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EX-32.1 - EXHIBIT 32.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.tv500248_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - Lightstone Value Plus Real Estate Investment Trust, Inc.tv500248_ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended June 30, 2018

 

OR

 

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

 

For the transition period from                      to

 

Commission file number 000-52610

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland   20-1237795

(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 ¨

 

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

 

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

Yes  ¨  No þ

 

As of August 1, 2018, there were approximately 24.6 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust, Inc., including shares issued pursuant to the dividend reinvestment plan.  

 

 

 

 

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, 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 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 19
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
     
Item 4. Controls and Procedures 35
     
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings 35
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
     
Item 3. Defaults Upon Senior Securities 36
     
Item 4. Mine Safety Disclosures 36
     
Item 5. Other Information 36
     
Item 6. Exhibits 36

 

2

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

 

   As of
June 30, 2018
   As of
 December 31, 2017
 
   (unaudited)     
Assets          
Investment property:          
Land and improvements  $44,647   $49,681 
Building and improvements   153,315    164,418 
Furniture and fixtures   2,212    2,154 
Construction in progress   166    204 
Gross investment property   200,340    216,457 
Less accumulated depreciation   (38,048)   (37,956)
Net investment property   162,292    178,501 
Investment in related parties   112,523    159,792 
Cash and cash equivalents   75,960    116,434 
Marketable securities, available for sale   118,530    57,944 
Restricted cash   2,731    2,785 
Tenant and other accounts receivable   1,174    1,143 
Intangible assets   259    337 
Prepaid expenses and other assets   3,082    2,738 
Total Assets  $476,551   $519,674 
           
Liabilities and Stockholders' Equity          
Mortgages payable, net  $117,514   $157,927 
Notes payable   18,609    18,602 
Accounts payable, accrued expenses and other liabilities   20,220    20,388 
Due to related parties   421    496 
Tenant allowances and deposits payable   1,039    1,483 
Distributions payable   4,299    4,387 
Deferred rental income   721    716 
Acquired below market lease intangibles   234    305 
Total Liabilities   163,057    204,304 
           
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; 60,000 shares authorized, 24,611 and 24,847 shares issued and outstanding, respectively   246    248 
Additional paid-in-capital   192,142    194,497 
Accumulated other comprehensive (loss)/income   (1,400)   15,467 
Accumulated surplus   105,338    86,956 
Total Company's stockholders' equity   296,326    297,168 
Noncontrolling interests   17,168    18,202 
Total Stockholders' Equity   313,494    315,370 
Total Liabilities and Stockholders' Equity  $476,551   $519,674 

 

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

 

3

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2018   2017   2018   2017 
                 
Revenues:                    
Rental income  $4,696   $8,953   $9,640   $16,620 
Tenant recovery income   648    869    1,392    1,815 
Other service income   -    2,989    -    5,765 
                     
Total revenues   5,344    12,811    11,032    24,200 
                     
Expenses:                    
Property operating expenses   1,684    6,738    3,405    12,861 
Real estate taxes   461    669    965    1,349 
General and administrative costs   1,050    1,006    2,207    2,441 
Depreciation and amortization   1,805    2,721    3,578    5,514 
                     
Total operating expenses   5,000    11,134    10,155    22,165 
                     
Operating income   344    1,677    877    2,035 
                     
Other (loss)/income, net   (18)   68    112    51 
Interest and dividend income   4,555    5,094    9,738    9,797 
Interest expense   (2,497)   (3,489)   (5,328)   (7,195)
Gain on disposition of real estate   7,137    -    7,137    - 
Loss on sale and redemption of marketable securities   (75)   (16)   (78)   (49)
Unrealized gain/(loss) on marketable equity securities   3,467    -    (340)   - 
Gain on satisfaction of mortgage receivable   -    3,216    -    3,216 
                     
Net income   12,913    6,550    12,118    7,855 
                     
Less: net income attributable to noncontrolling interests   (753)   (312)   (643)   (523)
                     
Net income attributable to Company's common shares  $12,160   $6,238   $11,475   $7,332 
                     
Net income per Company’s common share, basic and diluted  $0.49   $0.25   $0.46   $0.29 
                     
Weighted average number of common shares outstanding, basic and diluted   24,650    24,989    24,715    25,024 

 

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

 

4

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE 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  $12,913   $6,550   $12,118   $7,855 
                     
Other comprehensive loss                    
Holding loss on marketable securities, available for sale   (465)   (1,952)   (1,497)   (2,741)
Reclassification adjustment for loss included in net income   75    16    78    49 
                     
Other comprehensive loss   (390)   (1,936)   (1,419)   (2,692)
                     
Comprehensive income   12,523    4,614    10,699    5,163 
                     
Less: Comprehensive income attributable to noncontrolling interests   (746)   (97)   (615)   (197)
                     
Comprehensive income attributable to Company's common shares  $11,777   $4,517   $10,084   $4,966 

 

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

 

5

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Amounts in thousands)

(Unaudited)

 

   Common   Additional
Paid-In
   Accumulated
Other
Comprehensive
   Accumulated   Noncontrolling   Total Stockholders' 
   Shares   Amount   Capital   Income/(loss)   Surplus   Interests   Equity 
BALANCE, December 31, 2017   24,847   $248   $194,497   $15,467   $86,956   $18,202   $315,370 
Reclassification of other accumulated comprehensive income to accumulated surplus   -    -    -    (15,476)   15,476    -    - 
Net income   -    -    -    -    11,475    643    12,118 
Other comprehensive loss   -    -    -    (1,391)   -    (28)   (1,419)
Distributions declared   -    -    -    -    (8,569)   -    (8,569)
Distributions paid to noncontrolling interests   -    -    -    -    -    (1,653)   (1,653)
Contributions received from noncontrolling interests   -    -    -    -    -    4    4 
Redemption and cancellation of shares   (236)   (2)   (2,355)   -    -    -    (2,357)
BALANCE, June 30, 2018   24,611   $246   $192,142   $(1,400)  $105,338   $17,168   $313,494 

 

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

 

6

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, 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 income  $12,118   $7,855 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   3,578    5,514 
Unrealized loss on marketable equity securities, available for sale   340    - 
Loss on sale of marketable securities, available for sale   78    49 
Gain on disposition of real estate   (7,137)   - 
Gain on satisfaction of mortgage receivable   -    (3,216)
Other non-cash adjustments   110    294 
Changes in assets and liabilities:          
Increase in prepaid expenses and other assets   (599)   (1,184)
Decrease in tenant and other accounts receivable   16    57 
Decrease in tenant allowances and deposits payable   (175)   (3)
Increase in accounts payable, accrued expenses and other liabilities   1,006    3,411 
Decrease in due to related parties   (75)   (3)
Decrease/(increase) in deferred rental income   18    (158)
           
Net cash provided by operating activities   9,278    12,616 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of investment property, net   (805)   (1,428)
Purchase of marketable securities   (71,375)   (5,081)
Collections on mortgage receivable   -    8,109 
Proceeds from sale and redemption of marketable securities   8,951    667 
Proceeds from joint venture   710    43 
Proceeds from preferred investments in related parties   60,000    2,300 
Investments in joint venture   (646)   (146)
Investments in related parties   (12,795)   (8,230)
Proceeds from sale of investment property and other real estate assets   -    233 
           
Net cash used in investing activities   (15,960)   (3,533)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Mortgage payments   (21,182)   (204)
Redemption and cancellation of common stock   (2,357)   (1,363)
Contributions received from noncontrolling interests   4    7 
Distributions paid to noncontrolling interests   (1,653)   (1,951)
Distributions paid to Company's common stockholders   (8,658)   (8,755)
           
Net cash used in financing activities   (33,846)   (12,266)
           
Net change in cash, cash equivalents and restricted cash   (40,528)   (3,183)
Cash , cash equivalents and restricted cash, beginning of year   119,219    108,357 
Cash, cash equivalents and restricted cash, end of period  $78,691   $105,174 
           
Supplemental cash flow information for the periods indicated is as follows:          
           
Cash paid for interest  $3,995   $2,452 
Distributions declared but not paid  $4,299   $4,360 
Non cash purchase of investment property  $58   $48 
Unrealized loss on marketable securities  $1,419   $2,692 
Assets transferred due to foreclosure  $13,521   $- 
Liabilities credited in foreclosure  $20,658   $- 
Reclassification of accumulated other comprehensive income and noncontrolling interests to accumulated surplus  $15,476   $- 

 

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

 

7

 

 

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

Notes to Consolidated Financial Statements

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

 

1.Organization

 

Lightstone Value Plus Real Estate Investment Trust, Inc., a Maryland corporation (“Lightstone REIT”) was formed on June 8, 2004 (date of inception) and subsequently qualified as a real estate investment trust (“REIT”) during the year ending December 31, 2006. Lightstone REIT was formed primarily for the purpose of engaging in the business of investing in and owning commercial and residential real estate properties located throughout the United States. The Company also has and will continue to seek to originate, acquire and manage a diverse portfolio of real estate-related investments.

 

Lightstone REIT 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, L.P., a Delaware limited partnership formed on July 12, 2004 (the “Operating Partnership”), in which Lightstone REIT as the general partner, held a 98% interest as of June 30, 2018.

 

The Lightstone REIT 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, 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, 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, which closed on October 10, 2008. 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, David Lichtenstein is the indirect owner of the Advisor and the indirect owner and manager of Lightstone SLP, LLC, which has subordinated profits interests (“SLP units”) 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 the Lightstone REIT or the Operating Partnership.

 

The Company’s stock is not currently listed on a national securities exchange. The Company may seek to list its 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.

 

As of June 30, 2018, on a collective basis, the Company wholly or majority owned and consolidated the operating results and financial condition of 2 retail properties containing a total of approximately 0.5 million square feet of retail space, 10 industrial properties containing a total of approximately 0.5 million square feet of industrial space and one multi-family residential property containing a total of 199 units. All of the Company’s properties are located within the United States. As of June 30, 2018, the retail properties, the industrial properties and the multi-family residential properties were 79%, 66% and 97% occupied based on a weighted-average basis, respectively.

 

Noncontrolling Interests

 

As of June 30, 2018, the noncontrolling interests consist of (i) parties of the Company that hold units in the Operating Partnership and (ii) certain interests in consolidated subsidiaries. The units include SLP units, limited partner units and common units. The noncontrolling interests in consolidated subsidiaries include ownership interests in Pro-DFJV Holdings LLC (“PRO”) held by the Company’s Sponsor and 50-01 2nd St. Associates LLC (the “2nd Street Joint Venture”) held by the Company’s Sponsor and other affiliates.

 

2.Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of the Lightstone REIT and its Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). All inter-company balances and transactions have been eliminated in consolidation.

 

8

 

 

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

Notes to Consolidated Financial Statements

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

 

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of the Company and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. The unaudited interim consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair presentation of the results for the periods presented. The accompanying unaudited consolidated financial statements of Lightstone Value Plus Real Estate Investment Trust, Inc. and its 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 and real-estate related investments, marketable securities, 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 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 tenant improvements, leasing commissions, and 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  $75,960   $100,731 
Restricted cash   2,731    4,443 
Total cash, cash equivalents and restricted cash  $78,691   $105,174 

 

Effective January 1, 2018, the Company adopted guidance issued by the FASB that 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, using a modified-retrospective approach. This resulted in a $15.5 million reclassification of aggregate net unrealized gains from accumulated other comprehensive income (“AOCI”) and noncontrolling interests to opening accumulated surplus see Note 3.

 

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 will be accounted for as an acquisition of an asset or as a business combination. The guidance provides a test to determine when a set of assets and activities acquired is not a business. When substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. 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.

 

9

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, 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 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing 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. Lease contracts are excluded from this revenue recognition criteria; however, the sale of real estate is required to follow the new model. The Company has adopted this standard for the year beginning on January 1, 2018 using the modified retrospective approach. The adoption of this pronouncement had no effect on our consolidated financial statements since, with the disposal of the DoubleTree – Danvers in September 2017, substantially all revenues now consist of rental income from leasing arrangements, which is specifically excluded from the standard.

 

New Accounting Pronouncements

 

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

 

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 our 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.

 

Reclassifications 

 

Certain prior period amounts may have been reclassified to conform to the current year presentation.

 

3.Marketable Securities, Fair Value Measurements and Notes Payable

 

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 
Marketable Securities:                    
Equity securities:                    
Equity Securities, primarily REITs  $1,405   $252   $(5)  $1,652 
Marco OP Units and Marco II OP Units   19,227    16,384    -    35,611 
    20,632    16,636    (5)   37,263 
Debt securities:                    
Corporate Bonds and Preferred Securities   81,000    24    (1,155)   79,869 
Mortgage Backed Securities ("MBS")   1,695    -    (297)   1,398 
    82,695    24    (1,452)   81,267 
Total  $103,327   $16,660   $(1,457)  $118,530 

 

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

Notes to Consolidated Financial Statements

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

 

   As of December 31, 2017 
   Adjusted Cost   Gross Unrealized
Gains
   Gross Unrealized
Losses
   Fair Value 
Marketable Securities:                    
Equity securities:                    
Equity Securities, primarily REITs  $1,405   $263   $-   $1,668 
Marco OP Units and Marco II OP Units   19,227    16,708    -    35,935 
    20,632    16,971    -    37,603 
Debt securities:                    
Corporate Bonds and Preferred Securities   18,494    371    (81)   18,784 
Mortgage Backed Securities   1,856    -    (299)   1,557 
    20,350    371    (380)   20,341 
Total  $40,982   $17,342   $(380)  $57,944 

 

The Marco OP Units and the Marco II OP Units are exchangeable for a similar number of common operating partnership units (“Simon OP Units”) of Simon Property Group, L.P., (“Simon OP”), the operating partnership of Simon Property Group, Inc. (“Simon”). Subject to the various conditions, the Company may elect to exchange the Marco OP Units and/or the Marco II OP Units to Simon OP Units which must be immediately delivered to Simon in exchange for cash or similar number of shares of Simon’s common stock (“Simon Stock”).

 

Prior to January 1, 2018, the Company accounted for marketable equity securities at fair value with unrealized gains and losses recognized in AOCI on the consolidated balance sheet. Realized gains and losses on marketable equity securities sold or impaired were recognized on the consolidated statements of operations.

 

On January 1, 2018, the Company adopted guidance issued by the FASB that required it to change the way it accounts for marketable equity securities. The Company’s marketable equity securities are measured at fair value and starting January 1, 2018 unrealized gains and losses are recognized on the consolidated statements of operations. Upon adoption, the Company reclassified $15.5 million of aggregate net unrealized gains from AOCI and noncontrolling interests to opening accumulated surplus.

 

The Company considers the declines in market value of certain of its investments to be temporary in nature as the unrealized losses were caused primarily by changes in market interest rates or widening credit spreads. When evaluating these 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. During the six months ended June 30, 2018 and 2017, the Company did not recognize any impairment charges. As of June 30, 2018, the Company does not consider any of its investments to be other-than-temporarily impaired.

 

The Company may sell certain of its investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management. At the time of purchase, the maturities of the Company’s MBS generally ranged from 27 years to 30 years.

 

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.

 

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

Notes to Consolidated Financial Statements

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

 

Marketable securities, available for sale, measured at fair value on a recurring basis as of the dates indicated are as follows:

 

   Fair Value Measurement Using     
As of June 30, 2018  Level 1   Level 2   Level 3   Total 
                 
Marketable Securities:                    
Equity Securities, primarily REITs  $1,652   $-   $-   $1,652 
Marco OP and OP II Units   -    35,611    -    35,611 
Corporate Bonds and Preferred Securities   -    79,869    -    79,869 
MBS   -    1,398    -    1,398 
Total  $1,652   $116,878   $-   $118,530 

 

   Fair Value Measurement Using     
As of December 31, 2017  Level 1   Level 2   Level 3   Total 
                 
Marketable Securities:                    
Equity Securities, primarily REITs  $1,668   $-   $-   $1,668 
Marco OP and OP II Units   -    35,935    -    35,935 
Corporate Bonds and Preferred Securities   -    18,784    -    18,784 
MBS   -    1,557    -    1,557 
Total  $1,668   $56,276   $-   $57,944 

 

The fair values of the Company’s investments in Corporate Bonds and Preferred Securities and MBS are measured using readily available quoted prices for similar assets. Additionally, as noted and disclosed above, the Company’s Marco OP and Marco OP II Units are ultimately exchangeable for cash or similar number of shares of Simon Stock, therefore the Company uses the quoted market price of Simon Stock to measure the fair value of the Company’s Marco OP and Marco OP II Units.

 

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  $15,596 
Due in 1 year through 5 years   45,699 
Due in 5 year through 10 years   18,574 
Due after 10 years   1,398 
Total  $81,267 

 

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

 

Notes Payable

  

Margin Loan

 

The Company has access to a margin loan (the “Margin Loan”) from a financial institution that holds custody of certain of the Company’s marketable securities. The Margin Loan, which is due on demand, bears interest at Libor plus 0.85% (2.94% as of June 30, 2018) and 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. There were no amounts outstanding under this Margin Loan as of June 30, 2018 and December 31, 2017.

 

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

Notes to Consolidated Financial Statements

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

 

Line of Credit

 

The Company has a non-revolving credit facility (the “Line of Credit”) with a financial institution which permits borrowings up to $25.0 million. The Line of Credit expires on June 19, 2019 and bears interest at Libor plus 1.35% (3.44% as of June 30, 2018). The Line of Credit is collateralized by approximately 209,000 Marco OP Units and PRO guaranteed the Line of Credit. The amount outstanding under the Line of Credit was $18.6 million as of June 30, 2018 and December 31, 2017 and is included in Notes Payable on the consolidated balance sheets. The Company currently intends to seek to extend or replace the Line of Credit on or before its expiration. If we are unable to extend or replace the Line of Credit, we will repay the then outstanding balance in full at the expiration date using working capital, cash proceeds from the sale of assets and/or redemptions of our preferred investments in related parties.

 

4. Mortgages Payable, Net

 

Mortgages payable, net consists of the following:

 

Property  Interest Rate   Weighted Average
Interest Rate as of
 June 30, 2018
   Maturity Date  Amount Due at
Maturity
   As of
 June 30, 2018
   As of
December 31, 2017
 
                        
Gulf Coast Industrial Portfolio   9.83%   9.83%  Due on demand  $30,642   $30,642   $50,205 
                             
St. Augustine Outlet Center   (Repaid in full - see below)   -    -    20,400 
                             
Gantry Park   4.48%   4.48%  November 2024   65,317    73,922    74,500 
                             
DePaul Plaza   LIBOR + 2.75%    4.51%  June 2020   13,494    14,276    14,480 
                             
Total mortgages payable        5.86%     $109,453    118,840    159,585 
                             
Less: Deferred financing costs                     (1,326)   (1,658)
                             
Total mortgages payable, net                    $117,514   $157,927 

 

Libor as of June 30, 2018 and December 31, 2017 was 2.09% and 1.57%, respectively. The Company’s loans are secured by the indicated real estate and are non-recourse to the Company, unless otherwise indicated.

 

On May 29, 2018, the Company repaid in full its $20.4 million recourse mortgage loan secured by the St. Augustine Outlet Center located in St. Augustine, Florida, with a scheduled maturity in August 2018.  

 

Certain of the Company’s debt agreements require the maintenance of certain ratios, including debt service coverage. The Company is currently in compliance with all of its financial debt covenants other than the non-recourse mortgage indebtedness originally secured by a portfolio of industrial properties (collectively, the “Gulf Coast Industrial Portfolio”) located in New Orleans, Louisiana (seven properties), and Baton Rouge, Louisiana (three properties) and San Antonio, Texas (four properties), as discussed below. Additionally, certain of our mortgages payable also contain clauses providing for prepayment penalties.

 

As a result of not meeting certain debt service coverage ratios on the non-recourse mortgage indebtedness secured by the Gulf Coast Industrial Portfolio (the “Gulf Coast Industrial Portfolio Mortgage”), the lender elected to retain the excess cash flow from these properties beginning in July 2011.  During the third quarter of 2012, the Gulf Coast Industrial Portfolio Mortgage was transferred to a special servicer, who discontinued scheduled debt service payments and notified the Company that the Gulf Coast Industrial Portfolio Mortgage was in default and although originally due in February 2017 became due on demand.

 

On June 5, 2018, the special servicer completed a partial foreclosure of the Gulf Coast Industrial Portfolio pursuant to which it foreclosed on the four properties located in San Antonio, Texas (the “San Antonio Assets”). The San Antonio Assets were sold in a foreclosure sale by the special servicer for an aggregate amount of approximately $20.7 million. (See Note 6)

 

Upon consummation of the foreclosure sale, the buyers assumed the significant risks and rewards of ownership and took legal title and physical possession of the San Antonio Assets for the aggregate sales price of $20.7 million. The Company simultaneously received an aggregate credit of approximately $20.7 million against the total outstanding indebtedness of the Gulf Coast Industrial Portfolio Mortgage, of which $19.6 million and $1.1 million were applied by the Company against the outstanding principal and outstanding accrued interest payable, respectively, under the Gulf Coast Industrial Portfolio Mortgage.

 

13

 

 

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

Notes to Consolidated Financial Statements

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

 

As a result, the remaining outstanding principal of the Gulf Coast Industrial Portfolio Mortgage was approximately $30.6 million as of June 30, 2018. Although the special servicer is not currently charging or being paid interest at the stated default rate, the Company has been accruing default interest expense on the Gulf Coast Industrial Portfolio Mortgage pursuant to the terms of its loan agreement.

 

Additionally, the Company previously accrued default interest expense on a non-recourse mortgage loan (the “Oakview Plaza Mortgage”), pursuant to the terms of its loan agreement during the period from January 2017 through September 2017. The Oakview Plaza Mortgage was secured by a retail shopping center located in Omaha, Nebraska (“Oakview Plaza”). The lender foreclosed on Oakview Plaza in September 2017.

 

Default interest expense related to the Gulf Coast Industrial Mortgage of $0.5 million and $1.0 million was accrued during the three and six months ended June 30, 2018, respectively, and default interest expense related to both the Gulf Coast Industrial Portfolio Mortgage and the Oakview Plaza Mortgage of $0.8 million and $1.7 million was accrued during the three and six months ended June 30, 2017, respectively. Cumulative accrued default interest expense (solely related the Gulf Coast Industrial Portfolio Mortgage) of $12.2 million and $11.2 million is included in accounts payable, accrued expenses and other liabilities on our consolidated balance sheets as of June 30, 2018 and December 31, 2017, respectively.  However, the Company does not expect to pay any of the accrued default interest expense as the Gulf Coast Industrial Portfolio Mortgage is non-recourse.   Additionally, the Company believes the continued loss of excess cash flow from the Gulf Coast Industrial Portfolio and the special servicer’s placement of the non-recourse mortgage indebtedness in default will not have a material impact on its results of operations or financial position.

 

Other than the Gulf Coast Industrial Portfolio Mortgage, the Company has no additional significant maturities of mortgage debt over the next 12 months.

 

The following table shows the contractually scheduled principal maturities of the Company’s mortgage debt during the next five years and thereafter as of June 30, 2018:

 

   2018   2019   2020   2021   2022   Thereafter   Total 
Principal maturities  $31,427   $1,621   $14,924   $1,328   $1,389   $68,151   $118,840 
                                    
Less: Deferred financing costs                                 (1,326)
                                    
Total principal maturities, net                                $117,514 

 

5.Net Earnings Per Share

 

Basic net 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. Diluted net income per share includes the potentially dilutive effect, if any, which would occur if our outstanding options to purchase our common stock were exercised. For all periods presented, dilutive net income per share is equivalent to basic net income per share, as the company has no common stock equivalent shares.

 

6.Disposition

 

Gulf Coast Industrial Portfolio – San Antonio Assets

 

As previously discussed in Note 4, on June 5, 2018, the special servicer for the Gulf Coast Industrial Portfolio Mortgage completed a partial foreclosure of the Gulf Coast Industrial Portfolio pursuant to which it foreclosed on the San Antonio Assets. The San Antonio Assets were sold in a foreclosure sale by the special servicer for an aggregate amount of approximately $20.7 million.

 

14

 

 

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

Notes to Consolidated Financial Statements

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

 

Upon consummation of the foreclosure sale, the buyers assumed the significant risks and rewards of ownership and took legal title and physical possession of the San Antonio Assets for the agreed upon sales price of $20.7 million. The Company simultaneously received an aggregate credit of approximately $20.7 million which it applied against the total outstanding indebtedness (approximately $19.6 million and $1.1 million of principal and accrued interest payable, respectively) of the Gulf Coast Industrial Portfolio Mortgage.

 

The aggregate carrying value of the assets transferred and the liabilities extinguished in connection with the foreclosure of the San Antonio Assets were approximated $13.6 million and $20.7 million respectively.

 

Since the Company’s performance obligations were met at the closing of the foreclosure sales and the Company has no continuing involvement with the San Antonio Assets an aggregate gain on disposition of real estate of approximately $7.1 million was recognized during the second quarter of 2018.

 

The disposition of San Antonio Assets 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 San Antonio Assets are reflected in the Company’s results from continuing operations for all periods presented through their respective date of disposition.

 

7.Related Party Transactions

 

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

 

The Company, pursuant to the related party arrangements, has recorded the following amounts for the periods indicated:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2018   2017   2018   2017 
Asset management fees (general and administrative costs)  $427   $565   $891   $1,128 
Property management fees (property operating expenses)   136    186    289    376 
Development fees and leasing commissions*   42    99    120    581 
Total  $605   $850   $1,300   $2,085 

 

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

 

In connection with the Company’s initial public offering, Lightstone SLP, LLC, an affiliate of the Company’s Sponsor, previously purchased an aggregate of $30.0 million of SLP units which are included in noncontrolling interests in the consolidated balance sheets. These SLP units, the purchase price of which will be repaid only after stockholders receive a stated preferred return and their net investment, entitle Lightstone SLP, LLC to a portion of any regular distributions made by the Operating Partnership.

 

During the three and six months ended June 30, 2018, distributions of $0.5 million and $1.0 million were declared and paid on the SLP units.

 

Additionally, the Company’s Sponsor, has a 19.17% membership interest in PRO, a subsidiary of the Operating Partnership, which is accounted for as noncontrolling interests.

 

Preferred Investments

 

The Company has entered into several agreements with various related party entities that provide for it to make preferred contributions pursuant to certain instruments (the “Preferred Investments”) that entitle the Company to certain prescribed monthly preferred distributions. The Preferred Investments had an aggregate balance of $111.1 million and $158.3 million as of June 30, 2018 and December 31, 2017, respectively, and are classified as held-to-maturity securities, recorded at cost and included in investments in related parties on the consolidated balance sheets. The fair value of these investments approximated their carrying values based on market rates for similar instruments.

 

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

Notes to Consolidated Financial Statements

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

 

During the six months ended June 30, 2018, the Company made an aggregate $12.8 million of additional contributions and redeemed the entire $60.0 million outstanding on the 485 7th Avenue Preferred Investment and as of June 30, 2018, remaining contributions of up to $6.4 million were unfunded. The Company did not enter into any new Preferred Investments during the six months ended June 30, 2018.

 

The Preferred Investments are summarized as follows:

 

       Preferred Investment Balance   Unfunded Contributions   Investment Income 
       As of   As of   As of   Three Months Ended June 30,   Six Months Ended June 30, 
Preferred Investments  Dividend Rate   June 30, 2018   December 31, 2017   June 30, 2018   2018   2017   2018   2017 
40 East End Avenue (1)   8% to 12%   $30,000   $30,000   $-   $910   $910   $1,810   $1,543 
30-02 39th Avenue   12%   10,000    10,000    -    303    304    603    639 
485 7th Avenue   12%   -    60,000    -    70    1,820    1,095    3,620 
East 11th Street   12%   57,500    46,119    -    1,726    1,035    3,207    1,980 
Miami Moxy   12%   13,608    12,195    6,392    398    309    772    559 
Total Preferred Investments       $111,108   $158,314   $6,392   $3,407   $4,378   $7,487   $8,341 

 

Note:

(1) - The dividend rate increased from 8% to 12% during March 2017 in connection with the procurement of construction financing on this project.

 

The Joint Venture

 

The Company has a 2.5% membership interest in a joint venture (the “Joint Venture”) with Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a related party REIT also sponsored by our Sponsor. The Joint Venture previously acquired our membership interests in a portfolio of 11 hotels in a series of transactions completed during 2015. During the third quarter of 2017, the Joint Venture sold its ownership interests in four of the hotels to an unrelated third party. On November 6, 2017, the Joint Venture acquired a 170-room select service hotel located in New Orleans, Louisiana (the “Hyatt – New Orleans”) from an unrelated third party. As a result, the Joint Venture holds ownership interests in eight hotels as of June 30, 2018.

 

The Company accounts for our 2.5% membership interest in the Joint Venture under the cost method and as of June 30, 2018 and December 31, 2017, the carrying value of our investment was $1.4 million and $1.5 million, respectively, which is included in investment in related parties on the consolidated balance sheets.

 

8.Financial Instruments

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, tenant and other accounts receivable, accounts payable, accrued expenses and other liabilities and due to related parties approximated their fair values because of the short maturity of these instruments. The estimated fair value of the notes payable (line of credit) approximated its carrying value ($18.6 million) because of its floating interest rate.

 

The estimated fair value (in millions) of the Company’s mortgage debt is summarized as follows:

 

   As of June 30, 2018   As of December 31, 2017 
   Carrying Amount   Estimated Fair
Value
   Carrying Amount   Estimated Fair
Value
 
Mortgages payable  $118.8   $116.1   $159.6   $158.6 

 

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

 

9.Segment Information

 

The Company has historically operated within four business segments which are: (i) retail real estate (the “Retail Segment”), (ii) multi-family residential real estate (the “Multi-Family Residential Segment”), (iii) industrial real estate (the “Industrial Segment”) and (iv) hospitality (the “Hospitality Segment”). However, during the third quarter of 2017, the Company sold its only remaining consolidated hospitality property and therefore, no longer has a Hospitality Segment. The Company’s Advisor and its affiliates provide leasing, property and facilities management, acquisition, development, construction and tenant-related services for its portfolio. The Company’s revenues for the three and six months ended June 30, 2018 and 2017 were exclusively derived from activities in the United States. No revenues from foreign countries were received or reported. The Company had no long-lived assets in foreign locations as of June 30, 2018 and December 31, 2017. The accounting policies of the segments are the same as those described in Note 2: Summary of Significant Accounting Policies of the Company’s December 31, 2017 Annual Report on Form 10-K. Unallocated assets, revenues and expenses relate to corporate related accounts, including the Company’s Preferred Investments in Related Parties (see Note 7).

 

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

Notes to Consolidated Financial Statements

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

 

The Company evaluates performance based upon net operating income/(loss) from the combined properties in each real estate segment.

 

Selected results of operations for the three and six months ended June 30, 2018 and 2017, and total assets as of June 30, 2018 and December 31, 2017 regarding the Company’s operating segments are as follows:

 

   For the Three Months Ended June 30, 2018 
   Retail   Multi-Family   Industrial   Hospitality   Unallocated   Total 
                         
Total revenues  $1,719    2,255   $1,370   $     -   $    -   $5,344 
                               
Property operating expenses   697    505    482    -    -    1,684 
Real estate taxes   261    18    182    -    -    461 
General and administrative costs   (27)   1    2    -    1,074    1,050 
                               
Net operating income/(loss)   788    1,731    704    -    (1,074)   2,149 
                               
Depreciation and amortization   965    411    429    -    -    1,805 
                   -           
Operating (loss)/income  $(177)  $1,320   $275   $-   $(1,074)  $344 
                               
As of June 30, 2018:                              
Total Assets  $69,695   $67,500   $36,508   $-   $302,848   $476,551 

 

   For the Three Months Ended June 30, 2017 
   Retail   Multi-Family   Industrial   Hospitality   Unallocated   Total 
                         
Total revenues  $2,639    2,167   $1,521   $6,484   $-   $12,811 
                               
Property operating expenses   939    480    507    4,812    -    6,738 
Real estate taxes   379    18    192    80    -    669 
General and administrative costs   7    20    (20)   42    957    1,006 
                               
Net operating income/(loss)   1,314    1,649    842    1,550    (957)   4,398 
                               
Depreciation and amortization   1,146    406    441    728    -    2,721 
                   -           
Operating income/(loss)  $168   $1,243   $401   $822   $(957)  $1,677 
                               
As of December 31, 2017:                              
Total Assets  $70,758   $67,966   $49,461   $61,316   $270,173    519,674 

 

   For the Six Months Ended June 30, 2018 
   Retail   Multi-Family   Industrial   Hospitality   Unallocated   Total 
                         
Total revenues  $3,571    4,446   $3,015   $-   $-   $11,032 
                               
Property operating expenses   1,443    988    974    -    -    3,405 
Real estate taxes   523    36    406    -    -    965 
General and administrative costs   (4)   5    (7)   -    2,213    2,207 
                               
Net operating income/(loss)   1,609    3,417    1,642    -    (2,213)   4,455 
                               
Depreciation and amortization   1,867    820    891    -    -    3,578 
                   -           
Operating (loss)/income  $(258)  $2,597   $751   $-   $(2,213)  $877 

 

17

 

 

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

Notes to Consolidated Financial Statements

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

 

   For the Six Months Ended June 30, 2017 
   Retail   Multi-Family   Industrial   Hospitality   Unallocated   Total 
                         
Total revenues  $5,353    4,325   $3,102   $11,420   $-   $24,200 
                               
Property operating expenses   1,877    938    1,048    8,997    1    12,861 
Real estate taxes   759    36    393    161    -    1,349 
General and administrative costs   90    30    (16)   118    2,219    2,441 
                               
Net operating income/(loss)   2,627    3,321    1,677    2,144    (2,220)   7,549 
                               
Depreciation and amortization   2,372    811    881    1,450    -    5,514 
                              
Operating income/(loss)  $255   $2,510   $796   $694   $(2,220)  $2,035 

 

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.

 

11.Subsequent Events

 

Distribution Payment

 

On July 16, 2018, the distribution for the three-month period ending June 30, 2018 of $4.3 million was paid in cash.

 

Distribution Declaration

 

On August 7, 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.

 

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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, 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, Inc., a Maryland corporation, and, as required by context, Lightstone Value Plus REIT, L.P. and its wholly owned subsidiaries, which we collectively refer to as “the Operating Partnership.” 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, or the SEC, contain or will contain, forward-looking statements. All statements, other than statements of historical facts, including, among others, statements regarding our possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives, are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of Lightstone Value Plus Real Estate Investment Trust, 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, changes in governmental, tax, real estate and zoning laws and regulations, failure to increase tenant occupancy and operating income, rejection of leases by tenants in bankruptcy, financing and development risks, construction and lease-up delays, cost overruns, the level and volatility of interest rates, the rate of revenue increases versus expense increases, the financial stability of various tenants and industries, the failure of the Company (defined herein) to make additional investments in real estate properties, the failure to upgrade our tenant mix, restrictions in current financing arrangements, the failure to fully recover tenant obligations for common area maintenance (“CAM”), insurance, taxes and other property expenses, the failure of the Company to continue to qualify as a real estate investment trust (“REIT”), the failure to refinance debt at favorable terms and conditions, an increase in impairment charges, loss of key personnel, failure to achieve earnings/funds from operations targets or estimates, conflicts of interest with the Advisor, 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 and in the Company’s other reports filed with the SEC.

 

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

  

Overview

 

Lightstone Value Plus Real Estate Investment Trust, Inc. (the “Lightstone REIT”) and Lightstone Value Plus REIT, 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, its Operating Partnership or the Company as required by the context in which such pronoun is used.

 

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Lightstone REIT has and expects to continue to invest in and operate commercial, residential and hospitality properties, principally in the United States. Principally through the Operating Partnership, our investments have included both portfolios and individual properties. Our commercial holdings currently consist of retail (primarily multi-tenant shopping centers), industrial properties and residential properties comprised of multi-family complexes. The Company also has and will continue to seek to originate, acquire and manage a diverse portfolio of real estate-related investments.

 

We do not have employees. We have an advisory agreement with Lightstone Value Plus REIT 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 reimburse the Advisor for certain expenses incurred on our behalf.

 

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 an 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.

 

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Portfolio Summary –

 

   Location 

Year Built

(Range of
years built)

  Gross
Leasable
Area
(GLA") in
Square Feet
  

Percentage

Occupied as
of
June 30, 2018

  

Annualized

Revenues
based
on rents at
June 30, 2018

 

Annualized

Revenues per
square foot at

June 30, 2018

 
Wholly Owned and Consolidated Real Estate Properties:                        
                             
Retail                        
St. Augustine Outlet Center  St. Augustine, FL  1998   335,572    72.7%  $3.1 million  $12.60 
DePaul Plaza  Bridgeton, MO  1985   187,090    89.5%  $2.0 million  $12.20 
   Retail Total   522,662    78.7%        
                         
Industrial                        
7 Flex/Office/Industrial Buildings within the Gulf Coast Industrial Portfolio  New Orleans, LA  1980-2000   339,700    57.2%  $2.1 million  $10.95 
3 Flex/Industrial Buildings within the Gulf Coast Industrial Portfolio  Baton Rouge, LA  1985-1987   182,792    80.9%  $1.1 million  $7.19 
                         
   Industrial Total   522,492    65.5%        

 

Multi - Family Residential  Location  Year Built
(Range of
years built)
  Leasable
Units
   Percentage
Occupied
as of
June 30, 2018
   Annualized
Revenues based
on rents at
June 30, 2018
  Annualized
Revenues
per unit at
June 30, 2018
 
                           
Gantry Park (Multi-Family Apartment Building)  Queens, NY   2013   199    97.0%  $8.50  $43,899 

 

Annualized revenue is defined as the minimum monthly payments 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

 

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

 

Dispositions

 

Gulf Coast Industrial Portfolio – San Antonio Assets

 

As a result of not meeting certain debt service coverage ratios on the non-recourse mortgage indebtedness (the “Gulf Coast Industrial Portfolio Mortgage”) originally secured by a portfolio of industrial properties (collectively, the “Gulf Coast Industrial Portfolio”) located in New Orleans, Louisiana (seven properties), and Baton Rouge, Louisiana (three properties) and San Antonio, Texas (four properties), the lender elected to retain the excess cash flow from these properties beginning in July 2011.  During the third quarter of 2012, the Gulf Coast Industrial Portfolio Mortgage was transferred to a special servicer.

 

On June 5, 2018, the special servicer completed a partial foreclosure of the Gulf Coast Industrial Portfolio pursuant to which it foreclosed on the four properties located in San Antonio, Texas (the “San Antonio Assets”). The San Antonio Assets were sold in a foreclosure sale by the special servicer for an aggregate amount of approximately $20.7 million. Since our performance obligations were met at the closing of the foreclosure sales and we have no continuing involvement with the San Antonio Assets an aggregate gain on disposition of assets of approximately $7.1 million was recognized during the second quarter of 2018.

 

The dispositions of (i) the San Antonio Assets on June 5, 2018, (ii) a hotel and water park located in Danvers, Massachusetts (the “DoubleTree – Danvers”) on September 7, 2017 and (iii) a retail power center located in Omaha, Nebraska (“Oakville Plaza”) on September 15, 2017 did not qualify to be reported as discontinued operations since none of the dispositions represented a strategic shift that had a major effect on our operations and financial results. Accordingly, the operating results of the San Antonio Assets (Industrial Segment), the DoubleTree – Danvers (Hospitality Segment) and Oakville Plaza (Retail Segment) are reflected in our results from continuing operations for all periods presented through their respective dates of disposition.

 

21

 

 

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

 

Consolidated

 

Revenues

 

Our revenues are comprised of rental income, tenant recovery income and other service income. Total revenues decreased by approximately $7.5 million to $5.3 million for the three months ended June 30, 2018 compared to $12.8 million for the same period in 2017. See “Segment Results of Operations for the Three Months Ended June 30, 2018 compared to June 30, 2017” for additional information on revenues by segment.

 

Property operating expenses

 

Property operating expenses decreased by approximately $5.1 million to $1.7 million for the three months ended June 30, 2018 compared to $6.7 million for the same period in 2017. This decrease is primarily is attributable to lower expenses in our Hospitality Segment as a result of the disposition of the DoubleTree – Danvers.

 

Real estate taxes

 

Real estate taxes expense decreased by approximately $0.2 million to $0.5 million for the three months ended June 30, 2018 compared to $0.7 million the same period in 2017.  This decrease is primarily attributable to lower expenses as a result of the dispositions of the DoubleTree – Danvers and Oakview Plaza.

 

General and administrative expenses

 

General and administrative expenses were relatively flat at approximately $1.1 million for the three months ended June 30, 2018 compared to $1.0 million for the same period in 2017.

 

Depreciation and amortization

 

Depreciation and amortization expense decreased by approximately $0.9 million to $1.8 million for the three months ended June 30, 2018 compared to $2.7 million the same period in 2017.  This decrease is primarily attributable to lower expense resulting from the dispositions of the DoubleTree – Danvers and Oakview Plaza.

 

Gain on disposition of real estate

 

During the second quarter of 2018 we recognized a gain on disposition of real estate of approximately $7.1 million related to the foreclosure sale of the San Antonio Assets.

 

Interest and dividend income

 

Interest and dividend income decreased by approximately $0.5 million to $4.6 million for the three months ended June 30, 2018 compared to $5.1 million the same period in 2017. The decrease reflects lower investment income of $1.0 million from our Preferred Investments (see Note 7) offset by increased interest and dividend income from our investments in marketable securities of $0.5 million.

 

Interest expense

 

Interest expense, including amortization of deferred financing costs, decreased by approximately $1.0 million to $2.5 million for the three months ended June 30, 2018 compared to $3.5 million for the same period in 2017. This decrease primarily reflects lower interest expense resulting from reductions in mortgage indebtedness in connection with the dispositions of the San Antonio Assets and Oakview Plaza.

 

Unrealized gain on marketable equity securities

 

During the three months ended June 30, 2018, we recorded an unrealized gain on marketable equity securities of $3.5 million which represents the change in the fair value of our marketable equity securities during the three months ended June 30, 2018. No unrealized gain on marketable equity securities was recorded for the 2017 period as these amounts were previously recorded as a component of other comprehensive income prior the adoption, on January 1, 2018, of guidance issued by FASB that now requires companies to measure investments in marketable equity securities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income.

 

22

 

 

Gain on satisfaction of mortgage receivable

 

During the second quarter of 2017 we recognized a gain on satisfaction of mortgage receivable of approximately $3.2 million related to the repayment in full of our mortgage receivable collateralized by a Holiday Inn Express located in East Brunswick, New Jersey which we acquired at a discount in 2011.

 

Noncontrolling interests

 

The net earnings allocated to noncontrolling interests relates to (i) parties of the Company that hold units in the Operating Partnership (ii) the interest in PRO-DFJV Holdings LLC (“PRO”) held by our Sponsor and (iii) the ownership interests in 50-01 2nd St. Associates LLC (the “2nd Street Joint Venture”) held by our Sponsor and other affiliates. 

 

Segment Results of Operations for the Three Months Ended June 30, 2018 compared to June 30, 2017

 

Retail Segment

 

   For the Three Months Ended June 30,   Variance Increase/(Decrease) 
   2018   2017   $   % 
             
Revenues  $1,719   $2,639   $(920)   -34.9%
NOI   788    1,314    (526)   -40.0%
Average Occupancy Rate for period   78.9%   85.1%        -6.2%

 

The following table represents lease expirations for the Retail Segment as of June 30, 2018:

 

Lease
Expiration
Year
  Number of
Expiring
Leases
   GLA of Expiring
Leases (Sq. Ft.)
   Annualized Base
Rent of Expiring
Leases ($)
   Percent of
Total GLA
   Percent of Total
Annualized Base
Rent
 
2018   6    18,394    314,486    4.9%   6.8%
2019   18    76,786    1,248,877    20.3%   27.1%
2020   10    153,729    1,558,727    40.4%   33.7%
2021   4    31,705    316,399    8.4%   6.9%
2022   4    14,318    269,832    3.8%   5.9%
2023   2    30,700    530,545    8.1%   11.5%
2024   1    1,163    54,977    0.3%   1.2%
2025   4    15,517    191,526    4.1%   4.2%
2026   2    28,687    -    7.6%   0.0%
2027   -    -    -    0.0%   0.0%
Thereafter   1    7,959    123,365    2.1%   2.7%
    52    378,958    4,608,734    100.0%   100.0%

 

As of June 30, 2018, we had three tenants, Kohl’s Inc., Saks & Company and H&M Hennes & Mauritz L.P., each with one store, representing approximately 19.6%, 5.4% and 5.0%, respectively, of the total GLA in our Retail Segment. Additionally, as of that date, we did not have any other tenants whose GLA was 5% or more of the total GLA in our Retail Segment.

 

Revenues and NOI decreased for the three months ended June 30, 2018 compared to the same period in 2017. Revenues and NOI decreased by approximately $0.7 million and $0.4 million, respectively, for the three months ended June 30, 2018 compared to the same period in 2017 as a result of the disposition of Oakview Plaza. Revenues and NOI decreased by approximately $0.2 million and $0.1 million, respectively, for the three months ended June 30, 2018 compared to the same period in 2017 for our remaining retail properties primarily as a result of the lower average occupancy rate during the 2018 period.

 

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Multi-Family Residential Segment

 

   For the Three Months Ended June 30,   Variance Increase/(Decrease) 
   2018   2017   $   % 
             
Revenues  $2,255   $2,167   $88    4.1%
NOI   1,731    1,649    82    5.0%
Average Occupancy Rate for period   97.8%   97.2%        0.6%

 

Revenues, NOI and average occupancy were relatively flat for Gantry Park, our only multi-family residential property.

 

Industrial Segment

 

   For the Three Months Ended June 30,   Variance Increase/(Decrease) 
   2018   2017   $   % 
             
Revenues  $1,370   $1,521   $(151)   -9.9%
NOI   704    842    (138)   -16.4%
Average Occupancy Rate for period   72.3%   72.1%        0.2%

 

The following table represents lease expirations for our Industrial Segment as of June 30, 2018

 

Lease
Expiration
Year
  Number of
Expiring
Leases
   GLA of Expiring
 Leases (Sq. Ft.)
   Annualized Base
Rent of Expiring
Leases ($)
   Percent of
Total GLA
   Percent of Total
Annualized
Base Rent
 
2018   6    17,952    -    5.2%   0.0%
2019   5    24,081    29,329    7.0%   1.0%
2020   10    110,723    1,210,843    32.4%   42.7%
2021   5    18,866    178,158    5.5%   6.3%
2022   7    62,046    519,958    18.1%   18.3%
2023   3    108,566    901,317    31.8%   31.7%
    36    342,234    2,839,605    100.0%   100.0%

 

As of June 30, 2018, we had two tenants, Carrier Enterprise, LLC and PSS World Medical, Inc., representing approximately 17.0% and 7.8%, respectively, of the total GLA in our Industrial Segment. Additionally, as of that date, we did not have any other tenants whose GLA was 5% or more of the total GLA in our Industrial Segment.

 

Revenues and NOI decreased for the three months ended June 30, 2018 compared to the same period in 2017 primarily as a result of the disposition of the San Antonio Assets on June 5, 2018.

 

Hospitality Segment

 

   For the Three Months Ended June 30, 
   2018   2017 
     
Revenues  $-   $6,484 
NOI   -    1,550 
Average Occupancy Rate for period   0.0%   78.9%
Rev PAR  $-   $105.81 

 

On September 7, 2017, the Company disposed of the DoubleTree – Danvers, which was its only remaining consolidated hospitality property and therefore, no longer has a Hospitality Segment.

 

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

 

Consolidated

 

Revenues

 

Our revenues are comprised of rental income, tenant recovery income and other service income. Total revenues decreased by approximately $13.2 million to $11.0 million for the six months ended June 30, 2018 compared to $24.2 million for the same period in 2017. See “Segment Results of Operations for the Six Months Ended June 30, 2018 compared to June 30, 2017” for additional information on revenues by segment.

 

Property operating expenses

 

Property operating expenses decreased by approximately $9.5 million to $3.4 million for the six months ended June 30, 2018 compared to $12.9 million for the same period in 2017. This decrease is primarily attributable to lower expenses in our Hospitality Segment as a result of the disposition of the DoubleTree – Danvers.

 

Real estate taxes

 

Real estate taxes expense decreased by approximately $0.3 million to $1.0 million for the six months ended June 30, 2018 compared to $1.3 million the same period in 2017.  This decrease is primarily attributable to lower expenses resulting from the dispositions of the DoubleTree – Danvers and Oakview Plaza.

 

General and administrative expenses

 

General and administrative expenses decreased by approximately $0.2 million to $2.2 million for the six months ended June 30, 2018 compared to $2.4 million the same period in 2017 principally due to lower asset management fees as a result of the dispositions of the DoubleTree – Danvers and Oakview Plaza.

 

Depreciation and amortization

 

Depreciation and amortization expense decreased by approximately $1.9 million to $3.6 million for the six months ended June 30, 2018 compared to $5.5 million the same period in 2017.  This decrease is primarily attributable to lower expense resulting from the dispositions of the DoubleTree – Danvers and Oakview Plaza.

 

Gain on disposition of real estate

 

During the second quarter of 2018 we recognized a gain on disposition of real estate of approximately $7.1 million related to the foreclosure sale of the San Antonio Assets.

 

Interest and dividend income

 

Interest and dividend income decreased by approximately $0.1 million to $9.7 million for the six months ended June 30, 2018 compared to $9.8 million the same period in 2017. The decrease reflects lower investment income of $0.9 million from our Preferred Investments (see Note 7) partially offset by higher interest and dividend income from our investments in marketable securities of $0.8 million.

 

Interest expense

 

Interest expense, including amortization of deferred financing costs, decreased by approximately $1.9 million to $5.3 million for the six months ended June 30, 2018 compared to $7.2 million for the same period in 2017. This decrease primarily reflects lower interest expense resulting from reductions in mortgage indebtedness in connection with the dispositions of the San Antonio Assets and Oakview Plaza.

 

Unrealized loss on marketable equity securities

 

During the six months ended June 30, 2018, we recorded an unrealized loss on marketable equity securities of $0.3 million which represents the change in the fair value of our marketable equity securities during the six months ended June 30, 2018. No unrealized loss on marketable equity securities was recorded for the 2017 period as these amounts were previously recorded as a component of other comprehensive income prior the adoption, on January 1, 2018, of guidance issued by FASB that now 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.

 

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Gain on satisfaction of mortgage receivable

 

During the second quarter of 2017 we recognized a gain on satisfaction of mortgage receivable of approximately $3.2 million related to the repayment in full of our mortgage receivable collateralized by a Holiday Inn Express located in East Brunswick, New Jersey which we acquired at a discount in 2011.

 

Noncontrolling interests

 

The net earnings allocated to noncontrolling interests relates to (i) parties of the Company that hold units in the Operating Partnership (ii) the interest in PRO-DFJV Holdings LLC (“PRO”) held by our Sponsor and (iii) the ownership interests in the 2nd Street Joint Venture held by our Sponsor and other affiliates. 

 

Segment Results of Operations for the Six Months Ended June 30, 2018 compared to June 30, 2017

 

Retail Segment

 

   For the Six Months Ended June 30,   Variance Increase/(Decrease) 
   2018   2017   $   % 
             
Revenues  $3,571   $5,353   $(1,782)   -33.3%
NOI   1,609    2,627    (1,018)   -38.8%
Average Occupancy Rate for period   80.2%   84.7%        -4.5%

 

Revenues and NOI decreased by approximately $1.4 million and $0.9 million, respectively, for the six months ended June 30, 2018 compared to the same period in 2017 as a result of the disposition of Oakview Plaza. Revenues and NOI decreased by approximately $0.4 million and $0.1 million, respectively, for the six months ended June 30, 2018 compared to the same period in 2017 for our remaining retail properties primarily as a result of the lower average occupancy rate during the 2018 period.

 

Multi-Family Residential Segment

 

   For the Six Months Ended June 30,   Variance Increase/(Decrease) 
   2018   2017   $   % 
             
Revenues  $4,446   $4,325   $121    2.8%
NOI   3,417    3,321    96    2.9%
Average Occupancy Rate for period   97.9%   97.6%        0.3%

 

Revenues, NOI and average occupancy were relatively flat for Gantry Park, our only multi-family residential property.

 

Industrial Segment

 

   For the Six Months Ended June 30,   Variance Increase/(Decrease) 
   2018   2017   $   % 
             
Revenues  $3,015   $3,102   $(87)   -2.8%
NOI   1,642    1,677    (35)   -2.1%
Average Occupancy Rate for period   73.6%   71.1%        2.5%

 

Revenues and NOI decreased for the six months ended June 30, 2018 compared to the same period in 2017 primarily as a result of the disposition of the San Antonio Assets on June 5, 2018.

 

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Hospitality Segment

 

   For the Six Months Ended June 30, 
   2018   2017 
     
Revenues  $-   $11,420 
NOI   -    2,144 
Average Occupancy Rate for period   0.0%   67.8%
Rev PAR  $-   $86.06 

 

On September 7, 2017, the Company disposed of the DoubleTree – Danvers, which was its only remaining consolidated hospitality property and therefore, no longer has a Hospitality Segment.

 

Financial Condition, Liquidity and Capital Resources   

 

Overview:

 

Rental income, interest and dividend income and borrowings are our principal source of funds to pay operating expenses, scheduled debt service, capital expenditures and distributions, excluding non-recurring capital expenditures.

 

We expect to meet our short-term liquidity requirements, including the funding of our remaining contributions for investments in related parties (Preferred Investments) of up to $6.4 million as of June 30, 2018, generally through working capital and borrowings. As of June 30, 2018, we had approximately $76.0 million of cash and cash equivalents on hand and $118.5 million of marketable securities, available for sale. 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.

 

We currently have $118.8 million of outstanding mortgage debt and an $18.6 million outstanding under a line of credit. 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 the independent directors and is disclosed to our stockholders. We may also incur short-term indebtedness, having a maturity of two years or less.

 

Our borrowings consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. We typically have obtained level payment financing, meaning that the amount of debt service payable would be substantially the same each year. As such, most of the mortgages on our properties provide for a so-called “balloon” payment and are at a fixed interest rate.

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.

 

On May 29, 2018, we repaid in full our $20.4 million recourse mortgage loan secured by the St. Augustine Outlet Center located in St. Augustine, Florida, with a scheduled maturity in August 2018.

 

Certain of our debt agreements require the maintenance of certain ratios, including debt service coverage. We are currently in compliance with all of its financial debt covenants other than the debt originally associated with a portfolio of industrial properties (collectively, the “Gulf Coast Industrial Portfolio”) located in New Orleans, Louisiana (seven properties), Baton Rouge, Louisiana (three properties) and San Antonio, Texas (four properties), as discussed below.

 

As a result of not meeting certain debt service coverage ratios on the non-recourse mortgage indebtedness secured by the Gulf Coast Industrial Portfolio (the “Gulf Coast Industrial Portfolio Mortgage”), the lender elected to retain the excess cash flow from these properties beginning in July 2011.  During the third quarter of 2012, the Gulf Coast Industrial Portfolio Mortgage was transferred to a special servicer, who discontinued scheduled debt service payments and notified the Company that the Gulf Coast Industrial Portfolio Mortgage was in default and although originally due in February 2017 became due on demand.

 

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On June 5, 2018, the special servicer completed a partial foreclosure of the Gulf Coast Industrial Portfolio pursuant to which it foreclosed on the four properties located in San Antonio, Texas (the “San Antonio Assets”.) The San Antonio Assets were sold in a foreclosure sale by the special servicer for an aggregate amount of approximately $20.7 million. (See Note 6)

 

Upon consummation of the foreclosure sale, the buyers assumed the significant risks and rewards of ownership and took legal title and physical possession of the San Antonio Assets for the aggregate sales price of $20.7 million. We simultaneously received an aggregate credit of approximately $20.7 million against the total indebtedness of the Gulf Coast Industrial Portfolio Mortgage, of which $19.6 million and $1.1 million were applied by us against the outstanding principal and outstanding accrued interest payable respectively, under the Gulf Coast Industrial Portfolio Mortgage.

 

As a result, the remaining outstanding principal balance of the Gulf Coast Industrial Portfolio Mortgage was approximately $30.6 million as of June 30, 2018. Although the special servicer is not currently charging or being paid interest at the stated default rate, we have been accruing default interest expense on the Gulf Coast Industrial Portfolio Mortgage pursuant to the terms of its loan agreement.

 

Additionally, the Company previously accrued default interest expense on a non-recourse mortgage loan (the “Oakview Plaza Mortgage”), pursuant to the terms of its loan agreement during the period from January 2017 through September 2017. The Oakview Plaza Mortgage was secured by a retail shopping center located in Omaha, Nebraska (“Oakview Plaza”). The lender foreclosed on Oakview Plaza in September 2017.

 

Default interest expense related to the Gulf Coast Industrial Portfolio Mortgage of $0.5 million and $1.0 million was accrued during the three and six months ended June 30, 2018, respectively, and default interest expense related to both the Gulf Coast Industrial Mortgage and the Oakview Plaza Mortgage of $0.8 million and $1.7 million was accrued during the three and six months ended June 30, 2017, respectively. Cumulative accrued default interest expense (solely related to the Gulf Coast Industrial Portfolio Mortgage) of $12.2 million and $11.2 million is included in accounts payable, accrued expenses and other liabilities on our consolidated balance sheets as of June 30, 2018 and December 31, 2017, respectively.  However, we do not expect to pay any of the accrued default interest expense as the Gulf Coast Industrial Portfolio Mortgage is non-recourse.  Additionally, we believe the continued loss of excess cash flow from the Gulf Coast Industrial Portfolio and the special servicer’s placement of the non-recourse mortgage indebtedness in default will not have a material impact on our results of operations or financial position.

 

Other than the Gulf Coast Industrial Portfolio Mortgage, we have no additional significant maturities of mortgage debt over the next 12 months.

 

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. As of June 30, 2018, our total borrowings of $137.4 million represented 39% of net assets.

 

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

 

We may also obtain lines of credit to be used to acquire properties or real estate-related assets. These lines of credit will be at prevailing market terms and will be repaid from proceeds from the sale or refinancing of properties, working capital or permanent financing. Our Sponsor or its affiliates may guarantee the lines of credit although they will not be obligated to do so.

 

In addition to meeting working capital needs and distributions, if any, to our stockholders, our capital resources are used to make certain payments to our Advisor and our Property Manager, including payments related to asset acquisition fees, development fees and leasing commissions, asset management fees, the reimbursement of acquisition related expenses to our Advisor and property management fees. We also reimburse our Advisor and its affiliates for actual expenses it incurs for administrative and other services provided to us. Additionally, the Operating Partnership may be required to make distributions to Lightstone SLP, LLC, an affiliate of the Advisor.

 

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The following table represents the fees incurred associated with the payments to our Advisor and our Property Manager for the periods indicated:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2018   2017   2018   2017 
Asset management fees (general and administrative costs)  $427   $565   $891   $1,128 
Property management fees (property operating expenses)   136    186    289    376 
Development fees and leasing commissions*   42    99    120    581 
Total  $605   $850   $1,300   $2,085 

 

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

 

Summary of Cash Flows

 

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

 

   For the Six Months Ended June 30, 
   2018   2017 
     
Net cash flows provided by operating activities  $9,278   $12,616 
Net cash flows used in investing activities   (15,960)   (3,533)
Net cash flows used in financing activities   (33,846)   (12,266)
Net change in cash and cash equivalents   (40,528)   (3,183)
           
Cash and cash equivalents, beginning of year   119,219    108,357 
Cash and cash equivalents, end of the period  $78,691   $105,174 

 

Our principal sources of cash flow are derived from the operation of our rental properties, interest and dividend income on our marketable securities and real estate-related investments, as well as loan proceeds and proceeds from redemptions of preferred investments in related parties. We intend that our properties and real estate-related investments will provide a relatively consistent stream of cash flow that provides us with resources to fund operating expenses, debt service and quarterly distributions if declared by our board of directors.

 

Our principal demands for liquidity are (i) our property operating expenses, (ii) real estate taxes, (iii) insurance costs, (iv) leasing costs and related tenant improvements, (v) capital expenditures, (vi) acquisition, investment and development activities, (vii) scheduled debt service and (viii) distributions to our stockholders and noncontrolling interests. The principal sources of funding for our operations are operating cash flows and proceeds from (i) the sale and redemption of marketable securities, (ii) the selective disposition of properties or interests in properties, (iii) redemptions of our preferred investments in related parties, (iv) the issuance of equity and debt securities and (v) the placement of mortgage loans or other indebtedness.

 

Operating activities

 

Net cash flows provided by operating activities of $9.3 million for the six months ended June 30, 2018 consists of the following:

 

·cash inflows of approximately $9.1 million from our net income after adjustment for non-cash items; and

 

·cash inflows of approximately $0.2 million associated with the net changes in operating assets and liabilities.

 

Investing activities

 

The net cash used in investing activities of $16.0 million for the six months ended June 30, 2018 consists primarily of the following:

 

·net purchases of investment property of approximately $0.8 million;

 

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·net proceeds from preferred investments in related parties of $47.2 million; and

 

·net purchases of marketable securities of $62.4 million;

 

Financing activities

 

The net cash used in financing activities of approximately $33.8 million for the six months ended June 30, 2018 is primarily related to the following:

 

·distributions to our common shareholders of $8.7 million;

 

·redemptions and cancellation of common stock of $2.3 million;

 

·aggregate distributions to our noncontrolling interests of $1.6 million; and

 

·debt principal payments $21.2 million.

 

Preferred Investments

 

We have entered into several agreements with various related party entities that provide for us to make preferred contributions pursuant to certain instruments (the “Preferred Investments”) that entitle us to monthly preferred distributions. The Preferred Investments had an aggregate balance of $111.1 million and $158.3 million as of June 30, 2018 and December 31, 2017, respectively, and are classified as held-to-maturity securities, recorded at cost and included in investments in related parties on the consolidated balance sheets. The fair value of these investments approximated their carrying values based on market rates for similar instruments.

 

During the six months ended June 30, 2018, we made an aggregate $12.8 million of additional contributions and redeemed $60.0 million of the Preferred Investments and as of June 30, 2018, remaining contributions of up to $6.4 million were unfunded.

 

The Preferred Investments are summarized as follows:

 

      

Preferred

Investment Balance

  

Unfunded

Contributions

   Investment Income 
       As of   As of   As of   Three Months Ended June 30,   Six Months Ended June 30, 
Preferred Investments  Dividend Rate   June 30, 2018   December 31, 2017   June 30, 2018   2018   2017   2018   2017 
40 East End Avenue (1)   8% to 12%    30,000    30,000    -    910    910    1,810    1,543 
30-02 39th Avenue   9% to 12%    10,000    10,000    -    303    304    603    639 
485 7th Avenue   12%   -    60,000    -    70    1,820    1,095    3,620 
East 11th Street   12%   57,500    46,119    -    1,726    1,035    3,207    1,980 
Miami Moxy   12%   13,608    12,195    6,392    398    309    772    559 
Total Preferred Investments       $111,108   $158,314   $6,392   $3,407   $4,378   $7,487   $8,341 

 

Note:

(1) - The dividend rate increased from 8% to 12% during March 2017 in connection with the procurement of construction financing on this project.

 

Distribution Reinvestment Plan (“DRIP”) and Share Repurchase Program

 

Our DRIP previously provided 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 restrictions. From our inception through December 31, 2017 we repurchased approximately 3.9 million shares of common stock. For the six months ended June 30, 2018, we repurchased 235,765 shares of common stock for $10.00 per share, pursuant to our share repurchase program. We funded share repurchases for the periods noted above from the cumulative proceeds of the sale of our shares pursuant to our DRIP and from our operating funds.

 

On May 10, 2018, the Board of Directors amended the share repurchase program to (i) change to the price for all purchases under our share repurchase program from $10.00 per share to 92% of the estimated net asset value per share of the Company’s common stock (previously the purchase price was $10.00 per share) and (ii) increase the number of shares repurchased during any calendar year from two (2.0%) of the weighted average number of shares outstanding during the prior calendar year to five (5.0%) of the weighted average number of shares outstanding during the previous twelve months.

 

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.

 

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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 our contractual obligations outstanding over the next five years and thereafter as of June 30, 2018.

 

Contractual Obligations  2018   2019   2020   2021   2022   Thereafter   Total 
Mortgage Payable  $31,427   $1,621   $14,924   $1,328   $1,389   $68,151   $118,840 
Interest Payments 1,2   2,027    3,988    3,593    3,191    3,130    5,983    21,912 
                                    
Total Contractual Obligations  $33,454   $5,609   $18,517   $4,519   $4,519   $74,134   $140,752 

 

1)The non-recourse mortgage associated with the Gulf Coast Industrial Portfolio is due on demand and therefore, no future interest payments on this mortgage are included in these amounts.

 

Notes Payable

  

Margin Loan

 

We have access to a margin loan (the “Margin Loan”) from a financial institution that holds custody of certain of our marketable securities. The Margin Loan, which is due on demand, bears interest at Libor plus 0.85% (2.94% as of June 30, 2018) and 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. There were no amounts outstanding under the Margin Loan as of June 30, 2018 and December 31, 2017.

 

Line of Credit

 

We have a non-revolving credit facility (the “Line of Credit”) with a financial institution which permits borrowings up to $25.0 million. The Line of Credit expires on June 19, 2019 and bears interest at Libor plus 1.35% (3.44% as of June 30, 2018). The Line of Credit is collateralized by approximately 209,000 Marco OP Units and PRO guaranteed the Line of Credit. The amount outstanding under the Line of Credit was $18.6 million as of June 30, 2018 and is included in Notes Payable on the consolidated balance sheets. We currently intend to seek to extend or replace the Line of Credit on or before its expiration. If we are unable to extend or replace the Line of Credit, we will repay the then outstanding balance in full at the expiration date using working capital, cash proceeds from the sale of assets and/or redemptions of our preferred investments in related parties.

 

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.

 

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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 in the calculation of FFO and MFFO. Items are presented net of non-controlling interest portions where applicable.

 

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   For the Three Months Ended   For the Six Months Ended 
   June 30, 2018   June 30, 2017   June 30, 2018   June 30, 2017 
Net income  $12,913   $6,550   $12,118   $7,855 
FFO adjustments:                    
Depreciation and amortization:                    
Depreciation and amortization of real estate assets   1,805    2,721    3,578    5,514 
Equity in depreciation and amortization for unconsolidated affiliated real estate entities   -    -    -    - 
Adjustments to equity in earnings from unconsolidated entities, net   -    -    -    - 
Gain on disposal of investment property   (7,137)   -    (7,137)   - 
Gain on satisfaction of mortgage receivable   -    (3,216)   -    (3,216)
                     
FFO   7,581    6,055    8,559    10,153 
MFFO adjustments:                    
Other Adjustment                    
Acquisition and other transaction related costs expensed(1)   -    -    -    - 
Amortization of above or below market leases and liabilities(2)   (35)   (33)   (70)   (64)
Loss on debt extinguishment   117    -    117    - 
Accretion of discounts and amortization of premiums on debt investments   -    -    -    - 
Mark-to-market adjustments(3)   (3,510)   8    189    (57)
Non-recurring (losses)/gains from extinguishment/sale of debt, derivatives or securities holdings(4)   75    16    78    49 
                     
MFFO   4,228    6,046    8,873    10,081 
Straight-line rent(5)  $97   $11   $112   $(56)
MFFO - IPA recommended format(6)  $4,325   $6,057   $8,985   $10,025 
                     
Net income  $12,913   $6,550   $12,118   $7,855 
Less: loss attributable to noncontrolling interests   (753)   (312)   (643)   (523)
Net income applicable to Company's common shares  $12,160   $6,238   $11,475   $7,332 
Net income  per common share, basic and diluted  $0.49   $0.25   $0.46   $0.29 
                     
FFO  $7,581   $6,055   $8,559   $10,153 
Less: FFO attributable to noncontrolling interests   (806)   (464)   (895)   (891)
FFO attributable to Company's common shares  $6,775   $5,591   $7,664   $9,262 
FFO per common share, basic and diluted  $0.27   $0.22   $0.31   $0.37 
                     
MFFO - IPA recommended format  $4,325   $6,057   $8,985   $10,025 
Less: MFFO attributable to noncontrolling interests   (471)   (459)   (922)   (878)
MFFO attributable to Company's common shares  $3,854   $5,598   $8,063   $9,147 
                     
Weighted average number of common shares                    
outstanding, basic and diluted   24,650    24,989    24,715    25,024 

 

Notes:

(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 equity 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.

 

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(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.
(6)Our MFFO results include certain unusual items as set forth in the table below. We believe it is helpful to our investors in understanding our operating results to both highlight them and present adjusted MFFO excluding their impact (as shown below).

 

   For the Three Months Ended   For the Six Months Ended 
   June 30, 2018   June 30, 2017   June 30, 2018   June 30, 2017 
Gulf Coast Industrial Portfolio - Default interest expense(a)  $(451)  $(615)  $(953)  $(1,009)
Oakview Plaza - Default interest expenes(b)   -    (216)   -    (718)
Total before allocations to noncontrolling interests   (451)   (831)   (953)   (1,727)
Allocations to noncontrolling interests   9    16    19    33 
Total after allocations to noncontrolling interests  $(442)  $(815)  $(934)  $(1,694)

 

(a)Represents the accrual of default interest expense on our non-recourse mortgage loan collateralized by our Gulf Coast Industrial Portfolio Although the lender for the Gulf Coast Industrial Portfolio is currently not charging us or being paid interest at the stated default rate, we have accrued interest at the default rate pursuant to the terms of the respective loan agreement. Additionally, we have had various discussions with the special servicer to restructure the terms of the non-recourse mortgage loan and do not expect to pay any of the accrued default interest.
(b)Represents the accrual of default interest expense on our non-recourse mortgage loan secured by Oakview Plaza. The Oakview Plaza Mortgage Loan matured in January 2017 and was not repaid which constituted a maturity default. In connection with the Oakview Plaza Foreclosure which occurred on September 15, 2017, approximately $1.0 million of accrued default interest was extinguished.

 

Excluding the impact of these unusual items from our MFFO, after taking into consideration allocations to noncontrolling interests, our adjusted MFFO would have been $4,296 and $6,413 for the three months ended June 30, 2018 and 2017, respectively and $8,997 and $10,841 for the six months ended June 30, 2018 and 2017, respectively.

 

The table below presents our cumulative distributions paid and cumulative FFO attributable to the Company’s common shares:

 

  

From inception

through

 
   June 30, 2018 
     
FFO attributable to  Company’s common shares  $200,691 
Distributions paid  $207,225 

 

On July 16, 2018, the distribution for the three-month period ending June 30, 2018 of $4.3 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 to 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. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk.

 

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

 

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As of June 30, 2018, we held various marketable securities with a fair value of approximately $118.5 million, which are available for sale for general investment return purposes. We regularly review the market prices of these investments for impairment purposes. As of June 30, 2018, a hypothetical adverse 10% movement in market values would result in a hypothetical loss in fair value of approximately $11.9 million.

 

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

 

   2018   2019   2020   2021   2022   Thereafter   Total 
Mortgages Payable  $31,427    1,621    14,924    1,328    1,389    68,151   $118,840 

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, tenant and other accounts receivable, accounts payable, accrued expenses and other liabilities and due to related parties approximated their fair values because of the short maturity of these instruments. The estimated fair value of the notes payable (line of credit) approximated its carrying value ($18.6 million) because of its floating interest rate.

 

The estimated fair value of the Company’s mortgage debt is summarized as follows:

 

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

Carrying

Amount

  

Estimated

Fair
Value

  

Carrying

Amount

  

Estimated

Fair
Value

 
Mortgages payable  $118.8   $116.1   $159.6   $158.6 

 

The fair value of the mortgage payable was determined by discounting the future contractual interest and principal payments by estimated current market interest rates.

 

 In addition to changes in interest rates, the value of our real estate and real estate related investments is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of lessees, which may affect our ability to refinance our debt if necessary.

 

 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, we may become subject to legal proceedings, claims or disputes.

 

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

 

ITEM 1A. RISK FACTORS

 

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

 

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

 

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

 

Not applicable.

 

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, 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

 

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

 

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