Lightstone Value Plus REIT V, Inc. - Quarter Report: 2019 June (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 June 30, 2019

Commission File Number: 000-53650

Lightstone Value Plus Real Estate Investment Trust V, 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

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

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

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

Yes 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 August 10, 2019, the Registrant had approximately 22.8 million shares of common stock outstanding.

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST V, INC.

INDEX

PART I

FINANCIAL INFORMATION

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Consolidated Balance Sheets

(dollars in thousands, except per share amounts)

See Notes to Consolidated Financial Statements.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Consolidated Statements of Operations and Comprehensive Loss

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

(Unaudited)

See Notes to Consolidated Financial Statements.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Consolidated Statements of Stockholders’ Equity

(dollars and shares in thousands)

(Unaudited)

See Notes to Consolidated Financial Statements.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Consolidated Statements of Cash Flows

(dollars in thousands)

(Unaudited)

See Notes to Consolidated Financial Statements.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

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

We were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis. In particular, we have focused generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment, or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who are distressed or face time-sensitive deadlines. We have acquired a wide variety of commercial properties, including office, industrial, retail, hospitality, and multifamily. We have purchased existing, income-producing properties, and newly-constructed properties. We have also invested in other real estate-related investments such as mortgage and mezzanine loans. We intend to hold the various real properties in which we have invested until such time as our board of directors determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that the objectives will not be met. As of June 30, 2019, we had eight real estate investments (four wholly owned properties and four properties consolidated through investments in joint ventures) and one real estate-related investment (mezzanine loan).

Substantially all of our business is conducted through Lightstone REIT V OP LP, which was previously named Behringer Harvard Opportunity OP II LP prior to November 1, 2017, a limited partnership organized in Delaware (the “Operating Partnership”).  As of June 30, 2019, 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 June 30, 2019, our wholly owned subsidiary, BHO Business Trust II, a Maryland business trust, was the sole limited partner of the Operating Partnership and owned the remaining 99.9% interest in the Operating Partnership.

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

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 our previous advisor on January 19, 2007.  These shares of convertible stock were transferred to an affiliate of Lightstone on February 10, 2017. As of June 30, 2019, we had 22.8 million shares of common stock outstanding and 1.0 thousand shares of convertible stock outstanding held by an affiliate of Lightstone.

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.

Noncontrolling Interests

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

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

Interim Unaudited Financial Information

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which was filed with the Securities and Exchange Commission (the “SEC”) on April 1, 2019.  The unaudited interim consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair presentation of the results for the periods presented. The accompanying unaudited consolidated financial statements of Lightstone Value Plus Real Estate Investment Trust V, Inc. have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

Principles of Consolidation and Basis of Presentation

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

The consolidated balance sheet as of December 31, 2018 included herein has been derived from the consolidated balance sheet included in the Company's Annual Report on Form 10-K.

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

Reclassifications  

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

Earnings per Share

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

Recently Adopted Accounting Pronouncements

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

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

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

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

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

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

New Accounting Pronouncements

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

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

On February 14, 2019, the Company completed the acquisition of a 384-unit multifamily property located in Ann Arbor, Michigan (the “Valley Ranch Apartments”) from an unrelated third party, for an aggregate purchase price of approximately $70.3 million, excluding closing and other related transaction costs. In connection with the acquisition, our Advisor received an aggregate of approximately $1.3 million in acquisition fees and acquisition expense reimbursements.

In connection with the acquisition of the Valley Ranch Apartments, the Company simultaneously entered into a $43.4 million non-recourse mortgage loan (the “Valley Ranch Apartments Loan”) collateralized by the Valley Ranch Apartments (see Note 7).

The Company determined this acquisition was an asset acquisition and allocated the total purchase price, including acquisition fees and expenses, to the assets acquired based on their relative fair value. Approximately $24.1 million was allocated to land and improvements, $46.3 million was allocated to building and improvements, and $1.1 million was allocated to in-place lease intangibles.

The capitalization rate for the acquisition of the Valley Ranch Apartments was approximately 5.35%. The Company calculates the capitalization rate for a real property by dividing the net operating income (“NOI”) of the property by the purchase price of the property, excluding costs. For purposes of this calculation, NOI was based upon the year ended November 30, 2018. Additionally, NOI is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation.

500 West 22nd Street Mezzanine Loan

On February 28, 2019, the Company entered into a $12.0 million mezzanine loan promissory note (the “500 West 22nd Street Mezzanine Loan”) with an unaffiliated third party (the “500 West 22nd Street Mezzanine Loan Borrower”). On the same date, the Company initially funded $8.0 million of the 500 West 22nd Street Mezzanine Loan. During the three months ended June 30, 2019, the Company funded an additional $1.0 million of the 500 West 22nd Street Mezzanine Loan. Through June 30, 2019, the Company has funded an aggregate of $9.0 million of the 500 West 22nd Street Mezzanine Loan and as of June 30, 2019, $3.0 million remained unfunded.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

The 500 West 22nd Street Mezzanine Loan is recorded in note receivable, net on the consolidated balance sheet. In connection with the fundings made for the 500 West 22nd Street Mezzanine Loan, our Advisor received an aggregate of approximately $0.2 million in acquisition fees from the Company during the six months ended June 30, 2019. The acquisition fees are accounted for as an addition to the carrying value of the 500 West 22^nd Street Mezzanine Loan and are being amortized over the initial term of the 500 West 22^nd Street Mezzanine Loan using a straight-line method that approximates the effective interest method.

The 500 West 22^nd Street Mezzanine Loan is due August 31, 2021 and is collateralized by the ownership interests of the 500 West 22^nd Street Mezzanine Loan Borrower. The 500 West 22nd Street Mezzanine Loan Borrower owns a parcel of land located at 500 West 22^nd Street, New York, New York. The 500 West 22^nd Street Mezzanine Loan bears interest at a rate of LIBOR + 11.0% per annum with a floor of 13.493% (13.493% as of June 30, 2019). The Company received an origination fee of 1.0% of the loan balance, or approximately $0.1 million, which is presented in the consolidated balance sheets as a direct deduction from the carrying value of the 500 West 22^nd Street Mezzanine Loan and is being amortized to interest income, using a straight-line method that approximates the effective interest method, over the initial term of the 500 West 22nd Street Mezzanine Loan. The 500 West 22^nd Street Mezzanine Loan may be extended two additional six- month periods by the 500 West 22^nd Street Mezzanine Loan Borrower provided certain conditions are met, including the establishment of an additional reserve for interest and the payment of an extension fee equal to 0.25% of the outstanding loan balance.

In connection with the initial funding under the 500 West 22^nd Street Mezzanine Loan, the Company retained approximately $2.1 million of the proceeds to establish a reserve for interest and other items, which is presented in the consolidated balance sheets as a direct deduction from the carrying value of the 500 West 22^nd Street Mezzanine Loan and are being applied against the first 8.0% of monthly interest due during the initial term of the 500 West 22nd Street Mezzanine Loan. The additional monthly interest due is added to the balance of the 500 West 22nd Street Mezzanine Loan and payable at maturity.

During the three and six months ended June 30, 2019, the Company recorded $0.1 million and $0.2 million of interest income, respectively, related to the note receivable and as of June 30, 2019, the balance of the 500 West 22nd Street Mezzanine Loan was $9.2 million and the remaining reserves for interest and other items aggregated $1.8 million.

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

As of June 30, 2019 and December 31, 2018, management estimated that the carrying value of cash and cash equivalents, restricted cash, prepaid expenses and other assets, accounts payable, accrued and other liabilities, accrued property tax and payables to related parties were at amounts that reasonably approximated their fair value based on their highly-liquid nature and short-term maturities. The carrying amount of the note receivable approximates fair value because the interest rate is variable and reflective of the market rate. The fair value of the notes payable is categorized as a Level 2 in the fair value hierarchy. The fair value was estimated using a discounted cash flow analysis valuation on the borrowing rates currently available for loans with similar terms and maturities. The fair value of the notes payable was determined by discounting the future contractual interest and principal payments by a market rate. Disclosure about fair value of financial instruments is based on pertinent information available to management as of June 30, 2019 and December 31, 2018. Carrying amounts of our notes payable and the related estimated fair value is summarized as follows:

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

Marketable Securities

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

When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. As of June 30, 2019, the Company did not recognize any impairment charges.

Fair Value Measurements

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

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

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

The fair values of the Company’s investments in debt securities are measured using quoted prices for these investments; however, the markets for these assets are not active. As of June 30, 2019, all of the Company’s debt securities were classified as Level 2 assets and there were no transfers between the level classifications during the six months ended June 30, 2019.

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

Notes payable consists of the following:

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

On February 14, 2019, the Company entered into the Valley Ranch Apartments Loan scheduled to mature on March 1, 2026. The Valley Ranch Apartments Loan bears interest at 4.16% and requires monthly interest-only payments through its stated maturity. The Valley Ranch Apartments Loan is collateralized by the Valley Ranch Apartments and is non-recourse to the Company. In connection with the Valley Ranch Apartments Loan, our Advisor received an aggregate of approximately $0.4 million in financing fees.

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

On June 13, 2019, the Company entered into a seven-year $28.8 million mortgage loan (the “Flats at Fishers Loan”) scheduled to mature on July 1, 2026. The Flats at Fishers Loan bears interest at 3.78% and requires monthly interest-only payments through the first two years of the loan term and thereafter, monthly payments of principal and interest based upon a 30-year amortization. The Flats at Fishers Loan is collateralized by the Flats at Fishers and is non-recourse to the Company. In connection with the Flats at Fishers Loan, our Advisor received an aggregate of approximately $0.3 million in financing fees.

The following table provides information with respect to the contractual maturities and scheduled principal repayments of our indebtedness as of June 30, 2019.

In addition, the Company’s non-recourse mortgage loan secured by the Lakes of Margate (outstanding principal balance of $13.5 million as of June 30, 2019) matures in January 2020. We currently expect to refinance all or a portion of this maturing indebtedness on or before its scheduled maturity. However, if we are unable to refinance the outstanding indebtedness at favorable terms, we will look to repay the then outstanding balance with available cash and/or proceeds from selective asset sales.

The Company’s office, multi-family and student housing properties are leased to tenants under operating leases. Substantially all of our multi-family and student housing leases have initial terms of 12 months or less. Our office leases expire between 2019 and 2025.

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

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

As of June 30, 2019, the approximate fixed future minimum rental payments, excluding variable lease consideration, from the Company’s office property, Gardens Medical Pavilion, due to us under non-cancelable are as follows:

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

Pursuant to the lease agreements, tenants of the property may be required to reimburse the Company for some or the entire portion of the particular tenant's pro rata share of the real estate taxes and operating expenses of the property. Such amounts are not included in the future minimum lease payments above, but are included in rental revenues on the accompanying consolidated statements of operations. Rental revenue of approximately $0.6 million and $1.2 million for the three and six months ended June 30, 2019, respectively, and rental revenue of approximately $0.2 million and $0.4 million for the three and six months ended June 30, 2018, respectively, related to variable lease payments was included in rental revenues on the accompanying consolidated statements of operations.

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