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EX-32.2 - EXHIBIT 32.2 - Lightstone Value Plus Real Estate Investment Trust V, Inc.tm2014622d1_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - Lightstone Value Plus Real Estate Investment Trust V, Inc.tm2014622d1_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Lightstone Value Plus Real Estate Investment Trust V, Inc.tm2014622d1_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Lightstone Value Plus Real Estate Investment Trust V, Inc.tm2014622d1_ex31-1.htm
EX-10.1 - EXHIBIT 10.1 - Lightstone Value Plus Real Estate Investment Trust V, Inc.tm2014622d1_ex10-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2020

 

Commission File Number: 000-53650

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland   20-8198863
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

1985 Cedar Bridge Avenue, Suite 1, Lakewood, New Jersey 08701

(Address of principal executive offices) (Zip Code)

 

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

 

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 ¨

 

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 11, 2020, the Registrant had approximately 20.2 million shares of common stock outstanding.

 

 

 

 

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST V, INC.

INDEX

 

        Page
PART I   FINANCIAL INFORMATION   1
         
Item 1.   Financial Statements (Unaudited)   2
     
    Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019   3
     
    Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2020 and 2019   4
         
    Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019   5
         
    Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019   6
     
    Notes to Consolidated Financial Statements   7
     
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   17
     
Item 4.   Controls and Procedures   28
     
PART II   OTHER INFORMATION    
     
Item 1.   Legal Proceedings   29
     
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   29
     
Item 3.   Defaults Upon Senior Securities   29
     
Item 4.   Mine Safety Disclosures   29
     
Item 5.   Other Information   29
     
Item 6.   Exhibits   29

 

 2 

 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Consolidated Balance Sheets

(dollars in thousands, except per share amounts)

 

   March 31, 2020   December 31, 2019 
    (unaudited)      
Assets          
Investment property:          
Land and improvements  $63,190   $55,888 
Building and improvements   244,663    207,867 
Furniture, fixtures and equipment   5,788    5,561 
Gross investment property   313,641    269,316 
Less accumulated depreciation   (42,645)   (40,230)
Net investment property   270,996    229,086 
           
Cash and cash equivalents   19,213    15,640 
Marketable securities, available for sale   5,510    5,496 
Restricted cash   4,635    3,932 
Note receivable, net   11,500    10,423 
Prepaid expenses and other assets   1,835    1,238 
Assets held for sale   22,407    40,807 
Total Assets  $336,096   $306,622 
           
Liabilities and Stockholders' Equity          
Notes payable, net  $213,148   $183,788 
Advance from advisor   10,052    - 
Accounts payable and accrued and other liabilities   3,563    3,488 
Payables to related parties   303    6 
Accrued property tax   2,201    2,326 
Liabilities held for sale   483    13,915 
Total liabilities   229,750    203,523 
           
Commitments and Contingencies          
           
Stockholders' Equity:          
Preferred stock, $.0001 par value per share; 50.0 million shares authorized, none issued and outstanding   -    - 
Convertible stock, $.0001 par value per share; 1,000 shares authorized, issued and outstanding   -    - 
Common stock, $.0001 par value per share; 350.0 million shares authorized, 22.2 million and 23.4 million shares issued and outstanding, respectively   2    2 
Additional paid-in-capital   204,841    204,912 
Accumulated other comprehensive income   77    111 
Accumulated deficit   (98,423)   (102,404)
Total Company stockholders' equity   106,497    102,621 
           
Noncontrolling interests   (151)   478 
Total Stockholder's Equity   106,346    103,099 
Total Liabilities and Stockholders' Equity  $336,096   $306,622 

 

See Notes to Consolidated Financial Statements.

 

 3 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Consolidated Statements of Operations and Comprehensive Income

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

(Unaudited)

 

   For the Three Months Ended March 31, 
   2020   2019 
Rental revenues  $9,400   $8,533 
           
Expenses          
Property operating expenses   2,960    2,789 
Real estate taxes   1,218    1,190 
General and administrative   1,539    1,483 
Depreciation and amortization   2,511    3,100 
Total operating expenses   8,228    8,562 
           
Operating income/(loss)   1,172    (29)
           
Interest expense, net   (2,140)   (1,987)
Interest income   487    245 
Gain on sale of investment property   5,474    - 
Other income, net   199    65 
Net income/(loss)   5,192    (1,706)
Net (income)/loss attributable to noncontrolling interests   (1,211)   13 
Net income/(loss) attributable to the Company's shares  $3,981   $(1,693)
Weighted average shares outstanding:          
Basic and diluted   22,223    23,431 
Basic and diluted income/(loss) per share  $0.18   $(0.07)
Comprehensive income/(loss):          
Net income/(loss)  $5,192   $(1,706)
Other comprehensive (loss)/income:          
Holding (loss)/gain on marketable securities, available for sale   (28)   168 
Reclassification adjustment for (gain)/loss included in net income/(loss)   (6)   52 
Total other comprehensive (loss)/income   (34)   220 
Comprehensive income/(loss):   5,158    (1,486)
Comprehensive (income)/loss attributable to noncontrolling interest   (1,211)   13 
Comprehensive income/(loss) attributable to the Company's shares  $3,947   $(1,473)

 

See Notes to Consolidated Financial Statements.

 

 4 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Consolidated Statements of Stockholders’ Equity

(dollars and shares in thousands)

(Unaudited)

 

                   Additional   Accumulated
Other
           Total 
   Convertible Stock   Common Stock   Paid-In   Comprehensive   Accumulated   Noncontrolling   Stockholders' 
   Shares   Amount   Shares   Amount   Capital   Income   Deficit   Interests   Equity 
BALANCE, December 31, 2018   1   $-    23,432   $2   $214,537   $(217)  $(95,295)  $794   $119,821 
                                              
Net loss   -    -    -    -    -    -    (1,693)   (13)   (1,706)
Distributions to noncontrolling interest holders   -    -    -    -    -         -    (36)   (36)
Other comprehensive loss:                                             
Holding gain on marketable securities, available for sale   -    -    -    -    -    168    -    -    168 
Reclassification adjustment for loss on sale of marketable securities included in net loss   -    -    -    -    -    52    -    -    52 
                                              
BALANCE, March 31, 2019   1   $-    23,432   $2   $214,537   $3   $(96,988)  $745   $118,299 

 

           Additional   Accumulated
Other
           Total 
   Convertible Stock   Common Stock   Paid-In   Comprehensive   Accumulated   Noncontrolling   Stockholders' 
   Shares   Amount   Shares   Amount   Capital   (Loss)/Income   Deficit   Interests   Equity   
BALANCE, December 31, 2019   1   $-    22,223   $2   $204,912   $111   $(102,404)  $478   $103,099 
                                  -           
Net income   -    -    -    -    -    -    3,981    1,211    5,192 
Distributions paid to noncontrolling interest holders   -    -    -    -    -    -    -    (1,840)   (1,840)
Costs associated with redemptions of common stock   -    -    -    -    (71)   -    -    --    (71)
Other comprehensive loss:                                             
Holding loss on marketable securities, available for sale   -    -    -    -    -    (28)   -    -    (28)
Reclassification adjustment for gain on sale of marketable securities included in net income   -    -    -    -    -    (6)   -    -    (6)
                                              
BALANCE, March 31, 2020   1   $-    22,223   $2   $204,841   $77   $(98,423)  $(151)  $106,346 

 

See Notes to Consolidated Financial Statements.

 

 5 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Consolidated Statements of Cash Flows

(dollars in thousands)

(Unaudited)

 

   For the Three Months Ended March 31, 
   2020   2019 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income/(loss)  $5,192   $(1,706)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:          
Depreciation and amortization   2,511    3,100 
Amortization of deferred financing fees   125    150 
Gain on sale of investment property   (5,474)   - 
Non-cash interest income   (418)   (98)
Other non-cash adjustments   33    (373)
Changes in operating assets and liabilities:          
Decrease in prepaid expenses and other assets   405    2,992 
(Decrease)/increase in accounts payable and accrued and other liabilities   (879)   1,021 
Increase/(decrease) in payables to related parties   297    (297)
Net cash provided by operating activities   1,792    4,789 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of investment property   (45,172)   (72,427)
Purchases of marketable securities   (566)   (1,399)
Proceeds from sale of marketable securities   524    10,893 
Funding of note receivable, net   (659)   (5,868)
Acquisition fee paid on note receivable   -    (139)
Proceeds from sale of investment property, net of closing costs   23,673      
Proceeds from disposition of investment in unconsolidated joint venture   -    10,944 
Cash used in investing activities   (22,200)   (57,996)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from notes payable   29,920    43,414 
Payments on notes payable   (12,714)   (211)
Proceeds from advance from advisor   25,000    - 
Payments on advance from advisor   (15,000)   - 
Payment of loan fees and expenses   (611)   (824)
Costs associated with redemptions of common stock   (71)   - 
Distributions to noncontrolling interest holders   (1,840)   (36)
Net cash provided by/(used in) financing activities   24,684    42,343 
           
Net change in cash, cash equivalents and restricted cash   4,276    (10,864)
Cash, cash equivalents and restricted cash, beginning of year   19,572    32,652 
Cash, cash equivalents and restricted cash, end of period  $23,848   $21,788 
Supplemental cash flow information for the periods indicated is as follows:          
Cash paid for interest  $1,967   $401 
Loan origination fee on note receivable  $-   $120 
Capital expenditures for real estate in accrued liabilities and accounts payable  $6   $9 
Holding gain/loss on marketable securities, available for sale  $34   $220 
           
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  $19,213   $18,740 
Restricted cash   4,635    3,048 
Total cash and restricted cash  $23,848   $21,788 

 

See Notes to Consolidated Financial Statements.

 

 6 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

1. Business and Organization

 

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

 

We were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis. In particular, we have focused generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment, or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who are distressed or face time-sensitive deadlines.  We have acquired a wide variety of commercial properties, including office, industrial, retail, hospitality, and multifamily.  We have purchased existing, income-producing properties, and newly-constructed properties. We have also invested in other real estate-related investments such as mortgage and mezzanine loans. We intend to hold the various real properties in which we have invested until such time as our board of directors determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that the objectives will not be met. We currently have one operating segment. As of March 31, 2020, we had eight real estate investments (five wholly owned properties and three properties consolidated through investments in joint ventures) and one real estate-related investment (mezzanine loan).

 

Substantially all of our business is conducted through Lightstone REIT V OP LP, a limited partnership organized in Delaware (the “Operating Partnership”).  As of March 31, 2020, our wholly-owned subsidiary, BHO II, Inc., a Delaware corporation, owned a 0.1% partnership interest in the Operating Partnership as its sole general partner.  As of March 31, 2020, our wholly-owned subsidiary, BHO Business Trust II, a Maryland business trust, was the sole limited partner of the Operating Partnership and owned the remaining 99.9% interest in the Operating Partnership

 

Our business is managed by an external advisor and we have no employees. Effective February 10, 2017, we engaged affiliates of The Lightstone Group (“Lightstone”), LSG-BH II Advisor LLC and LSG Development Advisor LLC (collectively, the “Advisor”), to provide advisory services to us. Lightstone is majority owned by the chairman of our board of directors, David Lichtenstein. Subject to the oversight of our board of directors, our external advisor is responsible for managing our day-to-day affairs and for services related to the management of our assets.

 

Organization

 

In connection with our initial capitalization, we issued 22,500 shares of our common stock and 1,000 shares of our convertible stock to our previous advisor on January 19, 2007.  The 1,000 shares of convertible stock were transferred to an affiliate of Lightstone on February 10, 2017 and remain outstanding as of March 31, 2020.

 

Our common stock is not currently listed on a national securities exchange. The timing of a liquidity event for our stockholders will depend upon then prevailing market conditions. Our board of directors previously targeted June 30, 2023 as the commencement of a liquidity event, however, on January 9, 2020, our board of directors elected to extend the targeted timeline until June 30, 2028 based on their assessment of our investment objectives and liquidity options for our stockholders. We can provide no assurances as to the actual timing of the commencement of a liquidity event for our stockholders or the ultimate liquidation of the Company. We will seek stockholder approval prior to liquidating our entire portfolio.

 

Noncontrolling Interests

 

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

 

 7 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

2. Summary of Significant Accounting Policies

 

Interim Unaudited Financial Information

 

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which was filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2020.  The unaudited interim consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair presentation of the results for the periods presented. The accompanying unaudited consolidated financial statements of Lightstone Value Plus Real Estate Investment Trust V, Inc. have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

 

Principles of Consolidation and Basis of Presentation

 

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

 

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

 

Reclassifications  

 

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

 

Earnings per Share

 

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

 

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 real-estate related investments 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.

 

 8 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

The Company’s consolidated portfolio of properties currently consists of seven multi-family apartment complexes and one student housing complex. Despite current restrictions and mitigation strategies, the Company’s multi-family properties have not yet seen any significant impact from the COVID-19 pandemic. However, the Company’s student housing complex, which consists of the River Club Apartments and the Townhomes at River Club, are located in Athens, Georgia and principally serve as “off-campus” lodging for students attending the University of Georgia, which has transitioned to online instruction for the remainder of its Spring 2020 semester and its other course offerings throughout the summer. Leases for the River Club Apartments and Townhomes at River Club generally have a term of one year from August through July. The Company’s student housing complex is located “off-campus” and its tenants have not been forced to vacate. However, if the current COVID-19 pandemic and related mitigation strategies extend beyond the summer, the University of Georgia may decide to continue offering only online instruction to its students in lieu of “on-campus” classes which could adversely impact leasing demand, occupancy levels and operating results of the Company’s student housing complex for future periods. Additionally, the Company’s note receivable relates to a development project which is subject to similar restrictions and risks.

 

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 properties and real estate-related investments are negatively impacted in future periods for an extended period because (i) tenants are unable to pay their rent, (ii) demand for its student housing complex declines, and (iii) its borrower is unable to pay scheduled debt service on the outstanding note receivable; the Company’s business and financial results could be materially and adversely impacted. While the Company has implemented various cost reduction strategies, including the deferral of certain non-critical capital expenditures, there can be no assurance that these cost savings will fully mitigate the potential adverse impact of any lost revenue and income.

 

COVID-19 Lease Modification Accounting Relief

 

Due to the business disruptions and challenges severely affecting the global economy caused by the COVID-19 pandemic, many lessors may be required to provide rent deferrals and other lease concessions to lessees. While the lease modification guidance addresses routine changes to lease terms resulting from negotiations between the lessee and the lessor, this guidance did not contemplate concessions being so rapidly executed to address the sudden liquidity constraints of some lessees arising from the COVID-19 pandemic and restrictions intended to prevent its spread.

 

In April 2020, the Financial Accounting Standards Board (“FASB”) staff issued a question and answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. Under existing GAAP, the Company would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated within the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A allows the Company, if certain criteria have been met, to bypass the lease by lease analysis, and instead elect to either apply the lease modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances. The Company is evaluating the impact of this policy election and has not yet concluded on whether it will apply the election.

 

New Accounting Pronouncements

 

In June 2016, the FASB issued new guidance which replaces the incurred loss impairment methodology currently in use with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  The new guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.  The Company is currently in the process of evaluating the impact the adoption of this standard will have on the Company’s consolidated financial statements.

 

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

 

 9 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

3. Real Estate Asset Acquisition

 

Autumn Breeze Apartments

 

On March 17, 2020, the Company completed the acquisition of a 280-unit multifamily property located in Noblesville, Indiana (the “Autumn Breeze Apartments”) from an unrelated third party, for an aggregate purchase price of approximately $43.0 million, excluding closing and other related transaction costs. In connection with the acquisition, the Company paid the Advisor an aggregate of approximately $0.8 million in acquisition fees and acquisition expense reimbursements.

 

The Company determined this acquisition was an asset acquisition and allocated the total purchase price, including acquisition fees and expenses, to the assets acquired based on their relative fair value. Approximately $7.2 million was allocated to land and improvements, $36.0 million was allocated to building and improvements, and $0.6 million was allocated to in-place lease intangibles.

 

The capitalization rate for the acquisition of the Autumn Breeze Apartments was approximately 4.86%. The Company calculates the capitalization rate for a real property by dividing the net operating income (“NOI”) of the property by the purchase price of the property, excluding costs. For purposes of this calculation, NOI was based upon the year ended February 29, 2020. Additionally, NOI is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation.

 

4. Note Receivable

 

500 West 22nd Street Mezzanine Loan

 

On February 28, 2019, the Company, as the lender, and an unrelated third party (the “500 West 22nd Street Mezzanine Loan Borrower”), as the borrower, entered into a loan promissory note (the “500 West 22nd Street Mezzanine Loan”) pursuant to which the Company would fund up to $12.0 million of mezzanine financing. On the same date, the Company initially funded $8.0 million of the 500 West 22nd Street Mezzanine Loan. Subsequently through March 31, 2020, the Company funded an additional $4.0 million and as a result, the 500 West 22nd Street Mezzanine Loan has been fully funded.

 

The 500 West 22nd Street Mezzanine Loan is recorded in note receivable, net on the consolidated balance sheet. In connection with the fundings made for the 500 West 22nd Street Mezzanine Loan, our Advisor has received an aggregate of approximately $0.2 million in acquisition fees from the Company. The acquisition fees are accounted for as an addition to the carrying value of the 500 West 22nd Street Mezzanine Loan and are being amortized as a reduction to interest income over the initial term of the 500 West 22nd Street Mezzanine Loan using a straight-line method that approximates the effective interest method.

 

The 500 West 22nd Street Mezzanine Loan is due August 31, 2021 and is collateralized by the ownership interests of the 500 West 22nd Street Mezzanine Loan Borrower. The 500 West 22nd Street Mezzanine Loan Borrower owns a parcel of land located at 500 West 22nd Street, New York, New York. The 500 West 22nd Street Mezzanine Loan bears interest at a rate of LIBOR + 11.0% per annum with a floor of 13.493% (13.493% as of March 31, 2020). The Company received an origination fee of 1.0% of the loan balance, or approximately $0.1 million, which is presented in the consolidated balance sheets as a direct deduction from the carrying value of the 500 West 22nd Street Mezzanine Loan and is being amortized to interest income, using a straight-line method that approximates the effective interest method, over the initial term of the 500 West 22nd Street Mezzanine Loan. The 500 West 22nd Street Mezzanine Loan may be extended two additional six-month periods by the 500 West 22nd Street Mezzanine Loan Borrower provided certain conditions are met, including the establishment of an additional reserve for interest and the payment of an extension fee equal to 0.25% of the outstanding loan balance.

 

In connection with the initial funding under the 500 West 22nd Street Mezzanine Loan, the Company retained approximately $2.1 million of the proceeds to establish a reserve for interest and other items, which is presented in the consolidated balance sheets as a direct deduction from the carrying value of the 500 West 22nd Street Mezzanine Loan and are being applied against the first 8.0% of monthly interest due during the initial term of the 500 West 22nd Street Mezzanine Loan. Through March 31, 2020, approximately $0.9 million of the reserve has been recognized as interest income and the remaining balance of the reserve was approximately $1.2 million as of March 31, 2020. The additional monthly interest due above the 8.0% threshold is added to the balance of the 500 West 22nd Street Mezzanine Loan and payable at maturity. As of March 31, 2020, approximately $0.6 million of additional interest due is included in the balance of the 500 West 22nd Street Mezzanine Loan.

 

 10 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

During the three months ended March 31, 2020 and 2019, the Company recorded approximately $0.4 million and $0.1 million, respectively, of interest income related to the note receivable and as of March 31, 2020, the outstanding principal balance of the 500 West 22nd Street Mezzanine Loan was approximately $12.0 million.

 

5. Financial Instruments

 

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

 

As of March 31, 2020 and December 31, 2019, management estimated that the carrying value of cash and cash equivalents, restricted cash, prepaid expenses and other assets, advance from advisor, accounts payable, accrued and other liabilities, accrued property tax and payables to related parties were at amounts that reasonably approximated their fair value based on their highly-liquid nature and short-term maturities. The carrying amount of the note receivable approximates fair value because the interest rate is variable and reflective of the market rate. The fair value of the notes payable is categorized as a Level 2 in the fair value hierarchy. The fair value was estimated using a discounted cash flow analysis valuation on the borrowing rates currently available for loans with similar terms and maturities. The fair value of the notes payable was determined by discounting the future contractual interest and principal payments by a market rate. Disclosure about fair value of financial instruments is based on pertinent information available to management as of March 31, 2020 and December 31, 2019. Carrying amounts of our notes payable and the related estimated fair value is summarized as follows:

 

   As of March 31, 2020   As of December 31, 2019 
   Carrying
Amount
   Estimated Fair
Value
   Carrying
Amount
   Estimated Fair
Value
 
Notes payable  $216,607   $226,202   $186,761   $187,304 

 

6. Marketable Securities and Fair Value Measurements

 

Marketable Securities

 

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

 

   As of March 31, 2020 
   Adjusted Cost   Gross Unrealized
Gains
   Gross Unrealized
Losses
   Fair Value 
Debt securities:                
Corporate and Government Bonds  $5,433   $101   $(24)  $5,510 

 

 11 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

   As of December 31, 2019 
   Adjusted Cost   Gross Unrealized
Gains
   Gross Unrealized
Losses
   Fair Value 
Debt securities:                    
Corporate and Government Bonds  $5,385   $113   $(2)  $5,496 

 

When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. As of March 31, 2020, the Company did not recognize any impairment charges.

 

Fair Value Measurements

 

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

 

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

 

  Level 1 – Quoted prices in active markets for identical assets or liabilities.
     
  Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
     
  Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The fair values of the Company’s investments in debt securities are measured using quoted prices for these investments; however, the markets for these assets are not active. As of March 31, 2020, all of the Company’s debt securities were classified as Level 2 assets and there were no transfers between the level classifications during the three months ended March 31, 2020.

 

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

 

   As of
March 31,
2020
 
Due in 1 year  $1,178 
Due in 1 year through 5 years   4,210 
Due in 5 years through 10 years   122 
Due after 10 years   - 
Total  $5,510 

 

 12 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

7. Held for Sale and Disposition of Gardens Medical Pavilion

 

Gardens Medical Pavilion

 

On December 23, 2019, the Company and CPI/AHP Garden Medical Pavilion Mob Owner, L.L.C. (the “Gardens Medical Pavilion Buyer”), an unaffiliated third party, entered into a purchase and sale agreement (the “Gardens Medical Pavilion Agreement”) pursuant to which the Company would dispose of the Gardens Medical Pavilion to the Gardens Medical Pavilion Buyer for an aggregate contractual sales price of $24.3 million.

 

As of December 31, 2019, the Gardens Medical Pavilion met the criteria to be classified as held for sale and therefore, its associated assets and liabilities are classified as held for sale in the consolidated balance sheet as of December 31, 2019.

 

On January 15, 2020, the Company completed the disposition of the Gardens Medical Pavilion for a contractual sales price of $24.3 million.  In connection with the disposition of the Gardens Medical Pavilion, the Company recognized a gain on the sale of investment property of approximately $5.5 million during the first quarter of 2020. Approximately $12.6 million of the proceeds were used towards the repayment in full of a mortgage loan secured by the Gardens Medical Pavilion.

 

Lakes of Margate

 

Beginning with the fourth quarter of 2019, Lakes of Margate met the criteria to be classified as held for sale and therefore, its associated assets and liabilities are classified as held for sale in the consolidated balance sheet as of March 31, 2020 and December 31, 2019.

 

The following summary presents the major components of assets and liabilities held for sale, of as the date indicated. (amounts as of December 31, 2019 include Lakes of Margate and Gardens Medical Pavilion and amounts as of March 31, 2020 only include Lakes of Margate)

 

   As of   As of 
   March 31,
2020
   December 31,
2019
 
Net investment property  $22,156   $39,604 
Other assets   251    1,203 
Total assets held for sale  $22,407   $40,807 
           
Note payable, net   -    12,441 
Accounts payable and accrued expenses   483    1,474 
Total liabilities held for sale  $483   $13,915 

 

8. Notes Payable

 

Notes payable consists of the following:

 

Property  Interest Rate  Weighted Average
Interest Rate as of
March 31, 2020
  Maturity Date  Amount
Due at Maturity
   As of
March 31,
2020
   As of
December 31,
2019
 
River Club and the Townhomes at River Club  LIBOR + 1.78%     May 1, 2025  $28,419   $30,359   $30,359 
                         
Arbors Harbor Town  4.53%  4.53%  December 28, 2025   29,000    29,000    29,000 
                         
Parkside  4.45%  4.45%  September 1, 2025   15,782    17,514    17,588 
                         
Axis at Westmont  4.39%  4.39%  February 1, 2026   34,343    37,600    37,600 
                         
Valley Ranch Apartments  4.16%  4.16%  March 1, 2026   43,414    43,414    43,414 
                         
Flats at Fishers  3.78%  3.78%  July 1, 2026   26,090    28,800    28,800 
                         
Autumn Breeze Apartments  3.39%  3.39%  April 1, 2030   25,518    29,920    - 
                         
Total notes payable     4.25%     $202,566    216,607    186,761 
                         
Less: Deferred financing costs                 (3,459)   (2,973)
                         
Total notes payable, net                $213,148   $183,788 

 

 13 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

On March 31, 2020, the Company entered into a ten-year $29.9 million non-recourse mortgage loan (the “Autumn Breeze Apartments Loan”) scheduled to mature on April 1, 2030. The Autumn Breeze Apartments Loan bears interest at 3.39% and requires monthly interest-only payments through March 31, 2023 and monthly principal and interest payments of approximately $0.1 million thereafter, through its stated maturity. The Autumn Breeze Apartments Loan is collateralized by the Autumn Breeze Apartments. In connection with the Autumn Breeze Apartments Loan, the Company paid the Advisor an aggregate of approximately $0.3 million in financing fees.

 

The Company’s loan agreements stipulate that it complies with certain reporting and financial covenants. The Company is currently in compliance with all of its debt covenants.

 

The following table provides information with respect to the contractual maturities and scheduled principal repayments of our indebtedness as of March 31, 2020.

 

   2020   2021   2022   2023   2024   Thereafter   Total 
Principal maturities  $225   $1,023   $1,468   $2,498   $3,181   $208,212   $216,607 
                                    
Less: deferred financing costs                                 (3,459)
                                    
Total notes payable, net                                $213,148 

 

9. Stockholders’ Equity

 

Tender Offer

 

The Company commenced a tender offer on December 17, 2019, pursuant to which it offered to acquire up to 2.0 million shares of its common stock at a purchase price of $7.75 per share, or $15.5 million in the aggregate (the “Tender Offer”).

 

The Tender Offer terminated on February 28, 2020, and a total of 2,183,888 shares were validly tendered and not withdrawn pursuant to the Tender Offer as of such date, an amount that exceeded the maximum number of shares the Company offered to purchase pursuant to the Tender Offer. In accordance with the terms of the Tender Offer, the Company subsequently repurchased a total of 2.0 million shares at a price of $7.75 per share for an aggregate purchase price of $15.5 million in April 2020.

 

 14 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

Because the amount of repurchase requests exceeded the maximum number of shares the Company had offered to repurchase, the Company repurchased shares on a pro-rata basis, subject to “odd lot” priority as described in the Tender Offer. Excluding the stockholders eligible for “odd lot” priority that were not be subject to proration, approximately 91.58% of the number of shares tendered by each remaining stockholder who participated in the Tender Offer were repurchased by the Company.

 

Share Redemption Program and Redemption Price

 

The Company’s board of directors has adopted a share redemption program (the “SRP”) that permits stockholders to sell their shares back to it, subject to the significant conditions and limitations of the program.  The Company’s board of directors can amend the provisions of the SRP at any time without the approval of the stockholders.

 

On August 9, 2017, the board of directors adopted a Fourth Amended and Restated Share Redemption Program (the “Fourth Amended SRP”) which became effective July 1, 2018. The Fourth Amended SRP established that the price at which the Company would redeem shares submitted for redemption will be a percentage of the estimated net asset value per share (“NAV per Share”) as of the Effective Date, as defined, as follows:

 

For Redemptions with an Effective Date Between  
July 1, 2018 and June 30, 2019:  92.5% of the estimated NAV per Share
July 1, 2019 and June 30, 2020:  95.0% of the estimated NAV per Share
July 1, 2020 and June 30, 2021:  97.5% of the estimated NAV per Share
Thereafter:  100% of the estimated NAV per Share

 

Pursuant to the terms of the Fourth Amended SRP, any shares approved for redemption are redeemed on a periodic basis as determined from time to time by the Company’s board of directors, and no less frequently than annually.  The Company will not redeem, during any twelve-month period, more than 5% of the weighted average number of shares outstanding during the twelve-month period immediately prior to the date of redemption.  In addition, the cash available for redemptions is limited to no more than $10.0 million in any twelve-month period.  Any redemption requests are honored pro rata among all requests received based on funds available and are not honored on a first come, first served basis.

 

On December 28, 2018, the Company’s board of directors adopted a Fifth Amended and Restated Share Redemption Program (the “Fifth Amended SRP”) which became effective on January 31, 2019. The only material change to the program was to change the measurement period for the limitations on the number and dollar amount of shares that may be accepted for redemption from a rolling 12 month-period to a calendar year.

 

In accordance with the Company’s Fifth Amended SRP, the per share redemption price automatically adjusted to $8.64 effective November 7, 2019 as a result of the determination and approval by the Company’s board of directors of the updated estimated NAV per Share.

 

In connection with the approval of the Tender Offer on December 13, 2019, the Company’s board of directors approved the suspension of the SRP. Pursuant to the terms of the SRP, while the SRP is suspended, the Company will not accept any requests for redemption.

 

Distributions

 

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

 

 15 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

10. Related Party Transactions

 

The Company has agreements with the Advisor to pay certain fees, in exchange for services performed by the Advisor and/or its affiliated entities. Amounts the Company owes to the Advisor and its affiliated entities are principally for these fees, and are classified as payables to related parties on the consolidated balance sheets.

 

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 
Acquisition fees and acquisition expense reimbursement (1)  $764   $1,369 
Debt financing fees (2)   299    434 
Property management fees (property operating expenses)   115    87 
Administrative services reimbursement (general and administrative costs)   328    322 
Asset management fees (general and administrative costs)   632    548 
           
Total  $2,138   $2,760 

 

(1)Capitalized to the corresponding asset and amortized over its estimated useful life.
(2)Capitalized upon the execution of the loan, presented in the consolidated balance sheets as a direct deduction from the carrying value of the corresponding loan and amortized over the initial term of the corresponding loan.

 

Advance from Advisor

 

On March 16, 2020, the Advisor provided an advance of $25.0 million to the Company, of which $15.0 million was subsequently repaid on March 31, 2020. The outstanding balance bears interest at a fixed-rate of 5.00%. Approximately $0.1 million of interest was incurred on the advance during the three months ended March 31, 2020.  As of March 31, 2020, the outstanding advance balance plus accrued interest totaled approximately $10.1 million and is presented as Advance from Advisor on the consolidated balance sheet.

 

The Company currently expects to repay the Advance from Advisor with proceeds from selective asset sales and/or financing transactions.

 

 16 

 

 

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

 

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.

 

Forward-Looking Statements

 

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

 

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors described below: 

 

  market and economic challenges experienced by the U.S. and global economies or real estate industry as a whole and the local economic conditions in the markets in which our investments are located. Additionally, our business and financial performance may be adversely affected by current and future economic and other conditions; such as recession, political upheaval or uncertainty, terrorism and acts of war, natural and man-made disasters, cybercrime, and outbreaks of contagious diseases;
  uncertainties regarding the impact of the current COVID-19 pandemic, and restrictions intended to prevent its spread on our business and the economy generally;
  the availability of cash flow from operating activities for distributions, if any;
  conflicts of interest arising out of our relationships with our advisor and its affiliates;
  our ability to retain our executive officers and other key individuals who provide advisory and property management services to us;
  our level of debt and the terms and limitations imposed on us by our debt agreements;
  the availability of credit generally, and any failure to obtain debt financing at favorable terms or a failure to satisfy the conditions and requirements of that debt;
  our ability to make accretive investments in a diversified portfolio of assets;
  future changes in market factors that could affect the ultimate performance of any development or redevelopment projects, including but not limited to construction costs, plan or design changes, schedule delays, availability of construction financing, performance of developers, contractors and consultants and growth in rental rates and operating costs;
  our ability to secure leases at favorable rental rates;
  our ability to sell our assets at a price and on a timeline consistent with our investment objectives;
  impairment charges;
  unfavorable changes in laws or regulations impacting our business, our assets or our key relationships; and
  factors that could affect our ability to qualify as a real estate investment trust.

 

 17 

 

 

Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Report, and may ultimately prove to be incorrect.  We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results, except as required by applicable law.  We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 21E of the Exchange Act.

 

Cautionary Note

 

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

 

Executive Overview

 

We were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis.  In particular, we have focused generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who were distressed or faced time-sensitive deadlines.  In addition, our opportunistic and value-add investment strategy has included investments in real estate-related assets that present opportunities for higher current income. Since inception, we have acquired a wide variety of commercial properties, including office, industrial, retail, hospitality, and multifamily. We have purchased existing, income-producing properties and newly constructed properties. We have also invested in mortgage and mezzanine loans. We have made our investments in or in respect of real estate assets located in the United States and other countries based on our view of existing market conditions. As of March 31, 2020, our investments included multifamily and student housing communities and a note receivable. All of our current investments are located in the United States. We currently intend to hold our various real properties until such time as our board of directors determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that the objectives will not be met.

 

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 real-estate related investments 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.

 

 18 

 

 

Our consolidated portfolio of properties currently consists of seven multi-family apartment complexes and one student housing complex. Despite current restrictions and mitigation strategies, our multi-family properties have not yet seen any significant impact from the COVID-19 pandemic. However, our student housing complex, which consists of the River Club Apartments and the Townhomes at River Club, are located in Athens, Georgia and principally serve as “off-campus” lodging for students attending the University of Georgia, which has transitioned to online instruction for the remainder of its Spring 2020 semester and its other course offerings throughout the summer. Leases for the River Club Apartments and Townhomes at River Club generally have a term of one year from August through July. Our student housing complex is located “off-campus” and its tenants have not been forced to vacate. However, if the current COVID-19 pandemic and related mitigation strategies extend beyond the summer, the University of Georgia may decide to continue offering only online instruction to its students in lieu of “on-campus” classes which could adversely impact leasing demand, occupancy levels and operating results of tour student housing complex for future periods. Additionally, our note receivable relates to a development project which is subject to similar restrictions and risks.

 

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 properties and real estate-related investments are negatively impacted in future periods for an extended period because (i) tenants are unable to pay their rent, (ii) demand for our student housing complex declines, and (iii) the borrower is unable to pay scheduled debt service on the outstanding note receivable; our business and financial results could be materially and adversely impacted. While we have implemented various cost reduction strategies, including the deferral of certain non-critical capital expenditures, there can be no assurance that these cost savings will fully mitigate the potential adverse impact of any lost revenue and income.

 

These and other market and economic challenges could materially affect (i) the value and performance of our investments, (ii) our ability to pay future distributions, if any, (iii) the availability or terms of financings, (iv) our ability to make scheduled principal and interest payments, and (v) our ability to refinance any outstanding debt when contractually due.

 

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 accounting principles generally accepted in the United States of America (“GAAP”) requires our 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.

 

Liquidity and Capital Resources

 

We had unrestricted cash and cash equivalents of $19.2 million and marketable securities, available for sale of $5.5 million as of March 31, 2020. Our principal demands for funds going forward will be for the payment of (a) operating expenses, (b) interest and principal payments on our outstanding indebtedness, (c) tender offers and/or redemptions of shares of our common stock, (d) distributions, if any, to our shareholders, and (e) selective acquisitions and/or real estate-related investments. Generally, we expect to meet our cash needs with our cash on hand and cash flow from operations. However, to the extent that our cash on hand and cash flow from operations are not sufficient to cover our cash needs, we may use proceeds from additional borrowings and/or selective asset sales to fund such needs. We have borrowed and may continue to borrow money to acquire properties and make other investments.  Under our charter, the maximum amount of our indebtedness is limited to 300% of our “net assets” (as defined by our charter) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors.  In addition to our charter limitation, our board of directors has adopted a policy to generally limit our aggregate borrowings to approximately 75% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests.  Our policy limitation, however, does not apply to individual real estate assets.

 

Acquisition and Disposition Activities

 

Autumn Breeze Apartments

 

On March 17, 2020, we completed the acquisition of a 280-unit multifamily property located in Noblesville, Indiana (the “Autumn Breeze Apartments”) from an unrelated third party, for an aggregate purchase price of approximately $43.0 million, excluding closing and other related transaction costs. In connection with the acquisition, our Company paid the Advisor an aggregate of approximately $0.8 million in acquisition fees and acquisition expense reimbursements.

 

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Gardens Medical Pavilion

 

On January 15, 2020, we completed the disposition of the Gardens Medical Pavilion for a contractual sales price of $24.3 million. In connection with the disposition of the Gardens Medical Pavilion, we recognized a gain on the sale of investment property of approximately $5.5 million during the first quarter of 2020. Approximately $12.6 million of the proceeds were used towards the repayment in full of a mortgage loan secured by the Gardens Medical Pavilion.

 

Debt Financings

 

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

 

As of March 31, 2020, our outstanding notes payable were $213.1 million, net of deferred financing fees of $3.5 million and had a weighted average interest rate of 4.3%. As of December 31, 2019, the Company had notes payable of $183.8 million, net of deferred financing fees of $3.0 million, with a weighted average interest rate of 4.1%.

 

Autumn Breeze Apartments Loan

 

On March 31, 2020, we entered into a ten-year $29.9 million non-recourse mortgage loan (the “Autumn Breeze Apartments Loan”) scheduled to mature on April 1, 2030. The Autumn Breeze Apartments Loan bears interest at 3.39% and requires monthly interest-only payments through March 31, 2023 and monthly principal and interest payments of approximately $0.1 million thereafter, through its stated maturity. The Autumn Breeze Apartments Loan is collateralized by the Autumn Breeze Apartments. In connection with the Autumn Breeze Apartments Loan, our Company paid the Advisor an aggregate of approximately $0.3 million in financing fees.

 

Our loan agreements stipulate that we comply with certain reporting and financial covenants.  These covenants include, among other things, maintaining minimum debt service coverage ratios, loan to value ratios, and liquidity.  We are currently in compliance with all of our debt covenants.

 

One of our principal short-term and long-term liquidity requirements includes the repayment of maturing debt.  The following table provides information with respect to the contractual maturities and scheduled principal repayments of our indebtedness as of March 31, 2020 (dollars in thousands).

 

Contractual Obligations  2020   2021   2022   2024   2023   Thereafter   Total 
Mortgage Payable  $225   $1,023   $1,468   $2,498   $3,181   $208,212   $216,607 
Interest Payments   6,401    8,586    8,529    8,458    8,371    12,958    53,303 
                                    
Total Contractual Obligations  $6,626   $9,609   $9,997   $10,956   $11,552   $221,170   $269,910 

 

Advance from Advisor

 

On March 16, 2020, the Advisor provided an advance of $25.0 million to the Company, of which $15.0 million was subsequently repaid on March 31, 2020. The outstanding balance bears interest at a fixed-rate of 5.00%. Approximately $0.1 million of interest was incurred on the advance during the three months ended March 31, 2020.  As of March 31, 2020, the outstanding advance balance plus accrued interest totaled approximately $10.1 million and is presented as Advance from Advisor on the consolidated balance sheet.

 

The Company currently expects to repay the Advance from Advisor with proceeds from selective asset sales and/or financing transactions.

 

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Tender Offer

 

We commenced a tender offer on December 17, 2019, pursuant to which we offered to acquire up to 2.0 million shares of our common stock at a purchase price of $7.75 per share, or $15.5 million in the aggregate (the “Tender Offer”).

 

The Tender Offer terminated on February 28, 2020, and a total of 2,183,888 shares were validly tendered and not withdrawn pursuant to the Tender Offer as of such date, an amount that exceeded the maximum number of shares we offered to purchase pursuant to the Tender Offer. In accordance with the terms of the Tender Offer, we subsequently repurchased a total of 2.0 million shares at a price of $7.75 per share for an aggregate purchase price of $15.5 million in April 2020.

 

Because the amount of repurchase requests exceeded the maximum number of shares we had offered to repurchase, we repurchased shares on a pro-rata basis, subject to “odd lot” priority as described in the Tender Offer. Excluding the stockholders eligible for “odd lot” priority that were not be subject to proration, approximately 91.58% of the number of shares tendered by each remaining stockholder who participated in the Tender Offer were repurchased by us.

 

Results of Operations

 

As of March 31, 2020, we had eight real estate investments (five wholly owned properties and three properties consolidated through investments in joint ventures) and one real estate-related investment (mezzanine loan). 

 

On March 17, 2020, we acquired the Autumn Breeze Apartments (the “2020 Acquisition”) and on February 14, 2019, we acquired the Valley Ranch Apartments (the “2019 Acquisition” and collectively, the “Acquisitions”). Additionally, on January 4, 2019 we received proceeds of approximately $10.9 million representing the minimum amount payable for our participation in the residual interests of our equity method investment in Prospect Park. Any additional amounts received will be recognized upon receipt.

 

On January 15, 2020, we disposed of the Gardens Medical Pavilion (the “Disposition”) and the disposition of this property did not qualify to be reported as discontinued operations since it did not represent a strategic shift that had a major effect on our operations and financial results. Accordingly, the operating results of this property are reflected in our results from continuing operations for all periods presented through its date of disposition.

 

Our results of operations for the respective periods presented reflect our acquisition and disposition activities. Properties owned by us during the entire periods presented are referred to as our “Same Store” properties.

 

Three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

 

The following table provides summary information about our results of operations (dollars in thousands):

 

   Three Months Ended
March 31,
   Increase/   Percentage   Change
due to
   Change
due to
   Change
due to
 
   2020   2019   (Decrease)   Change   Acquisitions(1)   Dispositions(2)   Same Store(3) 
                             
Rental revenues  $9,400   $8,533   $867    10.0%  $934   $(464)  $397 
Property operating expenses   2,960    2,789    171    6.0%   307    (132)   (4)
Real estate taxes   1,218    1,190    28    2.0%   138    (69)   (41)
General and administrative   1,539    1,483    56    4.0%   (11)   6    61 
Depreciation and amortization   2,511    3,100    (589)   (19.0%)   120    (273)   (436)
Interest expense, net   2,140    1,987    153    8.0%   233    (160)   80 
Gain on sale of real estate   5,474    -    5,474    100.0%   -    5,474    - 

____________________

Notes:

(1)Represents the effect on our operating results for the periods indicated resulting from our 2019 acquisition of the Valley Ranch Apartments and our 2020 acquisition of the Autumn Breeze Apartments.
(2)Represents the effect on our results for the periods indicated resulting from our 2020 disposition of the Gardens Medical Pavilion.
(3)Represents the change for the three months ended March 31, 2020 compared to the same period in 2019 for real estate and real estate-related investments owned by us during the entire periods presented (“Same Store”). Our results for Same Store properties for the three months ended March 31, 2020 and 2019 include River Club and the Townhomes at River Club, Lakes of Margate, Arbors Harbor Town, Parkside, Flats at Fishers and the Axis at Westmont.

 

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The following table reflects total rental revenues and total property operating expenses for the three months ended March 31, 2020 and 2019 for: (i) our Same Store properties, (ii) the Acquisitions and (iii) the Disposition (dollars in thousands):

 

   Three Months Ended March 31,     
Description  2020   2019   Change 
Rental Revenues:               
Same Store  $7,573   $7,176   $397 
Acquisitions   1,729    795    934 
Disposition   98    562    (464)
Total rental revenues  $9,400   $8,533   $867 
                
Property operating expenses:               
Same Store  $2,508   $2,512   $(4)
Acquisitions   433    126    307 
Disposition   19    151    (132)
Total property and hotel operating expenses  $2,960   $2,789   $171 

 

The tables below reflect occupancy and effective monthly rental rates for our operating properties owned as of March 31, 2020:

 

   Occupancy   Effective Monthly Rent per Square Foot/Unit(1)     
   As of March 31,   As of March 31,     
Property  2020   2019   2020   2019     
River Club and the Townhomes at River Club   96%   98%  $457.43   $426.37    per bed 
Lakes of Margate   96%   92%   1,405.66    1,392.39    per unit 
Arbors Harbor Town   93%   92%   1,316.19    1,243.64    per unit 
Parkside   99%   91%   1,156.84    1,141.06    per unit 
Flats at Fishers   96%   93%   1,147.02    1,075.17    per unit 
Axis at Westmont   93%   93%   1,174.67    1,114.82    per unit 
Valley Ranch Apartments (2)   97%   93%   1,383.47    1,383.99    per unit 
Autumn Breeze Apartments (3)   95%   N/A    1,065.79    N/A    per unit 

 

______________________________

 

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

 

(2)The Valley Ranch Apartments were acquired on February 14, 2019.

 

(3)The Autumn Breeze Apartments were acquired on March 17, 2020.

 

Revenues.  Rental revenues for the three months ended March 31, 2020 were $9.4 million, an increase of $0.9 million, compared to $8.5 million for the same period in 2019.  Excluding the effect of our acquisition and disposition activities, our rental revenues increased by $0.4 million for our Same Store properties primarily as a result of increased occupancy and average monthly rent per unit/sq. ft.

 

Property Operating Expenses. Property operating expenses for the three months ended March 31, 2020 were $3.0 million, an increase of $0.2 million, compared to $2.8 million for the same period in 2019. Excluding the effect of our acquisition and disposition activities, our property operating expenses were relatively flat for our Same Store properties.

 

Real Estate Taxes.  Real estate taxes for the three months ended March 31, 2020 and 2019 were relatively unchanged at $1.2 million. Excluding the effect of our acquisition and disposition activities, our real estate taxes were relatively flat for our Same Store properties.

 

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General and Administrative Expenses.   General and administrative expenses for the three months ended March 31, 2020 and 2019 were relatively flat at $1.5 million.

 

Depreciation and Amortization.   Depreciation and amortization expense for the three months ended March 31, 2020 was $2.5 million, a decrease of $0.6 million, compared to $3.1 million for the same period in 2019. Excluding the effect of our acquisition and disposition activities, depreciation and amortization decreased by $0.4 million for our Same Store Properties. The decrease reflects the reclassification of Lakes of Margate to held for sale as of December 31, 2019 (see Note 7 of the Notes to Consolidated Financial Statements).

 

Interest Expense, net.   Interest expense for the three months ended March 31, 2020 was $2.1 million, an increase of $0.1 million, compared to $2.0 million for the same period in 2019. Excluding the effect of our acquisition and disposition activities, interest expense increased slightly by $0.1 million for our Same Store properties.

 

Gain on Sale of Investment Property.   During the three months ended March 31, 2020, we recognized a gain on the sale of the Gardens Medical Pavilion approximately $5.5 million. 

 

Summary of Cash Flows

 

Operating activities

 

The net cash flows provided by operating activities of $1.8 million for the three months ended March 31, 2020 consists of the following:

 

·cash inflows of approximately $2.0 million from our net income after adjustment for non-cash items; and

 

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

 

Investing activities

 

The net cash used in investing activities of $22.2 million for the three months ended March 31, 2020 consists primarily of the following:

 

·the acquisition of the Autumn Breeze Apartments for $45.0 million;

 

·funding of note receivable of $0.7 million; and

 

·proceeds from the sale of the Gardens Medical Pavilion of $23.7 million.

 

Financing activities

 

The net cash provided by financing activities of $24.7 million for the three months ended March 31, 2020 consists primarily of the following:

 

·net proceeds from notes payable of $29.3 million;

 

·net advances from advisor of $10.0 million;

 

·debt principal payments of $12.7 million (including $12.6 million for the repayment in full of the Gardens Medical Pavilion mortgage loan); and

 

·distributions paid to noncontrolling interests of $1.8 million.

 

Funds from Operations and Modified Funds from Operations

 

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and 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.

 

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

 

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

 

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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.

 

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

 

   For the Three Months Ended March 31, 
Description  2020   2019 
Net income/(loss)  $5,192   $(1,706)
FFO adjustments:          
Depreciation and amortization of real estate assets   2,511    3,100 
Gain on sale of investment property   (5,474)   - 
FFO   2,229    1,394 
MFFO adjustments:          
Other adjustments:          
Acquisition and other transaction related costs expensed(1)   -    - 
Noncash adjustments:          
Amortization of above or below market leases and liabilities(2)   -    (19)
Non-recurring (loss)/gain from extinguishment/sale of debt, derivatives or securities holdings(3)   (6)   52 
MFFO before straight-line rent   2,223    1,427 
Straight-line rent(4)   (32)   - 
MFFO - IPA recommended format  $2,191   $1,427 
           
Net income/(loss)  $5,192   $(1,706)
Less: (income)/loss attributable to noncontrolling interests   (1,211)   13 
Net income/(loss) applicable to Company's common shares  $3,981   $(1,693)
Net income/(loss) per common share, basic and diluted  $0.18   $(0.07)
           
FFO  $2,229   $1,394 
Less: FFO attributable to noncontrolling interests   (170)   (155)
FFO attributable to Company's common shares  $2,059   $1,239 
FFO per common share, basic and diluted  $0.09   $0.05 
           
MFFO - IPA recommended format  $2,191   $1,427 
Less: MFFO attributable to noncontrolling interests   (164)   (152)
MFFO attributable to Company's common shares  $2,027   $1,275 
           
Weighted average number of common shares outstanding, basic and diluted   22,223    23,341 

 

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

 

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2)Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.
3)Management believes that adjusting for gains or losses related to extinguishment/sale of debt, derivatives or securities holdings is appropriate because they are items that may not be reflective of ongoing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods.
4)Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance.

 

Distributions

 

We made an election to qualify as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2008. U.S. federal tax law requires a REIT to distribute at least 90% of its annual REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles, or GAAP) determined without regard to the deduction for dividends paid and excluding any net capital gain. In order to continue to qualify for REIT status, we may be required to make distributions in excess of cash available. Distributions, if any, are authorized at the discretion of our board of directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. Such analyses may include actual and anticipated operating cash flow, capital expenditure needs, general financial and market conditions, proceeds from asset sales and other factors that our board of directors deems relevant. Our board of directors’ decisions will be substantially influenced by their obligation to ensure that we maintain our federal tax status as a REIT. We cannot provide assurance that we will pay distributions at any particular level, or at all.

 

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Off-Balance Sheet Arrangements

 

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

 

Critical Accounting Policies and Estimates

 

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

 

Our critical accounting policies and estimates have not changed significantly from the discussion found in the Management Discussion and Analysis and Results of Operations in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2020.

 

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Item 4.   Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our principal executive officer and principal financial officer, evaluated, as of March 31, 2020, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e) using the criteria established in Internal Control-New Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective, as of March 31, 2020, to provide reasonable assurance that information required to be disclosed by us in this report is recorded, processed, summarized, and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

 

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

 

Changes in Internal Control over Financial Reporting

 

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

 

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PART II

 

OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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

 

As of the date hereof, we are 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, we have 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 quarterly report, we did not sell any equity securities that were not registered under the Securities Act of 1933.

 

Our common stock is not currently listed on a national securities exchange. The timing of a liquidity event for our stockholders will depend upon then prevailing market conditions. Our board of directors previously targeted June 30, 2023 as the commencement of a liquidity event, however, on January 9, 2020, our board of directors elected to extend the targeted timeline until June 30, 2028 based on their assessment of our investment objectives and liquidity options for our stockholders. We can provide no assurances as to the actual timing of the commencement of a liquidity event for our stockholders or the ultimate liquidation of the Company. We will seek stockholder approval prior to liquidating our entire portfolio.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

None.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

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

 

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SIGNATURE

 

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

 

  LIGHTSTONE VALUE PLUS REAL ESTATE
INVESTMENT TRUST V, INC.
   
Date: May 15, 2020 By:       /s/ Mitchell C. Hochberg
    Mitchell C. Hochberg
    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)

 

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Index to Exhibits

 

Exhibit Number   Description
10.1*   Assignment and Assumption of Real Estate Contract, dated March 17, 2020, by and between LVP BH Autumn Breeze LLC and Lightstone Acquisitions VI LLC.
31.1*   Rule 13a-14(a)/15d-14(a) Certification
31.2*   Rule 13a-14(a)/15d-14(a) Certification
32.1*   Section 1350 Certification**
32.2*   Section 1350 Certification**
101*   The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed on May 15, 2020, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Equity, (iv) Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements.

 

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

 

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