For the Three Months Ended									For the Six Months Ended
	June 30, 2010					June 30, 2009				June 30, 2010				June 30, 2009
Expenses:
General and administrative costs		$	242,320			$	25,001			$	393,572			$	77,572
Total operating expenses			242,320				25,001				393,572				77,572
Operating loss			(242,320	)			(25,001	)			(393,572	)			(77,572	)
Interest income			87,117				-				142,832				-
Loss from investment in unconsolidated affiliated real estate entity			(51,955	)			-				(51,955	)			-
Net loss			(207,158	)			(25,001	)			(302,695	)			(77,572	)
Less: net loss attributable to noncontrolling interest			14				-				24				-
Net loss attributable to Company's common shares		$	(207,144	)		$	(25,001	)		$	(302,671	)		$	(77,572	)
Net loss per Company's common share, basic and diluted		$	(0.09	)		$	(1.25	)		$	(0.15	)		$	(3.88	)
Weighted average number of common shares outstanding, basic and diluted			2,276,938				20,000				1,959,758				20,000

 

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

 

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

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS

(UNAUDITED)

 

																										Accumulated				Total
		Preferred Shares								Common Shares								Additional								Distributions in				Company				Total
		Preferred								Common								Paid-In				Subscription				Excess of				Stockholders'				Noncontrolling				Total
		Shares				Amount				Shares				Amount				Capital				Receivable				Net Loss				Equity				Interests				Equity
BALANCE, December 31, 2009			-				-				1,236,037				12,360				8,616,032				(665,882	)			(405,503	)			7,557,007				1,958				7,558,965
Comprehensive loss:
Net loss			-				-				-				-				-				-				(302,671	)			(302,671	)			(24	)			(302,695	)
Total comprehensive loss			-				-				-				-				-				-				(302,671	)			(302,671	)			(24	)			(302,695	)
Distributions declared			-				-				-				-				-				-				(248,046	)			(248,046	)			-				(248,046	)
Distributions paid to noncontrolling interests																																			(65	)			(65	)
Contribution by noncontrolling interest																																			2,500,000				2,500,000
Proceeds from offering											1,319,136				13,192				13,159,967				323,303								13,496,462				-				13,496,462
Selling commissions and dealer manager fees																			(1,233,682	)											(1,233,682	)							(1,233,682	)
Other offering costs																			(801,329	)											(801,329	)							(801,329	)
Proceeds from distribution reinvestment program											20,948				209				198,793												199,002								199,002
BALANCE, June 30, 2010			-			$	-				2,576,121			$	25,761			$	19,939,781			$	(342,579	)		$	(956,220	)		$	18,666,743			$	2,501,869			$	21,168,612

 

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

 

5

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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

(UNAUDITED)

		For the Six Months Ended
		June 30, 2010				June 30, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(302,695	)		$	(77,572	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Equity in loss from investment in unconsolidated affiliated real estate entity			51,955
Changes in assets and liabilities:
Increase in prepaid expenses and other assets			(291,130	)			-
(Decrease)/increase in accounts payable and other accrued expenses			(103,591	)			46,360
(Decrease)/increase in due to sponsor			(18,731	)			27,825
Net cash used in operating activities			(664,192	)			(3,387	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage loan receivable			(7,857,000	)			-
Net cash used in investing activities			(7,857,000	)			-
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease due from sponsor			180,953				-
Proceeds from issuance of common stock			13,496,462				-
Payment of commissions and offering costs			(3,630,937	)
Distributions to noncontrolling interests			(65	)			-
Distributions to common stockholders			(206,218	)			-
Net cash provided by financing activities			9,840,195				-
Net change in cash and cash equivalents			1,319,003				(3,387	)
Cash and cash equivalents, beginning of period			8,596,008				99,703
Cash and cash equivalents, end of period		$	9,915,011			$	96,316
Supplemental disclosure of cash flow information:
Distributions declared		$	248,046			$	-
Value of shares issued from distribution reinvestment program		$	199,002			$	-
Non cash commissions and other offering costs in accounts payable and other accrued expenses		$	1,006,279			$	-
Subscription receivable		$	323,303			$	-
Investment in affiliated real estate entity in exchange for issuance of subordinated profit interests		$	2,500,000			$	-
Restriced escrow deposits and related liability established related to mortgage loan receivable		$	338,169			$	-

 

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

 

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

Notes to Consolidated Financial Statements

(Unaudited)

1.

Organization

 

Lightstone Value Plus Real Estate Investment Trust II, Inc., a Maryland corporation (the “Company”) was formed on April 28, 2008. The Company was formed primarily for the purpose of engaging in the business of investing in and owning commercial and residential real estate properties located throughout North America, as well as real estate-related securities, such as collateralized debt obligations, commercial mortgage-backed securities and mortgage and mezzanine loans secured, directly or indirectly, by the same types of properties which it may acquire directly.

The Company is structured as an umbrella partnership real estate investment trust, or UPREIT, and substantially all of the Company’s current and future business is and will be conducted through Lightstone Value Plus REIT II LP, a Delaware limited partnership formed on April 30, 2008 (the “Operating Partnership”).

The Company is offering to sell a maximum of 51,000,000 shares of common shares, at a price of $10 per share (exclusive of 6.5 million shares available pursuant to the Company’s distribution reinvestment plan, 75,000 shares that are reserved for issuance under the Company’s stock option plan and 255,000 shares reserved for issuance under the Company’s Employee and Director Incentive Restricted Share Plan). The Company’s Registration Statement on Form S-11 (the “Registration Statement”) was declared effective under the Securities Act of 1933 on February 17, 2009. Lightstone Securities, LLC (the “Dealer Manager”), an affiliate of The Lightstone Group (the “Sponsor”), is serving as the dealer manager of the Company’s public offering (the “Offering”).

 

The Company issued 20,000 shares to Lightstone Value Plus REIT II, LLC, “(the Advisor”) on May 20, 2008, for $10 per share.  In addition, as of September 30, 2009, the Company had reached its minimum offering by receiving subscriptions of its common shares, representing gross offering proceeds of approximately $6.5 million, and investors were admitted as stockholders on October 1, 2009. Through June 30, 2010, cumulative gross offering proceeds of $25.2 million were released to the Company.  The Company invested the proceeds from this sale and proceeds from the Advisor in the Operating Partnership, and as a result, held a 99.99% general partnership interest at June 30, 2010 in the Operating Partnership’s common units.  The Operating Partnership commenced operations as of October 1, 2009.

 

Noncontrolling Interest – Partners of Operating Partnership

On May 20, 2008, the Advisor contributed $2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The limited partner has the right to convert operating partnership units into cash or, at the option of the Company, an equal number of common shares of the Company, as allowed by the limited partnership agreement.

Lightstone SLP II LLC, which is wholly owned and controlled by The Lightstone Group (our “Sponsor”) will purchase subordinated general partner participation units (“subordinated profits interests”) in the Operating Partnership at a cost of $100,000 per unit for each $1,000,000 in subscriptions up to ten percent of the offering proceeds on a semi-annual basis.  Lightstone SLP II LLC may elect to purchase the subordinated profits interests with either cash or an interest in real property of equivalent value.  The proceeds received from the cash sale of the subordinated profits interests will be used to offset payments made by Company from offering proceeds to pay the dealer manager fees and selling commissions and other offering costs.  On June 30, 2010, Lightstone SLP II LLC purchased 25 subordinated profits interests valued at $2.5 million by contributing a 26.25% interest in Brownmill LLC (see Note 3 for further discussion regarding Brownmill LLC).

   

2.

Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of the Company and the Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). As of June 30, 2010, the Company had a 99.99% general partnership interest in the common units of the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation.  

 

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of  the Company and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. 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 Lightstone Value Plus Real Estate Investment Trust II, Inc. and its Subsidiaries (collectively, the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

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

Notes to Consolidated Financial Statements

(Unaudited)

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

 

New Accounting Pronouncements

  

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”, which was primarily codified into Topic 810 in the ASC.  This standard requires ongoing assessments to determine whether an entity is a variable entity and requires qualitative analysis to determine whether an enterprise’s variable interest(s) give it a controlling financial interest in a variable interest entity. In addition, it requires enhanced disclosures about an enterprise’s involvement in a variable interest entity. This standard is effective for the fiscal year that begins after November 15, 2009. The Company adopted this standard on January 1, 2010 and the adoption did not have a material impact on the Company's consolidated financial statements.

In January 2010, the FASB issued FASB Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”.  ASU No. 2010-06 amends ASC 820 and clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements. This ASU becomes effective for the Company on January 1, 2010. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

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

3.

Investment in Unconsolidated Affiliated Real Estate Entity

The entity listed below is partially owned by the Company.  The Company accounts for this investment under the equity method of accounting as the Company exercises significant influence, but does not control this entity. A summary of the Company’s investment in unconsolidated affiliated real estate entity is as follows:

								As of
Real Estate Entity		Date of Ownership		Ownership %				June 30, 2010			December 31, 2009
Brownmill LLC ("Brownmill")		June 30, 2010			26.25	%		$	2,448,045			$	-
Total Investment in unconsolidated affiliated real estate entity								$	2,448,045			$	-

 

Brownmill

On June 30, 2010, the Company, through its Operating Partnership, entered into a Contribution Agreement between the Operating Partnership and Lightstone Holdings LLC (“LGH”), a wholly-owned subsidiary of our Sponsor, pursuant to which LGH contributed to the Operating Partnership a 26.25% equity interest in Brownmill (the “Brownmill Interest”) in order to fulfill the Sponsor’s commitment to purchase subordinated profit interests with cash or contributed property. In exchange, the Operating Partnership issued 25 units of subordinated profits interests, at $100,000 per unit (at total value of $2.5 million), to Lightstone SLP II LLC.  The preliminary fair value of the Brownmill Interest, as of April 1, 2010, as determined by the Company is approximately $8.4 million of which $2.5 million is in the form of equity and $5.9 million is in the form of mortgage indebtedness.

As a result of this contribution in exchange for subordinated profit interests, as of June 30, 2010, the Operating Partnership owns a 26.25% membership interest in Brownmill. The Brownmill Interest is a non-managing interest. An affiliate of the Company’s Sponsor, is the majority owner and manager of Brownmill.  Profit and cash distributions will be allocated in accordance with each investor’s ownership percentage.  The Company will allocate its portion of profit and cash distributions beginning as of April 1, 2010 based upon the original date Lightstone SLP II LLC was to purchase the subordinated profit interests.

As the Company has recorded this investment in accordance with the equity method of accounting, its portion of Brownmill’s total indebtedness of $22.2 million as of June 30, 2010 is not included in the investment.   In connection with the contribution of the Brownmill Interest, the Company did not incur any transactions fees.

Brownmill owns two retail properties known as Browntown Shopping Center (“Browntown”) and Millburn Mall (“Millburn”, and together with Browntown, (the “Brownmill Properties”), which are located in Old Bridge, NJ and Vauxhall, NJ, respectively.   The Brownmill Properties collectively represent 156,002 square feet of total gross leasable area, and were 76.7% occupied as of June 30, 2010. The Brownmill Properties are cross-collateralized, collateralizing a non-recourse loan maturing on October 8, 2015. The loan has a 10-year term and monthly principal and interest payments of $133,051 through its maturity date.  The loan bears a fixed interest rate of 5.36%. The aggregate outstanding balance of the Brownmill Loan was $22.2 million as of June 30, 2010, $19.8 million of which will be due upon maturity assuming no prior principal prepayment.

 

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Brownmill Financial Information

The Company’s carrying value of its Brownmill Interest differs from its share of member’s equity reported in the condensed balance sheet of Brownmill LLC due to the Company’s basis of its investment in excess of the historical net book value of Brownmill. The Company’s additional basis allocated to depreciable assets is recognized on a straight-line basis over the lives of the appropriate assets.  The Company’s Brownmill Interest additional basis allocation to depreciable assets is a preliminary estimate and could change based upon the final fair value to net book value analysis, which is expected to be completed once all information is available.

The following table represents the unaudited condensed income statement for Brownmill LLC for the period April 1, 2010 through June 30, 2010.

 

		For the Period April 1, 2010 through June 30, 2010
Revenue		$	900,295
Property operating expenses			361,139
Depreciation and amortization			217,686
Operating income			321,470
Interest expense and other, net			(305,008	)
Net income		$	16,462
Company's share of net income		$	4,321
Additional depreciation and amortization expense (1)			(56,276	)
Company's loss from investment		$	(51,955	)

 

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

The following table represents the unaudited condensed balance sheet for Brownmill as of June 30, 2010:

 

		As of
		June 30, 2010
Real estate, at cost (net)		$	18,075,945
Cash and restricted cash			567,867
Other assets			1,773,296
Total assets		$	20,417,108
Mortgage payable		$	22,196,256
Other liabilities			859,798
Member capital			(2,638,946	)
Total liabilities and members' capital		$	20,417,108

 

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4.

Mortgage Loan Receivable and Restricted Escrow

On June 29, 2010, the Company, through its Operating Partnership, entered into an Assignment and Assumption Agreement (the “Assignment”) with Citigroup Global Markets Realty Corp. (the “Seller”).  Under the terms of the Assignment, the Operating Partnership purchased from the Seller a fixed-rate of 5.916%, nonrecourse mortgage note (the “Loan”) for $7.9 million.  In addition, the Seller agreed to indemnify the Operating Partnership from all existing litigation. As a result of the Assignment, the Operating Partnership assumed all rights and obligations, with the exception of the existing litigation, in connection with the Loan, and became the lender under the Loan.  Total legal and other closing costs of the Assignment were approximately $88,407, including an acquisition fee equal to 0.95% of the purchase price, or approximately $74,600, payable to our advisor.  These fees were expensed during the three months ended June 30, 2010 within general and administrative costs on the consolidated statements of operations.

The Loan was originated by the Seller in August 2007 with an original principal balance of $18.7 million, and is collateralized by a 141-room limited service hotel located in East Rutherford, NJ.  The hotel is currently operating under a Marriott Franchise Agreement as a Fairfield Inn. The Loan was scheduled to mature in September 2017 under its original term, and has been in default since February 2009.

The Company has recorded the Loan as a mortgage loan receivable of $7.9 million, net of a discount of $10.8 million. The Company believes that the collateral on the Loan equals or exceeds $7.9 million as of June 30, 2010.   As the Loan is in default, the Company is not amortizing the discount as the Company intends to take ownership through foreclosure or negotiate a transfer of ownership with the existing borrower.  In addition, interest income on the Loan will be recorded on a cash basis.

The borrower under the loan agreement is required to transfer any excess cash to the Company on a monthly basis. The Company first will apply the excess cash to required funding for taxes and insurance and other escrow related disbursements and any remaining cash will be applied to principal due for the month and interest.  At the date of the acquisition of the loan, the escrow deposits held by the Seller and transferred to the Company were $0.3 million and are recorded on the consolidated balance sheet as restricted escrows.  The Company has recorded an offsetting liability for these disbursements in the consolidated balance sheet within accounts payable and other accrued expenses.

5.

Selling Commission, Dealer Manager Fees and Other Offering Costs

Selling commissions and dealer manager fees paid to the Dealer Manager, and other third-party offering expenses such as registration fees, due diligence fees, marketing costs, and professional fees are accounted for as a reduction against additional paid-in capital (“APIC”) as costs are incurred.  Any organizational costs are accounted for as general and administrative costs. For the six months ended June 30, 2010, the Company has incurred approximately $1.2 million in selling commissions and dealer manager fees and $0.8 million of other offering costs.  Since commencement of its initial public offering through June 30, 2010, the Company has incurred approximately $2.3 million in selling commissions and dealer manager fees and $3.5 million of other offering costs.

6.

Subscription Receivable

 

As of June 30, 2010 and December 31, 2009, the Company recorded a subscription receivable of $0.3 million and $0.7 million, respectively, as a reduction in the Company’s equity on the consolidated balance sheets.   The subscription receivable relates to shares issued to the Company’s shareholders for which the proceeds have not yet been received by the Company solely due to a fact of timing of transfers from the escrow agent holding the funds.

7.

Related Party Transactions

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

 

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The following table represents the fees incurred associated with the payments to the Company’s Advisor and Property Manager for the three and six months ended June 30, 2010:

		For the Three Months Ended June 30, 2010				For the Six Months Ended June 30, 2010
Acquisition fees		$	74,642			$	74,642
Asset management fees			4,014				8,028
Property management fees			-				-
Acquisition expenses reimbursed to Advisor			-				-
Development fees			-				-
Leasing commissions			-				-
Total		$	78,656			$	82,670

 

During the three and six months ended June 30, 2009, the Company did not incur any fees associated with payments to its Advisor or its Property Manager.

As of June 30, 2010, the Company owns a 26.25% membership interest in Brownmill.  Affiliates of the Company’s Sponsor, are the majority owners and manager of Brownmill.  See Note 3.

8.

Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate their fair values because of the short maturity of these instruments. The carrying amount of the mortgage loan receivable approximates the fair value based upon current market information that would have been used by a market participant to estimate the fair value of such loan.

9.

Commitments and Contingencies

Legal Proceedings 

From time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes.  As of the date hereof, we are not a party to any material pending legal proceedings.

10.

Subsequent Events

On July 9, 2010, the Company’s Board of Directors declared the quarterly distribution for the three-month period ended June 30, 2010 in the amount of $0.00178082191 per share per day which equals a daily amount, if paid each day for a 365-day period, of 6.5% annualized rate based on a share price of $10.00 payable to stockholders of record on the close of business each day during the quarter.  The distribution was paid in full on July 15, 2010 using a combination of cash ($0.2 million) and shares ($0.2 million) which represents 18,437 shares of the Company’s common stock issued pursuant to the Company’s Distribution Reinvestment Program, at a discounted price of $9.50 per share.  

The amount of distributions to be distributed to our stockholders in the future will be determined by our Board of Directors and are dependent on a number of factors, including funds available for payment of distributions, our financial condition, capital expenditure requirements and annual distribution requirements needed to maintain our status as a Real Estate Investment Trust under the Internal Revenue Code.

 

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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 financial statements of Lightstone Value Plus Real Estate Investment Trust II, Inc. 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, L.P. and its wholly owned subsidiaries, which we collectively refer to as the “Operating Partnership”.

 

Forward-Looking Statements

 

Certain information included in this Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by us with the Securities and Exchange Commission, or the SEC, contain or will contain, forward-looking statements. All statements, other than statements of historical facts, including, among others, statements regarding our possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives, are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of Lightstone Value Plus Real Estate Investment Trust 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 failure of the Company to make additional investments in real estate properties, the failure to upgrade our tenant mix, restrictions in current financing arrangements, the failure to fully recover tenant obligations for common area maintenance (“CAM”), insurance, taxes and other property expenses, the failure of the Company to continue to qualify as a real estate investment trust (“REIT”), the failure to refinance debt at favorable terms and conditions, an increase in impairment charges, loss of key personnel, failure to achieve earnings/funds from operations targets or estimates, conflicts of interest with the Advisor and the Sponsor and their affiliates, failure of joint venture relationships, significant costs related to environmental issues as well as other risks listed from time to time in this Form 10-Q, our Form 10-K, our Registration Statement on Form S-11 (File No. 333-151532), as the same may be amended and supplemented from time to time, and in the Company’s other reports filed with the Securities and Exchange Commission (“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.

 

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  Overview

Lightstone Value Plus Real Estate Investment Trust II, Inc. (the “Company”) intends to acquire and operate commercial, residential and hospitality properties, principally in North America. Principally through the Lightstone Value Plus REIT II, LP, (the “Operating Partnership”), our acquisitions may include both portfolios and individual properties. We expect that our commercial holdings will consist of retail (primarily multi-tenanted shopping centers), lodging, industrial and office properties and that our residential properties located either in or near major metropolitan areas.

Capital required for the purchase of real estate and real estate related investments will be obtained from the public offering of up to 51,000,000 common shares for $10 per share, and from any indebtedness that we may incur in connection with the acquisition of any real estate and real estate related investments thereafter. A Registration Statement on Form S-11 covering our public offering was declared effective under the Securities Act of 1933 on February 17, 2009.  The offering commenced on April 24, 2009 and is ongoing. We are dependent upon the net proceeds from the offering to conduct our proposed activities.

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

Current Environment

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

 U.S. and global credit and equity markets have recently undergone significant disruption, making it difficult for many businesses to obtain financing on acceptable terms or at all. As a result of this disruption, in general there has been an increase in the costs associated with the borrowings and refinancing as well as limited availability of funds for refinancing.  If these conditions continue or worsen, our cost of borrowing may increase and it may be more difficult to finance investment opportunities in the short term.

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

		For the Six Months Ended
		June 30, 2010				June 30, 2009
Cash flows used in operating activities		$	(664,192	)		$	(3,387	)
Cash flows used in investing activities			(7,857,000	)			-
Cash flows provided by financing activities			9,840,195				-
Net change in cash and cash equivalents			1,319,003				(3,387	)
Cash and cash equivalents, beginning of the period			8,596,008				99,703
Cash and cash equivalents, end of the period		$	9,915,011			$	96,316

 

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Our principal source of cash flow was derived from the net offering proceeds received. In the future, we intend to acquire properties which will provide a relatively consistent stream of cash flow that provides us with resources to fund operating expenses, debt service and quarterly distributions.

 

Our principal demands for liquidity currently are acquisition and development activities as well as costs associated with our public offering.  The principal sources of funding for our operations are currently the issuance of equity securities.

Operating activities

During the six months ended June 30, 2010, cash flows used in operating activities was $0.7 million compared to $3,387 for six months ended June 30, 2009.  The cash used during 2010 related to net loss of $0.3 million plus the increase in prepaid expenses and other assets due to the upfront payment of insurance premiums during the period.

Investing activities

Cash used in investing activities during the six months ended June 30, 2010 of $7.9 million relates to the purchase of a mortgage loan in June 2010.  See Note 4 of notes to consolidated financial statements.

Financing activities

Cash provided by financing activities during the six months ended June 30, 2010 is primarily the proceeds from the issuance of common stock of $13.5 million offset by the payment of selling commissions, dealer manger fees and other offering costs of $3.6 million.

 

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

Contractual Obligations  

 

None

Funds from Operations

In addition to measurements defined by accounting principles generally accepted in the United States of America (“GAAP”), our management also focuses on funds from operations (“FFO”) and modified funds from operations (“MFFO”) to measure our performance.   FFO is generally considered to be an appropriate supplemental non-GAAP measure of the performance of real estate investment trusts (“REITs”).  FFO is defined by the National Association of Real Estate Investment Trusts, Inc (“NAREIT”) as net earnings before depreciation and amortization of real estate assets, gains or losses on dispositions of real estate, (including such non-FFO items reported in discontinued operations).   Notwithstanding the widespread reporting of FFO, changes in accounting and reporting rules under GAAP that were adopted after NAREIT’s definition of FFO have prompted a significant increase in the magnitude of non-operating items included in FFO.  For example, acquisition expenses, acquisition fees and financing fees, which we intend to fund from the proceeds of this offering and which we do not view as an expense of operating a property, are now deducted as expenses in the determination of GAAP net income.  As a result, we intend to consider a modified FFO, or MFFO, when assessing our operating performance.  We intend to explain all modifications to FFO and to reconcile MFFO to FFO and FFO to GAAP net income when presenting MFFO information.

 

Our MFFO is FFO excluding straight-line rental revenue, the net amortization of above-market and below market leases, other than temporary impairment of marketable securities, gain/loss on sale of marketable securities, impairment charges on long-lived assets and acquisition-related costs expensed.  Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate diminishes predictably over time.  Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient.

 

 Accordingly, we believe that FFO is helpful to stockholders and our management as a measure of operating performance because it excludes depreciation and amortization, gains and losses from property dispositions, and extraordinary items, and as a result, when compared year over year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which is not immediately apparent from net income.  We believe that MFFO is helpful to stockholders and our management as a measure of operating performance because it excludes charges that management considers more reflective of investing activities or non-operating valuation changes.  By providing FFO and MFFO, we present information that reflects how our management analyzes our long-term operating activities.  We believe fluctuations in MFFO are indicative of changes in operating activities and provide comparability in evaluating our performance over time and as compared to other real estate companies that may not be affected by impairments or acquisition activities. 

 

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Below is a reconciliation of net loss to FFO for the three and six months ended June 30, 2010 and 2009.

	For the Three Months Ended									For the Six Months Ended
	June 30, 2010					June 30, 2009				June 30, 2010				June 30, 2009
Net loss		$	(207,158	)		$	(25,001	)		$	(302,695	)		$	(77,572	)
Adjustments:
Equity in depreciation and amortization for unconsolidated affiliated real estate entity			113,419								113,419
FFO			(93,739	)			(25,001	)			(189,276	)			(77,572	)
Less: FFO attributable to noncontrolling interests			7				-				17				-
FFO  attributable to Company's common share		$	(93,732	)		$	(25,001	)		$	(189,259	)		$	(77,572	)
FFO per common share, basic and diluted		$	(0.04	)		$	(1.25	)		$	(0.10	)		$	(3.88	)
Weighted average number of common shares outstanding, basic and diluted			2,276,938				20,000				1,959,758				20,000

 

Below is the reconciliation of MFFO for the three and six months ended June 30, 2010 and 2009.

 

	For the Three Months Ended									For the Six Months Ended
	June 30, 2010					June 30, 2009				June 30, 2010				June 30, 2009
FFO		$	(93,739	)		$	(25,001	)		$	(189,276	)		$	(77,572	)
Adjustments:
Noncash Adjustments:
Amortization of above and below market leases			-				-				-				-
Straight-line rent adjustment (1)			(12,101	)							(12,101	)
Total non cash adjustments			(12,101	)			-				(12,101	)			-
Other adjustments:
Acquisition/divestiture costs expensed			88,449				-				88,449				-
MFFO		$	(17,391	)		$	(25,001	)		$	(112,928	)		$	(77,572	)
Less: MFFO attributable to noncontrolling interests			1								11				-
MFFO  attributable to Company's common share		$	(17,390	)		$	(25,001	)		$	(112,917	)		$	(77,572	)

1)  Straight-line rent adjustment relates to straight-line rent from unconsolidated affiliated real estate entity.

 

 Sources of Distribution

 On July 9, 2010, the Company’s Board of Directors declared the quarterly distribution for the three-month period ended June 30, 2010 in the amount of $0.00178082191 per share per day which equals a daily amount that, if paid each day for a 365-day period, of 6.5% annualized rate based on a share price of $10.00 payable to stockholders of record on the close of business each day during the quarter.  The distribution was paid in full on July 15, 2010 using a combination of cash ($0.1 million) and shares ($0.1 million) which represents 18,437 shares of the Company’s common stock issued pursuant to the Company’s Distribution Reinvestment Program, at a discounted price of $9.50 per share.   We used proceeds from our offering of common stock to fund all of our cash distribution.

 

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The following table provides a summary of the quarterly distributions declared and the source of distribution based upon cash flows provided by operations for the three and six months ended June 30, 2010.  We did not declare a distribution for the three and six months ended June 30, 2009 as we did not begin operations until October 2009.

 

		Related to the Six Months Ended				Quarter ended				Quarter ended
		June 30, 2010				June 30, 2010				March 31,  2010
Distribution period:							Q2 2010				Q1 2010
Date distribution declared						July 9, 2010				March 23, 2010
Date distribution paid						July 15, 2010				April 15, 2010
Distributions Paid		$	314,927			$	192,562			$	122,365
Distributions Reinvested			301,517				175,152				126,365
Total Distributions		$	616,444			$	367,714			$	248,730
Source of distributions
Cash flows used from operations		$	-			$	-			$	-
Proceeds from issuance of common stock			616,444				367,714				248,730
Total Sources		$	616,444			$	367,714			$	248,730

 

New Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”, which was primarily codified into Topic 810 in the ASC.  This standard requires ongoing assessments to determine whether an entity is a variable entity and requires qualitative analysis to determine whether an enterprise’s variable interest(s) give it a controlling financial interest in a variable interest entity. In addition, it requires enhanced disclosures about an enterprise’s involvement in a variable interest entity. This standard is effective for the fiscal year that begins after November 15, 2009. The Company adopted this standard on January 1, 2010 and the adoption did not have a material impact on the Company's consolidated financial statements.

In January 2010, the FASB issued FASB Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”.  ASU No. 2010-06 amends ASC 820 and clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements. This ASU becomes effective for the Company on January 1, 2010. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk.

 

We may be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund the expansion and refinancing of our real estate investment portfolio and operations. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes. As of June 30, 2010, we did not have any swap or derivative agreements outstanding.

In addition to changes in interest rates, the value of our real estate will be subject to fluctuations based on changes in the real estate capital markets, market rental rates for local, regional and national economic conditions and changes in the creditworthiness of tenants. All of these factors may also affect our ability to refinance our debt if necessary.

 

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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 unregistered securities. Through June 30, 2010, we have not repurchased any of our securities.

Use of Initial Public Offering Proceeds  

On February 17, 2009, our Registration Statement on Form S-11 (File No. 333-151532), covering a public offering, which we refer to as the “Offering,” of up to 51,000,000 common shares for $10 per share (exclusive of 6,500,000 shares available pursuant to the Company’s distribution reinvestment plan, 75,000 shares that are reserved for issuance under the Company’s stock option plan and 255,000 shares reserved for issuance under the Company’s employee and director incentive restricted share plan) was declared effective under the Securities Act of 1933.

We issued 20,000 shares to the Advisor on May 20, 2008, for $10 per share.  In addition, as of September 30, 2009, we had reached its minimum offering by receiving subscriptions of its common shares, representing gross offering proceeds of approximately $6.5 million. Through June 30, 2010, cumulative gross offering proceeds of $25.5 million were released to the Company.  The Company invested the proceeds from this sale and proceeds from the Advisor in the Operating Partnership, and as a result, held a 99.99% general partnership interest at June 30, 2010 in the Operating Partnership’s common units.

  

Lightstone SLP II LLC will purchase subordinated profits interests in the Operating Partnership at a cost of $100,000 per unit for each $1,000,000 in subscriptions up to ten percent of the offering proceeds.  Lightstone SLP II LLC may elect to purchase the subordinated profits interests with either cash or an interest in real property of equivalent value.  The proceeds received from the cash sale of the subordinated profits interests will be used to offset payments made by us from offering proceeds to pay the dealer manager fees and selling commissions and other offering costs.    On June 30, 2010, Lightstone SLP II LLC purchased 25 subordinated profits interest valued at $2.5 million by contributing a 26.25% interest in Brownmill LLC (see Note 3 of notes to consolidated financial statements regarding Brownmill LLC).

We will utilize a portion of offering proceeds towards funding the dealer manager fees, selling commissions and other offering costs.

Below is a summary of the expenses we have incurred life to date in connection with the issuance and distribution of the registered securities.

 

Type of Expense Amount
Underwriting discounts and commissions		$	2,275,152
Other expenses incurred to be paid non-affiliates			3,471,624
Total  offering expenses  incurred through June 30, 2010		$	5,746,776

 

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As of June 30, 2010, the total costs of raising capital associated with our offering which we have funded, including fees paid to our Dealer Manager was approximately 23% of total proceeds compared to 31% as of December 31, 2009.  As a significant amount of offering costs associated with accounting, legal and marketing costs are incurred prior to the sale of shares, the percentage of proceeds utilized towards commissions, dealer manager fees and other offering costs is higher than our estimate of  approximately 10% of offering proceeds.  As we sell more shares, this percentage will decline over time.

Cumulatively, we have used the net offering proceeds received of $20.4 million, after deduction of offering expenses paid since inception of $4.7 million, as follows:

		At June 30, 2010
Construction of plant, building and facilities		$	-
Purchase of real estate interests			-
Purchase of mortgage loan			7,587,000
Investment in real estate securities			1,690,000
Cash and cash equivalents (as of June 30, 2010)			9,915,011
Subscriptions Receivable (as of June 30, 2010)			342,579
Fund cash distributions			206,218
Other uses (primarily timing of payables)			689,432
Total uses		$	20,430,240

 

As of August 6, 2010, we have sold 2,802,394 shares at an aggregate of price of approximately $28.0 million.  In addition, we have sold approximately 39,384 shares at an aggregate price of approximately $0.4 million under our Distribution Reinvestment Plan.

ITEM 4. REMOVED AND RESERVED

ITEM 5. OTHER INFORMATION.

 

None.