Lightstone Value Plus REIT V, Inc. - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended September 30, 2017

Commission File Number: 000-53650

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

(Exact Name of Registrant as Specified in Its Charter)

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

(Address of principal executive offices) (Zip Code)

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

Indicate by check mark whether the Registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨

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

Yes x No ¨

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

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

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

Yes ¨ No x

As of November 3, 2017, the Registrant had approximately 24.8 million shares of common stock outstanding.

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST V, INC.

(FORMERLY BEHRINGER HARVARD OPPORTUNITY REIT II, INC.)

INDEX

PART I

FINANCIAL INFORMATION

Item 1.                 Financial Statements.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

See Notes to Consolidated Financial Statements.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Consolidated Statements of Operations and Comprehensive Income

(in thousands, except per share amounts)

(Unaudited)

See Notes to Consolidated Financial Statements.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Consolidated Statement of Stockholders’ Equity

(in thousands)

(Unaudited)

See Notes to Consolidated Financial Statements.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

See Notes to Consolidated Financial Statements.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Notes to Consolidated Financial Statements (Unaudited)

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

Business

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

We were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis. In particular, we have focused generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment, or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who are distressed or face time-sensitive deadlines.  We have acquired a wide variety of commercial properties, including office, industrial, retail, hospitality, and multifamily.  We have purchased existing, income-producing properties, and newly-constructed properties. We have also invested in other real estate-related investments such as mortgage and mezzanine loans. We intend to hold the various real properties in which we have invested until such time as our board of directors determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that the objectives will not be met. As of September 30, 2017, we had seven real estate investments, six of which were consolidated through investments in joint ventures.

Substantially all of our business is conducted through Behringer Harvard Opportunity OP II LP, a limited partnership organized in Delaware (the “Operating Partnership”).  As of September 30, 2017, our wholly-owned subsidiary, BHO II, Inc., a Delaware corporation, owned a 0.1% partnership interest in the Operating Partnership as its sole general partner.  As of September 30, 2017, our wholly-owned subsidiary, BHO Business Trust II, a Maryland business trust, was the sole limited partner of the Operating Partnership and owned the remaining 99.9% interest in the Operating Partnership.

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

Organization

In connection with our initial capitalization, we issued 22.5 thousand shares of our common stock and 1.0 thousand shares of our convertible stock to Behringer on January 19, 2007.  Behringer transferred its shares of convertible stock to one of its affiliates on April 2, 2010. Behringer transferred its shares of convertible stock to an affiliate of Lightstone on February 10, 2017. As of September 30, 2017, we had 24.8 million shares of common stock outstanding and 1.0 thousand shares of convertible stock outstanding. The outstanding convertible stock is held by an affiliate of Lightstone.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Notes to Consolidated Financial Statements (Unaudited)

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

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

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which was filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2017.  The unaudited interim consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair presentation of the results for the periods presented. The accompanying unaudited consolidated financial statements of Lightstone Value Plus Real Estate Investment Trust V, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

The consolidated balance sheet as of December 31, 2016 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.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  The most significant assumptions and estimates relate to the valuation of real estate, 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.

Principles of Consolidation and Basis of Presentation

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

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

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Notes to Consolidated Financial Statements (Unaudited)

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

Real Estate

Accumulated depreciation and amortization related to our consolidated investments in real estate assets and intangibles were as follows:

We amortize the value of in-place leases, in-place tenant improvements, and in-place leasing commissions to expense over the initial term of the respective leases.  In no event does the amortization period for intangible assets or liabilities exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, the unamortized portion of the acquired lease intangibles related to that tenant would be charged to expense.

Real Estate Held for Sale

We classify properties as held for sale when certain criteria are met in accordance with GAAP.  At that time, we present the assets and obligations of the property held for sale separately in our consolidated balance sheet and we cease recording depreciation and amortization expense related to that property.  Properties held for sale are reported at the lower of their carrying amount or their estimated fair value, less estimated costs to sell.  We did not have any real estate assets classified as held for sale as of September 30, 2017 or December 31, 2016.

Restricted Cash

As required by our lenders, restricted cash is held in escrow accounts for anticipated capital expenditures, real estate taxes, and other reserves for our consolidated properties. Capital reserves are typically utilized for non-operating expenses such as tenant improvements, leasing commissions, and major capital expenditures. Alternatively, a lender may require its own formula for an escrow of capital reserves. Restricted cash may also include certain funds temporarily placed in escrows with qualified intermediaries in order to facilitate potential like-kind exchange transactions in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Notes to Consolidated Financial Statements (Unaudited)

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

We early adopted the new Financial Accounting Standards Board (“FASB”) guidance on December 31, 2016, which changed the presentation of our statements of cash flows and related disclosures for all periods presented and accordingly, the following is a summary of our cash, cash equivalents, and restricted cash total as presented in our statements of cash flows for the nine months ended September 30, 2016:

Investment Impairment

For all of our real estate and real estate-related investments, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable.  Examples of the types of events and circumstances that would cause management to assess our assets for potential impairment include, but are not limited to: a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; an accumulation of costs in excess of the acquisition basis plus construction of the property; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers; and changes in the global and local markets or economic conditions.  To the extent that our portfolio is concentrated in limited geographic locations, downturns specifically related to such regions may result in tenants defaulting on their lease obligations at those properties within a short time period, which may result in asset impairments.  When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset.  These projected cash flows are prepared internally by the Advisor and reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. The Company’s principal executive officer and principal financial officer review these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions that are consistent with market data or with assumptions that would be used by a third-party market participant and assume the highest and best use of the investment. We consider trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist.  In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value.  While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.

In evaluating our investments for impairment, management may use appraisals and make estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during our ownership, and the projected sales price of each of the properties.  A future change in these estimates and assumptions could result in understating or overstating the carrying value of our investments, which could be material to our financial statements. In addition, we may incur impairment charges on assets classified as held for sale in the future if the carrying amount of the asset upon classification as held for sale exceeds the estimated fair value, less costs to sell.

We also evaluate our investments in unconsolidated joint ventures at each reporting date.  If we believe there is an other than temporary decline in market value, we will record an impairment charge based on these evaluations.  We assess potential impairment by comparing our portion of estimated future undiscounted operating cash flows expected to be generated by the joint venture over the life of the joint venture’s assets to the carrying amount of the joint venture.  In the event that the carrying amount exceeds our portion of estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the joint venture to its estimated fair value.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Notes to Consolidated Financial Statements (Unaudited)

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

We believe the carrying value of our operating real estate assets and our investment in an unconsolidated joint venture is currently recoverable.  There were no impairment charges for the nine months ended September 30, 2017 and 2016.  However, if market conditions worsen unexpectedly or if changes in our strategy significantly affect any key assumptions used in our fair value calculations, we may need to take charges in future periods for impairments related to our existing investments.  Any such non-cash charges would have an adverse effect on our consolidated financial position and results of operations.

Investment in Unconsolidated Joint Venture

We provide funding to third-party developers for the acquisition, development, and construction of real estate (“ADC Arrangement”).  Under an ADC Arrangement, we may participate in the residual profits of the project through the sale or refinancing of the property.  We evaluate this arrangement to determine if it has characteristics similar to a loan or if the characteristics are more similar to a joint venture or partnership such as participating in the risks and rewards of the project as an owner or an investment partner.  When we determine that the characteristics are more similar to a jointly-owned investment or partnership, we account for the arrangement as an investment in an unconsolidated joint venture under the equity method of accounting or a direct investment (consolidated basis of accounting) instead of applying loan accounting. The ADC Arrangement is reassessed at each reporting period. See Note 8, Investment in Unconsolidated Joint Venture, for further discussion.

Revenue Recognition

We recognize rental revenue generated from leases of our operating properties on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any. Leases associated with our multifamily, student housing, and hotel assets are generally short-term in nature, and thus have no straight-line rent.

Hotel revenue is derived from the operations of the Courtyard Kauai Coconut Beach Hotel and consists primarily of guest room, food and beverage, and other ancillary revenues such as laundry and parking. Hotel revenue is recognized as the services are rendered.

Accounts Receivable

Accounts receivable primarily consist of receivables related to our consolidated properties of $1.9 million and $1.4 million as of September 30, 2017 and December 31, 2016, respectively, and included straight-line rental revenue receivables of $0.4 million as of September 30, 2017 and December 31, 2016.  The allowance for doubtful accounts was insignificant as of both September 30, 2017 and December 31, 2016.

Furniture, Fixtures, and Equipment

Furniture, fixtures, and equipment are recorded at cost and are depreciated according to the Company’s capitalization policy, which uses the straight-line method over their estimated useful lives of five to seven years.  Furniture, fixtures, and equipment associated with properties classified as held for sale are not depreciated. Maintenance and repairs are charged to operations as incurred.  Accumulated depreciation associated with our furniture, fixtures, and equipment was $5.0 million and $9.9 million as of September 30, 2017 and December 31, 2016, respectively.

Deferred Financing Fees

Deferred financing fees are recorded at cost, accounted for as a reduction to notes payable, and are amortized to interest expense using a straight-line method that approximates the effective interest method over the life of the related debt. Deferred financing fees, net were $0.5 million and $0.8 million as of September 30, 2017 and December 31, 2016, respectively.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Notes to Consolidated Financial Statements (Unaudited)

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

Income Taxes

We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), and have qualified as a REIT since the year ended December 31, 2008.  To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders.  As a REIT, we generally will not be subject to federal income tax at the corporate level.  We are organized and operate in such a manner as to qualify for taxation as a REIT under the Code and intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT. Taxable income from non-REIT activities managed through a taxable REIT subsidiary (“TRS”) is subject to applicable federal, state, and local income and margin taxes. We currently have no taxable income associated with a TRS. Our operating partnerships are flow-through entities and are not subject to federal income taxes at the entity level.

During 2015, we recorded an aggregate provision for income tax of approximately $2.7 million representing estimated foreign income tax due as a result of the sale of two foreign investments, Alte Jakobstraße (“AJS”) and Holstenplatz.  During the third quarter of 2016, we recorded an income tax benefit of less than $0.1 million representing the difference in the actual taxes due and the originally estimated taxes payable on the sale of Holstenplatz.  During the third quarter of 2017, we recorded an aggregate income tax benefit of approximately $1.6 million consisting of (i) a refund of foreign income tax of approximately $0.8 million and (ii) the reversal of our previously estimated taxes payable on these sales of $0.8 million.

We have reviewed our tax positions under GAAP guidance that clarify the relevant criteria and approach for the recognition and measurement of uncertain tax positions. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken, or expected to be taken, in a tax return. A tax position may only be recognized in the financial statements if it is more likely than not that the tax position will be sustained upon examination. We believe it is more likely than not that the tax positions taken relative to our federal tax status as a REIT will be sustained in any tax examination.

Foreign Currency Translation

For our international investments where the functional currency is other than the U.S. dollar, assets and liabilities are translated using period-end exchange rates, while the statement of operations amounts are translated using the average exchange rates for the respective period. Gains and losses resulting from the change in exchange rates from period to period are reported separately as a component of other comprehensive income (loss). Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations and comprehensive income (loss).

Upon the substantial liquidation of our investment in a foreign entity, the cumulative translation adjustment (“CTA”) balance is required to be released into earnings. In accordance with Accounting Standards Update (“ASU”) 2013-05, upon disposal of the property, we recognize the CTA as an adjustment to the resulting gain or loss on sale.

The Euro was the functional currency for the operations of AJS and Holstenplatz, which were both sold in 2015. As a result of the sale of AJS and Holstenplatz, we no longer have foreign operations. However, we still maintain a Euro-denominated bank account that is comprised primarily of the remaining undistributed proceeds from the sale of these properties, which we translate into U.S. dollars at the current exchange rate at each reporting period. As of September 30, 2017, we maintained approximately $5.2 million in Euro-denominated accounts. For the three and nine months ended September 30, 2017, the foreign currency translation adjustment was a gain of $0.2 million and $0.5 million, respectively. For the three and nine months ended September 30, 2016, the foreign currency translation adjustment was a gain of less than $0.1 million.

Concentration of Credit Risk

As of September 30, 2017 and December 31, 2016, we had cash and cash equivalents deposited in certain financial institutions in excess of federally insured levels.  We have diversified our cash and cash equivalents among several banking institutions in an attempt to minimize exposure to any one of these entities.  We regularly monitor the financial stability of these financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents or restricted cash.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Notes to Consolidated Financial Statements (Unaudited)

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

Geographic and Asset Type Concentration

Our investments may at times be concentrated in certain asset types that are subject to higher risk of foreclosure, or secured by assets concentrated in a limited number of geographic locations. For the nine months ended September 30, 2017, 42% and 16% of our total revenues were derived from our properties located in Hawaii and Florida, respectively. Additionally, 42%, 31%, and 21% of our total revenues for the nine months ended September 30, 2017 were from our hotel, multifamily, and student housing investments, respectively. To the extent that our portfolio is concentrated in limited geographic regions or types of assets, downturns relating generally to such region or type of asset may result in defaults on a number of our investments within a short time period, which may reduce our net income and the value of our common stock and accordingly limit our ability to fund our operations. The Courtyard Kauai Coconut Beach Hotel, our only hotel and sole property located in Hawaii, was sold on August 15, 2017. See Note 7 for additional information.

Noncontrolling Interest

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

Earnings per Share

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

New Accounting Pronouncements to be Adopted

In May 2014, the FASB issued an update (“ASU 2014-09”) to ASC Topic 606, Revenue from Contracts with Customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance.  The new guidance will require companies to apply a five-step model in accounting for revenue arising from contracts with customers, as well as enhance disclosures regarding revenue recognition. Lease contracts will be excluded from this revenue recognition criteria; however, the sale of real estate will be required to follow the new model.  ASU 2014-09 is effective for public companies for interim and annual reporting periods beginning after December 15, 2017. Either full retrospective adoption or modified retrospective adoption is permitted. The Company is continuing to evaluate the standard; however, we do not expect its adoption to have a significant impact on the consolidated financial statements, as substantially all revenues consist of rental income from leasing arrangements, which is specifically excluded from the standard.

During the quarter ended June 30, 2016, the FASB issued subsequent updates to ASU 2014-09. In April 2016, the FASB issued an update (“ASU 2016-10”) to ASC Topic 606, Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing. In May 2016, the FASB issued an update (“ASU 2016-12”) to ASC Topic 606, Revenue from Contracts with Customers, Narrow-Scope Improvement and Practical Expedients.  The amendments in these updates did not change the core principle of the guidance in Topic 606; rather, they added improvements to reduce the diversity in practice at initial application and the cost and complexity of applying Topic 606 both at transition and an ongoing basis. The areas affected include: assessing the collectability criteria; presentation of sales taxes and other similar taxes collected from customers; noncash consideration; contract modification and completed contracts at transition; and technical correction as it relates to retrospective application and disclosure.  The new guidance is effective January 1, 2018 and allows full or modified retrospective application.  We do not expect the adoption of ASU 2016-10 and ASU 2016-12 to have a material effect on our consolidated financial statements; however, we will continue to evaluate this assessment until the guidance becomes effective.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Notes to Consolidated Financial Statements (Unaudited)

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

In February 2016, the FASB issued an update (“ASU 2016-02”) to ASC Topic 842, Leases. ASU 2016-02 supersedes the existing lease accounting model, and modifies both lessee and lessor accounting. The new guidance will require lessees to recognize a liability to make lease payments and a right-of-use asset, initially measured at the present value of lease payments, for both operating and financing leases, with classification affecting the pattern of expense recognition in the statement of earnings. For leases with a term of 12 months or less, lessees will be permitted to make an accounting policy election by class of underlying asset to not recognize lease liabilities and lease assets. Under this new pronouncement, lessor accounting will be largely unchanged from existing GAAP. The new standard will be effective January 1, 2019, with early adoption permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements when adopted.

In June 2016, the FASB issued an update (“ASU 2016-13”) to ASC Topic 326, Credit Losses. This amended guidance requires measurement and recognition of expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This is different from the current guidance as this will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets. Financial assets that are measured at amortized cost will be required to be presented at the net amount expected to be collected with an allowance for credit losses deducted from the amortized cost basis. Generally, the pronouncement requires a modified retrospective method of adoption. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements when adopted.

In January 2017, the FASB issued an update (“ASU 2017-01”) to ASC Topic 805, Business Combinations, Clarifying the Definition of a Business. The guidance clarifies the definition of a business and assists in the evaluation of whether a transaction will be accounted for as an acquisition of an asset or as a business combination. The guidance provides a test to determine when a set of assets and activities acquired is not a business. When substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. Under the updated guidance, an acquisition of a single property will likely be treated as an asset acquisition as opposed to a business combination and associated transaction costs will be capitalized rather than expensed as incurred. Additionally, assets acquired, liabilities assumed, and any noncontrolling interest will be measured at their relative fair values. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted, including for interim or annual periods for which financial statements have not yet been issued. Upon adoption of this guidance, we anticipate future acquisitions of real estate assets, if any, will likely qualify as an asset acquisition. Therefore, any future transaction costs associated with an asset acquisition will be capitalized and accounted for in accordance with the guidance in ASU 2017-01.

Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has been established.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Notes to Consolidated Financial Statements (Unaudited)

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

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access.  Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs for the asset or liability that are typically based on an entity’s own assumptions, as there is little, if any, related market activity.  In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Recurring Fair Value Measurements

We may use interest rate swaps and caps to manage our interest rate risk.  The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative.  This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, implied volatilities, and foreign currency exchange rates.

As of September 30, 2017, we have no derivative financial instruments.

Nonrecurring Fair Value Measurements

There were no impairment charges recorded during the nine months ended September 30, 2017 and 2016.

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

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Notes to Consolidated Financial Statements (Unaudited)

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

As of September 30, 2017 and December 31, 2016, management estimated that the carrying value of cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses and other assets, accounts payable, accrued and other liabilities, payables/receivables from related parties, and distributions payable to noncontrolling interests were at amounts that reasonably approximated their fair value based on their highly-liquid nature and short-term maturities. The fair value of the notes payable is categorized as a Level 2 in the fair value hierarchy.  The fair value was estimated using a discounted cash flow analysis valuation on the borrowing rates currently available for loans with similar terms and maturities.  The fair value of the notes payable was determined by discounting the future contractual interest and principal payments by a market rate.  Disclosure about fair value of financial instruments is based on pertinent information available to management as of September 30, 2017 and December 31, 2016.

Carrying amounts of our notes payable and the related estimated fair value as of September 30, 2017 and December 31, 2016 are as follows:

As of September 30, 2017, we consolidated six real estate assets in our consolidated balance sheet. The following table presents certain information about our consolidated investments as of September 30, 2017:

Courtyard Kauai Coconut Beach Hotel

On June 19, 2017, we, through our indirect 80%-owned subsidiaries, Kauai Coconut Beach, LLC and Kauai Coconut Beach Operator, LLC, (collectively, the “Sellers”) entered into an agreement (the “Courtyard Kauai Agreement”) to sell the Courtyard Kauai Coconut Beach Hotel, a 311-room hotel located in Kapaa, Hawaii, to KHS, LLC, (the “Buyer”) an unaffiliated third party, for a contractual sales price of $62.0 million.

On August 15, 2017, the Sellers completed the sale of the Courtyard Kauai Coconut Beach Hotel to the Buyer for $62.0 million pursuant to the terms of the Courtyard Kauai Agreement.  In connection with the transaction, the Buyer assumed the existing outstanding mortgage indebtedness of $36.0 million secured by the Courtyard Kauai Coconut Beach Hotel. The net proceeds from the disposition of the Courtyard Kauai Coconut Beach Hotel were approximately $24.1 million, after the payment of closing costs, expenses, pro rations and other working capital adjustments and a payment of a payment of approximately $1.7 million to the minority owner of the Courtyard Kauai Coconut Beach Hotel. In connection with the sale of the Courtyard Kauai Coconut Beach Hotel, we recognized a gain on sale of real estate of $20.9 million on our consolidated statements of operations during the third quarter of 2017.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Notes to Consolidated Financial Statements (Unaudited)

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

In connection with the sale of the Courtyard Kauai Coconut Beach Hotel, certain funds were placed in escrow with a qualified intermediary in order to facilitate potential like-kind exchange transactions in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended. The balance of the escrow account was approximately $27.0 million as of September 30, 2017 and is included in restricted cash on the consolidated balance sheet.

The disposition of the Courtyard Kauai Coconut Beach Hotel did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the operating results of the Courtyard Kauai Coconut Beach Hotel are reflected in the Company’s results from continuing operations for all periods presented through its respective date of disposition.

We provided mezzanine financing totaling $15.3 million to an unaffiliated third-party entity (the “Borrower”) that owns an apartment complex in Denver, Colorado (the “Huron”).  The Borrower also has a senior construction loan with a third-party construction lender (the “Senior Lender”) in an aggregate original principal amount of $40 million.  The senior construction loan is guaranteed by the owners of the developer.  We also have a personal guaranty from the owners of the developer guaranteeing completion of the project and payment of cost overruns. Our mezzanine loan is secured by all of the membership interests of the Borrower and is subordinate to the senior construction loan. Our advances of $15.3 million initially had annual stated interest rates ranging from 10% to 18%. We evaluated this ADC Arrangement and determined that the characteristics are similar to a jointly-owned investment or partnership. Accordingly, the investment is accounted for as an unconsolidated joint venture under the equity method of accounting instead of loan accounting since we will participate in the residual interests through the sale or refinancing of the property. 

Both the senior loan and our mezzanine loan were in technical default at December 31, 2016 due to a delay in completion of the project. The project was subsequently completed in January 2017. On March 23, 2017, the Senior Lender executed a loan amendment extending the maturity date of the loan to March 24, 2018. The Senior Lender loan amendment also increased the interest rate 75 basis points to 30-day LIBOR plus 375 basis points and added provisions to require the maintenance of certain prescribed minimum occupancy and rental rates at future dates. On May 8, 2017, we amended the mezzanine loan agreement to mirror the maturity date of the senior loan and changed our interest rate to 11% for the entire balance of the loan. The amended mezzanine loan agreement was effective as of March 1, 2017. As of September 30, 2017, the outstanding principal balance under the mezzanine loan was $15.3 million. The Borrower funded all cost overruns.

We considered the impact of these events on our accounting treatment and determined the ADC Arrangement should still continue to be accounted for as an unconsolidated joint venture under the equity method of accounting. We will continue to monitor this situation and assess any impact these or future events might have on our ability to ultimately realize the carrying value of our investment. The ADC Arrangement is reassessed at each reporting period.

In connection with our investment in the Huron, we capitalized interest of $176 during the nine months ended September 30, 2016. There was no interest capitalized on our investment in the Huron during the three months ended September 30, 2016 or during the 2017 periods. For the three and nine months ended September 30, 2017 and 2016, we recorded no equity in earnings (losses) of unconsolidated joint venture related to our investment in the Huron. The Company’s maximum exposure to losses associated with its unconsolidated joint venture is limited to its carrying value in this investment.

The following table sets forth our ownership interest in the Huron:

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Notes to Consolidated Financial Statements (Unaudited)

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

Summarized balance sheet information for the unconsolidated joint venture as of September 30, 2017 and December 31, 2016, shown at 100%, is as follows:

Summarized statement of operations information for the unconsolidated joint venture for the periods indicated, shown at 100%, is as follows:

Effective January 1, 2016, we adopted the guidance in ASU 2015-02. As a result, the Operating Partnership (see Note 1) and each of our less than wholly-owned real estate partnerships (22 Exchange, LLC, Gardens Medical Pavilion, LLC, SL Parkside Apartments, LLC, and the ADC Arrangement associated with the Huron) have been deemed to have the characteristics of a VIE. However, we were not required to consolidate any previously unconsolidated entities or deconsolidate any previously consolidated entities as a result of the change in classification. Accordingly, there has been no change to the amounts reported in our consolidated balance sheets and statements of cash flows or amounts recognized in our consolidated statements of operations.

Consolidated VIEs

The Company consolidates the Operating Partnership, 22 Exchange, LLC, Gardens Medical Pavilion, LLC through BH-AW-Florida MOB Venture, LLC, and SL Parkside Apartments, LLC, 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.

Unconsolidated VIEs

Included in the Company’s joint venture investments as of September 30, 2017 is the ADC Arrangement associated with the Huron, which is accounted for as an unconsolidated joint venture and is a VIE. Refer to Note 8 for further details on the ADC Arrangement. This arrangement was established to provide mezzanine financing to an unaffiliated third party that owns the Huron, an apartment complex in Denver, Colorado. Based on our reevaluation under ASU 2015-02, we determined that we are not the primary beneficiary of this VIE based on the rights of the general partner. The arrangement does not allow for substantive kick-out rights over the general partner and we do not have the power to direct the activities of the Huron that most significantly affect the entity’s economic performance. Accordingly, we have determined it is appropriate, consistent with past accounting, that the Huron ADC Arrangement will continue to be accounted for under the equity method.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Notes to Consolidated Financial Statements (Unaudited)

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

The following table sets forth information on our notes payable as of September 30, 2017 and December 31, 2016:

_________________________________

(1) Includes approximately $0.1 million of unamortized premium related to debt we assumed at acquisition.

As of September 30, 2017, our outstanding notes payable were $102.9 million, net of deferred financing fees of $0.5 million, and had a weighted-average interest rate of 5.0%. For loans in place as of September 30, 2017, we have guaranteed payment of certain recourse liabilities with respect to certain customary nonrecourse carveouts as set forth in the guaranties in favor of the unaffiliated lenders with respect to the 22 Exchange and Parkside notes payable.

We are subject to various customary financial covenants, including, maintaining minimum debt service coverage ratios, loan to value ratios and liquidity. We did not meet the debt service coverage requirements for our 22 Exchange loan as of March 31, 2017, June 30, 2017 and September 30, 2017. As a result, we expect the lender to begin sweeping the cash from operations; however, the loan is not in default.

As of September 30, 2017, the Company had debt of approximately $12.6 million associated with Gardens Medical Pavilion, approximately $23.6 million associated with River Club and Townhomes at River Club, and $9.8 million associated with Parkside maturing in the next twelve months.

If we do not dispose of Gardens Medical Pavilion, River Club and Townhomes at River Club or Parkside by their maturity dates, we expect to repay the outstanding balances with available cash or refinance all or a portion of the balances outstanding.

The following table summarizes our contractual obligations for principal payments, based on initial scheduled maturity dates and does not reflect the exercise of any extension options, as of September 30, 2017:

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Notes to Consolidated Financial Statements (Unaudited)

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

Courtyard Kauai Coconut Beach Hotel Debt

Our debt secured by Courtyard Kauai Coconut Beach Hotel, with an outstanding balance of $38 million as of December 31, 2016, was scheduled to mature on May 9, 2017. On May 8, 2017, we, through our 80% ownership interest in a joint venture between our indirect wholly owned subsidiary and JMI Realty, LLC, an unaffiliated third party (the “Kauai Joint Venture”), entered into a new mortgage facility of up to $44 million (the “Courtyard Kauai Loan”) with TH Commercial Investment Corp. Initial borrowings of $36 million were advanced under the Courtyard Kauai Loan and those funds plus additional cash were used to repay the then outstanding balance under the previous loan with Wells Fargo Bank. The Courtyard Kauai Loan bore interest at 30-day LIBOR plus 4.7% and was scheduled to mature in three years with two one-year extensions available. We had also guaranteed payment of certain recourse liabilities with respect to certain customary nonrecourse carveouts as set forth in the guaranties in favor of the lender.  

On August 15, 2017, the Courtyard Kauai Loan was assumed by the Buyer in connection with our sale of the Courtyard Kauai Coconut Beach Hotel. The outstanding balance as of the date of sale was $36.0 million. See Note 7 for additional information.

Future minimum base rental payments of our office property, Gardens Medical Pavilion, and the retail space at 22 Exchange due to us under non-cancelable leases in effect as of September 30, 2017 are as follows:

The schedule above does not include rental payments due to us from our multifamily and student housing properties, as leases associated with these properties typically are for periods of one year or less.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Notes to Consolidated Financial Statements (Unaudited)

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

We may be exposed to the risk associated with variability of interest rates that might impact our cash flows and the results of operations.  The hedging strategy of entering into interest rate caps and swaps, therefore, is to eliminate or reduce, to the extent possible, the volatility of cash flows.

As of September 30, 2017, we did not have any derivative instruments and were not engage in any hedging activities.

Our derivative financial instruments had a nominal effect on the consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016.

Distributions are authorized at the discretion of our board of directors based on its analysis of our performance over the previous periods and expectations of performance for future periods. These analyses may include actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, general financial and market conditions, proceeds from asset sales, and other factors that our board of directors deems relevant. Our board of director’s decisions will be substantially influenced by the obligation to ensure that we maintain our federal tax status as a REIT. We cannot provide assurance that we will pay distributions at any particular level, or at all.

Advisor

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

From January 4, 2008 through February 10, 2017, we were party to successive advisory management agreements, each with a term of one year or less, with the Behringer Advisor. The most recently executed advisory management agreement was the Fifth Amended and Restated Advisory Management Agreement (the “Fifth Advisory Agreement”) entered into on July 25, 2016 and effective as of June 6, 2016. On February 10, 2017, we entered into a Termination of Advisory Management Agreement with the Behringer Advisor and (solely with respect to certain sections) Behringer (the “Advisory Termination Agreement”) pursuant to which the Fifth Advisory Agreement was terminated as of the close of business on February 10, 2017.

Concurrently with our entry into the Advisory Termination Agreement, we engaged the Advisor to provide us with advisory services pursuant to two separate advisory management agreements (collectively, the “Lightstone Advisory Agreement”). With the exception of the Administrative Services Fee, the fees earned by and expenses reimbursed to the Advisor pursuant to the Lightstone Advisory Agreement are identical to the fees earned by and expenses reimbursed to the Behringer Advisor pursuant to the Fifth Advisory Agreement. The following discussion describes the fees and expenses payable to our external advisor and its respective affiliates under both the Fifth Advisory Agreement and the Lightstone Advisory Agreement.

We pay our external advisor acquisition and advisory fees of 1.5% of the amount paid in respect of the purchase, development, construction, or improvement of each asset we acquire, including any debt attributable to those assets. In addition, we pay acquisition and advisory fees of 1.5% of the funds advanced in respect of a loan investment. We incurred no acquisition and advisory fees payable to our external advisor for the three and nine months ended September 30, 2017 and 2016 because we had no acquisitions during these periods.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Notes to Consolidated Financial Statements (Unaudited)

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

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

Our external advisor and its affiliates are also responsible for paying all of the investment-related expenses that we or the external advisor or its affiliates incur that are due to third parties or related to the additional services provided by our external advisor as described above with respect to investments we do not make, other than certain non-refundable payments made in connection with any acquisition. For the three and nine months ended September 30, 2017 and 2016, we incurred no acquisition expense reimbursements.

We pay our external advisor a debt financing fee of 0.5% of the amount available under any loan or line of credit made available to us and pay directly all third-party costs associated with obtaining the debt financing. During the second quarter of 2017, we incurred a debt financing fee of $0.2 million related to the Courtyard Kauai Loan. We incurred no debt financing fees for the three and nine months ended September 30, 2016.

We pay our external advisor a development fee in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the project if such affiliate provides the development services and if a majority of our independent directors determines that such development fee is fair and reasonable to us.  We incurred no development fees for the three and nine months ended September 30, 2017 and 2016.

We pay our external advisor a monthly asset management fee of one-twelfth of 0.7% of the value of each asset. The value of our assets will be the value as determined in connection with the establishment and publication of an estimated value per share unless the asset was acquired after our publication of an estimated value per share (in which case the value of the asset will be the contractual purchase price of the asset). For the three and nine months ended September 30, 2017, we expensed $0.4 million and $1.4 million, respectively, of asset management fees payable to our external advisor compared to $0.5 million and $1.6 million for the same periods in 2016, respectively.

Our external advisor is responsible for paying all of the expenses it incurs associated with persons employed by the external advisor to the extent that they provide services to us for which our external advisor receives an acquisition, asset management, or debt financing fee, including wages and benefits of the applicable personnel. Instead of reimbursing our external advisor for specific expenses paid or incurred in connection with providing services to us, we pay our external advisor an administrative services fee (also referred to as an administrative services reimbursement under the Lightstone Advisory Agreement) based on a budget of expenses prepared by the external advisor. The administrative services fee is intended to reimburse for all costs associated with providing services to us. For the calendar year ending December 31, 2017, the administrative services fee is $1.325 million annually, pro-rated for the first six months of the year and $1.30 million annually, pro-rated for the second six months of the year. Under the Fifth Advisory Agreement, for the calendar year ended December 31, 2016, the administrative services fee was the lesser of (i) $1.325 million per calendar year, and (ii) the actual costs of providing administrative services to us under the Fifth Advisory Agreement, payable in four equal quarterly installments within 45 days of the end of each calendar quarter. In addition, under the advisory management agreements, we are to reimburse the external advisor for certain due diligence services provided in connection with asset acquisitions and dispositions and debt financings separately from the administrative services fee. For the three and nine months ended September 30, 2017, we incurred and expensed such costs for administrative services and due diligence services of approximately $0.5 million and $1.2 million, respectively, compared to approximately $0.9 million and $1.2 million for the same periods in 2016, respectively. These amounts include less than $0.1 million related to certain due diligence services provided during the respective periods.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Notes to Consolidated Financial Statements (Unaudited)

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

Notwithstanding the fees and cost reimbursements payable to our external advisor pursuant to our advisory management agreement, under our charter we may not reimburse the external advisor for any amount by which our operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of: (i) 2% of our average invested assets, or (ii) 25% of our net income determined without reduction for any additions to reserves for depreciation, bad debts, or other similar non-cash reserves and excluding any gain from the sale of our assets for that period unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the four fiscal quarters ended September 30, 2017, our total operating expenses (including the asset management fee) exceeded the limit on total operating expenses; however, our independent directors determined the excess expenses were justified because of our transition to the new external advisor.

Property Manager

From January 4, 2008 through February 10, 2017, we were party to a property management and leasing agreement (as amended and restated, the “Behringer Property Management Agreement”) between us, our operating partnership, Behringer Harvard Opportunity Management Services, LLC, and Behringer Harvard Real Estate Services, LLC (collectively, the “Behringer Manager”). On February 10, 2017, we entered into a Termination of Property Management and Leasing Agreement with the Behringer Manager and (solely with respect to certain sections) Behringer (the “Property Management Termination Agreement”) pursuant to which the Behringer Property Management Agreement was terminated as of the close of business on February 10, 2017.

Concurrently with our entry into the Property Management Termination Agreement, we engaged LSG-BH II Property Manager LLC (the “Lightstone Manager”) pursuant to a property management and leasing agreement (the “Lightstone Property Management Agreement”). The fees earned by and expenses reimbursed to the Lightstone Manager pursuant to the Lightstone Property Management Agreement are identical to the fees earned by and expenses reimbursed to the Behringer Manager pursuant to the Behringer Property Management Agreement. The following discussion describes the fees and expenses payable to our affiliated property manager and its respective affiliates under both the Behringer Property Management Agreement (in effect from August 13, 2008 through February 10, 2017) and the Lightstone Property Management Agreement (in effect as of February 10, 2017).

We pay our property manager and affiliate of our external advisor, fees for the management, leasing, and construction supervision of our properties which is 4.0% of gross revenues of the properties managed by our property manager. We pay our property manager an oversight fee equal to 0.5% of the gross revenues of the property managed for any property for which we contract directly with a third-party property manager.  In no event will our property manager or its affiliates receive both a property management fee and an oversight fee with respect to any particular property.  In the event we own a property through a joint venture that does not pay our property manager directly for its services, we will pay our property manager a management fee or oversight fee, as applicable, based only on our economic interest in the property.  For the three and nine months ended September 30, 2017, we incurred and expensed property management fees or oversight fees to the related-party property manager of less than $0.1 million and $0.1 million, respectively, compared to $0.1 million and $0.4 million in the same periods in 2016, respectively.

We pay our property manager a construction management fee in an amount not to exceed 5% of all hard construction costs incurred in connection with, but not limited to capital repairs and improvements, major building reconstruction and tenant improvements, if such affiliate supervises construction performed by or on behalf of us or our affiliates. We incurred no construction management fees for the three and nine months ended September 30, 2017 and 2016.

As of September 30, 2017 and December 31, 2016, we had a payable to our external advisor and its affiliates of $0.1 million and $0.4 million, respectively. These balances consist of accrued fees, including asset management fees, administrative service expenses, property management fees, and other miscellaneous costs payable to our external advisor and property manager.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Formerly Behringer Harvard Opportunity REIT II, Inc.)

Notes to Consolidated Financial Statements (Unaudited)

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

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

Share Redemption Program

On November 8, 2017, our board of directors approved redemptions for the third quarter of 2017 totaling 239 thousand shares with an aggregate redemption payment of approximately $1.2 million. See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” for a full description of the price at which we redeem shares under our share redemption program.

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

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

Forward-Looking Statements

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

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy, and other future conditions.  These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements.  Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described herein and under “Item 1A, Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2017 and the factors described below:

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

Cautionary Note

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

Executive Overview

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

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

Liquidity and Capital Resources

We had unrestricted cash and cash equivalents of $53.2 million as of September 30, 2017. Our principal demands for funds going forward will be for the payment of (a) operating expenses, (b) interest and principal on our outstanding indebtedness, (c) share redemptions and (d) distributions, if any, authorized by our board of directors. Generally, we expect to meet cash needs for the payment of operating expenses, interest on our outstanding indebtedness and share redemptions with our cash flow from operations and to fund authorized distributions (if any) from available cash flow from operations and/or proceeds received from asset sales. To the extent that our cash flow from operations is not sufficient to cover our operating expenses, interest on our outstanding indebtedness, or share redemptions, we expect to use cash generated from borrowings and asset sales to fund such needs.

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

On January 5, 2016, we paid a special cash distribution of $38.4 million, or $1.50 per share of common stock, which was funded from proceeds received from asset sales.

The debt secured by Courtyard Kauai Coconut Beach Hotel, with an outstanding balance of $38 million was scheduled to mature on May 9, 2017. On May 8, 2017, we, through our 80% ownership interest in a joint venture between our indirect wholly owned subsidiary and JMI Realty, LLC, an unaffiliated third party (the “Kauai Joint Venture”), entered into a new mortgage facility of up to $44 million (the “Courtyard Kauai Loan”) with TH Commercial Investment Corp. Initial borrowings of $36 million were advanced under the Courtyard Kauai Loan and those funds plus additional cash were used to repay the then outstanding balance under the previous loan with Wells Fargo Bank. The Courtyard Kauai Loan bore interest at 30-day LIBOR plus 4.7% and was scheduled to mature in three years with two one-year extensions available. We also had guaranteed payment of certain recourse liabilities with respect to certain customary nonrecourse carveouts as set forth in the guaranties in favor of the lender.

On August 15, 2017, the Courtyard Kauai Loan was assumed by the buyer in connection with our sale of the Courtyard Kauai Coconut Beach Hotel. The outstanding balance as of the date of sale was $36.0 million. In connection with the sale of the Kauai Coconut Beach Hotel, certain funds were placed in escrow with a qualified intermediary in order to facilitate potential like-kind exchange transactions in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended. The balance of the escrow account was approximately $27.0 million as of September 30, 2017 and is included in restricted cash on the consolidated balance sheet. See Note 7 for additional information.

As of September 30, 2017, the Company had debt of approximately $12.6 million associated with Gardens Medical Pavilion, approximately $23.6 million associated with River Club and Townhomes at River Club, and $9.8 million associated with Parkside maturing in the next twelve months.

If we do not dispose of Gardens Medical Pavilion, River Club and Townhomes at River Club or Parkside by their maturity dates, we expect to repay the outstanding balances with available cash or refinance all or a portion of the balances outstanding. In addition to our debt obligations, we consider other factors in evaluating our liquidity. For example, to the extent our portfolio is concentrated in certain geographic regions and types of assets, downturns relating generally to such regions and assets may result in tenants defaulting on their lease obligations at a number of our properties within a short time period.  Such defaults could negatively affect our liquidity and adversely affect our ability to fund our ongoing operations. For the nine months ended September 30, 2017, 42% and 16% of our total revenues were derived from our properties located in Hawaii and Florida, respectively. Additionally, 42%, 31% and 21% of our total revenues were from our hotel, multifamily and student housing investments, respectively.

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

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

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

Debt Financings

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

As of September 30, 2017, our outstanding notes payable were $102.9 million, net of deferred financing fees of $0.5 million, and had a weighted average interest rate of 5.0%. As of December 31, 2016, the Company had notes payable of $142.3 million, net of deferred financing fees of $0.8 million, with a weighted average interest rate of 3.9%. For loans in place as of September 30, 2017, we have guaranteed payment of certain recourse liabilities with respect to certain customary nonrecourse carveouts as set forth in the guaranties in favor of the unaffiliated lenders with respect to the 22 Exchange and Parkside notes payable.

We are subject to various customary financial covenants, including, maintaining minimum debt service coverage ratios, loan to value ratios and liquidity.  We did not meet the debt service coverage requirements for our 22 Exchange loan as of March 31, 2017, June 30, 2017 and September 30, 2017. As a result, we expect the lender to begin sweeping the cash from operations; however, the loan is not in default.

One of our principal short-term and long-term liquidity requirements includes the repayment of maturing debt.  The following table provides information with respect to the contractual maturities and scheduled principal repayments of our indebtedness as of September 30, 2017. The table information is based on initial scheduled maturity dates and does not reflect the exercise of any extension options (dollars in thousands):

(1)  Does not include approximately $0.1 million of unamortized premium related to debt we assumed on our acquisition of Parkside.

Results of Operations

As of September 30, 2017, we had seven real estate investments, six of which were consolidated through investments in joint ventures. As of September 30, 2016, we had eight real estate investments, seven of which were consolidated, (one wholly owned and six properties consolidated through investments in joint ventures). We sold the Courtyard Kauai Coconut Beach Hotel on August 15, 2017 and Lakewood Flats on August 16, 2016.

Our results of operations for the respective periods presented reflect decreases in most categories principally resulting from our dispositions of Courtyard Kauai Coconut Beach Hotel in August 2017 (the “2017 Disposition”) and Lakewood Flats in August 2016 (the “2016 Disposition” and together with the 2017 Disposition, the “Dispositions”). Properties owned by us during the entire periods presented are referred to as our “Same Store” properties.

The disposition of the Courtyard Kauai Coconut Beach Hotel did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the operating results of the Courtyard Kauai Coconut Beach Hotel are reflected in the Company’s results from continuing operations for all periods presented through its respective date of disposition.

Three months ended September 30, 2017 as compared to the three months ended September 30, 2016.

The following table provides summary information about our results of operations for the three months ended September 30, 2017 and 2016 (dollars in thousands):

The following table reflects total rental and hotel revenues and total property and hotel operating expenses for the three months ended September 30, 2017 and 2016 for: (i) our Same Store properties and (ii) the Dispositions (dollars in thousands):

The tables below reflect occupancy and effective monthly rental rates for our Same Store operating properties:

Revenues.  Rental revenues for the three months ended September 30, 2017 were $6.1 million, a decrease of $0.6 million, compared to $6.7 million the same period in 2016.  Excluding the effect of the 2016 Disposition, our rental revenues increased slightly by $0.2 million for our Same Store properties.

Hotel revenues for the three months ended September 30, 2017 were $2.7 million, a decrease of $2.0 million, compared to $4.7 million for the same period in 2016. The change in our hotel revenues was attributable to the 2017 Disposition.

Property Operating Expenses.    Property operating expenses for the three months ended September 30, 2017 were $2.7 million, an increase of $0.1 million, compared to $2.6 million for the same period in 2016. Excluding the effect of the 2016 Disposition, our property operating expenses increased by $0.3 million for our Same Store properties.

Hotel Operating Expenses.  Hotel operating expenses for the three months ended September 30, 2017 were $1.9 million, a decrease of $1.6 million, compared to $3.5 million for the same period in 2016. The decrease in hotel operating expenses was due to the aforementioned disposition of the Courtyard Kauai Coconut Beach Hotel on August 15, 2017.

Interest Expense, net.   Interest expense for the three months ended September 30, 2017 and 2016 was unchanged at $1.6 million.

Real Estate Taxes.  Real estate taxes for the three months ended September 30, 2017 were $1.1 million, a slight decrease of $0.1 million, compared to $1.2 million for the same period in 2016.

Property Management Fees.   Property management fees, which are based on revenues, were $0.3 million for the three months ended September 30, 2017 and $0.4 million for the three months ended September 30, 2016, and were comprised of property management fees paid to unaffiliated third parties and our property manager.

Asset Management Fees.   Asset management fees for the three months ended September 30, 2017 and 2016 were $0.4 million and $0.6 million, respectively, and were comprised of asset management fees paid to our external advisor and third parties with respect to our investments. Asset management fees for the three months ended September 30, 2016 include fees related to the Dispositions of less than $0.1 million.

General and Administrative Expenses.   General and administrative expenses, which increased slightly by $0.2 million during the three months ended September 30, 2017 compared to the same period in 2016, consists of audit fees, legal fees, board of directors’ fees, and other administrative expenses.

Depreciation and Amortization.   Depreciation and amortization decreased by $0.3 million during the three months ended September 30, 2017 compared to the same period in 2016. Excluding the effect of the Dispositions, our depreciation and amortization increased slightly by $0.1 million for our Same Store properties.

Gain on Sale of Real Estate.   On August 15, 2017, we sold the Courtyard Kauai Coconut Beach Hotel for a contractual sales price of approximately $62.0 million, resulting in a third quarter gain on sale of real estate of $20.9 million. Additionally, we recognized a $0.4 million gain on sale of real estate during the nine months ended September 30, 2017 related to escrow reimbursements received from the Lakewood Flats outstanding insurance claim. On August 16, 2016, we sold Lakewood Flats for a contract sales price of approximately $68.8 million, resulting in a gain on sale of real estate of $11.5 million and a deferred gain of approximately $1.2 million. The deferred gain represented the amount of monies held in escrow to be reimbursed upon completion of the property’s outstanding insurance claim. The remaining deferred gain escrow balance as of September 30, 2017 was approximately $0.6 million.

Nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.

The following table provides summary information about our results of operations for the nine months ended September 30, 2017 and 2016 (dollars in thousands):

The following table reflects total rental and hotel revenues and total property and hotel operating expenses for the nine months ended September 30, 2017 and 2016 for: (i) our Same Store properties and (ii) our Dispositions (dollars in thousands):

The tables below reflect occupancy and effective monthly rental rates for our Same Store operating properties:

Revenues.  Rental revenues for the nine months ended September 30, 2017 were $18.3 million, a decrease of $3.3 million, compared to $21.6 million for the same period in 2016.  Excluding the effect of the Dispositions, our rental revenues increased by $0.8 million for our Same Store properties.

Hotel revenues for the nine months ended September 30, 2017 were $13.2 million, a decrease of $0.7 million, compared to $13.9 million for the same period in 2016. The change in our hotel revenues was attributable to the 2017 Disposition.

Property Operating Expenses.  Property operating expenses for the nine months ended September 30, 2017 were $6.8 million, a decrease of $0.3 million, compared to $ 7.1 million for the same period in 2016. Excluding the effect of our 2016 Disposition, our property operating expenses increased by $0.5 million for our Same Store properties.

.

Hotel Operating Expenses.  Hotel operating expenses for the nine months ended September 30, 2017 were $9.2 million, a decrease of $1.0 million, compared to $10.2 million for the same period in 2016. The decrease in hotel operating expenses was due to the aforementioned disposition of the Courtyard Kauai Coconut Beach Hotel on August 15, 2017.

Interest Expense, net.   Interest expense for the nine months ended September 30, 2017 was $4.8 million, an increase of $0.1 million, compared to $4.7 million for the same period in 2016. Excluding the effect of the Dispositions, our interest expense increased slightly by $0.1 million.

Real Estate Taxes.  Real estate taxes for the nine months ended September 30, 2017 were $3.3 million, a decrease of $0.8 million, compared to $4.1 million for the same period in 2016. Excluding the effect of the Dispositions, our real estate taxes slightly increased by $0.2 million for our Same Store properties.

Property Management Fees.   Property management fees, which are based on revenues, were $1.0 million for the nine months ended September 30, 2017 and $1.2 million, for the nine months ended September 30, 2016, and were comprised of property management fees paid to unaffiliated third parties and our property manager.

Asset Management Fees.   Asset management fees for the nine months ended September 30, 2017 and 2016 were $1.4 million and $1.8 million, respectively, and were comprised of asset management fees paid to our external advisor and third parties with respect to our investments. Asset management fees for the nine months ended September 30, 2016 include fees related to the Dispositions of less than $0.1 million.

General and Administrative Expenses.   General and administrative expenses, which increased by $0.4 million during the nine months ended September 30, 2017 compared to the same period in 2016, consists of audit fees, legal fees, board of directors’ fees, and other administrative expenses.

Depreciation and Amortization.   Depreciation and amortization was $7.5 million, a decrease of $0.9 million, compared to $8.4 million for the same period in 2016. Excluding the effect of the Dispositions, our depreciation and amortization was relatively constant for our Same Store properties.

Gain on Sale of Real Estate.   On August 15, 2017, we sold the Courtyard Kauai Coconut Beach Hotel for a contractual sales price of approximately $62.0 million, resulting in a third quarter gain on sale of real estate of $20.9 million. Additionally, we recognized a $0.7 million gain on sale of real estate during the nine months ended September 30, 2017 related to escrow reimbursements received from the Lakewood Flats outstanding insurance claim. On August 16, 2016, we sold Lakewood Flats for a contractual sales price of approximately $68.8 million, resulting in a third quarter gain on sale of real estate of approximately $11.5 million and a deferred gain of approximately $1.2 million. The deferred gain represented the amount of monies held in escrow to be reimbursed upon completion of the property’s outstanding insurance claim. The remaining deferred gain escrow balance as of September 30, 2017 was approximately $0.6 million.

Summary of Cash Flows

Operating activities

Net cash flows provided by operating activities of $4.6 million for the nine months ended September 30, 2017 consists of the following:

Investing activities

The net cash provided by investing activities of $22.5 million for the nine months ended September 30, 2017 consists primarily of the following:

Financing activities

The net cash used in financing activities of $12.9 million for the nine months ended September 30, 2017 consists primarily of the following:

Funds from Operations

Funds from operations (“FFO”) is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. We use FFO as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) in the April 2002 “White Paper of Funds From Operations” which is net income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property and impairments of depreciable real estate (including impairments of investments in unconsolidated joint ventures and partnerships which resulted from measurable decreases in the fair value of the depreciable real estate held by the joint venture or partnership), plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships, joint ventures, subsidiaries, and noncontrolling interests as one measure to evaluate our operating performance. In October 2011, NAREIT clarified the FFO definition to exclude impairment charges of depreciable real estate (including impairments of investments in unconsolidated joint ventures and partnerships which resulted from measurable decreases in the fair value of the depreciable real estate held by the joint venture or partnership).

Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance.

We believe that FFO is helpful to investors and our management as a measure of operating performance because it excludes depreciation and amortization, gains and losses from property dispositions, impairments of depreciable assets, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which is not immediately apparent from net income.

FFO should not be considered as an alternative to net income (loss), as an indication of our liquidity, nor as an indication of funds available to fund our cash needs, including our ability to make distributions and should be reviewed in connection with other GAAP measurements. Additionally, the exclusion of impairments limits the usefulness of FFO as a historical operating performance measure since an impairment charge indicates that operating performance has been permanently affected. FFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO. Our FFO as presented may not be comparable to amounts calculated by other REITs that do not define these terms in accordance with the current NAREIT definition or that interpret the definition differently.

Our calculation of FFO for the three and nine months ended September 30, 2017 and 2016 is presented below (dollars in thousands, except per share amounts):

Cash flows generated from FFO may be used to fund all or a portion of certain capitalizable items that are excluded from FFO, such as capital expenditures and payments of principal on debt, each of which may impact the amount of cash available for special distributions to our stockholders.

Distributions

Distributions are authorized at the discretion of our board of directors based on its analysis of our performance over the previous periods and expectations of performance for future periods. These analyses may include actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, general financial and market conditions, proceeds from asset sales, and other factors that our board of directors deems relevant. The board of director’s decisions will be substantially influenced by the obligation to ensure that we maintain our federal tax status as a REIT. We cannot provide assurance that we will pay distributions at any particular level, or at all.

On November 20, 2015, our board of directors authorized a special cash distribution of $1.50 per share of common stock, payable to stockholders of record as of December 31, 2015. The Company paid this special cash distribution which aggregated $38.4 million on January 5, 2016. This special cash distribution represented a portion of proceeds received from previous asset sales.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

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

Our critical accounting policies and estimates have not changed significantly from the discussion found in the Management Discussion and Analysis and Results of Operations in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2017.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk.

Foreign Currency Exchange Risk

The Euro was the functional currency for the operations of Alte Jakobstraße (“AJS”) and Holstenplatz, which were both sold in 2015. As a result of the sale of AJS and Holstenplatz, we no longer have foreign operations. However, we still maintain a Euro-denominated bank account that is comprised primarily of the remaining undistributed proceeds from the sale of these properties, which we translate into U.S. dollars at the current exchange rate at each reporting period. As of September 30, 2017, we maintained approximately $5.2 million in Euro-denominated accounts.

Interest Rate Risk

We may be exposed to interest rate changes primarily as a result of long-term debt used to acquire properties and make loans and other permitted investments.  Our management’s objectives, with regard to interest rate risks, are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs.  To achieve these objectives, we will borrow primarily at fixed rates or variable rates with the lowest margins available and in some cases, with the ability to convert variable rates to fixed rates.  With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.  We may enter into derivative financial instruments such as options, forwards, interest rate swaps, caps, or floors to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate portion of our variable rate debt.  However, all of our outstanding notes payable of $103.4 million, excluding deferred financing fees, as of September 30, 2017 were subject to fixed interest rates. 

Item 4.   Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our principal executive officer and principal financial officer, evaluated, as of September 30, 2017, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e) using the criteria established in Internal Control-New Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective, as of September 30, 2017, to provide reasonable assurance that information required to be disclosed by us in this report is recorded, processed, summarized, and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

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

Changes in Internal Control over Financial Reporting

There has been no change in internal control over financial reporting that occurred during the quarter ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1.      Legal Proceedings.

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

Item 1A.   Risk Factors.

There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2016.

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

Recent Sales of Unregistered Securities

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

Share Redemption Program

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

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

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

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

Effective November 18, 2016, our estimated value per share was $7.80. For a full description of the methodologies used to estimate the value of our common stock as of October 31, 2016, see Part II, Item 5, “Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Market Information” included in our Annual Report on Form 10-K for the year ended December 31, 2016.

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

Any redemption requests are honored pro rata among all requests received based on funds available and are not honored on a first come, first served basis. During the quarter ended September 30, 2017, our board of directors approved all Ordinary Redemption requests received that complied with the applicable requirements and guidelines of the share redemption program for an aggregate of 223,105 shares redeemed for approximately $1.1 million (approximately $5.14 per share). During the quarter ended September 30, 2017,  our board of directors redeemed all Exceptional Redemption requests received that complied with the applicable requirements and guidelines of the share redemption program for an aggregate of 15,869 shares redeemed for $91,992 (approximately $5.80 per share). All redemptions were funded with cash on hand.

During the quarter ended September 30, 2017, we redeemed shares as follows (including both Ordinary Redemptions and Exceptional Redemptions):

None.

None.

None. 

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

SIGNATURE

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

Index to Exhibits