Annual Statements Open main menu

Lightstone Value Plus REIT I, Inc. - Quarter Report: 2014 March (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended March 31, 2014

 

OR

 

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

 

For the transition period from                      to

 

Commission file number 000-52610

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland   20-1237795

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

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

 

(732) 367-0129

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes    þ     No    ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  

Yes  þ     No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   ¨   Accelerated filer   ¨   Non-accelerated filer    þ

 

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

Yes  ¨  No þ

 

As of May 8, 2014, there were approximately 25.8 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust, Inc., including shares issued pursuant to the dividend reinvestment plan.  

 

 
 

 

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

 

INDEX

 

      Page
PART I FINANCIAL INFORMATION    
       
Item 1. Financial Statements    
       
  Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013   3
       
  Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2014  and 2013   4
       
  Consolidated Statements of Comprehensive Income/(Loss) (unaudited) for the Three Months Ended March 31, 2014  and 2013   5
       
  Consolidated Statement of Stockholders’ Equity (unaudited) for the Three Months Ended March 31, 2014   6
       
  Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2014 and 2013   7
       
  Notes to Consolidated Financial Statements   9
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   21
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   36
       
Item 4. Controls and Procedures   37
       
PART II OTHER INFORMATION    
       
Item 1. Legal Proceedings   38
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   38
       
Item 3. Defaults Upon Senior Securities   38
       
Item 4. Mine Safety Disclosures   38
       
Item 5. Other Information   39
       
Item 6. Exhibits   39

 

 
 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

 

   As of March 31, 2014   As of December 31, 2013 
    (Unaudited)      
Assets         
           
Net investment property  $415,165   $414,209 
           
Investment in unconsolidated affiliated real estate entity   9,361    9,496 
Cash and cash equivalents   61,492    52,899 
Marketable securities, available for sale   145,078    146,383 
Restricted escrows   12,869    20,145 
Tenant accounts receivable (net of allowance for doubtful accounts of $168 and $194, respectively)   3,535    3,366 
Mortgage receivable   5,286    5,310 
Intangible assets, net   2,104    1,964 
Interest receivable from related parties   -    171 
Prepaid expenses and other assets   16,317    16,109 
Assets held for sale   -    7,709 
           
Total Assets  $671,207   $677,761 
           
Liabilities and Stockholders' Equity          
Mortgages payable  $295,014   $295,278 
Notes payable   39,514    40,186 
Accounts payable, accrued expenses and other liabilities   15,216    18,381 
Due to sponsor   798    973 
Tenant allowances and deposits payable   2,138    1,777 
Distributions payable   4,443    4,525 
Deferred rental income   1,920    1,414 
Acquired below market lease intangibles, net   940    989 
Liabilities held for sale   -    6,113 
           
Total Liabilities   359,983    369,636 
           
Commitments and contingencies (See Note 11)          
           
Stockholders' equity:          
Company's Stockholders Equity:          
Preferred shares, $0.01 par value, 10,000 shares authorized,  none issued and outstanding   -    - 
Common stock, $0.01 par value; 60,000 shares authorized, 25,721 and 25,635 shares issued and outstanding, respectively   257    256 
Additional paid-in-capital   202,245    211,447 
Accumulated other comprehensive income   41,176    34,050 
Accumulated surplus   20,469    23,002 
           
Total Company's stockholders' equity   264,147    268,755 
           
Noncontrolling interests   47,077    39,370 
           
Total Stockholders' Equity   311,224    308,125 
           
Total Liabilities and Stockholders' Equity  $671,207   $677,761 

 

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

 

3
 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data) (Unaudited)  

 

   Three Months Ended March 31, 
   2014   2013 
         
Revenues:          
Rental income  $17,921   $11,056 
Tenant recovery income   1,240    1,245 
Other service income   3,039    2,366 
           
Total revenues   22,200    14,667 
           
Expenses:          
Property operating expenses   12,515    8,656 
Real estate taxes   1,352    1,037 
General and administrative costs   1,783    2,238 
Depreciation and amortization   3,970    2,363 
           
Total operating expenses   19,620    14,294 
           
Operating income   2,580    373 
           
Other income, net   296    246 
Mark to market adjustment on derivative financial instruments   (39)   (1,499)
Interest income   1,469    3,549 
Interest expense   (4,896)   (3,674)
Gain on sale of marketable securities (includes gain of $548 and $6, respectively,  accumulated other comprehensive income reclassifications)   1,167    11 
Gain on disposition of unconsolidated affiliated real estate entities   -    1,200 
Loss from investment in unconsolidated affiliated real estate entity   (135)   (2,086)
           
Net income/(loss) from continuing operations   442    (1,880)
           
Net income from discontinued operations   1,620    125 
           
Net income/(loss)   2,062    (1,755)
           
Less: net income attributable to noncontrolling interests   (152)   (263)
           
Net income/(loss) attributable to Company's common shares  $1,910   $(2,018)
           
Basic and diluted net income/(loss) per Company's common share:          
Continuing operations  $0.01   $(0.07)
Discontinued operations   0.06    - 
           
Net income/(loss) per Company’s common share, basic and diluted  $0.07   $(0.07)
           
Weighted average number of common shares outstanding, basic and diluted  25,723    30,122 

 

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

 

4
 

  

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(Amounts in thousands) (Unaudited)  

 

   For the Three Months March 31, 
   2014   2013 
         
Net income/(loss)  $2,062   $(1,755)
           
Other comprehensive income:          
Unrealized gain on available for sale securities   8,383    1,614 
Reclassification adjustment for gain included in net income/(loss)   (548)   (6)
           
Other comprehensive income   7,835    1,608 
           
Comprehensive income/(loss)   9,897    (147)
           
Less: Comprehensive income attributable to noncontrolling interests   (861)   (316)
           
Comprehensive income/(loss) attributable to Company's common shares  $9,036   $(463)

  

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

 

5
 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Amounts in thousands) (Unaudited)

 

   Common   Additional Paid-In   Accumulated Other
Comprehensive 
      Total Noncontrolling    
   Shares   Amount   Capital   Income   Accumulated Surplus   Interests   Total Equity 
                             
BALANCE, December 31, 2013   25,635    256    211,447    34,050    23,002    39,370   $308,125 
Net income   -    -    -    -    1,910    152    2,062 
Other comprehensive income   -    -    -    7,126    -    709    7,835 
                                    
Distributions declared   -    -    -    -    (4,443)   -    (4,443)
Distributions paid to noncontrolling interests   -    -    -    -    -    (710)   (710)
Contributions received from noncontrolling interests   -    -    -    -    -    9    9 
Redemption and cancellation of shares and noncontrolling interests   (43)   (1)   (10,650)   -    -    7,547    (3,104)
Shares issued from distribution reinvestment program   129    2    1,448    -    -    -    1,450 
BALANCE, March 31, 2014   25,721    257    202,245    41,176    20,469    47,077   $311,224 

 

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

 

6
 

  

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)(Unaudited)

 

   For the Three Months Ended March 31, 
   2014   2013 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income/(loss)  $2,062   $(1,755)
Less net income – discontinued operations   1,620    125 
Net income/(loss) – continuing operations   442    (1,880)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:          
Depreciation and amortization   3,970    2,363 
Mark to market adjustment on derivative financial instruments   39    1,499 
Gain on sale of marketable securities   (1,167)   (11)
Gain on disposition of unconsolidated affiliated real estate entities   -    (1,200)
Loss from investment in unconsolidated affiliated real estate entity   135    2,086 
Other non-cash adjustments   (26)   (648)
Changes in assets and liabilities:          
Decrease in prepaid expenses and other assets   80    992 
Increase in tenant allowance and security deposits payable   343    198 
Increase/(decrease) in accounts payable and accrued expenses   1,295    (1,569)
Decrease in due to Sponsor   (175)   (209)
Increase/(decrease) in deferred rental income   506    (89)
Net cash provided by operating activities – continuing operations   5,442    1,532 
Net cash provided by operating activities – discontinued operations   44    665 
Net cash provided by operating activities   5,486    2,197 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of investment property, net   (6,156)   (27,892)
Purchase of marketable securities   (7,470)   - 
Contributions to investment in unconsolidated affiliated real estate entities   -    (11,623)
Collections on mortgage receivable   24    32 
Proceeds from sale of marketable securities   17,778    5,342 
Proceeds from disposition of investments in unconsolidated affiliated real estate entities   -    1,200 
Settlement of derivative financial instrument   (3,543)   - 
Deposit for purchase of real estate, net   -    (500)
Release of restricted escrows   7,159    4,808 
Net cash provided by/(used in) investing activities – continuing operations   7,792    (28,633)
Net cash provided by/(used in) investing activities – discontinued operations   9,007    (91)
Net cash provided by/(used in) investing activities   16,799    (28,724)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Mortgage payments   (816)   (442)
Payment of loan fees and expenses   (41)   (50)
Redemption and cancellation of common stock and noncontrolling interests   (3,104)   (1,274)
Proceeds from mortgage financing   553    6,440 
Net payments on notes payable   (672)   (15,380)
Contributions received from noncontrolling interests   9    3 
Distributions paid to noncontrolling interests   (710)   (2,157)
Distributions paid to Company's common stockholders   (3,076)   (3,636)
Net cash used in financing activities – continuing operations   (7,857)   (16,496)
Net cash used in financing activities – discontinued operations   (5,835)   (189)
Net cash used in financing activities   (13,692)   (16,685)
           
Net change in cash and cash equivalents   8,593    (43,212)
Cash and cash equivalents, beginning of period   52,899    98,805 
Cash and cash equivalents, end of period  $61,492   $55,593 

 

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

 

7
 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(Amounts in thousands) (Unaudited )

 

   For the Three Months Ended March 31, 
   2014   2013 
Supplemental disclosure of cash flow information:        
Cash paid for interest  $3,884    2,305 
Distributions declared  $4,443    5,204 
Value of shares issued from distribution reinvestment program  $1,450    1,671 
Non-cash purchase of investment property  $250    5,718 

 

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

 

8
 

 

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

Notes to Consolidated Financial Statements

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

 

1.Organization

 

Lightstone Value Plus Real Estate Investment Trust, Inc., a Maryland corporation (“Lightstone REIT”) was formed on June 8, 2004 (date of inception) and subsequently qualified as a real estate investment trust (“REIT”) during the year ending December 31, 2006. Lightstone REIT was formed primarily for the purpose of engaging in the business of investing in and owning commercial and residential real estate properties located throughout the United States.

 

Lightstone REIT is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT, L.P., a Delaware limited partnership formed on July 12, 2004 (the “Operating Partnership”), in which Lightstone REIT as the general partner, held a 98.1% interest as of March 31, 2014.

 

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

 

The Company is managed by Lightstone Value Plus REIT, LLC (the “Advisor”), an affiliate of the Lightstone Group, Inc., under the terms and conditions of an advisory agreement. The Lightstone Group, Inc. previously served as the Company’s sponsor (the “Sponsor”) during its initial public offering, which closed on October 10, 2008. The Sponsor and Advisor are majority owned and controlled by David Lichtenstein, the Chairman of the Company’s board of directors (the “Board”) and its Chief Executive Officer.

 

The Company’s stock is not currently listed on a national securities exchange. The Company may seek to list its stock for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its shares of common stock until they are listed for trading. In the event the Company does not obtain listing prior to October 10, 2018 (the tenth anniversary of the completion of its initial public offering,) its charter requires that the Board of Directors must either (i) seek stockholder approval of an extension or amendment of this listing deadline; or (ii) seek stockholder approval to adopt a plan of liquidation of the corporation.

 

As of March 31, 2014, on a collective basis, the Company (i) wholly owned and consolidates the operating results and financial condition of 3 retail properties containing a total of approximately 0.7 million square feet of retail space, 15 industrial properties containing a total of approximately 1.3 million square feet of industrial space, 7 multi-family residential properties containing a total of 1,784 units, and 12 hotel hospitality properties containing a total of 1,557 rooms, (ii) majority owned and consolidates the operating results and financial condition of 1 residential development project, and (iii) owned an interest accounted for under the equity method of accounting in 1 office property containing a total of approximately 1.1 million square feet of office space. All of the Company’s properties are located within the United States. As of March 31, 2014, the retail properties, the industrial properties, the multi-family residential properties and the office property were 83.3%, 85.9%, 95.5% and 81.3% occupied based on a weighted-average basis, respectively. Its hotel hospitality properties’ average revenue per available room (“Rev PAR”) was $67.92 and occupancy was 56.2%, respectively for the three months ended March 31, 2014.

 

During the year ended December 31, 2013 the Company disposed of two Extended Stay Hotels located in Houston, Texas (the “Houston Extended Stay Hotels”) and a retail shopping center (“Everson Pointe”) located in Snellville, Georgia. The operating results of the Houston Extended Stay Hotels and Everson Pointe have been classified as discontinued operations in the consolidated statements of operations for all periods presented.

 

On January 22, 2014 the Company disposed of Crowe’s Crossing Shopping Center, (“Crowe’s Crossing”) a retail shopping center located in Stone Mountain, Georgia. The operating results of Crowe’s Crossing have been classified as discontinued operations in the consolidated statements of operations for all periods presented.  Additionally, the associated assets and liabilities of Crowe’s Crossing have been classified as held for sale in the consolidated balance sheet as of December 31, 2013.

 

Noncontrolling Interests

 

As of March 31, 2014, the noncontrolling interests consist of (i) parties of the Company that hold units in the Operating Partnership and (ii) certain interests in consolidated subsidiaries. The units include SLP units, limited partner units and Common Units. The noncontrolling interests in consolidated subsidiaries include ownership interests in Pro-DFJV Holdings LLC (“PRO”), 50-01 2nd St Associates LLC (the “2nd Street Joint Venture”), and the interests held by minority owners of certain of our hotels.

 

9
 

 

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

Notes to Consolidated Financial Statements

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

 

Noncontrolling Interests - Redemption of Series A Preferred Units and Repayment of Notes Receivable

 

On January 2, 2014, the Operating Partnership redeemed all of the then remaining outstanding 50,100 Series A preferred units in the Operating Partnership (the “Series A Preferred Units”), held by the Arbor Mill Run JRM, LLC, a Delaware limited liability company, Arbor National CJ, LLC, a New York limited liability company, Prime Holdings LLC, a Delaware limited liability company , TRAC Central Jersey LLC, a Delaware limited liability company, Central Jersey Holdings II, LLC, a New York limited liability company and JT Prime LLC, a Delaware limited liability company (collectively, the “Contributing Parties”), at their liquidation preference of approximately $50.1 million and the Contributing Parties simultaneously repaid the remaining notes receivable due from the Contributing Parties aggregating approximately $47.4 million in full.

 

2.Summary of Significant Accounting Policies

 

Basis of Presentation

 

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

 

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of the Company and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. 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 statement of the results for the periods presented. The accompanying unaudited consolidated financial statements of Lightstone Value Plus Real Estate Investment Trust, Inc. and its Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate, depreciable lives, and revenue recognition. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.

 

The consolidated balance sheet as of December 31, 2013 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.

 

Pro Forma Financial Information

 

The following table provides unaudited pro forma results of operations for the period indicated, as if the acquisitions that the Company made in 2013 (the Holiday Inn Express - Auburn, the Courtyard - Baton Rouge, the Residence Inn - Baton Rouge, the Aloft – Rogers, the Fairfield Inn – Jonesboro, the Hampton Inn - Miami and the Hampton Inn & Suites - Fort Lauderdale) had been acquired at the beginning of that period. Such pro forma results are not necessarily indicative of the results that actually would have occurred had these acquisitions been completed on the date indicated, nor are they indicative of the future operating results of the combined company.

 

   For the Three Months
Ended March 31, 2013
 
Pro forma rental revenue  $20,279 
Pro forma net loss  $(756)
Pro forma net loss per Company's common share, basic and diluted  $(0.03)

 

10
 

 

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

Notes to Consolidated Financial Statements

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

 

Reclassifications

 

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

 

New Accounting Pronouncements

 

In April 2014, the Financial Accounting Standards Board issued an accounting standards update providing new guidance on the requirements for reporting a discontinued operation. The update changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. This update is effective for fiscal years beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in the financial statements previously issued or available for issuance.  The adoption of this standards update affects presentation only and, as such, will not have a material impact on the Company’s consolidated financial statements.

 

3.Investment in Unconsolidated Affiliated Real Estate Entity

 

The entity discussed below is partially owned by the Company. The Company accounts for this investment under the equity method of accounting as the Company exercises significant influence, but does not control this entity. A summary of the Company’s investment in unconsolidated affiliated real estate entity is as follows:

 

      Ownership   As of 
Real Estate Entity  Date Acquired  %   March 31, 2014   December 31, 2013 
1407 Broadway Mezz II, LLC ("1407 Broadway")  January 4, 2007   49.0%  $9,361   $9,496 

 

 

1407 Broadway

 

The Company has a 49.0% ownership in 1407 Broadway, which has a sub-leasehold interest in a ground lease to an office building located at 1407 Broadway in New York, New York. During the second quarter of 2011, the Company’s share of cumulative losses resulting from its ownership interest in 1407 Broadway brought the carrying value of its investment in 1407 Broadway to zero. Since the Company was not obligated to fund 1407 Broadway’s deficits and the balance of the Company’s investment in 1407 Broadway was zero, the Company suspended the recording of its portion of equity losses or earnings from 1407 Broadway until such time as the Company’s investment in 1407 Broadway was greater than zero.

 

On March 11, 2013, 1407 Broadway completed a restructuring of its outstanding non-recourse mortgage note payable with a then outstanding principal balance of approximately $127.3 million with Swedbank AB. In connection with the restructuring, 1407 Broadway made a principal pay down of approximately $1.3 million, bringing the new loan balance to $126.0 million, and extended the maturity of the loan to January 12, 2023. Additionally, during the year ended December 31, 2013, 1407 Broadway’s members made capital contributions aggregating $16.1 million, of which $13.5 million was placed initially into a capital reserve account with the lender pursuant to the terms of the restructuring. As a result of the Company’s capital contributions which totaled $12.1 million, it commenced recording equity earnings in the first quarter of 2013. The Company’s equity earnings for the three months ended March 31, 2013 includes an adjustment to record previously unrecorded losses aggregating $5.2 million through December 31, 2012.

 

11
 

  

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

Notes to Consolidated Financial Statements

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

  

1407 Broadway Financial Information

 

The following table represents the unaudited condensed income statement for 1407 Broadway:

  

   For the Three Months Ended March 31, 
   2014   2013 
         
Total revenue  $9,982   $9,687 
           
Property operating expenses   8,008    7,226 
Depreciation and amortization   1,666    1,390 
Operating income   308    1,071 
           
Interest expense and other, net   (709)   (2,190)
           
Gain on debt extinguishment   -    7,494 
           
Net (loss)/income  $(401)  $6,375 
           
Company's equity earnings  $(135)  $(2,086)

 

The following table represents the unaudited condensed balance sheet for 1407 Broadway:

 

   As of   As of 
   March 31, 2014   December 31, 2013 
           
Real estate, at cost (net)  $117,003   $114,188 
Intangible assets   85    249 
Cash and restricted cash   15,709    18,437 
Other assets   18,754    19,969 
           
Total assets  $151,551   $152,843 
           
Mortgage payable  $126,000   $126,000 
Other liabilities   13,612    14,503 
Member capital   11,939    12,340 
           
Total liabilities and members' capital  $151,551   $152,843 

 

4. 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, 2014 
   Adjusted Cost   Gross Unrealized Gains   Gross Unrealized
Losses
   Fair Value 
Equity Securities, primarily REITs  $1,405   $194   $-   $1,599 
Marco OP Units and Marco II OP Units   51,970    44,716    -    96,686 
Corporate Bonds and Preferred Equities   39,794    1,047    (457)   40,384 
Mortgage Backed Securities ("MBS")   6,648    -    (239)   6,409 
Total  $99,817   $45,957   $(696)  $145,078 

 

12
 

 

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

Notes to Consolidated Financial Statements

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

 

   As of December 31, 2013 
   Adjusted Cost   Gross Unrealized Gains   Gross Unrealized
Losses
   Fair Value 
Equity Securities, primarily REITs  $10,059   $555   $-   $10,614 
Marco OP Units and Marco II OP Units   51,970    37,736    -    89,706 
Corporate Bonds and Preferred Equities   39,576    675    (1,307)   38,944 
Mortgage Backed Securities ("MBS")   7,352    -    (233)   7,119 
Total  $108,957   $38,966   $(1,540)  $146,383 

 

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

 

All of the MBS were issued by various U.S. government-sponsored enterprises (Freddie Mac and Fannie Mae). The Company considers the declines in market value of its investment portfolio to be temporary in nature. The unrealized losses on the Company’s investments were caused primarily by changes in market interest rates or widening credit spreads. 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. During the three months ended March 31, 2014 and 2013, the Company did not recognize any impairment charges. As of March 31, 2014, the Company does not consider any of its investments to be other-than-temporarily impaired.

 

The Company may sell certain of its investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management. For the three months ended March 31, 2014 and 2013, the Company realized $1.2 million and $11of gross gains, respectively, related to sales of securities and early redemptions of MBS by the security issuer. The maturities of the Company’s MBS generally ranged from 27 years to 30 years.

 

Notes Payable

  

Margin Loan

 

The Company has access to a margin loan (the “Margin Loan”) from a financial institution that holds custody of certain of the Company’s marketable securities. The Margin Loan, which is due on demand, bears interest at Libor plus 0.85% (1.00% as of March 31, 2014) and is collateralized by the marketable securities in the Company’s account. The amounts available to the Company under the Margin Loan are at the discretion of the financial institution and not limited to the amount of collateral in its account. The amount outstanding under this Margin Loan is $19.6 million and $20.3 million as of March 31, 2014 and December 31, 2013, respectively, and is included in Notes Payable on the consolidated balance sheets.

 

Line of Credit

 

On September 14, 2012, the Company entered into a non-revolving credit facility (the “Line of Credit”) with a financial institution which permits borrowings up to $25.0 million. The Line of Credit expires on December 13, 2014 and bears interest at Libor plus 3.00% (3.15% as of March 31, 2014). The Line of Credit is collateralized by 440,311 Marco OP Units and PRO guaranteed the Line of Credit.

 

The amount outstanding under the Line of Credit is $19.9 million as of both March 31, 2014 and December 31, 2013 and is included in Notes Payable on the consolidated balance sheets.

 

13
 

 

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

Notes to Consolidated Financial Statements

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

 

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.

 

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

 

   Fair Value Measurement Using     
As of March 31, 2014  Level 1   Level 2   Level 3   Total 
                 
Marketable Securities:                    
Equity Securities, primarily REITs  $1,599   $-   $-   $1,599 
Marco OP and OP II Units   -    96,686    -    96,686 
Corporate Bonds and Preferred Equities   -    40,384    -    40,384 
MBS   -    6,409    -    6,409 
Total  $1,599   $143,479   $-   $145,078 

 

   Fair Value Measurement Using     
As of December 31, 2013  Level 1   Level 2   Level 3   Total 
                 
Marketable Securities:                    
Equity Securities, primarily REITs  $10,614   $-   $-   $10,614 
Marco OP and OP II Units   -    89,706    -    89,706 
Corporate Bonds and Preferred Equities   -    38,944    -    38,944 
MBS   -    7,119    -    7,119 
Total  $10,614   $135,769   $-   $146,383 

 

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

 

14
 

 

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

Notes to Consolidated Financial Statements

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

 

5. Mortgages Payable

 

Mortgages payable consists of the following:

 

       Weighted
Average Interest
          Loan Amount as of 
Property  Interest Rate   Rate as of March
31, 2014
   Maturity Date  Amount Due at
Maturity
   March 31, 2014   December 31,
2013
 
                        
Southeastern Michigan Multi-Family Properties   5.96%    5.96%  July 2016  $38,139   $39,413   $39,555 
                             
Oakview Plaza   5.49%    5.49%  January 2017   25,583    26,714    26,814 
                             
Gulf Coast Industrial Portfolio   9.83%    9.83%  Due on demand   51,790    51,790    51,902 
                             
Camden Multi-Family Properties (Two Individual Loans)   5.44%    5.44%  December 2014   26,334    26,610    26,718 
                             
St. Augustine Outlet Center   6.09%    6.09%  April 2016   23,748    24,707    24,824 
                             
Gantry Park   Libor + 3.50%    4.08%  September 2016   44,093    44,093    43,540 
                             
DePaul Plaza   Libor + 3.00%    3.16%  September 2017   11,147    11,909    11,964 
                             
Courtyard - Parsippany   Libor + 3.50%    3.66%  August 2018   7,126    7,907    7,947 
                             
Courtyard - Baton Rouge   5.56%    5.56%  May 2017   5,873    6,293    6,325 
                             
Residence Inn - Baton Rouge   5.36%    5.36%  December 2018   5,363    5,960    5,990 
                             
Promissory Note (cross-collateralized by three hotels)   4.94%    4.94%  August 2018   14,008    15,541    15,622 
                             
Revolving Credit Facility (cross-collateralized by five hotels)   Libor + 4.95%    5.13%  May 2016   34,077    34,077    34,077 
                             
Total mortgages payable        5.94%     $287,281   $295,014   $295,278 

 

Libor as of March 31, 2014 and December 31, 2013 was 0.15% and 0.17%, respectively. Our loans are secured by the indicated real estate and are non-recourse to the Company.

 

 The following table shows the contractually scheduled principal maturities during the next five years and thereafter as of March 31, 2014 in the Consolidated Balance Sheets:

 

Remainder of
2014
   2015   2016   2017   2018   Thereafter   Total 
$80,140   $2,461   $141,935   $43,517   $26,961   $-   $295,014 

 

Pursuant to the Company’s loan agreements, escrows in the amount of approximately $11.7 million and $11.5 million were held in restricted escrow accounts as of March 31, 2014 and December 31, 2013, respectively. Such escrows will be released in accordance with the applicable loan agreements for payments of real estate taxes, insurance and capital improvement transactions, as required. Certain of our mortgages payable also contain clauses providing for prepayment penalties.

 

Certain of the Company’s debt agreements require the maintenance of certain ratios, including debt service coverage. The Company believes it is currently in compliance with all of its debt covenants other than the debt associated with the Gulf Coast Industrial Portfolio which was placed in default during 2012 and is due on demand as discussed below.

 

15
 

 

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

Notes to Consolidated Financial Statements

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

 

As a result of not meeting certain debt service coverage ratios on the non-recourse mortgage indebtedness secured by the Gulf Coast Industrial Portfolio, the lender elected to retain the excess cash flow from these properties beginning in July 2011 until such time as the required coverage ratios are met for two successive quarters.  During the third quarter of 2012, the loan was transferred to a special servicer, who discontinued scheduled debt service payments and notified us that the loan was in default and due on demand.

 

Although the lender is currently not charging or being paid interest at the stated default rate, an aggregate $3.4 million of default interest has been accrued through March 31, 2014 pursuant to the terms of the loan agreement. For the three months ended March 31, 2014 and 2013, $0.5 million and $0.6 million of default interest was accrued. As a result, accrued default interest of approximately $3.4 million and $2.9 million is included in accounts payable, accrued expenses and other liabilities on our consolidated balance sheets as of March 31, 2014 and December 31, 2013, respectively.  We are currently engaged in discussions with the special servicer to restructure the loan and do not expect to pay the default interest as this mortgage indebtedness is non-recourse to us.  We believe the continued loss of excess cash flow from these properties and the placement of the non-recourse mortgage indebtedness in default will not have a material impact on our results of operations or financial position.

 

6. Assets and Liabilities Held for Sale, Assets and Liabilities Disposed of and Discontinued Operations

 

During the year ended December 31, 2013 the Company disposed of the Houston Extended Stay Hotels and Everson Pointe for approximately $27.0 million. In connection with the disposition, the Company repaid in full the then outstanding mortgage indebtedness of approximately $11.1 million. The operating results of the Houston Extended Stay Hotels and Everson Pointe, through their respective dates of disposition, have been classified as discontinued operations in the consolidated statements of operations for all periods presented. These transactions resulted in a fourth quarter aggregate gain on disposition of $2.0 million.

 

During the fourth quarter of 2013, Crowe’s Crossing met the criteria to be classified as held for sale. The operating results of Crowe’s Crossing have been classified as discontinued operations in the consolidated statements of operations for all periods presented.  Additionally, the associated assets and liabilities of Crowe’s Crossing are classified as held for sale in the consolidated balance sheet as of December 31, 2013.

 

On January 22, 2014 the Company disposed of Crowe’s Crossing for approximately $9.3 million. In connection with the disposition, the Company repaid in full the then outstanding mortgage indebtedness of approximately $5.8 million, which was scheduled to mature in September 2015. The Company recognized a gain on disposition of approximately $1.6 million, which is included in discontinued operations during the three months ended March 31, 2014.

 

The following summary presents the operating results of the Houston Extended Stay Hotels, Everson Pointe and Crowe’s Crossing included in discontinued operations in the Consolidated Statements of Operations for the periods indicated.

 

   For the Three Months Ended 
   March 31, 2014   March 31, 2013 
Revenues  $58   $1,473 
           
Operating expenses   29    1,095 
           
Operating income   29    378 
           
Interest expense   (19)   (253)
Gain on disposition   1,610    - 
           
Net income from discontinued operations  $1,620   $125 

 

Cash flows generated from discontinued operations are presented separately on the Company’s consolidated statements of cash flows.

 

The following summary presents the major components of assets and liabilities held for sale, of as the date indicated.

 

16
 

 

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

Notes to Consolidated Financial Statements

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

 

   As of 
   December 31, 2013 
      
Net investment property  $6,622 
Intangible assets, net   525 
Other assets   562 
      
Total assets held for sale  $7,709 
      
Mortgages payable  $5,834 
Accounts payable and accrued expenses   41 
Other liabilities   238 
      
Total liabilities held for sale  $6,113 

 

7.

Net Earnings Per Share

 

Basic net earnings per share is calculated by dividing net income attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the applicable period. Diluted net income per share includes the potentially dilutive effect, if any, which would occur if our outstanding options to purchase our common stock were exercised. For all periods presented, the effect of these exercises, if any, was insignificant and, therefore, diluted net income per share is equivalent to basic net income per share.

 

8. Related Party Transactions    

 

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

 

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

 

   Three Months Ended March 31, 
   2014   2013 
   (unaudited)     
Acquisition fees  $32   $316 
Asset management fees   713    621 
Property management fees   348    422 
Development fees and leasing commissions   164    374 
Total  $1,257   $1,733 

 

Lightstone SLP, LLC, an affiliate of the Company’s Sponsor, has purchased subordinated profits interests in the Operating Partnership (“SLP units”). These SLP units, the purchase price of which will be repaid only after stockholders receive a stated preferred return and their net investment, entitle Lightstone SLP, LLC to a portion of any regular distributions made by the Operating Partnership.

 

During the three months ended March 31, 2014, distributions of $0.5 million were declared and paid on the SLP units and are part of noncontrolling interests. Since inception through March 31, 2014, cumulative distributions declared were $13.4 million, of which $12.9 million were paid. See Note 3 for other related party transactions.

 

9. Financial Instruments

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted escrows, tenants’ accounts receivable, accounts payable and accrued expenses and the notes payable approximated their fair values because of the short maturity of these instruments. The carrying amount reported in the consolidated balance sheets for the mortgage receivable approximated its fair value based upon current market information that would have been used by a market participant to estimate the fair value of such loan.

 

17
 

 

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

Notes to Consolidated Financial Statements

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

 

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

 

   As of March 31, 2014   As of December 31, 2013 
   Carrying Amount   Estimated Fair
Value
   Carrying Amount   Estimated Fair
Value
 
Mortgages payable  $295.0   $293.4   $295.3   $292.8 

 

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

 

10. Segment Information

 

The Company currently operates in four business segments as of March 31, 2014: (i) retail real estate (the “Retail Segment”), (ii) multi-family residential real estate (the “Multi-family Residential Segment”), (iii) industrial real estate (the “Industrial Segment”) and (iv) hospitality (the “Hospitality Segment”). The Company’s advisor and its affiliates provide leasing, property and facilities management, acquisition, development, construction and tenant-related services for its portfolio. The Company’s revenues for the three months ended March 31, 2014 and 2013 were exclusively derived from activities in the United States. No revenues from foreign countries were received or reported. The Company had no long-lived assets in foreign locations as of March 31, 2014 and December 31, 2013. The accounting policies of the segments are the same as those described in Note 2: Summary of Significant Accounting Policies of the Company’s December 31, 2013 Annual Report on Form 10-K. Unallocated assets, revenues and expenses relate to corporate related accounts.

 

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

 

As discussed in Note 6, the results of operations presented below exclude the Houston Extended Stay Hotels, Everson Pointe and Crowe’s Crossing due to their classification as discontinued operations for all periods presented. The Houston Extended Stay Hotels were previously included in the Company’s hospitality segment and Everson Pointe and Crowe’s Crossing were previously included in the Company’s retail segment.

 

Selected results of operations for the three months ended March 31, 2014 and 2013, and total assets as of March 31, 2014 and December 31, 2013 regarding the Company’s operating segments are as follows:

 

   For the Three Months Ended March 31, 2014 
   Retail   Multi-Family   Industrial   Hospitality   Unallocated   Total 
Total revenues  $2,852   $4,919   $1,878   $12,551   $-   $22,200 
                               
Property operating expenses   767    1,952    512    9,283    1    12,515 
Real estate taxes   339    345    209    459    -    1,352 
General and administrative costs   20    95    (56)   167    1,557    1,783 
                               
Net operating income/(loss)   1,726    2,527    1,213    2,642    (1,558)   6,550 
                               
Depreciation and amortization   962    1,023    459    1,526    -    3,970 
                               
Operating income/(loss)  $764   $1,504   $754   $1,116   $(1,558)  $2,580 
                               
As of March 31, 2014:                              
Total Assets  $105,593   $146,287   $59,443   $152,015   $207,869   $671,207 

 

18
 

 

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

Notes to Consolidated Financial Statements

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

 

   For the Three Months Ended March 31, 2013 
   Retail   Multi-Family   Industrial   Hospitality   Unallocated   Total 
                         
Total revenues  $2,952   $3,235   $1,724   $6,756   $-   $14,667 
                               
Property operating expenses   778    1,451    450    5,974    3    8,656 
Real estate taxes   344    186    200    307    -    1,037 
General and administrative costs   (3)   56    (7)   71    2,121    2,238 
                               
Net operating income/(loss)   1,833    1,542    1,081    404    (2,124)   2,736 
                               
Depreciation and amortization   1,000    432    453    478    -    2,363 
                               
Operating income/(loss)  $833   $1,110   $628   $(74)  $(2,124)  $373 
                               
As of December 31, 2013:                              
Total Assets  $114,817   $145,582   $59,937   $150,923   $206,502   $677,761 

 

11. Commitments and Contingencies

 

Legal Proceedings

 

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

 

On January 4, 2007, 1407 Broadway Real Estate LLC ("Office Owner"), an indirect, wholly owned subsidiary of 1407 Broadway Mezz II LLC ("1407 Broadway "), consummated the acquisition of a sub-leasehold interest (the "Sublease Interest") in an office building located at 1407 Broadway, New York, New York (the "Office Property"). 1407 Broadway is a joint venture between LVP 1407 Broadway LLC ("LVP LLC"), a wholly owned subsidiary of our operating partnership, and Lightstone 1407 Manager LLC ("Manager"), which is wholly owned by David Lichtenstein, the Chairman of our Board of Directors and our Chief Executive Officer, and Shifra Lichtenstein, his wife.

 

 The Sublease Interest was acquired pursuant to a Sale and Purchase of Leasehold Agreement with Gettinger Associates, L.P. ("Gettinger"). In July 2006, Abraham Kamber Company, as Sublessor under the sublease ("Sublessor"), served two notices of default on Gettinger (the "Default Notices"). The first alleged that Gettinger had failed to satisfy its obligations in performing certain renovations and the second asserted numerous defaults relating to Gettinger's purported failure to maintain the Office Property in compliance with its contractual obligations.

 

In response to the Default Notices, Gettinger commenced legal action and obtained an injunction that extends its time to cure any default, prohibits interference with its leasehold interest and prohibits Sublessor from terminating its sublease pending resolution of the litigation. A motion by Sublessor for partial summary judgment, alleging that certain work on the Office Property required its prior approval, was denied by the Supreme Court, New York County. Subsequently, by agreement of the parties, a stay was entered precluding the termination of the Sublease Interest pending a final decision on Sublessor's claim of defaults under the Sublease Interest. In addition, the parties stipulated to the intervention of Office Owner as a party to the proceedings.

 

On April 12, 2012, the Supreme Court, New York County decided in favor of the Company with respect to all matters before the Court. Sublessor filed a Notice of Appeal on June 7, 2012 and, after fully briefing the issues, the parties argued the appeal on January 30, 2013.  On February 21, 2013, the Appellate Division, First Department rendered its decision largely affirming the lower court’s determination.  The Appellate Division did determine that there were two 2007 defaults that had not been cured and that the assignment of the sublease had occurred at a time when defaults existed.  The Appellate Division determined that the remedy for such defaults was not a forfeiture of the sublease.  Instead, the Appellate Division remanded to the lower court with direction that the lower court fashion a remedy short of forfeiture.  Recently, the Sublessor has sent a letter claiming that the Appellate Division order “lifted” the Yellowstone Injunction, a procedure in New York law whereby a tenant in a commercial premises has a right to stay the time to cure, and demanding a cure within thirty (30) days. We have rejected that claim because the Appellate Division decision expressly remanded the case with a direction that the Supreme Court fashion a remedy other than forfeiture of the alleged defaults, and requested a conference from the lower court. On December 10, 2013, the parties appeared before Justice James and engaged in oral argument. Thereafter, in January 2014 the transcript was supplied to the Court pursuant to its direction. The parties are now awaiting the Court’s determination of the appropriate remedy.

 

19
 

 

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

Notes to Consolidated Financial Statements

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

 

While any proceeding or litigation has an element of uncertainty, management currently believes that the likelihood of an unfavorable outcome with respect to any of the aforementioned legal proceedings is remote. No provision for loss has been recorded in connection therewith.

 

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

 

Outlet Centers Transactions

 

The Company previously held ownership interests in GPH and Livermore Valley Holdings LLC (“LVH”). On December 4, 2012, GPH, LVH and certain of their subsidiaries (collectively, the “Holding Entities”) completed the disposition of their ownership interests in an outlet center located in Grand Prairie, Texas (the “Grand Prairie Outlet Center”), an outlet center located in Livermore, California (the “Livermore Valley Outlet Center”) and a parcel of land adjacent to the Livermore Outlet Center (the “Livermore Land Parcel” and collectively, the “Outlet Centers Transactions”) to Simon and certain of its affiliates (collectively, the “Simon Parties”). Pursuant to the terms of the Outlet Centers Transactions, the aggregate consideration received at closing is subject to certain true-ups and adjustments, including a final valuation of the Grand Prairie Outlet Center and the Livermore Valley Outlet Center, based on their aggregate net operating income, as defined, during calendar year 2013. The final valuation is expected to be completed during the second quarter of 2014. Furthermore, the Holding Entities, subject to the satisfaction of certain conditions, may (i) receive $5.0 million of additional consideration for the Livermore Land Parcel or (ii) elect to repurchase the Livermore Land Parcel for $35.0 million. During the first quarter of 2013, the Holding Entities received an additional $3.0 million, of which the Company’s share was $1.2 million, related to the disposition of its ownership interest in the Grand Prairie Outlet Center resulting from the satisfaction of certain conditions.

 

Loan Collection Guaranties

 

The Operating Partnership and PRO (collectively, the “LVP Parties”) have provided and will continue to have the opportunity to provide guaranties of collection (the “Loan Collection Guaranties”) with respect to draws made under revolving credit facilities (or indebtedness incurred to refinance the revolving credit facilities) by Simon in connection with the closing of certain contribution transactions related to the LVP Parties’ ownership interests in (i) Mill Run LLC (“Mill Run”) and Prime Outlets Acquisition Company (“POAC” and collectively, the “POAC/Mill Run Transaction”) and (ii) GPH and LVH, . The Loan Collection Guaranties are required for at least four years following the closings of POAC/Mill Run Transaction and the Outlet Centers Transaction, which closed on August 30, 2010 and December 4, 2012, respectively. Under the terms of the Loan Collection Guaranties, the LVP Parties are obligated to make payments in respect of principal and interest due under the revolving credit facilities after Simon OP has failed to make payments, the amounts outstanding under the revolving credit facilities have been accelerated, and the lender have failed to collect the full amounts outstanding under the revolving credit facilities after exhausting other remedies. The maximum amounts of the Loan Collection Guaranties will be reduced by the extent of any payments of principal made by Simon OP or other cash proceeds recovered by the lenders.

 

12. Subsequent Events

 

Distribution Payment

 

On April 15, 2014, the distribution for the three-month period ending March 31, 2014 of approximately $4.4 million was paid in full using a combination of cash and approximately 0.1 million shares of the Company’s common stock issued pursuant to the Company’s Distribution Reinvestment Program (“DRIP”), at a discounted price of $11.21 per share. The distribution was paid from cash flows provided from operations (approximately $3.0 million or 58%) and excess cash proceeds from the issuance of common stock through the Company’s DRIP (approximately $1.4 million or 42%).

 

Distribution Declaration

 

On May 14, 2014, the Board authorized and the Company declared a distribution for the three-month period ending June 30, 2014. The distribution will be calculated based on shareholders of record each day during this three-month period at a rate of $0.0019178 per day, and will equal a daily amount that, if paid each day for a 365-day period, would equal a 7.0% annualized rate based on a share price of $10.00. The distribution will be paid in cash on July 15, 2014 to shareholders of record as of June 30, 2014. The shareholders have an option to elect the receipt of shares under the Company’s DRIP.

 

20
 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

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

 

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

 

As discussed in Note 6 to the Consolidated Financial Statements, the results of operations presented below exclude two Extended Stay Hotels located in Houston, Texas (the “Houston Extended Stay Hotels”), a retail shopping center (“Everson Pointe”) located in Snellville, Georgia and a retail shopping center (“Crowe’s Crossing”) located in Stone Mountain, Georgia due to their classification as discontinued operations. The Houston Extended Stay Hotels were previously included in the Company’s hospitality segment and Everson Pointe and Crowe’s Crossing were previously included in the Company’s retail segment.

 

Forward-Looking Statements

 

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

 

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

 

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

 

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

  

Overview

 

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

 

21
 

 

Lightstone REIT has and may continue to acquire and operate in the future commercial, residential and hospitality properties, principally in the United States. Principally through the Operating Partnership, our acquisitions have included both portfolios and individual properties. Our commercial holdings consist of retail (primarily multi-tenant shopping centers), lodging (primarily select service hotels), industrial properties and residential properties comprised of multi-family complexes.

 

 As discussed in Notes 1 and 6 of the Notes to Consolidated Financial Statements, the results of operations presented below exclude certain properties due to their classification as discontinued operations.

 

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

 

Current Environment

 

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

 

U.S. and international markets are currently experiencing increased levels of volatility due to a combination of many factors, including depressed home prices, limited access to credit markets, higher fuel prices, less consumer spending and fears of a national and global recession. The effects of the current market dislocation may persist as financial institutions continue to take the necessary steps to restructure their business and capital structures. As a result, this economic downturn has reduced demand for space and removed support for rents and property values. Since we cannot predict when the real estate markets may recover, the value of our properties may decline if current market conditions persist or worsen.

 

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

 

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

 

22
 

 

Portfolio Summary –

 

   Location  Year Built (Range of
years built)
   Leasable Square
Feet
   Percentage Occupied as of
March 31, 2014
   Annualized Revenues based
on rents at
March 31, 2014
  Annualized Revenues per
square foot at March 31,
 2014
 
Wholly Owned and Consolidiated Real Estate Properties:                          
                           
Retail                          
St. Augustine Outlet Center  St. Augustine, FL   1998    330,246    80.9%   $4.0 million  $14.87 
Oakview Plaza  Omaha, NE   1999 - 2005    176,774    90.6%   $2.4 million  $14.84 
DePaul Plaza  Bridgeton, MO   1985    187,090    80.7%   $1.7 million  $11.05 
       Retail Total    694,110    83.3%        
                           
Industrial                          
7 Flex/Office/Industrial Buildings within the Gulf Coast Industrial Portfolio  New Orleans, LA   1980-2000    339,700    74.3%   $2.8 million  $10.90 
4 Flex/Industrial Buildings within the Gulf Coast Industrial Portfolio  San Antonio, TX   1982-1986    484,369    82.1%   $1.8 million  $4.64 
3 Flex/Industrial Buildings within the Gulf Coast Industrial Portfolio  Baton Rouge, LA   1985-1987    182,792    95.8%   $1.2 million  $6.64 
Sarasota  Sarasota, FL   1992    280,242    100.0%   $0.6 million  $1.99 
       Industrial Total    1,287,103    85.9%        

 

Multi - Family Residential  Location  Year Built (Range of
years built)
  Leasable Units   Percentage Occupied as
of March 31, 2014
   Annualized Revenues based
on rents at
March 31, 2014
  Annualized Revenues per
unit at March 31, 2014
 
Southeastern Michigan Multi-Family Properties (Four Apartment Buildings)  Southeast  MI  1965-1972   1,017    94.3%   $7.9 million  $8,217 
Camden Multi-Family Properties (Two Apartment Communities)  Greensboro/Charlotte, NC  1984-1985   568    96.7%   $4.2 million  $7,612 
Gantry Park (Multi-Family Apartment Building)  Queens, NY  2013   199    98.0%   $7.6 million  $39,085 
      Residential Total   1,784    95.5%        

 

   Location  Year Built   Year to date
Available Rooms
   Percentage Occupied as
of March 31, 2014
   Revenue per Available
Room for the Three
Months Ended  March 31,
2014
   Average Daily Rate For
the Three Months Ended
March 31, 2014
 
Wholly-Owned and Consolidated Hospitality Properties:                             
                              
DoubleTree - Danvers  Danvers, Massachusetts   1978    32,670    36.3%  $43.75   $120.51  
                              
Courtyard - Parsippany  Parsippany, New Jersey   2001    13,590    36.8%  $54.17   $147.08  
                              
Courtyard - Willoughby  Willoughby, Ohio   1999    8,100    66.0%  $78.60   $119.13  
                              
Fairfield Inn - DesMoines  West Des Moines, Iowa   1997    9,180    53.8%  $51.24   $95.23  
                              
SpringHill Suites - DesMoines  West Des Moines, Iowa   1999    8,730    58.6%  $58.39   $99.60  
                              
Holiday Inn Express - Auburn  Auburn, Alabama   2002    7,380    69.4%  $70.55   $101.67  
                              
Courtyard - Baton Rouge  Baton Rouge, Lousiana   1997    10,890    67.7%  $65.98   $97.41  
                              
Residence Inn - Baton Rouge  Baton Rouge, Lousiana   2000    9,720    42.7%  $42.02   $98.34  
                              
Aloft - Rogers  Rogers, Arkansas   2008    11,700    52.4%  $60.92   $116.37  
                              
Fairfield Inn - Jonesboro  Jonesboro, Arkansas   2009    7,470    69.7%  $62.83   $90.19  
                              
Hampton Inn - Miami  Miami, Florida   1996    11,340    89.8%  $133.60   $148.78  
                              
Hampton Inn & Suites - Fort Lauderdale  Fort Lauderdale, Florida   1996    9,360    89.0%  $148.51   $166.95  
                              
       Hospitality Total    140,130    56.2%  $67.92   $120.84  

 

   Location  Year Built   Leasable Square
Feet
   Percentage Occupied as
of March 31, 2014
   Annualized Revenues based
on rents at
March 31, 2014
   Annualized Revenues per
square foot at March 31,
2014
 
Unconsolidated Affiliated Real Estate Entities-Office:                            
1407 Broadway(1)  New York, NY   1952    1,114,695    81.3%  $38.40   $42.42 

 

(1) - Sub-lease interest indirectly owned by 1407 Broadway Mezz II, LLC, in which we have an 49.0% ownership interest.

 

23
 

 

Annualized revenue is defined as the minimum monthly payments due as of March 31, 2014 annualized, excluding periodic contractual fixed increases and rents calculated based on a percentage of tenants’ sales. The annualized base rent disclosed in the table above includes all concessions, abatements and reimbursements of rent to tenants.

 

Critical Accounting Policies and Estimates

 

There were no material changes during the three months ended March 31, 2014 to our critical accounting policies as reported in our Annual Report on Form 10-K, for the year ended December 31, 2013.

 

Results of Operations

 

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

 

Hotel Acquisitions

 

On January 18, 2013, we acquired a Holiday Inn Express Hotel & Suites (the “Holiday Inn Express - Auburn”) located in Auburn, Alabama. On May 16, 2013, we acquired a portfolio comprised of two hotels located in Baton Rouge, Louisiana (the “Courtyard - Baton Rouge” and the “Residence Inn - Baton Rouge”, or collectively, the “Baton Rouge Hotel Portfolio”). On June 18, 2013, we acquired a portfolio comprised of two hotels, one located in Rogers, Arkansas (the “Aloft - Rogers”) and the other in Jonesboro, Arkansas (the “Fairfield Inn - Jonesboro”, or collectively, the “Arkansas Hotel Portfolio”). On August 30, 2013, we acquired a portfolio comprised of two hotels located in South Florida (the “Hampton Inn - Miami” and the “Hampton Inn & Suites - Fort Lauderdale”, or collectively, the “Florida Hotel Portfolio”).

 

For the Three Months Ended March 31, 2014 vs. March 31, 2013

 

Consolidated

 

Revenues

 

Our revenues are comprised of rental revenues, tenant recovery income and other service income. Total revenues increased by approximately $7.5 million to $22.2 million for the three months ended March 31, 2014 compared to $14.7 million for the same period in 2013. The increase primarily reflects higher revenues in our Hospitality Segment of $5.8 million and our Multi-Family Residential Segment of $1.7 million. See “Segment Results of Operations for the Three Months Ended March 31, 2014 compared to March 31, 2013” for additional information on revenues by segment.

 

Property operating expenses

 

Property operating expenses increased by approximately $3.8 million to $12.5 million for the three months ended March 31, 2014 compared to $8.7 million the same period in 2013. The increase was primarily due to the timing of our hotel acquisitions noted above.

 

Real estate taxes

 

Real estate taxes were increased by approximately $0.4 million to $1.4 million for the three months ended March 31, 2014 compared to $1.0 million the same period in 2013. The increase was primarily due to the timing of our hotel acquisitions noted above.

 

General and administrative expenses

 

General and administrative expenses decreased by approximately $0.4 million to $1.8 million for the three months ended March 31, 2014 compared to $2.2 million the same period in 2013. The decrease is primarily attributable to lower professional fees incurred during the three months ended March 31, 2014 compared to the same period in 2013.

 

24
 

 

Depreciation and Amortization

 

Depreciation and amortization expense increased by approximately $1.6 million to $4.0 million for the three months ended March 31, 2014 compared to $2.4 million the same period in 2013. The increase was primarily due to the timing of our hotel acquisitions noted above.

 

Mark to market adjustment on derivative financial instruments

 

During the three months ended March 31, 2014 and 2013, we recorded mark to market adjustments on derivative financial instruments of $39 and $1.5 million, respectively. The mark to market adjustments during the 2013 period primarily represented the change in the fair values of a collar entered into to protect the value of a portion of our Marco OP Units within a certain specified range through December 2013.

 

Interest and dividend income

 

Interest and dividend income decreased by approximately $2.0 million to $1.5 million for the three months ended March 31, 2014 compared to $3.5 million the same period in 2013. The decrease was primarily attributable to the repayment in full of a second mortgage loan receivable held by LVP Rego Park, LLC (the “Rego Park Joint Venture”) in June 2013 as well as the elimination of interest income accruing on our Notes Receivable due from Noncontrolling Interests for periods subsequent to June 26, 2013..

 

Interest expense

 

Interest expense, including amortization of deferred financing costs, increased by approximately $1.2 million to $4.9 million for the three months ended March 31, 2014 compared to $3.7 million for the same period in 2013. The increase is primarily attributable to the timing of certain new borrowings throughout 2013.

 

Gain on sale of marketable securities

 

Gain on sale of marketable securities increased by approximately $1.2 million to a gain of $1.2 million for the three months ended March 31, 2014 compared to a gain of $11 for the same period in 2013.

 

Loss from investment in unconsolidated affiliated real estate entity

 

This account represents our portion of the earnings associated with our ownership interest in an investment in unconsolidated affiliated real estate entity, which we account for under the equity method of accounting. Our loss from investment in unconsolidated affiliated real estate entity was $0.1 million during the three months ended March 31, 2014 compared to a loss of $2.1 million during the same period in 2013. See Note 3 of the Notes to Consolidated Financial Statements for additional information.

 

Gain on disposition of unconsolidated affiliated real estate entities

 

During the first quarter of 2013, we received an additional $1.2 million related to the 2012 disposition of our ownership interest in Grand Prairie Holdings LLC resulting from the satisfaction of certain conditions and recognized a gain on disposition of unconsolidated affiliated real estate entities in our consolidated statements of operations.

 

Noncontrolling interests

 

The net earnings allocated to noncontrolling interests relates to (i) the interests in the Operating Partnership held by our Sponsor as well as common units held by our limited partners (ii) the interest in PRO-DFJV Holdings LLC (“PRO”) held by our Sponsor, (iii) the 10.0% interest in the Rego Park Joint Venture previously held by Lightstone Value Plus Real Estate Investment Trust II, Inc., (iv) the ownership interests in 50-01 2nd St Associates LLC (the “2nd Street Joint Venture”) held by our Sponsor and other affiliates and (v) the interests held by minority owners of certain of our hotels. .

 

25
 

 

Segment Results of Operations for the Three Months Ended March 31, 2014 compared to March 31, 2013

 

Retail Segment

 

   For the Three Months Ended March 31,   Variance Increase/(Decrease) 
   2014   2013   $   % 
   (unaudited)         
Revenues  $2,852   $2,952   $(100)   -3.4%
NOI   1,726    1,833    (107)   -5.8%
Average Occupancy Rate for period   83.3%   83.8%        -0.5%

  

The following table represents lease expirations for the Retail Segment as of March 31, 2014:

 

Lease
Expiration
Year
  Number of
Expiring
Leases
   GLA of Expiring
Leases (Sq. Ft.)
   Annualized Base
Rent of Expiring
Leases ($)
   Percent of
Total GLA
   Percent of Total
Annualized Base
Rent
 
2014   15    48,371    695,037    9.1%   9.5%
2015   13    129,071    1,777,317    24.2%   24.3%
2016   9    47,841    640,994    9.0%   8.8%
2017   3    8,000    117,600    1.5%   1.6%
2018   12    90,904    1,343,720    17.0%   18.4%
2019   12    44,520    1,021,311    8.3%   14.0%
2020   5    117,957    984,814    22.1%   13.5%
2021   2    18,764    253,444    3.5%   3.5%
2022   -    -    -    -    - 
2023   1    28,000    479,920    5.2%   6.6%
Thereafter   -    -    -    -    - 
    72    533,428    7,314,157    100.0%   100.0%

 

Revenues and NOI decreased slightly for the three months ended March 31, 2014 compared to the same period in 2013 primarily as a result of the slight decrease in the average occupancy rate during the 2014 period.

 

Multi-Family Residential Segment

 

   For the Three Months Ended March 31,   Variance Increase/(Decrease) 
   2014   2013   $   % 
   (unaudited)         
Revenues  $4,919   $3,235   $1,684    52.1%
NOI   2,527    1,542    985    63.9%
Average Occupancy Rate for period   94.0%   95.1%        -1.1%

 

Revenues increased $1.7 million accompanied by an increase in NOI of $1.0 million while the average occupancy rate decreased slightly for the three months ended March 31, 2014 compared to the same period in 2013. The increases in revenue and NOI are primarily attributable to the operations of Gantry Park. The construction of Gantry Park was substantially completed and its associated assets were placed into service during the third quarter of 2013.

 

Industrial Segment

 

   For the Three Months Ended March 31,   Variance Increase/(Decrease) 
   2014   2013   $   % 
   (unaudited)         
Revenues  $1,878   $1,724   $154    8.9%
NOI   1,213    1,081    132    12.2%
Average Occupancy Rate for period   86.5%   82.9%        3.6%

 

26
 

 

The following table represents lease expirations for our Industrial Segment as of March 31, 2014:

 

Industrial Segment

 

Lease
Expiration
Year
  Number of
Expiring
Leases
   GLA of Expiring
Leases (Sq. Ft.)
   Annualized Base
Rent of Expiring
Leases ($)
   Percent of
Total GLA
   Percent of Total
Annualized
Base Rent
 
2014   38    277,401    1,148,254    25.1%   22.3%
2015   25    537,145    2,168,169    48.5%   42.0%
2016   28    173,369    777,948    15.7%   15.1%
2017   6    41,577    291,231    3.8%   5.7%
2018   11    76,025    765,115    6.9%   14.9%
Thereafter   -    -    -    -    - 
    108    1,105,517    5,150,717    100.0%   100.0%

 

Revenues and NOI increased slightly for the three months ended March 31, 2014 compared to the same period in 2013 primarily as a result of the higher average occupancy during the 2014 period.

 

Hospitality Segment

 

   For the Three Months Ended March 31,   Variance Increase/(Decrease) 
   2014   2013   $   % 
   (unaudited)         
Revenues  $12,551   $6,756   $5,795    85.8%
NOI   2,642    404    2,238    554.0%
Average Occupancy Rate for period   56.2%   51.4%        4.8%
Rev PAR  $67.92   $56.11   $11.81    21.0%

 

The revenues in our Hospitality Segment increased by approximately $5.8 million for the three months ended March 31, 2014 compared to the same period in 2013. The increase is primarily attributable to the timing of our hotel acquisitions noted above.

 

NOI in our Hospitality Segment increased by $2.2 million for the three months ended March 31, 2014 compared to the same period in 2013. This increase is primarily attributable to the timing of our hotel acquisitions noted above.

 

Financial Condition, Liquidity and Capital Resources   

 

Overview:

 

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

 

We expect to meet our short-term liquidity requirements generally through working capital and proceeds from our distribution reinvestment plan and borrowings. We believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.

 

We currently have $295.0 million of outstanding mortgage debt, a $19.9 million line of credit and a $19.6 million margin loan. Additionally, we have approximately $6.9 million of remaining availability to us under a construction loan for Gantry Park (the “Gantry Park Construction Loan”) and $10.9 million available to us under our revolving credit facility (the “Revolving Credit Facility”). We have and intend to continue to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to our stockholders. We may also incur short-term indebtedness, having a maturity of two years or less.

 

Our charter provides that the aggregate amount of borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. As of March 31, 2014, our total borrowings of $334.5 million represented 94% of net assets.

 

27
 

 

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

 

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

 

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

 

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

 

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

 

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

 

   Three Months Ended March 31, 
   2014   2013 
   (unaudited) 
Acquisition fees  $32   $316 
Asset management fees   713    621 
Property management fees   348    422 
Development fees and leasing commissions   164    374 
Total  $1,257   $1,733 

 

As of March 31, 2014, we had approximately $61.5 million of cash and cash equivalents on hand and $145.1 million of marketable securities, available for sale.

 

Summary of Cash Flows

 

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

 

28
 

 

   For the Three Months Ended March 31, 
   2014   2013 
   (unaudited) 
Cash flows provided by operating activities  $5,486   $2,197 
Cash flows provided by/(used in) investing activities   16,799    (28,724)
Cash flows used in financing activities   (13,692)   (16,685)
Net change in cash and cash equivalents   8,593    (43,212)
           
Cash and cash equivalents, beginning of the period   52,899    98,805 
Cash and cash equivalents, end of the period  $61,492   $55,593 

 

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

 

Operating activities

 

Net cash flows provided by operating activities of $5.5 million for the three months ended March 31, 2014 consists of the following:

 

·cash inflows of approximately $3.5 million from our net income from continuing operations after adjustment for non-cash items; and

 

·cash inflows of approximately $2.0 million associated with the net changes in operating assets and liabilities.

 

Investing activities

 

The net cash provided by investing activities from of $16.8 million for the three months ended March 31, 2014 consists primarily of the following:

 

·purchases of investment property of approximately $6.2 million;

 

·final settlement payment for Marco OP Units Collar of $3.5 million;

 

·funds released for the collateral requirement on the collar for our Marco OP Units of approximately $7.2 million;

 

·net proceeds from the sale and purchase of marketable securities of $10.3 million; and

 

·cash inflows of approximately $9.0 million from discontinued operations, consisting primarily of net proceeds from the sale of Crowe’s Crossing.

 

Financing activities

 

The net cash used by financing activities of approximately $13.7 million for the three months ended March 31, 2014 is primarily related to the following:

 

·distributions to our common shareholders of $3.1 million

 

·redemptions and cancellation of common stock and noncontrolling interests of $3.1 million;

 

·distributions to our noncontrolling interests of $0.7 million;

 

·net payments on our notes payable of $0.7 million and net proceeds from mortgage financing of $0.5 million;

 

·debt principal payments $0.8 million; and

 

29
 

 

·cash outflows of approximately $5.8 million from discontinued operations, consisting primarily of repayment of mortgage indebtedness in connection with disposition of Crowe’s Crossing.

 

The following summarizes our indebtedness maturing in 2014 and our current intentions:

 

Gulf Coast Industrial Portfolio

 

Our non-recourse mortgage of approximately $51.8 million, secured by the Gulf Coast Industrial Portfolio, which was originally due in February 2017, is in default and therefore, due on demand. We are in discussions with the lender to potentially modify or restructure the loan. No assurance can be made that we will be successful in such efforts. See “Contractual Obligations” below for additional information.

 

Camden Multi-Family Properties

 

Our two individual non-recourse mortgages aggregating approximately $26.6 million, secured by the Camden Multi-Family Properties are scheduled to mature in December 2014. We are currently evaluating our options with respect to these properties and may seek to refinance or extend these mortgages or potentially dispose of the properties. No assurances can be made that we will be successful in such efforts. See “Contractual Obligations” below for additional information.

 

Distribution Reinvestment Plan and Share Repurchase Program

 

Our DRIP provides our stockholders with an opportunity to purchase additional shares of our common stock at a discount by reinvesting distributions. Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to us, subject to restrictions. We redeemed redemption requests at an average price per share of common stock of $9.00. We fund share redemptions from the cumulative proceeds of the sale of shares of common shares pursuant to our DRIP. Our Board of Directors reserves the right to terminate the either program for any reason without cause by providing written notice of termination of the DRIP to all participants or written notice of termination of the share repurchase program to all stockholders.

 

Contractual Obligations  

 

The following is a summary of our contractual obligations outstanding over the next five years and thereafter as of March 31, 2014.

 

Contractual
Obligations
  Remainder of 2014   2015    2016   2017   2018   Thereafter   Total 
Mortgage Payable  $80,140   $2,461    141,935   $43,517   $26,961   $-   $295,014 
Interest Payments1,2   9,296    10,767    7,420    1,852    919    -    30,254 
                                    
Total Contractual Obligations  $89,436   $13,228   $149,355   $45,369   $27,880   $-   $325,268 

 

1)These amounts represent future interest payments related to mortgage payable obligations based on the fixed and variable interest rates specified in the associated debt agreements. All variable rate debt agreements are based on the one-month rate. For purposes of calculating future interest amounts on variable interest rate debt the one-month rate as of March 31, 2014 was used.
2)The debt associated with the Gulf Coast Industrial Portfolio is in default and due on demand and therefore no future interest payments on this debt are included in these amounts.

 

We have access to a margin loan and line of credit from a financial institution that holds custody of certain of the Company’s marketable securities. The aggregate amount outstanding on both the margin loan and line of credit was $39.5 million as of March 31, 2014, and is due on demand.

 

We have a $45.0 million Revolving Credit Facility that allows the Company to designate properties as collateral that allow the Company to borrow up to a 60.0% loan-to-value ratio of the properties. The initial loan of $14.2 million under the Revolving Credit Facility was secured by the Courtyard - Willoughby, the Fairfield Inn - Des Moines and the SpringHill Suites - Des Moines. During the third quarter of 2013 the Company borrowed an additional $19.9 million under the Revolving Credit Facility and pledged the Florida Hotel Portfolio as additional collateral under the Revolving Credit Facility. The outstanding balance of the Revolving Credit Facility was $34.1 million as of March 31, 2014 and the remaining amount available under the Revolving Credit Facility was $10.9 million.

 

30
 

 

During the second quarter of 2012, we commenced construction of Gantry Park, a residential project. On September 28, 2012 we entered into the Gantry Park Construction Loan providing up to $51.0 million to fund the costs of development and construction.  During the fourth quarter of 2013, we substantially completed the construction of Gantry Park and placed its associated assets into service. The outstanding balance of the Gantry Park Construction Loan was $44.1 million as of March 31, 2014. As of March 31, 2014, the remaining amount available under the Gantry Park Construction Loan was $6.9 million which we believe will be sufficient to fund the remaining anticipated costs related to the development and construction of Gantry Park.

 

Certain of our debt agreements require the maintenance of certain ratios, including debt service coverage. We are currently in compliance with all of our debt covenants; however, the debt associated with our Gulf Coast Industrial Portfolio was placed in default during 2012 and is due on demand as discussed below.

 

As a result of not meeting certain debt service coverage ratios on the non-recourse mortgage indebtedness secured by the Gulf Coast Industrial Portfolio, the lender elected to retain the excess cash flow from these properties beginning in July 2011 until such time as the required coverage ratios are met for two successive quarters.  During the third quarter of 2012, the loan was transferred to a special servicer, who discontinued scheduled debt service payments and notified us that the loan was in default and due on demand.

 

Although the lender is currently not charging or being paid interest at the stated default rate, an aggregate $3.4 million of default interest has been accrued through March 31, 2014 pursuant to the terms of the loan agreement. For the three months ended March 31, 2014 and 2013, default interest of $0.5 million and $0.6 million, respectively, was accrued. As a result, accrued default interest of approximately $3.4 million and $2.9 million is included in accounts payable, accrued expenses and other liabilities on our consolidated balance sheets as of March 31, 2014 and December 31, 2013, respectively. We are currently engaged in discussions with the special servicer to restructure the loan and do not expect to pay the default interest as this mortgage indebtedness is non-recourse to us.  We believe the continued loss of excess cash flow from these properties and the placement of the non-recourse mortgage indebtedness in default will not have a material impact on our results of operations or financial position.

 

Noncontrolling Interests - Redemption of Series A Preferred Units and Repayment of Notes Receivable

 

On January 2, 2014, our Operating Partnership redeemed all of the then remaining outstanding 50,100 Series A preferred units in the Operating Partnership (the “Series A Preferred Units”), held by the Arbor Mill Run JRM, LLC, a Delaware limited liability company, Arbor National CJ, LLC, a New York limited liability company, Prime Holdings LLC, a Delaware limited liability company , TRAC Central Jersey LLC, a Delaware limited liability company, Central Jersey Holdings II, LLC, a New York limited liability company and JT Prime LLC, a Delaware limited liability company (collectively, the “Contributing Parties”), at their liquidation preference of approximately $50.1 million and the Contributing Parties simultaneously repaid the remaining notes receivable due from the Contributing Parties aggregating approximately $47.4 million in full.

 

Funds from Operations and Modified Funds from Operations

 

Due to certain unique operating characteristics of real estate companies, as discussed below, the National Association of Real Estate Investment Trusts, Inc., or NAREIT, an industry trade group, has promulgated a measure known as funds from operations, or FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to net income or loss as determined under generally accepted accounting principles in the United States, or GAAP.

 

We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the White Paper. The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property and asset impairment write-downs, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT’s policy described above.

 

31
 

 

The historical accounting convention used for real estate assets requires depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Additionally, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indicators exist and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated undiscounted future cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate-related depreciation and amortization and impairments, provides a more complete understanding of our performance to investors and to management, and when compared year over year, 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. However, FFO and MFFO, as described below, 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 method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.

 

Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under GAAP, that are typically accounted for as operating expenses.

 

Management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start up entities may also experience significant acquisition activity during their initial years, we believe that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases. We will use the proceeds raised in our offering to acquire properties, and we intend to begin the process of achieving a liquidity event (i.e., listing of our common stock on a national exchange, a merger or sale of the company or another similar transaction) within seven to ten years after the proceeds from the primary offering are fully invested. Thus, we will not continuously purchase assets and will have a limited life. Due to the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association, or IPA, an industry trade group, has standardized a measure known as modified funds from operations, or MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, 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 our properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our offering has been completed and our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our offering and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on our operating performance during the periods in which properties are acquired.

 

32
 

 

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, or the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (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; mark-to-market adjustments included in net income; 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. The accretion of discounts and amortization of premiums on debt investments, unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. While we are responsible for managing interest rate, hedge and foreign exchange risk, we do retain an outside consultant to review all our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such gains and losses in calculating MFFO, as such gains and losses are not reflective of ongoing operations.

 

Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses, amortization of above and below market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income. These expenses are paid in cash by us, and therefore such funds will not be available to distribute to investors. All paid and accrued acquisition fees and expenses negatively impact our operating performance during the period in which properties are acquired and 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 other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. Therefore, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired. MFFO that excludes such costs and expenses would only be comparable to that of non-listed REITs that have completed their acquisition activities and have similar operating characteristics as us. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of derivatives as items which are unrealized and may not ultimately be realized. We view both gains and losses from dispositions of assets and fair value adjustments of derivatives as items which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. 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. Acquisition fees and expenses will not be reimbursed by the advisor if there are no further proceeds from the sale of shares in our offering, and therefore such fees and expenses will 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.

 

Our management uses MFFO and the adjustments used to calculate it in order to evaluate our performance against other non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors. For example, acquisition costs are funded from the proceeds of our offering and other financing sources and not from operations. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.

 

Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily 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 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 GAAP measurements as an indication of our performance. MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value and there is no net asset value determination during the offering stage and for a period thereafter. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO or MFFO.

 

Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.

  

33
 

 

The below table illustrates the items deducted from or added to net /income/(loss) in the calculation of FFO and MFFO during the periods presented. The table discloses MFFO in the IPA recommended format and MFFO without the straight-line rent adjustment which management also uses as a performance measure. Items are presented net of noncontrolling interest portions where applicable.

 

   For the Three Months Ended 
   March 31, 2014   March 31, 2013 
Net income/(loss)  $2,062   $(1,755)
FFO adjustments:          
Depreciation and amortization:          
Depreciation and amortization of real estate assets   3,970    2,363 
Equity in depreciation and amortization for unconsolidated affiliated real estate entity   816    681 
Adjustments to equity in earnings from unconsolidated entity, net   -    5,210 
Gain on disposal of unconsolidated affiliated real estate entities   -    (1,200)
Discontinued operations:          
Depreciation and amortization of real estate assets   -    319 
Gain on disposal of investment property   (1,722)   - 
           
FFO   5,126    5,618 
MFFO adjustments:          
Other Adjustment          
Acquisition and other transaction related costs expensed(1)   93    474 
Amortization of above or below market leases and liabilities(2)   (35)   (80)
Accretion of discounts and amortization of premiums on debt investments   -    (624)
Mark-to-market adjustments(3)   97    1,499 
Non-recurring losses/(gains) from extinguishment/sale of debt, derivatives or securities holdings(4)   112    (3,672)
Gain on sale of marketable securities   (1,167)   (11)
           
MFFO   4,226    3,204 
Straight-line rent(5)  $63   $- 
MFFO - IPA recommended format(6)  $4,289   $3,204 
           
Net income/(loss)  $2,062   $(1,755)
Less: income attributable to noncontrolling interests   (152)   (263)
Net income/(loss) applicable to company's common shares  $1,910   $(2,018)
Net income/(loss)  per common share, basic and diluted  $0.07   $(0.07)
           
FFO  $5,126   $5,618 
Less: FFO attributable to noncontrolling interests   (454)   (298)
FFO attributable to company's common shares  $4,672   $5,320 
FFO per common share, basic and diluted  $0.18   $0.18 
           
MFFO - IPA recommended format  $4,289   $3,204 
Less: MFFO attributable to noncontrolling interests   (464)   (198)
MFFO attributable to company's common shares  $3,825   $3,006 
           
Weighted average number of common shares outstanding, basic and diluted   25,723    30,122 

 

Notes:

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

 

34
 

 

(2)Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.
(3)Management believes that adjusting for mark-to-market adjustments is appropriate because they are nonrecurring items that may not be reflective of ongoing operations and reflects unrealized impacts on value based only on then current market conditions, although they may be based upon current operational issues related to an individual property or industry or general market conditions. Mark-to-market adjustments are made for items such as ineffective derivative instruments, certain marketable securities and any other items that GAAP requires we make a mark-to-market adjustment for. The need to reflect mark-to-market adjustments is a continuous process and is analyzed on a quarterly and/or annual basis in accordance with GAAP.
(4)Management believes that adjusting for gains or losses related to extinguishment/sale of debt, derivatives or securities holdings is appropriate because they are items that may not be reflective of ongoing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods.
(5)Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance.
(6)Includes approximately $510 and $1,183 of default interest incurred and unpaid during the three months ended March 31, 2014 and 2013, consisting of (i) $510 and $577 for the three months ended March 31, 2014 and 2013, respectively related to our non-recourse mortgage loan on our Gulf Coast Industrial Portfolio and (ii) $606 for the three months ended March 31, 2013, representing our proportionate share of default interest expense related to the non-recourse mortgage indebtedness of our unconsolidated investment in 1407 Broadway. Since July 2011, the lender has elected to retain all excess cash flow from the Gulf Coast Industrial Property.  Although the lender is currently not charging or being paid interest at the stated default rate, the Company has accrued interest at the default rate pursuant to the terms of the loan agreement.  Additionally, the Company is engaged in discussions with the lender to restructure the non-recourse mortgage loan and does not expect to pay the default interest.  The default interest on the non-recourse mortgage indebtedness of 1407 Broadway was incurred and unpaid during but subsequently waived by the lender in connection with the completion of a loan extension in March 2013.  Excluding the impact of the default interest incurred for the Gulf Coast Industrial Portfolio and for 1407 Broadway from our MFFO calculation after taking into consideration allocations to noncontrolling interests would increase MFFO for the three months ended March 31, 2014 and 2013 to $4,335 and $4,170, respectively.

 

The table below presents our cumulative distributions paid and cumulative FFO:

 

   From inception through 
   March 31, 2014 
     
FFO  $82,564 
Distributions  $131,538 

 

Sources of Distribution

 

The amount of distributions paid to our stockholders in the future will be determined by our Board and is dependent on a number of factors, including funds available for payment of dividends, our financial condition, capital expenditure requirements and annual distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code.

 

The following table provides a summary of the quarterly distribution declared and the source of distribution based upon cash flows provided by operations:

 

35
 

 

   Three Months Ended March 31, 2014   Three Months Ended March 31, 2013 
Distribution period:  Q1 2014   Percentage of
Distributions
   Q1 2013   Percentage of
Distributions
 
                 
Date distribution declared   March 28, 2014         March 22, 2013      
                     
Date distribution paid   April 15, 2014         April 15, 2013      
                     
Distributions paid   3,033        $3,564      
Distributions reinvested   1,410         1,640      
Total Distributions  $4,443        $5,204      
                     
Source of distributions:                    
Cash flows provided by operations   3,033    68%  $2,197    42%
Cash other than cash flows provided by operations   -    0%   1,367    26%
Proceeds from issuance of common stock through DRIP   1,410    32%   1,640    32%
Total Sources  $4,443    100%  $5,204    100%
                     
Cash flows provided by operations (GAAP basis)  $5,486        $2,197      
                     
Number of shares (in thousands) of common stock issued pursuant to the Company's DRIP   126         146      

 

Information Regarding Dilution

 

In connection with the ongoing offering of shares of our common stock under our DRIP, we are providing information about our net tangible book value per share. Our net tangible book value per share is a mechanical calculation using amounts from our consolidated balance sheet, and is calculated as (1) total book value of our assets less the net value of intangible assets, (2) minus total liabilities less the net value of intangible liabilities, (3) divided by the total number of shares of common stock outstanding. It assumes that the value of real estate, and real estate related assets and liabilities diminish predictably over time as shown through the depreciation and amortization of real estate investments. Real estate values have historically risen or fallen with market conditions. Net tangible book value is used generally as a conservative measure of net worth that we do not believe reflects our estimated fair value per share. It is not intended to reflect the value of our assets upon an orderly liquidation of the company in accordance with our investment objectives. Our net tangible book value reflects dilution in the value of our common stock from the issue price as a result of (i) operating losses, which reflect accumulated depreciation and amortization of real estate investments and (ii) the funding of distributions from sources other than our cash flow from operations. As of March 31, 2014, our net tangible book value per share was $12.05. The offering price of shares under our DRIP at March 31, 2014 was $11.21.

 

Our offering price under our DRIP was not established on an independent basis and bears no relationship to the net value of our assets. Further, even without depreciation in the value of our assets, the other factors described above with respect to the dilution in the value of our common stock are likely to cause our offering price to be higher than the amount you would receive per share if we were to liquidate at this time.

 

New Accounting Pronouncements

 

See Note 2 to the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been adopted during 2014 and certain accounting standards that we have not yet been required to implement and may be applicable to our future operations.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk.

 

36
 

 

We may be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund the expansion and refinancing of our real estate investment portfolio and operations. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes. As of March 31, 2014, we had one interest rate swap and two interest rate caps outstanding with insignificant intrinsic values.

 

As of March 31, 2014, we held various marketable securities with a fair value of approximately $145.1 million, which are available for sale for general investment return purposes. We regularly review the market prices of these investments for impairment purposes. As of March 31, 2014, a hypothetical adverse 10% movement in market values would result in a hypothetical loss in fair value of approximately $14.5 million.

 

The following table shows the mortgage payable obligations maturing during the next five years and thereafter as of March 31, 2014:

 

   Remainder of
2014
   2015   2016   2017   2018   Thereafter   Total   Estimated Fair
Value
 
Mortgages Payable  $80,140   $2,461   $141,935   $43,517   $26,961   $-   $295,014   $293,425 

 

As of March 31, 2014, approximately $137.5 million, or 41%, of our debt has variable interest rates and our interest expense associated with these instruments is, therefore, subject to changes in market interest rates. Based on rates as of March 31, 2014, a 1% adverse movement (increase in Libor) would increase our annual interest expense by approximately $1.2 million.

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted escrows, tenants’ accounts receivable, accounts payable and accrued expenses and the notes payable approximated their fair values because of the short maturity of these instruments. The carrying amount reported in the consolidated balance sheets for the mortgage receivable approximated its fair value based upon current market information that would have been used by a market participant to estimate the fair value of such loan.

 

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

 

   As of March 31, 2014   As of December 31, 2013 
   Carrying Amount   Estimated Fair
Value
   Carrying Amount   Estimated Fair
Value
 
Mortgage payable  $295.0   $293.4   $295.3   $292.8 

 

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

 

 In addition to changes in interest rates, the value of our real estate and real estate related investments is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of lessees, which may affect our ability to refinance our debt if necessary. As of March 31, 2014, the only off-balance sheet arrangements we had outstanding was an interest rate cap with an insignificant intrinsic value.

 

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

 

ITEM 4. CONTROLS AND PROCEDURES.

 

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

 

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

 

37
 

 

PART II. OTHER INFORMATION:

ITEM 1. LEGAL PROCEEDINGS

 

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

 

On January 4, 2007, 1407 Broadway Real Estate LLC ("Office Owner"), an indirect, wholly owned subsidiary of 1407 Broadway Mezz II LLC ("1407 Broadway "), consummated the acquisition of a sub-leasehold interest (the "Sublease Interest") in an office building located at 1407 Broadway, New York, New York (the "Office Property"). 1407 Broadway is a joint venture between LVP 1407 Broadway LLC ("LVP LLC"), a wholly owned subsidiary of our operating partnership, and Lightstone 1407 Manager LLC ("Manager"), which is wholly owned by David Lichtenstein, the Chairman of our Board of Directors and our Chief Executive Officer, and Shifra Lichtenstein, his wife.

 

 The Sublease Interest was acquired pursuant to a Sale and Purchase of Leasehold Agreement with Gettinger Associates, L.P. ("Gettinger"). In July 2006, Abraham Kamber Company, as Sublessor under the sublease ("Sublessor"), served two notices of default on Gettinger (the "Default Notices"). The first alleged that Gettinger had failed to satisfy its obligations in performing certain renovations and the second asserted numerous defaults relating to Gettinger's purported failure to maintain the Office Property in compliance with its contractual obligations.

 

In response to the Default Notices, Gettinger commenced legal action and obtained an injunction that extends its time to cure any default, prohibits interference with its leasehold interest and prohibits Sublessor from terminating its sublease pending resolution of the litigation. A motion by Sublessor for partial summary judgment, alleging that certain work on the Office Property required its prior approval, was denied by the Supreme Court, New York County. Subsequently, by agreement of the parties, a stay was entered precluding the termination of the Sublease Interest pending a final decision on Sublessor's claim of defaults under the Sublease Interest. In addition, the parties stipulated to the intervention of Office Owner as a party to the proceedings.

 

On April 12, 2012, the Supreme Court, New York County decided in favor of the Company with respect to all matters before the Court. Sublessor filed a Notice of Appeal on June 7, 2012 and, after fully briefing the issues, the parties argued the appeal on January 30, 2013.  On February 21, 2013, the Appellate Division, First Department rendered its decision largely affirming the lower court’s determination.  The Appellate Division did determine that there were two 2007 defaults that had not been cured and that the assignment of the sublease had occurred at a time when defaults existed.  The Appellate Division determined that the remedy for such defaults was not a forfeiture of the sublease.  Instead, the Appellate Division remanded to the lower court with direction that the lower court fashion a remedy short of forfeiture. Recently, the Sublessor has sent a letter claiming that the Appellate Division order “lifted” the Yellowstone Injunction, a procedure in New York law whereby a tenant in a commercial premises has a right to stay the time to cure, and demanding a cure within thirty (30) days. We have rejected that claim because the Appellate Division decision expressly remanded the case with a direction that the Supreme Court fashion a remedy other than forfeiture of the alleged defaults, and requested a conference from the lower court. On December 10, 2013, the parties appeared before Justice James and engaged in oral argument. Thereafter, in January 2014 the transcript was supplied to the Court pursuant to its direction. The parties are now awaiting the Court’s determination of the appropriate remedy.

 

While any proceeding or litigation has an element of uncertainty, management currently believes that the likelihood of an unfavorable outcome with respect to any of the aforementioned legal proceedings is remote. No provision for loss has been recorded in connection therewith.

 

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

 

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

 

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

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

38
 

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS

  

Exhibit

Number

 

 

Description

     
31.1*   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2*   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15 d-14(a) of the Securities Exchange Act, as amended.
32.1*   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
32.2*   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”

 

*Filed herewith

 

39
 

 

SIGNATURES

 

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

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE

INVESTMENT TRUST, INC.

   
Date:     May 14, 2014 By: /s/ David Lichtenstein
    David Lichtenstein
   

Chairman and Chief Executive Officer

(Principal Executive Officer)

 

Date:     May 14, 2014 By:   /s/ Donna Brandin
    Donna Brandin
   

Chief Financial Officer and Treasurer

(Duly Authorized Officer and Principal Financial and Accounting Officer)

 

40