 19, 2020, the Board of Directors amended the share repurchase program to remove stockholder notice requirements and also approved the suspension of all redemptions effective immediately. On March 25, 2020, the Board of Directors determined to suspend the share repurchase program effective immediately.

 

Effective May 10, 2021, the Board of Directors reopened the share repurchase program for redemptions submitted in connection with a stockholder’s death or hardship and set the price for all such purchases to 100% of the NAV per Share ($8.02 as of December 31, 2020).

 

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

Deaths that occurred subsequent to January 1, 2020 are eligible for consideration. Beginning January 1, 2022, requests for redemptions in connection with a stockholder’s death must be submitted and received by the Company within one year of the stockholder’s date of death for consideration.

 

On an annual basis, the Company will not redeem in excess of 0.5% of the number of shares outstanding as of the end of the preceding year for either death or hardship redemptions, respectively. Redemption requests are expected to be processed on a quarterly basis and may be subject to pro ration if either type of redemption requests exceed the annual limitation.

 

Earnings per Share

 

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

 

8.

Related Party Transactions

 

The Company has various agreements, including an advisory agreement, 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. Amounts the Company owes to the Advisor and its affiliated entities are principally for asset management fees, and are classified as due to related parties on the consolidated balance sheets.

 

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 March 31,
		2021				2020
Asset management fees (general and administrative costs)		$	737			$	722
Development fees (1)			-				32
Total		$	737			$	754

 

(1)

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

 

The advisory agreement has a one-year term and is renewable for an unlimited number of successive one-year periods upon the mutual consent of the Advisor and the Company’s independent directors. Payments to the Advisor or its affiliates may include asset acquisition fees and the reimbursement of acquisition-related expenses, development fees and the reimbursement of development-related costs, financing coordination fees, asset management fees or asset management participation, and construction management fees. The Company may also reimburse the Advisor and its affiliates for actual expenses it incurs for administrative and other services provided for it. Upon the liquidation of the Company’s assets, it may pay the Advisor or its affiliates a disposition commission.

 

In connection with the Company’s Offering and Follow-On Offering, Lightstone SLP II LLC, an affiliate of the Company’s Sponsor, contributed (i) cash of approximately $12.9 million and (ii) equity interests in the Brownmill Joint Venture valued at $4.8 million to the Operating Partnership in exchange for 177.0 Subordinated Profits Interests in the Operating Partnership with an aggregate value of $17.7 million, which are included in noncontrolling interests in the consolidated balance sheets. These Subordinated Profit Interests, the purchase price of which will be repaid only after stockholders receive a stated preferred return and their net investment, entitle Lightstone SLP II, LLC to a portion of any regular distributions made by the Operating Partnership. There have been no distributions declared on the Subordinated Profits Interests for quarterly periods after March 31, 2020. Since the Company’s inception, the cumulative distributions declared and paid on the Subordinated Profits Interests were $7.9 million. Any future distributions on the Subordinated Profits Interests will always be subordinated until stockholders receive a stated preferred return, as described above.

 

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

9.	Financial Instruments

 

The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and other assets, accounts payable and other accrued expenses, margin loan, notes payable and due to related party approximated their fair values as of March 31, 2021 and December 31, 2020 because of the short maturity of these instruments. The carrying amount and estimated fair value of our mortgages payable are as follows:

 

		As of March 31, 2021								As of December 31, 2020
		Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value
Mortgages payable		$	136,612			$	136,875			$	136,664			$	136,743

 

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

 

10.	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, 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.

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

 

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

 

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

 

Forward-Looking Statements

 

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

 

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

 

Risks and other factors that might cause differences, some of which could be material, include, but are not limited to, economic and market conditions, competition, tenant or joint venture partner(s) bankruptcies, our lack of operating history, the availability of cash flows from operations to pay distributions, changes in governmental, tax, real estate and zoning laws and regulations, failure to increase tenant occupancy and operating income, rejection of leases by tenants in bankruptcy, financing and development risks, construction and lease-up delays, cost overruns, the level and volatility of interest rates, the rate of revenue increases versus expense increases, the financial stability of various tenants and industries, the our failure to make additional investments in real estate properties, the failure to upgrade our tenant mix, restrictions in current financing arrangements, the failure to fully recover tenant obligations for common area maintenance, insurance, taxes and other property expenses, the our failure to continue to qualify as a real estate investment trust (“REIT”), the failure to refinance debt at favorable terms and conditions, an increase in impairment charges, loss of key personnel, failure to achieve earnings/funds from operations targets or estimates, conflicts of interest with the Advisor and the Sponsor and their affiliates, failure of joint venture relationships, significant costs related to environmental issues and uncertainties regarding the impact of the current COVID-19 pandemic, and restrictions and other measures intended to prevent its spread on our business and the economy generally, as well as other risks listed from time to time in this Form 10-Q, our Form 10-K and in the Company’s other reports filed with the SEC.

 

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

 

Structure

 

Lightstone REIT II is a Maryland corporation, formed on April 28, 2008, elected to be taxed as a real estate investment trust for U.S. federal income tax purposes (“REIT”) beginning with the taxable year ending December 31, 2009.

 

 

Lightstone REIT II is structured as an umbrella partnership REIT (“UPREIT”), and substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT II LP (the “Operating Partnership”), a Delaware limited partnership formed on April 30, 2008. As of March 31, 2021, we held a 99% general partnership interest in our Operating Partnership’s common units.

 

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

 

We have and will continue to seek to acquire a diverse portfolio of real estate assets and real estate-related investments, including hotels, other commercial and/or residential properties, primarily located in the United States. All such properties 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. Although we expect that most of our investments will be of these types, we may invest in whatever types of real estate-related investments that we believe are in our best interests.

 

We currently have one operating segment. As of March 31, 2021, we (i) majority owned and consolidated the operating results and financial condition of 14 limited service hotels containing a total of 1,802 rooms, (ii) held an unconsolidated 48.6% membership interest in Brownmill, LLC (“the Brownmill Joint Venture”), an affiliated entity that owns two retail properties, and (iii) held an unconsolidated 50.0% membership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”), an affiliated entity that owns and operates a 183-room limited service hotel located in Long Island City, New York (the “Hilton Garden Inn – Long Island City”). We account for our unconsolidated membership interests in the Brownmill Joint Venture and the Hilton Garden Inn Joint Venture under the equity method of accounting.

 

As of March 31, 2021, seven of our consolidated limited service hotels are held in a joint venture (the “Joint Venture”) formed between us and Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”), a related party REIT also sponsored by The Lightstone Group, LLC. We and Lightstone I have 97.5% and 2.5% membership interests in the Joint Venture, respectively. Additionally, as of March 31, 2021, certain of our consolidated hotels also have ownership interests held by unrelated minority owners. The membership interests of Lightstone I and the unrelated minority owners are accounted for as noncontrolling interests.

 

Our advisor is Lightstone Value Plus REIT II LLC (the “Advisor”), which is majority owned by David Lichtenstein. On May 20, 2008, the Advisor contributed $2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. Our Advisor also owns 20,000 shares of common stock (“Common Shares”) which were issued on May 20, 2008 for $200,000, or $10.00 per share. Mr. Lichtenstein also is the majority owner of the equity interests of The Lightstone Group, LLC. The Lightstone Group, LLC served as the sponsor (the ‘‘Sponsor’’) during our initial public offering and follow-on offering (the “Follow-On Offering”, and collectively, the “Offerings”), which terminated on August 15, 2012 and September 27, 2014, respectively. Our Advisor, pursuant to the terms of an advisory agreement, together with our board of directors (the “Board of Directors”), is primarily responsible for making investment decisions on our behalf and managing our day-to-day operations. Through his ownership and control of The Lightstone Group, LLC, Mr. Lichtenstein is the indirect owner and manager of Lightstone SLP II LLC, a Delaware limited liability company (the “Associate General Partner”), which owns 177.0 subordinated profits interests (“Subordinated Profits Interests”) in the Operating Partnership which were acquired for aggregate consideration of $17.7 million in connection with our Offerings. Mr. Lichtenstein also acts as our Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT II or the Operating Partnership.

 

We do not have any employees. The Advisor receives compensation and fees for services related to the investment and management of our assets.

 

Our Advisor has affiliates which may manage certain of the properties we acquire. However, we also contract with other unaffiliated third-party property managers, principally for the management of our hospitality properties.

 

Our Common Shares are not currently listed on a national securities exchange. We may seek to list our Common Shares for trading on a national securities exchange only if a majority of our independent directors believe listing would be in the best interest of our stockholders. We do not intend to list our Common Shares at this time. We do not anticipate that there would be any market for our Common Shares until they are listed for trading. In the event we do not obtain listing prior to September 27, 2024, which is the tenth anniversary of the termination of our Follow-On Offering, our charter requires that our Board of Directors must either (i) seek stockholder approval of an extension or amendment of this listing deadline; or (ii) seek stockholder approval to adopt a plan of liquidation of the corporation.

 

 

Current Environment

 

Our operating results are substantially impacted by the overall health of local, U.S. national and global economies and may be influenced by market and other challenges. Additionally, our business and financial performance may be adversely affected by current and future economic and other conditions; including, but not limited to, availability or terms of financings, financial markets volatility, political upheaval or uncertainty, natural and man-made disasters, terrorism and acts of war, unfavorable changes in laws and regulations, outbreaks of contagious diseases, cybercrime, loss of key relationships, and recession.

 

These and other market and economic challenges could materially affect (i) the value and performance of our investments, (ii) our ability to pay future distributions, if any, (iii) the  availability or terms of financings, (iv) our ability to make scheduled principal and interest payments, and (v) our ability to refinance any outstanding debt when contractually due.

 

 COVID-19 Pandemic Operations and Liquidity Update

 

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic leading many countries, including the United States, particularly at the individual state level, to subsequently impose various degrees of restrictions and other measures, including, but not limited to, mandatory temporary closures, quarantine guidelines, limitations on travel, and “shelter in place” rules in an effort to reduce its duration and the severity of its spread. Although the COVID-19 pandemic has continued to evolve, most of these previously imposed restrictions and other measures have now been reduced and/or lifted. However, the COVID-19 pandemic remains highly unpredictable and dynamic and its duration and extent is likely dependent on numerous developments such as the regulatory approval, mass production, administration and ultimate effectiveness of vaccines, as well as the timeline to achieve a level of sufficient herd immunity amongst the general population. Accordingly, the COVID-19 pandemic may continue to have negative effects on the overall health of the U.S. economy for the foreseeable future. 

 

The extent to which our business may be affected by the ongoing COVID-19 pandemic will largely depend on both current and future developments, all of which are highly uncertain and cannot be reasonably predicted. As a result of the COVID-19 pandemic, room demand for our consolidated and unconsolidated hotels began to significantly decline in March 2020 and while there has been slight sequential improvement since then; room demand continues to be substantially below historical levels. Since March 2020, the COVID-19 pandemic has had a significant negative impact on our operations, financial position and cash flow and we currently expect that it will continue to do so for the foreseeable future. We cannot currently estimate if and when room demand will fully recover to pre-pandemic levels for our hotels. Additionally, we have an unconsolidated 48.6% membership interest in the Brownmill Joint Venture, which owns two retail properties located in New Jersey that have been subject to various restrictions. If the Brownmill Joint Venture’s retail properties are negatively impacted for an extended period because our tenants are unable to pay their rent, our equity earnings and the carrying value of our investment in the Brownmill Joint Venture could be materially and adversely impacted.  

 

In light of the past, present and potential future impact of the COVID-19 pandemic on the operating results of our hotels, we have taken various actions to preserve our liquidity, including, but not limited to, those described below:

 

●

We implemented cost reduction strategies for all of our hotels, leading to reductions in certain operating expenses and capital expenditures.

 

●

Amendments to Revolving Credit Facility –

 

On June 2, 2020, our revolving credit facility (the “Revolving Credit Facility”) was amended to provide for (i) the deferral of the six monthly debt service payments aggregating $2.6 million for the period from April 1, 2020 through September 30, 2020 until November 15, 2021; (ii) a 100 bps reduction in the interest rate spread to LIBOR + 2.15%, subject to a 3.00% floor, for the six-month period from September 1, 2020 through February 28, 2021; (iii) our pre-funding $2.5 million into a cash collateral reserve account to cover the six monthly debt service payments due from October 1, 2020 through March 1, 2021; and (iv) a waiver of all financial covenants for quarter-end periods before June 30, 2021.

 

Subsequently, on March 31, 2021, the Revolving Credit Facility was further amended providing for (i) us to pledge our membership interest in another hotel as additional collateral within 45 days, (ii) us to fund an additional $2.5 million into the cash collateral reserve account; (iii) a waiver of all financial covenants for quarter-end periods through September 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods beginning December 31, 2021 through March 31, 2023; (iv) an extension of the maturity date from May 17, 2021 to September 15, 2022 upon completion of the pledge of the additional collateral; (v) one additional one-year extension option at the lender’s sole discretion; and (vi) certain limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.

 

On May 13, 2021, we pledged the additional collateral and extended the maturity date of the Revolving Credit Facility to September 15, 2022.

 

See Note 6 of the Notes to Consolidated Financial Statements for additional information.

 

●

In April 2020, our hotels received $3.3 million from loans provided under the federal Paycheck Protection Program (“PPP Loans”). Subsequently, during the first quarter of 2021, our hotels received an additional $3.7 million from PPP Loans. See Note 7 of the Notes to Consolidated Financial Statements for additional information.

 

●

On March 19, 2020, the Board of Directors determined to suspend regular quarterly distributions, and, as result, has not declared any distributions on our Common Shares or Subordinated Profits Interests since the suspension. Additionally, on March 19, 2020, the Board of Directors approved the suspension of all redemptions under our shareholder redemption program.

 

 

●

We had $7.2 million of funds previously held in escrow with a qualified intermediary to facilitate a potential like-kind exchange transaction in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended, released to us in May 2020.

 

●

The Hilton Garden Inn Joint Venture has obtained various amendments to its non-recourse mortgage loan secured by the Hilton Garden Inn – Long Island City. See Note 4 of the Notes to the Consolidated Financial Statements for additional information.

 

We believe that these actions, along with our available on hand cash and cash equivalents, restricted cash and marketable securities, will provide us with sufficient liquidity to meet our obligations for at least 12 months from the date of issuance of these financial statements.

 

We are not currently aware of any other material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from our operations, other than those referred to above or throughout this Form 10-Q. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires our 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.

 

Portfolio Summary –

 

Location

Year Built

Leasable Square Feet

Percentage Occupied as of March 31, 2021

Annualized Revenues based on rents as of March 31, 2021

Annualized Revenues per square foot as of March 31, 2021

Unconsolidated Affiliated Entities:

Retail

Brownmill LLC (2 retail properties)

Old Bridge and Vauxhall, New Jersey

1962

155,928

71.5

%

$2.8 million

$

17.60

 

Year to Date

Percentage Occupied for the Three Months Ended

Revenue per Available Room (“RevPAR”) for the Three Months Ended

Average Daily Rate (“ADR”) for the Three Months Ended

Location

Year Built

Available Rooms

March 31, 2021

March 31, 2021

March 31, 2021

Hospitality

Hilton Garden Inn - Long Island City

Long Island City, New York

2014

16,470

71.9

%

$

84.75

$

117.91

 

Consolidated Properties:

 

Hospitality								Year to Date				Percentage Occupied for the Three Months Ended				RevPAR for the Three Months Ended				Average Daily Rate for the Three Months Ended
		Location		Year Built				Available Rooms				March 31, 2021				March 31, 2021				March 31, 2021
Fairfield Inn - East Rutherford		East Rutherford, New Jersey			1990				12,690				40.1	%		$	32.47			$	80.96
TownePlace Suites - Little Rock		Little Rock, Arkansas			2009				8,280				68.2	%		$	44.39			$	65.09
Aloft - Tucson		Tucson, Arizona			1971				13,860				48.9	%		$	47.83			$	97.84
Aloft - Philadelphia		Philadelphia, Pennsylvania			2008				12,240				59.6	%		$	48.45			$	81.27
Four Points by Sheraton - Philadelphia		Philadelphia, Pennsylvania			1985				15,930				39.3	%		$	28.40			$	72.25
Courtyard - Willoughby		Willoughby, Ohio			1999				8,100				43.1	%		$	37.73			$	87.55
Fairfield Inn - Des Moines		West Des Moines, Iowa			1997				9,180				33.1	%		$	26.49			$	79.97
SpringHill Suites - Des Moines		West Des Moines, Iowa			1999				8,730				35.3	%		$	27.29			$	77.37
Hampton Inn - Miami		Miami, Florida			1996				11,340				67.9	%		$	58.92			$	86.82
Hampton Inn & Suites - Fort Lauderdale		Fort Lauderdale, Florida			1996				9,360				81.3	%		$	81.89			$	100.73
Courtyard - Parsippany		Parsippany, New Jersey			2001				13,590				22.6	%		$	19.78			$	87.53
Hyatt Place - New Orleans		New Orleans, Louisiana			1996				15,300				99.8	%		$	52.61			$	52.70
Residence Inn - Needham		Needham, Massachusetts			2013				11,880				62.5	%		$	57.40			$	91.88
Courtyard - Paso Robles		Paso Robles, California			2007				11,700				54.2	%		$	63.82			$	117.85
		Hospitality Total							162,180				54.3	%		$	44.47			$	81.87

  

 

Annualized base rent is defined as the minimum monthly base rent due as of March 31, 2021 annualized, excluding periodic contractual fixed increases and rents calculated based on a percentage of tenants’ sales. The annualized base rent disclosed in the table above includes all concessions, abatements and reimbursements of rent to tenants.

 

Critical Accounting Policies and Estimates

 

There were no material changes during the three months ended March 31, 2021 to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2020 except for as discussed in Note 2 to the financial statements.

 

Results of Operations

 

We currently have one operating segment. As of March 31, 2021 we (i) majority owned and consolidated the operating results and financial condition of 14 limited service hotels containing a total of 1,802 rooms, (ii) held an unconsolidated 48.6% membership interest in Brownmill LLC (the “Brownmill Joint Venture”), an affiliated entity that owns two retail properties, and (iii) held an unconsolidated 50.0% membership interest in the Hilton Garden Inn Joint Venture, an affiliated entity that owns and operates the Hilton Garden Inn – Long Island City, a 183-room limited service hotel. We account for our unconsolidated membership interests in the Brownmill Joint Venture and the Hilton Garden Inn Joint Venture under the equity method of accounting.

 

As of March 31, 2021, seven of our consolidated limited service hotels are held in a joint venture (the “Joint Venture”) formed between us and Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”), a related party REIT also sponsored by our Sponsor. We and Lightstone I have 97.5% and 2.5% membership interests in the Joint Venture, respectively. Additionally, as of March 31, 2021, certain of our consolidated hotels also have ownership interests held by unrelated minority owners. The membership interests of Lightstone I and the unrelated minority owners are accounted for as noncontrolling interest

 

Comparison of the three months ended March 31, 2021 vs. March 31, 2020

 

Consolidated

 

Our consolidated revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation and amortization for the three months ended March 31, 2021 and 2020 are attributable to our consolidated hospitality properties, all of which were owned by us during the entire periods presented.

 

Although our operating performance during the 2021 and 2020 quarterly periods were both negatively impacted by the COVID-19 pandemic, our hospitality portfolio first began to experience a significant drop in room demand beginning in March 2020. Overall, our hospitality portfolio experienced decreases in (i) the percentage of rooms occupied from 61.3% to 54.3% for the three months ended March 31, 2020 and 2021, respectively, (ii) revenue per available room (“RevPAR”) from $75.92 to $44.47 for the three months ended March 31, 2020 and 2021, respectively, and (iii) the average daily rate per room (“ADR”) from $123.83 to $81.87 for the three months ended March 31, 2020 and 2021, respectively.

 

Revenues

 

Revenues decreased by $5.8 million to $7.4 million during the three months ended March 31, 2021, compared to $13.2 million for the same period in 2020. This decrease reflects the lower occupancy, RevPAR and ADR during the 2021 period compared to the same period in 2020, which was primarily attributable to the COVID-19 pandemic.

 

Property operating expenses

 

Property operating expenses decreased by $4.1 million to $5.9 million during the three months ended March 31, 2021 compared to $10.0 million for the same period in 2020. This decrease reflects the lower occupancy during the 2021 period resulting from the COVID-19 pandemic.

 

Real estate taxes

 

Real estate taxes for the three months ended March 31, 2021 and 2020 were relatively flat at $0.9 million.

 

General and administrative expenses

 

General and administrative expenses increased by slightly by $0.1 million to $1.3 million during the three months ended March 31, 2021 compared to $1.2 million for the same period in 2020.

 

 

Depreciation and amortization

 

Depreciation and amortization expense increased by slightly by $0.1 million to $2.7 million during the three months ended March 31, 2021 compared to $2.6 million for the same period in 2020.

 

Interest expense

 

Interest expense was $1.3 million during the three months ended March 31, 2021 compared to $1.8 million for the same period in 2020. Interest expense is primarily attributable to financings associated with our hotels and reflects both changes in market interest rates on our variable rate indebtedness and the weighted average principal outstanding during the periods.

 

Earnings from investments in unconsolidated affiliated real estate entities

 

Our loss from investments in unconsolidated affiliated real estate entities was $0.1 million during the three months ended March 31, 2021 compared to $0.5 million for the same period in 2020. Our loss from investments in unconsolidated affiliated real estate entities is attributable to our ownership interests in the Hilton Garden Inn Joint Venture  and the Brownmill Joint Venture. We account for our membership interests in the Hilton Garden Inn Joint Venture and the Brownmill Joint Venture under the equity method of accounting.

 

Noncontrolling interests

 

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

 

Financial Condition, Liquidity and Capital Resources

 

Overview:

 

Revenues, interest and dividend income, proceeds from the sale of marketable securities, distributions from unconsolidated affiliated entities and borrowings are our principal sources of funds to pay operating expenses, scheduled debt service, capital expenditures (excluding non-recurring capital expenditures), contributions to our unconsolidated affiliated entities, redemptions and cancellations of shares of our common stock, if approved, and distributions, if any, required to maintain our status as a REIT.

 

We currently believe that these cash resources along with our available cash on hand of $14.7 million, restricted cash of $4.6 million and marketable securities of $6.9 million, all as of March 31, 2021, will be sufficient to satisfy our cash requirements for the foreseeable future and we do not currently anticipate a need to raise funds from other than these sources within the next 12 months. However, to the extent that cash flow from operations and available cash on hand, restricted cash and marketable securities are not sufficient to cover our cash needs, we may use proceeds from additional borrowings and/or selective asset sales to fund such needs.

 

As of March 31, 2021, we have mortgage indebtedness totaling $136.6 million, $7.1 million of PPP Loans (classified as notes payable on our consolidated balance sheet) and a margin loan of $2.5 million. We have and intend to continue to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of our independent directors and is disclosed to our stockholders. Market conditions will dictate the overall leverage limit; as such our aggregate long-term permanent borrowings may be less than 75% of aggregate fair market value of all properties. We may also incur short-term indebtedness, having a maturity of two years or less.

 

Our charter provides that the aggregate amount of 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 March 31, 2021, our total borrowings aggregated $146.2 million which represented 88% of our net assets.

 

Additionally, in order to leverage our investments in marketable securities and seek a higher rate of return, we have access to borrowings under a margin loan. This loan is due on demand and any outstanding balance must be paid upon the liquidation of securities.

 

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

 

 

We may also obtain lines of credit to be used to acquire properties. If obtained, these lines of credit will be at prevailing market terms and will be repaid from proceeds from the sale or refinancing of properties, working capital 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 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.

 

We have various agreements, including an advisory agreement, with the Advisor to pay certain fees in exchange for services performed by the Advisor and/or its affiliated entities. Additionally, our ability to secure financing and our real estate operations are dependent upon our Advisor and its affiliates to perform such services as provided in these agreements.

 

In addition to meeting working capital needs and distributions, if any, made to maintain our status as a REIT, our capital resources are used to make certain payments to our Advisor, including payments related to asset acquisition fees and asset management fees, the reimbursement of acquisition-related expenses to our Advisor. We also reimburse our advisor for actual expenses it incurs for administrative and other services provided to us.

 

 The advisory agreement has a one-year term and is renewable for an unlimited number of successive one-year periods upon the mutual consent of the Advisor and our independent directors.

 

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 March 31,
		2021				2020
Asset management fees (general and administrative costs)		$	737			$	722
Development fees (1)			-				32
Total		$	737			$	754

 

(1)

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

 

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 Three Months Ended March 31,
		2021				2020
Net cash used in operating activities		$	(2,245	)		$	(837	)
Net cash used in investing activities			(187	)			(294	)
Net cash provided by/(used in) financing activities			3,291				(6,262	)
			859				(7,393	)
Cash, cash equivalents and restricted cash, beginning of year			18,423				30,216
Cash, cash equivalents and restricted cash, end of the period		$	19,282			$	22,823

 

We believe that our cash available on hand, restricted cash and any proceeds from the sale of marketable securities, together with our expected earnings, and/or distributions from our investments will provide us with sufficient resources to fund our operating expenses, debt service, capital contributions, distributions, if any, required to maintain our status as a REIT. Generally, we expect to meet our cash needs with our cash on hand, restricted cash and cash flow from operations. However, to the extent that our cash on hand and cash flow from operations are not sufficient to cover our cash needs, we may use proceeds from additional borrowings and/or selective asset sales to fund such needs.

 

In light of the COVID-19 pandemic’s impact on our operating performance, we have successfully negotiated various changes to the terms of our Revolving Credit Facility, including forbearance of scheduled debt service, reductions in interest rates, waiver periods and modifications of financial covenants and various extension options. See “Contractual Mortgage Obligations” for additional information.

 

 

Operating activities

 

The cash used in operating activities of $2.2 million for the three months ended March 31, 2021 consisted of our net loss of $4.7 million and depreciation and amortization, loss from investments in unconsolidated affiliated entities, amortization of deferred financing costs and other non-cash items aggregating $2.9 million offset by net changes in operating assets and liabilities of $0.4 million. The net use of cash in operating activities of $2.2 million during the three months ended March 31, 2021 was principally attributable to the effect of the COVID-19 pandemic on our operating performance as well as seasonality in our hospitality portfolio.

 

Investing activities

 

The cash used in investing activities of $0.2 million for the three months ended March 31, 2021 consists primarily of the following:

 

●

capital expenditures of $0.1 million; and

 

●

$0.1 million of contributions to unconsolidated affiliated real estate entities.

 

Financing activities

 

The cash provided by financing activities of $3.3 million for the three months ended March 31, 2021 consists primarily of the following:

 

●

proceeds from notes payable of $3.7 million;

 

●

debt principal payments of $0.1 million;

 

●

payments of loan fees and expenses of $0.3 million; and

 

●

net margin loan payments of $0.1 million.

 

Distributions on Common Shares

 

On March 19, 2020, the Board of Directors determined to suspend regular quarterly distributions on our Common Shares and as a result, no distributions have been declared since the suspension.

 

Future distributions declared on our Common Shares, if any, will be at the discretion of the Board of Directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. The Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, revenues and sources of income, operating and interest expenses and our ability to refinance near-term debt as well as the IRS’s annual distribution requirement that REITs distribute no less than 90% of their taxable income. We cannot assure that any future distributions will be made or that we will maintain any particular level of distributions that we have previously established or may establish.

 

Contractual Mortgage Obligations

 

The following is a summary of our estimated contractual mortgage obligations outstanding over the next five years and thereafter as of March 31, 2021, after taking into consideration the extension of the maturity of the Revolving Credit Facility.

 

Contractual Mortgage Obligations		2021				2022				2023				2024				2025				Thereafter				Total
Principal maturities		$	148			$	123,256			$	13,208			$	-			$	-			$	-			$	136,612
Interest payments (1)			6,929				4,679				670				-				-				-				12,278
Total Contractual Mortgage Obligations		$	7,077			$	127,935			$	13,878			$	-			$	-			$	-			$	148,890

 

Note:

(1)

These amounts represent future interest payments related to mortgage payable obligations based on the fixed and variable interest rates specified in the associated debt agreement. All variable rate debt agreements are based on the one-month LIBOR rate. For purposes of calculating future interest amounts on variable interest rate debt the one-month LIBOR rate as of March 31, 2021 was used.

 

 

Revolving Credit Facility

 

We, through certain subsidiaries, have a non-recourse Revolving Credit Facility with a financial institution. The Revolving Credit Facility provides us with a line of credit of up to $140.0 million pursuant to which we may designate properties as collateral that allow borrowings up to a 65.0% loan-to-value ratio subject to also meeting certain financial covenants, including a prescribed minimum debt yield. The Revolving Credit Facility provides for monthly interest-only payments and the entire principal balance is due upon its expiration.

 

The Revolving Credit Facility, which was entered into on May 17, 2018, had an initial maturity date of May 17, 2021, which was subject to certain options to extend at the sole discretion of the lender. The initial interest rate on the Revolving Credit Facility was LIBOR + 3.50% until it was reduced to LIBOR + 3.15% effective March 31, 2019.

 

On June 2, 2020, we and the lender agreed to certain changes to the terms of Revolving Credit Facility, including (i) the deferral of monthly debt service for payments aggregating $2.6 million for the period from April 1, 2020 through September 30, 2020, which are now due on November 15, 2021; (ii) subject to certain conditions, the interest rate spread may be reduced by 100 bps to LIBOR + 2.15%, subject to a 3.00% floor, for the six-month period beginning September 1, 2020 through February 28, 2021; (iii) we deposited $2.5 million into a cash collateral account to be applied against the monthly debt service payments due from October 1, 2020 through March 1, 2021; and (iv) waiver of all financial covenants for periods before June 30, 2021.

 

On March 31, 2021, our Revolving Credit Facility was further amended to provide for (i) us to pledge our membership interest in another hotel as additional collateral within 45 days, (ii) us to fund an additional $2.5 million into the cash collateral reserve account (which is include in restricted cash on our consolidated balance sheet as of March 31, 2021); (iii) a waiver of all financial covenants for quarter-end periods through September 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods beginning December 31, 2021 through March 31, 2023; (iv) an extension of the maturity date from May 17, 2021 to September 15, 2022 upon completion of the pledge of the additional collateral; (v) one additional one-year extension option at the lender’s sole discretion; and (vi) certain limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.  

 

On May 13, 2021, we pledged the additional collateral and extended the maturity date of the Revolving Credit Facility to September 15, 2022.

 

As of March 31, 2021, we had pledged 12 of our hotel properties as collateral under the Revolving Credit Facility and the outstanding principal balance was $123.0 million. Additionally, no additional borrowings were available under the Revolving Credit Facility as of March 31, 2021.

 

Courtyard – Paso Robles Mortgage Loan

 

In connection with our acquisition of the Courtyard – Paso Robles on December 14, 2017, we assumed the Courtyard - Paso Robles Mortgage Loan. The Courtyard – Paso Robles Mortgage Loan matures in November 2023, bears interest at a fixed rate of 5.49% and requires monthly principal and interest payments of approximately $79 through its stated maturity with a balloon payment of approximately $13.0 million due at maturity. The Courtyard – Paso Robles Mortgage Loan had an outstanding balance of approximately $13.6 million as of March 31, 2021.

 

On October 28, 2020, the servicer of the Courtyard – Paso Robles Mortgage Loan agreed to waive the minimum debt yield financial covenant for all periods through June 30, 2021.

 

PPP Loans

 

During April 2020, we, through various subsidiaries (each such entity, a “Borrower”) received aggregate funding of $3.3 million through loans (the “PPP Loans”) originated under the federal Paycheck Protection Program, which was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. During the first quarter of 2021, the Borrower received an additional aggregate funding of $3.7 million of PPP Loans. The PPP Loans each have a term of five years and provide for an interest rate of 1.00%.  The payment of principal and interest on the PPP loan is deferred until the day that the forgiven amount is remitted to the lender (approximately five months after the forgiveness application is submitted to the lender, unless the Borrower appeals a denial of forgiveness) or ten months after the end of the Borrower’s covered period, whichever is earlier. Pursuant to the terms of the CARES Act, the proceeds of the PPP Loans may be used for payroll costs, mortgage interest, rent or utility costs.  

 

 

The promissory note for each of the PPP Loans contains customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note.   Under the terms of the CARES Act, each Borrower can apply for and be granted forgiveness for all or a portion of the PPP Loans.  Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act. Although we intend for each Borrower to apply for forgiveness, no assurance may be given that any Borrower will ultimately obtain forgiveness under any relevant PPP Loan in whole or in part. As of March 31, 2021, the PPP Loans had an outstanding balance of $7.1 million, which is classified as Notes Payable on the consolidated balance sheets.

 

In addition to the mortgages payable and PPP Loans described above, a margin loan that was made available to us from a financial institution that holds custody of certain of our marketable securities. The margin loan is collateralized by the marketable securities in our account. The amounts available to us under the margin loan are at the discretion of the financial institution and not limited to the amount of collateral in our account. The amount outstanding under this margin loan was $2.5 million as of March 31, 2021 and is due on demand. The margin loan bears interest at LIBOR + 0.85% (0.99% as of March 31, 2021).

 

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 calculate FFO, a non-GAAP measure, consistent with the standards established over time by the Board of Governors of NAREIT, as restated in a White Paper approved by the Board of Governors of NAREIT effective in December 2018 (the “White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Our FFO calculation complies with NAREIT’s definition.

 

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 straight-line 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.

 

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 from or added to net income in the calculation of FFO and MFFO. Items are presented net of non-controlling interest portions where applicable.

 

		For the Three Months Ended March 31,
		2021				2020
Net loss		$	(4,732	)		$	(3,925	)
FFO adjustments:
Depreciation and amortization of real estate assets			2,692				2,645
Adjustments to equity in earnings from unconsolidated affiliated entities			434				426
FFO			(1,606	)			(854	)
MFFO adjustments:
Other adjustments:
Acquisition and other transaction related costs expensed (1)			-				-
Adjustments to equity in earnings from unconsolidated affiliated entities			(10	)			(1	)
Amortization of above or below market leases and liabilities (2)			-				-
Accretion of discounts and amortization of premiums on debt investments			-				-
Mark-to-market adjustments (3)			22
Non-recurring (gains)/losses from extinguishment/sale of debt, derivatives or securities holdings (4)			-				245
MFFO			(1,594	)			(610	)
Straight-line rent (5)			-				-
MFFO - IPA recommended format		$	(1,594	)		$	(610	)
Net loss		$	(4,732	)		$	(3,925	)
Less: loss attributable to noncontrolling interests			88				74
Net loss applicable to Company’s common shares		$	(4,644	)		$	(3,851	)
Net loss per common share, basic and diluted		$	(0.27	)		$	(0.22	)
FFO		$	(1,606	)		$	(854	)
Less: FFO attributable to noncontrolling interests			37				18
FFO attributable to Company’s common shares		$	(1,569	)		$	(836	)
FFO per common share, basic and diluted		$	(0.09	)		$	(0.05	)
MFFO - IPA recommended format		$	(1,594	)		$	(610	)
Less: MFFO attributable to noncontrolling interests			37				18
MFFO attributable to Company’s common shares		$	(1,557	)		$	(592	)
Weighted average number of common shares outstanding, basic and diluted			17,430				17,445

 

(1)

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

(2)

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

(3)

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

 

 

(4)

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

(5)

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

 

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

 

		For the period April, 28, 2008
		(date of inception) through
		March 31, 2021
FFO attributable to Company’s common shares		$	62,184
Distributions declared and paid		$	85,040

 

New Accounting Pronouncements  

 

See Note 2 of the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been adopted during 2021, if any, and certain accounting standards that we have not yet been required to implement and may be applicable to our future operations.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

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

 

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

 

 

PART II. OTHER INFORMATION:

 

ITEM 1. LEGAL PROCEEDINGS.

 

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

 

As of the date hereof, we are not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on our results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, we have 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, we did not sell any equity securities that were not registered under the Securities Act of 1933.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit Number		Description
31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
101*		XBRL (eXtensible Business Reporting Language).The following financial information from Lightstone Value Plus Real Estate Investment Trust II, Inc. on Form 10-Q for the quarter ended March 31, 2021, filed with the SEC on May 14, 2021, formatted in XBRL includes: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Operations, (3) Consolidated Statements of Comprehensive Loss, (4) Consolidated Statements of Stockholders’ Equity, (5) Consolidated Statements of Cash Flows and (6) the Notes to the Consolidated Financial Statement.

 

*

Filed herewith

 

 

SIGNATURES

 

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

 

	LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC.
Date: May 14, 2021	By:	/s/ David Lichtenstein
		David Lichtenstein
		Chairman and Chief Executive Officer (Principal Executive Officer)

 

Date: May 14, 2021	By:	/s/ Seth Molod
		Seth Molod
		Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)