Lightstone Value Plus REIT I, Inc. - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2019

OR

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)

(732) 367-0129

(Registrant’s Telephone Number, Including Area Code)

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

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

Yes    þ     No    ¨

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

Yes  þ     No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

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

Yes  ¨  No þ

As of August 10, 2019, there were approximately 23.1 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

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)

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

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

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)  

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

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME

(Amounts in thousands)

(Unaudited)

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

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in thousands)

(Unaudited)

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

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)

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

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)

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

Lightstone REIT is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT, L.P., a Delaware limited partnership formed on July 12, 2004 (the “Operating Partnership”), in which Lightstone REIT as the general partner, held a 98% interest as of June 30, 2019.

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

The Company is managed by Lightstone Value Plus REIT, LLC (the “Advisor”), an affiliate of the Lightstone Group, Inc., under the terms and conditions of an advisory agreement. The Lightstone Group, Inc. previously served as the Company’s sponsor (the “Sponsor”) during its initial public offering, which closed on October 10, 2008. Subject to the oversight of the Company’s board of directors (the “Board of Directors”), the Advisor has primary responsibility for making investment decisions and managing the Company’s day-to-day operations. Through his ownership and control of The Lightstone Group, David Lichtenstein is the indirect owner of the Advisor and the indirect owner and manager of Lightstone SLP, LLC, which has subordinated profits interests (“SLP units”) in the Operating Partnership. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control the Lightstone REIT or the Operating Partnership.

The Company’s stock is not currently listed on a national securities exchange. The Company may seek to list its stock for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its shares of common stock until they are listed for trading.

As of June 30, 2019, on a collective basis, the Company wholly owned or majority owned and consolidated the operating results and financial condition of two retail properties (St. Augustine Outlet Center and DePaul Plaza) containing a total of approximately 0.5 million square feet of retail space, and one multi-family residential property (Gantry Park Landing) containing a total of 199 units. All of the Company’s properties are located within the United States. As of June 30, 2019, the St. Augustine Outlet Center, DePaul Plaza and Gantry Park Landing were 75%, 89% and 99% occupied, respectively.

Tender Offer

The Company commenced a tender offer on April 19, 2019, pursuant to which it is offered to acquire up to 0.5 million shares of its common stock at a purchase price of $7.00 per share, or $3.5 million in the aggregate (the “Tender Offer”). Pursuant to the terms of the Tender Offer, which expired on June 14, 2019, the Company repurchased approximately 60,420 of its shares of common stock at $7.00 per share, or an aggregate of approximately $0.4 million.

Discontinued Operations

During the first quarter of 2019, a portfolio comprised of the Company’s industrial properties (the “Gulf Coast Industrial Portfolio”) which were previously included in the Company’s Industrial Segment, met the criteria to be classified as discontinued operations in the consolidated statements of operations for all periods presented. Additionally, the associated assets and liabilities of ten of the properties within the Gulf Coast Industrial Portfolio which are located in Louisiana (the “Louisiana Properties”) have been reclassified as held for disposition in the consolidated balance sheet as of December 31, 2018. The disposition of the Louisiana Properties, which represented all of the Company’s remaining industrial properties, represented a strategic shift that had a major effect on the Company’s operations and financial results and therefore, upon their disposition, the operating results of the entire Gulf Coast Industrial Portfolio were classified as discontinued operations in the Company’s consolidated statements of operations for all periods presented (See Note 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)

Segment Reporting

Since its inception, the Company has owned and managed various commercial and residential properties located throughout the United States. It historically operated within four business segments which were: (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”). Additionally, it presented as unallocated amounts (“Unallocated”) its (i) investments in real estate companies which were unconsolidated, (ii) other real estate-related investments and (iii) corporate operations. However, during 2015 the Company disposed of substantially all of its hospitality properties and subsequently in 2017 sold its only remaining hospitality property and therefore, no longer had a Hospitality Segment. Additionally, during the first quarter of 2019, the Company disposed of all of its remaining industrial properties and no longer has an Industrial Segment. As a result of these disposition activities, the Company only remaining properties were two retail properties (St. Augustine Outlet Center and DePaul Plaza) and one multi-family property (Gantry Park Landing).

Because of the changes in the composition of the Company’s real estate investments, the segment financial information is no longer relevant to the Company’s chief operating decision maker and it no longer is a driver of resource allocation decisions. Rather, the Company now evaluates all of its real estate investments as one operating segment and no longer reports any segment information in its consolidated financial statements.

Noncontrolling Interests

Partners of Operating Partnership

On July 6, 2004, the Advisor contributed $2 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The limited partner has the right to convert operating partnership units into cash or, at the option of the Company, an equal number of shares of common stock of the Company, as allowed by the limited partnership agreement.

In connection with the Company’s initial public offering, Lightstone SLP, LLC, an affiliate of the Advisor, purchased an aggregate of $30.0 million of SLP Units in the Operating Partnership at a cost of $100,000 per unit.

In addition, 497,209 units of common limited partnership interest in the Operating Partnership (“Common Units”) were issued during the years ended December 31, 2008 and 2009 and remain outstanding as of June 30, 2019.

Other Noncontrolling Interests in Consolidated Subsidiaries

As of June 30, 2019, the other noncontrolling interests in consolidated subsidiaries include ownership interests in (i) Pro-DFJV Holdings LLC (“PRO”) held by the Company’s Sponsor, (ii) 50-01 2nd St. Associates LLC (the “2nd Street Joint Venture”), held by the Company’s Sponsor and other affiliates, (iii) the 162nd Street Joint Venture I held by an affiliate of the Company’s Sponsor, (iv) the 162nd Street Joint Venture II held by an affiliate of the Company’s Sponsor and (v) the Greenpoint Joint Venture held by an affiliate of the Company’s Sponsor. PRO’s holdings principally consist of Marco OP Units and Marco II OP Units (see Note 4). The 2nd Street Joint Venture owns Gantry Park Landing, a multi-family apartment building located in Queens, New York. The 162nd Street Joint Venture I, the 162nd Street Joint Venture II and the Greenpoint Joint Venture each hold a promissory note collateralized by land parcels being developed by unaffiliated third parties (see Note 5).

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. In addition, interests in entities acquired are evaluated based on applicable GAAP, and if deemed to be variable interest entities (“VIE”) in which we are the primary beneficiary are also consolidated. If the interest in the entity is determined not to be a VIE, then the entity is evaluated for consolidation based on legal form, economic substance, and the extent to which we have control, substantive participating rights or both under the respective ownership agreement. For entities in which we have less than a controlling interest but have significant influence, we account for the investment using the equity method of accounting.

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

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

Notes to Consolidated Financial Statements

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

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of the Company and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018. The unaudited interim consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair presentation of the results for the periods presented. The accompanying unaudited consolidated financial statements of Lightstone Value Plus Real Estate Investment Trust, Inc. and its Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate and real-estate related investments, marketable securities, notes receivable, 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, 2018 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.

Consolidated VIEs

The Company consolidates the 162nd Street Joint Venture I, the 162nd Street Joint Venture II and the Greenpoint Joint Venture, which are variable interest entities, or VIEs, for which we are the primary beneficiary. Generally, a VIE is a legal entity in which the equity investors do not have the characteristics of a controlling financial interest or the equity investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. A limited partnership, or legal entities such as an LLC, are considered a VIE when the majority of the limited partners unrelated to the general partner possess neither the right to remove the general partner without cause, nor certain rights to participate in the decisions that most significantly affect the financial results of the partnership. In determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; and the similarity with and significance to our business activities and the business activities of the other investors. Significant judgments related to these determinations include estimates about the current and future fair values and performance of real estate held by these VIEs and general market conditions.

Recently Adopted Accounting Pronouncements

In August 2018, the SEC adopted the final rule amending certain disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded. In addition, the amendments expand the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statements. The rule was effective on November 5, 2018 and will be effective for the quarter that begins after the effective date.  Since the Company already includes a year to date consolidated statement of stockholders’ equity in our interim financial statement filings, the adoption of this guidance resulted in the inclusion of a quarter to date consolidated statement of stockholders equity in our second and third quarter interim financial statement filings and the inclusion of corresponding prior periods statement of stockholders’ equity for all periods presented.

In February 2016, the FASB issued an accounting standards update (“ASU”) that amends the existing lease accounting guidance and requires lessees to recognize a lease liability and a right-of-use asset for all leases on their balance sheets. Lessees of operating leases will continue to recognize lease expense in a manner similar to current accounting. For lessors, accounting for leases under the new guidance is substantially the same as in prior periods, but eliminates current real estate- specific provisions and changes the treatment of initial direct costs. The standard became effective for the Company on January 1, 2019.

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

Notes to Consolidated Financial Statements

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

The Company elected the following package of practical expedients provided by the standard: (i) an entity need not reassess whether any expired or existing contract is a lease or contains a lease, (ii) an entity need not reassess the lease classification of any expired or existing leases, and (iii) an entity need not reassess initial direct costs for any existing leases. The Company also elected the short-term lease exception provided for in the standard and therefore will only recognize right-of-use assets and lease liabilities for leases with a term greater than one year.

The Company did not recognize any right-of-use assets or lease liabilities upon adoption of the standard. The Company does not have any material leases such as ground leases or building leases or any material leases for leases with a term greater than one year. From time to time the Company will enter into immaterial leases for office equipment such as copiers.  The resulting right-of-use assets or lease liabilities would be immaterial in the aggregate and are recognized in the period they are incurred as lease expense.

The ASU provides a practical expedient which allows lessors to not separate lease and non-lease components in a contract and allocate the consideration in the contract to the separate components if both: (i) the timing and pattern of revenue recognition for the non-lease component and the related lease component are the same and (ii) the combined single lease component would be classified as an operating lease. The Company elected the practical expedient to account for lease and non-lease components as a single component in lease contracts where we are the lessor. The ASU also provides a transition option that permits entities to not recast the comparative periods presented when transitioning to the standard, which the Company also elected.

The adoption of this standard did not have a material effect on our consolidated financial position or our results of operations.

New Accounting Pronouncements

In June 2016, the FASB issued an accounting standards update which replaces the incurred loss impairment methodology currently in use with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  The Company is currently in the process of evaluating the impact the adoption of this standard will have on the Company’s consolidated financial statements.

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

Supplemental Cash Flow Information

Supplemental cash flow information for the periods indicated is as follows:

Reclassifications 

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

Lower East Side Moxy Hotel

On December 3, 2018, the Company, through a subsidiary of the Operating Partnership, acquired three parcels of land located at 147-151 Bowery, New York, New York (collectively, the “Bowery Land”) from 151 Emmut Properties LLC and 145-149 Bowery LLC, both unaffiliated third parties, for aggregate consideration of approximately $56.5 million, excluding closing and other acquisition related costs, on which it intends to develop and construct a 296-room Marriott Moxy hotel (the “Lower East Side Moxy Hotel”). Additionally, on December 6, 2018, the Company, though a subsidiary of the Operating Partnership, acquired certain air rights located at 329 Broome Street, New York, New York (the “Air Rights”) from B.R.P. Realty Corp., an unaffiliated third party, for approximately $2.4 million, excluding closing and other acquisition related costs. The Company intends to use the Air Rights in connection with the development and construction of the Lower East Side Moxy Hotel. In connection with the acquisition of the Bowery Land and the Air Rights, the Advisor earned an acquisition fee equal to 2.75% of the gross contractual purchase price, which was approximately $1.6 million.

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 June 30, 2019 and December 31, 2018, the Company incurred and capitalized to construction in progress an aggregate of $67.2 million (including the acquisition fee of $1.6 million and capitalized interest of $1.8 million) and $63.3 million (including the acquisition fee of $1.6 million), respectively, consisting of acquisition and other development costs attributable to the Lower East Side Moxy Hotel. During the three and six months ended June 30, 2019, the Company capitalized interest of approximately $0.9 million and $1.8 million, respectively in connection with the development of the Lower East Side Moxy Hotel.

Exterior Street Project

On February 27, 2019, the Company, through subsidiaries of the Operating Partnership, acquired two adjacent parcels of land located at 355 and 399 Exterior Street, New York, New York (collectively, the “Exterior Street Land”), from Borden Realty Corp and 399 Exterior Street Associates LLC, unaffiliated third parties, for an aggregate purchase price of approximately $59.0 million, excluding closing and other acquisition related costs, on which it intends to develop and construct a multi-family residential property (the “Exterior Street Project”).

On March 29, 2019, the Company entered into a $35.0 million loan (the “Exterior Street Loan”) which bears interest at 4.50% and is scheduled to initially mature on April 9, 2020, but may be further extended through the exercise of two, six-month extension options, subject to certain conditions. The Exterior Street Loan requires monthly interest payments through its maturity date and is collateralized by the Exterior Street Land. In connection with the acquisition of the Exterior Street Land, the Advisor earned an acquisition fee equal to 2.75% of the gross aggregate contractual purchase price, which was approximately $1.6 million.

As of June 30, 2019, the Company incurred and capitalized to construction in progress an aggregate of $62.8 million (including the acquisition fee of $1.6 million and $1.0 million of capitalized interest) consisting of acquisition and other development costs attributable to the Exterior Street Project. During the three and six months ended June 30, 2019, the Company capitalized interest of approximately $0.7 million and $1.0 million, respectively in connection with the development of the Exterior Street Project.

Santa Clara Data Center

On January 10, 2019, the Company, through subsidiaries of the Operating Partnership, acquired a parcel of land located at 2175 Martin Avenue, Santa Clara, CA (the “Martin Avenue Land”) from The Chioini Living Trust, an unaffiliated third party, for approximately $10.6 million, excluding closing and other acquisition related costs, on which the Company is developing a data center (the “Santa Clara Data Center”). In connection with the acquisition of the Martin Avenue Land, the Advisor earned an acquisition fee equal to 2.75% of the gross contractual purchase price, which was approximately $0.2 million.

As of June 30, 2019, the Company has incurred and capitalized to construction in progress an aggregate of $12.2 million (including the acquisition fee of $0.2 million and $0.2 million of capitalized interest) consisting of acquisition and other development costs attributable to the Santa Clara Data Center. During the three and six months ended June 30, 2019, the Company capitalized interest of approximately $0.1 million and $0.2 million, respectively in connection with the development of the Santa Clara Data Center.

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

Notes to Consolidated Financial Statements

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

Marketable Securities:

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

As of both June 30, 2019 and December 31, 2018, the Company held an aggregate of 209,243 Marco OP Units and Marco II OP Units, of which 89,695 were owned by PRO. The Marco OP Units and the Marco II OP Units are exchangeable for a similar number of common operating partnership units (“Simon OP Units”) of Simon Property Group, L.P., (“Simon OP”), the operating partnership of Simon Property Group, Inc. (“Simon”). Subject to the various conditions, the Company may elect to exchange the Marco OP Units and/or the Marco II OP Units to Simon OP Units which must be immediately delivered to Simon in exchange for cash or similar number of shares of Simon’s common stock (“Simon Stock”).

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

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

The Company considers the declines in market value of certain of its investments to be temporary in nature as the unrealized losses were caused primarily by changes in market interest rates or widening credit spreads. When evaluating these investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. During the three and six months ended June 30, 2019 and 2018, the Company did not recognize any impairment charges. As of June 30, 2019, the Company does not consider any of its investments to be other-than-temporarily impaired.

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

Notes to Consolidated Financial Statements

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

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

Fair Value Measurements

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

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

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

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

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

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

Notes Payable

Margin Loan

The Company has access to a margin loan (the “Margin Loan”) from a financial institution that holds custody of certain of the Company’s marketable securities. The Margin Loan, which is due on demand, bears interest at Libor plus 0.85% (3.25% as of June 30, 2019) and is collateralized by the marketable securities in the Company’s account. The amounts available to the Company under the Margin Loan are at the discretion of the financial institution and not limited to the amount of collateral in its account. There were no amounts outstanding under this Margin Loan as of June 30, 2019 and December 31, 2018.

Line of Credit

The Company had a non-revolving credit facility (the “Line of Credit”) with a financial institution which previously permitted borrowings up to $25.0 million and was scheduled to expire on June 19, 2019. Effective June 19, 2019, the Line of Credit was extended until June 19, 2021 and the amount available for borrowings was reduced to $20.0 million. The Line of Credit bears interest at Libor plus 1.35% (3.75% as of June 30, 2019). The Line of Credit is collateralized by approximately 209,000 Marco OP Units and PRO has guaranteed the Line of Credit. No amounts were outstanding under the Line of Credit as of June 30, 2019 and December 31, 2018.

162nd Street Joint Venture I

On February 5, 2019, a wholly-owned subsidiary of the Operating Partnership (the “162nd Street Sub I”) and an affiliate of the Sponsor (“CRE Capital I”) formed the 162nd Street Joint Venture I, a joint venture in which the Company and CRE Capital I have 45.45% and 55.55% ownership interests, respectively. On the same date, the 162nd Street Joint Venture I made a $4.2 million, nonrecourse loan (the “162nd Street Joint Venture I Promissory Note”) to an unaffiliated third party (the “162nd Street Joint Venture I Borrower”). The Company has determined that the 162nd Street Joint Venture I is a VIE and the 162nd Street Sub I is the primary beneficiary.  Another wholly-owned subsidiary of the Operating Partnership is the manager and sole decision maker of the 162nd Street Joint Venture I. Since the 162nd Street Sub I is the primary beneficiary, beginning on February 5, 2019, the Company has consolidated the operating results and financial condition of the 162nd Street Joint Venture I and accounted for the ownership interest of CRE Capital I as a noncontrolling interest. The 162nd Street Joint Venture I Promissory Note is recorded in notes receivable on the consolidated balance sheet.

The 162nd Street Joint Venture I Promissory Note is due March 1, 2020 and is collateralized by the ownership interests of the 162nd Street Joint Venture I Borrower. The 162nd Street Joint Venture I Borrower owns a parcel of land located at 89-25 East 162nd Street, Jamaica, New York (Lot 30) that the 162nd Street Joint Venture I Borrower intends to develop. Additionally, the 162nd Street Joint Venture I Promissory Note and the 162nd Street Joint Venture II Promissory Note (as defined and described below) are cross-collateralized. The 162nd Street Joint Venture I Promissory Note bears interest at a rate of Libor + 7.5% per annum with a floor of 10% (10.0 % as of June 30, 2019). The 162nd Street Joint Venture I received an origination fee of 1.5% of the loan balance or approximately $0.1 million, which is presented in the consolidated balance sheets as a direct deduction from the carrying value of the 162nd Street Joint Venture I Promissory Note and is being amortized to interest income, using a straight-line method that approximates the effective interest method, over the initial term of the 162nd Street Joint Venture I Promissory Note. The maturity of the 162nd Street Joint Venture I Promissory Note can be further extended for an additional one year at the discretion of the 162nd Street Joint Venture I Borrower provided certain conditions are met, including the funding of an additional reserve for interest and the payment of an extension fee equal to 1% of the outstanding loan balance.

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

Notes to Consolidated Financial Statements

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

Upon funding of the 162nd Street Joint Venture I Promissory Note, the 162nd Street Joint Venture I retained approximately $0.4 million of the proceeds to establish a reserve for interest and other items which is presented in the consolidated balance sheets as a direct deduction from the carrying value of the 162nd Street Joint Venture I Promissory Note and is being applied against the monthly interest due during the initial term of the 162nd Street Joint Venture I Promissory Note.

162nd Street Joint Venture II

On February 5, 2019, a wholly-owned subsidiary of the Operating Partnership (the “162nd Street Sub II”) and an affiliate of the Sponsor (“CRE Capital II”) formed the 162nd Street Joint Venture II, a joint venture in which the Company and CRE Capital II have 45.45% and 55.55% ownership interests, respectively. On the same date, the 162nd Street Joint Venture II made a $9.2 million, nonrecourse loan (the “162nd Street Joint Venture II Promissory Note”) to an unaffiliated third party (the “162nd Street Joint Venture II Borrower”). The Company has determined that the 162nd Street Joint Venture II is a VIE and the 162nd Street Sub II is the primary beneficiary.  Another wholly-owned subsidiary of the Operating Partnership is the manager and sole decision maker of the 162nd Street Joint Venture II. Since the 162nd Street Sub II is the primary beneficiary, beginning on February 5, 2019, the Company has consolidated the operating results and financial condition of the 162nd Street Joint Venture II and accounted for the ownership interest of CRE Capital II as a noncontrolling interest. The 162nd Street Joint Venture II Promissory Note is recorded in notes receivable on the consolidated balance sheet.

The 162nd Street Joint Venture II Promissory Note is due March 1, 2020 and is collateralized by the ownership interests of the 162nd Street Joint Venture II Borrower. The 162nd Street Joint Venture II Borrower owns a parcel of land located at 89-12 East 162nd Street, Jamaica, New York (Lot 50) that the 162nd Street Joint Venture II Borrower intends to develop. Additionally, the 162nd Street Joint Venture II Promissory Note and the 162nd Street Joint Venture I Promissory Note are cross-collateralized. The 162nd Street Joint Venture II Promissory Note bears interest at a rate of Libor + 7.5% per annum with a floor of 10% (10.0% as of June 30, 2019). The 162nd Street Joint Venture II received an origination fee of 1.5% of the loan balance or approximately $0.1 million, which is presented in the consolidated balance sheets as a direct deduction from the carrying value of the 162nd Street Joint Venture II Promissory Note and is being amortized to interest income, using a straight-line method that approximates the effective interest method, over the initial term of the 162nd Street Joint Venture II Promissory Note. The maturity of the 162nd Street Joint Venture II Promissory Note can be further extended for an additional one year at the discretion of the 162nd Street Joint Venture II Borrower provided certain conditions are met, including the establishment of an additional reserve for interest and the payment of an extension fee equal to 1% of the outstanding loan balance.

Upon funding of the 162nd Street Joint Venture II Promissory Note, the 162nd Street Joint Venture II retained approximately $1.0 million of the proceeds to establish a reserve for interest and other items, which is presented in the consolidated balance sheets as a direct deduction from the carrying value of the 162nd Street Joint Venture II Promissory Note and is being applied against the monthly interest due during the initial term of the 162nd Street Joint Venture II Promissory Note.

Greenpoint Joint Venture

On April 5, 2019, a wholly-owned subsidiary of the Operating Partnership (the “Greenpoint Sub”) and an affiliate of the Sponsor (“CRE Greenpoint”) formed the Greenpoint Joint Venture, a joint venture in which the Company and CRE Greenpoint each have 50.0% ownership interests. On the same date, the Greenpoint Joint Venture made aggregate mortgage loans of $13.0 million (a $0.9 million mortgage loan and a $12.1 million mortgage loan, collectively, the “Greenpoint Joint Venture Mortgages”) to an unaffiliated third party (the “Greenpoint Joint Venture Borrower”). The Company has determined that the Greenpoint Joint Venture is a VIE and the Greenpoint Sub is the primary beneficiary.  Another wholly-owned subsidiary of the Operating Partnership is the manager and sole decision maker of the Greenpoint Joint Venture. Since the Greenpoint Sub is the primary beneficiary, beginning on April 5, 2019, the Company has consolidated the operating results and financial condition of the Greenpoint Joint Venture and accounted for the ownership interest of CRE Greenpoint as a noncontrolling interest. The Greenpoint Venture Mortgages are recorded in notes receivable on the consolidated balance sheet.

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 Greenpoint Joint Venture Mortgages are due April 5, 2020 and are collateralized by parcels of land located at 47-16 through 47-24 Greenpoint Avenue, Sunnyside, New York, and the buildings and other improvements that the Greenpoint Joint Venture Borrower is currently developing. The Greenpoint Joint Venture Mortgages bear interest at a rate of Libor + 5.75% per annum with a floor of 8.25% (8.25% as of June 30, 2019). The Greenpoint Joint Venture received an origination fee of 1.0% of the loan balance or approximately $0.1 million, which is presented in the consolidated balance sheets as a direct deduction from the carrying value of the Greenpoint Joint Venture Mortgages and is being amortized to interest income, using a straight-line method that approximates the effective interest method, over the initial term of the Greenpoint Joint Venture Mortgages. The maturity of the Greenpoint Joint Venture Mortgages can be further extended for two additional six-month periods at the discretion of the Greenpoint Joint Venture Borrower provided certain conditions are met, including the establishment of an additional reserve for interest and the payment of an extension fee equal to 1% of the outstanding loan balance.

Upon funding of the Greenpoint Joint Venture Mortgages, the Greenpoint Joint Venture retained approximately $1.7 million of the proceeds to establish a reserve for interest and other items, which is presented in the consolidated balance sheets as a direct deduction from the carrying value of the Greenpoint Joint Venture Mortgages and is being applied against the monthly interest due during the initial term of the Greenpoint Joint Venture Mortgages.

During the three and six months ended June 30, 2019, the Company recorded $0.6 million and $0.7 million, respectively, of interest income related to the Notes Receivable and as of June 30, 2019, the balance of the Notes Receivable was $26.4 million and the remaining reserves for interest and other items aggregated $2.7 million.

Mortgages payable, net consists of the following:

Libor as of June 30, 2019 and December 31, 2018 was 2.40% and 2.52%, respectively. The Company’s loans are secured by the indicated real estate and are non-recourse to the Company, unless otherwise indicated.

On March 29, 2019, the Company entered into the $35.0 million Exterior Street Loan which bears interest at 4.50% and is scheduled to initially mature on April 9, 2020, but may be further extended through the exercise of two, six-month extension options, subject to certain conditions. The Exterior Street Loan requires monthly interest payments through its maturity date and is collateralized by the Exterior Street Land.

On December 3, 2018, the Company entered into a mortgage loan collateralized by the Bowery Land and the Air Rights (the “Bowery Mortgage) for approximately $35.6 million. The Bowery Mortgage has a term of two years, bears interest at LIBOR+4.25% and requires monthly interest-only payments through its stated maturity with the entire unpaid balance due upon maturity. Through June 30, 2019, the Company received aggregate proceeds of $33.7 million under the Bowery Mortgage. As a result, the Bowery Mortgage had an outstanding balance and remaining availability of $33.7 million and $1.9 million, respectively, as of June 30, 2019.

The Exterior Street Loan (outstanding principal balance of $35.0 million as of June 30, 2019) initially matures on April 9, 2020 but has two, six-month extension options, subject to certain conditions. The Company intends to seek to exercise the extension options or refinance the Exterior Street Loan on or before its applicable stated maturity date. The mortgage loan (the “DePaul Plaza Mortgage”) collateralized by the DePaul Plaza retail property (outstanding principal balance of $13.9 million as of June 30, 2019) matures on June 1, 2020. We currently expect to refinance all or a portion of the DePaul Plaza Mortgage on or before its scheduled maturity date. However, if we are unable to refinance the outstanding indebtedness at favorable terms, we will look to repay the then outstanding balance with available cash and/or proceeds from selective asset sales. The Company has no additional significant maturities of mortgage debt over the next 12 months.

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 following table shows the contractually scheduled principal maturities of the Company’s mortgage debt during the next five years and thereafter as of June 30, 2019:

The Company’s two retail properties and multi-family residential property are leased to tenants under operating leases. Substantially all of our multi-family residential property leases have initial terms of 12 months or less. Our retail space leases expire between 2019 and 2030.

We, as a lessor, retain substantially all of the risks and benefits of ownership of the investment properties and continue to account for our leases as operating leases. We accrue fixed lease income on a straight-line basis over the terms of the leases. Some of our tenants are also required to pay overage rents based on sales over a stated base amount during the lease year. We recognize this variable lease consideration only when each tenant’s sales exceed the applicable sales threshold. We amortize any tenant inducements as a reduction of revenue utilizing the straight-line method over the term of the related lease.

We structure our leases to allow us to recover a portion of our property operating expenses from our tenants. A portion of our leases require the tenant to reimburse us for a portion of our operating expenses, including common area maintenance (“CAM”), real estate taxes and insurance. Such property operating expenses typically include utility, insurance and other administrative expenses. For some of our leases we receive a fixed payment from the tenant for the CAM component which is recognized as revenue on a straight-line basis over the term of the lease. When not reimbursed by the fixed CAM component, CAM expense reimbursements are based on the tenant’s proportionate share of the allocable operating expenses for the property. We accrue reimbursements from tenants for recoverable portions of all of these expenses as variable lease consideration in the period the applicable expenditures are incurred. We recognize differences between estimated recoveries and the final billed amounts in the subsequent year. These differences were not material in any period presented.

As of June 30, 2019, the approximate fixed future minimum rent payments, excluding variable lease consideration, from the Company’s two retail properties, due to us under non-cancelable are as follows:

Pursuant to the lease agreements, tenants of the property may be required to reimburse the Company for some or the entire portion of the particular tenant's pro rata share of the real estate taxes and operating expenses of the property. Such amounts are not included in the future minimum lease payments above, but are included in tenant recovery income on the accompanying consolidated statements of operations. Lease income of approximately $0.4 million and $0.7 million for the three and six months ended June 30, 2019, respectively, and, lease income of approximately $0.7 million and $1.4 million for the three and six months ended June 30, 2018, respectively, related to variable lease payments was included in tenant recovery income on the accompanying consolidated statements of operations.

The Company has excluded our multi-family residential property leases from this table as substantially all of its multi-family residential property leases have initial terms of 12 months of less.

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)

Disposition Transactions related to Gulf Coast Industrial Portfolio

The Company had an outstanding non-recourse mortgage loan (the “Gulf Coast Industrial Portfolio Mortgage Loan”) which was originated in February 2007 and subsequently transferred during the third quarter of 2012 to a special servicer that discontinued scheduled debt service payments and notified the Company that the loan was in default and due on demand. The Gulf Coast Industrial Portfolio Mortgage Loan was initially cross-collateralized by a portfolio of 14 industrial properties (collectively, the “Gulf Coast Industrial Portfolio”) including ten properties located in Louisiana (seven properties located in New Orleans and three properties located in Baton Rouge, and collectively, the “Louisiana Properties”) and four properties located in San Antonio, Texas (the “San Antonio Properties”).

Foreclosure of San Antonio Assets

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

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

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

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

During 2018, the disposition of the San Antonio Assets did not initially qualify to be reported as discontinued operations since their disposition did not represent a strategic shift that had a major effect on the Company’s operations and financial results.

Assignment of Ownership in Louisiana Assets to Lender

On February 12, 2019, the Company and the lender of the Gulf Coast Industrial Portfolio Mortgage entered into an assignment agreement (the “Assignment Agreement”) pursuant to which the Company assigned its membership interests in the Louisiana Assets to the lender with an effective date of February 7, 2019. Under the terms of the Assignment Agreement, the lender assumed the significant risks and rewards of ownership and took legal title and physical possession of the Louisiana Assets and assumed all the other assets and related liabilities, including the Gulf Coast Industrial Mortgage and its accrued and unpaid interest, and released the Company of any claims against the liabilities assumed.

As a result of the Assignment Agreement, the Company has fully satisfied all of its obligations with respect to the Gulf Coast Industrial Portfolio Mortgage and all amounts accrued but not paid for interest (including default interest) and no amounts are due to the lender. Additionally, the Company has no continuing involvement with the Louisiana Assets. 

The aggregate carrying value of the assets transferred and the liabilities extinguished in connection with the Company’s assignment of its ownership interests in the Louisiana Assets to the lender was approximately $37.0 million and $49.6 million, respectively.

Since the Company’s performance obligations were met upon the assignment of its ownership interests in the Louisiana Assets to the lender and the Company has no continuing involvement with the Louisiana Assets, an aggregate gain on debt extinguishment of approximately $13.6 million was recognized during the first quarter of 2019.

The disposition of the Louisiana Assets, which comprised all of the Company’s remaining industrial properties, represented a strategic shift that had a major effect on the Company’s operations and financial results.