UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

 

For the quarterly period ended September 30, 2017

 

OR

 

¨

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

 

For the transition period from                      to

 

Commission file number 000-55773

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland		47-1796830
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

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

 

(732) 367-0129

(Registrant’s Telephone Number, Including Area Code)

 

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

Yes   þ No ¨

 

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

Yes  þ      No  ¨

 

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

 

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

 

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

 

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

Yes  ¨  No þ

 

As of November 1, 2017, there were 9.0 million outstanding shares of common stock of Lightstone Real Estate Income Trust Inc.

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

INDEX

 

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016	3
	Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2017 and 2016	4
	Consolidated Statement of Stockholders’ Equity (unaudited) for the Nine Months Ended September 30, 2017	5
	Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2017 and 2016	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Mine Safety Disclosures	26
Item 5.	Other Information	26
Item 6.	Exhibits	26

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		September 30, 2017				December 31, 2016
		(Unaudited)
Assets
Investment in related party		$	37,000,000			$	37,000,000
Investments in unconsolidated affiliated real estate entities			31,158,226				-
Cash			15,293,700				21,874,240
Deposit and other assets			25,267				5,818,713
Due from related parties			-				28,696
Total Assets		$	83,477,193			$	64,721,649
Liabilities and Stockholders' Equity
Accounts payable and other accrued expenses		$	35,852			$	267,726
Due to related parties			53,609				-
Distributions payable			587,318				413,275
Subordinated advances - related party			12,843,707				12,703,876
Total liabilities			13,520,486				13,384,877
Commitments and Contingencies
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, 8,952,132 and 6,397,005 shares issued and outstanding, respectively			89,521				63,970
Additional paid-in-capital			75,586,926				52,616,396
Subscription receivable			-				(274,449	)
Accumulated deficit			(5,719,740	)			(1,069,145	)
Total Stockholders' Equity			69,956,707				51,336,772
Total Liabilities and Stockholders' Equity		$	83,477,193			$	64,721,649

 

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

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2017				2016				2017				2016
Income:
Investment income		$	1,134,667			$	600,366			$	3,367,000			$	1,103,133
Loss from investment in unconsolidated affiliated real estate entity			(741,002	)			-				(2,066,879	)			-
Total income			393,665				600,366				1,300,121				1,103,133
Expenses:
General and administrative costs			265,960				85,273				766,996				207,553
Interest expense			47,122				21,138				139,831				32,787
Total expenses			313,082				106,411				906,827				240,340
Net income		$	80,583			$	493,955			$	393,294			$	862,793
Net income per common share, basic and diluted		$	0.01			$	0.13			$	0.05			$	0.43
Weighted average number of common shares outstanding, basic and diluted			8,955,440				3,730,626				8,451,031				2,009,286

 

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

 

 

PART I. FINANCIAL INFORMATION:    

ITEM 1. FINANCIAL STATEMENTS.

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

		Common
										Additional
										Paid-In				Subscription				Accumulated				Total
		Shares				Amount				Capital				Receivable				Deficit				Equity
BALANCE, December 31, 2016			6,397,005			$	63,970			$	52,616,396			$	(274,449	)		$	(1,069,145	)		$	51,336,772
Net income			-				-				-				-				393,294				393,294
Distributions declared			-				-				-				-				(5,043,889	)			(5,043,889	)
Proceeds from offering			2,506,031				25,060				24,865,186				274,449				-				25,164,695
Shares issued from distribution reinvestment program			69,332				693				657,959				-				-				658,652
Redemption and cancellation of shares			(20,236	)			(202	)			(196,217	)			-				-				(196,419	)
Selling commissions and dealer manager fees			-				-				(2,330,905	)			-				-				(2,330,905	)
Other offering costs			-				-				(25,493	)			-				-				(25,493	)
BALANCE, September 30, 2017			8,952,132			$	89,521			$	75,586,926			$	-			$	(5,719,740	)		$	69,956,707

 

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

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Nine Months Ended September 30, 2017				For the Nine Months Ended September 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	393,294			$	862,793
Adjustments to reconcile net income to net cash  provided by operating activities:
Loss from investment in unconsolidated affiliated real estate entity			2,066,879				-
Changes in assets and liabilities:
Decrease/(increase) in other assets			106,196				(5,834	)
(Decrease)/increase in accounts payable and other accrued expenses			(13,150	)			4,969
Increase in accrued interest on subordinated advances - related party			139,831				32,787
Increase/(decrease) in due to related parties			82,305				(37,774	)
Net cash provided by operating activities			2,775,355				856,941
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in related party			-				(18,194,001	)
Deposit on real estate investment			-				(3,412,500	)
Investments in unconsolidated affiliated real estate entities			(27,537,856	)			-
Cash used in investing activities			(27,537,856	)			(21,606,501	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock			25,164,695				37,950,067
Proceeds from subordinated advances - related party			-				10,432,013
Payment of commissions and offering costs			(2,575,121	)			(4,713,533	)
Redemption and cancellation of common stock			(196,419	)			-
Distributions paid to Company's common stockholders			(4,211,194	)			(724,181	)
Net cash provided by financing activities			18,181,961				42,944,366
Net change in cash			(6,580,540	)			22,194,806
Cash, beginning of year			21,874,240				1,213,014
Cash, end of period		$	15,293,700			$	23,407,820
Supplemental disclosure of cash flow information:
Distributions declared, but not paid		$	587,318			$	301,454
Commissions and other offering costs accrued but not paid		$	-			$	352,045
Subscription receivable			-				39,000
Value of shares issued from distribution reinvestment program		$	658,652			$	215,248
Application of deposit to acquisition of investment property		$	5,687,250			$	-

 

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

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

1.

Organization

 

Lightstone Real Estate Income Trust Inc. (‘‘Lightstone Income Trust’’), incorporated on September 9, 2014, in Maryland, elected to qualify to be taxed as a real estate investment trust (‘‘REIT’’) for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2016.

 

Lightstone Income Trust sold 20,000 Common Shares to Lightstone Real Estate Income LLC, a Delaware limited liability company (the ‘‘Advisor’’), an entity majority owned by David Lichtenstein, on September 12, 2014, for $10.00 per share. Mr. Lichtenstein also is a majority owner of the equity interests of Lightstone Income Trust’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. 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 Income Trust.

 

Lightstone Income Trust, together with its subsidiaries is collectively referred to as the ‘‘Company’’ and the use of ‘‘we,’’ ‘‘our,’’ ‘‘us’’ or similar pronouns refers to Lightstone Income Trust or the Company as required by the context in which any such pronoun is used.

 

The Company’s registration statement on Form S-11 (the “Offering”), pursuant to which it offered to sell up to 30,000,000 shares of its common stock, par value $0.01 per share (which may be referred to herein as ‘‘shares of common stock’’ or as ‘‘Common Shares’’) for an initial offering price of $10.00 per share, subject to certain volume and other discounts (the “Primary Offering”) (exclusive of 10,000,000 shares available pursuant to its distribution reinvestment program (the ‘‘DRIP’’) which were offered at a discounted price equivalent to 95% of the Primary Offering Price per Common Share) was declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933 on February 26, 2015. On June 30, 2016, the Company adjusted its offering price to $9.14 per Common Share in its Primary Offering, which was equal to the Company’s estimated net asset value (“NAV”) per Common Share as of March 31, 2016, and effective July 25, 2016, the Company’s offering price was adjusted to $10.00 per Common Share in its Primary Offering, which was equal to the estimated NAV per Common Share as of June 30, 2016. Our estimated NAV per Common Share remained unchanged at $10.00 as of both September 30, 2016 and December 31, 2016.

 

The Offering, which terminated on March 31, 2017, raised aggregate gross proceeds of approximately $85.6 million from the sale of approximately 8.9 million shares of common stock (including $2.0 million in Common Shares at a purchase price of $9.00 per Common Share to an entity 100% owned by David Lichtenstein, who also owns a majority interest in the Company’s Sponsor). After including aggregate advances from our Sponsor of $12.6 million under the Subordinated Agreement (as discussed in Note 6) and allowing for the payment of approximately $7.6 million in selling commissions and dealer manager fees and $3.2 million in organization and offering expenses, the Offering generated aggregate net proceeds of approximately $87.5 million.

 

On April 21, 2017, the Company’s board of directors approved the termination of the DRIP effective May 15, 2017. Previously, the Company’s stockholders had an option to elect the receipt of shares of the Company’s common stock in lieu of cash distributions under the Company’s DRIP, however, all future distributions will be in the form of cash. In addition, through May 15, 2017 (the termination date of the DRIP), the Company issued approximately 0.1 million shares of common stock under its DRIP, representing approximately $1.2 million of additional proceeds under the Offering.

 

The Company has and expects to continue to seek to originate, acquire and manage a diverse portfolio of real estate-related investments. The Company may invest in mezzanine loans, first lien mortgage loans, second lien mortgage loans, bridge loans and preferred equity interests, in each case with a focus on investments intended to finance development or redevelopment opportunities. The Company may also invest in debt and derivative securities related to real estate assets. The Company expects that a majority of its investments by value will be secured by or related to properties or entities advised by, or wholly or partially, directly or indirectly owned by, the Sponsor, by its affiliates or by real estate investment programs sponsored by it.

 

The Company has no employees. The Company retains the Advisor to manage its affairs on a day-to-day basis. Orchard Securities, LLC (the ‘‘Dealer Manager’’), a third party not affiliated with the Company, the Sponsor or the Advisor, served as the dealer manager of the Offering until their termination on March 31, 2017 as a result of the termination of the Offering. The Advisor is an affiliate of the Sponsor and will receive compensation and fees for services related to the investment and management of the Company’s assets.

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

2.

Summary of Significant Accounting Policies

 

The accompanying unaudited interim consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair presentation of the results for the periods presented. The accompanying unaudited consolidated financial statements of the Lightstone Income Trust and 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.

 

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

 

In August 2016, the FASB issued an accounting standards update which provides guidance on the classification of certain cash receipts and cash payments in the statement of cash flows, including those related to debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, and distributions received from equity method investees.  This guidance is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years.  The guidance must be adopted on a retrospective basis and must be applied to all periods presented, but may be applied prospectively if retrospective application would be impracticable.  This guidance will not have a material impact on the Company’s consolidated financial statements.

 

In June 2016, the FASB issued an accounting standards update which replaces the incurred loss impairment methodology currently in use with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  The Company does not expect that this guidance will have a material impact on its consolidated financial statements.

 

In January 2016, the FASB issued an accounting standards update that eliminates the requirement for public business entities to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet and is effective for periods beginning after December 15, 2017 and early adoption is not permitted. This guidance will not have a material impact on the Company’s consolidated financial statements.

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

In May 2014, the FASB issued an accounting standards update that provides for a single five-step model to be applied to all revenue contracts with customers as well as requires additional financial statement disclosures that will enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows relating to customer contracts.  Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard.  This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.  The adoption of this standard will not have a material impact on the Company’s consolidated financial statements.

 

The Company has reviewed and determined that 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 current operations.

 

3.

Investments in Unconsolidated Affiliated Real Estate Entities

 

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

 

								As of
Entity		Date of Ownership		Ownership %				September 30, 2017				December 31, 2016
RP Maximus Cove, L.L.C. (the "Cove Joint Venture")		January 31, 2017			22.50	%		$	18,552,816			$	-
40 East End Ave. Pref Member LLC ( “40 East End Ave. Joint Venture”)		March 31, 2017			33.30	%			12,605,410				-
Total investments in unconsolidated affiliated real estate entities								$	31,158,226			$	-

 

The Cove Joint Venture

 

On September 29, 2016, the Company, through its wholly owned subsidiary, REIT Cove LLC (“REIT Cove”), LSG Cove LLC (“LSG Cove”), an affiliate of the Lightstone Group, LLC, the Company’s sponsor and a related party, and Maximus Cove Investor LLC (“Maximus”), an unrelated third party (collectively, the “Buyer”), entered into an agreement of sale and purchase with an unrelated third party, RP Cove, L.L.C (the “Seller”), pursuant to which the Buyer would acquire the Seller’s membership interest in RP Maximus Cove, L.L.C. (the “Cove Joint Venture”) for approximately $255.0 million (the “Cove Transaction”). The Cove Joint Venture owns and operates The Cove at Tiburon (“the Cove”), a 281-unit, luxury waterfront multifamily rental property located in Tiburon, California. Prior to entering into the Cove Transaction, Maximus previously owned a separate noncontrolling interest in the Cove Joint Venture.

 

On January 31, 2017, REIT Cove entered into an Assignment and Assumption Agreement (the “Assignment”) with another of the Company’s wholly owned subsidiaries, REIT IV COVE LLC (“REIT IV Cove”) and REIT III COVE LLC (“REIT III Cove”), a subsidiary of the operating partnership of Lightstone Value Plus Real Estate Investment Trust III, Inc., a real estate investment trust also sponsored by the Company’s sponsor and a related party, and together with REIT IV Cove, collectively, the “Assignees”. Under the terms of the Assignment, the Assignees were assigned the rights and obligations of REIT Cove with respect to the Cove Transaction.

 

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

 

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

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

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

 

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

 

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

 

The Cove Joint Venture Condensed Financial Information

 

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

 

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

 

(amounts in thousands)		For the Three Months Ended September 30, 2017				For the Period January 31,2017 (date of investment) through September 30, 2017
Revenue		$	3,523			$	8,724
Property operating expenses			1,175				3,076
General and administrative costs			54				196
Depreciation and amortization			2,383				6,348
Operating loss			(89	)			(896	)
Interest expense and other, net			(2,406	)			(6,161	)
Net loss		$	(2,495	)		$	(7,057	)
Company's share of net loss (22.50%)		$	(561	)		$	(1,588	)
Additional depreciation and amortization expense (1)			(180	)			(479	)
Company's loss from investment		$	(741	)		$	(2,067	)

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

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

 

		As of
(amounts in thousands)		September 30, 2017
Real estate, at cost (net)		$	150,602
Cash and restricted cash			2,797
Other assets			1,822
Total assets		$	155,221
Mortgage payable, net		$	173,325
Other liabilities			1,933
Members' deficit (1)			(20,037	)
Total liabilities and members' deficit		$	155,221

 

(1)

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

 

40 East End Ave. Joint Venture

 

On March 31, 2017, the Company entered into a joint venture agreement (the “40 East End Ave. Transaction”) with SAYT Master Holdco LLC, an entity majority-owned and controlled by David Lichtenstein, who also majority owns and controls the Company’s Sponsor, and a related party, (the “Seller”), providing for the Company to acquire 33.3% of the Seller’s approximate 100% membership interest in 40 East End Ave. Pref Member LLC ( “40 East End Ave. Joint Venture”) for aggregate consideration of approximately $10.3 million. During the six months ended September 30, 2017, the Company contributed an additional $2.3 million to the 40 East End Ave. Joint Venture.

 

In accordance with the Company’s charter, a majority of the Company’s board of directors, including a majority of the Company’s independent directors not otherwise interested in the transaction, approved the 40 East End Ave. Transaction as fair and reasonable to the Company and on terms and conditions not less favorable to the Company than those available from unaffiliated third parties.

 

The Company’s interest in the 40 East End Ave. Joint Venture is a non-managing interest. Because the Company exerts significant influence over but does not control the 40 East End Ave. Joint Venture, it will account for its ownership interest in the 40 East End Ave. Joint Venture in accordance with the equity method of accounting. All contributions to and distributions of earnings from the 40 East End Ave. Joint Venture will be made on a pro rata basis in proportion to each Member’s equity interest percentage. Any distributions in excess of earnings from the 40 East End Ave. Joint Venture will be made to the Members pursuant to the terms of its operating agreement. The Company will commence recording its allocated portion of earnings and cash distributions from the 40 East End Ave. Joint Venture beginning as of March 31, 2017 with respect to its membership interest of approximately 33.3% in the 40 East End Ave. Joint Venture. Additionally, Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”), a real estate investment trust also sponsored by the Company’s Sponsor, has made $30.0 million of contributions to a subsidiary of the 40 East End Ave. Joint Venture, pursuant to an instrument that entitles Lightstone I to monthly preferred distributions at a rate of 12% per annum.

 

The 40 East End Ave. Joint Venture, through affiliates, owns a parcel of land located at the corner of 81^st Street and East End Avenue in the Upper East Side neighborhood of New York City on which it is constructing a luxury residential project consisting of 29 condominium units. As of and for the nine months ended September 30, 2017, the 40 East End Ave. Joint Venture was being developed and therefore had no results of operations.

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

The following table represents the unaudited condensed balance sheet for the 40 East End Ave. Joint Venture:

 

		As of
(amounts in thousands)		September 30, 2017
Real estate inventory		$	78,811
Cash and restricted cash			2,280
Other assets			270
Total assets		$	81,361
Mortgage payable, net		$	10,834
Other liabilities			2,610
Members' capital			67,917
Total liabilities and members' capital		$	81,361

 

4.

Stockholders’ Equity

 

Earnings per Share

 

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

 

Subscription Receivable

 

The subscription receivable relates to shares issued to the Company’s shareholders for which the proceeds have not yet been received by the Company as of the balance sheet date solely due to timing of transfers from the escrow agent holding the funds.

 

Distributions

 

Distribution Declaration

 

On November 9, 2017, the Board of Directors authorized and the Company declared a distribution for each month during the three-month period ending March 31, 2018. The distributions will be calculated based on shareholders of record at a rate of $0.002191781 per day, and will equal a daily amount that, if paid each day for a 365-day period, would equal a 8.0% annualized rate based on a share price of $10.00 payable on or about the 15th day following each month end to stockholders of record at the close of business on the last day of the prior month.

 

Distribution Payments

 

On August 15, 2017, September 15, 2017 and October 16, 2017, the Company paid distributions for the months ended July 31, 2017, August 31, 2017 and September 30, 2017, respectively, totaling $1,801,111. The distributions were paid in cash. The distributions were paid from a combination of cash flows provided by operations ($853,784 or 47%) and offering proceeds ($947,327 or 53%).

 

5.

Selling Commissions, Dealer Manager Fees and Other Offering Costs

 

Selling commissions and dealer manager fees were paid to the Dealer Manager, pursuant to various agreements that were terminated on March 31, 2017, in connection with the termination of the Offering, and other third-party offering costs such as registration fees, due diligence fees, marketing costs, and professional fees are accounted for as a reduction against additional paid-in capital 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 September 30,								For the Nine Months Ended September 30,
		2017				2016				2017				2016
Selling commissions and dealer manager fees		$	-			$	2,752,667			$	2,330,905			$	3,444,017
Other offering costs		$	-			$	(96,486	)		$	25,493			$	650,782

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

Since the Company’s inception through March 31, 2017 (the termination date of the Offering), it incurred approximately $7.6 million in selling commissions and dealer manager fees and $3.2 million of other offering costs in connection with the public offering of shares of its common stock.

 

6.

Related Party Transaction and Other Arrangements

 

In addition to certain agreements with the Sponsor and Dealer Manager (see Note 5), the Company has agreements with the Advisor to pay certain fees, in exchange for services performed by the Advisor and/or its affiliated entities.

 

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

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2017				2016				2017				2016
Acquisition fees (1)		$	-			$	-			$	573,750			$	-
Asset management fees (general and administrative costs)			156,112				-				417,919				-
Total		$	156,112			$	-			$	991,669			$	-

 

(1)

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

 

Investment in Related Party

 

105-109 W. 28^th Street Preferred Investment

 

On November 25, 2015, the Company entered into an agreement (the “Moxy Transaction”) with various related party entities that provides for the Company to make aggregate preferred equity contributions (the “105-109 W. 28^th Street Preferred Investment”) of up to $20.0 million in various affiliates of its Sponsor (the “Developer”) which owns a parcel of land located at 105-109 W. 28^th Street, New York, NY at which they are constructing a 343-room Marriott Moxy hotel. The 105-109 W. 28^th Street Preferred Investment is made pursuant to an instrument that entitles the Company to monthly preferred distributions at a rate of 12% per annum and was redeemable by the Company at the earlier of (i) the date that is two years from the date of the Company’s final contribution or (ii) the third anniversary of 105-109 W. 28^th Street Preferred Investment. The Company may also have requested redemption or a restructuring of the agreement prior to the acceptance of any construction financing, which was obtained in December 2016. On September 30, 2016, the Company and the Developer amended the Moxy Transaction so that the Company’s contributions would become redeemable on the fifth anniversary of the Moxy Transaction. The 105-109 W. 28^th Street Preferred Investment is classified as a held-to-maturity security and recorded at cost.

 

On August 30, 2016, the Company and the Developer amended the Moxy Transaction so that Company’s total aggregate contributions under the 105-109 W. 28^th Street Preferred Investment would increase by $17.0 million to $37.0 million.

 

As of both September 30, 2017 and December 31, 2016, the 105-109 W. 28th Street Preferred Investment had an outstanding balance of $37.0 million, which is classified as an investment in related party on the consolidated balance sheets.  During the three and nine months ended September 30, 2017, the Company recorded $1,134,667 and $3,367,000, respectively, and during the three and nine months ended September 30, 2016, the Company recorded $600,366 and $1,103,133, respectively, of investment income related to the 105-109 W. 28^th Street Preferred Investment. The Company’s Advisor elected to waive the acquisition fee associated with this transaction.​

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

Subordinated Advances – Related Party

 

On March 18, 2016, the Company and its Sponsor entered into a subordinated unsecured loan agreement (the “Subordinated Agreement”) pursuant to which the Sponsor had committed to make a significant investment in the Company of up to $36.0 million, which is equivalent to 12.0% of the $300.0 million maximum offering amount of Common Shares. The outstanding advances under the Subordinated Agreement (the “Subordinated Advances”) will bear interest at a rate of 1.48%, which was equal to the mid-term applicable U.S. federal rate as of March 2016. Interest will retroactively accrue on the outstanding advances under the Subordinated Agreement back to the date of each quarterly draw, but no interest or outstanding advances will be due and payable to the Sponsor until holders of the Company’s Common Shares have received liquidation distributions equal to their respective net investments (defined as $10.00 per Common Share) plus a cumulative, pre-tax, non-compounded annual return of 8.0% on their respective net investments.

  

Distributions in connection with a liquidation of the Company initially will be made to holders of its Common Shares until holders of its Common Shares have received liquidation distributions equal to their respective net investments plus a cumulative, pre-tax, non-compounded annual return of 8.0% on their respective net investments. Thereafter, only if additional liquidating distributions are available, the Company will be obligated to repay the outstanding advances under the Subordinated Agreement and accrued interest to the Sponsor, as described in the Subordinated Agreement. In the event that additional liquidation distributions are available after the Company repays its holders of common stock their respective net investments plus their 8% return on investment and then the outstanding advances under the Subordinated Agreement and accrued interest to its Sponsor, such additional distributions will be paid to holders of its Common Shares and its Sponsor: 85.0% of the aggregate amount will be payable to holders of the Company’s Common Shares and the remaining 15.0% will be payable to the Sponsor.

 

The Subordinated Advances and its related interest are subordinate to all of the Company’s obligations as well as to the holders of its Common Shares in an amount equal to the shareholder’s net investment plus a cumulative, pre-tax, non-compounded annual return of 8.0% and only potentially payable in the event of a liquidation of the Company.

 

As of September 30, 2017, an aggregate of approximately $12.6 million of Subordinated Advances had been funded, which along with the related accrued interest of $211,694, are classified as Subordinated Advances – Related Party, a liability on the consolidated balance sheets. During the three and nine months ended September 30, 2017, the Company accrued $47,122 and $139,831, respectively, of interest on the Subordinated Advances and during the three and nine months ended September 30, 2016, the Company accrued $21,138 and $32,787, respectively, of interest on the Subordinated Advances.

 

In connection with the termination of the Offering, on March 31, 2017, the Company and the Sponsor terminated the Subordinated Agreement. As a result of the termination, the Sponsor is no longer obligated to make Subordinated Advances to the Company. Interest will continue to accrue on the aggregate Subordinated Advances and repayment, if any, of the Subordinated Advances and accrued interest will be made according to the terms of the Subordinated Agreement disclosed above.

 

7.

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.

 

 

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 Real Estate Income Trust Inc. and Subsidiaries (‘‘Lightstone Income Trust’’), and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Lightstone Real Estate Income Trust Inc., a Maryland corporation, and its subsidiaries.

 

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 Real Estate Income Trust Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that actual results may differ materially from those contemplated by such forward-looking statements.

 

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

 

Risks and other factors that might cause differences, some of which could be material, include, but are not limited to, economic and market conditions, competition, tenant or joint venture partner(s) bankruptcies, 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 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 Income Trust, together with its subsidiaries, is collectively referred to as the ‘‘Company’’ and the use of ‘‘we,’’ ‘‘our,’’ ‘‘us’’ or similar pronouns refers to Lightstone Income Trust or the Company as required by the context in which any such pronoun is used.

 

Lightstone Income Trust has and expects to continue to seek to originate, acquire and manage a diverse portfolio of real estate-related investments. The Company may invest in mezzanine loans, first lien mortgage loans, second lien mortgage loans, bridge loans and preferred equity interests, in each case with a focus on investments intended to finance development or redevelopment opportunities. We may also invest in debt and derivative securities related to real estate assets. We expect that a majority of our investments by value will be secured by or related to properties or entities advised by, or wholly or partially, directly or indirectly owned by, the Sponsor, by its affiliates or by real estate investment programs sponsored by it.

 

 

Capital required to originate and acquire investments and conduct our operations  was obtained from public offerings of shares of our common stock and is expected to be obtained 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 were 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 Real Estate Income LLC, a Delaware limited liability company (the ‘‘Advisor’’), an entity majority owned by David Lichtenstein, on September 12, 2014, 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 offered 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 an initial offering price of $10.00 per share, subject to certain volume and other discounts (the “Primary Offering”) (exclusive of 10,000,000 shares available pursuant to its distribution reinvestment plan (the “DRIP”) which were offered at a discounted price equivalent to 95% of the Primary Offering price per Common Share) was declared effective by the SEC under the Securities Act of 1933 on February 26, 2015. On June 30, 2016, we adjusted our offering price to $9.14 per Common Share in our Primary offering, which was equal to our estimated net asset value (“NAV”) per Common Share as of March 31, 2016, and effective July 25, 2016, our offering price was adjusted to $10.00 per Common Share in our Primary Offering, which is equal to the estimated NAV per Common Share as of June 30, 2016. Our estimated NAV per Common Share remained unchanged at $10.00 as of both September 30, 2016 and December 31, 2016. The Offering, which terminated on March 31, 2017, raised aggregate gross proceeds of approximately $85.6 million from the sale of 8.9 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).

 

On April 21, 2017, the Company’s board of directors approved the termination of the DRIP effective May 15, 2017. Previously, the Company’s stockholders had an option to elect the receipt of shares of the Company’s common stock in lieu of cash distributions under the Company’s DRIP, however, all future distributions will be in the form of cash. In addition, through May 15, 2017 (the termination date of the DRIP), we issued approximately 0.1 million shares of common stock under our DRIP, representing approximately $1.2 million of additional proceeds under the Offering.

 

We have no employees. We retained the Advisor to manage our affairs on a day-to-day basis. Orchard Securities, LLC (the ‘‘Dealer Manager’’) served as the dealer manager of the Offering until their termination on March 31, 2017 as a result of the termination of the Offering. The Advisor is an affiliate of the Sponsor. The Advisor will receive compensation and fees for services related to the investment and management of our assets during our offering, acquisition, operational and liquidation stages.

 

On March 18, 2016, we and our Sponsor entered into a subordinated unsecured loan agreement (the “Subordinated Agreement”) pursuant to which the Sponsor had committed to make a significant investment in us of up to $36.0 million, which was equivalent to 12.0% of the $300.0 million maximum offering amount of Common Shares. The outstanding advances under the Subordinated Agreement (the “Subordinated Advances”) will bear interest at a rate of 1.48%, which was equal to the mid-term applicable U.S. federal rate as of March 2016. Interest will retroactively accrue on the outstanding advances under the Subordinated Agreement back to the date of each quarterly draw, but no interest or outstanding advances will be due and payable to the Sponsor until holders of the Company’s Common Shares have received liquidation distributions equal to their respective net investments (defined as $10.00 per Common Share) plus a cumulative, pre-tax, non-compounded annual return of 8.0% on their respective net investments.

 

Distributions in connection with a liquidation of the Company initially will be made to holders of our Common Shares until holders of our Common Shares have received liquidation distributions equal to their respective net investments plus a cumulative, pre-tax, non-compounded annual return of 8.0% on their respective net investments. Thereafter, only if additional liquidating distributions are available, we will be obligated to repay the holders of common stock their respective net investments plus their 8% return on investment and then the outstanding advances under the Subordinated Agreement and accrued interest to the Sponsor, as described in the Subordinated Agreement. In the unlikely event that additional liquidation distributions are available after we repay the outstanding advances under the Subordinated Agreement and accrued interest to our Sponsor, such additional distributions will be paid to holders of our Common Shares and our Sponsor: 85.0% of the aggregate amount will be payable to holders of our Common Shares and the remaining 15.0% will be payable to the Sponsor.

 

As of September 30, 2017 an aggregate of approximately $12.6 million of Subordinated Advances had been funded, which along with the related accrued interest of $211,694, is classified as Subordinated Advances – Related Party, a liability, on the consolidated balance sheets.

 

In connection with the termination of the Offering, on March 31, 2017, we and our Sponsor terminated the Subordinated Agreement. As a result of the termination, our Sponsor is no longer obligated to make Subordinated Advances to the Company. Interest will continue to accrue on the aggregate Subordinated Advances and repayment, if any, of the Subordinated Advances and accrued interest will be made according to the terms of the Subordinated Agreement disclosed above.

 

 

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 –

 

Unconsolidated Affiliated Real Estate Entity:

 

Multi - Family Residential			Location				Year Built				Leasable Units				Percentage Occupied as of September 30, 2017			Annualized Revenues based on rents at September 30, 2017				Annualized Revenues per unit at September 30, 2017
The Cove (Multi-Family Complex)			Tiburon, California				1967				281				90	%		$	14.0 million			$	55,724

 

Critical Accounting Policies and Estimates

 

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

 

Results of Operations

 

During the fourth quarter of 2015 we made our first real estate-related investment, the 105-109 W. 28^th Street Preferred Investment. Additionally, we acquired a 22.5% membership in RP Maximus Cove, L.L.C. (the “Cove Joint Venture”) on January 31, 2017 and we acquired an approximate 33.3% interest in 40 East End Ave. Pref Member LLC ( “40 East End Ave. Joint Venture”) on March 31, 2017. We account for our 22.5% interest in the Cove Joint Venture and our approximately 33.3% interest in the 40 East End Ave. Joint Venture under the equity method of accounting as of September 30, 2017. The operating results of our investments are reflected in our consolidated statements of operations commencing from their respective dates of acquisition. The Cove Joint Venture owns and operates The Cove at Tiburon (“the Cove”), a 281-unit, luxury waterfront multifamily rental property located in Tiburon, California. The 40 East End Ave. Joint Venture, through affiliates, owns a parcel of land located at the corner of 81^st Street and East End Avenue in the Upper East Side neighborhood of New York City on which it is constructing a luxury residential project consisting of 29 condominium units. As of and for the three and nine months ended September 30, 2017, the 40 East End Ave. Joint Venture was being developed and therefore had no results of operations. See Note 3 and Note 6 of the Notes to Consolidated Financial Statements for additional information on our investments.

 

For the Three Months Ended September 30, 2017 vs. September 30, 2016

 

Investment income

 

Investment income, which was attributable to the 105-109 W. 28^th Street Preferred Investment, was $1,134,667 for the three months ended September 30, 2017 compared to $600,366 for the same period in 2016 as a result of the Company’s additional contribution to the 105-109 W. 28^th Street Preferred Investment subsequent to the 2016 period.

 

Loss from investment in unconsolidated affiliated real estate entity

 

Our loss from investment in unconsolidated affiliated real estate entity during three months ended September 30, 2017 was $741,002. Our loss from investment in unconsolidated affiliated real estate entity is attributable to our ownership interest in the Cove Joint Venture. Commencing on January 31, 2017 which was the date that we acquired our interest, we account for our ownership interest in the Cove Joint Venture under the equity method of accounting.

 

 

General and administrative expenses

 

General and administrative expense increased by $180,687 to $265,960 during the three months ended September 30, 2017 compared to $85,273 for the same period in 2016. The increase reflects an increase in the asset management fees to our Advisor during the 2017 period.

 

Interest expense

 

Interest expense, which was attributable to the Subordinated Advances – Related Party, was $47,122 for the three months ended September 30, 2017 compared to $21,138 for the same period in 2016 as a result of the additional advances funded by the Sponsor subsequent to the 2016 period.

 

For the Nine Months Ended September 30, 2017 vs. September 30, 2016

 

Investment income

 

Investment income, which was attributable to the 105-109 W. 28^th Street Preferred Investment, was $3,367,000 for the nine months ended September 30, 2017 compared to $1,103,133 for the same period in 2016 as a result of the Company’s additional contribution to the 105-109 W. 28^th Street Preferred Investment subsequent to the 2016 period.

 

Loss from investment in unconsolidated affiliated real estate entity

 

Our loss from investment in unconsolidated affiliated real estate entity during nine months ended September 30, 2017 was $2,066,879. Our loss from investment in unconsolidated affiliated real estate entity is attributable to our ownership interest in the Cove Joint Venture. Commencing on January 31, 2017 which was the date that we acquired our interest, we account for our ownership interest in the Cove Joint Venture under the equity method of accounting.

 

General and administrative expenses

 

General and administrative expenses increased by $559,443 to $766,996 during the nine months ended September 30, 2017 compared to $207,553 for the same period in 2016. The increase reflects an increase in the asset management fees to our Advisor and higher accounting and transfer agent fees during the 2017 period.

 

Interest expense

 

Interest expense, which was attributable to the Subordinated Advances – Related Party, was $139,831 for the nine months ended September 30, 2017 compared to $32,787 for the same period in 2016 as a result of the additional advances funded by the Sponsor subsequent to the 2016 period.

 

Financial Condition, Liquidity and Capital Resources

 

For the nine months ended September 30, 2017 our primary source of funds were approximately $25.2 million of net proceeds from the sale of shares of common stock under our Offering and $2.8 million of cash flows from operations.

 

Our future sources of funds will primarily consist of cash on hand and cash flows from our operations. We currently believe that these cash resources will be sufficient to satisfy our cash requirements (primarily operating expenses and distributions) 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 obtained the capital required to originate and acquire investments and conduct our operations from the proceeds of our Offering, and may obtain additional capital from any future offerings we may conduct, from secured or unsecured financings from banks and other lenders and from any undistributed funds from our operations.

 

Once we have fully invested the proceeds of our Offering, our portfolio-wide loan-to-value ratio (calculated after the close of the Offering) is expected to be approximately 25%. For purposes of calculating our 25% target leverage, we will determine the loan-to-value ratio on our portfolio based on the greater of the aggregate cost and the fair market value of our investments and other assets. There is no limitation on the amount we may borrow for the purchase or origination of any single investment. Our charter allows us to incur leverage up to 300% of our total “net assets” (as defined in our charter) as of the date of any borrowing, which is generally expected to be approximately 75% of the cost of our investments. We may only exceed this 300% limit with the approval of a majority of our independent directors. In all events, we expect that our secured and unsecured borrowings will be reasonable in relation to the net value of our assets and will be reviewed by our board of directors at least quarterly.

 

 

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

 

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

 

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

 

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

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2017				2016				2017				2016
Selling commissions and dealer manager fees		$	-			$	2,752,667			$	2,330,905			$	3,444,017
Other offering costs		$	-			$	(96,486	)		$	25,493			$	650,782

 

We have agreements with the Advisor to pay certain fees, in exchange for services performed by the Advisor and/or its affiliated entities.

 

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

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2017				2016				2017				2016
Acquisition fees (1)		$	-			$	-			$	573,750			$	-
Asset management fees (general and administrative costs)			156,112				-				417,919				-
Total		$	156,112			$	-			$	991,669			$	-

 

(1)

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

 

During our operational stage, we expect to make payments to our Advisor in connection with the selection and origination or purchase of investments and the management of our assets and to reimburse certain costs incurred by our Advisor in providing services to us. The advisory agreement has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of our Advisor and our independent directors.

 

 

Summary of Cash Flows

 

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

 

		For the Nine Months Ended September 30, 2017				For the Nine Months Ended September 30, 2016
Cash flows provided by operating activities		$	2,775,355			$	856,941
Cash flows used in investing activities			(27,537,856	)			(21,606,501	)
Cash flows provided by financing activities			18,181,961				42,944,366
Net change in cash and cash equivalents			(6,580,540	)			22,194,806
Cash and cash equivalents, beginning of the year			21,874,240				1,213,014
Cash and cash equivalents, end of the period		$	15,293,700			$	23,407,820

 

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

 

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

 

Operating activities

 

The net cash provided by operating activities of $2.8 million during the 2017 period primarily related to our net income of $0.4 million adjusted by adding back our loss from investment in unconsolidated affiliated real estate entities of $2.1 million and by changes in assets and liabilities of $0.3 million.

 

Investing activities

 

The cash used in investing activities of $27.5 million during the 2017 period consisted of investments in unconsolidated affiliated real estate entities.

 

Financing activities

 

The net cash provided by financing activities of $18.2 million during the 2017 period principally consists of proceeds from the issuance of our common stock of $25.2 million; partially offset by the payment of selling commissions, dealer manager fees and other offering costs of approximately $2.6, distributions of $4.2 million to common stockholders and redemptions and cancellation of common stock of $0.2 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.

 

DRIP and Share Repurchase Program

 

Our DRIP provides our stockholders with an opportunity to purchase additional shares of our common stock at a discount by reinvesting distributions. The offering provided for 10.0 million shares available for issuance under our DRIP which were offered at a discounted price equivalent to 95% of our Primary Offering price per Common Share. Through May 15, 2017 (the termination date of the DRIP), 128,554 shares of common stock had been issued under our DRIP.

 

Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to us, subject to restrictions. From our date of inception through December 31, 2015, we did not receive any requests to redeem shares of our common stock under our share repurchase program. For the year ended December 31, 2016 we repurchased 18,798 shares of common stock pursuant to our share repurchase program at an average price per share of $9.75 per share. For the nine months ended September 30, 2017, we repurchased 20,236 shares of common stock pursuant to our share repurchase program at an average price per share of $9.71 per share. We funded share repurchases for the periods noted above from the cumulative proceeds of the sale of our shares pursuant to our DRIP.

 

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

 

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

 

Funds from Operations and Modified Funds from Operations

 

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.

 

Because of these factors, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has published a standardized measure of performance known as funds from operations ("FFO"), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT's operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.

 

We define FFO, a non-GAAP measure, consistent with the standards set forth in the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding gains or losses from sales of property and real estate related impairments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.

 

We believe that the use of FFO provides a more complete understanding of our performance to investors and to management and reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.

 

Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT's definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.

 

Because of these factors, the Investment Program Association (the "IPA"), an industry trade group, published a standardized measure of performance known as modified funds from operations ("MFFO"), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP.

 

We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline") issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction-related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and acquisition and transaction-related fees and expenses (which includes costs incurred in connection with strategic alternatives), amounts relating to deferred rent receivables and amortization of market lease and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Certain of the above adjustments are also made to reconcile net income (loss) to net cash provided by (used in) operating activities, such as for the amortization of a premium and accretion of a discount on debt and securities investments, amortization of fees, any unrealized gains (losses) on derivatives, securities or other investments, as well as other adjustments.

 

MFFO excludes non-recurring impairment of real estate-related investments. We assess the credit quality of our investments and adequacy of reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. We consider the estimated net recoverable value of a loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive situation of the region where the borrower does business.

 

We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.

 

Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. FFO and MFFO should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.

 

Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guidelines or the SEC or another regulatory body could standardize the allowable adjustments across the publicly registered, non-listed REIT industry, and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.

 

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

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2017				2016				2017				2016
Net income		$	80,583			$	493,955			$	393,294			$	862,793
FFO adjustments:
Adjustments to equity earnings from unconsolidated affiliated real estate entities, net			715,911				-				1,907,349				-
FFO			796,494				493,955				2,300,643				862,793
MFFO adjustments:
Other adjustments:
Acquisition and other transaction related costs expensed			-				-				-				4,000
MFFO			796,494				493,955				2,300,643				866,793
Straight-line rent(1)			-				-				-				-
MFFO - IPA recommended format		$	796,494			$	493,955			$	2,300,643			$	866,793
Net income		$	80,583			$	493,955			$	393,294			$	862,793
Less: net income attributable to noncontrolling interests			-				-				-				-
Net income applicable to Company's common shares		$	80,583			$	493,955			$	393,294			$	862,793
Net loss per common share, basic and diluted		$	0.01			$	0.13			$	0.05			$	0.43
FFO		$	796,494			$	493,955			$	2,300,643			$	862,793
Less: FFO attributable to noncontrolling interests			-				-				-				-
FFO attributable to Company's common shares		$	796,494			$	493,955			$	2,300,643			$	862,793
FFO per common share, basic and diluted		$	0.09			$	0.13			$	0.27			$	0.43
MFFO - IPA recommended format		$	796,494			$	493,955			$	2,300,643			$	866,793
Less: MFFO attributable to noncontrolling interests			-				-				-				-
MFFO attributable to Company's common shares		$	796,494			$	493,955			$	2,300,643			$	866,793
Weighted average number of common shares outstanding, basic and diluted			8,955,440				3,730,626				8,451,031				2,009,286

 

(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 had the option to elect the receipt of shares in lieu of cash under our DRIP until it was terminated effective May 15, 2017.

 

		Year to Date September 30, 2017								Three Months Ended September 30, 2017								Three Months Ended June 30, 2017								Three Months Ended March 31, 2017
Distribution period:						Percentage of Distributions				Q3 2017				Percentage of Distributions				Q2 2017				Percentage of Distributions				Q1 2017				Percentage of Distributions
Date distribution declared											May 12, 2017								March 27, 2017								November 14, 2016
Date distribution paid											August 15, 2017, September 15, 2017, & October 16, 2017								May 15, 2017, June 15, 2017, & July 14, 2017								February 15, 2017, March 15, 2017, & April 17, 2017
Distributions paid		$	4,530,564							$	1,801,111							$	1,782,830							$	946,623
Distributions reinvested			513,325								-								98								513,227
Total Distributions		$	5,043,889							$	1,801,111							$	1,782,928							$	1,459,850
Source of distributions:
Cash flows provided by operations		$	2,775,355				55	%		$	853,784				47	%		$	725,411				41	%		$	946,623				65	%
Offering proceeds			1,755,209				35	%			947,327				53	%			1,057,419				59	%			-				0	%
Proceeds from issuance of common stock through DRIP			513,325				10	%			-				0	%			98				0	%			513,227				35	%
Total Sources		$	5,043,889				100	%		$	1,801,111				100	%		$	1,782,928				100	%		$	1,459,850				100	%
Cash flows provided by operations (GAAP basis)		$	2,775,355							$	853,784							$	725,412							$	1,196,159
Number of shares of common stock issued pursuant to the Company's DRIP			54,034								-								10								54,024

 

		Year to Date September 30, 2016								Three Months Ended September 30, 2016								Three Months Ended June 30, 2016								Three Months Ended March 31, 2016
Distribution period:						Percentage of Distributions				Q3 2016				Percentage of Distributions				Q2 2016				Percentage of Distributions				Q1 2016				Percentage of Distributions
Date distribution declared											August 5, 2016								May 12, 2016								October 28, 2015, March 11, 2016
Date distribution paid											August 15, 2016 September 15, 2015 October 14, 2016								May 14, 2016, June 15, 2016, & July 15, 2016								February 16, 2016, March 15, 2016, & April 15, 2016
Distributions paid		$	889,647							$	507,217							$	250,216							$	132,214
Distributions reinvested			305,089								241,022								27,019								37,048
Total Distributions		$	1,194,736							$	748,239							$	277,235							$	169,262
Source of distributions:
Cash flows provided by operations		$	856,941				72	%		$	507,217				68	%		$	250,216				90	%		$	65,948				39	%
Offering proceeds			32,706				3	%			-				-				-				-				66,266				39	%
Proceeds from issuance of common stock through DRIP			305,089				25	%			241,022				32	%			27,019				10	%			37,048				22	%
Total Sources		$	1,194,736				100	%		$	748,239				100	%		$	277,235				100	%		$	169,262				100	%
Cash flows provided by operations (GAAP basis)		$	856,941							$	515,675							$	275,318							$	65,948
Number of shares of common stock issued pursuant to the Company's DRIP			32,384								25,371								3,113								3,900

 

 

The table below presents our cumulative FFO and distributions declared:

 

		For the period September 9, 2014
		(date of inception) through
		September 30, 2017
FFO		$	3,724,817
Distributions declared		$	7,537,209

 

New Accounting Pronouncements

 

See Note 2 of the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been issued or adopted during 2017 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.

 

The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or rates. Our interest rate risk management objectives with respect to our long-term debt will be to limit the impact of interest rate changes in earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars, and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes. We do not anticipate having any foreign operations and thus we do not expect to be exposed to foreign currency fluctuations.

 

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 September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION:

 

ITEM 1. LEGAL PROCEEDINGS.

 

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

 

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

 

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

 

Recent Sales of Unregistered Securities

 

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

 

Use of Public 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 Real Estate Income LLC (the “Advisor”), which is wholly owned by our Sponsor.

 

On September 12, 2014, the Company sold 20,000 Common Shares to the Advisor for $10.00 per share.

 

The Company’s registration statement on Form S-11 (the “Offering”), pursuant to which it offered to sell up to 30,000,000 shares of its common stock, par value $0.01 per share (which may be referred to herein as ‘‘shares of common stock’’ or as ‘‘Common Shares’’) for an initial offering price of $10.00 per share, subject to certain volume and other discounts (the “Primary Offering”) (exclusive of 10,000,000 shares available pursuant to its distribution reinvestment program (the ‘‘DRIP’’) which were offered at a discounted price equivalent to 95% of the Primary Offering Price per Common Share) was declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933 on February 26, 2015. On June 30, 2016, the Company adjusted its offering price to $9.14 per Common Share in its Primary Offering, which was equal to the Company’s estimated net asset value (“NAV”) per Common Share as of March 31, 2016, and effective July 25, 2016, the Company’s offering price was adjusted to $10.00 per Common Share in its Primary Offering, which is equal to the estimated NAV per Common Share as of June 30, 2016. Our estimated NAV per Common Share remained unchanged at $10.00 as of both September 30, 2016 and December 31, 2016.

 

The Offering, which terminated on March 31, 2017, raised aggregate gross proceeds of approximately $85.6 million from the sale of approximately 8.9 million shares of common stock (including $2.0 million in Common Shares at a purchase price of $9.00 per Common Share to an entity 100% owned by David Lichtenstein, who also owns a majority interest in the Company’s Sponsor). After including the purchase of aggregate advances from our Sponsor of $12.6 million under the Subordinated Agreement and allowing for the payment of approximately $7.6 million in selling commissions and dealer manager fees and $3.2 million in organization and offering expenses, the Offering generated aggregate net proceeds of approximately $87.5 million. In addition, the Company had issued approximately 0.1 million shares of common stock under its DRIP, representing approximately $1.2 million of additional proceeds under the Offering. The DRIP was terminated effective May 15, 2017.

 

On March 18, 2016, the Company and its Sponsor entered into a subordinated unsecured loan agreement (the “Subordinated Agreement”) pursuant to which the Sponsor had committed to make a significant investment in the Company of up to $36.0 million, which is equivalent to 12.0% of the $300.0 million maximum offering amount of Common Shares.

 

As of September 30, 2017 an aggregate of approximately $12.6 million of Subordinated Advances had been funded, which along with the related accrued interest of $211,694, are classified as Subordinated Advances – Related Party, a liability, on the consolidated balance sheets.

 

In connection with the termination of the Offering, on March 31, 2017, the Company and the Sponsor terminated the Subordinated Agreement. As a result of the termination, the Sponsor is no longer obligated to make Subordinated Advances to the Company. Interest will continue to accrue on the aggregate Subordinated Advances and repayment, if any, of the Subordinated Advances and accrued interest will be made according to the terms of the Subordinated Agreement disclosed above.

 

 

Below is a summary of the expenses we have incurred in connection with the issuance and distribution of the registered securities since inception:

 

Type of Expense Amount
Selling commissions and dealer manager fees		$	7,557,885
Other expenses incurred			3,180,431
Total  offering costs incurred from inception through March 31, 2017		$	10,738,316

 

Cumulatively through the termination of our Offering on March 31, 2017, we have used the net offering proceeds of $87.5 million (including aggregate advances from our Sponsor of $12.6 million under the Subordinated Agreement), after deduction of offering expenses paid since inception of $10.7 million, as follows:

 

Cash		$	13,874,295
Cash distributions not funded by operations			2,392,865
Investment in related party			37,000,000
Real Estate Investments			33,225,106
Other uses  (primarily timing of payables)			977,158
Total uses		$	87,469,424

 

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 Real Estate Income Trust Inc. on Form 10-Q for the quarter ended September 30, 2017, filed with the SEC on November 14, 2017, formatted in XBRL includes: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Operations, (3) Consolidated Statements of Stockholders’ Equity, (4) Consolidated Statements of Cash Flows, and (5) the Notes to the Consolidated Financial Statement.

 

*Filed herewith

 

 

SIGNATURES

 

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

 

	LIGHTSTONE REAL ESTATE INCOME TRUST INC.
Date: November 14, 2017	By:	/s/ David Lichtenstein
		David Lichtenstein
		Chairman and Chief Executive Officer (Principal Executive Officer)

 

Date: November 14, 2017	By:	/s/ Donna Brandin
		Donna Brandin
		Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)