LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II INC - FORM 10-Q

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EX-32.1 - EXHIBIT 32.1 - LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II INC	tv500251_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II INC	tv500251_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2018

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

For the transition period from to

Commission file number 000-54047

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

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

(732) 367-0129

(Registrant’s Telephone Number, Including Area Code)

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 þ		Smaller reporting company ¨
		Emerging growth company ¨

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

Yes ¨ No þ

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

As of August 1, 2018, there were approximately 18.1 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust II, Inc., including shares issued pursuant to the distribution reinvestment plan.

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

INDEX

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017	3

	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017	4

	Consolidated Statements of Comprehensive (Loss)/Income for the Three and Six Months Ended June 30, 2018 and 2017	5

	Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2018	6

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	30

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults Upon Senior Securities	31

Item 4.	Mine Safety Disclosures	31

Item 5.	Other Information	31

Item 6.	Exhibits	31

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

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

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

	June 30, 2018			December 31, 2017
	(unaudited)

Assets
Investment property:
Land and improvements	$	40,550		$	40,411
Building and improvements		215,202			214,518
Furniture and fixtures		37,052			36,268
Construction in progress		1,000			329
Gross investment property		293,804			291,526
Less accumulated depreciation		(32,686	)		(26,982	)
Net investment property		261,118			264,544

Investment in unconsolidated affiliated entities		18,452			5,140
Cash and cash equivalents		35,390			44,449
Marketable securities, available for sale		8,188			9,778
Restricted cash		3,754			5,724
Accounts receivable and other assets		7,130			5,337
Total Assets	$	334,032		$	334,972

Liabilities and Stockholders' Equity
Accounts payable and other accrued expenses	$	8,741		$	7,790
Margin loan		5,215			6,642
Mortgages payable, net		152,715			143,781
Due to related party		559			957
Distributions payable		3,154			3,211
Total liabilities		170,384			162,381

Commitments and contingencies

Stockholders' Equity:
Company's stockholders' equity:
Preferred shares, $0.01 par value, 10,000 shares authorized, none issued and outstanding		-			-
Common stock, $0.01 par value; 100,000 shares authorized, 18,073 and 18,199, shares issued and outstanding, respectively		181			182
Additional paid-in-capital		153,920			155,162
Accumulated other comprehensive loss		(531	)		(211	)
Accumulated (deficit)/surplus		(4,969	)		1,771
Total Company stockholders' equity		148,601			156,904

Noncontrolling interests		15,047			15,687

Total Stockholders' Equity		163,648			172,591

Total Liabilities and Stockholders' Equity	$	334,032		$	334,972

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

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

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

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2018			2017			2018			2017

Revenues	$	21,468		$	21,644		$	40,832		$	42,250

Expenses:
Property operating expenses		13,712			13,627			26,461			26,475
Real estate taxes		799			764			1,700			1,490
General and administrative costs		1,247			895			2,637			2,306
Depreciation and amortization		2,870			2,729			5,720			5,426

Total operating expenses		18,628			18,015			36,518			35,697

Operating income		2,840			3,629			4,314			6,553

Interest and dividend income		129			164			261			306
Loss on sale of marketable securities, available for sale		(31	)		-			(31	)		(307	)
Earnings from investment in unconsolidated affiliated entities		88			54			147			110
Interest expense		(2,661	)		(1,963	)		(5,053	)		(3,936	)
Other expense, net		(36	)		(13	)		(46	)		(40	)

Net income/(loss)		329			1,871			(408	)		2,686

Less: net income attributable to noncontrolling interests		(29	)		(73	)		(47	)		(115	)

Net income/(loss) applicable to Company's common shares	$	300		$	1,798		$	(455	)	$	2,571

Net income/(loss) per Company's common share, basic and diluted	$	0.02		$	0.10		$	(0.03	)	$	0.14

Weighted average number of common shares outstanding, basic and diluted		18,097			18,323			18,129			18,348

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

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME

(Amounts in thousands)

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2018			2017			2018			2017

Net income/(loss)	$	329		$	1,871		$	(408	)	$	2,686

Other comprehensive (loss)/income:
Holding (loss)/gain on marketable securities, available for sale		(330	)		452			(351	)		895
Reclassification adjustment for loss included in net income		31			-			31			307

Other comprehensive (loss)/income		(299	)		452			(320	)		1,202

Comprehensive income/(loss)		30			2,323			(728	)		3,888

Less: Comprehensive income attributable to noncontrolling interests		(29	)		(73	)		(47	)		(115	)

Comprehensive income/(loss) attributable to the Company's common shares	$	1		$	2,250		$	(775	)	$	3,773

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

PART I. FINANCIAL INFORMATION:

ITEM 1. FINANCIAL STATEMENTS.

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

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Amounts in thousands)

(Unaudited)

							Additional												Total
	Common Stock						Paid-In			Accumulated Other			Accumulated			Noncontrolling			Stockholders'
	Shares			Amount			Capital			Comprehensive Loss			Surplus/(Deficit)			Interests			Equity

BALANCE, December 31, 2017		18,199		$	182		$	155,162		$	(211	)	$	1,771		$	15,687		$	172,591

Net (loss)/income		-			-			-			-			(455	)		47			(408	)
Other comprehensive loss		-			-			-			(320	)		-			-			(320	)
Distributions declared		-			-			-			-			(6,285	)		-			(6,285	)
Contributions of noncontrolling interests		-			-			-			-			-			644			644
Distributions to noncontrolling interests		-			-			-			-			-			(1,331	)		(1,331	)
Redemption and cancellation of shares		(126	)		(1	)		(1,242	)		-			-			-			(1,243	)

BALANCE, June 30, 2018		18,073		$	181		$	153,920		$	(531	)	$	(4,969	)	$	15,047		$	163,648

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

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	For the Six Months Ended June 30,
	2018			2017

CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/income	$	(408	)	$	2,686
Adjustments to reconcile net (loss)/income to net cash provided by operating activities:
Depreciation and amortization		5,720			5,426
Amortization of deferred financing costs		567			321
Loss on sale of marketable securities, available for sale		31			307
Earnings from investment in unconsolidated affiliated entities		(147	)		(110	)
Other non-cash adjustments		63			(7	)
Changes in assets and liabilities:
Increase in accounts receivable and other assets		(1,871	)		(1,172	)
Increase in accounts payable and other accrued expenses		879			450
Decrease in due to related party		(398	)		(7	)
Net cash provided by operating activities		4,436			7,894

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment property, net		(2,208	)		(1,889	)
Purchase of marketable securities		-			(3,556	)
Proceeds from sale of marketable securities		1,239			3,504
Investments in unconsolidated affiliated entities		(13,266	)		-
Deposits for sale of assets		-			3,200
Distributions from unconsolidated affiliated entities		101			97
Net cash (used in)/provided by investing activities		(14,134	)		1,356

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgages payable		140,000			-
Payments on mortgages payable		(130,509	)		(6,532	)
Payment of loan fees and expenses		(1,123	)		-
(Payments)/proceeds on margin loan, net		(1,427	)		2,486
Contribution of noncontrolling interests		644			607
Redemption and cancellation of common shares		(1,243	)		(1,084	)
Distributions to noncontrolling interests		(1,331	)		(4,764	)
Distributions to common stockholders		(6,342	)		(8,562	)
Net cash used in financing activities		(1,331	)		(17,849	)

Net change in cash, cash equivalents and restricted cash		(11,029	)		(8,599	)
Cash, cash equivalents and restricted cash, beginning of year		50,173			46,667
Cash, cash equivalents and restricted cash, end of period	$	39,144		$	38,068

Supplemental cash flow information for the periods indicated is as follows:

Cash paid for interest	$	3,421		$	3,633
Distributions declared	$	6,285		$	8,507
Holding loss/gain on marketable securities, available for sale	$	320		$	895
Non cash purchase of investment property	$	70		$	97

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

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

Notes to Consolidated Financial Statements

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

(Unaudited)

Organization

Lightstone Value Plus Real Estate Investment Trust II, Inc. (the “Lightstone REIT II”) is a Maryland corporation formed on April 28, 2008, which has qualified as a real estate investment trust (“REIT”) for U.S. federal income tax purposes since its taxable year ending December 31, 2009. The Lightstone REIT II was formed primarily for the purpose of engaging in the business of investing in and owning commercial and residential real estate properties located principally in North America, as well as other real estate-related securities, such as collateralized debt obligations, commercial mortgage-backed securities and mortgage and mezzanine loans secured, directly or indirectly, by the same types of properties which it may acquire directly.

The Lightstone REIT II is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT II LP (the “Operating Partnership”), a Delaware limited partnership formed on April 30, 2008, in which Lightstone REIT II as the general partner, held a 99% interest as of June 30, 2018.

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

The Company is managed by Lightstone Value Plus REIT II LLC (the “Advisor”), an affiliate of The Lightstone Group, Inc. under the terms and conditions of an advisory agreement. The Lightstone Group, Inc. previously served as the Company’s sponsor (the “Sponsor”) during its initial public offering (the “Offering”) and follow-on offering (the “Follow-on Offering”, and collectively, “the Offerings”), which terminated on August 15, 2012 and September 27, 2014, respectively. Subject to the oversight of the Company’s board of directors (the “Board of Directors”), the Advisor has primary responsibility for making investment decisions and managing the Company’s day-to-day operations. Through his ownership and control of The Lightstone Group, Inc., Mr. Lichtenstein is the indirect owner of the Advisor and the indirect owner and manager of Lightstone SLP II LLC, which has subordinated profits interests in the Operating Partnership. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT II or the Operating Partnership.

The Company’s shares of common stock are not currently listed on a national securities exchange. The Company may seek to list its shares of common stock for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its shares of common stock until they are listed for trading. In the event the Company does not obtain listing prior to August 15, 2022, the tenth anniversary of the termination of its initial public offering, its charter requires that the Board of Directors must either (i) seek stockholder approval of an extension or amendment of this listing deadline; or (ii) seek stockholder approval to adopt a plan of liquidation of the corporation.

Noncontrolling Interests

The noncontrolling interests consist of (i) parties of the Company that hold units in the Operating Partnership, (ii) membership interests held by Lightstone Value Plus Real Estate Investment Trust, Inc., a REIT also sponsored by the Company’s Sponsor, in a joint venture (“the Joint Venture”), and (iii) the membership interests held by minority owners of certain of the Company’s hotels.

Partners of Operating Partnership

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

Lightstone SLP II LLC, which is wholly owned by the Company’s Sponsor, committed to purchase subordinated profits interests in the Operating Partnership (“Subordinated Profits Interests”) at a cost of $100,000 per unit for each $1.0 million in subscriptions up to ten percent of the proceeds from the primary shares under the Offerings. Lightstone SLP II LLC had the option to purchase the Subordinated Profits Interests with either cash or an interest in real property of equivalent value. From the Company’s inception through the termination of its Offerings, the Company’s Sponsor made cash contributions of $12.9 million and contributed equity interests totaling 48.6% in Brownmill, LLC (“Brownmill”), which were valued at $4.8 million, in exchange for a total of 177.0 Subordinated Profits Interests with an aggregate value of $17.7 million in fulfillment of its commitment.

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

Notes to Consolidated Financial Statements

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

(Unaudited)

Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Lightstone REIT II and its Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). As of June 30, 2018, the Lightstone REIT II had a 99% general partnership interest in the common units of the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation.

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of the Company and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. The accompanying unaudited consolidated financial statements of the Lightstone Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

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

The consolidated balance sheet as of December 31, 2017 included herein has been derived from the consolidated balance sheet included in the Company's Annual Report on Form 10-K.

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

Recently Adopted Accounting Pronouncements

Effective January 1, 2018 the Company adopted guidance issued by the Financial Accounting Standards Board (“FASB”) that requires amounts that are generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this standard using the retrospective transition method.

As required by the Company’s lenders, restricted cash is held in escrow accounts for anticipated capital expenditures, real estate taxes, and other reserves for certain of our consolidated properties. Capital reserves are typically utilized for non-operating expenses such as major capital expenditures. Alternatively, a lender may require its own formula for an escrow of capital reserves. Restricted cash may also include certain funds temporarily placed in escrow with qualified intermediaries to facilitate potential like-kind exchange transactions in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended.

The following is a summary of the Company’s cash, cash equivalents, and restricted cash total as presented in our statements of cash flows for the periods presented:

	Six Months Ended June 30,
	2018		2017
Cash and cash equivalents	$	35,390	$	34,918
Restricted cash		3,754		3,150
Total cash, cash equivalents and restricted cash	$	39,144	$	38,068

Effective January 1, 2018 the Company adopted guidance issued by the FASB that requires companies to measure investments in equity securities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income. Since all of the Company’s marketable securities, available for sale, are debt securities this guidance had no impact on the Company’s consolidated financial statements.

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

Notes to Consolidated Financial Statements

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

(Unaudited)

Effective January 1, 2018, the Company adopted guidance issued by the FASB that clarifies the definition of a business and assists in the evaluation of whether a transaction is 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. Additionally, assets acquired, liabilities assumed, and any noncontrolling interest will be measured at their relative fair values. The Company anticipates future acquisitions of real estate assets, if any, will likely qualify as an asset acquisition. Therefore, any future transaction costs associated with an asset acquisition will be capitalized and accounted for in accordance with this guidance.

Effective January 1, 2018, the Company adopted guidance issued by the FASB that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the previous revenue recognition guidance. The new guidance requires companies to apply a five-step model in accounting for revenue arising from contracts with customers, as well as enhance disclosures regarding revenue recognition. Additionally, the sale of real estate is required to follow the new model. The Company adopted this standard on January 1, 2018 using the modified retrospective transition method. Due to the short-term nature of the Company's revenue streams, the adoption of this standard did not have an impact on the amount and timing of revenue recognition for revenues from rooms and food, beverage and other ancillary services. The adoption of this standard had no impact on the Company's revenue or net income, and, therefore, no adjustment was recorded to the Company's opening balance of accumulated surplus. The Company also considered and determined that presenting revenue disaggregated by rooms and food, beverage and other depicts the appropriate categories about the nature and timing of its revenue streams and that no additional disaggregation is needed. See Note 3.

New Accounting Pronouncements

In February 2016, the FASB issued an accounting standards update which supersedes the existing lease accounting model, and modifies both lessee and lessor accounting. The new guidance will require lessees to recognize a liability to make lease payments and a right-of-use asset, initially measured at the present value of lease payments, for both operating and financing leases, with classification affecting the pattern of expense recognition in the statement of earnings. For leases with a term of 12 months or less, lessees will be permitted to make an accounting policy election by class of underlying asset to not recognize lease liabilities and lease assets. The Company intends to adopt the standard on January 1, 2019 and apply certain practical expedients available to us upon adoption. The Company is continuing to evaluate the impact this guidance will have on its consolidated financial statements when adopted.

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

Revenues

Revenues consist of amounts derived from hotel operations, including occupied hotel rooms and sales of food, beverage and other ancillary services and are presented on a disaggregated basis below. Revenues are recorded net of any sales or occupancy tax collected from our guests.

Room revenue is generated through contracts with customers whereby the customers agree to pay a daily rate for right to use a hotel room. The Company's contract performance obligations are fulfilled at the end of the day that the customer is provided the room and revenue is recognized daily at the contract rate. Payment from the customer is secured at the end of the contract upon check-out by the customer from our hotel. The Company participates in frequent guest programs sponsored by the brand owners of our hotels whereby the brand owner allows guests to earn loyalty points during their hotel stay. The Company recognizes revenue at the amount earned that it will receive from the brand owner when a guest redeems their loyalty points by staying at one of the Company’s hotels.

Revenue from food, beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a hotel room and revenue is recognized when these goods or services are provided to the customer and the Company’s contract performance obligations have been fulfilled.

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

Notes to Consolidated Financial Statements

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

(Unaudited)

Some contracts for rooms, food, beverage or other services require an upfront deposit which is recorded as deferred revenues (or contract liabilities) and recognized once the performance obligations are satisfied. The contract liabilities are not significant.

The Company notes no significant judgements regarding the recognition of room, food and beverage or other revenues.

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2018		2017		2018		2017
Revenues
Room	$	20,263	$	20,594	$	38,510	$	40,308
Food, beverage and other		1,205		1,050		2,322		1,942
Total revenues	$	21,468	$	21,644	$	40,832	$	42,250

Investments in Unconsolidated Affiliated Entities

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

					As of
Entity	Date of Ownership	Ownership %			June 30, 2018		December 31, 2017
Brownmill	Various		48.58	%	$	5,142	$	5,140
Hilton Garden Inn Joint Venture	March 27, 2018		50.00	%		13,310		-
Total investments in unconsolidated affiliated real estate entities					$	18,452	$	5,140

Brownmill

During 2010, 2011 and 2012, the Company entered into five separate contribution agreements with Lightstone Holdings LLC (‘‘LGH’’), a wholly-owned subsidiary of the Company’s Sponsor, pursuant to which LGH contributed to the Company an approximate aggregate 48.6% equity interest (34.4%, 5.6% and 8.6% in 2010, 2011 and 2012, respectively) in exchange for the Company issuing an aggregate of 48 units (33, 6 and 9 in 2010, 2011 and 2012, respectively) of Subordinated Profits Interests, at $100,000 per unit (at an aggregate total value of $4.8 million, of which $3.3 million, $0.6 million and $0.9 million were in 2010, 2011 and 2012, respectively), to Lightstone SLP II LLC.

As of June 30, 2018, the Company owns a 48.6% membership interest in Brownmill. The Company’s interest in Brownmill is a non-managing interest. An affiliate of the Company’s Sponsor is the majority owner and manager of Brownmill. Profit and cash distributions are allocated in accordance with each investor’s ownership percentage. The Company accounts for its investment in Brownmill in accordance with the equity method of accounting.

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

Brownmill Condensed Financial Information

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

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

Notes to Consolidated Financial Statements

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

(Unaudited)

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

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2018			2017			2018			2017
Revenue	$	918		$	869		$	1,879		$	1,762

Property operating expenses		333			351			794			781
Depreciation and amortization		179			176			357			391

Operating income		406			342			728			590

Interest expense and other, net		(172	)		(159	)		(384	)		(218	)
Net income	$	234		$	183		$	344		$	372
Company's share of net income	$	114		$	89		$	167		$	181
Additional depreciation and amortization expense ⁽¹⁾		(33	)		(35	)		(65	)		(71	)
Company's earnings from investment	$	81		$	54		$	102		$	110

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

The following table represents the condensed balance sheets for Brownmill:

	As of		As of
	June 30, 2018		December 31, 2017

Real estate, at cost (net)	$	14,465	$	14,697
Cash and restricted cash		833		727
Other assets		1,486		1,388
Total assets	$	16,784	$	16,812

Mortgage payable	$	14,382	$	14,485
Other liabilities		462		523
Members' capital		1,940		1,804
Total liabilities and members' capital	$	16,784	$	16,812

Hilton Garden Inn Joint Venture

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

In connection with the acquisition, the Company paid an acquisition fee of $0.3 million payable to the Advisor, equal to 0.95% of the Company’s pro-rata share of the contractual purchase price which is reflected in the Company’s carrying value which is included in investments in unconsolidated affiliated entities on the consolidated balance sheets.

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

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

Notes to Consolidated Financial Statements

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

(Unaudited)

Hilton Garden Inn Joint Venture Financial Information

The following table represents the condensed income statement for the Hilton Garden Inn Joint Venture for the periods indicated:

	For the Three Months Ended June 30, 2018			For the Period March 27, 2018 through June 30, 2018
Revenues	$	3,015		$	3,185

Property operating expenses		1,901			1,970
General and administrative costs		2			2
Depreciation and amortization		636			636
Operating income		476			577
Interest expense		(463	)		(488	)
Net income	$	13		$	89
Company's share of net income (50.00%)	$	7		$	45

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

	As of
	June 30, 2018

Investment property, net	$	59,759
Cash		1,115
Other assets		787
Total assets	$	61,661

Mortgage payable, net	$	34,738
Other liabilities		871
Members' capital		26,052
Total liabilities and members' capital	$	61,661

Marketable Securities and Fair Value Measurements

Marketable Securities

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

	As of June 30, 2018
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Debt securities:

Corporate Bonds and Preferred Securities	$	8,719	$	-	$	(531	)	$	8,188

	As of December 31, 2017
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

Debt securities:

Corporate Bonds and Preferred Securities	$	9,989	$	-	$	(211	)	$	9,778

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

Notes to Consolidated Financial Statements

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

(Unaudited)

When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. As of June 30, 2018 and December 31, 2017, the Company did not recognize any impairment charges.

Fair Value Measurements

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

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

•

Level 1 – Quoted prices in active markets for identical assets or liabilities.

•

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As of June 30, 2018 and December 31, 2017, all of the Company’s debt securities and were classified as Level 2 assets and there were no transfers between the level classifications during the six months ended June 30, 2018.

The fair values of the Company’s investments in Corporate Bonds and Preferred Securities are measured using readily available quoted prices for similar assets.

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

	As of June 30, 2018
Due in 1 year	$	-
Due in 1 year through 5 years		4,880
Due in 5 year through 10 years		-
Due after 10 years		3,308
Total	$	8,188

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

Margin Loan

The Company has access to a margin loan from a financial institution that holds custody of certain of the Company’s marketable securities. The margin loan is collateralized by the marketable securities in the Company’s account. The amounts available to the Company under the margin loan are at the discretion of the financial institution and not limited to the amount of collateral in its account. The margin loan bears interest at Libor plus 0.85% (2.94% as of June 30, 2018).

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

Notes to Consolidated Financial Statements

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

(Unaudited)

Mortgages payable, net

Mortgages payable, net consisted of the following:

		Weighted Average Interest Rate
Description	Interest Rate	as of June 30, 2018			Maturity Date	Amount Due at Maturity		As of June 30, 2018			As of December 31, 2017
Revolving Loan, secured by fifteen properties	LIBOR + 3.50%		5.61	%	May 2021	$	140,000	$	140,000		$	-

Courtyard – Paso Robles	5.49%		5.49	%	November 2023		13,022		14,000			14,000

Promissory Note, secured by two properties	(Repaid in full see below)								-			6,653

Revolving Loan, secured by nine properties	(Repaid in full see below)								-			73,616

Courtyard - Parsippany	(Repaid in full see below)								-			7,240

Hyatt – New Orleans	(Repaid in full see below)								-			18,000

Residence Inn – Needham	(Repaid in full see below)								-			25,000

Total mortgages payable			6.03	%		$	153,022	$	154,000		$	144,509

Less: Deferred financing costs									(1,285	)		(728	)

Total mortgages payable, net								$	152,715		$	143,781

On May 17, 2018, the Company, through two wholly owned subsidiaries, entered into a loan agreement with Western Alliance Bank (“Western Alliance”) providing for a non-recourse revolving credit facility (the “Revolving Credit Facility”) of up to $140.0 million. The Revolving Credit Facility bears interest at Libor plus 3.50%, has an initial term of three years, subject to two, one-year extension options at the sole discretion of Western Alliance, and provides for monthly interest-only payments with the unpaid principal balance due at maturity. The Revolving Credit Facility’s maturity may be accelerated upon the occurrence of certain customary events of default. The Revolving Credit Facility provides for borrowings up to 65.0% of the loan-to-value ratio of properties designated as collateral. On May 17, 2018, the Company received an initial advance of $123.8 million under the Revolving Credit Facility and designated the following 13 of its hotel properties as collateral:

Holiday Inn, Opelika, Alabama

Aloft, Tucson, Arizona

Aloft, Philadelphia, Pennsylvania

Four Points by Sheraton, Philadelphia, Pennsylvania

Courtyard by Marriott, Willoughby, Ohio

Fairfield Inn & Suites by Marriott, West Des Moines, Iowa

SpringHill Suites by Marriott, West Des Moines, Iowa

Hampton Inn, Miami, Florida

Hampton Inn & Suites, Fort Lauderdale, Florida

Holiday Inn Express, Auburn, Alabama

Residence Inn by Marriott, Needham, Massachusetts

Hyatt Place, New Orleans, Louisiana

Courtyard by Marriott, Parsippany, New Jersey

The Company used the initial proceeds from the Revolving Credit Facility towards the repayment in full of an aggregate of $123.8 million of existing mortgage indebtedness as follows:

$73.6 million of the proceeds were used to repay in full a non-recourse revolving loan, secured by the first nine of the hotel properties listed above, with a scheduled maturity in May 2018;

$25.0 million of the proceeds were used to repay in full a non-recourse mortgage loan, secured by the Residence Inn by Marriott, Needham, Massachusetts, with a scheduled maturity in December 2020;

$18.0 million of the proceeds were used to repay in full a non-recourse mortgage loan, secured by the Hyatt Place, New Orleans, Louisiana, with a scheduled maturity in December 2020; and

$7.2 million of the proceeds were used to repay in full a non-recourse mortgage loan, secured by the Courtyard by Marriott, Parsippany, New Jersey, with a scheduled maturity in August 2018.

On June 6, 2018, the Company received the remaining proceeds available under the Revolving Credit Facility of $16.2 million and designated the SpringHill Suites – Peabody and the TownePlace Suites – Little Rock as collateral. The Company used approximately $6.6 million of the proceeds repay in full a non-recourse promissory note, secured by the SpringHill Suites – Peabody and the TownePlace Suites – Little Rock, with a scheduled maturity in August 2018.

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

Notes to Consolidated Financial Statements

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

(Unaudited)

Principal Maturities

The following table, based on the initial terms of the mortgages, sets forth their aggregate estimated contractual principal maturities, including balloon payments due at maturity, as of June 30, 2018:

	Remainder of
	2018		2019		2020		2021		2022		Thereafter		Total

Principal maturities	$	15	$	179	$	187	$	140,200	$	211	$	13,208	$	154,000

Less: deferred financing costs														(1,285	)

Total principal maturiteis, net													$	152,715

Restricted escrows

Pursuant to the Company’s loan agreements, escrows in the amount of $3.7 million and $5.2 million were held in restricted cash accounts as of June 30, 2018 and December 31, 2017, respectively. Such escrows will be released in accordance with the applicable loan agreements for payments of real estate taxes, insurance and capital improvement transactions, as required. Certain of our mortgages payable also contain clauses providing for prepayment penalties.

Debt Compliance

Certain of our debt agreements also contain clauses providing for prepayment penalties and require the maintenance of certain ratios, including debt service coverage and fixed leverage charge ratio. As of June 30, 2018, the Company is in compliance with respect to all of its financial debt covenants.

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 attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the applicable period.

Related Party Transactions

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

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2018		2017		2018		2017
Acquisition fees (1)	$	-	$	-	$	285	$	-
Asset management fees (general and administrative costs)		755		607		1,441		1,211
Total	$	755	$	607	$	1,726	$	1,211

(1)

The acquisition fee for the Hilton Garden Inn Joint Venture of $285 was capitalized and included in investment in unconsolidated affiliated entities on the consolidated balance sheets.

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

Notes to Consolidated Financial Statements

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

(Unaudited)

Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable and other assets, accounts payable and other accrued expenses, margin loan, due to related party, and distributions payable approximated their fair values because of the short maturity of these instruments. The estimated fair value of our mortgages payable is as follows:

As of June 30, 2018

As of December 31, 2017

Carrying Amount

Estimated Fair

Value

Carrying Amount

Estimated Fair

Value

Mortgages payable

154,000

154,022

144,509

144,942

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

10.

Commitments and Contingencies

Legal Proceedings

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

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

11.

Subsequent Events

Distribution Payments

On July 16, 2018, the distribution for the three-month period ending June 30, 2018 of $3.2 million was paid in cash.

Distribution Declaration

On August 13, 2018, the Board of Directors authorized and the Company declared a distribution for the three-month period ending September 30, 2018. The distribution will be calculated based on shareholders of record each day during this three-month period at a rate of $0.0019178 per day, and will equal a daily amount that, if paid each day for a 365-day period, would equal a 7.0% annualized rate based on a share price of $10.00. The distribution will be paid in cash on or about October 15, 2018 to shareholders of record as of September 30, 2018.

PART I. FINANCIAL INFORMATION, CONTINUED:

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

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

Forward-Looking Statements

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

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

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

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

Overview

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

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

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

Current Environment

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

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

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

Portfolio Summary –

Location

Year Built

Leasable Square Feet

Percentage Occupied as of

June 30, 2018

Annualized Revenues
based on rents as of

June 30, 2018

Annualized Revenues
per square foot

as of June 30, 2018

Unconsolidated Affiliated Entities:

Retail

Brownmill LLC (2 retail properties)

Old Bridge and Vauxhall, New Jersey

1962

155,928

2.7 million

17.28

Hospitality

Year to Date

Percentage Occupied

for the Six Months Ended

Revenue per Available Room

("RevPAR") for the Six Months

Average Daily Rate For the Six

Months Ended

Location

Year Built

Available Rooms

June 30, 2018

Ended June 30, 2018

June 30, 2018

Hilton Garden Inn - Long Island City (1)

Long Island City, New York

2014

17,568

167.31

182.18

(1) Hotel acquired March 27, 2018

Consolidated Properties:
Hospitality			Year to Date		Percentage Occupied for the Six Months Ended			Revenue per Available Room ("RevPAR") for the Six Months		Average Daily Rate For the Six Months Ended
	Location	Year Built	Available Rooms		June 30, 2018			Ended June 30, 2018		June 30, 2018

SpringHill Suites - Peabody	Peabody, Massachusetts	2002		29,684		79.4	%	$	86.44	$	108.92

Fairfield Inn - East Rutherford	East Rutherford, New Jersey	1990		25,521		85.1	%	$	102.62	$	120.61

TownePlace Suites - Little Rock	Little Rock, Arkansas	2009		16,652		71.6	%	$	56.10	$	78.35

Holiday Inn - Opelika	Opelika, Alabama	2009		15,747		67.8	%	$	68.19	$	100.52

Aloft - Tucson	Tucson, Arizona	1971		27,874		74.7	%	$	111.70	$	149.52

Aloft - Philadelphia	Philadelphia, Pennsylvania	2008		24,616		78.2	%	$	95.53	$	122.15

Four Points by Sheraton - Philadelphia	Philadelphia, Pennsylvania	1985		32,037		77.1	%	$	80.87	$	104.89

Courtyard - Willoughby	Willoughby, Ohio	1999		16,290		77.1	%	$	89.91	$	116.57

Fairfield Inn - DesMoines	West Des Moines, Iowa	1997		18,462		63.2	%	$	65.51	$	103.61

SpringHill Suites - DesMoines	West Des Moines, Iowa	1999		17,557		63.5	%	$	63.42	$	99.91

Hampton Inn - Miami	Miami, Florida	1996		22,806		85.7	%	$	119.11	$	138.99

Hampton Inn & Suites - Fort Lauderdale	Fort Lauderdale, Florida	1996		18,824		83.5	%	$	132.11	$	158.16

Courtyard - Parsippany	Parsippany, New Jersey	2001		27,331		68.6	%	$	104.27	$	152.10

Holiday Inn Express - Auburn	Auburn, Alabama	2002		14,842		64.4	%	$	68.53	$	106.34

Hyatt Place - New Orleans	New Orleans, Louisiana	1996		30,770		75.1	%	$	134.42	$	179.10

Residence Inn - Needham	Needham, Massachusetts	2013		23,892		86.4	%	$	147.62	$	170.81

Courtyard - Paso Robles	Paso Robles, California	2007		23,530		83.2	%	$	116.46	$	139.93

		Hospitality Total		386,435		76.3	%	$	99.65	$	130.57

Annualized base rent is defined as the minimum monthly base rent due as of June 30, 2018 annualized, excluding periodic contractual fixed increases and rents calculated based on a percentage of tenants’ sales. The annualized base rent disclosed in the table above includes all concessions, abatements and reimbursements of rent to tenants.

Critical Accounting Policies and Estimates

There were no material changes during the six months ended June 30, 2018 to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2017 except for the newly adopted accounting standards discussed in Note 2 to the financial statements.

Results of Operations

We currently have one operating segment. As of June 30, 2018, we majority owned and consolidated the operating results and financial condition of 17 limited service hotels containing a total of 2,135 rooms. Additionally, we held a 48.6% membership interest in Brownmill and a 50.0% interest in the Hilton Garden Inn – Long Island City, both of which we account for under the equity method of accounting.

2018:

On March 27, 2018, we acquired a 50.0% ownership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”), an affiliated real estate entity that owns and operates a 183-room, limited-service hotel located in Long Island City, New York (the “Hilton Garden Inn - Long Island City”) that the Company does not consolidate but rather accounts for under the equity method of accounting.

2017:

During July 2017, we sold a portfolio of seven limited service hotels (the “Hotel Portfolio”). The disposition of the Hotel Portfolio, which is also referred to herein as the “2017 Disposed Hotels”, did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the operating results of the Hotel Portfolio are reflected in the Company’s results from continuing operations for all periods presented through its date of disposition (July 14, 2017).

Additionally, during 2017, we acquired the Hyatt – New Orleans (November 2017), the Residence Inn – Needham (December 2017) and the Courtyard – Paso Robles (December 2017), which are collectively referred to herein as the “2017 Acquired Hotels”. The operating results of the 2017 Acquired Hotels are reflected in our operating results commencing with their respective dates of acquisition.

Properties owned by us during the entire periods presented are referred to as our “Same Store” properties.

For the Three Months Ended June 30, 2018 vs. June 30, 2017

Revenues

Revenues decreased by $0.1 million to $21.5 million during the three months ended June 30, 2018 compared to $21.6 million for the same period in 2017 resulting from an increase in revenues of $5.9 million related to the 2017 Acquired Hotels, a decrease in revenues of $6.3 million related to the 2017 Disposed Hotels and an increase in revenues of approximately $0.2 million related to Same Store properties.

Property operating expenses

Property operating expenses increased slightly by $0.1 million to $13.7 million during the three months ended June 30, 2018 compared to $13.6 million for the same period in 2017 resulting from an increase in expenses of $3.4 million related to the 2017 Acquired Hotels, a decrease in expenses of $3.8 million related to the 2017 Disposed Hotels and an increase in expenses of approximately $0.5 million related to Same Store properties.

Real estate taxes

Real estate taxes were $0.8 million during both the three months ended June 30, 2018 and 2017 resulting from an increase in expense of $0.2 million related to the 2017 Acquired Hotels and a decrease in expense of $0.2 million related to the 2017 Disposed Hotels. Real estate taxes were unchanged for Same Store properties.

General and administrative expenses

General and administrative increased by $0.3 million to $1.2 million during the three months ended June 30, 2018 compared to $0.9 million for the same period in 2017 resulting from an increase in professional fees and asset management fees.

Depreciation and amortization

Depreciation and amortization expense increased slightly by $0.2 million to $2.9 million during the three months ended June 30, 2018 compared to $2.7 million for the same period in 2017 resulting from an increase in expenses of $0.8 million related to the 2017 Acquired Hotels, a decrease in expenses of $0.7 million related to the 2017 Disposed Hotels and an increase in expenses of approximately $0.1 million related to Same Store properties.

Interest expense

Interest expense was $2.7 million during the three months ended June 30, 2018 compared to $2.0 million for the same period in 2017. Interest expense during both periods primarily consisted of interest related to our mortgage indebtedness and an additional $0.4 million of deferred financing costs written off in the 2018 period related to the early extinguishment of several debt instruments.

Noncontrolling interests

The income or loss allocated to noncontrolling interests relates to the interest in our Operating Partnership held by our Advisor, membership interests held by Lightstone Value Plus Real Estate Investment Trust, Inc, a related party REIT also sponsored by our Sponsor in the Joint Venture, and the interests held by minority owners of certain of our hotels.

For the Six months ended June 30, 2018 vs. June 30, 2017

Revenues

Revenues decreased by $1.5 million to $40.8 million during the six months ended June 30, 2018 compared to $42.3 million for the same period in 2017 resulting from an increase in revenues of $11.1 million related to the 2017 Acquired Hotels, a decrease in revenues of $13.4 million related to the 2017 Disposed Hotels and an increase in revenues of approximately $0.8 million related to Same Store properties.

Property operating expenses

Property operating expenses were $26.5 million during both the six months ended June 30, 2018 and 2017 resulting from an increase in expenses of $6.5 million related to the 2017 Acquired Hotels, a decrease in expenses of $7.5 million related to the 2017 Disposed Hotels and an increase in expenses of approximately $1.0 million related to Same Store properties.

Real estate taxes

Real estate taxes increased by $0.2 million to $1.7 million during the six months ended June 30, 2018 compared to $1.5 million for the same period in 2017 resulting from an increase in expense of $0.4 million related to the 2017 Acquired Hotels, a decrease in expense of $0.3 million related to the 2017 Disposed Hotels and an increase in expenses of approximately $0.1 million related to Same Store properties.

General and administrative expenses

General and administrative expenses increased by $0.3 million to $2.6 million during the six months ended June 30, 2018 compared to $2.3 million for the same period in 2017 resulting from an increase in professional fees and asset management fees.

Depreciation and amortization

Depreciation and amortization expense increased slightly by $0.3 million to $5.7 million during the six months ended June 30, 2018 compared to $5.4 million for the same period in 2017 resulting from an increase in expenses of $0.1 million related to the 2017 Acquired Hotels, a decrease in expenses of $0.1 million related to the 2017 Disposed Hotels and an increase in expense of approximately $0.3 million related to Same Store properties.

Interest expense

Interest expense was $5.1 million during the six months ended June 30, 2018 compared to $3.9 million for the same period in 2017. Interest expense during both periods primarily consisted of interest related to our mortgage indebtedness indebtedness and an additional $0.4 million of deferred financing costs written off in the 2018 period related to the early extinguishment of several debt instruments .

Noncontrolling interests

Financial Condition, Liquidity and Capital Resources

Overview:

Revenues, interest and dividend income and borrowings are our principal sources of funds to pay operating expenses, scheduled debt service, capital expenditures and distributions, excluding non-recurring capital expenditures. For the six months ended June 30, 2018, our primary sources of funds were $4.4 million of cash flows from our operations.

Our future sources of funds will primarily consist of (i) cash flows from our operations, (ii) proceeds from our borrowings or sale of our investments in marketable securities (iii) the sale of our operating properties and (iv) the release of funds held in restricted escrows. We currently believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.

We currently have mortgage indebtedness totaling $154.0 million and a margin loan of $5.2 million.

On May 17, 2018, we entered into a loan agreement with Western Alliance Bank (“Western Alliance”) providing for a non-recourse revolving credit facility (the “Revolving Credit Facility”) of up to $140.0 million. The Revolving Credit Facility bears interest at Libor plus 3.50%, has an initial term of three years, subject to two, one-year extension options at the sole discretion of Western Alliance, and provides for monthly interest-only payments with the unpaid principal balance due at maturity. The Revolving Credit Facility’s maturity may be accelerated upon the occurrence of certain customary events of default. The Revolving Credit Facility provides for borrowings up to 65.0% of the loan-to-value ratio of properties designated as collateral. On May 17, 2018, we received an initial advance of $123.8 million under the Revolving Credit Facility and designated the following 13 of our hotel properties as collateral:

Holiday Inn, Opelika, Alabama

Aloft, Tucson, Arizona

Aloft, Philadelphia, Pennsylvania

Four Points by Sheraton, Philadelphia, Pennsylvania

Courtyard by Marriott, Willoughby, Ohio

Fairfield Inn & Suites by Marriott, West Des Moines, Iowa

SpringHill Suites by Marriott, West Des Moines, Iowa

Hampton Inn, Miami, Florida

Hampton Inn & Suites, Fort Lauderdale, Florida

Holiday Inn Express, Auburn, Alabama

Residence Inn by Marriott, Needham, Massachusetts

Hyatt Place, New Orleans, Louisiana

Courtyard by Marriott, Parsippany, New Jersey

We used the initial proceeds from the Revolving Credit Facility towards the repayment in full of an aggregate of $123.8 million of existing mortgage indebtedness as follows:

$73.6 million of the proceeds were used to repay in full a non-recourse revolving loan, secured by the first nine of the hotel properties listed above, with a scheduled maturity in May 2018;

$25.0 million of the proceeds were used to repay in full a non-recourse mortgage loan, secured by the Residence Inn by Marriott, Needham, Massachusetts, with a scheduled maturity in December 2020;

$18.0 million of the proceeds were used to repay in full a non-recourse mortgage loan, secured by the Hyatt Place, New Orleans, Louisiana, with a scheduled maturity in December 2020; and

$7.2 million of the proceeds were used to repay in full a non-recourse mortgage loan, secured by the Courtyard by Marriott, Parsippany, New Jersey, with a scheduled maturity in August 2018.

On June 6, 2018, we received the remaining proceeds available under the Revolving Credit Facility of $16.2 million and designated the SpringHill Suites – Peabody and the TownePlace Suites – Little Rock as collateral. We used approximately $6.6 million of the proceeds repay in full a non-recourse promissory note, secured by the SpringHill Suites – Peabody and the TownePlace Suites – Little Rock, with a scheduled maturity in August 2018.

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

Our charter provides that the aggregate amount of borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. Market conditions will dictate the overall leverage limit; as such our aggregate borrowings may be less than 300% of net assets. As of June 30, 2018, our total borrowings aggregated $159.2 million which represented 81% of our net assets.

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

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

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

Additionally, in order to leverage our investments in marketable securities and seek a higher rate of return, we borrowed using a margin loan collateralized by the securities held with the financial institution that provided the margin loan. This loan is due on demand and will be paid upon the liquidation of securities.

In addition to making investments in accordance with our investment objectives, we have used and expect to continue to use our capital resources to make certain payments to our Advisor and our Property Managers during the various phases of our organization and operation. During our acquisition and development stage, payments may include asset acquisition fees and asset management fees, and the reimbursement of acquisition related expenses to our Advisor. During our operational stage, we will pay our Property Managers and/or other third-party property managers a property management fee and our Advisor an asset management fee. We may also reimburse our Advisor and its affiliates for actual expenses it incurs for administrative and other services provided to us. Additionally, our Operating Partnership may be required to make distributions to Lightstone SLP II LLC, an affiliate of the Advisor.

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2018		2017		2018		2017
Acquisition fees (1)	$	-	$	-	$	285	$	-
Asset management fees (general and administrative costs)		755		607		1,441		1,211

Total	$	755	$	607	$	1,726	$	1,211

(1)

The acquisition fee for the Hilton Garden Inn Joint Venture of $285 was capitalized and included in investment in unconsolidated affiliated entities on the consolidated balance sheets.

Summary of Cash Flows

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

	For the Six Months Ended June 30,
	2018			2017

Net cash provided by operating activities	$	4,436		$	7,894
Net cash (used in)/provided by investing activities		(14,134	)		1,356
Net cash used in financing activities		(1,331	)		(17,849	)
		(11,029	)		(8,599	)
Cash, cash equivalents and restricted cash, beginning of year		50,173			46,667
Cash, cash equivalents and restricted cash, end of the period	$	39,144		$	38,068

Our principal sources of cash flow were derived from cash flows from our operations. In the future, we expect to continue to operate properties which should provide a relatively consistent stream of cash flow to provide us with resources to fund our operating expenses, scheduled debt service and any quarterly distributions authorized by our Board of Directors.

Our principal demands for liquidity currently are distributions and scheduled debt service on our mortgages payable.

Operating activities

Net cash flows provided by operating activities of $4.4 million for the six months ended June 30, 2018 consists of the following:

cash inflows of approximately $5.8 million from our net income after adjustment for non-cash items; and

cash outflows of approximately $1.4 million associated with the net changes in operating assets and liabilities.

Investing activities

The net cash used in investing activities of $14.1 million for the six months ended June 30, 2018 consists primarily of the following:

capital expenditures of $2.2 million;

$1.2 of proceeds from the sale of marketable securities;

$13.3 million related to the acquisition of our 50.0% interest in the Hilton Garden Inn Joint Venture; and

distributions from our investment in Brownmill of $0.1 million;

Financing activities

The net cash used in financing activities of $1.3 million for the six months ended June 30, 2018 consists primarily of the following:

distributions to our common shareholders of $6.3 million;

aggregate distributions to our noncontrolling interests of $1.3 million;

redemptions and cancellation of common stock of $1.2 million;

net debt proceeds from mortgage financings of $9.5 million;

payments of loan fees and expense of $1.1 million; and

net margin loan payments of $1.4 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.

Distribution Reinvestment Plan (“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. Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to us, subject to certain restrictions. From our inception through December 31, 2016 we redeemed 0.5 million common shares at an average price per share of $9.47 per share. During 2017, we redeemed 0.2 million common shares or 76% of redemption requests received during the period, at an average price per share of $9.91 per share. For the six months ended June 30, 2018, we redeemed 0.1 million common shares at an average price per share of $9.85 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 and available cash on hand.

On January 19, 2015, the Board of Directors suspended our DRIP effective April 15, 2015. For so long as the DRIP remains suspended, all future distributions will be in the form of cash.

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

Contractual Obligations

The following is a summary of the estimated contractual obligations related to our mortgage debt over the next five years and thereafter as of June 30, 2018.

	Remainder of
Contractual Obligations	2018		2019		2020		2021		2022		Thereafter		Total

Principal maturities	$	15	$	179	$	187	$	140,200	$	211	$	13,208	$	154,000

Interest payments		4,346		8,709		8,723		4,036		742		670		27,226
Total	$	4,361	$	8,888	$	8,910	$	144,236	$	953	$	13,878	$	181,226

In addition to the mortgage payable described above, a margin loan that was made available to us from a financial institution that holds custody of certain of our marketable securities. The margin loan is collateralized by the marketable securities in our account. The amounts available to us under the margin loan are at the discretion of the financial institution and not limited to the amount of collateral in our account. The amount outstanding under this margin loan was $5.2 million as of June 30, 2018 and is due on demand. The margin loan bears interest at Libor plus 0.85% (2.94% as of June 30, 2018).

Funds from Operations and Modified Funds from Operations

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

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

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

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

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

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

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

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

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

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

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

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2018			2017			2018			2017
Net income/(loss)	$	329		$	1,871		$	(408	)	$	2,686
FFO adjustments:
Depreciation and amortization of real estate assets		2,870			2,729			5,720			5,426
Adjustments to equity in earnings from unconsolidated entities, net		451			120			570			261
FFO		3,650			4,720			5,882			8,373
MFFO adjustments:

Other adjustments:
Acquisition and other transaction related costs expensed⁽¹⁾		25			-			98			-
Adjustments to equity in earnings from unconsolidated entities, net		(8	)		(30	)		(21	)		(49	)
Amortization of above or below market leases and liabilities⁽²⁾		-			-			-			-
Mark-to-market adjustments⁽³⁾		5			(10	)		(1	)		(36	)
Non-recurring loss from extinguishment/sale of debt, derivatives or securities holdings⁽⁴⁾		440			-			440			307
MFFO		4,112			4,680			6,398			8,595
Straight-line rent⁽⁵⁾		-			-			-			-
MFFO - IPA recommended format	$	4,112		$	4,680		$	6,398		$	8,595

Net income/(loss)	$	329		$	1,871		$	(408	)	$	2,686
Less: income attributable to noncontrolling interests		(29	)		(73	)		(47	)		(115	)
Net income/(loss) applicable to Company's common shares	$	300		$	1,798		$	(455	)	$	2,571
Net income/(loss) per common share, basic and diluted	$	0.02		$	0.10		$	(0.03	)	$	0.14

FFO	$	3,650		$	4,720		$	5,882		$	8,373
Less: FFO attributable to noncontrolling interests		(87	)		(147	)		(162	)		(264	)
FFO attributable to Company's common shares	$	3,563		$	4,573		$	5,720		$	8,109
FFO per common share, basic and diluted	$	0.20		$	0.25		$	0.32		$	0.44

MFFO - IPA recommended format	$	4,112		$	4,680		$	6,398		$	8,595
Less: MFFO attributable to noncontrolling interests		(87	)		(147	)		(163	)		(263	)
MFFO attributable to Company's common shares	$	4,025		$	4,533		$	6,235		$	8,332

Weighted average number of common shares outstanding, basic and diluted		18,097			18,323			18,129			18,348

(1)

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

(2)

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

(3)

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

(4)

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

(5)

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

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

	For the period April, 28, 2008
	(date of inception) through
	June 30, 2018

FFO	$	57,958
Distributions declared	$	66,415

Distribution Payments

On July 16, 2018, the distribution for the three-month period ending June 30, 2018 of $3.2 million was paid in cash.

The amount of distributions paid to our stockholders in the future will be determined by our Board 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.

New Accounting Pronouncements

See Note 2 of the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been adopted during 2018, if any, and certain accounting standards that we have not yet been required to implement and may be applicable to our future operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

We are currently and expect to continue to be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund the expansion and refinancing of our real estate investment portfolio and operations. Our interest rate risk management objectives have been and will continue to be to limit the impact of interest rate changes on our earnings, prepayment penalties and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes. As of June 30, 2018, we had one interest rate swap with an insignificant intrinsic value.

As of June 30, 2018, we held marketable securities with a fair value of $8.2 million, which are available for sale for general investment purposes. We regularly review the market prices of our investments for impairment purposes. As of June 30, 2018, a hypothetical adverse 10.0% movement in market values would result in a hypothetical loss in fair value of approximately $0.8 million.

The following table shows the estimated principal maturities for our mortgage debt during the next five years and thereafter as of June 30, 2018:

	Remainder of
	2018		2019		2020		2021		2022		Thereafter		Total

Principal maturities	$	15	$	179	$	187	$	140,200	$	211	$	13,208	$	154,000

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

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

As of June 30, 2018

As of December 31, 2017

Carrying Amount

Estimated Fair

Value

Carrying Amount

Estimated Fair

Value

Mortgages payable

154,000

154,022

144,509

144,942

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

As of June 30, 2018, $140.0 million, or 91%, of our debt, is a variable rate instrument (not subject to an interest rate cap or swap) and our interest expense associated with this instrument is, therefore, subject to changes in market interest rates. A 1% adverse movement (increase in Libor or Prime rate) would increase annual interest expense by approximately $1.4 million.

In addition to changes in interest rates, the value of our real estate and real estate related investments is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of tenants, which may affect our ability to obtain or refinance debt in the future. As of June 30, 2018, we had no off-balance sheet arrangements.

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

ITEM 4. CONTROLS AND PROCEDURES.

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

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

PART II. OTHER INFORMATION:

ITEM 1. LEGAL PROCEEDINGS.

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

ITEM 1A. RISK FACTORS

We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. For the six months ended June 30, 2018, there were no such material developments.

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

Recent Sales of Unregistered Securities

During the period covered by this Form 10-Q, we did not sell any equity securities that were not registered under the Securities Act of 1933.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit Number		Description

31.1*		Certification of Chief Executive Officer and Principal 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 and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
101*		XBRL (eXtensible Business Reporting Language).The following financial information from Lightstone Value Plus Real Estate Investment Trust II, Inc. on Form 10-Q for the quarter ended June 30, 2018, filed with the SEC on August 14, 2018, formatted in XBRL includes: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Operations, (3) Consolidated Statements of Comprehensive Income, (4) Consolidated Statements of Stockholders’ Equity, (5) Consolidated Statements of Cash Flows and (6) the Notes to the Consolidated Financial Statement.

*Filed herewith

SIGNATURES

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

	LIGHTSTONE VALUE PLUS REAL ESTATE
	INVESTMENT TRUST II, INC.

Date: August 14, 2018	By:	/s/ David Lichtenstein
		David Lichtenstein
		Chairman and Chief Executive Officer
		(Principal Executive Officer and Principal Financial Officer)

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II INC - FORM 10-Q - August 14, 2018

Attached files

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II INC Reports