UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended March 31, 2020

 

OR

 

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

 

For the transition period from                      to

 

Commission file number 000-55773

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC.

(Exact Name of Registrant as Specified in Its Charter)

 

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

 

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

 

(732) 367-0129

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

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, if any, every Interactive Data File required to be submitted 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			Smaller reporting company  x
			Emerging growth company x

 

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 May 10, 2020, there were 8.3 million outstanding shares of common stock of Lightstone Real Estate Income Trust Inc.

 

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

 

INDEX

 

			Page
PART I		FINANCIAL INFORMATION
Item 1.		Financial Statements (unaudited)	3
		Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019	3
		Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019	4
		Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2020 and 2019	5
		Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019	6
		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019	7
		Notes to Consolidated Financial Statements	8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 4.		Controls and Procedures	26
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings	26
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.		Defaults Upon Senior Securities	26
Item 4.		Mine Safety Disclosures	26
Item 5.		Other Information	26
Item 6.		Exhibits	27

 

 

PART I. FINANCIAL INFORMATION:

ITEM 1. FINANCIAL STATEMENTS:

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		March 31, 2020				December 31, 2019
		(unaudited)
Assets
Construction in progress		$	36,588,043			$	34,217,619
Investments in unconsolidated affiliated real estate entities			12,316,780				26,397,804
Cash and cash equivalents			36,222,804				13,730,832
Marketable securities, available for sale			-				4,161,781
Restricted cash and other assets			459,689				612,275
Total Assets		$	85,587,316			$	79,120,311
Liabilities and Stockholders' Equity
Mortgage payable, net		$	15,785,151			$	15,656,241
Accounts payable and other accrued expenses			706,904				536,668
Due to related parties			75,956				-
Distributions payable			283,914				285,841
Subordinated advances - related party			13,311,221				13,264,738
Total liabilities			30,163,146				29,743,488
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $0.01 par value; 50.0 million shares authorized, none issued and outstanding			-				-
Common stock, $0.01 par value; 200.0 million shares authorized, 8.5 million and 8.6 million shares issued and outstanding, respectively			85,374				85,952
Additional paid-in-capital			71,665,213				72,215,685
Accumulated other comprehensive income			-				400,089
Accumulated deficit			(16,326,417	)			(23,324,903	)
Total Stockholders' Equity			55,424,170				49,376,823
Total Liabilities and Stockholders' Equity		$	85,587,316			$	79,120,311

 

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

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		For the Three Months Ended March 31,
		2020				2019
Income:
Investment income		$	118,164			$	1,076,761
Gain from disposition of investment in unconsolidated affiliated real estate entity			8,180,509				-
Gain on sale of marketable securities			264,589				-
Loss from investments in unconsolidated affiliated real estate entities			(392,287	)			(1,003,709	)
Total income			8,170,975				73,052
Expenses:
General and administrative costs			226,616				301,022
Interest expense			46,483				46,098
Foreign currency transaction loss			47,648				26,848
Total expenses			320,747				373,968
Net income/(loss)		$	7,850,228			$	(300,916	)
Net income/(loss) per common share, basic and diluted		$	0.92			$	(0.03	)
Weighted average number of common shares outstanding, basic and diluted			8,556,479				8,640,912

 

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

 

 

PART I. FINANCIAL INFORMATION, CONTINUED: 

ITEM 1. FINANCIAL STATEMENTS, CONTINUED.

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

		For the Three Months Ended March 31,
		2020				2019
Net income/(loss)		$	7,850,228			$	(300,916	)
Other comprehensive (loss)/income:
Holding (loss)/gain on marketable securities, available for sale			(135,500	)			26,926
Reclassification adjustment for gain included in net income/(loss)			(264,589	)			-
Other comprehensive (loss)/income			(400,089	)			26,926
Comprehensive income/(loss)		$	7,450,139			$	(273,990	)

 

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

 

  

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED.

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

										Additional
		Common								Paid-In				Accumulated Other				Accumulated				Total
		Shares				Amount				Capital				Comprehensive Income				Deficit				Equity
BALANCE, December 31, 2018			8,665,262			$	86,653			$	72,898,310			$	-			$	(14,653,270	)		$	58,331,693
Net loss			-				-				-				-				(300,916	)			(300,916	)
Distributions declared (a)			-				-				-				-				(1,699,447	)			(1,699,447	)
Redemption and cancellation of shares			(30,020	)			(300	)			(286,695	)			-				-				(286,995	)
Other comprehensive income			-				-				-				26,926				-				26,926
BALANCE, March 31, 2019			8,635,242			$	86,353			$	72,611,615			$	26,926			$	(16,653,633	)		$	56,071,261

 

(a) Dividends per share were $0.20.                                  

  

										Additional
		Common								Paid-In				Accumulated Other				Accumulated				Total
		Shares				Amount				Capital				Comprehensive Income				Deficit				Equity
BALANCE, December 31, 2019			8,595,224			$	85,952			$	72,215,685			$	400,089			$	(23,324,903	)		$	49,376,823
Net income			-				-				-				-				7,850,228				7,850,228
Distributions declared (a)			-				-				-				-				(851,742	)			(851,742	)
Redemption and cancellation of shares			(57,800	)			(578	)			(550,472	)			-				-				(551,050	)
Other comprehensive loss			-				-				-				(400,089	)			-				(400,089	)
BALANCE, March 31, 2020			8,537,424			$	85,374			$	71,665,213			$	-			$	(16,326,417	)		$	55,424,170

 

(a) Dividends per share were $0.10.

 

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

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Three Months Ended March 31,
		2020				2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss)		$	7,850,228			$	(300,916	)
Adjustments to reconcile net income/(loss) to cash (used in)/provided by operating activities:
Loss from investments in unconsolidated affiliated real estate entities			392,287				1,003,709
Gain from disposition of  investment in unconsolidated affiliated real estate entity			(8,180,509	)			-
Gain on sale of marketable securities			(264,589	)			-
Amortization of discount on debt securities			(30,196	)			(2,408	)
Foreign currency transaction loss			47,648				26,848
Other non-cash adjustments			-				(1,481	)
Changes in assets and liabilities:
Increase in other assets			(115,333	)			(59,758	)
Increase/(decrease) in accounts payable and other accrued expenses			154,452				(36,643	)
Increase in accrued interest on subordinated advances - related party			46,483				46,098
Increase/(decrease) in due to related parties			75,956				(82	)
Cash (used in)/provided by operating activities			(23,573	)			675,367
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment property			(2,225,730	)			(1,009,869	)
Proceeds from sale of marketable securities			4,141,195				-
Proceeds from disposition of  investment in unconsolidated affiliated real estate entity			21,869,246				-
Proceeds from preferred investment in related party			-				26,500,000
Investments in unconsolidated affiliated real estate entities			-				(436,121	)
Cash provided by investing activities			23,784,711				25,054,010
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption and cancellation of common stock			(551,050	)			(286,995	)
Distributions paid to Company's common stockholders			(853,668	)			(1,701,487	)
Cash used in financing activities			(1,404,718	)			(1,988,482	)
Effect of exchange rate changes on cash and cash equivalents			(47,648	)			(26,848	)
Net change in cash, cash equivalents and restricted cash			22,308,772				23,714,047
Cash, cash equivalents and restricted cash, beginning of year			14,263,182				4,350,896
Cash, cash equivalents and restricted cash, end of period		$	36,571,954			$	28,064,943
Supplemental disclosure of cash flow information:
Distributions declared, but not paid		$	283,914			$	585,366
Holding loss/gain on marketable securities, available for sale		$	400,089			$	26,926
Non-cash purchase of investment property		$	395,000			$	-
Amortization of deferred financing costs included in construction in progress		$	128,910			$	-
The following is a summary of the Company’s cash, cash equivalents and restricted cash total as presented in our statements of cash flows for the periods presented:
Cash and cash equivalents		$	36,222,804			$	28,064,943
Restricted cash			349,150				-
Total cash, cash equivalents and restricted cash		$	36,571,954			$	28,064,943

 

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

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

1.

Business and Organization

 

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

 

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

 

The Company has and will continue to seek to originate, acquire and manage a diverse portfolio of real estate and real estate-related investments; including investments in mezzanine loans, first lien mortgage loans, second lien mortgage loans, bridge loans and preferred equity interests, with a focus on development investments and investments intended to finance development or redevelopment opportunities. The Company may also invest in debt and derivative securities related to real estate assets. A substantial portion of the Company’s investments by value may be secured by or related to properties or entities advised by, or wholly or partially, directly or indirectly owned by, The Lightstone Group, LLC (the “Sponsor”), its affiliates or by other real estate investment programs it sponsors. Although the Company expects that most of its investments will be of these types, it may make other investments. In fact, it may invest in whatever types of real estate-related investments that it believes are in its best interests.

 

The Company currently has one operating segment. As of March 31, 2020, it wholly owned and consolidated the operating results of one development project, the Williamsburg Moxy Hotel and held an unconsolidated approximate 33.3% membership interest in 40 East End Ave. Pref Member LLC (the “40 East End Ave. Joint Venture”). The Company accounts for its unconsolidated membership interest in the 40 East End Ave. Joint Venture in accordance with the equity method of accounting.

 

The Company’s advisor is Lightstone Real Estate Income LLC (the “Advisor”), which is majority owned by David Lichtenstein. On September 12, 2014, the Advisor contributed $200,000 for 20,000 shares of common stock (“Common Shares”), or $10.00 per share of the Lightstone Income Trust. Mr. Lichtenstein also is a majority owner of the equity interests of The Lightstone Group, LLC. The Lightstone Group, LLC served as the Company’s Sponsor during its initial public offering (the “Offering”) which terminated on March 31, 2017. Mr. Lichtenstein owns 222,222 Common Shares which were issued on June 15, 2015 for $2.0 million, or $9.00 per share. Subject to the oversight of the Company’s board of directors (the “Board of Directors”), the Advisor has primary responsibility for making investment decisions on behalf of the Company and managing its day-to-day operations. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone Income Trust.

 

The Company does not have any employees. The Advisor receives compensation and fees for services related to the investment and management of the Company’s assets. The Advisor has certain affiliates which may manage the properties the Company acquires. However, the Company may also contract with other unaffiliated third-party property managers.

 

The Company’s Common Shares are not currently listed on a national securities exchange. The Company may seek to list its Common Shares for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its Common Shares at this time. The Company does not anticipate that there would be any market for its Common Shares until they are listed for trading. In the event the Company does not begin the process of achieving a liquidity event prior to March 31, 2022, which is the fifth anniversary of the termination of its Offering, its charter requires either (a) an amendment to our charter to extend the deadline to begin the process of achieving a liquidity event, or (b) the holding of a stockholders meeting to vote on a proposal for an orderly liquidation of its portfolio.

 

2.

Summary of Significant Accounting Policies

 

The accompanying unaudited interim consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair presentation of the results for the periods presented. The accompanying unaudited consolidated financial statements of the Lightstone Income Trust and Subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America (‘‘GAAP’’) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

The consolidated financial statements have been prepared in accordance with GAAP. GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate debt investments and securities, the valuation of the investment in related party and revenue recognition. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.

 

The consolidated balance sheet as of December 31, 2019 included herein has been derived from the consolidated balance sheet included in the Company's Annual Report on Form 10-K.

 

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

 

Principles of Consolidation and Basis of Presentation

 

The consolidated financial statements include the accounts of Lightstone Income Trust and Subsidiaries (over which the Company exercises financial and operating control). All inter-company accounts and transactions have been eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary.

 

Financial Instruments

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash and other assets, mortgage payable, accounts payable and other accrued expenses and due to related parties approximate their fair values because of the short maturity of these instruments.

 

COVID-19 Pandemic

 

The global impact of the COVID-19 pandemic has been rapidly evolving and, as cases of the illness caused by the virus have continued to be identified in additional countries, many countries, including the United States, have reacted by instituting quarantines and restrictions on travel. In addition, all the states where we operate properties and have development projects have reacted to the COVID-19 pandemic by instituting quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of business that may continue to operate and/or restrictions on types of construction projects that may continue. Many states have recently announced guidelines to reduce certain of these restrictions.

 

Because the Company’s Williamsburg Moxy Hotel development project is in its pre-development stage, the COVID-19 pandemic has not currently affected its associated pre-development activities.  The Company’s other investment is its approximately 33.3% membership interest in the 40 East End Ave. Joint Venture, which is developing a substantially completed luxury residential condominium project (the “40 East End Avenue Project”) located at the corner of 81st Street and East End Avenue in the Upper East Side neighborhood of New York City. The 40 East End Avenue Project received its final temporary certificates of occupancy, or TCO, in March 2020.

 

The extent to which the Company’s business may be affected by the current COVID-19 pandemic will largely depend on both current and future developments, including its duration, spread and treatment, and related travel advisories and restrictions, all of which are highly uncertain and cannot be reasonably predicted.

 

If the Company’s Williamsburg Moxy Hotel development project and/or investment in the 40 East End Ave. Joint Venture is negatively impacted for an extended period because development activities and/or sales of condominium units are delayed, the Company’s business and financial results could be materially and adversely impacted.

 

New Accounting Pronouncements

 

The Company has reviewed and determined that 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.

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

3.

Williamsburg Moxy Hotel

 

On July 17, 2019, the Company acquired four adjacent parcels of land located at 353-361 Bedford Avenue in Brooklyn, New York (collectively, the “Williamsburg Land”), from unaffiliated third parties, for an aggregate purchase price of approximately $30.4 million, excluding closing and other acquisition related costs, on which it intends to develop and construct a 210-room branded hotel (the “Williamsburg Moxy Hotel”). As of March 31, 2020, the Williamsburg Moxy Hotel was in pre-development and not under construction.

  

In connection with the acquisition of the Williamsburg Land, the Advisor earned an acquisition fee equal to 1.00% of the gross aggregate contractual purchase price, which was approximately $0.3 million.

 

As of March 31, 2020, the Company incurred and capitalized to construction in progress an aggregate of $36.6 million consisting of acquisition and other development costs attributable to the Williamsburg Moxy Hotel. During the three months ended March 31, 2020, the Company capitalized interest of approximately $0.3 million in connection with the development of the Williamsburg Moxy Hotel.

 

Williamsburg Mortgage

 

In connection with the closing of the acquisition of the Williamsburg Land, the Company simultaneously entered into a mortgage loan collateralized by the Williamsburg Land (the “Williamsburg Mortgage”) for $16.0 million. The Williamsburg Mortgage has a term of one year, with two, six-month extension options, bears interest at 4.50% and requires monthly interest-only payments of $60,000 through its maturity with the entire unpaid balance due upon maturity. As of March 31, 2020, the outstanding principal balance of the Williamsburg Mortgage was $16.0 million, which is presented, net of deferred financing fees of $0.2 million, on the consolidated balance sheet and is classified as Mortgage Payable, net. Assuming the Company exercises the first of the two extension options; its interest payments will aggregate approximately $0.5 million for the remainder of 2020.

 

The Williamsburg Mortgage initially matures in July 2020 but has two, six-month extension options, which the Company can exercise by providing the lender with notice of its intent to extend. The Company currently plans to exercise the extension options unless it obtains construction financing on or before any of the applicable maturity dates. The Company has no other maturities of mortgage debt over the next 12 months.

 

4.

Investments in Unconsolidated Affiliated Real Estate Entities

 

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

 

								As of
Entity		Date of Ownership		Ownership %				March 31, 2020				December 31, 2019
RP Maximus Cove, L.L.C. (the "Cove Joint Venture")		January 31, 2017			22.50	%		$	-			$	13,846,410
40 East End Ave. Pref Member LLC ( “40 East End Ave. Joint Venture”)		March 31, 2017			33.30	%			12,316,780				12,551,394
Total investments in unconsolidated affiliated real estate entities								$	12,316,780			$	26,397,804

 

The Cove Joint Venture

 

On January 31, 2017, the Company, through its wholly owned subsidiary, REIT IV COVE LLC along with LSG Cove LLC, an affiliate of the Sponsor and a related party, REIT III COVE LLC, a subsidiary of the operating partnership of Lightstone Value Plus Real Estate Investment Trust III, Inc., a real estate investment trust also sponsored by the Company’s Sponsor and a related party and Maximus Cove Investor LLC (“Maximus”), an unrelated third party, completed the acquisition of all of RP Cove, L.L.C’s membership interest in RP Maximus Cove, L.L.C. (the “Cove Joint Venture”) for aggregate consideration of approximately $255.0 million (the “Cove Transaction”). The Cove Joint Venture owns and operates The Cove at Tiburon (the “Cove”), a 281-unit, luxury waterfront multifamily residential property located in Tiburon, California. Prior to entering into the Cove Transaction, Maximus previously owned a separate noncontrolling interest in the Cove Joint Venture.

 

The Company paid approximately $20.0 million for a 22.5% membership interest in the Cove Joint Venture. The Company’s ownership interest in the Cove Joint Venture was a non-managing interest. The Company determined that the Cove Joint Venture was a variable interest entity but the Company was not the primary beneficiary. The Company accounted for its ownership interest in the Cove Joint Venture in accordance with the equity method of accounting because it exerted significant influence over but did not control the Cove Joint Venture. All capital contributions and distributions of earnings from the Cove Joint Venture were made on a pro rata basis in proportion to each member’s equity interest percentage. Any distributions in excess of earnings from the Cove Joint Venture are made to the members pursuant to the terms of the Cove Joint Venture’s operating agreement. An affiliate of Maximus is the asset manager of the Cove and receives certain fees as defined in the Property Management Agreement for the management of the Cove. The Company commenced recording its allocated portion of profit/loss and cash distributions beginning as of January 31, 2017 with respect to its 22.5% membership interest in the Cove Joint Venture.

 

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

Subsequent to the Company’s acquisition of its 22.5% membership interest in the Cove Joint Venture, it made an aggregate of $2.6 million of additional capital contributions and received aggregate distributions of $0.9 million. All of these additional capital contributions were made and distributions received in periods prior to 2020.

 

On December 17, 2019, REIT IV Cove LLC, REIT III Cove LLC, LSG Cove LLC (collectively, the “Redeemers”), Maximus and the Cove Joint Venture entered into a redemption agreement (the “Redemption Agreement”), pursuant to which the Cove Joint Venture would redeem the membership interests of the Redeemers for an aggregate redemption price of approximately $87.6 million.

 

On February 12, 2020, the Cove Joint Venture completed the redemption of the Redeemers’ membership interests in the Cove Joint Venture pursuant to the terms of the Redemption Agreement for an aggregate redemption price of approximately $87.6 million. In connection, with the redemption of its 22.5% membership interest in the Cove Joint Venture, the Company received proceeds of approximately $21.9 million which resulted in a gain on the disposition of investment in unconsolidated affiliated real estate entity of approximately $8.2 million, which is included on the consolidated statements of operations for the three months ended March 31, 2020. As a result of the redemption of its 22.5% membership interest in the Cove Joint Venture, the Company no longer has an ownership interest in the Cove Joint Venture.

 

The Cove Joint Venture Financial Information

 

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

 

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

 

(amounts in thousands)		For the Period January 1 through February 12, 2020				For the Three Months Ended March 31, 2019
Revenue		$	1,375			$	3,693
Property operating expenses			430				1,240
General and administrative costs			13				42
Depreciation and amortization			960				2,837
Operating loss			(28	)			(426	)
Interest expense and other, net			(652	)			(2,934	)
Net loss		$	(680	)		$	(3,360	)
Company's share of net loss (22.50%)		$	(153	)		$	(756	)
Additional depreciation and amortization expense (1)			(5	)			(10	)
Company's loss from investment		$	(158	)		$	(766	)

  

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

 

(Unaudited)

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

 

		As of
(amounts in thousands)		December 31, 2019
Real estate, at cost (net)		$	138,045
Cash and restricted cash			1,491
Other assets			1,141
Total assets		$	140,677
Mortgage payable, net		$	178,353
Other liabilities			1,339
Members' deficit (1)			(39,015	)
Total liabilities and members' deficit		$	140,677

 

(1)

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

 

40 East End Ave. Joint Venture

 

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

 

The Company’s ownership interest in the 40 East End Ave. Joint Venture is a non-managing interest. Because the Company exerts significant influence over but does not control the 40 East End Ave. Joint Venture, it accounts for its ownership interest in the 40 East End Ave. Joint Venture in accordance with the equity method of accounting. All contributions to and distributions of earnings from the 40 East End Ave. Joint Venture are made on a pro rata basis in proportion to each member’s equity interest percentage. Any distributions in excess of earnings from the 40 East End Ave. Joint Venture are made to the members pursuant to the terms of its operating agreement. The Company commenced recording its allocated portion of earnings and cash distributions, if any, from the 40 East End Ave. Joint Venture beginning as of March 31, 2017 with respect to its membership interest of approximately 33.3% in the 40 East End Ave. Joint Venture. Additionally, Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”), a real estate investment trust also sponsored by our Sponsor, made $30.0 million of preferred equity contributions (the “Preferred Contributions”) to a subsidiary of the 40 East End Ave. Joint Venture, pursuant to an instrument that entitles Lightstone I to monthly preferred distributions at a rate of 12% per annum. No distributions may be paid to the members until the Preferred Contributions are redeemed in full.

 

The 40 East End Ave. Joint Venture, through affiliates, is developing the 40 East End Avenue Project, a substantially completed luxury residential 29-unit condominium project located at the corner of 81st Street and East End Avenue in the Upper East Side neighborhood of New York City. The 40 East End Avenue Project received its final TCO in March 2020.

 

On March 21, 2017, the 40 East End Ave. Joint Venture obtained financing from a financial institution of up to $85.3 million (the “40 East End Ave. Mortgage”) for the land acquisition and construction of the 40 East End Ave. Project. On December 19, 2019, the 40 East End Ave. Joint Venture entered into a loan (the “Condo Loan”) with a financial institution of up to $95.2 million, of which approximately $90.2 million was funded at closing and the remaining availability of $5.0 million will be advanced upon satisfaction of certain conditions, including obtaining final TCO for the 40 East End Ave. Project, which was obtained in March 2020. The Condo Loan matures in two years and bears interest at Libor plus 2.45%, which is payable monthly, and principal payments are required to be made from condominium sales proceeds. If principal paydowns from condominium sales proceeds do not reduce the outstanding principal balance of the Condo Loan to at least $81.0 million and $73.0 million as of December 19, 2020 and June 19, 2021, respectively, then the 40 East End Ave. Joint Venture will be required to make balloon payments in the amounts necessary to reach these thresholds. At closing, the 40 East End Ave. Joint Venture used a portion of the proceeds from the Condo Loan to (i) fully repay the then outstanding principal balance of $80.3 million plus accrued and unpaid interest of $0.2 million for the 40 East End Ave. Mortgage and (ii) redeem $9.5 million of Lightstone I’s Preferred Contributions.

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

In connection with the refinancing, the 40 East End Ave. Joint Venture recognized a loss on the early extinguishment of debt of approximately $0.8 million during the fourth quarter of 2019, of which the Company’s proportionate share was approximately $0.3 million.

 

The Company’s Sponsor and its affiliates (collectively, the “40 East End Guarantors”) have provided certain guarantees with respect to the Condo Loan and the members have agreed to reimburse the 40 East End Guarantors for any balance that may become due under the guarantees (the “40 East End Guarantee”), of which the Company’s share is approximately 33.3%. The Company has determined that the fair value of its share of the 40 East End Guarantee is immaterial.

 

On December 26, 2019, the 40 East End Ave. Joint Venture redeemed an additional $3.5 million of Lightstone I’s Preferred Contributions. As a result, Lightstone I’s remaining outstanding Preferred Contributions were $17.0 million as of December 31, 2019. Subsequently, an additional $11.0 million of Lightstone I’s Preferred Contributions were redeemed on February 13, 2020 reducing Lightstone I’s Preferred Contributions to $6.0 million as of March 31, 2020.

 

Subsequent to the Company’s acquisition through March 31, 2020, it has made an aggregate of $4.6 million of additional capital contributions to the 40 East End Ave. Joint Venture.

 

The 40 East End Ave. Joint Venture Financial Information

 

The following table represents the condensed income statements for the 40 East End Ave. Joint Venture:

 

(amounts in thousands)		For the Three Months Ended March 31, 2020				For the Three Months Ended March 31, 2019
Revenues		$	12,902			$	-
Cost of goods sold			11,581				-
Other expenses			703				393
Depreciation and amortization			-				320
Operating income/(loss)			618				(713	)
Interest expense and other, net			(1,322	)			-
Net loss		$	(704	)		$	(713	)
Company's share of net loss (33.3%)		$	(234	)		$	(238	)

 

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

 

		As of				As of
(amounts in thousands)		March 31, 2020				December 31, 2019
Real estate inventory		$	129,230			$	139,170
Cash and restricted cash			5,966				7,739
Other assets			192				637
Total assets		$	135,388			$	147,546
Mortgage payable, net			89,235				89,102
Other liabilities			1,817				2,404
Members' capital			44,336				56,040
Total liabilities and members' capital		$	135,388			$	147,546

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

5.

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 December 31, 2019
		Adjusted Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Debt securities:
Israeli Bonds		$	3,761,692			$	400,089			$	-			$	4,161,781

 

During 2019, the Company acquired unsecured corporate bonds that are publicly traded on the Tel Aviv Stock Exchange (the “Israeli Bonds”) and are denominated in ILS. The fair value of the Israeli Bonds was translated using period-end exchange rates. Gains and losses resulting from the changes in exchange rates and market prices from period to period were reported as a component of  accumulated other comprehensive income.  As of December 31, 2019, the Company did not recognize any impairment charges. During the three months ended March 31, 2020, the Company sold all of the Israeli Bonds and recognized a gain on the sale of marketable securities of $0.3 million.

 

The fair value of the Company’s investments in debt securities were measured using quoted prices in markets that were not active. As of December 31, 2019, all of the Company’s debt securities were classified as Level 2 assets and there were no transfers between the level classifications during the year ended December 31, 2019.

 

6. Stockholders’ Equity

 

Earnings per Share

 

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

 

Share Repurchase Program

 

The Company’s share repurchase program may provide its stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to us, subject to restrictions. From the Company’s date of inception through December 31, 2019, it repurchased 395,941 shares of common stock pursuant to its share repurchase program at an average price of $9.48 per share. For the three months ended March 31, 2020, the Company repurchased 57,800 shares of common stock pursuant to its share repurchase program at an average price of $9.53 per share.

 

On March 25, 2020, the Board of Directors amended the share repurchase program to remove stockholder notice requirements and also approved the suspension of all redemptions effective immediately.

 

Distributions

 

On January 15, 2020, February 15, 2020 and March 15, 2020, the Company paid distributions to its stockholders for the months ended December 31, 2019, January 31, 2020 and February 29, 2020, respectively, totaling $0.9 million. On April 29, 2020, the Company paid a distribution to its stockholders for the month ended March 31, 2020 totaling $0.3 million. These distributions were all paid in cash.

 

On March 25, 2020, the Board of Directors determined to suspend regular monthly distributions for months ending after March 2020.

 

Future distributions, if any, declared will be at the discretion of the Company’s Board of Directors based on their analysis of the Company’s performance over the previous periods and expectations of performance for future periods. The Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, operating and interest expenses and the Company’s ability to refinance near-term debt. In addition, the Company currently intends to continue to comply with the REIT distribution requirement that it annually distribute no less than 90% of its taxable income. The Company cannot assure that any future distributions will be made or that it will maintain any particular level of distributions that it has previously established or may establish.

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

  

7. Related Party Transaction and Other Arrangements

 

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

 

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

 

		For the Three Months Ended March 31,
		2020				2019
Asset management fees (general and administrative costs)		$	77,313			$	163,349

 

Subordinated Advances – Related Party

 

On March 18, 2016, the Company and its Sponsor entered into the Subordinated Agreement, a subordinated unsecured loan agreement, pursuant to which the Sponsor made aggregate principal advances of $12.6 million through March 31, 2017 (the termination date of the Offering). The outstanding principal advances bear interest at a rate of 1.48%, but no interest or principal is due or payable to the Sponsor until holders of the Company’s Common Shares have received liquidation distributions equal to their respective net investments (defined as $10.00 per Common Share) plus a cumulative, pre-tax, non-compounded annual return of 8.0% on their respective net investments.

 

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

 

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

 

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

 

As of both March 31, 2020 and December 31, 2019, an aggregate of approximately $12.6 million of principal advances have been funded, which along with the related accrued interest of $679,208 and $632,725, respectively, are classified as Subordinated Advances – Related Party, a liability on the consolidated balance sheets. During the three months ended March 31, 2020 and 2019, the Company accrued $46,483 and $46,098, respectively of interest on the principal advances.

 

8. Commitments and Contingencies

 

Legal Proceedings

 

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

 

  

PART I. FINANCIAL INFORMATION, CONTINUED:

 

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

 

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Lightstone Real Estate Income Trust Inc. and Subsidiaries (‘‘Lightstone Income Trust’’), and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Lightstone Real Estate Income Trust Inc., a Maryland corporation, and its subsidiaries.

 

Forward-Looking Statements

 

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

 

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

 

Risks and other factors that might cause differences, some of which could be material, include, but are not limited to, economic and market conditions, competition, tenant or joint venture partner(s) bankruptcies, our lack of operating history, the availability of cash flows from operations to pay distributions, changes in governmental, tax, real estate and zoning laws and regulations, failure to increase tenant occupancy and operating income, rejection of leases by tenants in bankruptcy, financing and development risks, construction and lease-up delays, cost overruns, the level and volatility of interest rates, the rate of revenue increases versus expense increases, the financial stability of various tenants and industries, the failure of the Company to make additional investments in real estate properties, the failure to upgrade our tenant mix, restrictions in current financing arrangements, the failure to fully recover tenant obligations for common area maintenance, insurance, taxes and other property expenses, the failure of the Company to continue to qualify as a real estate investment trust (“REIT”), the failure to refinance debt at favorable terms and conditions, an increase in impairment charges, loss of key personnel, failure to achieve earnings/funds from operations targets or estimates, conflicts of interest with the Advisor and the Sponsor and their affiliates, failure of joint venture relationships, significant costs related to environmental issues and uncertainties regarding the impact of the current COVID-19 pandemic, and restrictions intended to prevent its spread on our business and the economy generally, as well as other risks listed from time to time in this Form 10-Q, our Form 10-K and in the Company’s other reports filed with the SEC.

 

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

 

Overview

 

Lightstone Real Estate Income Trust Inc. (‘‘Lightstone Income Trust’’), is a Maryland corporation, formed on September 9, 2014, which elected to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2016.

 

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

 

 

We have and will continue to seek to originate, acquire and manage a diverse portfolio of real estate and real estate-related investments, including investments in mezzanine loans, first lien mortgage loans, second lien mortgage loans, bridge loans and preferred equity interests, with a focus on development investments and investments intended to finance development or redevelopment opportunities. We may also invest in debt and derivative securities related to real estate assets. A substantial portion of our investments by value may be secured by or related to properties or entities advised by, or wholly or partially, directly or indirectly owned by The Lightstone Group, LLC (the “Sponsor”), its affiliates or its other sponsored real estate investment programs. Although we expect that most of our investments will be of these types, we may invest in whatever types of real estate-related investments that we believe are in our best interests.

 

We currently have one operating segment. As of March 31, 2020, we wholly owned and consolidated the operating results of one development project, the Williamsburg Moxy Hotel and held an unconsolidated approximate 33.3% membership interest in 40 East End Ave. Pref Member LLC (the “40 East End Ave. Joint Venture”). We account for our unconsolidated membership interest in the 40 East End Ave. Joint Venture in accordance with the equity method of accounting.

 

Our advisor is Lightstone Real Estate Income LLC, a Delaware limited liability company (the ‘‘Advisor’’), which is majority owned by David Lichtenstein. On September 12, 2014, the Advisor contributed $200,000 to Lightstone Income Trust in exchange for 20,000 shares of common stock (“Common Shares”), or $10.00 per share. Mr. Lichtenstein also is a majority owner of the equity interests of The Lightstone Group, LLC. The Lightstone Group, LLC served as our Sponsor during our initial public offering (the “Offering”) which terminated on March 31, 2017. Mr. Lichtenstein owns 222,222 Common Shares which were issued on June 15, 2015 for $2.0 million, or $9.00 per share. Subject to the oversight of our board of directors (the “Board of Directors”), the Advisor has primary responsibility for making investment decisions on our behalf and managing our day-to-day operations. Mr. Lichtenstein also acts as our Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone Income Trust.

 

We do not have any employees. The Advisor receives compensation and fees for services related to the investment and management of our assets.  The Advisor has certain affiliates which may manage the properties we acquire. However, we may also contract with other unaffiliated third-party property managers.

 

Our Common Shares are not currently listed on a national securities exchange. We may seek to list our Common Shares for trading on a national securities exchange only if a majority of our independent directors believe listing would be in the best interest of our stockholders. We do not intend to list our Common Shares at this time. We do not anticipate that there would be any market for our Common Shares until they are listed for trading. In the event we do not begin the process of achieving a liquidity event prior to March 31, 2022, which is the fifth anniversary of the termination of our Offering, our charter requires either (a) an amendment to our charter to extend the deadline to begin the process of achieving a liquidity event, or (b) the holding of a stockholders meeting to vote on a proposal for an orderly liquidation of our portfolio.

 

Current Environment

 

Our operating results are substantially impacted by the overall health of local, U.S. national and global economies and may be influenced by market and other challenges. Additionally, our business and financial performance may be adversely affected by current and future economic and other conditions; including, but not limited to, availability or terms of financings, financial markets volatility, political upheaval or uncertainty, natural and man-made disasters, terrorism and acts of war, unfavorable changes in laws and regulations, outbreaks of contagious diseases, cybercrime, loss of key relationships, and recession.

 

COVID-19 Pandemic

 

The global impact of the COVID-19 pandemic has been rapidly evolving and, as cases of the illness caused by the virus have continued to be identified in additional countries, many countries, including the United States, have reacted by instituting quarantines and restrictions on travel. In addition, all the states where we operate properties and have development projects have reacted to the COVID-19 pandemic by instituting quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of business that may continue to operate and/or restrictions on types of construction projects that may continue. Many states have recently announced guidelines to reduce certain of these restrictions.

 

Because our Williamsburg Moxy Hotel development project is in its pre-development stage, the COVID-19 pandemic has not currently affected our associated pre-development activities.  Our other investment is our approximately 33.3% membership interest in the 40 East End Ave. Joint Venture, which is developing a substantially completed luxury residential condominium project (the “40 East End Avenue Project”) located at the corner of 81st Street and East End Avenue in the Upper East Side neighborhood of New York City. The 40 East End Avenue Project received its final temporary certificates of occupancy, or TCO, in March 2020.

 

The extent to which our business may be affected by the current COVID-19 pandemic will largely depend on both current and future developments, including its duration, spread and treatment, and related travel advisories and restrictions, all of which are highly uncertain and cannot be reasonably predicted.

 

 

If our Williamsburg Moxy Hotel development project and/or investment in the 40 East End Ave. Joint Venture are negatively impacted for an extended period because development activities and/or sales of condominium units are delayed, our business and financial results could be materially and adversely impacted.

 

We are not currently aware of any other material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from our operations, other than those referred to above or throughout this Form 10-Q. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period.

 

Operating Portfolio Summary –

 

On July 17, 2019 we acquired four adjacent parcels of land located at 353-361 Bedford Avenue in Brooklyn, New York on which we intend to develop and construct the Williamsburg Moxy Hotel, a 210-room branded hotel. As of March 31, 2020, the Williamsburg Moxy Hotel, which we wholly own and consolidate, was under development.

 

As of March 31, 2020, we held an unconsolidated approximate 33.3% membership interest in the 40 East End Ave. Joint Venture, an affiliated real estate entity which owns the 40 East End Project, a substantially complete luxury residential condominium project consisting of 29 units located at the corner of 81st Street and East End Avenue in the Upper East Side neighborhood of New York City. We account for our unconsolidated membership interests in the 40 East End Ave. Joint Venture in accordance with the equity method of accounting.

 

Critical Accounting Policies and Estimates

 

There were no material changes during the three months ended March 31, 2020 to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2019.

 

Results of Operations

 

Through March 31, 2020, we have made the following real estate and real estate-related investments:

 

105-109 W. 28^th Street Preferred Investment

 

We previously entered into an agreement, as amended, with various related party entities that provided for us to make aggregate preferred equity contributions (the “105-109 W. 28^th Street Preferred Investment”) of up to $37.0 million in an affiliate of our Sponsor (the “Moxy Developer”), which owns a parcel of land located at 105-109 W. 28^thStreet, New York, New York, on which it constructed a 343-room Marriott Moxy hotel, which opened during February 2019. The 105-109 W. 28^th Street Preferred Investment was made pursuant to an instrument that entitled us to monthly preferred distributions at a rate of 12% per annum.

 

We received aggregate repayments of $26.5 million during March 2019 and subsequently received the remaining outstanding balance of $10.5 million on August 26, 2019 and as a result, have fully redeemed the 105-109 W. 28th Street Preferred Investment.

 

The Cove Joint Venture

 

On January 31, 2017 we along with LSG Cove LLC, an affiliate of our Sponsor, our Sponsor’s other public program, Lightstone Value Plus Real Estate Investment Trust III, Inc. (“Lightstone III”) and Maximus Cove Investor LLC (“Maximus”), an unrelated third party acquired the membership interests in RP Maximus Cove L.L.C. (the “Cove Joint Venture”) from an unrelated third party. We, LSG Cove LLC, Lightstone III and Maximus had 22.5%, 45.0%, 22.5% and 10.0% membership interests in the Cove Joint Venture, respectively. The Cove Joint Venture owns and operates The Cove at Tiburon (the “Cove”), a multi-family complex consisting of 281-units, or 289,690 square feet, contained within 32 apartment buildings over 20.1 acres, located in Tiburon, California.

 

We account for our 22.5% membership interest in the Cove Joint Venture in accordance with the equity method of accounting.

 

On February 12, 2020, we, LSG Cove LLC and Lightstone III subsequently redeemed our respective membership interests in the Cove Joint Venture for an aggregate redemption price of approximately $87.6 million. In connection, with the redemption of our 22.5% membership interest in the Cove Joint Venture, we received proceeds of approximately $21.9 million which resulted in the recognition of a gain on the disposition of unconsolidated affiliated real estate entity of $8.2 million during the first quarter of 2020. As a result of the redemption of our 22.5% membership interest in the Cove Joint Venture, we no longer have an ownership interest in the Cove Joint Venture.

 

 

40 East End Ave. Joint Venture

 

On March 31, 2017, we entered into a joint venture agreement (the “40 East End Ave. Transaction”) with SAYT Master Holdco LLC, an entity majority-owned and controlled by David Lichtenstein, who also majority owns and controls the Sponsor, and a related party, (the “40 East End Seller”), providing for us to acquire an approximate 33.3% of the 40 East End Seller’s approximate 100% membership interest in 40 East End Ave. Pref Member LLC (the “40 East End Ave. Joint Venture”).

 

The 40 East End Ave. Joint Venture, through affiliates, is developing the 40 East End Avenue Project, a substantially completed luxury residential 29-unit condominium project located at the corner of 81st Street and East End Avenue in the Upper East Side neighborhood of New York City. The 40 East End Avenue Project received its final TCO in March 2020.

 

We account for our approximate 33.3% membership interest in the 40 East End Ave. Joint Venture in accordance with the equity method of accounting.

 

Williamsburg Moxy Hotel

 

On July 17, 2019, we acquired four adjacent parcels of land located at 353-361 Bedford Avenue in Brooklyn, New York (collectively, the “Williamsburg Land”) on which we intend to develop and construct a 210-room branded hotel (the “Williamsburg Moxy Hotel”). As of March 31, 2020, the Williamsburg Moxy Hotel was under development.

 

Additionally, during 2019, we acquired corporate bonds that are publicly traded on the Tel Aviv Stock Exchange (the “Israeli Bonds”) and denominated in New Israeli Shekel (“ILS”) that we subsequently sold during the three months ended March 31, 2020.

 

The operating results of our investments are reflected in our consolidated statements of operations commencing from their respective dates of acquisition through their respective dates of disposition.

 

Investment income

 

Our investment income was approximately $0.1 million and $1.1 million for the three months ended March 31, 2020 and 2019, respectively. During the three months ended March 31, 2020, our investment income consisted solely of interest income on our cash and cash equivalents and the Israeli Bonds. Our investment income during the three months ended March 31, 2019 primarily consisted of preferred distributions related to our 105-109 W. 28^th Street Preferred Investment and also included interest income on our cash and cash equivalents and the Israeli Bonds.

 

Gain from disposition of investment in unconsolidated affiliated real estate entity

 

On February 12, 2020, we completed the disposition of an unconsolidated 22.5% membership interest in the Cove Joint Venture which resulted in the recognition of a gain on the disposition of unconsolidated affiliated real estate entity of $8.2 million during the first quarter of 2020.

 

Gain on sale of marketable securities

 

During the three months ended March 31, 2020, the Company sold all of its Israeli Bonds and recognized a gain on the sale of marketable securities of $0.3 million.

 

Loss from investment in unconsolidated affiliated real estate entities

 

Our loss from investments in unconsolidated affiliated real estate entities during the three months ended March 31, 2020 was $0.4 million compared to $1.0 million for the same period in 2019. Our loss from investments in unconsolidated affiliated real estate entities is attributable to our ownership interests in the 40 East End Ave. Joint Venture and the Cove Joint Venture through the date of redemption of our membership interest on February 12, 2020. We account for our ownership in the Cove Joint Venture and the 40 East End Ave. Joint Venture in accordance with the equity method of accounting.

 

General and administrative expenses

 

General and administrative expenses during the three months ended March 31, 2020 was $0.2 million compared to $0.3 million for the same period in 2019.

 

 

Foreign currency transaction loss

 

We maintained funds in a bank account that is denominated in ILS and are re-measured into U.S. Dollars at the current exchange rate at the end of each reporting period. As of December 31, 2019, we maintained approximately 4,455 ILS in a bank account, which was re-measured to $1,291, and is included in cash and cash equivalents on our consolidated balance sheet. As of March 31, 2020 we had no ILS in the bank account. For the three months ended March 31, 2020 and 2019, our foreign currency transaction loss was $47,648 and $26,848, respectively.

 

Interest expense

 

Interest expense, which is attributable to the outstanding principal advances of $12.6 million included in Subordinated Advances – Related Party, was $46,483 and $46,098 for the three months ended March 31, 2020 and 2019, respectively. Additionally, during the three months ended March 31, 2020, $0.3 million of interest was capitalized to construction in progress for our Williamsburg Moxy Hotel development project.

 

Financial Condition, Liquidity and Capital Resources

 

For the three months ended March 31, 2020 our primary source of funds were proceeds received in connection with the redemption of our membership interest in the Cove Joint Venture of $21.9 million and proceeds from the disposition of marketable securities (Israeli Bonds) of $4.1 million. As of March 31, 2020, we had cash and cash equivalents of $36.2 million.

 

We currently believe that our current available cash on hand will be sufficient to satisfy our expected cash requirements (primarily consisting of our anticipated operating expenses, scheduled debt service, capital contributions and distributions to our shareholders, if any, required to maintain our qualification as a REIT, and our pre-development activities and certain construction costs associated with the Williamsburg Moxy Hotel) for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months. However, we ultimately expect to obtain financing to fund a substantial portion of our construction costs for the Williamsburg Moxy Hotel. However, there can be no assurance we will be successful in obtaining construction financing at favorable terms, if at all.

 

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

 

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

 

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

 

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

 

 

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

 

In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make certain payments to our Advisor. We have agreements with the Advisor to pay certain fees, in exchange for services performed by the Advisor and/or its affiliated entities.

 

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

 

		For the Three Months Ended March 31,
		2020				2019
Asset management fees (general and administrative costs)		$	77,313			$	163,349

 

The advisory agreement has a one-year term and is renewable for an unlimited number of successive one-year periods upon the mutual consent of our Advisor and our independent directors. During our acquisition and development stage, payments include asset acquisition fees and financing coordination fees, and the reimbursement of acquisition-related expenses to our Advisor. During our operational stage, we pay our Advisor an asset management fee or asset management participation or construction management fees. We also reimburse our Advisor and its affiliates for actual expenses it incurs for administrative and other services provided for us. Upon the liquidation of assets, we may pay our Advisor or its affiliates a real estate disposition commission.

 

Summary of Cash Flows

 

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

 

		For the Three Months Ended March 31, 2020				For the Three Months Ended March 31, 2019
Cash flows (used in)/provided by operating activities		$	(23,573	)		$	675,367
Cash flows provided by investing activities			23,784,711				25,054,010
Cash flows used in financing activities			(1,404,718	)			(1,988,482	)
Effect of exchange rate changes on cash and cash equivalents			(47,648	)			(26,848	)
Net change in cash, cash equivalents and restricted cash			22,308,772				23,714,047
Cash, cash equivalents and restricted cash, beginning of the year			14,263,182				4,350,896
Cash, cash equivalents and restricted cash, end of the period		$	36,571,954			$	28,064,943

 

Our principal source of cash flow has been derived from the disposition of our membership interest in the Cove Joint Venture and the disposition of our Israeli Bonds. We believe our cash available on hand, will provide us with sufficient resources to fund our operating expenses, expected debt service, capital contributions and distributions, if any, required to maintain our qualification as a REIT.

 

Operating activities

 

The cash used in operating activities of $24 during the three months ended March 31, 2020 consisted of our net income of $7.9 million and net changes in operating assets and liabilities of $0.2 million offset by a gain of $8.2 million on the disposition of our membership interest in the Cove Joint Venture.

 

Investing activities

 

The cash provided by investing activities of $23.8 million during the 2020 period consisted of proceeds received in connection with the redemption of our membership interest in the Cove Joint Venture of $21.9 million and proceeds from the disposition of marketable securities of $4.1 million offset by acquisition and other development costs of $2.2 million attributable to the Williamsburg Moxy Hotel.

 

 

Financing activities

 

The cash used in financing activities of $1.4 million during the 2020 period consists of distributions of $0.9 million to our common stockholders and redemptions and cancellation of shares of our common stock of $0.6 million.

 

Williamsburg Moxy Hotel

 

On July 17, 2019, we, through a subsidiary, acquired the Williamsburg Land, from unaffiliated third parties, for an aggregate purchase price of approximately $30.4 million, excluding closing and other acquisition related costs, on which we intend to develop and construct the Williamsburg Moxy Hotel. The acquisition was funded with cash on hand ($14.4 million) and proceeds from a mortgage loan ($16.0 million). As of March 31, 2020, the Williamsburg Moxy Hotel was in pre-development and not under construction.

 

In connection with the closing of the acquisition of the Williamsburg Land, we simultaneously entered into a mortgage loan collateralized by the Williamsburg Land (the “Williamsburg Mortgage”) for $16.0 million. The Williamsburg Mortgage has a term of one year, with two, six-month extension options, bears interest at 4.50% and requires monthly interest-only payments of $60,000 per month through its maturity with the entire unpaid balance due upon maturity. Assuming we exercise the first of the two extension options, our interest payments will aggregate approximately $0.5 million for the remainder of 2020.

 

The Williamsburg Mortgage (outstanding principal balance of $16.0 million as of March 31, 2020) initially matures in July 2020 but has two, six-month extension options, which we can exercise by providing the lender with notice of our intent to extend. We currently plan to exercise the extension options unless we obtain construction financing prior to the any of the applicable maturity dates. We have no other maturities of mortgage debt over the next 12 months.

 

As of March 31, 2020, we incurred and capitalized to construction in progress an aggregate of $36.6 million consisting of acquisition and other development costs attributable to the Williamsburg Moxy Hotel.

 

40 East End Ave. Joint Venture

 

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

 

Our ownership interest in the 40 East End Ave. Joint Venture is a non-managing interest. Because we exert significant influence over but do not control the 40 East End Ave. Joint Venture, we account for our ownership interest in the 40 East End Ave. Joint Venture in accordance with the equity method of accounting. All contributions to and distributions of earnings from the 40 East End Ave. Joint Venture are made on a pro rata basis in proportion to each member’s equity interest percentage. Any distributions in excess of earnings from the 40 East End Ave. Joint Venture are made to the members pursuant to the terms of its operating agreement. We commenced recording our allocated portion of earnings and cash distributions, if any, from the 40 East End Ave. Joint Venture beginning as of March 31, 2017 with respect to our membership interest of approximately 33.3% in the 40 East End Ave. Joint Venture. Additionally, Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”), a real estate investment trust also sponsored by our Sponsor, made $30.0 million of preferred equity contributions (the “Preferred Contributions”) to a subsidiary of the 40 East End Ave. Joint Venture, pursuant to an instrument that entitles Lightstone I to monthly preferred distributions at a rate of 12% per annum. No distributions may be paid to the members until the Lightstone I’s Preferred Contributions are redeemed in full.

 

The 40 East End Ave. Joint Venture, through affiliates, is developing the 40 East End Avenue Project, as substantially completed luxury residential 29-unit condominium project containing 29 units located at the corner of 81st Street and East End Avenue in the Upper East Side neighborhood of New York City. The 40 East End Project obtained its final TCO in March 2020.

 

On March 21, 2017, the 40 East End Ave. Joint Venture obtained financing from a financial institution of up to $85.3 million (the “Mortgage Payable”) for the land acquisition and construction of the 40 East End Ave. Project. On December 19, 2019, the 40 East End Ave. Joint Venture entered into a loan of approximately $95.2 million (the “Condo Loan”), of which approximately $90.2 million was funded at closing and the remaining availability of $5.0 million will be advanced upon satisfaction of certain conditions, including obtaining final TCO for the 40 East End Ave. Project, which was obtained in March 2020. The Condo Loan matures in two years and bears interest at LIBOR plus 2.45%, which is payable monthly, and principal payments are required to be made from condominium sales proceeds. If principal paydowns from condominium sales proceeds do not reduce the outstanding principal balance of the Condo Loan to at least $81.0 million and $73.0 million as of December 19, 2020 and June 19, 2021, respectively, then the 40 East End Ave. Joint Venture will be required to make balloon payments in the amounts necessary to reach these thresholds. At closing, the 40 East End Ave. Joint Venture used a portion of the proceeds from the Condo Loan to (i) fully repay the then outstanding principal balance of $80.3 million plus accrued and unpaid interest of $0.2 million for the Mortgage Payable and (ii) redeem $9.5 million of Lightstone I’s Preferred Contributions.

 

 

In connection with the refinancing, the 40 East End Ave. Joint Venture recognized a loss on the early extinguishment of debt of approximately $0.8 million during the fourth quarter of 2019, of which our proportionate share was approximately $0.3 million.

 

Our Sponsor and its affiliates (collectively, the “40 East End Guarantors”) have provided certain guarantees with respect to the Condo Loan and the members have agreed to reimburse the 40 East End Guarantors for any balance that may become due under the guarantees (the “40 East End Guarantee”), of which our share is approximately 33.3%. We have determined that the fair value of our share of the 40 East End Guarantee is immaterial.

 

On December 26, 2019, the 40 East End Ave. Joint Venture redeemed an additional $3.5 million of Lightstone I’s Preferred Contributions. As a result, Lightstone I’s remaining outstanding Preferred Contributions were $17.0 million as of December 31, 2019. Subsequently, an additional $11.0 million of Lightstone I’s Preferred Contributions were redeemed on February 13, 2020 reducing Lightstone I’s Preferred Contributions to $6.0 million as of March 31, 2020.

 

Subsequent to our acquisition through March 31, 2020, we have made an aggregate of $4.6 million of additional capital contributions to the 40 East End Ave. Joint Venture.

 

As of March 31, 2020, construction of the 40 East End Ave. Project was substantially complete. We do not currently expect to make any additional contributions to the 40 East End Ave. Joint Venture over the next 12 months. Additionally, we do not expect to receive any distributions from the 40 East End Ave. Joint Venture over the next 12 months as proceeds from the sales of condominium units must first be used to pay-down the Condo Loan and thereafter to redeem Lightstone I’s remaining Preferred Contributions.

 

Distributions

 

On January 15, 2020, February 15, 2020 and March 15, 2020, we paid distributions to our stockholders for the months ended December 31, 2019, January 31, 2020 and February 29, 2020, respectively, totaling $0.9 million. On April 29, 2020, we paid a distribution to our stockholders for the month ended March 31, 2020 totaling $0.3 million. These distributions were all paid in cash.

 

On March 25, 2020, the Board of Directors determined to suspend regular monthly distributions for months ending after March 2020.

 

Future distributions declared will be at the discretion of the Board of Directors based on their analysis of our performance over the previous periods and expectations of performance for future periods and may differ from the amount of the distribution determined for this period. The Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, operating and interest expenses and our ability to refinance near-term debt. In addition, we currently intend to continue to comply with the REIT distribution requirement that it annually distribute no less than 90% of our taxable income. We cannot assure that regular distributions will continue to be made or that we will maintain any particular level of distributions that it has established or may establish.

 

Share Repurchase Program

 

Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to us, subject to restrictions. From our date of inception through December 31, 2019, we repurchased 395,941 shares of common stock pursuant to our share repurchase program at an average price of $9.48 per share. For the three months ended March 31, 2020, we repurchased 57,800 shares of common stock pursuant to our share repurchase program at an average price of $9.53 per share. .

 

On March 25, 2020, the Board of Directors amended the share repurchase program to remove stockholder notice requirements and also approved the suspension of all redemptions effective immediately.

 

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 calculate FFO, a non-GAAP measure, consistent with the standards established over time by the Board of Governors of NAREIT, as restated in a White Paper approved by the Board of Governors of NAREIT effective in December 2018 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Our FFO calculation complies with NAREIT's definition.

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

The below table illustrates the items deducted in the calculation of FFO and MFFO.

 

		For the Three Months Ended March 31,
		2020				2019
Net income/(loss)		$	7,850,228			$	(300,916	)
FFO adjustments:
Gain from disposition of investment in unconsolidated affiliated real estate entity			(8,180,509	)			-
Adjustments to equity earnings from unconsolidated affiliated real estate entities			220,520				755,052
FFO			(109,761	)			454,136
MFFO adjustments:
Amortization of discount on debt securities			(30,196	)			(2,408	)
Foreign currency transaction loss			47,648				26,848
Gain on sale of marketable securities			(264,589	)			-
Adjustments to equity earnings from unconsolidated affiliated real estate entities (loss on debt extinguishment)(1)			-				-
MFFO			(356,898	)			478,576
Straight-line rent(2)			-				-
MFFO - IPA recommended format		$	(356,898	)		$	478,576
Net income/(loss)		$	7,850,228			$	(300,916	)
Net income/(loss) per common share, basic and diluted		$	0.92			$	(0.03	)
FFO		$	(109,761	)		$	454,136
FFO per common share, basic and diluted		$	(0.01	)		$	0.05
MFFO - IPA recommended format		$	(356,898	)		$	478,576
Weighted average number of common shares outstanding, basic and diluted			8,556,479				8,640,912

 

(1)

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.

 

(2)

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

 

 

The table below presents our cumulative FFO and distributions declared:

 

		For the period September 9, 2014
		(date of inception) through
		March 31, 2020
FFO		$	6,071,177
Distributions declared		$	22,291,378

 

ITEM 4. CONTROLS AND PROCEDURES.

 

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

 

There have been no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION:

 

ITEM 1. LEGAL PROCEEDINGS.

 

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

 

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

 

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

 

Recent Sales of Unregistered Securities

 

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

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

 

ITEM 6. EXHIBITS

 

Exhibit Number		Description
31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
101*		XBRL (eXtensible Business Reporting Language).The following financial information from Lightstone Real Estate Income Trust Inc. on Form 10-Q for the quarter ended March 31, 2020, filed with the SEC on May 15, 2020, formatted in XBRL includes: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Operations, (3) Consolidated Statements of Stockholders’ Equity, (4) Consolidated Statements of Cash Flows, and (5) the Notes to the Consolidated Financial Statement.

 

*Filed herewith

 

 

SIGNATURES

 

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

 

	LIGHTSTONE REAL ESTATE INCOME TRUST INC.
Date: May 15, 2020	By:	/s/David Lichtenstein
		David Lichtenstein
		Chairman and Chief Executive Officer
		(Principal Executive Officer)

 

Date: May 15, 2020	By:	/s/Seth Molod
		Seth Molod
		Chief Financial Officer
		(Duly Authorized Officer and Principal Financial and Accounting Officer)