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EX-32.1 - EXHIBIT 32.1 - Lightstone Value Plus Real Estate Investment Trust V, Inc.tv500258_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - Lightstone Value Plus Real Estate Investment Trust V, Inc.tv500258_ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2018

 

Commission File Number: 000-53650

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland   20-8198863
(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)

 

Registrant’s telephone number, including area code:  (888) 808-7348

 

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 x 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 x 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:

 

Large accelerated filer ¨   Accelerated filer ¨
Non-accelerated filer x (Do not check if a smaller reporting company)   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 x

 

As of August 1, 2018, the Registrant had approximately 24.5 million shares of common stock outstanding.

 

 

 

 

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST V, INC.

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 and Comprehensive Loss for the Three and Six Months Ended June 30, 2018 and 2017 4
     
  Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2018 5
     
  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 6
     
  Notes to Consolidated Financial Statements 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
     
Item 4. Controls and Procedures 31
     
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings 32
     
Item 1a. Risk Factors 32
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
     
Item 3. Defaults Upon Senior Securities 33
     
Item 4. Mine Safety Disclosures 33
     
Item 5. Other Information 33
     
Item 6. Exhibits 33

 

 2 

 

 

PART I

FINANCIAL INFORMATION

 

Item 1.                 Financial Statements.

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Consolidated Balance Sheets

(dollars in thousands, except per share amounts)

 

   June 30, 2018   December 31, 2017 
   (Unaudited)     
Assets          
Investment property:          
Land and improvements  $40,450   $40,354 
Building and improvements   157,905    157,073 
Furniture, fixtures and equipment   6,057    5,812 
Gross investment property   204,412    203,239 
Less accumulated depreciation   (42,809)   (38,373)
Net investment property   161,603    164,866 
           
Investment in unconsolidated joint venture   10,944    10,944 
Cash and cash equivalents   61,402    52,147 
Marketable securities, available for sale   14,836    - 
Restricted cash   4,344    5,213 
Prepaid expenses and other assets   3,039    2,994 
           
Total Assets  $256,168   $236,164 
           
Liabilities and Stockholders' Equity          
Notes payable, net  $116,376   $89,921 
Accounts payable, accrued and other liabilities   4,808    4,150 
Payables to related parties   -    33 
Distributions payable to noncontrolling interests   3    27 
Accrued property tax   3,257    2,398 
Total liabilities   124,444    96,529 
           
Commitments and Contingencies          
           
Stockholders' Equity:          
Preferred stock, $.0001 par value per share; 50,000,000 shares authorized, none issued and outstanding   -    - 
Convertible stock, $.0001 par value per share; 1,000 shares authorized, issued and outstanding   -    - 
Common stock, $.0001 par value per share; 350,000,000 shares authorized, 24,488,494 and 24,646,494 shares issued and outstanding, respectively   2    2 
Additional paid-in-capital   224,097    224,923 
Accumulated other comprehensive loss   (205)   (27)
Accumulated deficit   (93,513)   (90,108)
Total Company stockholders' equity   130,381    134,790 
           
Noncontrolling interests   1,343    4,845 
           
Total Stockholder's Equity   131,724    139,635 
           
Total Liabilities and Stockholders' Equity  $256,168   $236,164 

 

See Notes to Consolidated Financial Statements.

 

 3 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(dollars and shares in thousands, except per share amounts)

(Unaudited)

 

   For the Three Months Ended June 30,   For the Six Months Ended June 30, 
   2018   2017   2018   2017 
                 
Revenues                    
Rental revenues  $6,800   $6,151   $13,486   $12,223 
Hotel revenues   -    5,209    -    10,554 
Total revenues   6,800    11,360    13,486    22,777 
Expenses                    
Property operating expenses   2,211    1,974    4,652    4,061 
Hotel operating expenses   -    3,676    -    7,246 
Interest expense, net   1,362    1,773    2,686    3,242 
Real estate taxes   1,141    1,118    2,271    2,225 
Property management fees   248    363    494    758 
Asset management fees   392    510    782    1,019 
General and administrative   978    963    1,905    1,761 
Depreciation and amortization   2,389    2,568    4,818    5,146 
Total expenses   8,721    12,945    17,608    25,458 
Interest income, net   172    65    304    127 
Other (expense) income   (1)   3    16    4 
Loss before gain on sale of real estate and other assets   (1,750)   (1,517)   (3,802)   (2,550)
Gain on sale of real estate and other assets   60    -    307    282 
Net loss   (1,690)   (1,517)   (3,495)   (2,268)
Net loss (income) attributable to noncontrolling interests   117    (22)   90    (127)
Net loss attributable to the Company's shares  $(1,573)  $(1,539)  $(3,405)  $(2,395)
Weighted average shares outstanding:                    
Basic and diluted   24,515    25,026    24,561    25,098 
Basic and diluted loss per share  $(0.06)  $(0.06)  $(0.14)  $(0.10)
Comprehensive income (loss):                    
Net loss  $(1,690)  $(1,517)  $(3,495)  $(2,268)
Other comprehensive income (loss):                    
Holding loss on marketable securities, available for sale   (40)   -    (179)   - 
Foreign currency translation (loss) gain   (21)   233    1    287 
Total other comprehensive (loss) income   (61)   233    (178)   287 
Comprehensive loss   (1,751)   (1,284)   (3,673)   (1,981)
Comprehensive loss (income) attributable to noncontrolling interests   117    (22)   90    (127)
Comprehensive loss attributable to the Company's shares  $(1,634)  $(1,306)  $(3,583)  $(2,108)

 

See Notes to Consolidated Financial Statements.

 

 4 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Consolidated Statement of Stockholders’ Equity

(dollars and shares in thousands)

(Unaudited)

 

           Additional               Total 
   Convertible Stock   Common Stock   Paid-In   Accumulated Other       Noncontrolling   Stockholders' 
   Shares   Amount   Shares   Amount   Capital   Comprehensive Loss   Accumulated Deficit   Interests   Equity 
                                     
BALANCE, December 31, 2017   1   $-    24,647   $2   $224,923   $(27)  $(90,108)  $4,845   $139,635 
                                              
Net loss   -    -    -    -    -    -    (3,405)   (90)   (3,495)
Distributions to noncontrolling interest holders   -    -    -    -    -    -    -    (3,412)   (3,412)
Redemption and cancellation of shares   -    -    (158)   -    (826)   -    -    -    (826)
Other comprehensive loss:                                             
Holding loss on marketable securities, available for sale   -    -    -    -    -    (179)   -    -    (179)
Foreign currency translation gain   -    -    -    -    -    1    -    -    1 
                                              
BALANCE, June 30, 2018   1   $-    24,489   $2   $224,097   $(205)  $(93,513)  $1,343   $131,724 

 

See Notes to Consolidated Financial Statements.

 

 5 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Consolidated Statements of Cash Flows

(dollars in thousands)

(Unaudited)

 

   For the Six Months Ended June 30, 
   2018   2017 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(3,495)  $(2,268)
Adjustments to reconcile net loss to net cash provided by operating activities:          
Depreciation and amortization   4,818    5,065 
Amortization of deferred financing fees   155    289 
Other non-cash adjustments   (309)   (282)
Changes in operating assets and liabilities:          
Increase in prepaid expenses and other assets   (420)   (558)
Increase in accounts payable, accrued property tax and accrued and other liabilities   1,746    1,130 
Decrease in payables to related parties   (33)   (356)
           
Net cash provided by operating activities   2,462    3,020 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Additions of real estate and furniture, fixtures, and equipment   (1,169)   (851)
Purchase of marketable securities   (15,392)   - 
Proceeds from sale of marketable securities   375    - 
           
Net cash used in investing activities   (16,186)   (851)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Payments on notes payable   (33,592)   (39,068)
Proceeds from notes payable   61,374    36,000 
Financing costs   (1,411)   (1,465)
Redemptions of common stock   (826)   (1,147)
Contributions from noncontrolling interest holders   -    30 
Distributions to noncontrolling interest holders   (3,436)   (242)
           
Net cash provided by/(used in) financing activities   22,109    (5,892)
           
Effect of exchange rate changes on cash, cash equivalents and restricted cash   1    287 
Net change in cash, cash equivalents and restricted cash   8,386    (3,436)
Cash, cash equivalents and restricted cash, beginning of year   57,360    73,212 
Cash, cash equivalents and restricted cash, end of period  $65,746   $69,776 
           
Supplemental cash flow information for the periods indicated is as follows:          
           
Cash paid for interest  $1,803   $1,484 
Capital expenditures for real estate in accrued liabilities and accounts payable  $74   $- 
Accrued distributions to noncontrolling interest  $3   $18 
Holding loss on marketable securities, available for sale  $179  $- 

 

See Notes to Consolidated Financial Statements.

 

 6 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

1.Business and Organization

 

Business

 

Lightstone Value Plus Real Estate Investment Trust V, Inc., which was previously named Behringer Harvard Opportunity REIT II, Inc. prior to July 20, 2017, (which may be referred to as the “Company,” “we,” “us,” or “our”), was organized as a Maryland corporation on January 9, 2007 and has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes.

 

We were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis. In particular, we have focused generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment, or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who are distressed or face time-sensitive deadlines.  We have acquired a wide variety of commercial properties, including office, industrial, retail, hospitality, and multifamily.  We have purchased existing, income-producing properties, and newly-constructed properties. We have also invested in other real estate-related investments such as mortgage and mezzanine loans. We intend to hold the various real properties in which we have invested until such time as our board of directors determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that the objectives will not be met. As of June 30, 2018, we had eight real estate investments, seven of which were consolidated (one wholly owned property and six properties consolidated through investments in joint ventures) and one real estate investment which we account for under the equity method.

 

Substantially all of our business is conducted through Behringer Harvard Opportunity OP II LP, a limited partnership organized in Delaware (the “Operating Partnership”).  As of June 30, 2018, our wholly-owned subsidiary, BHO II, Inc., a Delaware corporation, owned a 0.1% partnership interest in the Operating Partnership as its sole general partner.  As of June 30, 2018, our wholly-owned subsidiary, BHO Business Trust II, a Maryland business trust, was the sole limited partner of the Operating Partnership and owned the remaining 99.9% interest in the Operating Partnership.

 

Our business has been managed by an external advisor since the commencement of our initial public offering, and we have no employees. From January 4, 2008 through February 10, 2017, an affiliate of Stratera Services, LLC, formerly known as “Behringer Harvard Holdings, LLC” (“Behringer”), acted as our external advisor (the “Behringer Advisor”). On February 10, 2017, we terminated our engagement of the Behringer Advisor and engaged affiliates of the Lightstone Group (“Lightstone”), LSG-BH II Advisor LLC and LSG Development Advisor LLC (collectively, the “Advisor”), to provide advisory services to us. The external advisor is responsible for managing our day-to-day affairs and for services related to the management of our assets.

 

Organization

 

In connection with our initial capitalization, we issued 22.5 thousand shares of our common stock and 1.0 thousand shares of our convertible stock to Behringer on January 19, 2007.  Behringer transferred its shares of convertible stock to one of its affiliates on April 2, 2010. Behringer 's affiliate transferred its shares of convertible stock to an affiliate of Lightstone on February 10, 2017. As of June 30, 2018, we had 24.5 million shares of common stock outstanding and 1.0 thousand shares of convertible stock outstanding. The outstanding convertible stock is held by an affiliate of Lightstone.

 

 7 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

Our common stock is not currently listed on a national securities exchange.  The timing of a liquidity event for our stockholders will depend upon then prevailing market conditions. We previously targeted the commencement of a liquidity event within six years after the termination of our initial public offering, which occurred on July 3, 2011. On June 29, 2017, our board of directors elected to extend the targeted timeline an additional six years until June 30, 2023 based on their assessment of our investment objectives and liquidity options for our stockholders. However, we can provide no assurances as to the actual timing of the commencement of a liquidity event for our stockholders or the ultimate liquidation of the Company. We will seek stockholder approval prior to liquidating our entire portfolio.

 

2.Interim Unaudited Financial Information

 

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which was filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2018.  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 V, Inc. 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 GAAP for complete financial statements.

 

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.

 

3.Summary of Significant Accounting Policies

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  The most significant assumptions and estimates relate to the valuation of real estate including impairment and depreciable lives. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.

 

Principles of Consolidation and Basis of Presentation

 

Our consolidated financial statements include our accounts and the accounts of other subsidiaries over which we have control. All inter-company transactions, balances, and profits have been eliminated in consolidation. In addition, interests in entities acquired are evaluated based on applicable GAAP, and entities deemed to be variable interest entities (“VIE”) in which we are the primary beneficiary are also consolidated. If the interest in the entity is determined not to be a VIE, then the entity is evaluated for consolidation based on legal form, economic substance, and the extent to which we have control, substantive participating rights or both under the respective ownership agreement. For entities in which we have less than a controlling interest or entities which we are not deemed to be the primary beneficiary, we account for the investment using the equity method of accounting.

 

There are judgments and estimates involved in determining if an entity in which we have made an investment is a VIE and, if so, whether we are the primary beneficiary. The entity is evaluated to determine if it is a VIE by, among other things, calculating the percentage of equity being risked compared to the total equity of the entity. Determining expected future losses involves assumptions of various possibilities of the results of future operations of the entity, assigning a probability to each possibility, and using a discount rate to determine the net present value of those future losses. A change in the judgments, assumptions, and estimates outlined above could result in consolidating an entity that should not be consolidated or accounting for an investment using the equity method that should in fact be consolidated, the effects of which could be material to our consolidated financial statements.

 

 8 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

Restricted Cash

 

As required by our lenders, restricted cash is held in escrow accounts for anticipated capital expenditures, real estate taxes, and other reserves for 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. On occasion, restricted cash may also include certain funds temporarily placed in escrows with qualified intermediaries in order 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 our cash, cash equivalents, and restricted cash total as presented in our statements of cash flows for the six months ended June 30, 2018 and 2017:

 

   June 30, 
   2018   2017 
Cash and cash equivalents  $61,402   $64,890 
Restricted cash   4,344    4,886 
Total cash, cash equivalents and restricted cash  $65,746   $69,776 

 

Noncontrolling Interests

 

Noncontrolling interests represents the noncontrolling ownership interest’s proportionate share of the equity in our consolidated real estate investments.  Income and losses are allocated to noncontrolling interest holders based generally on their ownership percentage.   If a property reaches a defined return threshold, then it will result in distributions to noncontrolling interests which is different from the standard pro-rata allocation percentage. In certain instances, our joint venture agreements provide for liquidating distributions based on achieving certain return metrics (“promoted interest”).

 

Marketable Securities

 

Marketable securities currently consist of debt securities that are designated as available-for-sale and are recorded at fair value. Unrealized holding gains or losses for debt securities are reported as a component of accumulated other comprehensive income/(loss). Realized gains or losses resulting from the sale of these securities are determined based on the specific identification of the securities sold.

 

An impairment charge is recognized when the decline in the fair value of a security below the amortized cost basis is determined to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the duration and severity of any decline in fair value below our amortized cost basis, any adverse changes in the financial condition of the issuers’ and its intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

 

Earnings per Share

 

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

 

 9 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

4.New Accounting Pronouncements

 

Recently Adopted Accounting Pronouncements

 

Effective January 1, 2018 the Company adopted guidance issued by the Financial Accounting Standards Board (“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 transition method. Since the Company had no investments in equity securities, except those accounted for under the equity method prior to January 1, 2018, the adoption of this standard had no effect on its consolidated financial statements when adopted.

 

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.

 

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 using the modified retrospective transition method. The adoption of this pronouncement had no effect on our consolidated financial statements since, with the disposal of the Courtyard Kauai Coconut Beach Hotel in August 2017, 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 operations. 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 have been reclassified to conform to the current year presentation.

 

5.Financial Instruments

 

We determined the following disclosure of estimated fair values using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value. The use of different market assumptions or only estimation methodologies may have a material effect on the estimated fair value amounts.

 

 10 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

As of June 30, 2018 and December 31, 2017, management estimated that the carrying value of cash and cash equivalents, restricted cash, prepaid expenses and other assets, accounts payable, accrued and other liabilities, accrued property tax, payables to related parties, and distributions payable to noncontrolling interests were at amounts that reasonably approximated their fair value based on their highly-liquid nature and short-term maturities. The fair value of the notes payable is categorized as a Level 2 in the fair value hierarchy. The fair value was estimated using a discounted cash flow analysis valuation on the borrowing rates currently available for loans with similar terms and maturities. The fair value of the notes payable was determined by discounting the future contractual interest and principal payments by a market rate. Disclosure about fair value of financial instruments is based on pertinent information available to management as of June 30, 2018 and December 31, 2017. Carrying amounts of our notes payable and the related estimated fair value is summarized as follows:

 

   As of June 30, 2018   As of December 31, 2017 
   Carrying Amount   Estimated Fair
Value
   Carrying Amount   Estimated Fair
Value
 
Notes payable  $118,033   $118,266   $90,321   $91,449 

 

6.Marketable Securities and Fair Value Measurements

 

Marketable Securities

 

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

 

   As of June 30, 2018 
   Adjusted Cost   Gross Unrealized
Gains
   Gross Unrealized
Losses
   Fair Value 
Debt securities:                    
Corporate Bonds  $15,015   $1   $(180)  $14,836 

 

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

 

Fair Value Measurements

 

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

 

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

 

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

 

 11 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

  · 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.

 

The fair values of the Company’s investments in Corporate Bonds are measured using quoted prices for these investments; however, the markets for these assets are not active. As of June 30, 2018, all of the Company’s Corporate Bonds were classified as Level 2 assets and there were no transfers between the level classifications during the six months ended June 30, 2018.

 

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  $3,239 
Due in 1 year through 5 years   8,435 
Due in 5 year through 10 years   3,162 
Due after 10 years   - 
Total  $14,836 

 

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

 

7.Notes Payable

 

Notes payable 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
 
                       
River Club and the Townhomes at River Club  LIBOR + 1.78%   3.89%  May 1, 2025  $28,419   $30,358   $- 
                           
River Club and the Townhomes at River Club     (Repaid in full on May 1, 2018)        -    23,511 
                           
Gardens Medical Pavilion  LIBOR + 1.90%   4.47%  June 28, 2021   12,300    13,000    - 
                           
Lakes of Margate  5.49% and 5.92%   5.75%  January 1, 2020   13,384    13,831    13,973 
                           
Arbors Harbor Town  3.99%   3.99%  January 1, 2019   23,632    23,894    24,153 
                           
22 Exchange  3.93%   3.93%  Due on demand   18,935    18,935    18,963 
                           
Parkside  4.45%   4.45%  June 1, 2025   15,693    18,015    - 
                           
Parkside     (Repaid in full on June 1, 2018)        -    9,721 
                           
Total notes payable      4.28%     $112,363    118,033    90,321 
                           
Less: Deferred financing costs                   (1,657)   (400)
                           
Total notes payable, net                  $116,376   $89,921 

 

 12 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

On May 1, 2018, the Company entered into a non-recourse mortgage loan (the “River Club Mortgage”) in the amount of $30.4 million. The River Club Mortgage has a term of seven years, bears interest at Libor plus 1.78% and requires monthly interest-only payments during the first five years and interest and principal payments pursuant to a 30-year amortization schedule for the remaining two years through its stated maturity with the entire unpaid balance due upon maturity. The River Club Mortgage is cross-collateralized by the River Club and the Townhomes at River Club. At closing, approximately $23.4 million of the proceeds from the River Club Mortgage were used to repay in full the existing non-recourse mortgage loan on the River Club and Townhomes at River Club.

 

On June 1, 2018, the Company entered into a non-recourse mortgage loan (the “Parkside Mortgage”) in the amount of $18.0 million. The Parkside Mortgage has a term of seven years, bears interest at 4.45% and requires monthly interest and principal payments pursuant to a 30-year amortization schedule through its stated maturity with the entire unpaid balance due upon maturity. The Parkside Mortgage is collateralized by Parkside. At closing, approximately $9.6 million of the proceeds from the Parkside Mortgage were used to repay in full the existing non-recourse mortgage loan on Parkside.

 

On June 28, 2018, the Company entered into a non-recourse mortgage loan (the “Gardens Medical Mortgage”) in the amount of $13.0 million. The Gardens Medical Mortgage has a term of three years, bears interest at Libor plus 1.90% and requires monthly interest and principal payments through its stated maturity with the entire unpaid balance due upon maturity. The Gardens Medical Mortgage is collateralized by the Gardens Medical Pavilion.

 

For loans in place as of June 30, 2018, we have guaranteed payment of certain recourse liabilities with respect to certain customary nonrecourse carveouts as set forth in the guaranties in favor of the unaffiliated lenders with respect to the 22 Exchange notes payable.

 

We are subject to various customary financial covenants, including, maintaining minimum debt service coverage ratios, loan to value ratios and liquidity. We did not meet the debt service coverage requirements for our 22 Exchange loan for all of the quarterly periods in 2017 and as a result, the lender elected to sweep the cash from operations beginning in January 2018. Additionally, the cash flow from operations was not sufficient to fully pay the scheduled monthly debt service due on January 5, 2018, which constituted an event of default and therefore, the 22 Exchange loan which was scheduled to mature in May 2023 became due on demand. We received notice on January 9, 2018 that the 22 Exchange loan had been transferred to a special servicer effective immediately. Subsequently, the special servicer placed the property in receivership and has commenced foreclosure proceedings.

 

The Company is accruing default interest expense on the 22 Exchange loan pursuant to the terms of its loan agreement. Default interest expense of $0.2 million and $0.5 million was accrued during the three and six months ended June 30, 2018. As a result, accrued default interest expense of $0.5 million is included in accounts payable, accrued and other liabilities on our consolidated balance sheet as of June 30, 2018. However, the Company does not expect to pay any of the accrued default interest expense as the 22 Exchange loan is non-recourse to it. Additionally, the Company believes the continued loss of excess cash flow, the expected loss of this property and the special servicer’s placement of the non-recourse mortgage indebtedness in default will not have a material impact on our consolidated results of operations or financial position.

 

The following table provides information with respect to the contractual maturities and scheduled principal repayments of our indebtedness as of June 30, 2018.

 

   2018   2019   2020   2021   2022   Thereafter   Total 
                             
Principal maturities  $19,585   $24,474   $13,938   $12,748   $343   $46,945   $118,033 
                                    
Less: deferred financing costs                                 (1,657)
                                    
Total notes payable, net                                $116,376 

 

In addition to the 22 Exchange loan, as of June 30, 2018, the Company had debt of approximately $23.9 million associated with Arbors Harbor Town maturing in the next twelve months. If we do not dispose of Arbors Harbor Town by its maturity date we expect to repay the outstanding balance with available cash or refinance all or a portion of the balance outstanding.

 

 13 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

8.Distributions

 

U.S. federal tax law requires a REIT distribute at least 90% of its annual REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles, or GAAP) determined without regard to the deduction for dividends paid and excluding any net capital gain. In order to continue to qualify for REIT status, we may be required to make distributions in excess of cash available. Distributions are authorized at the discretion of our board of directors based on its analysis of our performance over the previous periods and expectations of performance for future periods. These analyses may include actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, general financial and market conditions, proceeds from asset sales, and other factors that our board of directors deems relevant. Our board of director’s decisions will be substantially influenced by the obligation to ensure that we maintain our federal tax status as a REIT. We cannot provide assurance that we will pay distributions at any particular level, or at all.

 

9.Related Party Transactions

 

Advisor

 

Our external advisor and certain of its affiliates may receive fees and compensation in connection with the management and sale of our assets based on an advisory management agreement, as amended and restated.

 

From January 4, 2008 through February 10, 2017, we were party to various advisory management agreements, each with a term of one year or less, with the Behringer Advisor. On February 10, 2017, we and the Behringer Advisor terminated the then existing advisory management agreement effective as of the close of business.

 

Concurrently, we engaged the Advisor to provide us with advisory services pursuant to various advisory management agreements, each with an initial term of one year. The fees earned by and expenses reimbursed to the Advisor are substantially the same as the fees earned by and expenses reimbursed to the Behringer Advisor. The following discussion describes the fees and expenses payable to our external advisor and its respective affiliates under the various advisory management agreements.

 

We pay our external advisor acquisition and advisory fees of 1.5% of the amount paid in respect of the purchase, development, construction, or improvement of each asset we acquire, including any debt attributable to those assets. In addition, we pay acquisition and advisory fees of 1.5% of the funds advanced in respect of a loan investment. We incurred no acquisition and advisory fees payable to either of our external advisors for the three and six months ended June 30, 2018 and 2017 because we had no acquisitions during these periods.

 

We also pay our external advisor an acquisition expense reimbursement in the amount of (i) 0.25% of the funds paid for purchasing an asset, including any debt attributable to the asset, plus 0.25% of the funds budgeted for development, construction, or improvement in the case of assets that we acquire and intend to develop, construct, or improve or (ii) 0.25% of the funds advanced in respect of a loan investment. We also pay third parties, or reimburse our external advisor or its affiliates, for any investment-related expenses due to third parties in the case of a completed investment, including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisals, accounting fees and expenses, third-party brokerage or finder’s fees, title insurance, premium expenses, and other closing costs.

 

Our external advisor and its affiliates are also responsible for paying all of the investment-related expenses that we or the external advisor or its affiliates incur that are due to third parties or related to the additional services provided by our external advisor as described above with respect to investments we do not make, other than certain non-refundable payments made in connection with any acquisition. For the three and six months ended June 30, 2018 and 2017, we incurred no acquisition expense reimbursements.

 

 14 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

Prior to June 10, 2018 we paid our external advisor a debt financing fee of 0.5% of the amount available under any loan or line of credit made available to us and pay directly all third-party costs associated with obtaining the debt financing, on June 10, 2018 we amended the advisory management agreement with our advisor and increased the debt financing fee to 1.0% of the amount available under any loan or line of credit made available to us and pay directly all third-party costs associated with obtaining the debt financing. For the three and six months ended June 30, 2018 we incurred $0.3 million of debt financing fees and for the three and six months ended June 30, 2017 we incurred $0.2 million of debt financing fees.

 

We pay our external advisor a development fee in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the project if such affiliate provides the development services and if a majority of our independent directors determines that such development fee is fair and reasonable to us.  We incurred no development fees for the three and six months ended June 30, 2018 and 2017.

 

We pay our external advisor a monthly asset management fee of one-twelfth of 0.7% of the value of each asset. The value of our assets will be the value as determined in connection with the establishment and publication of an estimated net asset value (“NAV”) per share unless the asset was acquired after our publication of a NAV per share (in which case the value of the asset will be the contractual purchase price of the asset). For the three and six months ended June 30, 2018 we expensed $0.4 million and $0.8 million of asset management fees payable to our external advisor and for the three and six months ended June 30, 2017 we expensed $0.5 million and $1.0 million of asset management fees payable to each of our external advisors.

 

Our external advisor is responsible for paying all of the expenses it incurs associated with persons employed by the external advisor to the extent that they provide services to us for which our external advisor receives an acquisition, asset management, or debt financing fee, including wages and benefits of the applicable personnel. Instead of reimbursing our external advisor for specific expenses paid or incurred in connection with providing services to us, we pay our external advisor an administrative services fee, also referred to as an administrative services reimbursement (the “Administrative Services Fee”). The Administrative Services Fee is intended to reimburse the external advisor for all its costs associated with providing services to us. For the calendar year ending December 31, 2017, the Administrative Services Fee was up to $1.325 million annually, pro-rated for the first six months of the year and up to $1.30 million annually, pro-rated for the second six months of the year. On February 10, 2018, the advisory management agreements were extended an additional four months through June 10, 2018. For the period January 1, 2018 through June 10, 2018, the Administrative Services Fee is up to $1.3 million annually, pro-rated for the period. On June 10, 2018, the advisory management agreements were extended an additional year through June 10, 2019. For the period June 10, 2018 through June 10, 2019, the Administrative Services Fee is up to $1.29 million. The Administrative Service Fee is payable in four equal quarterly installments within 45 days of the end of each calendar quarter. In addition, under the various advisory management agreements, we are to reimburse the external advisor for certain due diligence services provided in connection with asset acquisitions and dispositions and debt financings separately from the Administrative Services Fee. We incurred and expensed $0.3 million and $0.7 million for the three and six months ended June 30, 2018, respectively, and $0.4 million and $0.7 million for the three and six months ended June 30, 2017, respectively, of such costs for administrative services and due diligence services.

 

Notwithstanding the fees and cost reimbursements payable to our external advisor pursuant to our advisory management agreement, under our charter we may not reimburse the external advisor for any amount by which our operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of: (i) 2% of our average invested assets, or (ii) 25% of our net income determined without reduction for any additions to reserves for depreciation, bad debts, or other similar non-cash reserves and excluding any gain from the sale of our assets for that period unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the four fiscal quarters ended June 30, 2018, our total operating expenses (including the asset management fee) exceeded the limit on total operating expenses; however, our independent directors determined the excess expenses were justified primarily as a result of the timing of the redeployment of our cash proceeds from the sale of the Courtyard Kauai Coconut Beach Hotel.

 

Property Manager

 

From January 4, 2008 through February 10, 2017, we were party to various property management and leasing agreements between us, our operating partnership, and certain affiliates of Behringer (collectively, the “Behringer Manager”). On February 10, 2017, we and the Behringer Manager terminated the then existing property management and leasing agreements effective as of the close of business.

 

 15 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

Concurrently, we engaged an affiliate of Lightstone (the “Lightstone Manager”) pursuant to a property management and leasing agreement. The fees earned by and expenses reimbursed to the Lightstone Manager are substantially the same as the fees earned by and expenses reimbursed to the Behringer Manager. The following discussion describes the fees and expenses payable to our affiliated property manager and its respective affiliates under both the various property management and leasing agreements.

 

We pay our property manager and affiliate of our external advisor, fees for the management, leasing, and construction supervision of our properties which is 4.0% of gross revenues of the properties managed by our property manager. We pay our property manager an oversight fee equal to 0.5% of the gross revenues of the property managed for any property for which we contract directly with a third-party property manager.  In no event will our property manager or its affiliates receive both a property management fee and an oversight fee with respect to any particular property.  In the event we own a property through a joint venture that does not pay our property manager directly for its services, we will pay our property manager a management fee or oversight fee, as applicable, based only on our economic interest in the property.   For the three and six months ended June 30, 2018, we incurred and expensed property management fees or oversight fees to the related-party property manager of less than $0.1 million and $0.1 million, respectively, compared to $0.1 million and $0.1 million in the same periods in 2017, respectively.

 

We pay our property manager a construction management fee in an amount not to exceed 5% of all hard construction costs incurred in connection with, but not limited to capital repairs and improvements, major building reconstruction and tenant improvements, if such affiliate supervises construction performed by or on behalf of us or our affiliates. We incurred no construction management fees for the three months ended June 30, 2018 and 2017.

 

As of both June 30, 2018 and December 31, 2017, we had a payable to our external advisor and its affiliates of less than $0.1 million. These balances consist of accrued fees, including asset management fees, administrative service expenses, property management fees, and other miscellaneous costs payable to our external advisor and property manager.

 

We are dependent on our external advisor and our property manager for certain services that are essential to us, including asset disposition decisions, property management and leasing services, and other general administrative responsibilities.  In the event that these companies were unable to provide us with their respective services, we would be required to obtain such services from other sources.

 

10.Subsequent Events

 

Share Redemption Program

 

On August 9, 2018, our board of directors approved redemptions for the second quarter of 2018 totaling 953 thousand shares with an aggregate redemption payment of approximately $7.0 million. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” for a full description of the price at which we redeem shares under our share redemption program.

 

 16 

 

 

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 and the notes thereto.

 

Forward-Looking Statements

 

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements include discussion and analysis of the financial condition of the Company, including our ability to rent space on favorable terms, to address our debt maturities and to fund our liquidity requirements, to sell our assets when we believe advantageous to achieve our investment objectives, our anticipated capital expenditures, the amount and timing of anticipated future cash distributions to our stockholders, the estimated per share value of our common stock, and other matters.  Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements.

 

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy, and other future conditions.  These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements.  Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described herein and under “Item 1A, Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2018 and the factors described below:

 

·market and economic challenges experienced by the U.S. and global economies or real estate industry as a whole and the local economic conditions in the markets in which our investments are located;

 

·the availability of cash flow from operating activities for distributions, if any;

 

·conflicts of interest arising out of our relationships with our advisor and its affiliates;

 

·our ability to retain or replace our executive officers and other key individuals who provide advisory and property management services to us;

 

·our level of debt and the terms and limitations imposed on us by our debt agreements;

 

·the availability of credit generally, and any failure to obtain debt financing at favorable terms or a failure to satisfy the conditions and requirements of that debt;

 

·our ability to make accretive investments in a diversified portfolio of assets;

 

·future changes in market factors that could affect the ultimate performance of our development or redevelopment projects, including but not limited to construction costs, plan or design changes, schedule delays, availability of construction financing, performance of developers, contractors and consultants, and growth in rental rates and operating costs;

 

·our ability to secure leases at favorable rental rates;

 

·our ability to acquire and/or sell assets at a price and on a timeline consistent with our investment objectives;

 

·impairment charges;

 

·unfavorable changes in laws or regulations impacting our business, our assets, or our key relationships; and

 

·factors that could affect our ability to qualify as a real estate investment trust.

 

 17 

 

 

Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Report, and may ultimately prove to be incorrect.  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, except as required by applicable law.  We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 21E of the Exchange Act.

 

Cautionary Note

 

The representations, warranties, and covenants made by us in any agreement filed as an exhibit to this Quarterly Report on Form 10-Q are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the parties to the agreement, and should not be deemed to be representations, warranties, or covenants to or with any other parties.  Moreover, these representations, warranties, or covenants should not be relied upon as accurately describing or reflecting the current state of our affairs.

 

Executive Overview

 

We were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis.  In particular, we have focused generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who were distressed or faced time-sensitive deadlines.  In addition, our opportunistic and value-add investment strategy has included investments in real estate-related assets that present opportunities for higher current income. Since inception, we have acquired a wide variety of commercial properties, including office, industrial, retail, hospitality, and multifamily. We have purchased existing, income-producing properties and newly constructed properties. We have also invested in other real estate-related investments such as mortgage and mezzanine loans. We have made our investments in or in respect of real estate assets located in the United States and other countries based on our view of existing market conditions. Currently, our investments include multifamily and student housing communities, and an office building. All of our current investments are located in the United States.

 

Our common stock is not currently listed on a national securities exchange.  The timing of a liquidity event for our stockholders will depend upon then prevailing market conditions. We previously targeted the commencement of a liquidity event within six years after the termination of our initial public offering, which occurred on July 3, 2011. On June 29, 2017, our board of directors elected to extend the targeted timeline an additional six years until June 30, 2023 based on their assessment of our investment objectives and liquidity options for our stockholders. However, we can provide no assurances as to the actual timing of the commencement of a liquidity event for our stockholders or the ultimate liquidation of the Company. We will seek stockholder approval prior to liquidating our entire portfolio.

 

Liquidity and Capital Resources

 

We had unrestricted cash and cash equivalents of $61.4 million as of June 30, 2018. Our principal demands for funds going forward will be for the payment of (a) operating expenses, (b) interest and principal payments on our outstanding indebtedness, (c) share redemptions and (d) distributions, if any, authorized by our board of directors. Generally, we expect to meet cash needs for the payment of operating expenses, interest on our outstanding indebtedness and share redemptions with our cash flow from operations and to fund authorized distributions (if any) from available cash flow from operations and/or proceeds received from asset sales. To the extent that our cash flow from operations is not sufficient to cover these items, we expect to use cash generated from borrowings and selective asset sales to fund such needs.

 

We intend to hold our various real properties until such time as our board of directors determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that the objectives will not be met.

 

In addition to our debt obligations, we consider other factors in evaluating our liquidity. For example, to the extent our portfolio is concentrated in certain geographic regions and types of assets, downturns relating generally to such regions and assets may result in tenants defaulting on their lease obligations at a number of our properties within a short time period.  Such defaults could negatively affect our liquidity and adversely affect our ability to fund our ongoing operations.

 

 18 

 

 

We may, but are not required to, establish capital reserves from cash flow generated by operating properties and other investments, or net sales proceeds from the sale of our properties and other investments.  Capital reserves are typically utilized for non-operating expenses such as tenant improvements, leasing commissions, and major capital expenditures.  Alternatively, a lender may establish its own criteria for escrow of capital reserves.

 

We have borrowed and may continue to borrow money to acquire properties and make other investments.  Under our charter, the maximum amount of our indebtedness is limited to 300% of our “net assets” (as defined by our charter) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors.  In addition to our charter limitation, our board of directors has adopted a policy to generally limit our aggregate borrowings to approximately 75% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests.  Our policy limitation, however, does not apply to individual real estate assets.

 

Commercial real estate debt markets may experience volatility and uncertainty as a result of certain related factors, including the tightening of underwriting standards by lenders and credit rating agencies, macro-economic issues related to fiscal, tax and regulatory policies, and global financial issues.  Should the overall cost of borrowings increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of our developments and investments.  This may result in our investment operations generating lower overall economic returns and a reduced level of cash flow, which could potentially impact our ability to make distributions to our stockholders.  In addition, disruptions in the debt markets may reduce the amount of capital that is available to finance real estate, which in turn could: (i) lead to a decline in real estate values generally; (ii) slow real estate transaction activity; (iii) reduce the loan to value ratio upon which lenders are willing to extend debt; and (iv) result in difficulty in refinancing debt as it becomes due, all of which may reasonably be expected to have a material adverse impact on the value of real estate investments and the revenues, income or cash flow from the operations of real properties and mortgage loans.

 

Debt Financings

 

From time to time, we have obtained mortgage, bridge, or mezzanine loans for acquisitions and investments, as well as property development.  In the future, we may obtain new financings to acquire properties and for property renovation development and redevelopment activities or refinance our existing real estate assets, depending on multiple factors.

 

On May 1, 2018, we entered into a non-recourse mortgage loan (the “River Club Mortgage”) in the amount of $30.4 million. The River Club Mortgage has a term of seven years, bears interest at Libor plus 1.78% and requires monthly interest-only payments during the first five years and interest and principal payments pursuant to a 30-year amortization schedule for the remaining two years through its stated maturity with the entire unpaid balance due upon maturity. The River Club Mortgage is cross-collateralized by the River Club and the Townhomes at River Club. At closing, approximately $23.4 million of the proceeds from the River Club Mortgage were used to repay in full the existing non-recourse mortgage loan on the River Club and Townhomes at River Club.

 

On June 1, 2018, we entered into a non-recourse mortgage loan (the “Parkside Mortgage”) in the amount of $18.0 million. The Parkside Mortgage has a term of seven years, bears interest at 4.45% and requires monthly interest and principal payments pursuant to a 30-year amortization schedule through its stated maturity with the entire unpaid balance due upon maturity. The Parkside Mortgage is collateralized by Parkside. At closing, approximately $9.6 million of the proceeds from the Parkside Mortgage were used to repay in full the existing non-recourse mortgage loan on Parkside.

 

On June 28, 2018, we entered into a non-recourse mortgage loan (the “Gardens Medical Mortgage”) in the amount of $13.0 million. The Gardens Medical Mortgage has a term of three years, bears interest at Libor plus 1.90% and requires monthly interest and principal payments through its stated maturity with the entire unpaid balance due upon maturity. The Gardens Medical Mortgage is collateralized by the Gardens Medical Pavilion.

 

As of June 30, 2018, our outstanding notes payable were $116.4 million, net of deferred financing fees of $1.7 million, and had a weighted average interest rate of 4.3%. As of December 31, 2017, the Company had notes payable of $89.9 million, net of deferred financing fees of $0.4 million, with a weighted average interest rate of 5.0%. For loans in place as of June 30, 2018, we have guaranteed payment of certain recourse liabilities with respect to certain customary nonrecourse carveouts as set forth in the guaranties in favor of the unaffiliated lenders with respect to the 22 Exchange.

 

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Our loan agreements stipulate that we comply with certain reporting and financial covenants.  These covenants include, among other things, maintaining minimum debt service coverage ratios, loan to value ratios, and liquidity.  We are currently in compliance with all of our debt covenants other than the debt associated with 22 Exchange (outstanding balance of approximately $19.0 million as of June 30, 2018) as discussed below.

 

We did not meet the debt service coverage requirements for our 22 Exchange loan for all of the quarterly periods in 2017 and, as a result, the lender elected to sweep the cash from operations beginning in January 2018. Additionally, the cash from operations was not sufficient to fully pay the scheduled monthly debt service due on January 5, 2018, which constituted an event of default and therefore, the 22 Exchange loan which was scheduled to mature in May 2023 became due on demand. We received notice on January 9, 2018 that the 22 Exchange loan had been transferred to a special servicer effective immediately. Subsequently, the special servicer placed the property in receivership and has commenced foreclosure proceedings.

 

Default interest expense of $0.2 million and $0.5 million was accrued during the three and six months ended June 30, 2018. As a result, accrued default interest expense of $0.5 million is included in accounts payable, accrued and other liabilities on our consolidated balance sheet as of June 30, 2018. However, we do not expect to pay any of the accrued default interest expense as the 22 Exchange loan is non-recourse to it. Additionally, we believe the loss of cash flow and the expected loss of this property will not have a material impact on our consolidated results of operations or financial condition.

 

In addition to the 22 Exchange loan, the Company has debt of $23.9 million associated with Arbors Harbor Town maturing in the next twelve months. If we do not dispose of Arbors Harbor Town by its maturity date, we expect to repay the outstanding balance with available cash or refinance all or a portion of the balance outstanding.

 

One of our principal short-term and long-term liquidity requirements includes the repayment of maturing debt.  The following table provides information with respect to the contractual maturities and scheduled principal repayments of our indebtedness as of June 30, 2018 (dollars in thousands).

 

Contractual Obligations  2018   2019   2020   2021   2022   Thereafter   Total 
                             
Mortgage Payable  $19,585   $24,474   $13,938   $12,748   $343   $46,945   $118,033 
                                    
Interest Payments   2,093    3,345    2,544    2,244    1,938    3,536    15,700 
                                    
Total Contractual Obligations  $21,678   $27,819   $16,482   $14,992   $2,281   $50,481   $133,733 

 

Results of Operations

 

As of June 30, 2018, we had eight real estate investments, seven of which were consolidated (one wholly owned property and six properties consolidated through investments in joint ventures) and one real estate investment which we account for under the equity method.  On November 30, 2017, we acquired the Flats at Fishers Marketplace (“Flats at Fishers” or the “2017 Acquisition”.) As of June 30, 2017, we had seven real estate investments, six of which were consolidated through investments in joint ventures.

 

Our results of operations for the respective periods presented reflect decreases in most categories principally resulting from our disposition of Courtyard Kauai Coconut Beach Hotel in August 2017 (the “2017 Disposition”). The effects of the 2017 Disposition are partially offset by increases resulting from the 2017 Acquisition. Properties owned by us during the entire periods presented are referred to as our “Same Store” properties.

 

The disposition of the Courtyard Kauai Coconut Beach Hotel 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 Courtyard Kauai Coconut Beach Hotel are reflected in the Company’s results from continuing operations for all periods presented through its respective date of disposition.

 

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Three months ended June 30, 2018 as compared to the three months ended June 30, 2017.

 

The following table provides summary information about our results of operations for the three months ended June 30, 2018 and 2017 (dollars in thousands):

 

   Thre Months Ended           Change   Change   Change 
   June 30,   Increase/   Percentage   due to   due to   due to 
   2018   2017   (Decrease)   Change   Acquisitions(1)   Dispositions(2)   Same Store(3) 
                             
Rental revenues  $6,800   $6,151   $649    11.0%  $861   $-   $(212)
Hotel revenues   -    5,209    (5,209)   (100.0)%   -    (5,209)   - 
Property operating expenses   2,211    1,974    237    12.0%   310    -    (73)
Hotel operating expenses   -    3,676    (3,676)   (100.0)%   -    (3,676)   - 
Interest expense, net   1,362    1,773    (411)   (23.0)%   -    (489)   78 
Real estate taxes   1,141    1,118    23    2.0%   144    (156)   35 
Property management fees   248    363    (115)   (32.0)%   28    (130)   (13)
Asset management fees(4)   392    510    (118)   (23.0)%   -    (104)   (14)
General and administrative   978    963    15    2.0%   -    -    15 
Depreciation and amortization   2,389    2,568    (179)   (7.0)%   535    (530)   (184)
Gain on sale of real estate   60    -    60    100.0%   -    60    - 

 ____________________

 

(1)Represents the effect on our operating results for the three months ended June 30, 2018 compared to the same period in 2017 resulting from our 2017 acquisition of the Flats at Fishers.
(2)Represents the effect on our results for the three months ended June 30, 2018 compared to the same period in 2017 principally resulting from our 2017 disposition of the Courtyard Kauai Coconut Beach Hotel.
(3)Represents the change for the three months ended June 30, 2018 compared to the same period in 2017 for real estate and real estate-related investments owned by us during the entire periods presented (“Same Store”). Same Store properties for results for the three months ended June 30, 2018 and 2017 include Gardens Medical Pavilion, River Club and the Townhomes at River Club, Lakes of Margate, Arbors Harbor Town, 22 Exchange and Parkside.
(4)Asset management fees payable to the Advisor are an obligation of the Company, and as such, asset management fees associated with all investments owned during the period are classified in continuing operations. Therefore, the amounts above include asset management fees associated with any property owned during a particular period, including those related to our disposed properties.

 

The following table reflects total rental and hotel revenues and total property and hotel operating expenses for the three months ended June 30, 2018 and 2017 for: (i) our Same Store properties (ii) the 2017 Disposition and (iii) the 2017 Acquisition (dollars in thousands):

 

   Three Months Ended June 30,     
Description  2018   2017   Change 
Revenues:               
Same store  $5,939   $6,151   $(212)
Acquisition   861    -    861 
Disposition   -    5,209    (5,209)
Total rental revenues  $6,800   $11,360   $(4,560)
                
Property and hotel operating expenses:               
Same store  $1,901   $1,974   $(73)
Acquisition   310    -    310 
Disposition   -    3,676    (3,676)
Total property and hotel operating expenses  $2,211   $5,650   $(3,439)

 

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The tables below reflect occupancy and effective monthly rental rates for our operating properties owned as of June 30, 2018:

 

   Occupancy (%)   Effective Monthly Rent per
Square Foot/Unit/Bed ($)(1)
    
   As of June 30,   As of June 30,    
Property  2018   2017   2018   2017    
Gardens Medical Pavilion   70%   75%  $2.09   $2.09   per sq. ft.
River Club and the Townhomes at River Club   97%   92%   420.33    409.50   per bed
Lakes of Margate   93%   95%   1,342.40    1,305.40   per unit
Arbors Harbor Town   91%   94%   1,265.47    1,231.39   per unit
22 Exchange   80%   88%   476.32    561.17   per bed
Parkside   92%   90%   1,173.98    1,180.25   per unit
Flats at Fishers   90%   n/a    944.10    n/a   per bed

______________________________

(1)Effective monthly rent is calculated as in-place contracted monthly rental revenue, including any premiums due for short-term or month-to-month leases, less any concessions or discounts.

 

Revenues.  Rental revenues for the three months ended June 30, 2018 were $6.8 million, an increase of $0.6 million, compared to $6.2 million the same period in 2017.  Excluding the effect of our 2017 Acquisition, our rental revenues decreased by $0.2 million for our Same Store properties.

 

There were no hotel revenues for the three months ended June 30, 2018 as a result of the 2017 Disposition. Hotel revenues for the three months ended June 30, 2017 were $5.2 million.

 

Property Operating Expenses.    Property operating expenses for the three months ended June 30, 2018 were $2.2 million, an increase of $0.2 million, compared to $2.0 million for the same period in 2017. Excluding the effect of our 2017 Acquisition, our property operating expenses were relatively flat for our Same Store properties.

 

Hotel Operating Expenses.  There were no hotel operating expenses for the three months ended June 30, 2018 as a result of the 2017 Disposition. Hotel operating expenses for the three months ended June 30, 2017 were $3.7 million.

 

Interest Expense, net.   Interest expense for the three months ended June 30, 2018 was $1.4 million, a decrease of $0.4 million, compared to $1.8 million for the same period in 2017. Excluding the effect of our 2017 Disposition, our interest expense increased slightly by $0.1 million for our Same Store properties.

 

Real Estate Taxes.  Real estate taxes for the three months ended June 30, 2018 and 2017 was unchanged at $1.1 million as the decrease resulting from the 2017 Disposition was offset by the 2017 Acquisition.

 

Property Management Fees.   Property management fees, which are based on revenues, were $0.2 million for the three months ended June 30, 2018 and $0.4 million for the three months ended June 30, 2017, and are comprised of property management fees paid to unaffiliated third parties and our property manager. Excluding the effect of our 2017 Disposition and 2017 Acquisition, property management fees were relatively flat.

 

Asset Management Fees.   Asset management fees for the three months ended June 30, 2018 and 2017 were $0.4 million and $0.5 million, respectively, and were comprised of asset management fees paid to our external advisor and third parties with respect to our investments. We pay our external advisor or its affiliates a monthly asset management fee of one-twelfth of 0.7% of the value for each asset as determined in connection with our establishment and publication of an estimated net asset value per share. Asset management fees for the three months ended June 30, 2017 included $0.1 million related to the 2017 Disposition.

 

General and Administrative Expenses.   General and administrative expenses for the three months ended June 30, 2018 and 2017 was unchanged at $1.0 million, consists of audit fees, legal fees, board of directors’ fees, and other administrative expenses.

 

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Depreciation and Amortization.   Depreciation and amortization decreased by $0.2 million during the three months ended June 30, 2018 compared to the same period in 2017. Excluding the effect of our 2017 Disposition and 2017 Acquisition, depreciation and amortization decreased slightly by $0.2 million for our Same Store properties.

 

Six months ended June 30, 2018 as compared to the six months ended June 30, 2018.

 

The following table provides summary information about our results of operations for the six months ended June 30, 2018 and 2017 (dollars in thousands):

 

   Six Months Ended           Change   Change   Change 
   June 30,   Increase/   Percentage   due to   due to   due to 
   2018   2017   (Decrease)   Change   Acquisitions(1)   Dispositions(2)   Same Store(3) 
                             
Rental revenues  $13,486   $12,223   $1,263    10.0%  $1,647   $-   $(384)
Hotel revenues   -    10,554    (10,554)   (100.0)%   -    (10,554)   - 
Property operating expenses   4,652    4,061    591    15.0%   627    -    (36)
Hotel operating expenses   -    7,246    (7,246)   (100.0)%   -    (7,246)   - 
Interest expense, net   2,686    3,242    (556)   (17.0)%   -    (678)   122 
Real estate taxes   2,271    2,225    46    2.0%   279    (315)   82 
Property management fees   494    758    (264)   (35.0)%   55    (264)   (55)
Asset management fees(4)   782    1,019    (237)   (23.0)%   -    (211)   (26)
General and administrative   1,905    1,761    144    8.0%   6    -    138 
Depreciation and amortization   4,818    5,146    (328)   (6.0)%   1,064    (1,060)   (332)
Gain on sale of real estate   307    282    25    9.0%   -    25    - 

_____________________

 

(1)Represents the effect on our operating results for the six months ended June 30, 2018 compared to the same period in 2017 resulting from our 2017 acquisition of the Flats at Fishers.
(2)Represents the effect on our results for the six months ended June 30, 2018 compared to the same period in 2017 principally resulting from our 2017 disposition of the Courtyard Kauai Coconut Beach Hotel.
(3)Represents the change for the six months ended June 30, 2018 compared to the same period in 2017 for real estate and real estate-related investments owned by us during the entire periods presented (“Same Store”). Same Store properties for results for the six months ended June 30, 2018 and 2017 include Gardens Medical Pavilion, River Club and the Townhomes at River Club, Lakes of Margate, Arbors Harbor Town, 22 Exchange and Parkside.
(4)Asset management fees payable to the Advisor are an obligation of the Company, and as such, asset management fees associated with all investments owned during the period are classified in continuing operations. Therefore, the amounts above include asset management fees associated with any property owned during a particular period, including those related to our disposed properties.

 

The following table reflects total rental and hotel revenues and total property and hotel operating expenses for the six months ended June 30, 2018 and 2017 for: (i) our Same Store properties (ii) the 2017 Disposition and (iii) the 2017 Acquisition (dollars in thousands):

 

   Six Months Ended June 30,     
Description  2018   2017   Change 
Revenues:               
Same store  $11,839   $12,223   $(384)
Acquisition   1,647    -    1,647 
Disposition   -    10,554    (10,554)
Total rental revenues  $13,486   $22,777   $(9,291)
                
Property and hotel operating expenses:               
Same store  $4,025   $4,061   $(36)
Acquisition   627    -    627 
Disposition   -    7,246    (7,246)
Total property and hotel operating expenses  $4,652   $11,307   $(6,655)

 

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The tables below reflect occupancy and effective monthly rental rates for our operating properties owned as of June 30, 2018:

 

   Occupancy (%)   Effective Monthly Rent per
Square Foot/Unit/Bed ($)(1)
    
   As of June 30,   As of June 30,    
Property  2018   2017   2018   2017    
Gardens Medical Pavilion   70%   75%  $2.09   $2.09   per sq. ft.
River Club and the Townhomes at River Club   97%   92%   420.33    409.50   per bed
Lakes of Margate   93%   95%   1,342.40    1,305.40   per unit
Arbors Harbor Town   91%   94%   1,265.47    1,231.39   per unit
22 Exchange   80%   88%   476.32    561.17   per bed
Parkside   92%   90%   1,173.98    1,180.25   per unit
Flats at Fishers   90%   n/a    944.10    n/a   per bed

 ______________________________

(1)Effective monthly rent is calculated as in-place contracted monthly rental revenue, including any premiums due for short-term or month-to-month leases, less any concessions or discounts.

 

Revenues.  Rental revenues for the six months ended June 30, 2018 were $13.5 million, an increase of $1.3 million, compared to $12.2 million the same period in 2017.  Excluding the effect of our 2017 Acquisition, our rental revenues decreased by $0.4 million for our Same Store properties.

 

There were no hotel revenues for the six months ended June 30, 2018 as a result of the 2017 Disposition. Hotel revenues for the six months ended June 30, 2017 were $10.6 million.

 

Property Operating Expenses.    Property operating expenses for the six months ended June 30, 2018 were $4.7 million, an increase of $0.6 million, compared to $4.1 million for the same period in 2017. Excluding the effect of our 2017 Acquisition, our property operating expenses were relatively flat for our Same Store properties.

 

Hotel Operating Expenses.  There were no hotel operating expenses for the six months ended June 30, 2018 as a result of the 2017 Disposition. Hotel operating expenses for the six months ended June 30, 2017 were $7.2 million.

 

Interest Expense, net.   Interest expense for the six months ended June 30, 2018 was $2.7 million, a decrease of $0.6 million, compared to $3.2 million for the same period in 2017. Excluding the effect of our 2017 Disposition, our interest expense increased slightly by $0.1 million for our Same Store properties.

 

Real Estate Taxes.  Real estate taxes for the six months ended June 30, 2018 was $2.3 million, a slight increase of $0.1 million, compared to $2.2 million for the same period in 2017. The increase of $0.1 million was attributable to our Same Store properties as the decrease resulting from the 2017 Disposition was offset by the 2017 Acquisition.

 

Property Management Fees.   Property management fees, which are based on revenues, were $0.5 million for the six months ended June 30, 2018 and $0.8 million for the six months ended June 30, 2017, and are comprised of property management fees paid to unaffiliated third parties and our property manager. Excluding the effect of our 2017 Disposition and 2017 Acquisition, property management fees were relatively flat.

 

Asset Management Fees.   Asset management fees for the six months ended June 30, 2018 and 2017 were $0.8 million and $1.0 million, respectively, and were comprised of asset management fees paid to our external advisor and third parties with respect to our investments. We pay our external advisor or its affiliates a monthly asset management fee of one-twelfth of 0.7% of the value for each asset as determined in connection with our establishment and publication of an estimated net asset value per share. Asset management fees for the six months ended June 30, 2017 included $0.2 million related to the 2017 Disposition.

 

General and Administrative Expenses.   General and administrative expenses, which increased slightly by $0.1 million during the six months ended June 30, 2018 compared to the same period in 2017, consists of audit fees, legal fees, board of directors’ fees, and other administrative expenses.

 

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Depreciation and Amortization.   Depreciation and amortization decreased by $0.3 million during the six months ended June 30, 2018 compared to the same period in 2017. Excluding the effect of our 2017 Disposition and 2017 Acquisition, depreciation and amortization decreased by $0.3 million for our Same Store properties.

 

Summary of Cash Flows

 

Operating activities

 

Net cash flows provided by operating activities of $2.5 million for the six months ended June 30, 2018 consists of the following:

 

·cash inflows of approximately $1.2 million from our net loss after adjustment for non-cash items; and

 

·cash inflows of approximately $1.3 million associated with the net changes in operating assets and liabilities.

 

Investing activities

 

The cash used in investing activities of $16.2 million for the six months ended June 30, 2018 consists primarily of the following:

 

·capital expenditures of $1.2 million; and

 

·net purchases of marketable securities, available for sale of $15.0 million.

 

Financing activities

 

The net cash provided by financing activities of $22.1 million for the six months ended June 30, 2018 consists primarily of the following:

 

·debt principal payments of $33.6 million;

 

·net proceeds from notes payable of $60.0 million;

 

·aggregate distributions to our noncontrolling interests of $3.4 million; and

 

·redemptions and cancellation of common stock of $0.8 million.

 

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 deferred rent receivables and amortization of market lease and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.

 

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.

 

 26 

 

 

Our calculations of FFO and MFFO are presented below (dollars and shares in thousands, except per share amounts):

 

   For the Three Months Ended June 30,   For the Six Months Ended June 30, 
Description  2018   2017   2018   2017 
Net loss  $(1,690)  $(1,517)  $(3,495)  $(2,268)
FFO adjustments:                    
Depreciation and amortization of real estate assets   2,389    2,568    4,818    5,146 
Gain on sale of real estate   (60)   -    (307)   (282)
Income tax expense associated with real estate sale   -    17    -    21 
FFO   639    1,068    1,016    2,617 
MFFO adjustments:                    
Other adjustments:                    
Acquisition and other transaction related costs expensed(1)   5    -    16    - 
Noncash adjustments:                    
Amortization of above or below market leases and liabilities(2)   (3)   3    (6)   6 
Non-recurring (loss)/gain from extinguishment/sale of debt, derivatives or securities holdings(3)   (2)   -    (2)   - 
Accretion of discounts and amortization of premiums on debt investments (4)   (28)   (42)   (70)   (84)
MFFO before straight-line rent   611    1,029    954    2,539 
Straight-line rent(5)   (9)   (18)   (11)   (42)
MFFO - IPA recommended format(6)  $602   $1,011   $943   $2,497 
                     
Net loss  $(1,690)  $(1,517)  $(3,495)  $(2,268)
Less: income (loss) attributable to noncontrolling interests   117    (22)   90    (127)
Net loss applicable to Company's common shares  $(1,573)  $(1,539)  $(3,405)  $(2,395)
Net loss per common share, basic and diluted  $(0.06)  $(0.06)  $(0.14)  $(0.10)
                     
FFO  $639   $1,068   $1,016   $2,617 
Less: FFO attributable to noncontrolling interests   (176)   (319)   (324)   (720)
FFO attributable to Company's common shares  $463   $749   $692   $1,897 
FFO per common share, basic and diluted  $0.02   $0.03   $0.03   $0.08 
                     
MFFO - IPA recommended format  $602   $1,011   $943   $2,497 
Less: MFFO attributable to noncontrolling interests   (171)   (313)   (314)   (706)
MFFO attributable to company's common shares  $431   $698   $629   $1,791 
                     
Weighted average number of common shares outstanding, basic and diluted   24,515    25,026    24,561    25,098 

 

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 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.

 

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4)Management believes that adjusting for mark-to-market adjustments is appropriate because they are nonrecurring items that may not be reflective of ongoing operations and reflects unrealized impacts on value based only on then current market conditions, although they may be based upon current operational issues related to an individual property or industry or general market conditions. Mark-to-market adjustments are made for items such as ineffective derivative instruments, certain marketable securities and any other items that GAAP requires we make a mark-to-market adjustment for. The need to reflect mark-to-market adjustments is a continuous process and is analyzed on a quarterly and/or annual basis in accordance with GAAP.
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, 2018 
Default interest expense(a)  $239   $476 
Allocations to noncontrolling interests   (24)   (48)
Total after allocations to noncontrolling interests  $215   $428 

 

(a)Represents the accrual of default interest expense on our non-recourse mortgage loan collateralized by 22 Exchange. Although the lender for 22 Exchange 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.

 

Excluding the impact of these unusual items from our MFFO, after taking into consideration allocations to noncontrolling interests, our adjusted MFFO would have been $646 and $1,057, for the three and six months ended June 30, 2018.

 

Distributions

 

U.S. federal tax law requires a REIT distribute at least 90% of its annual REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles, or GAAP) determined without regard to the deduction for dividends paid and excluding any net capital gain. In order to continue to qualify for REIT status, we may be required to make distributions in excess of cash available. Distributions are authorized at the discretion of our board of directors based on its analysis of our performance over the previous periods and expectations of performance for future periods. These analyses may include actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, general financial and market conditions, proceeds from asset sales, and other factors that our board of directors deems relevant. The board of director’s decisions will be substantially influenced by the obligation to ensure that we maintain our federal tax status as a REIT. We cannot provide assurance that we will pay distributions at any particular level, or at all.

 

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Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

 

Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On a regular basis, we evaluate these estimates, including investment impairment.  These estimates include such items as impairment of long-lived assets, depreciation and amortization, and allowance for doubtful accounts.  Actual results could differ from those estimates.

 

Other than as disclosed below, our critical accounting policies and estimates have not changed significantly from the discussion found in the Management Discussion and Analysis and Results of Operations in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2018.

 

Marketable Securities

 

Marketable securities currently consist of debt securities that are designated as available-for-sale and are recorded at fair value. Unrealized holding gains or losses for debt securities are reported as a component of accumulated other comprehensive income/(loss). Realized gains or losses resulting from the sale of these securities are determined based on the specific identification of the securities sold.

 

An impairment charge is recognized when the decline in the fair value of a security below the amortized cost basis is determined to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the duration and severity of any decline in fair value below our amortized cost basis, any adverse changes in the financial condition of the issuers’ and its intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

 

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Item 3.     Quantitative and Qualitative Disclosures About Market Risk.

 

Interest Rate Risk

 

We may be exposed to interest rate changes primarily as a result of long-term debt used to acquire properties and make loans and other permitted investments.  Our management’s objectives, with regard to interest rate risks, are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs.  To achieve these objectives, we will borrow primarily at fixed rates or variable rates with the lowest margins available and in some cases, with the ability to convert variable rates to fixed rates.  With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.  We may enter into derivative financial instruments such as options, forwards, interest rate swaps, caps, or floors to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate portion of our variable rate debt.  As of June 30, 2018, approximately $43.4 million, or 37%, of our debt, is a variable rate instrument (not subject to an interest rate cap or swap) and our interest expense associated with this instrument is, therefore, subject to changes in market interest rates. A 1% adverse movement (increase in Libor or Prime rate) would increase annual interest expense by approximately $0.4 million

 

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Item 4.   Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our principal executive officer and principal financial officer, evaluated, as of June 30, 2018, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e) using the criteria established in Internal Control-New Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective, as of June 30, 2018, to provide reasonable assurance that information required to be disclosed by us in this report is recorded, processed, summarized, and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

 

We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in internal control over financial reporting that occurred during the quarter ended June 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

 

OTHER INFORMATION

 

Item 1.      Legal Proceedings.

 

We are not a party to, and none of our properties are subject to, any material pending legal proceedings.

 

Item 1A.   Risk Factors.

 

There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

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

 

Recent Sales of Unregistered Securities

 

During the period covered by this quarterly report, we did not sell any equity securities that were not registered under the Securities Act of 1933.

 

Share Redemption Program

 

Our board of directors has adopted a share redemption program that permits stockholders to sell their shares back to us, subject to the significant conditions and limitations of the program.  Our board of directors can amend the provisions of our share redemption program at any time without the approval of our stockholders.

 

The terms on which we redeem shares may differ between redemptions upon a stockholder’s death, “qualifying disability” (as defined in the share redemption program) or confinement to a long-term care facility (collectively, Exceptional Redemptions) and all other redemptions, or Ordinary Redemptions.

 

Any shares approved for redemption will be redeemed on a periodic basis as determined from time to time by our board of directors, and no less frequently than annually.  We will not redeem, during any 12-month period, more than 5% of the weighted average number of shares outstanding during the 12-month period immediately prior to the date of redemption.  In addition, the cash available for redemptions is limited to no more than $10 million in any twelve-month period.  The redemption limitations apply to all redemptions, whether Ordinary or Exceptional Redemptions.

 

The per share redemption price for Ordinary Redemptions and Exceptional Redemptions is equal to the lesser of 80% and 90%, respectively, of (i) the current estimated per share value and (ii) the average price per share the investor paid for all of his shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock) less the Special Distributions (as defined in the share redemption program).

 

Effective December 4, 2017, our estimated value per share was $7.98. For a full description of the methodologies used to estimate the value of our common stock as of September 30, 2017, see Part II, Item 5, “Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Market Information” included in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

Notwithstanding the redemption prices set forth above, our board of directors may determine, whether pursuant to formulas or processes approved or set by our board of directors, the redemption price of the shares, which may differ between Ordinary Redemptions and Exceptional Redemptions; provided, however, that we must provide at least 30 days’ notice to stockholders before applying this new price determined by our board of directors.

 

Any redemption requests are honored pro rata among all requests received based on funds available and are not honored on a first come, first served basis. During the quarter ended June 30, 2018, our board of directors approved all Ordinary Redemption requests received that complied with the applicable requirements and guidelines of the share redemption program for an aggregate of 39,763 shares redeemed for approximately $0.2 million (approximately $5.17 per share). During the quarter ended June 30, 2018, our board of directors redeemed all Exceptional Redemption requests received that complied with the applicable requirements and guidelines of the share redemption program for an aggregate of 7,704 shares redeemed for $44,689 (approximately $5.80 per share). All redemptions were funded with cash on hand.

 

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During the quarter ended June 30, 2018, we redeemed shares as follows (including both Ordinary Redemptions and Exceptional Redemptions):

 

2018 

Total Number of

Shares Redeemed

  

Average Price

Paid Per Share

  

Total Number of

Shares Purchased

as Part of

Publicly

Announced Plans

or Programs

  

Maximum

Number of Shares

That May Be

Purchased Under

the Plans or

Programs 

 
April                 
May   47,467   $5.27    47,467    (1)
June                 
    47,467   $5.27    47,467      

_______________________________

 

(1)A description of the maximum number of shares that may be purchased under our redemption program is included in the narrative preceding this table.

 

Item 3.Defaults Upon Senior Securities.

 

None.

 

Item 4.Mine Safety Disclosures.

 

None.

 

Item 5.Other Information.

 

None. 

 

Item 6.Exhibits.

 

The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.

 

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SIGNATURE

 

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 V, INC.
   
Dated: August 14, 2018 By: /s/ Mitchell C. Hochberg
    Mitchell C. Hochberg
    Chief Executive Officer
    Principal Financial Officer

 

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Index to
Exhibit Number
  Description
31.1*   Rule 13a-14(a)/15d-14(a) Certification
32.1*   Section 1350 Certification**
101*   The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, filed on August 14, 2018, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Equity, (iv) Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements.

 

*Filed or furnished herewith
**In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section.  Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

 

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