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

Attached files

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EX-31.2 - EXHIBIT 31.2 - Lightstone Value Plus Real Estate Investment Trust III, Inc.	v417477_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Lightstone Value Plus Real Estate Investment Trust III, Inc.	v417477_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - Lightstone Value Plus Real Estate Investment Trust III, Inc.	v417477_ex32-1.htm
EX-32.2 - EXHIBIT 32.2 - Lightstone Value Plus Real Estate Investment Trust III, Inc.	v417477_ex32-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2015

¨	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 333-195292

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC.

(Exact Name of Registrant as Specified in Its Charter)

Maryland

46-1140492

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

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

(732) 367-0129

(Registrant’s Telephone Number, Including Area Code)

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

Yes þ No ¨

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

Yes þ No ¨

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

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨ Smaller reporting company þ

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

Yes ¨ No þ

As of August 10, 2015, there were approximately 1.8 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust III, Inc., including shares issued pursuant to the dividend reinvestment plan.

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

INDEX

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014	3

	Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2015 and 2014	4

	Consolidated Statement of Stockholders’ Equity (unaudited) for the Six Months Ended June 30, 2015	5

	Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2015 and 2014	6

	Notes to Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21

Item 4.	Controls and Procedures	22

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	23

Item 1A.	Risk Factors	23

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3.	Defaults Upon Senior Securities	24

Item 4.	Mine Safety Disclosures	24

Item 5.	Other Information	24

Item 6.	Exhibits	24

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

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

CONSOLIDATED BALANCE SHEETS

	June 30, 2015			December 31, 2014
	(Unaudited)
Assets

Investment property:
Land and improvements	$	2,205,864		$	-
Building and improvements		22,258,087			-
Furniture and fixtures		2,442,213			-
Gross investment property		26,906,164			-
Less accumulated depreciation		(246,266	)		-
Net investment property		26,659,898			-

Cash		2,604,158			1,738,026
Deposits		-			500,000
Prepaid expenses and other assets		728,645			182,078
Total Assets	$	29,992,701		$	2,420,104

Liabilities and Stockholders' Equity

Accounts payable and other accrued expenses	$	1,041,550		$	169,608
Revolving promissory notes payable - affiliate		17,798,192			-
Due to affiliate		1,992,213			1,934,970
Distributions payable		66,956			-
Total liabilities		20,898,911			2,104,578

Commitments and Contingencies

Stockholders' Equity:

Company's stockholders' equity:
Preferred stock, $0.01 par value; 50,000,000 shares authorized, none issued and outstanding		-			-
Common stock, $0.01 par value; 200,000,000 shares authorized, 1,461,415 and 286,674 shares issued and outstanding, respectively		14,614			2,867
Additional paid-in-capital		10,048,815			455,880
Subscription receivable		(136,037	)		-
Accumulated deficit		(835,447	)		(145,196	)
Total Company stockholders' equity		9,091,945			313,551

Noncontrolling interests		1,845			1,975
Total Stockholders' Equity		9,093,790			315,526
Total Liabilities and Stockholders' Equity	$	29,992,701		$	2,420,104

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

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

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

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended June 30, 2015						For the Six Months Ended June 30, 2015
	2015			2014			2015			2014

Revenues	$	1,620,917		$	-		$	2,174,339		$	-

Expenses:
Property operating expenses		933,274			-			1,246,529			-
Real estate taxes		64,819			-			96,553			-
General and administrative costs		382,321			595			653,269			1,862
Depreciation and amortization		194,427			-			251,872			-
Total operating expenses		1,574,841			595			2,248,223			1,862

Operating income/(loss)		46,076			(595	)		(73,884	)		(1,862	)

Interest expense		(255,940	)		-			(352,233	)		-
Other expense, net		(4,089	)		-			(4,464	)		-

Net loss		(213,953	)		(595	)		(430,581	)		(1,862	)

Less: net loss attributable to noncontrolling interests		39			-			73			-

Net loss applicable to Company's common shares	$	(213,914	)	$	(595	)	$	(430,508	)	$	(1,862	)

Net loss per Company's common shares, basic and diluted	$	(0.19	)	$	(0.03	)	$	(0.51	)	$	(0.09	)

Weighted average number of common shares outstanding, basic and diluted		1,151,224			20,000			841,614			20,000

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

PART I. FINANCIAL INFORMATION:

ITEM 1. FINANCIAL STATEMENTS.

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

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

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

BALANCE, December 31, 2014		286,674	$	2,867	$	455,880		$	-		$	(145,196	)	$	1,975		$	315,526

Net loss		-		-		-			-			(430,508	)		(73	)		(430,581	)
Distributions declared		-		-		-			-			(259,743	)		-			(259,743	)
Distributions paid to noncontrolling interests		-		-		-			-			-			(57	)		(57	)
Proceeds from offering		1,168,921		11,689		11,579,195			(136,037	)		-			-			11,454,847
Selling commissions and dealer manager fees		-		-		(1,067,615	)		-			-			-			(1,067,615	)
Other offering costs		-		-		(973,873	)		-			-			-			(973,873	)
Shares issued from distribution reinvestment program		5,820		58		55,228			-			-			-			55,286

BALANCE, June 30, 2015		1,461,415	$	14,614	$	10,048,815		$	(136,037	)	$	(835,447	)	$	1,845		$	9,093,790

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

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Six Months Ended June 30,
	2015			2014

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(430,581	)	$	(1,862	)
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:
Depreciation and amortization		251,872
Amortization of deferred financing costs		63,333
Other non-cash adjustments		868
Changes in assets and liabilities:
Increase in prepaid expenses and other assets		(256,374	)
Increase in accounts payable and other accrued expenses		549,725			65
Increase in due to affiliate		605
Net cash provided by/(used in) operating activities		179,448			(1,797	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment property		(26,273,699	)

Cash used in investing activities		(26,273,699	)		-

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving promissory notes payable - affiliate		20,200,000			-
Payments on revolving promissory notes payable - affiliate		(2,401,808	)		-
Payment of loan fees and expenses		(100,000	)		-
Proceeds from issuance of common stock		11,454,847			-
Payment of commissions and offering costs		(2,055,098	)		-
Distributions to noncontrolling interests		(57	)		-
Distributions to common stockholders		(137,501	)		-

Net cash provided by financing activities		26,960,383			-

Net change in cash		866,132			(1,797	)
Cash, beginning of year		1,738,026			198,726
Cash, end of period	$	2,604,158		$	196,929

Supplemental cash flow information for the periods indicated is as follows:
Cash paid for interest	$	214,397		$	-
Distributions declared, but not paid	$	66,956		$	-
Commissions and other offering costs accrued but not paid	$	195,072		$	-
Revolving promissory note origination fee accrued but not paid	$	130,000		$	-
Subscription receivable	$	136,037		$	-
Value of shares issued from distribution reinvestment program	$	55,286		$	-
Application of deposit to acquisition of investment property	$	500,000		$	-

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

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

Notes to Consolidated Financial Statements

Organization

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

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

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

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

Lightstone REIT III invested the proceeds received from the Advisor in the Operating Partnership, and as a result, held a 99% general partnership interest as of June 30, 2015 in the Operating Partnership’s partner units.

The Company’s registration statement on Form S-11 (the “Offering”), pursuant to which it is offering to sell up to 30,000,000 shares of its common stock, par value $0.01 per share (which may be referred to herein as ‘‘shares of common stock’’ or as ‘‘Common Shares’’) for $10.00 per share, subject to certain volume and other discounts (exclusive of 10,000,000 shares available pursuant to its distribution reinvestment plan (the “DRIP”) at an initial purchase price of $9.50 per share) was declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933 on July 15, 2014. As of June 30, 2015, the Company had received gross proceeds of $14.3 million from the sale of 1.5 million shares of its common stock (including $2.0 million in Common Shares at a purchase price of $9.00 per Common Share to an entity 100% owned by David Lichtenstein, who also owns a majority interest in the Company’s Sponsor). The Company intends to sell shares of its common stock under the Offering until the earlier of the date on which all the shares are sold, or July 15, 2016, two years from the date the Offering was declared effective by the SEC. The Company reserves the right to reallocate the shares of common stock it is offering between the primary offering and the DRIP. Additionally, the Offering may be terminated at any time.

The Company has no employees. The Company has retained the Advisor to manage its affairs on a day-to-day basis. Beacon Property Management Limited Liability Company and Paragon Retail Property Management LLC (the ‘‘Property Managers’’) may serve as property managers. Orchard Securities, LLC (the ‘‘Dealer Manager’’), a third party not affiliated with the Company, the Sponsor or the Advisor, serves as the dealer manager of the Company’s public offering. The Advisor and Property Managers are affiliates of the Sponsor. These related parties receive compensation and fees for services related to the investment and management of the Company’s assets. These entities receive fees during the Company’s offering, acquisition, operational and liquidation stages. (See Note 6 for a summary of related-party fees.)

Noncontrolling Interests

Partners of Operating Partnership

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

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

Notes to Consolidated Financial Statements

Lightstone SLP III LLC (the ‘‘Special Limited Partner’’), a Delaware limited liability company of which Mr. Lichtenstein is the majority owner, will be a special limited partner in the Operating Partnership and has committed to purchase subordinated profits interests in the Operating Partnership (the “Subordinated Participation Interests”) at a cost of $50,000 per unit for each $1.0 million in subscriptions accepted for the Offering or any follow-on offering on a semi-annual basis beginning with the quarter ended June 30, 2015. On July 31, 2015, the Special Limited Partner made a cash contribution of $700,000 in exchange for 14 Subordinated Participation Interests. The Special Limited Partner may elect to purchase the Subordinated Participation Interests for cash or may contribute interests in real property of equivalent value. The Subordinated Participation Interests may be entitled to receive liquidation distributions upon the liquidation of Lightstone REIT III. (See Note 6 for a summary of related-party fees).

Summary of Significant Accounting Policies

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of the Company and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. The accompanying unaudited consolidated financial statements of the Lightstone Value Plus Real Estate Investment Trust II, Inc. and its Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

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

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

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Lightstone REIT III and the Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). As of June 30, 2015, the Lightstone REIT III had a 99% general partnership interest in the common units of the Operating Partnership. All inter-company accounts and transactions have been eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board Financial Accounting Standards Board (“FASB”) issued an accounting standards update that completes the joint effort by the FASB and International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards. The update applies to all companies that enter into contracts with customers to transfer goods or services and is effective for us for interim and annual reporting periods beginning after December 15, 2016. Early application is not permitted and companies have the choice to apply the update either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying the update at the date of initial application (January 1, 2017) and not adjusting comparative information. On July 9, 2015, the FASB decided to delay the effective date of the new revenue standard by one year. The Company is currently evaluating the requirements and impact of this update on its consolidated financial statements.

In April 2015, the FASB issued an accounting standards update to simplify the presentation of debt issuance costs. This update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This new guidance will be effective for the Company beginning January 1, 2016. The Company is currently evaluating the impact of this standard on our consolidated financial statements.

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

Notes to Consolidated Financial Statements

Acquisitions and debt

Hampton Inn – Des Moines

On February 4, 2015, the Company completed the acquisition of a 120-room select service hotel located in Des Moines, Iowa (the “Hampton Inn – Des Moines”) from an unrelated third party, for an aggregate purchase price of approximately $10.9 million less adjustments, paid in cash, excluding closing and other related transaction costs. In connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 1.0% of the contractual purchase price, approximately $0.1 million. The acquisition was funded with approximately $2.7 million of offering proceeds and approximately $8.2 million of proceeds under a $10.0 million revolving promissory note (the “Des Moines Promissory Note”) from the operating partnership of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a real estate investment trust also sponsored by the Company’s sponsor.

The Des Moines Promissory Note was entered into on February 4, 2015, has a term of one year, bears interest at a floating rate of three-month Libor plus 6.0% (6.3% as of June 30, 2015) and requires quarterly interest payments through its stated maturity with the entire unpaid balance due upon maturity. The Company paid an origination fee of $100,000 to Lightstone II in connection with the Des Moines Promissory Note and pledged its ownership interest in the Hampton Inn – Des Moines as collateral. The outstanding principal balance and remaining availability under the Des Moines Promissory Note was approximately $7.0 million and $3.0 million, respectively, as of June 30, 2015. The Des Moines Promissory Note is included in revolving promissory notes payable – affiliates on our consolidated balance sheet.

The acquisition of the Hampton Inn – Des Moines was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the Hampton Inn – Des Moines has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. Approximately $1.2 million was allocated to land and improvements, $9.2 million was allocated to building and improvements, and $0.5 million was allocated to furniture and fixtures and other assets.

The capitalization rate for the acquisition of the Hampton Inn — Des Moines is approximately 11.3%. We calculate the capitalization rate for a real property by dividing net operating income of the property by the purchase price of the property, excluding costs. For purposes of this calculation, net operating income is based upon the twelve-month period ended July 31, 2014. Additionally, net operating income is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation.

Courtyard – Durham

On May 15, 2015, the Company completed the acquisition of a 146-room select service hotel located in Durham, North Carolina (the “Courtyard – Durham”) from an unrelated third party, for an aggregate purchase price of approximately $16.0 million, less adjustments, paid in cash, excluding closing and other related transaction costs. In connection with the acquisition, the Company’s Advisor received an acquisition fee equal to 1.0% of the contractual purchase price, approximately $0.2 million. The acquisition was funded with approximately $4.0 million of offering proceeds and approximately $12.0 million of proceeds under a $13.0 million revolving promissory note (the “Durham Promissory Note”) from the operating partnership of Lightstone II.

The Durham Promissory Note was entered into on May 15, 2015, has a term of one year, bears interest at a floating rate of three-month Libor plus 6.0% (6.3% as of June 30, 2015) and requires quarterly interest payments through its stated maturity with the entire unpaid balance due upon maturity. The Company accrued an origination fee of $130,000 to Lightstone II in connection with the Durham Promissory Note and pledged its ownership interest in the Courtyard – Durham as collateral. The outstanding principal balance and remaining availability under the Durham Promissory Note was $10.8 million and $2.2 million, respectively, as of June 30, 2015. The Durham Promissory Note is included in revolving promissory notes payable – affiliates on our consolidated balance sheet.

The acquisition of the Courtyard – Durham was accounted for under the purchase method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition of the Courtyard – Durham has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. Approximately $1.0 million was allocated to land and improvements, $13.1 million was allocated to building and improvements, and $1.9 million was allocated to furniture and fixtures and other assets.

The capitalization rate for the acquisition of the Courtyard – Durham is approximately 7.3%. We calculate the capitalization rate for a real property by dividing net operating income of the property by the purchase price of the property, excluding costs. For purposes of this calculation, net operating income is based upon the twelve-month period ended December 31, 2014. Additionally, net operating income is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation.

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

Notes to Consolidated Financial Statements

Financial Information

The following table provides the total amount of rental revenue and net income included in the Company’s consolidated statements of operations from the Hampton Inn — Des Moines and the Courtyard – Durham since their respective dates of acquisition for the period indicated:

	For the Three Months Ended June 30, 2015			For the Six Months Ended June 30, 2015

Rental revenue	$	1,620,917		$	2,174,339
Net loss	$	(170,547	)	$	(338,236	)

The following table provides unaudited pro forma results of operations for the period indicated, as if the Hampton Inn — Des Moines and the Courtyard – Durham had been acquired at the beginning of each period. Such pro forma results are not necessarily indicative of the results that actually would have occurred had these acquisitions been completed on the date indicated, nor are they indicative of the future operating results of the combined company.

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2015			2014		2015			2014
Pro forma rental revenue	$	2,287,518		$	1,879,068	$	4,189,043		$	3,758,135
Pro forma net (loss)/income ⁽¹⁾	$	(118,960	)	$	200,961	$	(209,402	)	$	401,249

Pro forma net (loss)/income per Company's common share, basic and diluted ⁽¹⁾	$	(0.10	)	$	10.05	$	(0.25	)	$	20.06

⁽¹⁾

Includes acquisition related expenses of $316,955 and $509,571 for the three and six months ended June 30, 2015, in connection with the acquisition of the Hampton Inn-Des Moines and the Courtyard-Durham.

Selling Commissions, Dealer Manager Fees and Other Offering Costs

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2015		2014		2015		2014
Selling commissions and dealer manager fees	$	556,508	$	-	$	1,067,615	$	-
Other offering costs	$	579,217	$	-	$	973,873	$	-

Earnings per Share

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

Related Party Transactions

The Company has agreements with the Advisor and the Property Managers 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.

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

Notes to Consolidated Financial Statements

For the three and six months ended June 30, 2015, the Company paid the Advisor acquisition fees of $160,000 and $269,000. No other amounts were paid to the Advisor for the three and six months ended June 30, 2014.

The Advisor will advance the organization and offering costs to the extent that the Company does not have the funds to pay such expenses. The related liability of approximately $1.8 million as of June 30, 2015 for these organization and offering costs is included in due to affiliate in the consolidated balance sheets.

Financial Instruments

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

As of June 30, 2015, the estimated fair value of the Des Moines Promissory Note and the Durham Promissory Note approximated their carrying values because of their floating interest rates.

Commitments and Contingencies

Legal Proceedings

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

Subsequent Events

Distribution Payment

On May 15, 2015, June 15, 2015 and July 15, 2015, the Company paid the distributions for the months ending April 30, 2015, May 31, 2015 and June 30, 2015, respectively, of $172,217. The distributions were paid in full using a combination of cash and 6,274 shares of the Company’s common stock issued pursuant to the Company’s Distribution Reinvestment Program (“DRIP”), at a discounted price of $9.50 per share. The distribution was paid from offering proceeds (approximately $112,612 or 65%) and excess cash proceeds from the issuance of common stock through the Company’s DRIP (approximately $59,605 or 35%).

Distribution Declaration

On August 14, 2015, the Board of Directors authorized and the Company declared a distribution for each month during the three-month period ending October 31, 2015. The distributions will be calculated based on shareholders of record each day during the month at a rate of $0.00164383 per day, and will equal a daily amount that, if paid each day for a 365-day period, would equal a 6.0% annualized rate based on a share price of $10.00 payable on by the 15th day following each month end to stockholders of record at the close of business each day during the prior month.

PART I. FINANCIAL INFORMATION, CONTINUED:

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

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Lightstone Value Plus Real Estate Investment Trust III, Inc. and Subsidiaries and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Lightstone Value Plus Real Estate Investment Trust III, Inc., a Maryland corporation, and, as required by context, Lightstone Value Plus REIT III, L.P., which we collectively refer to as the “Operating Partnership”.

Forward-Looking Statements

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

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

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

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

Overview

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

Lightstone REIT III intends to continue to acquire and operate commercial, residential and hospitality properties, principally in North America. Principally through the Operating Partnership, our future 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 will be located either in or near major metropolitan areas.

Capital required for the future purchases of real estate and/or real estate related investments is expected to be obtained from public offerings of shares of our common stock and from any indebtedness that we may incur either in connection with the acquisition of any real estate and real estate related investments or thereafter. We are dependent upon the net proceeds from public offerings of our common stock to conduct our proposed activities.

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

Our registration statement on Form S-11(the “Offering”), pursuant to which we are offering to sell up to 30,000,000 shares of our common stock (which may be referred to herein as ‘‘shares of common stock’’ or as ‘‘Common Shares’’) for $10.00 per share, subject to certain volume and other discounts (exclusive of 10,000,000 shares available pursuant to its distribution reinvestment plan (the “DRIP”) at an initial purchase price of $9.50 per share) was declared effective by SEC under the Securities Act of 1933 on July 15, 2014. As of June 30, 2015, we had received gross proceeds of $14.3 million from the sale of 1.5 million shares of our common stock (including $2.0 million in Common Shares at a purchase price of $9.00 per Common Share to an entity 100% owned by David Lichtenstein, who also owns a majority interest in the Company’s Sponsor).

We have no employees. We have retained the Advisor to manage our affairs on a day-to-day basis. Beacon Property Management Limited Liability Company and Paragon Retail Property Management LLC (the ‘‘Property Managers’’) may serve as property managers. Orchard Securities, LLC (the ‘‘Dealer Manager’’) will serve as the dealer manager of our public offering. The Advisor and Property Managers are affiliates of the Sponsor. These related parties will receive compensation and fees for services related to the investment and management of our assets. These entities will receive fees during our offering, acquisition, operational and liquidation stages.

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

Current Environment

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

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

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

Portfolio Summary –

			Year to Date		Percentage Occupied for the Six Months Ended			Revenue per Available Room for the Six Months Ended		Average Daily Rate For the Six Months Ended
	Location	Year Built	Available Rooms		June 30, 2015			June 30, 2015		June 30, 2015

Hampton Inn – Des Moines (Acquired February 4, 2015)	Des Moines, Iowa	1987		17,640		75	%	$	91.53	$	121.34

Courtyard - Durham (Acquired May 15, 2015)	Durham, North Carolina	1996		6,862		77	%	$	74.40		97.08

Critical Accounting Policies and Estimates

There were no material changes during the six months ended June 30, 2015 to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2014.

Results of Operations

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

For the Three Months Ended June 30, 2015 vs. June 30, 2014

Consolidated

The Company had no investment property with operating results for the three months ended June 30, 2014. The rental revenue, property operating expenses, real estate taxes, general and administrative costs, depreciation and amortization and the resulting operating loss for the three months ended June 30, 2015 is primarily attributable to the Hampton Inn – Des Moines, which was acquired on February 4, 2015 and to the Courtyard – Durham which was acquired on May 15, 2015. General and administrative costs of $595 for the three months ended June 30, 2014 primarily related to corporate filing fees and bank fees.

Interest expense

Interest expense was $255,940 during the three months ended June 30, 2015. Interest expense consisted of interest related to the financing of the acquisition of the hotels described above.

For the Six Months Ended June 30, 2015 vs. June 30, 2014

Consolidated

The Company had no investment property with operating results for the six months ended June 30, 2014. The rental revenue, property operating expenses, real estate taxes, general and administrative costs, depreciation and amortization and the resulting operating loss for the six months ended June 30, 2015 is primarily attributable to the Hampton Inn – Des Moines, which was acquired on February 4, 2015 and to the Courtyard – Durham which was acquired on May 15, 2015. General and administrative costs of $1,862 for the six months ended June 30, 2014 primarily related to corporate filing fees and bank fees.

Interest expense

Interest expense was $352,233 during the six months ended June 30, 2015. Interest expense consisted of interest related to the financing of the acquisition of the hotels described above.

Financial Condition, Liquidity and Capital Resources

Overview:

For the six months ended June 30, 2015, our primary source of funds were (i) $11.5 million of proceeds from our sale of shares of common stock under our Offering and $17.8 million in net proceeds from our revolving promissory notes. The primary source of capital required to fund our future purchases of real estate and/or real estate related investments will principally come from the proceeds related to our public offering of shares of our common stock and from any indebtedness that we may incur in connection with the acquisition and operations of any real estate investments thereafter.

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

Our future sources of funds will primarily consist of (i) proceeds from our sale of shares of common stock under our Offering, (ii) cash flows from our operations, (iii) proceeds from our borrowings and (iv) our DRIP. We currently believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.

We currently have a $10.0 million revolving promissory note (the “Des Moines Promissory Note”) and a $13.0 million revolving promissory note (the “Durham Promissory Note” and collectively, the “Revolving Promissory Notes Payable - Affiliates”) with an aggregate outstanding principal balance and remaining aggregate availability of $17.8 million and $5.2 million, respectively, as of June 30, 2015. We intend to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to our stockholders. Market conditions will dictate our overall leverage limit; as such our aggregate long-term permanent borrowings may be less than 75% of aggregate fair market value of all properties. We may also incur short-term indebtedness, having a maturity of two years or less.

Our charter provides that the aggregate amount of our borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. Market conditions will dictate our overall leverage limit; as such our aggregate borrowings may be less than 300% of net assets. As of June 30, 2015, our total borrowings were $17.8 million which represented 195% of our net assets.

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

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

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

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

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2015		2014		2015		2014
Selling commissions and dealer manager fees	$	556,508	$	-	$	1,067,615	$	-
Other offering costs	$	579,217	$	-	$	973,873	$	-

Since the Company’s inception through June 30, 2015, it has incurred approximately $1.1 million in selling commissions and dealer manager fees and $3.1 million of other offering costs in connection with the public offering of shares of its common stock. The Advisor will advance the organization and offering costs to the extent that the Company does not have the funds to pay such expenses. The related liability of approximately $1.8 million as of June 30, 2015 for these organization and offering costs is included in Due to affiliate in the consolidated balance sheets.

The Company expects that organization and offering costs, other than selling commissions and dealer manager fees, will amount to approximately 2.0% of gross offering proceeds. In no event will organization and offering costs exceed 15.0% of gross offering proceeds. During the initial stage of our Offering, the organization and offering costs may exceed 15.0% of gross offering proceeds since many of the expenses incurred in relation to the Offering are incurred prior to the sale of shares of our common stock.

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

Summary of Cash Flows

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

	For the Six Months Ended June 30,
	2015			2014
Net cash provided by/(used in) operating activities	$	179,448		$	(1,797	)
Net cash used in investing activities		(26,273,699	)		-
Net cash provided by financing activities		26,960,383			-
Net change in cash		866,132			(1,797	)
Cash, beginning of year		1,738,026			198,726
Cash, end of the period	$	2,604,158		$	196,929

Our principal source of cash flow was derived from proceeds received from our Offering and our Revolving Promissory Note. In the future, we expect to acquire properties which should provide a relatively consistent stream of cash flow to provide us with resources to fund our operating expenses, any scheduled debt service and any quarterly distributions authorized by our Board of Directors.

Our principal demands for liquidity currently are expected to be acquisition and development activities, scheduled debt service and costs associated with our public offerings. The principal sources of funding for our operations are currently expected to be proceeds from the issuance of equity securities.

Operating activities

The net cash provided by operating activities of $179,448 during the 2015 period was a result of our net loss of $430,581 offset by non-cash items of $316,073 and by changes in assets and liabilities of $293,956.

Investing activities

The cash used in investing activities of $26.3 million during the 2015 period consisted of approximately $10.2 million for the purchase of the Hampton Inn –Des Moines, which included a deposit of $500,000 paid prior to the 2015 period, and approximately $16.0 million for the purchase of the Courtyard - Durham.

Financing activities

The net cash provided by financing activities of $27.0 million during the 2015 primarily consisted of $17.8 million in net proceeds from our Revolving Promissory Notes Payable – Affiliate and $11.5 million of offering proceeds offset by the payment of approximately $2.1 million of commissions and offering costs.

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

Distribution Reinvestment Plan and Share Repurchase Program

Our DRIP provides our stockholders with an opportunity to purchase additional shares of our common stock at a discount by reinvesting distributions. The offering provides for 10.0 million shares available for issuance under our DRIP and our initial DRIP price per share of common stock is $9.50.

Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to us, subject to certain restrictions.

As of June 30, 2015 no shares have been repurchased under our share repurchase program.

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

Contractual Obligations

The Des Moines Promissory Note bears interest at a floating rate of three-month Libor plus 6.0% (6.3% as of June 30, 2015) and requires quarterly interest payments through its stated maturity with the entire unpaid balance ($7.0 million outstanding as of June 30, 2015) due upon maturity (February 4, 2016). The Durham Promissory Note bears interest at a floating rate of three-month Libor plus 6.0% (6.3% as of June 30, 2015) and requires quarterly interest payments through its stated maturity with the entire unpaid balance ($10.8 million outstanding as of June 30, 2015) due upon maturity (May 15, 2016). We estimate that approximately $0.6 million in interest will be paid for the remainder of 2015 and approximately $0.3 million in 2016 through maturity. We currently intend to seek to refinance both the Des Moines Promissory Note and the Durham Promissory Note prior to their stated maturities.

Funds from Operations and Modified Funds from Operations

Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, Inc., or NAREIT, an industry trade group, has promulgated a measure known as funds from operations, or FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to net income or loss as determined under generally accepted accounting principles in the United States, or GAAP.

We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the White Paper. The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property and asset impairment write-downs, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT’s policy described above.

The historical accounting convention used for real estate assets requires depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Additionally, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indicators exist and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated undiscounted future cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate-related depreciation and amortization and impairments, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. However, FFO and MFFO, as described below, 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 method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.

Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under GAAP, that are typically accounted for as operating expenses.

Management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. We will use the proceeds raised in our offering to acquire properties, and we intend to begin the process of achieving a liquidity event (i.e., listing of our common stock on a national exchange, a merger or sale of the company or another similar transaction) within seven to ten years after the proceeds from the primary offering are fully invested. Thus, we will not continuously purchase assets and will have a limited life. Due to the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association, or IPA, an industry trade group, has standardized a measure known as modified funds from operations, or MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, 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 our properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our offering has been completed and our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our offering and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on our operating performance during the periods in which properties are acquired.

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, or the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (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; mark-to-market adjustments included in net income; 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. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. While we are responsible for managing interest rate, hedge and foreign exchange risk, we do retain an outside consultant to review all our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such gains and losses in calculating MFFO, as such gains and losses are not reflective of ongoing operations.

Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses, amortization of above and below market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income. These expenses are paid in cash by us, and therefore such funds will not be available to distribute to investors. All paid and accrued acquisition fees and expenses negatively impact our operating performance during the period in which properties are acquired and 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 other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. Therefore, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired. MFFO that excludes such costs and expenses would only be comparable to that of non-listed REITs that have completed their acquisition activities and have similar operating characteristics as us. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of derivatives as items which are unrealized and may not ultimately be realized. We view both gains and losses from dispositions of assets and fair value adjustments of derivatives as items which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. 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. Acquisition fees and expenses will not be reimbursed by the advisor if there are no further proceeds from the sale of shares in our offering, and therefore such fees and expenses will 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.

Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors. For example, acquisition costs are funded from the proceeds of our offering and other financing sources and not from operations. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily 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 an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance. MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value and there is no net asset value determination during the offering stage and for a period thereafter. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO or MFFO.

Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.

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

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2015			2014			2015			2014
Net loss	$	(213,953	)	$	(595	)	$	(430,581	)	$	(1,862	)
FFO adjustments:
Depreciation and amortization of real estate assets		194,427			-			251,872			-
FFO		(19,526	)		(595	)		(178,709	)		(1,862	)
MFFO adjustments:

Acquisition and other transaction related costs expensed		316,955			-			509,571			-
MFFO		297,429			(595	)		330,862			(1,862	)
Straight-line rent⁽¹⁾		-			-			-			-
MFFO - IPA recommended format	$	297,429		$	(595	)	$	330,862		$	(1,862	)

Net loss	$	(213,953	)	$	(595	)	$	(430,581	)	$	(1,862	)
Less: net loss attributable to noncontrolling interests		39			-			73
Net loss applicable to Company's common shares	$	(213,914	)	$	(595	)	$	(430,508	)	$	(1,862	)
Net loss per common share, basic and diluted	$	(0.19	)	$	(0.03	)	$	(0.51	)	$	(0.09	)

FFO	$	(19,526	)	$	(595	)	$	(178,709	)	$	(1,862	)
Less: FFO attributable to noncontrolling interests		(3	)		-			17
FFO attributable to Company's common shares	$	(19,529	)	$	(595	)	$	(178,692	)	$	(1,862	)
FFO per common share, basic and diluted	$	(0.02	)	$	(0.03	)	$	(0.21	)	$	(0.09	)

MFFO - IPA recommended format	$	297,429		$	(595	)	$	330,862		$	(1,862	)
Less: MFFO attributable to noncontrolling interests		(47	)		-			(73	)		-
MFFO attributable to Company's common shares	$	297,382		$	(595	)	$	330,789		$	(1,862	)

Weighted average number of common shares outstanding, basic and diluted		1,151,224			20,000			841,614			20,000

⁽¹⁾

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

Distributions Declared by our Board of Directors and Source of Distributions

The following table provides a summary of our quarterly distributions declared during the periods presented. The amount of distributions paid to our stockholders in the future will be determined by our Board of Directors and is dependent on a number of factors, including funds available for payment of dividends, our financial condition, capital expenditure requirements and annual distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code. Additionally, our stockholders have the option to elect the receipt of shares in lieu of cash under our DRIP.

	Year to Date June 30, 2015					Three Months Ended June 30, 2015					Three Months Ended March 31, 2015
Distribution period:			Percentage of Distributions			Q2 2015		Percentage of Distributions			Q1 2015			Percentage of Distributions

Date distribution declared							May 14, 2014					January 14, 2015

Date distribution paid							May 15, 2015, June 15, 2015, & July 15, 2015					March 15, 2015 & April 15, 2015

Distributions paid	$	180,700				$	112,612				$	68,088
Distributions reinvested		79,043					59,605					19,438
Total Distributions	$	259,743				$	172,217				$	87,526

Source of distributions:
Cash flows provided by operations	$	112,615		43	%	$	112,615		65	%	$	-			-
Offering proceeds		68,088		27	%		-		-			68,088			78	%
Proceeds from issuance of common stock through DRIP		79,043		30	%		59,605		35	%		19,438			22	%
Total Sources	$	259,746		100	%	$	172,220		100	%	$	87,526			100	%

Cash flows provided by operations (GAAP basis)	$	179,448				$	285,757				$	(106,309	)

Number of shares of common stock issued pursuant to the Company's DRIP		8,320					6,274					2,046

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

	For the period October 5, 2012
	(date of inception) through
	June 30, 2015
FFO attributable to Company's common shares	$	(323,888	)
Distributions Paid	$	137,501

New Accounting Pronouncements

See Note 2 of the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been issued or adopted during 2015 and certain accounting standards that we have not yet been required to implement and may be applicable to our future operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

We are currently and expect to continue to be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund the expansion and refinancing of our real estate investment portfolio and operations. Our interest rate risk management objectives have been and will continue to be to limit the impact of interest rate changes on our earnings, prepayment penalties and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes. As of June 30, 2015, we did not have any derivative agreements outstanding.

The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable (included in other assets) and accounts payable and accrued expenses approximated their fair values as of June 30, 2015 because of the short maturity of these instruments.

As of June 30, 2015, the estimated fair value of the Revolving Promissory Notes approximated their carrying value ($17.8 million) because of their floating interest rates.

In addition to changes in interest rates, the value of our real estate and real estate related investments is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of tenants, which may affect our ability to obtain or refinance debt in the future. As of June 30, 2015, we had no off-balance sheet arrangements.

ITEM 4. CONTROLS AND PROCEDURES.

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

There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There were no significant deficiencies or material weaknesses identified in the evaluation, and therefore, no corrective actions were taken.

PART II. OTHER INFORMATION:

ITEM 1. LEGAL PROCEEDINGS.

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

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

ITEM 1A. RISK FACTORS

We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. For the quarter ended June 30, 2015, there were no such material developments.

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

Recent Sales of Unregistered Securities

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

Use of Offering Proceeds

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

The Company’s registration statement on Form S-11 (File No. 333-195292), pursuant to which it is offering to sell up to 30,000,000 shares of its common stock at a price of $10.00 per share, subject to certain volume discounts, (exclusive of 10,000,000 shares which are available pursuant to its distribution reinvestment plan (the “DRIP”) at an initial purchase price of $9.50 per share, was declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933 on July 15, 2014.

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

Lightstone SLP III LLC (‘‘Special Limited Partner’’), a Delaware limited liability company of which Mr. Lichtenstein is the majority owner, will be a special limited partner in the Operating Partnership and has committed to purchase subordinated profits interests in the Operating Partnership (“Subordinated Participation Interests”) at a cost of $50,000 per unit for each $1.0 million in subscriptions accepted for the Offering or any follow-on offering. The Special Limited Partner may elect to purchase the Subordinated Participation Interests for cash or may contribute interests in real property of equivalent value. On July 31, 2015, the Special Limited Partner made a cash contribution of $700,000 in exchange for 14 Subordinated Participation Interests. The Subordinated Participation Interests may be entitled to receive liquidation distributions upon the liquidation of Lightstone REIT III. (See Note 6 for a summary of related-party fees).

We have and expect to continue to utilize a portion of offering proceeds towards funding dealer manager fees, selling commissions and other offering costs.

Below is a summary of the expenses we have incurred from October 5, 2012 (date of inception) through June 30, 2015 in connection with the issuance and distribution of registered securities.

(Dollars in thousands)
Type of Expense Amount
Underwriting discounts and commissions	$	1,110,436
Other expenses incurred and paid to non-affiliates		1,153,024
Total offering expenses incurred	$	2,263,460

From our inception date through June 30, 2015, we have used the cumulative net offering proceeds received of approximately $14.3 million, after deducting offering costs incurred of $2.3 million, as follows:

(Dollars in thousands)
Purchase of investment properties, net of financings	$	9,355,507
Cash and cash equivalents, as adjusted		2,604,158
Other uses (primarily timing of payables)		(7,732	)

Total uses	$	11,951,933

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 III, Inc. on Form 10-Q for the quarter ended June 30, 2015, filed with the SEC on August 14, 2015, formatted in XBRL includes: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Operations, (3) Consolidated Statements of Stockholders’ Equity, (4) Consolidated Statements of Cash Flows, and (5) the Notes to the Consolidated Financial Statement.

*Filed herewith

SIGNATURES

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

	LIGHTSTONE VALUE PLUS REAL ESTATE
	INVESTMENT TRUST III, INC.

Date: August 14, 2015	By:	/s/ David Lichtenstein
		David Lichtenstein
		Chairman and Chief Executive Officer
		(Principal Executive Officer)

Date: August 14, 2015	By:	/s/ Donna Brandin
		Donna Brandin
		Chief Financial Officer
		(Duly Authorized Officer and Principal Financial and Accounting Officer)

Lightstone Value Plus Real Estate Investment Trust III, Inc. - FORM 10-Q - August 14, 2015

Attached files

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