UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2015
Commission File Number: 000-53650
Lightstone Value Plus Real Estate Investment Trust V, Inc.
(Exact name of registrant as specified in its charter)
| Maryland | 20-8198863 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| 1985 Cedar Bridge Avenue, Suite | |
| (Address of principal executive offices) | (Zip Code) |
(888) 808-7348
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.0001 par value per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act). Yes o¨ No ýx
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o¨ No ýx
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 ýx No o¨
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 ýx No o¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitionsdefinition of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer¨ | Accelerated filer¨ |
| Non-accelerated filerx | Smaller reporting companyx |
| Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.Large accelerated filer ¨oAccelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No xý
There is no established market for the Registrant’s common stock. The Registrant has adopted an Amended and Restateda Policy for Estimation of Common Stock Value (the “Valuation“Estimated Valuation Policy”) pursuant to which it has estimated the net asset value per share value of its common stock.stock (“NAV per Share”). As of October 31, 2014,September 30, 2018, the estimated NAV per share valueShare was $9.72. As of October 31, 2015, the estimated per share value was $9.19.$8.47. For a full description of the methodologies used to estimate the valueNAV per Share of the Registrant’s common stock, as of October 31, 2014 and October 31, 2015, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Market Information” included in the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 and this Annual Report on Form 10-K, respectively. As of December 31, 2015, in accordance with the Valuation Policy, the Registrant’s estimated per share value went from $9.19 to $7.69 to give effect to the $1.50 cash distribution paid to stockholders of record as of December 31, 2015.10-K. There were approximately 25,691,44324,488,494 shares of common stock held by non-affiliatesoutstanding as of June 30, 2015,2018, the last business day of the Registrant’s most recently completed second fiscal quarter. As of February 29, 2016,March 15, 2019, the registrant had 25,494,94623.4 million shares of common stock outstanding.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST V, INC.
FORM 10-K
Year Ended December 31, 2015
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| Signatures. | 48 | |
Forward-Looking Statements
Certain statements in this Annual Report on Form 10-K 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 Behringer Harvard Opportunity REIT II,Lightstone Value Plus Real Estate Investment Trust V, Inc. and our subsidiaries (which may be referred to herein as the “Company,” “we,” “us” or “our”), including our ability to make accretive real estate or real estate-related investments, rent space on favorable terms, to address our debt maturities and to fund our liquidity requirements, to sell our assets when we believe advantageous to achieve our investment objectives, our anticipated capital expenditures, the amount and timing of anticipated future special cash distributions to our stockholders, the estimated net asset value per share value of our common stock (“NAV per Share”), and other matters. Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements.
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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 under “Item 1A, Risk Factors” and elsewhere in this Annual Report on Form 10-K and the factors described below:
Forward-looking statements in this Annual Report on Form 10-K 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 27A of the Securities Act and 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 Annual Report on Form 10-K 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.
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Lightstone Value Plus Real Estate Investment Trust V, Inc., which was formerly known as 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 Substantially all of our business is conducted through Lightstone REIT V OP LP, which was previously named Behringer Harvard Opportunity OP II LP, a limited partnership organized in Delaware (the “Operating Partnership”). As of December 31, Subject to the oversight of our board of directors, our business has been managed by an external advisor since the commencement of our initial public offering and Our office is located at Public Offerings of Common Stock We commenced an initial public offering of our common stock on January 21, 2008 In connection with our initial capitalization, we issued 22,471 shares of our common stock and 1,000 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. As of April 2012, when we terminated the offering, we had issued 26.7 million shares of our common stock, including 22,471 shares owned by Behringer and 2.2 million shares issued through the DRP. As of December 31, 2018 Highlights During Item 1. Businessfocusedand expect to continue to focus 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 acquiredand expect to continue to acquire a wide variety of commercial properties, including office, industrial, retail, hospitality, and multifamily. We have purchasedand expect to continue to purchase existing, income-producing properties, and newly-constructed properties. Additionally, we have and may continue to invest in other real estate related investments, such as mortgage and mezzanine loans. We have also invested in a mortgage loan and a mezzanine loan. We are not actively seeking to purchase additional assets at this time, but may invest capital in our current assets in order to position them for sale in the normal course of business. Wecurrently intend to hold theour 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. Consistent withFrom our investment objectives of commencing a liquidation within three to six years after the termination of our initial public offering,inception through December 31, 2018, we have entered our disposition phase and our boardmade an aggregate of directors is in the process of considering the orderly disposition of our assets.As of December 31, 2015, we had acquired 2123 investments, including the origination of a mezzanine loan and a mortgage loan. OfWith respect to these 2123 investments, we have cumulatively disposed of 1216 investments through December 31, 2015,2018, including the early repayment of athe mortgage loanand mezzanine loans that we had originated and the sale of four investmentsoriginated. Additionally, during 2015. In addition,2013 we sold eight of the nine medical office buildings comprisingwhich comprised our Florida MOB Portfolio investment. We will not count the sale of these eight medical office buildings as the disposition of an investment until we sell the remaining medical office building, the Gardens Medical Pavilion, which was part of the Florida MOB Portfolio investment during 2013. The number of investment dispositions through December 31, 2015 does not reflect the sale of the eight buildings comprising the Original Florida MOB Portfolio. The Original Florida MOB Portfolio and Gardens Medical Pavilion, collectively, the Florida MOB Portfolio have been counted as one investment. As of December 31, 2015, we own an 80.8% interest in Gardens Medical Pavilion.2015,2018, 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 December 31, 2015,2018, 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.We are externallyadvised by Behringerwe have no employees. From January 4, 2008 through February 10, 2017, an affiliate of Stratera Services, LLC, formerly known as “Behringer Harvard Opportunity Advisors II, LLCHoldings, LLC” (“Behringer”), acted as our external advisor (the “Advisor”“Behringer Advisor”). On February 10, 2017, we terminated our engagement of Behringer Advisor and engaged affiliates of The Lightstone Group, LLC (“Lightstone”), LSG-BH II Advisor LLC and LSG Development Advisor LLC (collectively, the “Advisor”), to provide advisory services to us. Our external advisor is responsible for managing our day-to-day affairs and for identifyingservices related to our acquisition, financing and making investments on our behalf.15601 Dallas Parkway,1985 Cedar Bridge Avenue, Suite 600, Addison, Texas 75001,1, Lakewood, New Jersey 08701 and our toll-free telephone number is (866) 655-3650. The name Behringer Harvard is the property of Behringer Harvard Holdings, LLC (“Behringer”) and is used by permission.Fromuntil March 15, 2012 (for(the "Initial Offering"), including shares sold pursuant to our primary offering) and April 3, 2012 (for shares soldoffered pursuant to our distribution reinvestment plan (the “DRP”)),. On July 3, 2011, the Initial Offering terminated in accordance with its terms. On July 5, 2011, we conductedcommenced a follow-on public offering of our shares. Pursuantcommon stock (the "Follow-On Offering"), including shares offered pursuant to our public offering, weDRP. We terminated the primary component of the Follow-On Offering effective March 15, 2012 and the DRP component effective April 3, 2012. We raised gross offering proceeds of approximately $265.3 million from the sale of approximately 26.7 million shares under the Offerings, including shares sold pursuant tounder the DRP.6 2015,2018, we had redeemed 1.13.3 million shares of our common stock and had 25.623.4 million shares of common stock outstanding. As of December 31, 2015,2018, we had 1,000 shares of convertible stock outstanding held by an affiliate of Behringer.4are inpreviously targeted the processcommencement of disposinga liquidity event within six years after the termination of assetsour 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. As we make disposals, weliquidation of the Company. We will liquidate and distribute the net proceedsseek stockholder approval prior to liquidating our stockholders. Economic or market conditions may, however, result in different holding periods for different assets.2015entire portfolio.2015,2018, we completed the following key transactions:
For further information regarding our consolidated real estate properties, see Item 2.
Investment Objectives
Our primary investment objectives are:
Investment Policies
We have investedand expect to continue to invest in commercial properties, such as office, industrial, retail, hospitality, multifamily, existing income-producing properties, and newly-constructed properties that wereare initially identified as opportunistic and value-add investments with significant possibilities for capital appreciation due to their property specificproperty-specific characteristics or their market characteristics.
We have disposed of 1216 of our original portfolio assets through December 31, 2015,2018, including the early repayment of athe mortgage loanand mezzanine loans that we hadpreviously originated.
We are in our disposition phasehave and expect to sell our remaining properties in an orderly manner. Economic or market conditions may cause uscontinue to hold our investments for longer periods of time or sell an investment at a lower than anticipated price.
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Borrowing Policies
There is no limitation on the amount we may invest in or borrow related to any single property or other investment. Under our charter, the maximum amount of our indebtedness cannot exceed 300% of our “net assets” (as defined by the Statement of Policy Regarding Real Estate Investment Trusts adopted by the North American Securities Administrators Association on May 7, 2007 (the “NASAA REIT Guidelines”))2007) 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 board of directors must review our aggregate borrowings at least quarterly. As of December 31, 2015,2018, we had an aggregate debt leverage ratio of approximately 46.7%53.5% of the aggregate value of our assets.
Disposition Policies
As each of our investments reaches what we believe to be the asset’s optimum value during the expected life of the program, we will consider disposing of the investment and may do so for the purpose of reinvesting the net sales proceeds into real estate and real estate-related investments, distributing the net sale proceeds to our stockholders or satisfying obligations of the Company. Consistent with our investment objectives of commencing a liquidation within three to six years after the termination of our initial public offering, we have entered our disposition phase and our board of directors is in the process of considering the orderly disposition of our assets. We can provide no assurances, however, as to the timing of our ultimate liquidation; as economic or market conditions may result in different holding periods.obligations. A property may be sold before or after the expected holding period if, in the judgment of our Advisor and theour independent board, the sale of the property is determined to be in the best interests of the Company and its stockholders.
Distribution Policy
U.S. federal tax law requires a REIT we are required to distribute at least 90% of ourits annual REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles, or GAAP) determined without regard to our stockholders.the deduction for dividends paid and excluding any net capital gain. In order to continue to qualify for REIT status, we may be required to make distributions in excess of cash available. Distributions, if any, are authorized at the discretion of our board of directors based on itstheir analysis of our performance over the previous periods and expectations of performance for future periods. TheseSuch 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’s decisionOur board of directors’ decisions will be substantially influenced by itstheir 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. We expect that any future distributions authorized by our board of directors will be periodic, special distributions as opposed
Prior to regular monthly or quarterly distributions.
Since 2012, our board of directors has declared a total of $77.1 million, or $3.00 per share of common stock, in special cash distributions, all of which $38.7 million waswere paid to stockholders induring 2014, 2015, and 2015. On January 5, 2016, we paid $38.4 million in2016. These special cash distributions; this special cash distribution was declared on November 20, 2015 and is included in the total of $77.1 million of special cash distributions noted above. The special cash distributions paid during 2015 and 2014 were paid with a portion of proceeds from asset sales. We did not pay any distributions in 2013.
Competition
We are subject to significant competition in seeking tenants for the leasing of our properties and buyers for the potential sale of our properties. The competition for creditworthy tenants is intense, and we have been required to provide rent concessions, incur charges for tenant improvements, and provide other inducements.inducements in order to lease vacant space at our properties. Without these inducements, we may not be able to continue to lease vacant space timely, or at all, which would adversely impact our results of operations. We also compete with sellers of similar properties when we sell properties, which may result in our receiving lower proceeds from the sale of our properties or which may result in our not being able to sell suchour properties at a sales priceprices that will achieve our original return objective.objectives. We compete for buyers and tenants that may be suitable for us with many third parties engaged in real estate investment activities, including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, hedge funds, governmental bodies, and other entities. Many of our competitors, including larger REITs, have greater financial resources than we have and generally may be able to accept more risk. They also may enjoy competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies.
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Regulations
Our investments are subject to various federal, state and local laws, ordinances, and regulations, (including those of foreign jurisdictions), including, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality, noise pollution, and indirect environmental impacts such as increased motor vehicle activity. We believe that we have all permits and approvals necessary under current law to operate our investments.
Environmental
As an owner of real estate, we are subject to various environmental laws of federal, state, and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest.
Employees
We have no employees. TheOur Advisor or otherand its affiliates of Behringer perform a full range of real estate services for us, including asset management, accounting, legal, property management, and investor relations services.
We are dependent on the Advisor and its affiliates of Behringer for services that are essential to us, including asset management and acquisition, disposition and financing activities, and other general administrative responsibilities and asset disposition decisions. In the event thatresponsibilities. If these companies were unable to provide these services to us, we would be required to provide suchthe services ourselves or obtain suchthe services from other sources.
Financial Information About Industry Segments
Our current business consists of owning, managing, operating, leasing, developing, investing in, and disposing of real estate assets.and real estate-related investments. We internally evaluate all of our real estate assetsinvestments as one reportable segment, and, accordingly, we do not report segment information.
Available Information
We electronically file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports with the United States Securities Exchange Commission (the “SEC”). We also have filed with the SEC registration statements in connection with the Offerings. Copies of our filings with the SEC may be obtained from our website at
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The following table presents certain additional information about our consolidated investments in real estate as of December 31, 2015:
| Property Name | Location | Date Acquired | Approximate Rentable Square Footage or Number of Units and Beds | Description | Encumbrances (in 000's) | Ownership Interest | Occupancy at the end of 2015 | Occupancy at the end of 2014 | Effective Monthly Rent per Square Foot/Unit/Bed for 2015(1) | Effective Monthly Rent per Square Foot/Unit/Bed for 2014(1) | ||||||||||||||
Gardens Medical Pavilion(2) | Palm Beach Gardens, Florida | October 20, 2010 | 75,374 | Medical office | $13,298 | 80.8% | (2) | 62% | 60% | $ | 2.11 | $ | 1.21 | |||||||||||
| Courtyard Kauai Coconut Beach Hotel | Kauai, Hawaii | October 20, 2010 | 311 Rooms | (3) | Hotel | 38,000 | 80% | 82% | (4) | 82% | (4) | n/a | n/a | |||||||||||
| River Club and the Townhomes at River Club | Athens, Georgia | April 25, 2011 | 1,128 beds | (5) | Student housing | 24,299 | 85% | 96% | 97% | 383.62 | 362.72 | |||||||||||||
| Lakes of Margate | Margate, Florida | October 19, 2011 | 280 units | Multifamily | 14,496 | 92.5% | 95% | 90% | 1,218.84 | 1,127.98 | ||||||||||||||
| Arbors Harbor Town | Memphis, Tennessee | December 20, 2011 | 345 units | Multifamily | 25,130 | 94% | 91% | 91% | 1,144.39 | 1,169.66 | ||||||||||||||
| 22 Exchange | Akron, Ohio | April 16, 2013 | 471 beds / 22,104 sq ft retail space | Student housing | 19,500 | 90% | (6) | (6) | (7) | (7) | ||||||||||||||
| Parkside Apartments (“Parkside”) | Sugar Land, Texas | August 8, 2013 | 240 units | Multifamily | 10,469 | 90% | 77% | 83% | 1,149.54 | 1,066.50 | ||||||||||||||
| Lakewood Flats | Dallas, Texas | October 10, 2014 | 435 units | Multifamily | 33,500 | 100% | 94% | 93% | 1,189.74 | 1,168.13 | ||||||||||||||
| Property Name | Location | Date Acquired | Approximate Rentable Square Footage or Number of Units and Beds | Description | Encumbrances (dollars in thousands) | Ownership Interest | Occupancy as of of the end of 2018 | Occupancy as of of the end of 2017 | Effective Monthly Rent per Square Foot/Unit/Bed for 2018(1) | Effective Monthly Rent per Square Foot/Unit/Bed for 2017(1) | ||||||||||||||||||||||
| Gardens Medical Pavillion | Palm Beach Gardens, Florida | October 20, 2010 | 75,374 sq ft | Medical office building | $ | 12,900 | 81.8 | % | 72 | % | 70 | % | $ | 2.20 | $ | 2.20 | ||||||||||||||||
| River Club and the Townhomes at River Club(2) | Athens, Georgia | April 25, 2011 | 1,134 beds | Student housing | 30,359 | 85.0 | % | 97 | % | 95 | % | 427.31 | 434.81 | |||||||||||||||||||
| Lakes of Margate | Margate, Florida | October 19, 2011 | 280 units | Multifamily | 13,687 | 92.5 | % | 93 | % | 88 | % | 1,369.14 | 1,274.88 | |||||||||||||||||||
| Arbors Harbor Town | Memphis, Tennessee | December 20, 2011 | 345 units | Multifamily | 29,000 | 100.0 | %(4) | 92 | % | 92 | % | 1,273.98 | 1,299.08 | |||||||||||||||||||
| Parkside Apartments (“Parkside”) | Sugar Land, Texas | August 8, 2013 | 240 units | Multifamily | 17,877 | 90.0 | % | 89 | % | 93 | % | 1,162.39 | 1,116.33 | |||||||||||||||||||
| Flats at Fishers | Fishers, Indiana | November 30, 2017 | 306 Units | Multifamily | - | 100.0 | % | 92 | % | 73 | % | 1,090.26 | 1,094.71 | |||||||||||||||||||
| Axis at Westmont | Westmont, Illinois | November 27, 2018 | 400 Units | Multifamily | 37,600 | 100.0 | % | 92 | % | (3) | 1,137.00 | (3) | ||||||||||||||||||||
| (1) | Effective monthly rent is calculated using leases in place as of December 31 and takes into account any rent concessions. |
| (2) |
The following information generally applies to our consolidated investments in our real estate properties:
Portfolio Diversification
As an opportunistic and value-add fund, we utilize a business model driven by investment strategy and expected performance characteristics. Accordingly, we have investments in several types of real estate, including office, hotel, multifamily, and student housing.
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The following table shows the total revenuerevenues of our real estate portfolio for the properties we consolidated in our financial statements as offor the year ended December 31, 2015 ($2018 (dollars in thousands):
| Percentage of | ||||||||||
| Property | Description | 2018 Revenues(1) | Revenues | |||||||
| River Club and the Townhomes at River Club | Student Housing | $ | 5,685 | 20.7 | % | |||||
| Arbors Harbor Town | Multifamily | 5,260 | 19.1 | % | ||||||
| Lakes of Margate | Multifamily | 4,641 | 16.9 | % | ||||||
| Parkside | Multifamily | 3,322 | 12.1 | % | ||||||
| Gardens Medical Pavilion | Medical office building | 2,343 | 8.5 | % | ||||||
| Flats at Fishers | Multifamily | 3,669 | 13.3 | % | ||||||
| Axis at Westmont(2) | Multifamily | 528 | 1.9 | % | ||||||
| Total, excluding properties disposed | 25,448 | 92.5 | % | |||||||
| Other(3) | 2,063 | 7.5 | % | |||||||
| Total | $ | 27,511 | 100.0 | % | ||||||
| Property | Description | 2015 Revenue(1) | Percentage of 2015 Revenue | ||||||
| Gardens Medical Pavilion | Medical office building | $ | 1,897 | 4 | % | ||||
| Courtyard Kauai Coconut Beach Hotel | Hotel | 17,694 | 35 | % | |||||
| Arbors Harbor Town | Multifamily | 4,749 | 9 | % | |||||
| Lakes of Margate | Multifamily | 4,117 | 8 | % | |||||
| Parkside | Multifamily | 2,910 | 6 | % | |||||
| Lakewood Flats | Multifamily | 6,341 | 13 | % | |||||
| River Club and the Townhomes at River Club | Student housing | 5,100 | 10 | % | |||||
| 22 Exchange | Student housing | 3,399 | 7 | % | |||||
Total, excluding properties sold and held for sale(2) | $ | 46,207 | 92 | % | |||||
Babcock Self Storage(3) | Self-storage | 8 | — | % | |||||
Alte Jakobstraße(3) | Office building | 121 | — | % | |||||
Holstenplatz(3) | Office building | 933 | 2 | % | |||||
Wimberly(3) | Multifamily | 2,981 | 6 | % | |||||
| Total revenues | $ | 50,250 | 100 | % | |||||
| (1) | Includes revenues generated from tenant reimbursements. Tenant reimbursements generally include payment of real estate taxes, operating expenses, and common area maintenance and utility charges. |
| (2) | The Axis at Westmont was acquired on November 27, 2018. |
| (3) |
Geographic Diversification
The following table shows the geographic diversification of our real estate portfolio for those properties that we consolidate in our financial statements as offor the year ended December 31, 2015. This table excludes2018 excluding revenues generated from tenant reimbursements and revenues for the four investments we sold in 2015 ($our disposed properties (dollars in thousands):
| Location | Revenues(1)(2)(3) | Revenues | ||||||
| Florida | $ | 6,984 | 27.4 | % | ||||
| Texas | 3,322 | 13.1 | % | |||||
| Tennessee | 5,260 | 20.7 | % | |||||
| Illinois | 528 | 2.1 | % | |||||
| Georgia | 5,685 | 22.3 | % | |||||
| Indiana | 3,669 | 14.4 | % | |||||
| $ | 25,448 | 100.0 | % | |||||
| Location | 2015 Revenue(1)(2) | Percentage of 2015 Revenue | |||||
| Hawaii | $ | 17,694 | 40 | % | |||
| Florida | 5,047 | 12 | % | ||||
| Tennessee | 4,538 | 10 | % | ||||
| Georgia | 5,020 | 11 | % | ||||
| Texas | 8,746 | 20 | % | ||||
| Ohio | 3,208 | 7 | % | ||||
| $ | 44,253 | 100 | % | ||||
| (1) |
| (2) | This table does not include revenues of |
| (3) | Our multifamily property located in |
See Note 2, Summary of Significant Accounting Policies, to our Consolidated Financial Statements for information regarding how geographic concentration may be considered in the evaluation of our investments for impairment.
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Future Lease Payments Table
The following table presents the future minimum base rental payments due to us under non-cancelable leases over the next ten years at our office property, Gardens Medical Pavilion, our only remaining office property as of December 31, 2015 (in2018 (dollars in thousands):
| Year | Amount | |||
| 2016 | $ | 1,246 | ||
| 2017 | 1,242 | |||
| 2018 | 936 | |||
| 2019 | 874 | |||
| 2020 | 880 | |||
| 2021 | 766 | |||
| 2022 | 701 | |||
| 2023 | 701 | |||
| 2024 | 613 | |||
| 2025 | — | |||
| Thereafter | — | |||
| Year | Amount | |||
| 2019 | $ | 1,395 | ||
| 2020 | 1,184 | |||
| 2021 | 1,113 | |||
| 2022 | 968 | |||
| 2023 | 889 | |||
| 2024 | 805 | |||
| 2025 | 138 | |||
| Thereafter | - | |||
| Total | $ | 6,492 | ||
Portfolio Lease Expirations
The following table presents lease expirations for non-cancelable leases for our only remainingmedical office property,building, Gardens Medical Pavilion, as of December 31, 2015 ($2018 (dollars in thousands):
| Year of Expiration | Number of Leases Expiring | Annualized Base Rent(1) | Percent of Annualized Base Rent Expiring | Leased Rentable Sq. Ft. | Percent of Rentable Sq. Ft. Expiring | |||||||||||||||
| 2018 | 2 | $ | 294 | 17 | % | 7,575 | 13 | % | ||||||||||||
| 2019 | 2 | 179 | 10 | % | 6,747 | 12 | % | |||||||||||||
| 2020 | 3 | 164 | 10 | % | 6,245 | 11 | % | |||||||||||||
| 2021 | 2 | 158 | 9 | % | 5,303 | 9 | % | |||||||||||||
| 2022 | - | - | - | - | - | |||||||||||||||
| 2023 | 3 | 774 | 46 | % | 26,742 | 47 | % | |||||||||||||
| 2024 | 2 | 138 | 8 | % | 4,800 | 8 | % | |||||||||||||
| Thereafter | - | - | - | . | - | |||||||||||||||
| Total | 14 | $ | 1,707 | 100 | % | 57,412 | 100 | % | ||||||||||||
| Year of Expiration | Number of Leases Expiring | Annualized Base Rent(1) | Percent of Annualized Base Rent Expiring | Leased Rentable Sq. Ft. | Percent of Rentable Sq. Ft. Expiring | |||||||||||
| 2016 | 1 | $ | 53 | 4 | % | 2,377 | 4 | % | ||||||||
| 2017 | 3 | 371 | 24 | % | 10,540 | 16 | % | |||||||||
| 2018 | 3 | 167 | 11 | % | 7,383 | 11 | % | |||||||||
| 2019 | — | — | — | % | — | — | % | |||||||||
| 2020 | 1 | 120 | 8 | % | 4,370 | 7 | % | |||||||||
| 2021 | 1 | 76 | 5 | % | 2,844 | 4 | % | |||||||||
| 2022 | — | — | — | % | — | — | % | |||||||||
| 2023 | 1 | 127 | 8 | % | 16,548 | 26 | % | |||||||||
| 2024 | 1 | 613 | 40 | % | 20,433 | 32 | % | |||||||||
| 2025 | — | — | — | % | — | — | % | |||||||||
| Thereafter | — | — | — | % | — | — | % | |||||||||
| Total | 11 | $ | 1,527 | 100 | % | 64,495 | 100 | % | ||||||||
| (1) | Represents the cash rental rate of base rents, excluding tenant reimbursements, in the final month prior to the expiration multiplied by 12, without consideration of tenant contraction or termination rights. Tenant reimbursements generally include payment of real estate taxes, operating expenses, and common area maintenance and utility charges. |
| Item 3. | Legal Proceedings. |
We are not party to, and none of our properties are subject to, any material pending legal proceedings.
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market Information
There currently is no established public trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder. Unless and until our shares are listed on a national securities exchange, it is not expected that a public market for the shares will develop.
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Estimated Net Asset Value (“NAV”) and NAV per Share of Estimated Per Share Value
On November 20, 2015,30, 2018, pursuant to the Amended and Restated Policy for Estimation of Common Stock Value (the “Estimated Valuation Policy”), theour board of directors of Behringer Harvard Opportunity REIT II, Inc. metdetermined and established anapproved our estimated NAV of approximately $199.2 million and resulting estimated NAV per shareShare of $8.47 both as of September 30, 2018.
We believe there have been no material changes between September 30, 2018 and the date of this filing to the net value of the Company’sour assets and liabilities that existed as of September 30, 2018.
Process and Methodology
Our business is managed by an external advisor and we have no employees. Commencing on February 10, 2017, we engaged our Advisor to provide advisory services to us. Our Advisor, along with any necessary material assistance or confirmation of a third-party valuation expert or service, is responsible for calculating our estimated NAV and resulting NAV per Share, which we currently expect will be done on at least an annual basis unless and until our shares of common stock as of October 31, 2015 of $9.19. As of December 31, 2015, the estimated value per share of the Company’s common stock was reduced by $1.50 per share, from $9.19 to $7.69, in accordance with the Valuation Policy to take into account the special cash distribution paid to stockholders of record as of December 31, 2015.
Our estimated valueNAV and resulting NAV per share is to arrive at an estimated value that it believes is reasonable, after consultationShare as of September 30, 2018 were calculated with both the assistance of our Advisor and an independent, third-party valuation and advisory firm, Capright Property Advisors, LLC (“Capright”), using whatan independent third-party valuation firm engaged to assist with the valuation of our assets and liabilities. Our Advisor recommended and our board of directors deems to be appropriate valuation methodologiesestablished the estimated NAV per Share based upon the analyses and assumptions under current circumstancesreports provided by our Advisor and Capright. The process of estimating the value of our assets and liabilities is performed in accordance with theour Estimated Valuation Policy.
In arriving at an estimated valueNAV and resulting NAV per share,Share, our board of directors reviewed and considered the valuation analyses prepared by theour Advisor and Capright. TheOur Advisor presented a report to the board of directors with an estimated NAV and resulting NAV per share value.Share. Capright provided our board of directors an opinion that the resulting “as-is” market value for the Company’s properties, as calculated by theour Advisor, and the other assets and liabilities as valued by theour Advisor, along with the corresponding net asset valueNAV valuation methodologies and assumptions used by theour Advisor to arrive at a recommended valueNAV per Share of $9.19 per share$8.47 as of October 31, 2015September 30, 2018 were appropriate and reasonable. TheOur board of directors conferred with theour Advisor and a representative from Capright regarding the methodologies and assumptions used to reach their respective conclusions. TheOur board of directors, which is responsible for determining theour estimated per share value, considered all information provided in light of its own familiarity with our assets and liabilities and unanimously approved an estimated valuea NAV per Share of $9.19 per share$8.47 as of October 31, 2015.September 30, 2018.
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The engagement of Capright with respect to our estimated NAV and resulting NAV per Share as of September 30, 2018 was approved by our board of directors, including all of our independent directors. Capright has extensive experience in conducting asset valuations, including valuations of commercial real estate, debt, properties and real estate-related investments.
Capright’s opinion was subject to various limitations. In forming its opinion, Capright relied on certain information provided by our Advisor and third parties without independent verification. Our Advisor provided Capright with certain information regarding lease terms and the physical condition and capital expenditure requirements of each property. Capright did not perform engineering or structural studies or environmental studies of any of the properties, nor did they perform an independent appraisal of the other assets and liabilities included in our estimated valueNAV and resulting NAV per share.
In forming their conclusion as to the “as-is” value of the real estate investments held by the Companyus as of October 31, 2015,September 30, 2018, Capright’s opinion was subject to various limitations. ForIn connection with their engagement, Capright completed appraisals of six of our seven properties. Capright did not perform an appraisal on our mezzanine loan investment or on 22 Exchange, a student housing complex with a retail component, located in Akron, Ohio, in which we had a 90.0% ownership interest. With respect to the appraisals of the Company’s eight properties performed by Capright, the scope of their work included:
| · | Review of all property level information provided by our Advisor; |
| · | Physical inspection of three of our consolidated properties to determine their physical condition and location attributes; |
| · | Review of the historical performance of our real estate investments and business plans related to operations of the investments; |
| · | Review of the data models prepared by the Advisor supporting the valuation for each investment; and |
| · | Review of the applicable markets by means of publications and other resources to measure current market conditions, supply and demand factors, and growth patterns. |
In addition to their appraisals of all property level information provided by the Advisor;
| · | Review of key market assumptions for our mortgage liabilities, including but not limited to interest rates and collateral; |
| · | Review of our Advisor’s valuation of the mezzanine loan investment consisting solely of the estimated profit participation; |
| · | Review of our Advisor’s valuation of 22 Exchange. |
| · | Review of our Advisor calculations related to allocations of value to noncontrolling interests based on contractual terms and market assessments; and |
| · | Review of valuation methodology used by our Advisor for all other assets and liabilities. |
Capright has acted as a valuation advisor to the Companyus in connection with this assignment. The compensation paid to Capright in connection with this assignment was not contingent upon the successful completion of any transaction or conclusion reached by Capright. Capright has rendered valuation advisory services to another Behringer-sponsored investment program previously for which it received usual and customary compensation. Capright may be engaged to provide financial advisory services to the Company, itsus, our Advisor, or other Behringer-sponsoredLightstone-sponsored investment programs or their affiliates in the future.
The following is a summary of the valuation methodologies used for each type of asset:
Investments in Real Estate.
Our Advisor estimated the value of our investments in real estate utilizing multiple valuation methods, as appropriate for each asset, including an income approach using discounted cash flow analysis and a sales comparable analysis. The key assumptions used in the discounted cash flow approach were specific to each property type, market location, and quality of each property and were based on similar investors’ return expectations and market assessments. The key assumptions are reflected in the table included under “Allocation of Estimated Value”NAV per Share” below. In calculating values for our assets, our Advisor used balance sheet and cash flow estimates as of September 30, 2015.2018.
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In forming its opinion, Capright prepared appraisals on all eightsix of our seven consolidated investment properties in connection with the valuation. The appraisals estimated values by using discounted cash flow, comparable sales, or a weighting of these approaches in determining each property’s value. The appraisals employed a range of terminal capitalization rates, discount rates, growth rates, and other variables that fell within ranges that Capright and theour Advisor believed would be used by similar investors to value the properties we own. The assumptions used in developing these estimates were specific to each property (including holding periods) and were determined based upon a number of factors including the market in which the property is located, the specific location of the property within the market, property and market vacancy, tenant demand for space, and investor demand and return requirements.
While we and our Advisor believe that the approaches used by appraisers in valuing our real estate assets, including an income approach using discounted cash flow analysis and sales comparable analysis, is standard in the real estate industry, the estimated values for our investments in real estate may or may not represent current market values or fair values determined in accordance with GAAP.generally accepted accounting principles in the United States (“GAAP”). Real estate is currently carried at its amortized cost basis in our financial statements, subject to any adjustments applicable under GAAP.
The value of our mezzanine loan investment approximates its carrying value as of September 30, 2018 and represents the minimum amount payable to us for our participation in the residual interests of Prospect Park, which was valued at the outstanding principal balance plus accrued interest and the current estimated value of the profit participation. As significant progress has been completedsold on the development of the multifamily project, the value of the profit participation was derived by valuing the project using a discounted cash flow analysis. TheDecember 15, 2017. Our mezzanine loan investment is accounted for as an investment in unconsolidated joint venture on our condensed consolidated balance sheet atas of September 30, 20152018.
The following relates specifically to our valuation of 22 Exchange for purposes of estimating our NAV and resulting NAV per Share as of September 30, 2018. For all of the quarterly periods in 2017, we did not meet the debt service coverage requirements on the nonrecourse mortgage loan secured by 22 Exchange (the “22 Exchange Loan”). As a result, the lender elected to sweep the cash from operations beginning in January 2018 and because the cash flow from operations was not sufficient to fully pay the scheduled monthly debt service due in January 2018, the 22 Exchange Loan was placed in default and became due on demand. We also received notice in January 2018 that the 22 Exchange Loan had been transferred to a special servicer effective immediately. Subsequently, the special servicer placed the property in receivership and a sheriff’s sale was scheduled during December 31, 2015.
Cash and cash equivalents.The estimated value of our cash and cash equivalents approximate their carrying value due to their short term maturities.
Restricted cash.The estimated value of our restricted cash approximate their carrying value due to their short term maturities.
Marketable securities. The estimated values of our marketable securities are based on Level 2 inputs. Level 2 inputs are inputs that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. All of our marketable securities measured using Level 2 inputs were valued based on a market approach using readily available quoted market prices for similar assets.
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Notes payable.Values for our notes payable, which consist of mortgage loans, were estimated by the Advisor and reviewed by Capright using a discounted cash flow analysis, which used inputs based on the remaining loan terms and estimated current market interest rates for mortgage loans with similar characteristics, including remaining loan term and loan-to-value ratios. The current market interest rate was generally determined based on market rates for available comparable debt. The estimated current market interest rates for mortgage loans ranged from 1.7%2.4% to 5.2%4.6%.
Other Assetsassets and Liabilities
Noncontrolling Interests.
Common Stock Outstanding
Our estimated valueNAV per shareShare was calculated by aggregating the value of our assets, subtracting the value of both our liabilities and noncontrolling interests, and dividing the net totalamount by the fully-diluted shares of common stock outstanding. Our estimated value per share is effectiveoutstanding, all as of October 31, 2015.
Allocation of Estimated Value
The table below sets forth the calculation of the Company’sour estimated valueNAV per shareShare as of October 31, 2015,September 30, 2018, as well as the calculation of the Company’sour prior estimated valueNAV per shareShare as of October 31, 2014.September 30, 2017. The estimated valuationNAV per Share of $9.19 per share$8.47 as of October 31, 2015,September 30, 2018, reflects an increase of $0.49, or 6.1%, from the estimated valuationNAV per Share of $8.72 per share, which was the adjusted estimated per share value established$7.98 as of October 31, 2014 after adjustment for the $1.00 per share special distribution paid to shareholders on March 31, 2015.September 30, 2017.
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October 31, 2015 Estimated Value per Share | October 31, 2014 Estimated Value per Share | |||||||
| Real estate: | ||||||||
Operating(1) | $ | 13.06 | $ | 16.19 | ||||
Mezzanine loan investment(2) | 0.82 | 0.53 | ||||||
| Cash and cash equivalents | 3.07 | 2.92 | ||||||
| Restricted cash | 0.16 | 0.17 | ||||||
Notes payable(3) | (7.03 | ) | (8.78 | ) | ||||
| Other assets and liabilities | (0.30 | ) | (0.20 | ) | ||||
| Noncontrolling interests | (0.59 | ) | (1.11 | ) | ||||
| Estimated net asset value per share | $ | 9.19 | $ | 9.72 | ||||
| Estimated enterprise value premium | — | — | ||||||
Total estimated value per share(4) | $ | 9.19 | $ | 9.72 | ||||
Less: Special cash distribution(5) | — | (1.00 | ) | |||||
| Total estimated value per share, as adjusted | $ | 9.19 | $ | 8.72 | ||||
| Estimated NAV per Share | ||||||||
| As of September 30, 2018 | As of September 30, 2017 | |||||||
| Investments in real estate: | ||||||||
| Operating properties(1) | $ | 10.57 | $ | 8.17 | ||||
| Mezzanine loan(2) | 0.46 | 1.08 | ||||||
| Cash and cash equivalents | 2.21 | 2.11 | ||||||
| Restricted cash | 0.17 | 1.38 | ||||||
| Marketable securities | 0.63 | - | ||||||
| Notes payable | (5.02 | ) | (4.22 | ) | ||||
| Other assets and liabilities, net | (0.19 | ) | (0.15 | ) | ||||
| Noncontrolling interests | (0.36 | ) | (0.39 | ) | ||||
| Estimated NAV per Share(3) | $ | 8.47 | $ | 7.98 | ||||
Notes:
| (1) | The following are the key assumptions (shown on a weighted average basis) used in the discounted cash flow models to estimate the value of six of the seven consolidated properties we owned as of September 30, 2018. |
| Student | ||||||||||||
| Multifamily | Housing | Office | ||||||||||
| (four properties) | (one property) | (one property) | ||||||||||
| Exit capitalization rate | 6.22 | % | 6.25 | % | 7.00 | % | ||||||
| Discount rate | 7.28 | % | 7.25 | % | 8.25 | % | ||||||
| Annual market rent growth | 3.00 | % | 3.00 | % | 3.00 | % | ||||||
| Average holding period (in years) | 10.0 | 10.0 | 10.0 | |||||||||
The following are ranges of the key assumptions (shown on a weighted average basis) which are used in the discounted cash flow models to estimate the value of the real estate assets we currently own.
| Hotel | Multifamily | Student Housing | Office | ||||
| Exit capitalization rate | 7.50% | 6.04% | 6.50% | 7.00% | |||
| Discount rate | 9.00% | 7.04% | 7.69% | 8.25% | |||
| Annual market rent growth rate | 3.00% | 3.00% | 3.08% | 3.00% | |||
| Average holding period | 10 years | 10 years | 10 years | 10 years | |||
| Multifamily | |||||
| (four properties) | |||||
| Exit capitalization rate | 5.75% - 6.50% | ||||
| Discount rate | 7.00% - 7.75% |
| (2) | As of September 30, 2018, the estimated value of our mezzanine loan investment, which is accounted for as an investment in unconsolidated joint venture on our condensed consolidated balance sheet, approximated its carrying value of $10.9 million which represented the minimum amount payable to us for our participation in the residual interests of Prospect Park, a multifamily development project, which was sold on December 15, 2017. In January 2019, we subsequently received a distribution from our unconsolidated joint venture equal to our carrying value. |
| (3) | As of September 30, 2018, we had 23,535,706 shares of common stock outstanding. The potential dilutive effect of our common stock equivalents does not affect our estimated NAV per Share as there were no potentially dilutive securities outstanding as of the valuation date. |
The estimated values of our investments in real estate as an investment in unconsolidated joint venture on our consolidated balance sheet atof September 30, 2015 and December 31, 2015.
While we believe that our assumptions utilized are reasonable, a change in these assumptions would affect the calculation of the value of our real estate assets. The table below presents the estimated increase or decrease to our estimated valueNAV per share forShare resulting from a 25 basis point increase and decrease in the discount rates and capitalization rates.rates for six of the seven consolidated properties we currently own. The table is onlypresented to provide a hypothetical to illustrateillustration of possible results if only one change in assumptions was made, with all other factors heldremaining constant. Further, each of these assumptions could change by more or less than 25 basis points or not change at all.
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| Change in Estimated Value per Share | ||||||||
| Description | Increase of 25 basis points | Decrease of 25 basis points | ||||||
| Capitalization rate | $ | (0.61 | ) | $ | 0.67 | |||
| Discount rate | $ | (0.27 | ) | $ | 0.22 | |||
| Change in NAV per Share | ||||||||
| Increase of | Decrease of | |||||||
| 25 basis points | 25 basis points | |||||||
| Capitalization rate | $ | (0.44 | ) | $ | 0.48 | |||
| Discount rate | $ | (0.18 | ) | $ | 0.19 | |||
Historical Estimated ValuesNAV per Share
The historical reported estimated valuesNAV per shareShare of the Company’sour common stock as approved by theour board of directors arefor the preceding year is set forth below:
| $ | |||||
| September 30, 2017 | |||||
Current Report on Form 8-K filed December | |||||
Limitations and Risks
As with any valuation methodology, the methodology used to determine our estimated NAV and resulting NAV per Share is based upon a number of estimates and assumptions that may prove later not to be accurate or complete. Further, different participants with different property-specific and general real estate and capital market assumptions, estimates, judgments and standards could derive a different estimated NAV per Share, which could be significantly different from the estimated NAV per Share approved by our board of directors. The estimated NAV per Share approved by our board of directors does not represents the fair value of our assets and liabilities in accordance with GAAP, and such estimated NAV per Share is not a representation, warranty or guarantee that:
| · | Our shares of common stock would trade at the estimated NAV per Share on a |
| · | An independent third-party appraiser or other third-party valuation firm would agree with the estimated NAV per Share; or |
| · | The methodology used to estimate our NAV per Share would be acceptable to FINRA or under the Employee Retirement Income Security Act with respect to their respective requirements. |
The Internal Revenue Service and the Department of Estimated Value Per Share
As with any valuation methodology, our methodology is based upon a number of estimates and assumptions that may prove laternot be accurate or complete. Different parties with different assumptions and estimates could derive different estimated NAVs and resulting NAVs per share, and these differences could be significant. The estimated NAV per Share is not audited and does not represent the fair value of our assets less our liabilities in accordance GAAP, nor do they represent an actual liquidation value of our assets and liabilities or the amount shares of our common stock would trade at on a national securities exchange. Our estimated NAV per Share is based on the estimated value of our assets less the estimated value of our liabilities and other non-controlling interests divided by the number of our diluted shares of common stock outstanding, all as of the date indicated. Our estimated NAV per Share does not reflect a discount for the fact we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. Our estimated NAV per Share does not take into account estimated disposition costs or fees or penalties, if any, that may apply upon the prepayment of certain of our debt obligations or the impact of restrictions on the assumption of certain debt. Our estimated NAV per Share will fluctuate over time as a result of, among other things, future acquisitions or dispositions of assets, developments related to be inaccurate or incomplete. Further, differentindividual assets and the management of those assets and changes in the real estate and capital markets. Different parties using different assumptions and estimates could derive a different NAVs and resulting estimated valueNAVs per share, whichand these differences could be significantly different fromsignificant. Markets for real estate and real estate-related investments can fluctuate and values are expected to change in the future. Our Estimated Valuation Policy requires us to update our board’s estimated NAV per Share value per share. The estimated per share value determined by ouron an annual basis. Our board of directors neither represents the fair value according to GAAPwill review and approve each estimate of our assets less liabilities, nor does it represent the amount our shares would trade at on a national securities exchange or the amount a shareholder would obtain if he tried to sell his shares or if we liquidated our assets. Accordingly, with respect to theNAV and resulting estimated valueNAV per share, the Company can give no assurance that:Share.
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The following factors may cause a stockholder would be ablenot to resell his or her shares at this estimated value;
| · | The methodology used to determine estimated NAV per Share includes a number of estimates and assumptions that may not prove to be accurate or complete as compared to the actual amounts received in the liquidation. |
| · | In a liquidation, certain assets may not be liquidated at their estimated values because of transfer fees and disposition fees, which are not reflected in the estimated NAV calculation. |
| · | In a liquidation debt obligations may have to be prepaid and the costs of any prepayment penalties may reduce the liquidation amounts. Prepayment penalties are not included in determining the estimated value of liabilities in determining estimated NAV. |
| · | In a liquidation, the real estate assets may derive a portfolio premium which premium is not considered in determining estimated NAV. |
| · | In a liquidation, the potential buyers of the assets may use different estimates and assumptions than those used in determining estimated NAV. |
| · | If the liquidation occurs through a listing of the common stock on a national securities exchange, the capital markets may value the Company’s net assets at a different amount than the estimated NAV. Such valuation would likely be based upon customary REIT valuation methodology including funds from operation (‘‘FFO’’) multiples of other comparable REITs, FFO coverage of dividends and adjusted FFO payout of the Company’s anticipated dividend. |
| · | If the liquidation occurs through a merger of the Company with another REIT, the amount realized for the common stock may not equal the estimated NAV per Share because of many factors including the aggregate consideration received, the make-up of the consideration (e.g., cash, stock or both), the performance of any stock received as part of the consideration during the merger process and thereafter, the reception of the merger in the market and whether the market believes the pricing of the merger was fair to both parties. |
Holders
As of February 29, 2016,March 15, 2019, we had 25,494,94623.4 million shares of common stock outstanding held by a total of 10,87610,042 stockholders.
Distributions
We made an election to qualify as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2008. AsU.S. federal tax law requires a REIT we must distribute at least 90% of ourits annual REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles, or GAAP) determined without regard to our stockholders annually. Ourthe deduction for dividends paid and excluding any net capital gain. In order to continue to qualify for REIT status, we may be required to make distributions to our stockholders have historically been declared on a quarterly basis and paid on a monthly basis. We have paid all or a portionin excess of cash available. Distributions are authorized at the discretion of our distributions fromboard of directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. Such analyses may include actual and anticipated operating cash on hand, borrowings,flow, capital expenditure needs, general financial and market conditions, proceeds from the saleasset sales and other factors that our board of assets and the proceedsdirectors deem relevant. Our board of our offerings.
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Our board of directors has declared two special cash distributions during 2015, one on March 18, 2015 for a total of $25.7 million and one on November 20, 2015 for a total of $38.4 million, for an aggregate total of $64.1 million, or $2.50 per share of common stock. The CompanyWe paid the $25.7 million special cash distribution on March 31, 2015 and the $38.4 million special cash distribution on January 5, 2016. On August 8, 2014, our board of directors authorized a special cash distribution totaling $13 million, or $0.50 per share of common stock, which was paid on September 18, 2014. The special cash distributions paid during 20152016 and 20142015 were fully funded with a portion of proceeds from asset sales. We did not pay any distributions during the year ended December 31, 2013.
Recent Sales of Unregistered Securities
During the three months ended December 31, 2015,2018, we did not sell any equity securities that were not registered under the Securities Act of 1933.
Securities Authorized for Issuance under Equity Compensation Plans
Effective December 31, 2015:
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.
From our inception through December 31, 2017, we had redeemed 2.1 million shares of our common stock at an average price per share of $6.89 per share. During 2018, we redeemed approximately 1.2 million shares of our common stock at an average price per share of $7.10 per share.
The terms on which we redeemredeemed shares may differprior to July 1, 2018 differed 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. From April
Prior to July 1, 2012 through May 15, 2014, our board of directors suspended accepting Ordinary Redemptions. On May 15, 2014, our board of directors adopted2018, the Third Amended and Restated Share Redemption Program and reopened the share redemption program for Ordinary Redemptions, to be effective on that date. In addition, for periods beginning on or after May 15, 2014, the cash available for redemptions was increased from $1 million to no more than $10 million in any twelve-month period. The redemption limitations apply to all redemptions, whether Ordinary or Exceptional Redemptions.
On August 9, 2017, our board of directors adopted a Fourth Amended and Restated Share Redemption Program (the “Fourth Amended Share Redemption Program”) which became effective July 1, 2018. The material changes made to the program were as follows. We no longer process redemptions upon death, “qualifying disability,” or confinement to a long-term care facility on November 20, 2015, paid to stockholdersterms different than those on which we process all other redemptions. The price at which we redeem shares submitted for redemption will be a percentage of recordthe estimated NAV per Share as of December 31, 2015 on January 5, 2016. As a result, the redemption price for shares redeemed after December 31, 2015 will be based onEffective Date (as defined in the estimated value per share,Fourth Amended Share Redemption Program), as adjusted, of $7.69. For a full descriptionfollows:
| For Redemptions with an Effective Date Between | |
| July 1, 2018 and June 30, 2019: | 92.5% of the estimated NAV per Share |
| July 1, 2019 and June 30, 2020: | 95.0% of the estimated NAV per Share |
| July 1, 2020 and June 30, 2021: | 97.5% of the estimated NAV per Share |
| Thereafter: | 100% of the estimated NAV per Share |
Pursuant to the terms of the methodologies used to estimate the value of our common stock as of October 31, 2015, see “Determination of Estimated PerFourth Amended Share Value” disclosed above.
On December 28, 2018, our board of directors adopted a Fifth Amended and Restated Share Redemption Program (the “Fifth Amended Share Redemption Program”) which became effective on January 31, 2019. The only material change to the program was to change the measurement period for the limitations on the number and dollar amount of shares that may be accepted for redemption from a rolling 12 month-period to a calendar year. On March 26, 2019, our board of directors set the cash available for redemptions at $2.5 million for the quarterly period ended March 31, 2019.
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During the three months ended December 31, 2015, our board of directors redeemed all 27 Ordinary Redemption requests received that complied with the applicable requirements and guidelines of the share redemption program for an aggregate of 66,455 shares redeemed for $0.4 million (approximately $6.36 per share). All redemptions were funded with cash on hand.
| 2018 | Total Number of Shares Redeemed | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares That May Be Purchased Under the Plans or Programs | ||||||||||
| October | — | — | — | |||||||||||
| November | 104,298 | $ | 7.38 | 104,298 | (1) | |||||||||
| December | — | — | — | |||||||||||
| 104,298 | $ | 7.38 | 104,298 | (1) | ||||||||||
| 2015 | Total Number of Shares Redeemed | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares That May Be Purchased Under the Plans or Programs | ||||||||
| October | 69,788 | $ | 6.40 | 69,788 | (1) | |||||||
| November | — | — | — | |||||||||
| December | — | — | — | |||||||||
| 69,788 | $ | 6.40 | 69,788 | (1) | ||||||||
| (1) | A description of the maximum number of shares that may be purchased under our share redemption program is included in the narrative preceding this table. |
| Year | Portfolio Beginning of Year | Acquisitions | Dispositions | Portfolio at Year-End | Unconsolidated at Year-End (1) | ||||||||||
2011(2) | 10 | 4 | 3 | 11 | — | ||||||||||
2012(3) | 11 | 1 | 2 | 10 | — | ||||||||||
2013(4) | 10 | 4 | 1 | 13 | 1 | ||||||||||
| 2014 | 13 | 1 | 1 | 13 | 1 | ||||||||||
| 2015 | 13 | — | 4 | 9 | 1 | ||||||||||
| December 31, | |||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
| Total assets | $ | 343,845 | $ | 409,691 | $ | 414,375 | $ | 379,066 | $ | 447,996 | |||||||||
| Notes payable | $ | 178,692 | $ | 216,294 | $ | 212,037 | $ | 183,308 | $ | 239,757 | |||||||||
Other liabilities(1) | 48,574 | 16,841 | 9,549 | 9,225 | 11,235 | ||||||||||||||
| Behringer Harvard Opportunity REIT II, Inc. equity | 109,818 | 168,520 | 183,884 | 175,163 | 182,397 | ||||||||||||||
| Noncontrolling interest | 6,761 | 8,036 | 8,905 | 11,370 | 14,607 | ||||||||||||||
| Total liabilities and equity | $ | 343,845 | $ | 409,691 | $ | 414,375 | $ | 379,066 | $ | 447,996 | |||||||||
| Year Ended December 31, | |||||||||||||||||||
| 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
| Revenues | $ | 50,250 | $ | 48,597 | $ | 43,389 | $ | 32,718 | $ | 21,822 | |||||||||
Income (loss) from continuing operations, including gains on disposals(1) | 7,677 | (334 | ) | (17,553 | ) | (12,785 | ) | (9,409 | ) | ||||||||||
Gains on disposals in continuing operations(1) | 22,771 | 11,454 | n/a | n/a | n/a | ||||||||||||||
| Income from discontinued operations, including gains on disposal | — | — | 31,159 | 22,012 | 776 | ||||||||||||||
Impairment charge(2) | (1,417 | ) | — | — | — | — | |||||||||||||
| Net income (loss) | 7,677 | (334 | ) | 13,606 | 9,227 | (8,633 | ) | ||||||||||||
| Add: Net (income) loss attributable to noncontrolling interest | (699 | ) | 331 | (4,877 | ) | (7,562 | ) | 882 | |||||||||||
| Net income (loss) attributable to the Company | 6,978 | (3 | ) | 8,729 | 1,665 | (7,751 | ) | ||||||||||||
| Basic and diluted income (loss) per share | $ | 0.27 | $ | — | $ | 0.34 | $ | 0.06 | $ | (0.32 | ) | ||||||||
| Distributions declared per share | $ | 2.50 | $ | 0.50 | $ | — | $ | 0.625 | $ | 0.50 | |||||||||
| Item 7. | 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.
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. WeSince 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 a mortgage loan and a mezzanine loan.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. We are not actively seeking to purchase additional assets at this timeCurrently, our investments include multifamily and have entered our disposition phase. Consistent with our investment objectives of commencing a liquidation within three to six years after the terminationstudent housing communities and an office building. All of our initial public offering, we have enteredcurrent investments are located in the United States. We currently intend to hold our disposition phase andvarious real properties until such time as our board of directors is indetermines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that the process of considering the orderly disposition of our assets.
Market Outlook
As of December 31, 2015, we were invested in four multifamily properties. For the year ended December 31, 2015, excluding assets sold during the year, 39% of our total revenues were derived from our multifamily properties. The multifamily sector continued to perform well during 2015 and ended the year with the national multifamily vacancy rate at 4.2%. Home ownership rates continue to remain depressed which has contributed to rental demand. Strong job growth and positive general economic conditions supported increases in rental rates for the year. Many analysts are projecting continued multifamily rental growth, albeit at a slower pace particularly in markets with favorable job and income growth, where the demand fundamentals can absorb the supply. It is projected that supply totaling 285,000 units in 2016 will likely surpass demand, resulting in a nominal increase in vacancy.
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The current outlook on financing trends appears relatively stable thereand interest rates are risks. Itstill at relatively low historical levels. There is expectedgrowing sentiment that the U.S. Federal Reserve may continuebe likely to increasepause on interest rates during 2016,rate hikes for the timing and amount of theforeseeable future pending changing economic conditions. Changes in interest rate increasepolicy as well as government spending levels and global economic concerns canconditions generally affect the overall level of domestic economic growth. Any ofChanges in these issuesvariables could slow economic growth, which could affect the amount of capital available or the costs charged for financings. As of December 31, 2015,2018, our weighted average interest rate was 3.5%, compared to 3.3% at December 31, 2014.
Liquidity and Capital Resources
We had unrestricted cash and cash equivalents of $76.8$29.6 million atas of December 31, 2015.2018. 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) selective acquisitions and (c) special distributions.(d) distributions (if authorized by our board of directors). Generally, we expect to meet cash needs for the payment of operating expenses and interest on our outstanding indebtedness from our cash on hand and cash flow from operations, if any, and to fund special distributions (if any) from our cash on hand and excess cash flow and/or proceeds 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, redemptions or special distributions,redemptions, we expect to use borrowings and selective asset sales to fund such needs.
We intend to hold theour various real properties in which we have invested until such time as our board of directors determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that the objectives will not be met. We sold 1875 Lawrence in 2014, Babcock and AJSdisposed of 22 Exchange in the firstfourth quarter of 2015,2018through a deed-in-lieu of foreclosure transaction with the lender and Holstenplatz and Wimberlysold the Courtyard Kauai Coconut Beach Hotel in the third quarter of 2015. We are2017. Additionally, we received proceeds of approximately $21.6 million related to an equity method investment in Prospect Park in the processfourth quarter of disposing of assets. On March 31, 2015, we paid a special cash distribution, which represents a portion of proceeds2017 and an additional $10.9 million from asset sales, of $25.7 million, or $1.00 per share of common stock. On November 20, 2015, our board of directors authorized a special cash distribution of $38.4 million, or $1.50 per share of common stock, funded from proceeds of asset sales. The special cash distribution was paid onthis investment in January 5, 2016.
We did not make any distributions during 2018 and 2017.
We continually evaluate our liquidity and ability to fund future operations and debt obligations. As anticipated, we extended ourThe Company has debt secured by Courtyard Kauai Coconut Beach Hotel by 18 months from its initialof approximately $13.7 million associated with Lakes of Margate ($13.4 million due at maturity date of November 9, 2015January 1, 2020) maturing over the next twelve months. We currently expect to May 9, 2017. Therefinance 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 outstanding balance of the debt at December 31, 2015 was $38 million. The next debt maturity for the Company is January 2018.with available cash and/or proceeds from selective asset sales. 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 year ended December 31, 2015,2018, excluding 22 Exchange, the four investments we soldinvestment which was disposed of in 2015, 38%2018, approximately 27.4%, 13.1%, 20.7%, 2.1%, 22.3% and 20%14.4% of our total revenues (including revenues generated from tenant reimbursements) were derived from our properties located in HawaiiFlorida, Texas, Tennessee, Illinois, Georgia and Texas,Indiana, respectively. Additionally, excluding the four properties soldour investment which was disposed of in 2015, 39%2018, approximately 68.5%, 22.3% and 9.2% of our total revenues were from our multifamily properties, student housing properties and 38% were from our hotel property.
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.
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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 special 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 valueloan-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 at such time as determined to be necessary forrefinance our existing real estate assets, depending on multiple factors.
As of December 31, 2015,2018, our notes payable balance was $178.7$139.0 million, net of deferred financing fees of $2.4 million, and had a weighted average interest rate of 3.5% compared to4.28%. As of December 31, 2017, the Company had a notes payable balance of $216.3$89.9 million, excluding $9.1net of deferred financing fees of $0.4 million, of contractual obligations on real estate held for sale, andwith a weighted average interest rate of 3.3%4.97%.
2018 Debt Transactions
On May 1, 2018, we entered into a non-recourse mortgage loan (the “River Club Mortgage”) in the amount of $30.4 million. The River Club Mortgage has a term of seven years, bears interest at Libor plus 1.78% and requires monthly interest-only payments during the first five years and interest and principal payments pursuant to a 30-year amortization schedule for the remaining two years through its stated maturity with the entire unpaid balance due upon maturity. The River Club Mortgage is cross-collateralized by the River Club and the Townhomes at River Club. At closing, approximately $23.4 million of the proceeds from the River Club Mortgage were used to repay in full the existing non-recourse mortgage loan.
On June 1, 2018, we entered into a non-recourse mortgage loan (the “Parkside Mortgage”) in the amount of $18.0 million. The Parkside Mortgage has a term of seven years, bears interest at 4.45% and requires monthly interest and principal payments pursuant to a 30-year amortization schedule through its stated maturity with the entire unpaid balance due upon maturity. The Parkside Mortgage is collateralized by Parkside. At closing, approximately $9.6 million of the proceeds from the Parkside Mortgage were used to repay in full the existing non-recourse mortgage loan.
On June 28, 2018, the Company entered into a non-recourse mortgage loan (the “Gardens Medical Mortgage”) in the amount of $13.0 million. The Gardens Medical Mortgage has a term of three years, bears interest at Libor plus 1.90% and requires monthly interest and principal payments through its stated maturity with the entire unpaid balance due upon maturity. The Gardens Medical Mortgage is collateralized by the Gardens Medical Pavilion.
On November 27, 2018, we assumed a non-recourse mortgage loan (the “Axis at Westmont Mortgage”) in the amount of $37.6 million. The Axis at Westmont Mortgage is secured by a first mortgage lien on the assets of the Axis at Westmont, bears interest at a fixed annual rate of 4.39% and requires monthly interest only payments until March 1, 2021, at which time monthly principal and interest payments of $188,064 are required. Any unpaid principal and interest is due on the maturity date, February 1, 2026. We have the right to prepay the entire outstanding amount of the loan provided that if prepayment is made prior to November 1, 2025, a prepayment premium is required. The fair value of the Axis at Westmont Mortgage approximated its outstanding balance as of the date of assumption.
On December 28, 2018, we entered into a non-recourse mortgage loan (the “Arbors Harbor Town Mortgage”) in the amount of $29.0 million. The Arbors Harbor Town Mortgage has a term of seven years, bears interest at 4.53% and requires monthly interest payments through its stated maturity with the entire unpaid balance due upon maturity. The Arbors Harbor Town Mortgage is collateralized by the Arbors Harbor Town. At closing, approximately $23.7 million of the proceeds from the Arbors Harbor Town Mortgage were used to repay in full the existing non-recourse mortgage loan and an additional $1.9 million of the proceeds were used to acquire the 6.0% membership interest in the property held by a minority owner, and as a result, we now own 100.0% of this property.
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On December 28, 2018, we and the 10.0% noncontrolling memberrelinquished our ownership of22 Exchangethrough a deed-in-lieu of foreclosure transaction with the lender. Upon relinquishment of the property,we wererelieved of approximately $22.6 million of mortgage obligations, including accrued and unpaid interest associated with the mortgageloan and other liabilities.
2017 Debt Transactions
Our debt secured by Courtyard Kauai Coconut Beach Hotel, with an outstanding balance of $38.0 million as of December 31, 2014.2016, 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 $44.0 million (the “Courtyard Kauai Loan”) with TH Commercial Investment Corp. Initial borrowings of $36.0 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 havehad also guaranteed payment of certain recourse liabilities with respect to certain customary nonrecourse carveoutscarve-outs as set forth in the guaranties in favor of the unaffiliated lenderslender.
On August 15, 2017, the Courtyard Kauai Loan was assumed by the unrelated third-party buyer in connection with respect tothe sale of the Courtyard Kauai Coconut Beach Hotel, 22 Exchange,Hotel. The outstanding balance as of the date of sale was $36.0 million. See Notes 6 and Parkside notes payable.
On December 31, 2015,27, 2017, we used a portion of the proceeds from the sales of Babcock, AJS and Wimberlycash on hand to pay off in full the existing indebtedness related to the properties for an aggregate total of $35 million. In addition, we paid off the Holstenplatz debt of $8.1approximately $12.5 million on April 30, 2015, its maturity date, and sold the propertyGardens Medical Pavilion, which was scheduled to mature on SeptemberJanuary 1, 2015. We disbursed a total of $43.1 million to pay off the debt on the four properties disposed of in 2015.
Debt Compliance
Our loan agreements stipulate that we comply with certain reporting and financial covenants. These covenants include, among other things, maintaining minimum debt service coverage ratios, loan to value ratios, and liquidity. As of December 31, 2015, we believe we wereWe are currently in compliance with all of our debt covenants.
We did not meet the debt covenants underservice coverage requirements for our 22 Exchange loan agreements.as of March 31, 2017, June 30, 2017, September 30, 2017 and December 31, 2017. As a result, the lender elected to sweep the cash from operations beginning in January 2018. Additionally, the cash from operations was not sufficient to fully pay the scheduled monthly debt service due on January 5, 2018, which constituted an event of default and therefore, the 22 Exchange loan which was scheduled to mature in May 2023 is now due on demand. We received notice on January 9, 2018 that the 22 Exchange loan had been transferred to a special servicer effective immediately. Subsequently, the special servicer placed the property in receivership and commenced foreclosure proceedings and on December 28, 2018, we and the 10.0% noncontrolling memberrelinquished our ownership of22 Exchangethrough a deed-in-lieu of foreclosure transaction with the lender. Upon relinquishment of the property,we wererelieved of approximately $22.6 million of mortgage obligations, including accrued and unpaid interest associated with the mortgageloan and other liabilities.
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Contractual Obligations
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 December 31, 2015. Interest payments on variable rate debt are based on rates2018 (dollars in effectthousands):
| Contractual Obligations | 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | Total | |||||||||||||||||||||
| Mortgage Payable | $ | 831 | $ | 13,924 | $ | 13,235 | $ | 948 | $ | 1,582 | $ | 110,903 | $ | 141,423 | ||||||||||||||
| Interest Payments(1) | 6,351 | 5,759 | 5,416 | 5,053 | 5,004 | 9,178 | 36,761 | |||||||||||||||||||||
| Total Contractual Obligations | $ | 7,182 | $ | 19,683 | $ | 18,651 | $ | 6,001 | $ | 6,586 | $ | 120,081 | $ | 178,184 | ||||||||||||||
1) | These amounts represent future interest payments related to mortgage payable obligations based on the fixed and variable interest rates specified in the associated debt agreement. All variable rate debt agreements are based on the one-month LIBOR rate. For purposes of calculating future interest amounts on variable interest rate debt the one-month LIBOR rate as of December 31, 2018 was used. |
As of December 31, 2015.2018, we had debt of approximately $13.7 million associated with Lakes of Margate maturing in the next twelve months. 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 outstanding balance with available cash and/or proceeds from selective asset sales.
Results of Operations
As of December 31, 2018, we had eight real estate investments, seven of which were consolidated (three wholly owned properties and four properties consolidated through investments in joint ventures) and one real estate investment which we account for under the equity method. We disposed of one property (22 Exchange) on December 28, 2018 and acquired one property (Axis at Westmont) on November 27, 2018. The table doesdisposition of this property did not qualify to be reported as discontinued operations since it did not represent any extension options (in thousands):
Payments Due by Period(1) | ||||||||||||||||||||||||||||
| Description | 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | |||||||||||||||||||||
| Principal payments—fixed rate debt | $ | 1,912 | $ | 2,135 | $ | 46,845 | $ | 24,309 | $ | 13,772 | $ | 17,813 | $ | 106,786 | ||||||||||||||
| Principal payments—variable rate debt | — | 38,000 | — | 33,500 | — | — | 71,500 | |||||||||||||||||||||
| Interest payments—fixed rate debt | 5,052 | 4,940 | 3,308 | 1,579 | 784 | 1,665 | 17,328 | |||||||||||||||||||||
| Interest payments—variable rate debt | 1,190 | 845 | 655 | 602 | — | — | 3,292 | |||||||||||||||||||||
Total(2) | $ | 8,154 | $ | 45,920 | $ | 50,808 | $ | 59,990 | $ | 14,556 | $ | 19,478 | $ | 198,906 | ||||||||||||||
As of December 31, 2017, we had eight real estate investments, seven of which were consolidated (one wholly owned property and six properties consolidated through investments in joint ventures) and one real estate investment which we account for under the equity method. We sold one property (Courtyard Kauai Coconut Beach Hotel) on August 15, 2017 and acquired one property (Flats at Fishers) on November 30, 2017. The disposition of this property did not qualify to be reported as discontinued operations since it did not represent a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the operating results of this property are reflected in the Company’s results from continuing operations for all periods presented through its date of disposition. Additionally, on December 15, 2017 we received proceeds of approximately $21.6 million related to our equity method investment in Prospect Park.
Year ended December 31, 20152018 as compared to the year ended December 31, 2014
Our results of operations for the year ended December 31, 2015, we had nine real estate investments, eight of2018 compared to the same period in 2017 reflect our acquisition and disposition activities during such periods. Properties which were consolidated (one wholly owned and seven properties consolidated through investments in joint ventures). We sold four propertiesby us during 2015.the entire periods presented are referred to as our “Same Store” properties.
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The following table provides summary information about our results of operations for the years ended December 31, 20152018 and 2014 ($2017 (dollars in thousands):
| Year Ended | Change | Change | Change | |||||||||||||||||||||||||
| December 31, | Increase/ | Percentage | due to | due to | due to | |||||||||||||||||||||||
| 2018 | 2017 | (Decrease) | Change | Acquisitions(1) | Dispositions(2) | Same Store(3) | ||||||||||||||||||||||
| Rental revenues | $ | 27,511 | $ | 24,337 | $ | 3,174 | 13.0 | % | $ | 3,952 | $ | (1,122 | ) | $ | 344 | |||||||||||||
| Hotel revenues | - | 13,207 | (13,207 | ) | (2) | - | (13,207 | ) | - | |||||||||||||||||||
| Total revenues | 27,511 | 37,544 | (10,033 | ) | (27.0 | )% | 3,952 | (14,329 | ) | 344 | ||||||||||||||||||
| Property operating expenses | 10,151 | 8,855 | 1,296 | 15.0 | % | 1,311 | (77 | ) | 62 | |||||||||||||||||||
| Hotel operating expenses | - | 9,299 | (9,299 | ) | (2) | - | (9,299 | ) | - | |||||||||||||||||||
| Interest expense, net | 6,119 | 6,129 | (10 | ) | n/m | 166 | (52 | ) | (124 | ) | ||||||||||||||||||
| Real estate taxes | 4,522 | 4,343 | 179 | 4.0 | % | 556 | (389 | ) | 12 | |||||||||||||||||||
| Impairment charge | - | 4,132 | (4,132 | ) | (2) | - | (4,064 | ) | (68 | ) | ||||||||||||||||||
| Property management fees | 1,056 | 1,258 | (202 | ) | (16.0 | )% | 158 | (328 | ) | (32 | ) | |||||||||||||||||
| Asset management fees(4) | 1,610 | 1,782 | (172 | ) | (10.0 | )% | - | (265 | ) | 93 | ||||||||||||||||||
| General and administrative | 3,815 | 4,512 | (697 | ) | (15.0 | )% | (750 | ) | 25 | 28 | ||||||||||||||||||
| Depreciation and amortization | 9,653 | 9,618 | 35 | n/m | 2,089 | (1,341 | ) | (713 | ) | |||||||||||||||||||
| Income from investment in unconsolidated joint venture | - | 17,931 | (17,931 | ) | (100.0 | )% | - | (17,931 | ) | n/a | ||||||||||||||||||
| Gain on extinguishment of debt | 2,778 | - | 2,778 | 100.0 | % | - | 2,778 | - | ||||||||||||||||||||
| Gain on sale of real estate | 537 | 21,605 | (21,068 | ) | (98.0 | )% | - | (21,068 | ) | - | ||||||||||||||||||
| Income tax benefit | - | 1,604 | (1,604 | ) | (100.0 | )% | n/a | n/a | n/a | |||||||||||||||||||
| Year ended December 31, | Increase (Decrease) | Percentage Change | $ Change due to Acquisitions(1) | $ Change due to Dispositions(2) | $ Change due to Same Store(3) | ||||||||||||||||||||||
| Description | 2015 | 2014 | |||||||||||||||||||||||||
| Rental revenue | $ | 32,556 | $ | 32,226 | $ | 330 | 1.0 | % | $ | 4,956 | $ | (4,494 | ) | $ | (132 | ) | |||||||||||
| Hotel revenue | 17,694 | 16,371 | 1,323 | 8.1 | % | — | — | 1,323 | |||||||||||||||||||
| Property operating expenses | 11,503 | 11,288 | 215 | 1.9 | % | 1,087 | (1,111 | ) | 239 | ||||||||||||||||||
| Hotel operating expenses | 12,498 | 11,954 | 544 | 4.6 | % | — | — | 544 | |||||||||||||||||||
| Interest expense, net | 6,791 | 7,833 | (1,042 | ) | (13.3 | )% | 527 | (1,410 | ) | (159 | ) | ||||||||||||||||
| Real estate taxes | 6,127 | 5,388 | 739 | 13.7 | % | 1,138 | (583 | ) | 184 | ||||||||||||||||||
| Impairment charge | 1,417 | — | 1,417 | 100.0 | % | — | — | 1,417 | |||||||||||||||||||
| Property management fees | 1,650 | 1,642 | 8 | 0.5 | % | 135 | (153 | ) | 26 | ||||||||||||||||||
Asset management fees(4) | 2,702 | 2,368 | 334 | 14.1 | % | 332 | (272 | ) | 274 | ||||||||||||||||||
| General and Administrative | 3,620 | 4,076 | (456 | ) | (11.2 | )% | n/a | n/a | n/a | ||||||||||||||||||
| Acquisition expense | — | 1,307 | (1,307 | ) | (100.0 | )% | (1,307 | ) | — | — | |||||||||||||||||
| Depreciation and amortization | 14,950 | 14,362 | 588 | 4.1 | % | 2,448 | (2,072 | ) | 212 | ||||||||||||||||||
| Loss on early extinguishment of debt | 732 | 454 | 278 | 61.2 | % | — | 278 | — | |||||||||||||||||||
| Other loss | 777 | 38 | 739 | 1,944.7 | % | — | 739 | — | |||||||||||||||||||
| Gain on sale of real estate | 22,771 | 11,454 | 11,317 | 98.8 | % | — | 11,317 | — | |||||||||||||||||||
| Income tax benefit (expense) | (2,726 | ) | 101 | (2,827 | ) | n/a | n/a | n/a | n/a | ||||||||||||||||||
| (1) | Represents the |
| (2) | Represents the |
| (3) | Represents the |
| (4) | Asset management fees payable to the |
The following table reflects total rental revenue and hotel revenues and total property and hotel operating expenses for the years ended December 31, 20152018 and 20142017 for our (i) our Same Store operating portfolio;properties, (ii) our acquisition of Lakewood Flatsacquisitions and (iii) dispositions (dollars in 2014; (iii) our dispositions of Babcock on January 8, 2015, AJS on February 21, 2015, Holstenplatz on September 1, 2015, Wimberly on September 9, 2015, and 1875 Lawrence on May 30, 2014 (in thousands):
| Year Ended | ||||||||||||
| December 31, | ||||||||||||
| Description | 2018 | 2017 | Change | |||||||||
| Rental and hotel revenues: | ||||||||||||
| Same Store | $ | 21,259 | $ | 20,915 | $ | 344 | ||||||
| Acquisitions | 4,197 | 245 | 3,952 | |||||||||
| Dispositions | 2,055 | 16,384 | (14,329 | ) | ||||||||
| Total rental and hotel revenues | $ | 27,511 | $ | 37,544 | $ | (10,033 | ) | |||||
| Property and hotel operating expenses: | ||||||||||||
| Same Store | $ | 7,251 | $ | 7,189 | $ | 62 | ||||||
| Acquisitions | 1,355 | 44 | 1,311 | |||||||||
| Dispositions | 1,545 | 10,921 | (9,376 | ) | ||||||||
| Total property operating expenses | $ | 10,151 | $ | 18,154 | $ | (8,003 | ) | |||||
| 26 |
| Year Ended December 31, | ||||||||||||
| Description | 2015 | 2014 | Change | |||||||||
| Rental revenue | ||||||||||||
| Same Store | $ | 22,172 | $ | 22,304 | $ | (132 | ) | |||||
| Acquisition | 6,341 | 1,385 | 4,956 | |||||||||
| Dispositions | 4,043 | 8,537 | (4,494 | ) | ||||||||
| Total rental revenue | $ | 32,556 | $ | 32,226 | $ | 330 | ||||||
| Property operating expenses | ||||||||||||
| Same Store | $ | 8,325 | $ | 8,086 | $ | 239 | ||||||
| Acquisition | 1,408 | 321 | 1,087 | |||||||||
| Dispositions | 1,770 | 2,881 | (1,111 | ) | ||||||||
| Total property operating expenses | $ | 11,503 | $ | 11,288 | $ | 215 | ||||||
The tables below reflect occupancy and effective monthly rental rates for our Same Store operating properties and occupancy and ADR for Courtyard Kauai Coconut Beach Hotel:
| Occupancy | Effective Monthly Rent per Square Foot/Unit/Bed(1) | |||||||||||||||||||
| As of December 31, | Year Ended December 31, | |||||||||||||||||||
| Property | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||
| Gardens Medical Pavilion | 72 | % | 70 | % | $ | 2.20 | $ | 2.20 | per sq. ft. | |||||||||||
| River Club and the Townhomes at River Club | 97 | % | 95 | % | 427.31 | 434.81 | per bed | |||||||||||||
| Lakes of Margate | 93 | % | 88 | % | 1,369.14 | 1,274.88 | per unit | |||||||||||||
| Arbors Harbor Town | 92 | % | 92 | % | 1,273.98 | 1,299.08 | per unit | |||||||||||||
| Parkside | 89 | % | 93 | % | 1,162.39 | 1,116.33 | per unit | |||||||||||||
| Occupancy (%) | Effective Monthly Rent per Square Foot/Unit/Bed ($)(1) | |||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| Property | 2015 | 2014 | 2015 | 2014 | ||||||||||||
| Gardens Medical Pavilion | 62 | % | 60 | % | $ | 2.11 | $ | 1.21 | per sq ft | |||||||
| River Club and the Townhomes at River Club | 96 | % | 97 | % | 383.62 | 362.72 | per bed | |||||||||
| Lakes of Margate | 95 | % | 90 | % | 1,218.84 | 1,127.98 | per unit | |||||||||
| Arbors Harbor Town | 91 | % | 91 | % | 1,144.39 | 1,169.66 | per unit | |||||||||
| 22 Exchange | 94 | % | 83 | % | 584.20 | 524.41 | per bed | |||||||||
| Parkside | 77 | % | 83 | % | 1,149.54 | 1,066.50 | per unit | |||||||||
| (1) | Effective monthly rent is calculated as in-place contracted monthly rental revenue, including any premiums due for short-term or month-to-month leases, less any concessions or discounts. |
Occupancy (%)(1) | ADR ($) | |||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||
| Property | 2015 | 2014 | 2015 | 2014 | ||||||||||
| Courtyard Kauai Coconut Beach Hotel | 82 | % | 82 | % | $ | 140.34 | $ | 133.50 | ||||||
Revenues. Rental revenues for the respectiveyear ended December 31, 2018 were $27.5 million, an increase of $3.2 million, compared to $24.3 million for the same period 2017. Excluding the effect of our acquisition and disposition activities during the periods, presented reflect decreasesour rental revenues increased by $0.3 million for our Same Store properties. This increase was primarily attributable to higher occupancy and rental rates for the Lakes of Margate during 2018.
Hotel revenues for the year ended December 31, 2017 were $13.2 million. Our hotel revenues were attributable solely to the Courtyard Kauai Coconut Beach Hotel which was sold on August 15, 2017.
Property Operating Expenses. Property operating expenses for the year ended December 31, 2018 were $10.2 million, a decrease of $1.3 million, compared to $8.9 million for the same period in some categories2017. Excluding the effect of our acquisition and increasesdisposition activities during the periods, our property operating expenses were relatively flat with an increase of $0.1 million for our Same Store properties.
Hotel Operating Expenses. Hotel operating expenses for the year ended December 31, 2017 were $9.3 million. Our hotel operating expenses were attributable solely to the Courtyard Kauai Coconut Beach Hotel which was sold on August 15, 2017.
Interest Expense, Net. Interest expense, net for both the years ended December 31, 2018 and 2017 was $6.1 million. Excluding the effect of our acquisition and disposition activities during the periods, our interest expense, net decreased by $0.1 million.
Real Estate Taxes. Real estate taxes for the year ended December 31, 2018 were $4.5 million, an increase of $0.2 million, compared to $4.3 million for the same period in others.2017. Excluding the effect of our acquisitions and dispositions activity during the periods, our real estate taxes were unchanged for our Same Store Properties.
Impairment Charge. During the year ended December 31, 2015,2018 we had decreases in rental revenue and property operating expenses of $4.5 million and $1.1 million, respectively, from the impact of the five dispositions in 2014 and 2015. Our rental revenue and property operating expenses increased $5 million and $1.1 million, respectively, due to the acquisition of Lakewood Flats in October 2014. Management expects decreases in most categories in the future as we dispose of additional real estate and real estate-related assets. We aredid not actively seeking to purchase additional assets at this time, but may invest capital in our current assets in order to position them for sale in the normal course of business.
Property Management Fees
. Property management fees, which are based on revenues, were| 27 |
Asset Management Fees. Asset management fees for the years ended December 31, 20152018 and 20142017 were $2.7$1.1 million and $2.4$1.3 million, respectively, and were composed of asset management fees paid to our Advisorexternal advisor and third parties with respect to our investments. Pursuant to the Fourth Advisory Agreement, effective January 1, 2014,We pay our external advisor or its affiliates a monthly asset management fees payable to the Advisor arefee of one-twelfth of 0.7% and based onof the value for each asset as determined in connection with our establishment and publication of an estimated valueNAV per share. Assets acquired after the publication of an estimated value per share were valued at the contract purchase price of the asset plus amounts expended in connection with the development,
General and Administrative Expenses.
General and administrative expenses for the years ended December 31,Depreciation and Amortization.
Depreciation and amortization for the years ended December 31,Income from Investment in Unconsolidated Joint Venture.For the acquisitionyear ended December 31, 2018, we recorded no equity earnings related to our unconsolidated investment in Prospect Park. For the year ended December 31, 2017, we recorded equity earnings of Lakewood Flats in 2014 and $0.2$17.9 million related to our Same Store operations. These increases were partially offset byunconsolidated investment in Prospect Park. See Note 7 of the Notes to Consolidated Financial Statements for additional information.
Gain on Extinguishment of Debt. On December 28, 2018, we and the 10.0% noncontrolling member relinquished our ownership of 22 Exchange through a year-over-year decreasedeed-in-lieu of $2.1foreclosure transaction with the lender. Upon extinguishment of the mortgage debt obligation, we recognized a $2.8 million duegain on extinguishment of debt representing the difference between the carrying value of the mortgage debt, accrued interest payable and other obligations extinguished (an aggregate of approximately $22.6 million) over the carrying value of the property and other assets transferred (an aggregate of approximately $19.8 million) less an additional $0.1 million of expenses incurred in connection with the disposition.
Gain on Sale of Real Estate.During 2018 we recognized an aggregate gain of $0.5 million related to the 2014 and 2015 dispositions.
Income Tax Benefit. During the year ended December 31, 2014 primarily due to a partial recovery of estimated alternative minimum2018, we recorded no income tax expense of $0.2 million recorded in 2013.
| Year ended December 31, | Increase (Decrease) | Percentage Change | $ Change due to Acquisitions(1) | $ Change due to Dispositions(2) | $ Change due to Same Store(3) | $ Change due to Held for Sale(4) | |||||||||||||||||||||||||
| Description | 2014 | 2013 | |||||||||||||||||||||||||||||
| Rental revenue | $ | 32,226 | $ | 28,517 | $ | 3,709 | 13.0 | % | $ | 4,918 | $ | (1,808 | ) | $ | 601 | $ | (2 | ) | |||||||||||||
| Hotel revenue | 16,371 | 14,872 | 1,499 | 10.1 | % | — | — | 1,499 | — | ||||||||||||||||||||||
| Property operating expenses | 11,288 | 9,792 | 1,496 | 15.3 | % | 1,813 | (712 | ) | 408 | (13 | ) | ||||||||||||||||||||
| Hotel operating expenses | 11,954 | 11,363 | 591 | 5.2 | % | — | — | 591 | — | ||||||||||||||||||||||
| Interest expense, net | 7,833 | 7,844 | (11 | ) | (0.1 | )% | 693 | (613 | ) | (82 | ) | (9 | ) | ||||||||||||||||||
| Real estate taxes | 5,388 | 4,716 | 672 | 14.2 | % | 995 | (456 | ) | 86 | 47 | |||||||||||||||||||||
| Property management fees | 1,642 | 1,521 | 121 | 8.0 | % | 183 | (74 | ) | 15 | (3 | ) | ||||||||||||||||||||
Asset management fees(5) | 2,368 | 3,478 | (1,110 | ) | (31.9 | )% | 108 | (630 | ) | (540 | ) | (48 | ) | ||||||||||||||||||
| General and Administrative | 4,076 | 4,243 | (167 | ) | (3.9 | )% | n/a | n/a | n/a | n/a | |||||||||||||||||||||
| Acquisition expense | 1,307 | 3,998 | (2,691 | ) | (67.3 | )% | (2,691 | ) | — | — | — | ||||||||||||||||||||
| Depreciation and amortization | 14,362 | 13,978 | 384 | 2.7 | % | 1,166 | (960 | ) | 172 | 6 | |||||||||||||||||||||
| Gain on sale of real estate | 11,454 | — | 11,454 | 100.0 | % | — | 11,454 | — | — | ||||||||||||||||||||||
| Income tax benefit (expense) | 101 | (183 | ) | 284 | n/a | n/a | n/a | n/a | n/a | ||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||
| Description | 2014 | 2013 | Change | |||||||||
| Rental revenue | ||||||||||||
| Same Store | $ | 17,674 | $ | 17,073 | $ | 601 | ||||||
| Acquisitions | 11,632 | 6,714 | 4,918 | |||||||||
| Dispositions | 1,043 | 2,851 | (1,808 | ) | ||||||||
| Real Estate Held for Sale | 1,877 | 1,879 | (2 | ) | ||||||||
| Total rental revenue | $ | 32,226 | $ | 28,517 | $ | 3,709 | ||||||
| Property operating expenses | ||||||||||||
| Same Store | $ | 6,185 | $ | 5,777 | $ | 408 | ||||||
| Acquisitions | 3,962 | 2,149 | 1,813 | |||||||||
| Dispositions | 648 | 1,360 | (712 | ) | ||||||||
| Real Estate Held for Sale | 493 | 506 | (13 | ) | ||||||||
| Total property operating expenses | $ | 11,288 | $ | 9,792 | $ | 1,496 | ||||||
| Occupancy (%) | Effective Monthly Rent per Square Foot/Unit/Bed ($)(2) | |||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
Property(1) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Holstenplatz(3) | 100 | % | 100 | % | $ | 1.18 | $ | 1.39 | per sq ft | |||||||
| Gardens Medical Pavilion | 60 | % | 80 | % | 1.21 | 2.47 | per sq ft | |||||||||
| River Club and the Townhomes at River Club | 97 | % | 76 | % | 362.72 | 416.80 | per bed | |||||||||
| Lakes of Margate | 90 | % | 93 | % | 1,127.98 | 1,112.98 | per unit | |||||||||
| Arbors Harbor Town | 91 | % | 94 | % | 1,169.66 | 1,139.49 | per unit | |||||||||
Occupancy (%)(1) | ADR ($) | |||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||
| Property | 2014 | 2013 | 2014 | 2013 | ||||||||||
| Courtyard Kauai Coconut Beach Hotel | 82 | % | 80 | % | $ | 133.50 | $ | 124.35 | ||||||
Summary of $0.3 million, $0.2 million, and $0.2 million at LakesCash Flows
Operating activities
Net cash flows provided by operating activities of Margate, Arbors Harbor Town, and River Club and the Townhomes at River Club, respectively; and
| · | net cash inflows of approximately $0.1 million from our net income after adjustment for non-cash items; and | |
| · | net cash inflows of approximately $0.2 million associated with the net changes in our operating assets and liabilities. |
Investing activities
The net cash provided by operatingused in investing activities was $5.1 million compared to net cash provided of $1.5$38.8 million for the year ended December 31, 2014. The favorable increase2018 consists primarily of $3.6 million is primarily due to $1.3 million in acquisition expense incurred in 2014 for the acquisition of Lakewood Flats and an increase in working capital items. We acquired one asset in 2014 compared to none in 2015.following:
| · | net purchases of marketable securities, available for sale of $14.6 million; | |
| · | acquisition of noncontrolling interests of $1.9 million; | |
| · | the purchase of the Axis at Westmont for $22.8 million; and | |
| · | capital expenditures of $3.3 million. |
| 28 |
Financing activities
The net cash provided by investing activities was $73.9 million compared to net cash used of $23 million during the year ended December 31, 2014. In 2015, we received aggregate sales proceeds of $79.1 million from the sales of Babcock, AJS, Holstenplatz, and Wimberly. During 2014, we purchased Lakewood Flats for $60.4 million and sold 1875 Lawrence for $46.3 million.
| · | net proceeds from notes payable of $32.5 million; | |
| · | payment of loan fees and expenses of $2.5 million; | |
| · | aggregate distributions to our noncontrolling interests of $3.8 million; and | |
| · | redemptions and cancellation of common stock of $8.6 million. |
Funds from Operations and Modified Funds from Operations
The favorable increasehistorical accounting convention used for real estate assets requires straight-line depreciation of $2.6 million is primarilybuildings, improvements, and straight-line amortization of intangibles, which implies that the resultvalue of a reduction in acquisition expenses.real estate asset diminishes predictably over time. We acquired one asset in 2014 comparedbelieve that, because real estate values historically rise and fall with market conditions, including, but not limited to, three acquisitions in 2013.
Because of $83.5 million.
We define FFO, a non-GAAP measure, consistent with the standards set forth in the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding extraordinary items, as defined by GAAP, and gains (or losses)or losses from sales of property and impairments of depreciable real estate (includingrelated impairments, of investments in unconsolidated joint ventures and partnerships which resulted from measurable decreases in the fair value of the depreciableplus real estate held by the joint venture or partnership), plusrelated depreciation and amortization, on real estate assets, and after adjustments for unconsolidated partnerships and 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).
We believe that the use of FFO together with the required GAAP presentations, provides a more complete understanding of our performance.
Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT's definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.
Because of these factors, the Investment Program Association (the "IPA"), an industry trade group, published a standardized measure of performance known as modified funds from operations ("MFFO"), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP.
| 29 |
We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline") issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction-related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses (which includes costs incurred in connection with strategic alternatives), amounts relating to deferred rent receivables and amortization of market lease and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.
We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.
Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss), or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, nor as an indicationor indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in connectionconjunction with other GAAP measurements. Additionally,measurements as an indication of our performance. FFO and MFFO should not be construed to be more relevant or accurate than the exclusioncurrent GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The methods utilized to evaluate the performance of impairments limitsa publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the usefulnessnon-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.
Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guidelines or the SEC or another regulatory body could standardize the allowable adjustments across the publicly registered, non-listed REIT industry, and we would have to adjust our calculation and characterization of FFO as a historical operating performance measure since an impairment charge indicates that operating performance has been permanently affected.or MFFO accordingly.
| 30 |
Our calculations of 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.
| For the Year Ended December 31, | ||||||||
| Description | 2018 | 2017 | ||||||
| Net (loss) income | $ | (5,368 | ) | $ | 29,043 | |||
| FFO adjustments: | ||||||||
| Depreciation and amortization: | ||||||||
| Depreciation and amortization of real estate assets | 9,653 | 9,618 | ||||||
| Impairment charge(1) | - | 4,132 | ||||||
| Adjustments to equity in earnings from unconsolidated entity(2) | - | (17,931 | ) | |||||
| Loss on sale of real estate(3) | (537 | ) | (21,605 | ) | ||||
| Income tax expense (benefit) associated with real estate sale(4) | 4 | (1,604 | ) | |||||
| FFO | 3,752 | 1,653 | ||||||
| MFFO adjustments: | ||||||||
| Other adjustments: | ||||||||
| Acquisition and other transaction related costs expensed(5) | 17 | 792 | ||||||
| Amortization of above or below market leases and liabilities(6) | (12 | ) | 3 | |||||
| Gain on debt extinguishment(7) | (2,778 | ) | ||||||
| Loss on sale of marketable securities | 7 | - | ||||||
| Accretion of discounts and amortization of premiums on debt investments(8) | (70 | ) | (168 | ) | ||||
| MFFO before straight-line rent | 916 | 2,280 | ||||||
| Straight-line rent(9) | (41 | ) | (10 | ) | ||||
| MFFO - IPA recommended format | $ | 875 | $ | 2,270 | ||||
| Net (loss) income | $ | (5,368 | ) | $ | 29,043 | |||
| Less: loss (income) loss attributable to noncontrolling interests | 181 | (4,485 | ) | |||||
| Net (loss) income applicable to company's common shares | $ | (5,187 | ) | $ | 24,558 | |||
| Net (loss) income per common share, basic and diluted | $ | (0.21 | ) | $ | 0.98 | |||
| FFO | $ | 3,752 | $ | 1,653 | ||||
| Less: FFO attributable to noncontrolling interests | (734 | ) | (566 | ) | ||||
| FFO attributable to company's common shares | $ | 3,018 | $ | 1,087 | ||||
| FFO per common share, basic and diluted | $ | 0.12 | $ | 0.04 | ||||
| MFFO - IPA recommended format | $ | 875 | $ | 2,270 | ||||
| Less: MFFO attributable to noncontrolling interests | (423 | ) | (961 | ) | ||||
| MFFO attributable to company's common shares | $ | 452 | $ | 1,309 | ||||
| Weighted average number of common shares outstanding, basic and diluted | 24,177 | 24,950 | ||||||
| 2015 | 2014 | 2013 | ||||||||||||||||||||||
| Description | Amount | Per Share | Amount | Per Share | Amount | Per Share | ||||||||||||||||||
| Net income (loss) attributable to the Company | $ | 6,978 | $ | 0.27 | $ | (3 | ) | $ | — | $ | 8,729 | $ | 0.34 | |||||||||||
| Adjustments for: | ||||||||||||||||||||||||
Real estate depreciation and amortization(1) | 13,556 | 0.53 | 13,056 | 0.50 | 15,150 | 0.58 | ||||||||||||||||||
Gain on sale of real estate(2) | (21,579 | ) | (0.84 | ) | (11,454 | ) | (0.44 | ) | (26,004 | ) | (1.00 | ) | ||||||||||||
Impairment expense(3) | 1,263 | 0.05 | — | — | — | — | ||||||||||||||||||
Income tax expense associated with real estate sale(4) | 2,662 | 0.10 | — | — | — | — | ||||||||||||||||||
| NAREIT Defined Funds from Operations (FFO) attributable to common stockholders | $ | 2,880 | $ | 0.11 | $ | 1,599 | $ | 0.06 | $ | (2,125 | ) | $ | (0.08 | ) | ||||||||||
| GAAP weighted average shares: | ||||||||||||||||||||||||
| Basic and diluted | 25,688 | 25,943 | 26,035 | |||||||||||||||||||||
| (1) |
| (2) | For the year ended December 31, |
| (3) | The gain on sale of real estate |
| (4) | We had less than $0.1 million income tax expense in 2018.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 of $0.8 million related to the 2015 sale of two foreign investments. |
| (5) | We had less than $0.1 million acquisition expense in 2018.We recognized acquisition expenses of $0.8 million during the year ended December 31, 2017 principally related to our acquisition of the Flats at Fishers. |
| (6) | Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate. |
| (7) | During the year ended December 31, |
| 31 |
| (8) | During each of the years ended December 31, 2018 and 2017, we amortized $0.1 million and $0.2 |
Distributions
U.S. federal tax law requires a REIT distribute at least 90% of its annual REIT taxable income (which does not equal net income, (loss) above, whichas calculated in accordance with generally accepted accounting principles, or GAAP) determined without regard to the deduction for dividends paid and excluding any net capital gain. In order to continue to qualify for REIT status, we may be helpfulrequired to make distributions in assessing our operating results.
We expect thatdid not make any future distributions authorized by our board of directors will be periodic, special distributions as opposed to regular monthly or quarterly distributions.
| Description | 2015 | 2014 | ||||
| Ordinary income | — | — | ||||
| Capital gains | 25.8 | % | 58.4 | % | ||
| Return of capital | 74.2 | % | 41.6 | % | ||
| Total | 100.0 | % | 100.0 | % | ||
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.
| 32 |
Critical Accounting Policies and Estimates
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. These estimates include such items as purchase price allocation for real estate acquisitions, impairment of long-lived assets, depreciation and amortization, and allowance for doubtful accounts. Actual results could differ from those estimates.
Below is a discussion of the accounting policies that we consider to be critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.
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. InterestsIn addition, interests in entities acquired will beare evaluated based on applicable GAAP, which includes the requirement to consolidate entitiesand deemed to be variable interest entities (“VIE”) in which we are the primary beneficiary.beneficiary are also consolidated. If the interest in the entity is determined not to be a VIE, then the entity will beis 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 financial statements.
Accounting for Acquisitions of Investment Property
The cost of the real estate assets acquired in an asset acquisition is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based in each case on their relative fair values. Fees incurred related to asset acquisitions are capitalized as part of the cost of the investment.
Upon the acquisition of real estate properties that qualify as a business, we recognize the assets acquired, the liabilities assumed, and any noncontrolling interest as of the acquisition date, measured at their fair values. The acquisition date is the date on which we obtain control of the real estate property. The assets acquired and liabilities assumed may consist of land, inclusive of associated rights, buildings, assumed debt, identified intangible assets and liabilities, and asset retirement obligations. Identified intangible assets generally consist of above-market leases, in-place leases, in-place tenant improvements, in-place leasing commissions, and tenant relationships. Identified intangible liabilities generally consist of below-market leases. Goodwill is recognized as of the acquisition date and measured as the aggregate fair value of consideration transferred and any noncontrolling interests in the acquiree over the fair value of the identifiable net assets acquired. Likewise, a bargain purchase gain is recognized in current earnings when the aggregate fair value of consideration transferred and any noncontrolling interests in the acquiree is less than the fair value of the identifiable net assets acquired. Acquisition-related costs are expensed in the period incurred. Initial valuations are subject to change until our information is finalized, which is no later than twelve months from the acquisition date.
The fair value of the tangible assets acquired, consisting of land and buildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings. Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods believed to be used by market participants. The value of hotels and all other buildings is depreciated over the estimated useful lives of 39 years and 25 years, respectively, using the straight-line method.
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We determine the fair value of assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that management believes we could obtain at the date of the debt assumption. Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan using the effective interest method.
Investment in Unconsolidated Joint Venture
We have and may continue to 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 arrangementsuch arrangements to determine if it hasthey have 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 isArrangements are reassessed at each reporting period.
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 offersoffers; and changes in the global and local markets or economic conditions. Our assets may at times be concentrated in limited geographic locations and, toTo 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, as well as a panel of asset managers and financial analysts of the Advisor, reviewOur management reviews 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.
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New Accounting Pronouncements
See Note 3 of the current local market. There were no impairment charges recorded during the years ended December 31, 2014Notes to Consolidated Financial Statements for further information of certain accounting standards that have not yet been required to implement and 2013.
| Item 8. | Financial Statements and Supplementary Data. |
The information required by this Item 8 is included in our Consolidated Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. |
None.
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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 December 31, 2015,2018, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective, as of December 31, 2015,2018, 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.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Our management, including our principal executive officer and principal financial officer, evaluated, as of December 31, 2015,2018, the effectiveness of our internal control over financial reporting using the criteria established in
Changes in Internal Control over Financial Reporting
There has been no change in internal control over financial reporting that occurred during the quarter ended December 31, 20152018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| Item9B. | Other Information. |
None.
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Item 9B. Other Information.None.67
| Item 10. | Directors, Executive Officers and Corporate Governance. |
Directors Executive Officers and Corporate Governance.
Because our directors take a critical role in guiding our strategic direction and overseeing our management, they must demonstrate broad-based business and professional skills and experiences, concern for the long-term interests of our stockholders, and personal integrity and judgment. In addition, our directors must have time available to devote to board activities and to enhance their knowledge of our industry. As described further below, we believe our directors have the appropriate mix of experiences, qualifications, attributes, and skills required of our board members in the context of the current needs of our company.
Andreas K. Bremer
,Our board of directors has concluded that Mr. Bremer is qualified to serve as one of our directors for reasons including his more than 25 years of financial and general management experience, including international corporate finance and commercial lending. Mr. Bremer has served in various financial management positions and has significant experience in acquisition, disposition, management, and administration of commercial real estate investments. In addition, Mr. Bremer’s international background brings a unique perspective to our board.
Diane S. Detering-Paddison
,Our board of directors has concluded that Ms. Detering-Paddison is qualified to serve as one of our directors for reasons including her more than 2030 years of management experience with large commercial real estate companies, including Trammell Crow Company, CB Richard Ellis, ProLogis, and Cassidy Turley. With her background, Ms. Detering-Paddison brings substantial insight and experience with respect to the commercial real estate industry.
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Jeffrey F. Joseph, 77, has served as one of our independent directors since September 2017. Mr. Joseph served as President, Chief Executive Officer and director of Presidential Realty Corporation, a publicly held company focused on the development and ownership of multifamily residential properties, from 1991 until his retirement in 2011. From 1979 to 1991, Mr. Joseph served as a principal of Ivy Properties Ltd. and as General Counsel of Presidential Realty Corporation from 1973 to 1979. Mr. Joseph is Chairman of the Board of Takoda Service Dogs Inc., a charitable organization that provides service dogs to Veterans suffering from PTSD. Mr. Joseph began his career 1967 as an associate with Hughes Hubbard Blair & Reed. Mr. Joseph holds a Bachelor of Arts degree from Cornell University with a major in Economics and a Juris Doctorate degree from Cornell Law School, where he graduated Summa Cum Laude.
Our board of directors has concluded that Mr. Joseph is qualified to serve as one of our directors for reasons including his more than 40 years of real estate industry experience.
David Lichtenstein, 57, has served as one of our directors and Chairman of the Board of Directors since September 2017. Mr. Lichtenstein is Chairman and Chief Executive Officer of our Advisor. Mr. Lichtenstein founded both American Shelter Corporation and Lightstone. From 1988 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone, directing all aspects of the acquisition, financing and management of a diverse portfolio of multifamily, lodging, retail and industrial properties located in 20 states and Puerto Rico. From June 2004 to the present, Mr. Lichtenstein has served as the Chairman of the Board of Directors and Chief Executive Officer of Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”) and Chief Executive Officer of Lightstone Value Plus REIT LLC, its advisor. From April 2008 to the present, Mr. Lichtenstein has served as the Chairman of the Board of Directors and Chief Executive Offer of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”) and Lightstone Value Plus REIT II LLC, its advisor. From September 2014 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone Value Plus Real Estate Investment Trust III, Inc. (“Lightstone III”), and as Chief Executive Officer of Lightstone Value Plus REIT III LLC, its advisor. From September 2014 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone Real Estate Income Trust Inc., (“Lightstone IV”), and as Chief Executive Officer of Lightstone Real Estate Income LLC, its advisor. From October 2014 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone Enterprises Limited (“Lightstone Enterprises”). Mr. Lichtenstein was the president and/or director of certain subsidiaries of Extended Stay Hotels, Inc. (“Extended Stay”) that filed for Chapter 11 protection with Extended Stay. Extended Stay and its subsidiaries filed for bankruptcy protection on June 15, 2009 so they could reorganize their debts in the face of looming amortization payments. Extended Stay emerged from bankruptcy on October 8, 2010. Mr. Lichtenstein is no longer affiliated with Extended Stay. From July 2015 to the present, Mr. Lichtenstein has served as a member of the Board of Directors of the New York City Economic Development Corporation, New York City’s primary economic development vehicle. Mr. Lichtenstein is on the Board of Governors of the Real Estate Board of New York, a Trustee of the Citizens Budget Commission, and is a Member of The Economic Club of New York and the Real Estate Roundtable, and Co-Chair of the Real Estate Capital Policy Advisory Committee. He is also a member of the Brookings Institution’s Economic Studies Council and a trustee of The Touro College and University System and sits on the Board Supervisory Committee for The New York Medical College. Mr. Lichtenstein is a founder of the Friendship House, an organization that provides housing for families of sick children and adults in the Greater New York City area. Mr. Lichtenstein is also a member of the International Council of Shopping Centers and the National Association of Real Estate Investment Trusts, Inc., or NAREIT, an industry trade group, as well as a member of the Board of Directors of Touro College and New York Medical College.
Our board of directors has concluded that Mr. Lichtenstein is qualified to serve as one of our directors for reasons including his more than 25 years of financial and general management experience, including significant experience in acquisition, disposition, management, and administration of commercial real estate investments.
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Jeffrey P. Mayer, 59,62, has served as one of our independent directors since November 2007 and is chairman of our audit committee. Mr. Mayer is currentlypreviously served as a consultant serving the real estate industry. He alsoindustry and is the owner of Mayer Financial Consulting, LLC and is the firm’s sole employee. This firm was started in 2011 to provide consulting services to individuals and businesses primarily dealing with financial investments and real estate. From 2000 until 2007, Mr. Mayer was the Chief Financial Officer of ClubCorp, Inc., a holding company that owns and operates premier golf and business clubs and destination golf resorts. He previously served as Chief Financial Officer of Bristol Hotels & Resorts in Dallas, a position he held from 1996 until the company’s acquisition by Bass PLC in early 2000. Prior to joining Bristol, he was Corporate Controller at Host Marriott Corporation (formerly Marriott Corporation) and, prior to that, held various senior financial positions at Marriott Corporation. Mr. Mayer is a member of the National Association of Corporate Directors. He also serves as treasurer and board member of the Georgia Chapter of The American Foundation for Suicide Prevention. In addition, he serves or has previously served as the Audit Committee chairman for three other organizations including both profit and not-for-profit entities. He was a board member of the Dallas Children’s Advocacy Center and chairman of its audit committee. A graduate of the College of William & Mary, he began his career as an accountant with Arthur Andersen LLP.
Our board of directors has concluded that Mr. Mayer is qualified to serve as one of our directors and as Chairman of our Audit Committee for reasons including his more than 30 years of accounting and finance experience in the commercial real estate industry. In particular, Mr. Mayer has served as Chief Financial Officer for two commercial real estate companies and has significant management experience relating to preparing and reviewing financial statements and coordinating with external auditors. Mr. Mayer continues to provide consulting services to the commercial real estate industry and is in tune with current industry trends and issues.
Cynthia Pharr Lee
,Our board of directors has concluded that Ms. Lee is qualified to serve as one of our directors for reasons including her more than 20 years of management experience in the public relations and marketing communications industry, with significant experience working with commercial real estate and construction firms. Ms. Lee has also served on the board of directors and audit committee of a New York Stock Exchange listed company, which allows her to provide valuable knowledge and insight into management issues. In addition, Ms. Lee’s background complements that of our other board members and brings a unique perspective to our board.
Steven Spinola, 70, has served as one of our independent directors since September 2017. Mr. Spinola served as President of the Real Estate Board of New York (“REBNY”) from 1986 and since July 2015 as its President Emeritus. Mr. Spinola is a recipient of the Harry B. Helmsley Distinguished New Yorker Award for a lifetime of achievement in the profession. Before becoming REBNY’s President, Mr. Spinola served as President of the New York City Public Development Corporation (now known as the New York City Economic Development Corporation) from 1983 to 1986. Mr. Spinola currently serves as an independent director on the Board of Directors of Lightstone IV. Mr. Spinola holds a Bachelor of Arts degree from the City College of New York with a concentration in political science and government. He attended the Harvard Business School/Kennedy School of Government Summer Program for Senior Managers in Government.
Our board of directors has concluded that Mr. Spinola is qualified to serve as one of our directors for reasons including his extensive experience in the real estate industry.
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Executive Officers
In addition, the following individuals serve as our executive officers:
Mitchell Hochberg, 66, was appointed our Chief Executive Officer on September 28, 2017. Mr. Hochberg also serves as President and Chief Operating Officer of Lightstone I, Lightstone II, Lightstone III and Lightstone IV and their respective advisors. From October 2014 to the present, Mr. Hochberg has served as the Company’s President since April 2015.of Lightstone Enterprises. Mr. Kennedy also serves as PresidentHochberg was appointed Chief Executive Officer of Behringer Harvard Opportunity REIT I, Inc. (“BH OPP I”) effective as of September 28, 2017. Prior to joining the Company,The Lightstone Group in August 2012, Mr. KennedyHochberg served as Chief Financial Officerprincipal of Madden Real Estate Ventures from 2007 to August 2012 when it combined with our sponsor. Mr. Hochberg held the position of President and Chief Operating Officer of UrbanAmerica Advisors, LLC,Ian Schrager Company, a registered investment advisor that focuses on renewingdeveloper and redeveloping neglected metropolitan districts acrossmanager of innovative luxury hotels and residential projects in the United States (“UAA”) since March 2008. From Marchfrom early 2006 through March 2008,to early 2007 and prior to that Mr. KennedyHochberg founded Spectrum Communities, a developer of luxury neighborhoods in the northeast of the United States, in 1985 where for 20 years he served as a Managerits President and Chief Executive Officer. Additionally, Mr. Hochberg serves on the board of an investment fund managed by TriLyn Investment Management, LLC, a privately held investment management firm. From January 2004 through February 2006,directors of Orient-Express Hotels Ltd and as Chairman of the board of directors of Orleans Homebuilders, Inc. Mr. Kennedy servedHochberg received his law degree as a Managing DirectorHarlan Fiske Stone Scholar from Columbia University School of The Greenwich Group International, LLC, a real estate investment banking company. Mr. Kennedy began his career in 1982 at Equitable Real Estate Management, Inc. (a predecessorLaw and graduated magna cum laude from New York University College of Lend Lease Real Estate Advisors—US) as an accountantBusiness and rose to become Principal Managing Director and a member the management committee of Lend Lease Real Estate Advisors—US, a position he held through February 2003. Mr. Kennedy holdsPublic Administration with a Bachelor of Science degree in Accounting from Manhattan College.
Seth Molod, 55,was electedappointed our Chief Financial Officer in October 2014.and Treasurer August 27, 2018. Mr. HallMolod also serves as SeniorChief Financial Officer and Treasurer of Lightstone I, Lightstone II, Lightstone III and Lightstone IV. Mr. Molod also serves as the Executive Vice President and Chief Accounting Officer of the Company, positions he has held since September 2013 and as Treasurer, a position he has held since January 2012. From 2010 to 2012, Mr. Hall also served as the Company’s Senior Controller and Director of Financial Reporting. He also serves in similar positions for other Behringer Harvard-sponsored programs and as Treasurer and Principal Financial Officer of Vertical Capital Income Fund (VCAPX), a closed-end interval mutual fund. He began his tenure withour Sponsor and as the Company in January 2005 as an SEC Reporting Manager.Chief Financial Officer of our Advisor and the advisors of Lightstone I, Lightstone II, Lightstone III and Lightstone IV. Prior to joining Behringer, from 2000 to 2004,the Lightstone Group in August of 2018, Mr. HallMolod served in various accounting positions including two years as Corporate Controller for Aegis Communications Group, Inc. At that time, Aegis Communications was publicly tradedan Audit Partner, Chair of Real Estate Services and on the NASDAQ exchangeExecutive Committee of Berdon LLP, a full service accounting, tax, financial and wasmanagement advisory firm (“Berdon”). Mr. Molod joined Berdon in 1989. He has extensive experience advising some of the seventh-largest providernation’s most prominent real estate owners, developers, managers, and investors in both commercial and residential projects. Mr. Molod has worked with many privately held real estate companies as well as institutional investors, REITs, and other public companies. Mr. Molod is a licensed certified public accountant in New Jersey and New York and a member of outsourced customer care services in the United States. From 1991 to 2000,American Institute of Certified Public Accountants. Mr. Hall was Corporate Controller of a private distribution company for five years and also spent three years in public accounting. Mr. HallMolod holds a Bachelor of Business Administration degree in Finance from Angelo State University and a Master of Business Administration degree in Accounting from Tarleton State University. Mr. Hall is a Certified Public Accountant in the State of Texas.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires each director, officer, and individual beneficially owning more than 10% of a registered security of the Company to file with the SEC, within specified time frames, initial statements of beneficial ownership (Form 3) and statements of changes in beneficial ownership (Forms 4 and 5) of common stock of the Company. These specified time frames require the reporting of changes in ownership within two business days of the transaction giving rise to the reporting obligation. Reporting persons are required to furnish us with copies of all
Code of Ethics
Our board of directors has adopted a Code of Business Conduct Policy that is applicable to all members of our board of directors, our executive officers and employees of our Advisor and its affiliates. We have posted the policy on the website maintained for us at
Audit Committee Financial Expert
The Audit Committee consists of independent directors Jeffrey P. Mayer, the chairman, Andreas K. Bremer, Diane S. Detering-Paddison, Jeffrey F. Joseph, Steven Spinola and Cynthia Pharr Lee. Our board of directors has determined that Mr. Mayer is an “audit committee financial expert,” as defined by the rules of the SEC. The biography of Mr. Mayer, including his relevant qualifications, is previously described in this Item 10.
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We do not directly compensate our named executive officers, nor do we reimburse our Advisorexternal advisor for compensation paid to our named executive officers, for services rendered to us. Pursuant to the Fourth Amended and Restated Advisory Management Agreement, weWe pay certain management fees to our Advisor and its affiliatesexternal advisor to compensate the Advisorexternal advisor for the services it provides in our day-to-day management. In addition, we reimburse certain expenses of the Advisor and its affiliates,external advisor, including reimbursement for the costs of salaries and benefits of certain of their employees.
Reimbursement for the costs of salaries and benefits of our Advisor’sexternal advisor’s employees relate to compensation paid to our Advisor’sexternal advisor’s employees that provide services to us such as accounting, administrative or legal, for which our Advisorexternal advisor or its affiliates are not entitled to compensation in the form of a separate fee. A description of the fees that we pay to our Advisorexternal advisor and other affiliates is found in Item 13 below. Therefore, we do not have, nor has our board of directors or compensation committee considered, a compensation policy or program for our executive officers, and thus we have not included a Compensation Discussion and Analysis in this Annual Report on Form 10-K.
Directors’ Compensation
Beginning July 1, 2017, we pay each of our directors who are not an employee of the Company, the Advisor or their affiliatesIndependent Directors as defined in our charter an annual retainer of $25,000.$60,000. In addition, we pay the chairperson of the Audit Committeeaudit committee and our lead independent director an annual retainer of $10,000 and the chairpersons of our Nominatingnominating and Compensation Committeescompensation committees annual retainers of $5,000 each. These retainers are payable quarterly in arrears. In addition, we pay each non-employee directorof our directors who are Independent Directors as defined in our charter (a) $1,500 for each board of directors or permanent committee meeting attended in person or by telephone, (c) $1,000 for each special committee meeting attended by phone or in person, and (c) $500 for each written consent considered by the director.
Before July 1, 2017, we paid each of our directors who are Independent Directors as defined in our charter an annual retainer of $25,000. In addition, we paid the chairperson of the audit committee an annual retainer of $10,000 and the chairpersons of our nominating and compensation committees annual retainers of $5,000 each. These retainers were payable quarterly in arrears. In addition, we paid each of our directors who are Independent Directors as defined in our charter and under the rules and regulations of the Securities and Exchange Commission (a) $1,000 for each board of directors or permanent committee meeting attended in person, (b) $500 for each board of directors or permanent committee meeting attended by telephone, (c) $1,000 for each special committee meeting attended by phone or in person, and (c) $500 for each written consent considered by the director.
All directors receive reimbursement of reasonable out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors. If a director is also an employee of us, or an employee of the Advisor or its affiliates,affiliate director, we do not pay compensation for services rendered as a director.
Director Compensation Table
The following table sets forth certain information with respect to our director compensation during the fiscal year ended December 31, 2015:
| Name | Fees Earned(1) | |||
| David Lichtenstein | $ | - | ||
| Andreas K. Bremer | $ | 110,000 | ||
| Diane S. Detering-Paddison | $ | 86,250 | ||
| Jeffrey F. Joseph | $ | 86,250 | ||
| Steven Spinola | $ | 86,250 | ||
| Jeffrey P. Mayer | $ | 96,250 | ||
| Cynthia Pharr Lee | $ | 91,250 | ||
| Name | Fees Earned(1) | |||
| Robert S. Aisner | — | |||
| Michael D. Cohen | — | |||
| Andreas K. Bremer | $ | 49,000 | ||
| Diane S. Detering-Paddison | $ | 40,500 | ||
| Jeffrey P. Mayer | $ | 49,000 | ||
| Cynthia Pharr Lee | $ | 43,500 | ||
Michael J. O’Hanlon(2) | — | |||
| (1) | Includes fees earned for services rendered in |
Incentive Award Plan
Our 2007 Amended and Restated Incentive Award Plan (the “Incentive Award Plan”) was approved by the board of directors and stockholders on December 19, 2007. The Incentive Award Plan iswas administered by our Compensation Committee and providesprovided for equity awards to our employees, directors and consultants and those of our Advisor and its affiliates. The Incentive Award Plan authorizes the grant of non-qualified and incentive stock options, restricted stock awards, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards. A total of 10,000,000 shares have been authorized and reserved for issuance under our Incentive Award Plan. No awards have beenwere issued under the Incentive Award Plan, and effective December 19, 2017 we currently havemay no plans tolonger issue any awards under the Incentive Award Plan.
Compensation Committee Interlocks and Insider Participation
No member of our compensation committee served as an officer or employee of the Company or any of our subsidiaries during the fiscal year ended December 31, 20152018 or formerly served as an officer of the Company or any of our subsidiaries. In addition, during the fiscal year ended December 31, 2015,2018, none of our executive officers served as a director or member of a compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of any entity that has one or more executive officers or directors serving as a member of our board of directors or compensation committee.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Equity Compensation Plan Information
Effective December 19, 2017, we may no longer issue any awards under the Incentive Award Plan.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth information as of February 29, 2016March 15, 2019 regarding the beneficial ownership of our common stock by each person known by us to own 5% or more of the outstanding shares of common stock, each of our directors, each of our executive officers, and our directors and executive officers as a group:
| Name of Beneficial Owner(2) | Amount and Nature of Beneficial Ownership(1) | Percentage of Class | ||||||
| — | ||||||||
| — | ||||||||
| — | ||||||||
| — | ||||||||
| — | ||||||||
| — | ||||||||
| Jeffrey P. Mayer | — | — | ||||||
| Cynthia Pharr Lee | — | — | ||||||
| Steven Spinola | — | — | ||||||
| Jeffrey F. Joseph | — | — | ||||||
| Mitchell Hochberg | — | — | ||||||
| Seth Molod | — | — | ||||||
| All directors and executive officers as a group | — | — | ||||||
| (1) | Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities and shares issuable pursuant to options, warrants and similar rights held by the respective person or group that may be exercised within 60 days following |
| (2) | The address of |
| Item 13. | Certain Relationships and Related Transactions and Director Independence. |
Policies and Procedures for Transactions with Related Persons
We do not currently have written formal policies and procedures for the review, approval or ratification of transactions with related persons, as defined by Item 404 of Regulation S-K of the Exchange Act. Under that definition, transactions with related persons are transactions in which we were or are a participant and the amount involved exceeds $120,000 and in which any related person had or will have a direct or indirect material interest. Related parties include any executive officers, directors, director nominees, beneficial owners of more than 5% of our voting securities, immediate family members of any of the foregoing persons, and any firm, corporation or other entity in which any of the foregoing persons is employed and in which such person has 10% or greater beneficial ownership interest.
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However, in order to reduce or eliminate certain potential conflicts of interest, our charter contains a number of restrictions relating to (1) transactions we enter into with our Advisor and its affiliates, (2) certain future offerings, and (3) allocation of investment opportunities among affiliated entities. As a general rule, any related party transactions must be approved by a majority of the directors (including a majority of independent directors) not otherwise interested in the transaction. In determining whether to approve or authorize a particular related party transaction, these persons will consider whether the transaction between us and the related party is fair and reasonable to us.
Related Party Transactions
Advisor
Subject to the oversight of our board of directors, 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, LLC (“Lightstone”), LSG-BH II Advisor LLC and LSG Development Advisor LLC (collectively, the “Advisor”), to provide advisory services to us. Our external advisor is responsible for managing our day-to-day affairs and for services related to our acquisition, financing and disposition activities.
Our external advisor and certain of its affiliates may receive fees and compensation in connection with the management, acquisition, management,financing and saledisposition of our assets based on thean advisory management agreement, as periodically amended and restated.
From January 4, 2008 through February 10, 2017, we were party to various advisory management agreements, each with a term of one year or less, with the Behringer Advisor. On February 10, 2017, we and Restated Advisory Management Agreement
Concurrently, we entered intoengaged the Fourth Amended and Restated Advisory Management Agreement (the “Fourth Advisory Agreement”) with our Advisor to among other things, revise the acquisitionprovide us with advisory services pursuant to various advisory management agreements, each with an initial term of one year. The fees earned by and advisory fees, asset management fee, and the debt financing fee that may be paidexpenses reimbursed to the Advisor are substantially the same as the fees earned by and to fix certain expense reimbursement provisions. The Fourth Advisory Agreement was effective as of January 1, 2014. Effective as of June 6, 2015, we entered into the First Amendment to Fourth Amended and Restated Advisory Management Agreement to (i) reduce the administrative services fee to be paidexpenses reimbursed to the
We pay 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, the Advisor and its affiliates will also receivewe pay acquisition and advisory fees of 1.5% of the funds advanced in respect of a loan investment. WeDuring the year ended December 31, 2018, we incurred acquisition and advisory fees payable to Lightstone of approximately $1.0 million in connection with our acquisition of the Advisor of less than $0.1 million and $1 million for the years ended December 31, 2015 and 2014, respectively, as a result of improvements made to our assets and one acquisition in 2014. We had no acquisitions duringAxis at Westmont. During the year ended December 31, 2015.
We also receivepay 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 the Advisorour 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 Advisorexternal advisor or its affiliates incur that are due to third parties or related to the additional services provided by the Advisorour 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. WeFor the year ended December 31, 2018, we incurred approximately $0.1 million in acquisition expense reimbursements payable to Lightstone in connection with our one acquisition, the Axis at Westmont. For the year ended December 31, 2017, we incurred less than $0.1 million and $0.2 million in acquisition expense reimbursements duringpayable to Lightstone in connection with our one acquisition, the years ended December 31, 2015 and 2014, respectively.Flats at Fishers.
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We generally pay the Advisor or its affiliatesour 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 will pay directly all third partythird-party costs associated with obtaining the debt financing. WeDuring the year ended December 31, 2018 and 2017, we incurred debt financing fees of approximately $0.8 million and $0.2 million, for the year ended December 31, 2014. We incurred no debt financing fees for the year ended December 31, 2015.
We pay the Advisor or its affiliates 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 such fees forDuring the years ended December 31, 20152018 and 2014.
We pay the Advisor or its affiliates a monthly asset management fee which, effective January 1, 2014, was reduced toof 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 valuea NAV per shareShare unless the asset was acquired after our publication of an estimated valuea NAV per shareShare (in which case the value of the asset will be the contractcontractual purchase price of the asset). In addition, pursuant to the Fourth Advisory Agreement, the Advisor agreed to waive asset management fees previously accrued during the period from August 2013 to December 2013During each of $0.3 million. Therefore, we reversed this accrual in the second quarter of 2014. For the years ended December 31, 20152018 and 2014,2017, we expensed $2.5incurred $1.6 million and $2.2 million, respectively, of asset management fees payable to the Advisor.external advisor. The totals for the years ended December 31, 20152018 and 20142017 include asset management fees related to our disposed properties.
Our external advisor is responsible for paying all of the Fourth Advisory Agreement, beginning January 1, 2014, insteadexpenses it incurs associated with persons employed by the external advisor to the extent that they provide services related to us for which our external advisor receives an acquisition, asset management, or debt financing fee, including wages and benefits of the personnel. Instead of reimbursing the Advisorour external advisor for specific expenses paid or incurred in connection with providing services to us, we pay the Advisorour external advisor an administrative servicesfee, based onwhich is an allocation of a budgetportion of expenses prepared by the Advisor.actual costs that the external advisor paid or incurred providing these services to us (renamed an administrative services reimbursement under the Lightstone Advisory Agreement). The administrative services feefee/reimbursement is intended to reimburse the external advisor for all of the costs associated with providing services to us underus. For the Fourth Advisory Agreement. On June 6, 2015, we amended the Fourth Advisory Agreement to reducecalendar year ending December 31, 2017, the administrative services fee from $1.8was $1.325 million annually, pro-rated for calendarthe first six months of the year 2014and $1.3 million annually, pro-rated for the second six months of the year. For the period January 1, 2018 through June 10, 2018, the Administrative Services Fee is up to $1.5$1.3 million annually, pro-rated for calendarthe period. On June 10, 2018, the advisory management agreements were extended an additional year 2015.through June 10, 2019. For the period June 10, 2018 through June 10, 2019, the Administrative Services Fee is up to $1.29 million. The administrative services feeAdministrative Service Fee is payable in four equal quarterly installments within 45 days of the end of each calendar quarter. For the years ended December 31, 2015 and 2014, we incurred and expensed such costs for administrative services of approximately $1.5 million and $1.8 million, respectively. In addition, effective January 1, 2015,under the amended Fourth Advisory Agreement includes a provisionadvisory management agreement, we are to reimburse the Advisor for certain due diligence services provided in connection with asset dispositions or debt financings separately from the administrative services fee. We incurred $0.1 million for such costs duringFor each of the yearyears ended December 31, 2015.
Notwithstanding the fees and cost reimbursements payable to our Advisorexternal advisor pursuant to the Fourth Advisory Agreement,our advisory management agreement, under our charter we may not reimburse the Advisorexternal 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 quartersyear ended December 31, 2015 and 2014,2018, 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 not excessive.
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) Stratera (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.
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Concurrently, we engaged an affiliate of Lightstone (the “Lightstone Manager”) pursuant to a property management and leasing agreement. The fees earned by and expenses reimbursed to the Lightstone Manager are substantially the same as the fees earned by and expenses reimbursed to the Behringer Manager. The following discussion describes the fees and expenses payable to our affiliated property manager and its respective affiliates under both the various property management and leasing agreements.
We pay our property manager and affiliate of the Advisor, Behringer Harvard Opportunity II Management Services, LLC (“BHO II Management”), or its affiliates,our external advisor, fees for the management, leasing, and construction supervision of our properties. Effective January 1, 2014, we entered into the First Amendment to the Amended and Restated Property Management and Leasing Agreement,properties which reduced the property management fee paid tois 4.0% of gross revenues of the properties managed by BHO II Management or its affiliates.our property manager. We pay BHO II Management or its affiliatesour 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 BHO II Managementour 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 BHO II Managementour property manager directly for its services, we will pay BHO II Managementour property manager a management fee or oversight fee, as applicable, based only on our economic interest in the property. WeDuring the years ended December 31, 2018 and 2017, we incurred and expensed property management fees or oversight fees to BHO II Management of approximately $0.6$0.1 million for eachand $0.2 million, respectively, payable to the property manager and affiliates of the years ended December 31, 2015 and 2014.
We pay the Advisor or its affiliatesour 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 yearyears ended December 31, 2015. We incurred $0.1 million of construction management fees for the year ended December 31, 2014.
We are dependent on the Advisorour external advisor and BHO II Managementour property manager for certain services that are essential to us, including asset acquisition, financing and 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.
Independence
Although our shares are not listed for trading on any national securities exchange and therefore our board of directors is not subject to the independence requirements of the NYSE or any other national securities exchange, our board has evaluated whether our directors are “independent” as defined by the NYSE. The NYSE standards provide that to qualify as an independent director, in addition to satisfying certain bright-line criteria, the board of directors must affirmatively determine that a director has no material relationship with us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us).
Consistent with these considerations, after review of all relevant transactions or relationships between each director, or any of his or her family members, and the Company, our senior management and our independent registered public accounting firm, the board has determined that the majority of the members of our board, and each member of our audit committee, compensation committee and nominating committee, is “independent” as defined by the NYSE.
EisnerAmper LLP has served as our independent registered public accounting firm since January 2007.April 2017. Our management believes that it isthey are knowledgeable about our operations and accounting practices and well qualified to act as our independent registered public accounting firm.
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Audit and Non-Audit Fees
The following table presents the aggregate fees for professional services rendered by our independent registered public accounting firm, Deloitte & Touche LLP,billed to the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, “Deloitte & Touche”)Company for the years ended December 31, 2015 and 2014 (in thousands):
| 2015 | 2014 | ||||||
Audit Fees(1) | $ | 557 | $ | 550 | |||
Audit-Related Fees(2) | 7 | — | |||||
Tax Fees(3) | 6 | 80 | |||||
| All Other Fees | — | — | |||||
| Total Fees | $ | 570 | $ | 630 | |||
| (in thousands) | 2018 | 2017 | ||||||
| Audit Fees (a) | $ | 290 | $ | 239 | ||||
| Audit-Related Fees (b) | - | - | ||||||
| Tax Fees (c) | 90 | - | ||||||
| Total Fees | $ | 380 | $ | 239 | ||||
| a) | |
| b) | |
| c) | Fees for tax services. |
Our audit committee considers the provision of these services to be compatible with maintaining the independence of Deloitte & Touche LLP.
Audit Committee’s Pre-Approval Policies and Procedures
Our audit committee must approve any fee for services to be performed by the Company’s independent registered public accounting firm in advance of the service being performed. For proposed projects using the services of the Company’s independent registered public accounting firm that are expected to cost under $100,000, our audit committee will be provided information to review and must approve each project prior to commencement of any work. For proposed projects using the services of the Company’s independent registered public accounting firm that are expected to cost $100,000 and over, our audit committee will be provided with a detailed explanation of what is being included, and asked to approve a maximum amount for specifically identified services in each of the following categories: (1) audit fees; (2) audit-related fees; (3) tax fees; and (4) all other fees for any services allowed to be performed by the independent registered public accounting firm. If additional amounts are needed, our audit committee must approve the increased amounts prior to the previously approved maximum being reached and before the work may continue. Approval by our audit committee may be made at its regularly scheduled meetings or otherwise, including by telephonic or other electronic communications. The Company will report the status of the various types of approved services and fees, and cumulative amounts paid and owed, to our audit committee on a regular basis. Our audit committee has considered the independent registered public accounting firm’s non-audit services provided to the Company and has determined that such services are compatible with maintaining its independence.
Our audit committee approved all of the services provided by, and fees paid to, Deloitte & ToucheEisnerAmper LLP during the years ended December 31, 20152018 and 2014.2017.
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| Item 15. | Exhibits, Financial Statement Schedules. |
| (a) | List of Documents Filed. |
| 1. | Financial Statements |
The list of the financial statements filed as part of this Annual Report on Form 10-K is set forth on page F-1 herein.
| 2. | Financial Statement Schedules |
None.
| 3. | Exhibits |
The list of exhibits filed as part of this Annual Report on Form 10-K is submitted in the Exhibit Index following the financial statements in response to Item 601 of Regulation S-K.
| (b) | Exhibits. |
The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index attached hereto.
| (c) | Financial Statement Schedules. |
All financial statement schedules except for Schedules II, and III (see (a) 2. above), have been omitted because the required information of such schedules is not present, is not present in amounts sufficient to require a schedule, is not required or is included in the financial statements.statements and related notes.
| Item 16. | Form 10-K Summary |
None.
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Pursuant to the requirements of Section 13 or 15(d) 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. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ STEVEN SPINOLA /s/ JEFFREY P. MAYER /s/ CYNTHIA PHARR LEE INDEX TO CONSOLIDATED FINANCIAL STATEMENTS To the Board of Directors and Stockholders of Lightstone Value Plus Real Estate Investment Trust V, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Basis for Opinion These financial statements We conducted our audits in accordance with the standards of the Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence We have served as the Company’s auditor since 2017. EISNERAMPER LLP Iselin, New Jersey April 1, 2019 Lightstone Value Plus Real Estate Investment Trust V, Inc. Consolidated Balance Sheets (dollars in See Notes to Consolidated Financial Statements. Lightstone Value Plus Real Estate Investment Trust V, Inc. Consolidated Statements of Operations and Comprehensive (Loss) Income (dollars and shares in thousands, except per share amounts) See Notes to Consolidated Financial Statements. Lightstone Value Plus Real Estate Investment Trust V, Inc. Consolidated Statements of Stockholders’ Equity For the (dollars and shares in thousands) Additional Paid-In Accumulated Other Noncontrolling Total Capital Accumulated Deficit Comprehensive Loss Interests Equity See Notes to Consolidated Financial Statements. Lightstone Value Plus Real Estate Investment Trust V, Inc. Consolidated Statements of Cash Flows For the Years Ended December 31, 2018 and 2017 (dollars in thousands) See Notes to Consolidated Financial Statements. Lightstone Real Estate Investment Trust V, Inc. Notes to Consolidated Financial Statements (Dollar and share amounts in thousands, except per share/unit data and where indicated in millions) 1. Business and Organization Business Lightstone Value Plus Real Estate Investment Trust V, Inc. which was previously named Behringer Harvard Opportunity REIT II, Inc. 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 Substantially all of our business is conducted through Lightstone REIT V OP LP, which was previously named Behringer Harvard Opportunity OP II LP, a limited partnership organized in Delaware (the “Operating Partnership”). As of December 31, Our business has been managed by an external advisor since the commencement of our initial public offering, and Organization We commenced In connection with our initial capitalization, we issued Lightstone Real Estate Investment Trust V, Inc. Notes to Consolidated Financial Statements (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 2. Summary of Significant Accounting Policies Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with 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. 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. Accounting for Acquisitions of Investment Property The cost of the Upon the acquisition of real estate properties that meet the definition of a business, we recognize the assets acquired, the liabilities assumed and any noncontrolling interest as of the acquisition date, measured at their fair values. The acquisition date is the date on which we obtain control of the real estate property. The assets acquired and liabilities assumed may consist of land, inclusive of associated rights, buildings, assumed debt, identified intangible assets and liabilities, and asset retirement obligations. Identified intangible assets generally consist of above-market leases, in-place leases, in-place tenant improvements, in-place leasing commissions, and tenant relationships. Identified intangible liabilities generally consist of below-market leases. Goodwill is recognized as of the acquisition date and measured as the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree over the fair value of the identifiable net assets acquired. Likewise, a bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree is less than the fair value of the identifiable net assets acquired. Acquisition-related costs are expensed in the period incurred. Initial valuations are subject to change until our information is finalized, which is no later than Lightstone Real Estate Investment Trust V, Inc. Notes to Consolidated Financial Statements (Dollar and share amounts in thousands, except per share/unit data and where indicated in millions) The fair value of the tangible assets acquired, consisting of land and buildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings. Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods believed to be used by market participants. The value of hotels and all other buildings is depreciated over the estimated useful lives of 39 years and 25 years, respectively, using the straight-line method. We determine the fair value of assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that management believes we could obtain at the date of the debt assumption. Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan using the effective interest method. Cash and Cash Equivalents We consider investments in highly liquid money market funds or investments with original maturities of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents reported on the balance sheet approximates fair value. 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 certain of 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 escrow with qualified intermediaries to facilitate potential like-kind exchange transactions in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). We adopted Financial Accounting Standards Board (“FASB”) guidance 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 consolidated statements of cash flows for the periods presented: Marketable Securities Marketable securities currently consist of debt securities that are designated as available-for-sale and are recorded at fair value. Unrealized holding gains or losses for debt securities are reported as a component of accumulated other comprehensive income/(loss). Realized gains or losses resulting from the sale of these securities are determined based on the specific identification of the securities sold. An impairment charge is recognized when the decline in the fair value of a security below the amortized cost basis is determined to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the duration and severity of any decline in fair value below our amortized cost basis, any adverse changes in the financial condition of the issuers’ and its intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Lightstone Real Estate Investment Trust V, Inc. Notes to Consolidated Financial Statements (Dollar and share amounts in thousands, except per share/unit data and where indicated in millions) 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 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. During the year ended December 31, We believe the carrying value of our operating real estate assets and our investment in an unconsolidated joint venture is currently recoverable. 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. Lightstone Real Estate Investment Trust V, Inc. Notes to Consolidated Financial Statements (Dollar and share amounts in thousands, except per share/unit data and where indicated in millions) Investment in Unconsolidated Joint Venture We have and may continue to 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 Revenue Recognition We recognize rental income 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. Hotel revenues Other Assets Other assets primarily consist of deposits, receivables and intangible assets related to our consolidated Deferred Financing Fees The Company will capitalize initial direct costs associated with financing activities. The costs will be capitalized upon the execution of Deferred financing fees are recorded at cost, accounted for as a reduction to notes payable and Income Taxes We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code Lightstone Real Estate Investment Trust V, Inc. Notes to Consolidated Financial Statements (Dollar and share amounts in thousands, except per share/unit data and where indicated in millions) During the third quarter of 2017, we recorded an aggregate income tax benefit of approximately $1.6 million consisting of (i) a 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) The Euro Concentration of Credit Risk At December 31, Geographic and Asset Type Concentration Our investments Lightstone Real Estate Investment Trust V, Inc. Notes to Consolidated Financial Statements (Dollar and share amounts in thousands, except per share/unit data and where indicated in millions) 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. In certain instances, our joint venture agreement provides for liquidating distributions based on achieving certain return metrics (“promoted interest”). 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. During 2018, the Company paid $1.9 million for the 6.0% membership interest held by a minority owner in Arbors Harbor Town and as a result, now owns 100.0% of this property. Earnings per Share The Company had no potentially dilutive securities outstanding during the periods presented. Accordingly, net (loss) income Reportable Segments GAAP establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. We have determined that we have one reportable segment, with activities related to the ownership, development, and management of real estate assets. Our chief operating decision maker evaluates operating performance on an individual property level. Therefore, our properties are aggregated into one reportable segment. Reclassifications Certain prior period amounts may have 3. New Accounting Pronouncements Recently Adopted Accounting Pronouncements Effective January 1, 2018, the Effective January 1, 2018, the Company adopted guidance issued by the FASB that clarifies the definition of a business and assists in the evaluation of whether a transaction will be accounted for as an Effective January 1, 2018, the Company adopted guidance issued by the FASB that 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. Lightstone Real Estate Investment Trust V, Inc. Notes to Consolidated Financial Statements (Dollar and share amounts in thousands, except per share/unit data and where indicated in millions) New Accounting Pronouncements In August In In February 2016, the FASB issued an accounting standards update which 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 operations. 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. The standard offers several practical expedients for transition and certain expedients specific to lessees or lessors. Both lessees and lessors are permitted to make an election to apply a package of practical expedients available for implementation under the standard. The Company intends to apply the package of practical expedients and certain other transition expedients. For transition, the Company intends to recognize all effects of transition in the beginning of the adoption reporting period on January 1, 2019. The adoption of this standard will result in the recognition of right-of-use assets and related lease liability accounts on the consolidated balance sheet but will not have a material effect on our consolidated financial position or our results of operations. 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 4. Marketable Securities and Fair Value Measurements Marketable Securities The following is a summary of the Company’s available for sale securities as of the date indicated: Lightstone Real Estate Investment Trust V, Inc. Notes to Consolidated Financial Statements (Dollar and share amounts in thousands, except per share/unit data and where indicated in millions) When evaluating the Fair Value Measurements Fair value is defined as the exchange price that would be 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 The fair values of the Company’s investments in Debt Securities are measured using quoted prices for 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 Nonrecurring Fair Value Measurements During the year ended December 31, Lightstone Real Estate Investment Trust V, Inc. Notes to Consolidated Financial Statements (Dollar and share amounts in thousands, except per share/unit data and where indicated in millions) The following fair value hierarchy table presents information about our assets measured at fair value on a nonrecurring basis during the year ended December 31, Quantitative Information about Level 3 Fair Value Measurements Description Valuation Techniques 8.0% 7.0% We did not record any impairment charges during the year 5. Financial Instruments not Reported at Fair Value 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 December 31, The fair value of the notes payable is categorized as a Level 2 Carrying amounts of our notes payable and the related estimated fair value as follows: Lightstone Real Estate Investment Trust V, Inc. Notes to Consolidated Financial Statements (Dollar and share amounts in thousands, except per share/unit data and where indicated in millions) 6. Real Estate and Real Estate-Related Investments As of December 31, Note: Real Estate Asset Acquisitions Axis at Westmont On November 27, 2018, the Company completed the acquisition of the Axis at Westmont, a 400-unit multifamily property located in Westmont, Illinois from an unrelated third party, for an aggregate purchase price of approximately $59.3 million, excluding closing and other related transaction costs. In connection with the acquisition, the Company assumed approximately $37.6 million of debt and paid approximately $21.7 million of cash and the Company’s advisor received an acquisition fee equal to 1.75% of the contractual purchase price, approximately $1.0 million. The Company determined this acquisition was an asset acquisition and allocated the total purchase price, including closing costs and the acquisition fee, to the assets acquired based on relative fair value. Approximately $7.8 million was allocated to land and improvements, $52.1 million was allocated to building and improvements, and $0.5 million was allocated to in-place lease intangibles. The capitalization rate for the acquisition of the Axis at Westmont was approximately 5.45%. 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 December 31, Flats at Fishers On November 30, 2017, we The acquisition of the Flats at Fishers was accounted for under the purchase method of accounting with us treated as Lightstone Real Estate Investment Trust V, Inc. Notes to Consolidated Financial Statements (Dollar and share amounts in thousands, except per share/unit data and where indicated in millions) The capitalization rate for the acquisition of the Flats at Fishers was approximately 3.8%. For purposes of this calculation, NOI was based upon the twelve-month period ended June 30, 2017. Financial Information The following table provides the total amount of rental revenue and net income included in the The following table provides unaudited pro forma results of operations for the periods indicated, as if the Axis at Westmont and the Flats at Fishers had been acquired at the beginning of the earliest period presented. Such pro forma results are not necessarily indicative of the results that actually would have occurred had these acquisitions been completed on the dates indicated, nor are they indicative of the future operating results of the combined company. Real Estate Asset Dispositions The 22 Exchange On December 28, 2018, the Courtyard Kauai Coconut Beach Hotel On Lightstone Real Estate Investment Trust V, Inc. Notes to Consolidated Financial Statements (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, approximately $27.0 million Gain on Sale of During 2018 the Company recognized an aggregate gain of During the 7. We provided mezzanine financing totaling Pursuant to the On December 15, 2017, the Borrower sold Prospect Park to an unrelated third-party for a contractual sales price of approximately $100.5 million. In connection with the sale, the Borrower repaid the Senior Construction Loan in full and we We considered the impact of these events on the accounting treatment and determined the ADC Arrangement We did not record any equity earnings related to our unconsolidated investment Lightstone Real Estate Investment Trust V, Inc. Notes to Consolidated Financial Statements (Dollar and share amounts in thousands, except per share/unit data and where indicated in millions) 8. Variable Interest Entities Consolidated VIEs The Company consolidates the Operating Partnership, Gardens Medical Pavilion, LLC through BH-AW-Florida MOB Venture, LLC, and SL Parkside Apartments, LLC, which are 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. 9. Notes Payable The following table sets forth information on our notes payable as of December 31, Debt Transactions On May 1, 2018, the Lightstone Real Estate Investment Trust V, Inc. Notes to Consolidated Financial Statements (Dollar and share amounts in thousands, except per share/unit data and where indicated in millions) On June 1, 2018, the Company entered into a non-recourse mortgage loan (the “Parkside Mortgage”) in the amount of $18.0 million. The Parkside Mortgage has a term of seven years, bears interest at 4.45% and requires monthly interest and principal payments pursuant to a 30-year amortization schedule through its stated maturity with the entire unpaid balance due upon maturity. The Parkside Mortgage is collateralized by Parkside. At closing, approximately On June 28, 2018, the Company entered into a non-recourse mortgage loan (the “Gardens Medical Mortgage”) in the amount of On November 27, 2018, the Company assumed a non-recourse mortgage loan (the “Axis at Westmont Mortgage”) in the amount of $37.6 million. The Axis at Westmont Mortgage is secured by a first mortgage lien on the On December 28, 2018, the Company entered into a non-recourse mortgage loan (the “Arbors Harbor Town Mortgage”) in the amount of $29.0 million. The Debt Compliance The Company’s loan agreements stipulate that it complies with certain reporting and financial The Company did not meet the debt service coverage The following table Lightstone Real Estate Investment Trust V, Inc. Notes to Consolidated Financial Statements (Dollar and share amounts in thousands, except per share/unit data and where indicated in millions) In addition, the Company’s non-recourse mortgage loan secured by the Lakes of Margate (outstanding principal balance of $13.7 million as of December 31, 2018) 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 outstanding balance with available cash and/or proceeds from selective asset sales. 10. Leasing Activity Future minimum base rental payments of our The schedule above does not include rental payments due to us from our multifamily 11.Lightstone Value Plus Real Estate Investment Trust V, Inc. Behringer Harvard Opportunity REIT II, Inc.Dated: March 16, 2016April 1, 2019By: /s/ THOMAS P. KENNEDYMITCHELL HOCHBERG Mitchell Hochberg Thomas P. KennedyPresident Principal Executive Officer March 16, 2016April 1, 2019/s/ THOMAS P. KENNEDYMITCHELL HOCHBERG Thomas P. KennedyPresidentPrincipal Executive OfficerMarch 16, 2016/s/ ROBERT S. AISNERMitchell Hochberg Robert S. AisnerPrincipal Executive Officer April 1, 2019 /s/ DAVID LICHTENSTEIN David Lichtenstein Chairman of the Board of Directors March 16, 2016/s/ S. JASON HALL S. Jason HallChief Financial OfficerPrincipal Financial OfficerMarch 16, 2016April 1, 2019MICHAEL D. COHEN Michael D. CohenDirectorMarch 16, 2016Principal Financial Officer April 1, 2019 /s/ JEFFREY F. JOSEPH Jeffrey F. Joseph Director April 1, 2019 /s/ ANDREAS K. BREMER DirectorMarch 16, 2016
DirectorApril 1, 2019 Steven Spinola Director April 1, 2019 DirectorMarch 16, 2016
DirectorApril 1, 2019 DirectorMarch 16, 2016April 1, 2019 /s/ DIANE S. DETERING-PADDISON Director Director48 78Financial Statement SchedulesF-1 F-1Behringer Harvard Opportunity REIT II,Addison, TexasBehringer Harvard Opportunity REIT II,Lightstone Value Plus Real Estate Investment Trust V, Inc. and subsidiaries (the “Company”“Company") as of December 31, 20152018 and 2014,2017, and the related consolidated statements of operations and comprehensive (loss) income, (loss),stockholders’ equity, and cash flows for each of the three years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2018 and 2017, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the period ended December 31, 2015. Our audits also included the financial statement schedules listed in the Index at Item 15. United States of America. and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements and financial statement schedules based on our audits.Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. OurAs part of our audits included considerationwe are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’sCompany's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includessupportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion./s/ EisnerAmper LLP F-2 In our opinion, such consolidated financial statements present fairly,all material respects,thousands, except per share amounts) December 31, 2018 December 31, 2017 Assets Investment property: Land and improvements $ 46,175 $ 40,354 Building and improvements 194,726 157,073 Furniture, fixtures and equipment 6,285 5,812 Gross investment property 247,186 203,239 Less accumulated depreciation (46,182 ) (38,373 ) Net investment property 201,004 164,866 Investment in unconsolidated joint venture 10,944 10,944 Cash and cash equivalents 29,607 52,147 Marketable securities, available for sale 14,386 - Restricted cash 3,045 5,213 Prepaid expenses and other assets 5,471 2,994 Total Assets $ 264,457 $ 236,164 Liabilities and Stockholders' Equity Notes payable, net $ 139,016 $ 89,921 Accounts payable, accrued and other liabilities 3,634 4,150 Payables to related parties 316 33 Distributions payable to noncontrolling interests - 27 Accrued property tax 1,670 2,398 Total liabilities 144,636 96,529 Commitments and Contingencies Stockholders' Equity: Preferred stock, $.0001 par value per share; 50,000,000 shares authorized, none issued and outstanding - - Convertible stock, $.0001 par value per share; 1,000 shares authorized, issued and outstanding - - Common stock, $.0001 par value per share; 350,000,000 shares authorized, 23,431,408 and 24,646,494 shares issued and outstanding, respectively 2 2 Additional paid-in-capital 214,537 224,923 Accumulated other comprehensive loss (217 ) (27 ) Accumulated deficit (95,295 ) (90,108 ) Total Company stockholders' equity 119,027 134,790 Noncontrolling interests 794 4,845 Total Stockholder's Equity 119,821 139,635 Total Liabilities and Stockholders' Equity $ 264,457 $ 236,164 F-3 For the Years Ended December 31, 2018 2017 Revenues Rental revenues $ 27,511 $ 24,337 Hotel revenues - 13,207 Total revenues 27,511 37,544 Expenses Property operating expenses 10,151 8,855 Hotel operating expenses - 9,299 Interest expense, net 6,119 6,129 Real estate taxes 4,522 4,343 Impairment charge - 4,132 Property management fees 1,056 1,258 Asset management fees 1,610 1,782 General and administrative 3,815 4,512 Depreciation and amortization 9,653 9,618 Total expenses 36,926 49,928 Interest income, net 734 279 Income from investment in unconsolidated joint venture - 17,931 Gain on early extinguishment of debt 2,778 - Other income , net 2 8 Loss (gain) before gain on sale of real estate and income taxes (5,901 ) 5,834 Gain on sale of real estate, net 537 21,605 Income (expense) tax benefit (4 ) 1,604 Net (loss) income (5,368 ) 29,043 Net loss (income) attributable to the noncontrolling interest 181 (4,485 ) Net (loss) income attributable to the Company's shares $ (5,187 ) $ 24,558 Weighted average shares outstanding: Basic and diluted 24,177 24,950 Basic and diluted (loss) income per share $ (0.21 ) $ 0.98 Comprehensive (loss) income: Net (loss) income $ (5,368 ) $ 29,043 Other comprehensive (loss) income: Holding loss on marketable securities (189 ) - Foreign currency translation (loss) gain (1 ) 468 Total other comprehensive (loss) income (190 ) 468 Comprehensive (loss) income (5,558 ) 29,511 Comprehensive loss (income) attributable to noncontrolling interest 181 (4,485 ) Comprehensive (loss) income attributable to the Company's shares $ (5,377 ) $ 25,026 F-4 financial positionYears Ended December 31, 2018 and 2017 Convertible Stock Common Stock Shares Amount Shares Amount BALANCE, December 31, 2016 1 $ - 25,219 $ 3 $ 227,891 $ (114,666 ) $ (495 ) $ 5,906 $ 118,639 Net income - - - - - 24,558 - 4,485 29,043 Contributions from noncontrolling interest - - - - - - 55 55 Distributions to noncontrolling interest holders - - - - - - - (5,601 ) (5,601 ) Redemption and cancellation of shares - - (572 ) (1 ) (2,968 ) - - - (2,969 ) Foreign currency translation gain - - - - - - 468 - 468 BALANCE, December 31, 2017 1 $ - 24,647 $ 2 $ 224,923 $ (90,108 ) $ (27 ) $ 4,845 $ 139,635 Net loss - - - - - (5,187 ) - (181 ) (5,368 ) Contributions from noncontrolling interest holders - - - - - - - 76 76 Distributions to noncontrolling interest holders - - - - - - - (3,775 ) (3,775 ) Redemption and cancellation of shares - - (1,215 ) - (8,627 ) - - - (8,627 ) Acquisition of noncontrolling interest in a subsidiary - - - - (1,759 ) - - (171 ) (1,930 ) Other comprehensive loss: Holding loss on marketable securities, available for sale - - - - - - (189 ) - (189 ) Foreign currency translation loss - - - - - - (1 ) - (1 ) BALANCE, December 31, 2018 1 $ - 23,432 $ 2 $ 214,537 $ (95,295 ) $ (217 ) $ 794 $ 119,821 F-5 For the Year Ended December 31, 2018 2017 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (5,368 ) $ 29,043 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 9,653 9,618 Amortization of deferred financing fees 389 509 Loss on sale of marketable securities 7 - Gain on extinguishment of debt (2,778 ) - Impairment charge - 4,132 Income from investment in unconsolidated joint venture - (17,931 ) Gain on sale of real estate (537 ) (21,605 ) Other non-cash adjustments, net 174 (746 ) Changes in operating assets and liabilities: (Increase) decrease in prepaid expenses and other assets (3,068 ) 75 Increase (decrease) in accounts payable, and accrued and other liabilities 3,024 (81 ) Increase (decrease) in payables to related parties 283 (337 ) Net cash provided by operating activities 1,779 2,677 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investment property (26,154 ) (38,085 ) Net proceeds from sale of real estate and other assets - 24,047 Cash transferred in foreclosure (1,779 ) - Purchase of marketable securities (16,831 ) - Proceeds from sale of marketable securities 2,249 - Acquired restricted escrow deposits 339 - Acquisition of noncontrolling interest in a subsidiary (1,930 ) Distributions from unconsolidated joint venture - 21,645 Net cash (used in) provided by investing activities (44,106 ) 7,607 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable 90,374 36,000 Payments on notes payable (57,867 ) (52,630 ) Payment of loan fees and expenses (2,534 ) (1,465 ) Redemptions of common stock (8,627 ) (2,969 ) Contributions from noncontrolling interest holders 76 55 Distributions to noncontrolling interest holders (3,802 ) (5,595 ) Net cash provided by (used in) financing activities 17,620 (26,604 ) Effect of exchange rate changes on cash, cash equivalents, and restricted cash (1 ) 468 Net change in cash, cash equivalents and restricted cash (24,708 ) (15,852 ) Cash, cash equivalents and restricted cash, beginning of year 57,360 73,212 Cash, cash equivalents and restricted cash, end of year $ 32,652 $ 57,360 Supplemental cash flow information for the years indicated is as follows: Cash paid for interest, net of amounts capitalized $ 4,020 $ 5,878 Holding loss on marketable securities, available for sale $ 189 $ - Debt assumed by buyer in connection with disposition of investment property $ - $ 36,000 Mortgage assumed for acquisition $ 37,600 $ - Assets transferred due to foreclosure $ 18,061 $ - Liabilities extinguished in foreclosure $ 22,618 $ - Capital expenditures for real estate in accrued liabilities and accounts payable $ 164 $ 51 Accrued distributions to noncontrolling interest $ - $ 27 F-6 and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation, prior to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.As discussed in Note 2 to the consolidated financial statements, during 2014 the Company early adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update No. 2014-08 (“ASU 2014-08”), Presentation of Financial Statements and Property, Plant, and Equipment (Topics 205 and 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity./s/ Deloitte & Touche LLPDallas, TexasMarch 16, 2016F-2Behringer Harvard Opportunity REIT II, Inc.Consolidated Balance SheetsAs of December 31, 2015 and 2014(in thousands, except shares) 2015 2014 Assets Real estate Land and improvements, net $ 51,382 $ 60,374 Buildings and improvements, net 185,213 228,650 Real estate under development 176 274 Total real estate 236,771 289,298 Assets associated with real estate held for sale — 12,951 Cash and cash equivalents 76,815 72,949 Restricted cash 4,581 4,199 Accounts receivable, net 2,426 2,208 Prepaid expenses and other assets 1,078 1,402 Investment in unconsolidated joint venture 14,482 13,973 Furniture, fixtures and equipment, net 5,702 8,244 Deferred financing fees, net 1,656 2,617 Lease intangibles, net 334 1,850 Total assets $ 343,845 $ 409,691 Liabilities and Equity Notes payable $ 178,692 $ 216,294 Accounts payable 479 702 Payables to related parties 433 466 Acquired below-market leases, net 80 210 Distributions payable to noncontrolling interest 52 19 Distributions payable 38,378 — Income taxes payable 986 — Accrued and other liabilities 8,166 6,232 Obligations associated with real estate held for sale — 9,212 Total liabilities 227,266 233,135 Commitments and contingencies — — Equity Preferred stock, $.0001 par value per share; 50,000,000 shares authorized, none outstanding — — Convertible stock, $.0001 par value per share; 1,000 shares authorized, 1,000 outstanding — — Common stock, $.0001 par value per share; 350,000,000 shares authorized, 25,585,198 and 25,801,669 shares issued and outstanding at December 31, 2015 and 2014, respectively 3 3 Additional paid-in capital 229,796 231,240 Accumulated distributions and net loss (119,609 ) (62,477 ) Accumulated other comprehensive loss (372 ) (246 ) Total Behringer Harvard Opportunity REIT II, Inc. equity 109,818 168,520 Noncontrolling interest 6,761 8,036 Total equity 116,579 176,556 Total liabilities and equity $ 343,845 $ 409,691 See Notes to Consolidated Financial Statements.F-3Behringer Harvard Opportunity REIT II, Inc.Consolidated Statements of Operations and Comprehensive Income (Loss)For the Years Ended December 31, 2015, 2014 and 2013(in thousands, except per share amounts) 2015 2014 2013 Revenues Rental revenue $ 32,556 $ 32,226 $ 28,517 Hotel revenue 17,694 16,371 14,872 Total revenues 50,250 48,597 43,389 Expenses: Property operating expenses 11,503 11,288 9,792 Hotel operating expenses 12,498 11,954 11,363 Interest expense, net 6,791 7,833 7,844 Real estate taxes 6,127 5,388 4,716 Impairment charge 1,417 — — Property management fees 1,650 1,642 1,521 Asset management fees 2,702 2,368 3,478 General and administrative 3,620 4,076 4,243 Acquisition expense — 1,307 3,998 Depreciation and amortization 14,950 14,362 13,978 Total expenses 61,258 60,218 60,933 Interest income, net 149 224 128 Loss on early extinguishment of debt (732 ) (454 ) — Other income (loss) (777 ) (38 ) 46 Loss from continuing operations before gain on sale of real estate and income tax benefit (expense) (12,368 ) (11,889 ) (17,370 ) Gain on sale of real estate 22,771 11,454 — Income tax benefit (expense) (2,726 ) 101 (183 ) Income (loss) from continuing operations 7,677 (334 ) (17,553 ) Income from discontinued operations, including gains on disposition — — 31,159 Net income (loss) 7,677 (334 ) 13,606 Noncontrolling interest in continuing operations (699 ) 331 577 Noncontrolling interest in discontinued operations — — (5,454 ) Net (income) loss attributable to noncontrolling interest (699 ) 331 (4,877 ) Net income (loss) attributable to the Company $ 6,978 $ (3 ) $ 8,729 Amounts attributable to the Company Continuing operations $ 6,978 $ (3 ) $ (16,976 ) Discontinued operations — — 25,705 Net income (loss) attributable to the Company $ 6,978 $ (3 ) $ 8,729 Weighted average shares outstanding: Basic and diluted 25,688 25,943 26,035 Net income (loss) per share Continuing operations $ 0.27 $ — $ (0.65 ) Discontinued operations — — 0.99 Basic and diluted income per share $ 0.27 $ — $ 0.34 Distributions declared per common share $ 2.50 $ 0.50 $ — Comprehensive income (loss): Net income (loss) $ 7,677 $ (334 ) $ 13,606 Other comprehensive income (loss): Reclassification of unrealized loss on interest rate derivatives to net income — 58 123 Reclassification of unrealized loss on currency translation to net income 250 — — Foreign currency translation gain (loss) (376 ) (791 ) 262 Total other comprehensive income (loss) (126 ) (733 ) 385 Comprehensive income (loss) 7,551 (1,067 ) 13,991 Comprehensive (income) loss attributable to noncontrolling interest (699 ) 320 (4,890 ) Comprehensive income (loss) attributable to common shareholders $ 6,852 $ (747 ) $ 9,101 See Notes to Consolidated Financial Statements.F-4Behringer Harvard Opportunity REIT II, Inc.Consolidated Statements of EquityFor the Years Ended December 31, 2015, 2014 and 2013(in thousands) Number of Shares Balance at January 1, 2013 1 $ — 26,060 $ 3 $ 233,283 $ (58,249 ) $ 126 $ 11,370 $ 186,533 Net income 8,729 4,877 13,606 Redemption of common stock (44 ) (380 ) (380 ) Contributions from noncontrolling interest 4,655 4,655 Distributions to noncontrolling interest (12,010 ) (12,010 ) Other comprehensive income: Reclassification of unrealized loss on interest rate derivatives to net income 110 13 123 Foreign currency translation gain 262 262 Balance at December 31, 2013 1 $ — 26,016 $ 3 $ 232,903 $ (49,520 ) $ 498 $ 8,905 $ 192,789 Net loss (3 ) (331 ) (334 ) Redemption of common stock (214 ) (1,663 ) (1,663 ) (12,954 ) (12,954 ) Contributions from noncontrolling interest 273 273 Distributions to noncontrolling interest (822 ) (822 ) Other comprehensive income (loss): Reclassification of unrealized loss on interest rate derivatives to net income 47 11 58 Foreign currency translation loss (791 ) (791 ) Balance at December 31, 2014 1 $ — 25,802 $ 3 $ 231,240 $ (62,477 ) $ (246 ) $ 8,036 $ 176,556 Net income 6,978 699 7,677 Redemption of common stock (217 ) (1,444 ) (1,444 ) Distributions declared on common stock
($2.50 per share) (64,110 ) (64,110 ) Contributions from noncontrolling interest 538 538 Distributions to noncontrolling interest (2,512 ) (2,512 ) Other comprehensive income (loss): Reclassification of unrealized loss on currency translation to net income 250 250 Foreign currency translation loss (376 ) (376 ) Balance at December 31, 2015 1 $ — 25,585 $ 3 $ 229,796 $ (119,609 ) $ (372 ) $ 6,761 $ 116,579 See Notes to Consolidated Financial Statements.F-5Behringer Harvard Opportunity REIT II, Inc.Consolidated Statements of Cash FlowsFor the Years Ended December 31, 2015, 2014 and 2013(in thousands) 2015 2014 2013 Cash flows from operating activities: Net income (loss) $ 7,677 $ (334 ) $ 13,606 Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities: Depreciation and amortization 14,762 14,217 16,507 Amortization of deferred financing fees 689 779 949 Gain on sale of real estate (22,771 ) (11,454 ) (31,558 ) Loss on early extinguishment of debt 732 454 265 Loss on derivatives 26 215 94 Impairment charge 1,417 — — Change in operating assets and liabilities: Accounts receivable 384 (235 ) (373 ) Prepaid expenses and other assets 297 (358 ) 458 Accounts payable (223 ) 210 (1,246 ) Income taxes payable 1,121 — — Accrued and other liabilities 1,099 (1,305 ) 549 Net payables to related parties (33 ) (375 ) 277 Addition of lease intangibles (80 ) (313 ) (631 ) Cash provided by (used in) operating activities 5,097 1,501 (1,103 ) Cash flows from investing activities: Acquisition deposits reimbursed — 500 247 Acquisition deposits paid — — (500 ) Purchases of real estate — (60,433 ) (74,685 ) Investment in unconsolidated joint venture (509 ) (1,988 ) (14,429 ) Return of investment in unconsolidated joint ventures — — 2,444 Proceeds from sale of real estate 79,075 46,300 83,506 Additions of property and equipment (4,258 ) (8,566 ) (8,043 ) Change in restricted cash (382 ) 1,144 133 Cash provided by (used in) investing activities 73,926 (23,043 ) (11,327 ) Cash flows from financing activities: Financing costs (492 ) (670 ) (1,228 ) Proceeds from notes payable — 33,500 47,710 Payments on notes payable (45,094 ) (17,791 ) (12,987 ) Purchase of interest rate derivatives (6 ) (7 ) (133 ) Redemptions of common stock (1,444 ) (1,663 ) (380 ) Offering costs received from related party — — 3,832 Distributions paid to common shareholders (25,732 ) (12,954 ) — Contributions received from noncontrolling interest holders 538 273 4,655 Distributions paid to noncontrolling interest holders (2,480 ) (822 ) (11,990 ) Cash provided by (used in) financing activities (74,710 ) (134 ) 29,479 Effect of exchange rate changes on cash and cash equivalents (447 ) (252 ) 76 Net change in cash and cash equivalents 3,866 (21,928 ) 17,125 Cash and cash equivalents at beginning of year 72,949 94,877 77,752 Cash and cash equivalents at end of year $ 76,815 $ 72,949 $ 94,877 See Notes to Consolidated Financial Statements.F-6Behringer Harvard Opportunity REIT II, Inc.Notes to Consolidated Financial Statements1. Business and OrganizationBusinessBehringer Harvard Opportunity REIT II, Inc.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.aother real estate-related investments such as mortgage loan and a mezzanine loan. We are not actively seeking to purchase additional assets at this time, but may invest capital in our current assets in order to position them for sale in the normal course of business.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. Consistent with our investment objectives of commencing a liquidation within three to six years after the termination of our initial public offering, we have entered our disposition phase and our board of directors is in the process of considering the orderly disposition of our assets.2015,2018, we had nineeight real estate investments, eightseven of which were consolidated in our consolidated financial statements (one(three wholly owned properties and sevenfour properties consolidated through investments in joint ventures). We sold four properties in 2015; Babcock Self Storage (“Babcock”) on January 8, Alte Jakobstraße (“AJS”) on February 21, Holstenplatz on September 1, and Wimberly at Deerwood (“Wimberly”) on September 9.2015,2018, 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 December 31, 2015,2018, 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.We are externallyadvised by Behringerwe have no employees. From January 4, 2008 through February 10, 2017, an affiliate of Stratera Services, LLC, formerly known as “Behringer Harvard Opportunity Advisors II, LLCHoldings, LLC” (“Behringer”), acted as our external advisor (the “Advisor”“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 Advisorexternal advisor is responsible for managing our day-to-day affairs and for identifying and making investments onservices related to the management of our behalf.aan initial public offering of our common stock on January 21, 2008 (the "Initial Offering"), including shares offered pursuant to our distribution reinvestment plan (the “DRP”). On July 3, 2011, the Initial Offering terminated in accordance with its terms. On July 5, 2011, we commenced a follow-on public offering of our common stock (the "Follow-On Offering"), including shares offered pursuant to our DRP. We terminated the primary component of the public offeringFollow-On Offering effective March 15, 2012 and the DRP component of the offering effective April 3, 2012. We raised gross offering proceeds of approximately $265.3 million from the sale of approximately 26.7 million shares under the offering.22,47122.5 thousand shares of our common stock and 1,0001.0 thousand shares of our convertible stock to Behringer Harvard Holdings, LLC (“Behringer”) on January 19, 2007. Behringer transferred its shares of convertible stock to one of its affiliates on April 2, 2010.2015,2018, we had issued 26.7 million shares of our common stock, including 22,471 shares owned by Behringer and 2.2 million shares issued through the distribution reinvestment plan. As of December 31, 2015, we had redeemed 1.1 million shares of our common stock and had 25.624.6 million shares of common stock outstanding. As of December 31, 2015, we had 1,000outstanding and 1.0 thousand shares of convertible stock outstanding. The outstanding convertible stock is held by an affiliate of Behringer.Lightstone.F-7 are inpreviously targeted the processcommencement of disposinga liquidity event within six years after the termination of assetsour Initial 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. As we make disposals, weliquidation of the Company. We will liquidate and distribute the net proceedsseek stockholder approval prior to liquidating our stockholders. Economic or market conditions may, however, result in different holding periods for different assets.F-7Behringer Harvard Opportunity REIT II, Inc.Notes to Consolidated Financial StatementsGAAPgenerally accepted accounting principles in the U.S. (“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. TheseThe most significant assumptions and estimates include such items as purchase price allocation forrelate to the valuation of real estate acquisitions,including impairment and depreciable lives. Application of long-lived assets, depreciationthese assumptions requires the exercise of judgment as to future uncertainties and, amortization, and allowance for doubtful accounts. Actualas a result, actual results could differ from thosethese estimates.InterestsIn addition, interests in entities acquired will beare evaluated based on applicable GAAP, which includes the requirement to consolidateand entities deemed to be variable interest entities (“VIE”) in which we are the primary beneficiary.beneficiary are also consolidated. If the interest in the entity is determined not to be a VIE, then the entity will beis evaluated for consolidation based on legal form, economic substance, and the extent to which we have control, or 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,but have significant influence, we account for the investment using the equity method of accounting.InNotesreal estate assets acquired in an asset acquisition is allocated to Consolidated Financial Statements, all dollarthe acquired tangible assets, consisting of land, building and share amountstenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based in tabulationeach case on their relative fair values. Fees incurred related to asset acquisitions are in thousandscapitalized as part of dollars and shares, respectively, unless otherwise noted.Real Estatetwelve12 months from the acquisition date.F-8 F-8Behringer Harvard Opportunity REIT II, Inc.Notes to Consolidated Financial StatementsWe determine the value of above-market and below-market leases for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) management’s estimate of current market lease rates for the corresponding in-place leases, measured over a period equal to (a) the remaining non-cancelable lease term for above-market leases, or (b) the remaining non-cancelable lease term plus any below-market fixed rate renewal options that, based on a qualitative assessment of several factors, including the financial condition of the lessee, the business conditions in the industry in which the lessee operates, the economic conditions in the area in which the property is located, and the ability of the lessee to sublease the property during the renewal term, are reasonably assured to be exercised by the lessee for below-market leases. We record the fair value of above-market and below-market leases as intangible assets or intangible liabilities, respectively, and amortize them as an adjustment to rental income over the determined lease term.The total value of identified real estate intangible assets acquired is further allocated to in-place leases, in-place tenant improvements, in-place leasing commissions and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. The aggregate value for tenant improvements and leasing commissions is based on estimates of these costs incurred at inception of the acquired leases, amortized through the date of acquisition. The aggregate value of in-place leases acquired and tenant relationships is determined by applying a fair value model. The estimates of fair value of in-place leases include an estimate of carrying costs during the expected lease-up periods for the respective spaces considering existing market conditions. In estimating the carrying costs that would have otherwise been incurred had the leases not been in place, we include such items as real estate taxes, insurance and other operating expenses as well as lost rental revenue during the expected lease-up period based on existing market conditions. The estimates of the fair value of tenant relationships also include costs to execute similar leases including leasing commissions, legal fees and tenant improvements as well as an estimate of the likelihood of renewal as determined by management on a tenant-by-tenant basis. 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.As of December 31, 2015 and 2014, accumulated depreciation and amortization related to our consolidated investments in real estate assets and intangibles were as follows:December 31, 2015 Buildings and
Improvements Cost $ 211,635 $ 54,068 $ 3,083 $ (184 ) Less: depreciation and amortization (26,422 ) (2,686 ) (2,749 ) 104 Net $ 185,213 $ 51,382 $ 334 $ (80 ) December 31, 2014 $ 252,812 $ 62,447 $ 4,551 $ (469 ) (24,162 ) (2,073 ) (2,701 ) 259 Net $ 228,650 $ 60,374 $ 1,850 $ (210 ) (1)Excludes Babcock and AJS which were classified as held for sale as of December 31, 2014. These two properties sold on January 8, 2015 and February 21, 2015, respectively. Net book values included in assets associated with real estate held for sale in the consolidated balance sheet were buildings and improvements of $9.6 million, land and improvements of $3.2 million, lease intangibles of $0.2 million and acquired below-market leases of less than $0.1 million. See Note 7, Real Estate Held for Sale.F-9Behringer Harvard Opportunity REIT II, Inc.Notes to Consolidated Financial StatementsAnticipated net amortization expense associated with the acquired lease intangibles for each of the following five years ended December 31 is as follows:Year 2016 $ 36 2017 20 2018 (14 ) 2019 (12 ) 2020 (10 ) Real Estate Held for Sale and Discontinued OperationsWe 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. During the fourth quarter of 2014, we entered into sales contracts for Babcock, a self-storage facility in Texas, and AJS, an office building located in Berlin, Germany, and classified Babcock and AJS as real estate held for sale in our consolidated balance sheet at December 31, 2014. We sold Babcock on January 8, 2015 and AJS on February 21, 2015. We did not have any properties classified as held for sale at December 31, 2015.Effective as of April 1, 2014, we early adopted the revised guidance in Accounting Standards Update No. 2014-08 regarding discontinued operations. For sales of real estate or assets classified as held for sale after April 1, 2014, we will evaluate whether a disposal transaction meets the criteria of a strategic shift and will have a major effect on our operations and financial results to determine if the results of operations and gains on sale of real estate will be presented as part of our continuing operations or as discontinued operations in our consolidated statements of operations. If the disposal represents a strategic shift, it will be classified as discontinued operations for all periods presented; if not, it will be presented in continuing operations. December 31, 2018 2017 Cash and cash equivalents $ 29,607 $ 52,147 Restricted cash 3,045 5,213 Total cash, cash equivalents and restricted cash $ 32,652 $ 57,360 F-9 offersoffers; and changes in the global and local markets or economic conditions. Our assets may at times be concentrated in limited geographic locations and, toTo 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, andF-10Behringer Harvard Opportunity REIT II, Inc.Notes to Consolidated Financial StatementsThe Company’s principal executive officer and principal financial officer, as well as a panel of asset managers and financial analysts of the Advisor, reviewOur management reviews 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.2015,2018, we did not record any impairment charges. During the year ended December 31, 2017, we recorded a non-cash impairment charge of $1.4$4.1 million to reduce the carrying value of our investment in 22 Exchange, one of oura student housing investments,property with a retail component located in Akron, Ohio, to its estimated fair value. This charge was attributable to certain events; including the loss of our anchor retail tenant during the fourth quarter of 2017 and the lender’s notice to us that it would begin sweeping the cash from operations for this property effective January 2018. In estimating the fair value of 22 Exchange, we used management’s internal discounted cash flow analysisanalyses prepared with consideration of the current local market. There were no impairment charges recorded during the years ended December 31, 2014 and 2013.F-10 this arrangementsuch arrangements to determine if it hasthey have 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 isArrangements are reassessed at each reporting period. See Note 8, Investment in Unconsolidated Joint Venture,7 of the Notes to the Consolidated Financial Statements for further discussion.Straight-line rent was income of less than $0.1 million recognized in rental revenues for the year ended December 31, 2015. Straight-line rent was income of $0.2 million, and $0.4 million recognized in rental revenues for the years ended December 31, 2014 and 2013, respectively, and included amounts recognized in discontinued operations for the year ended December 31, 2013. Leases associated with our multifamily and student housing hotel and self-storage assets are generally short-term in nature, and thus have no straight-line rent. Net below-market lease amortization of less than $0.1 million was recognized in rentalfor the year ended December 31, 2015. Net above-market lease amortization of less than $0.1 million was recognized in rental revenues for the year ended December 31, 2014. Net above-market lease amortization of less than $0.1 million was recognized in rental revenues for the year ended December 31, 2013 and included amounts recognized in discontinued operations.F-11Behringer Harvard Opportunity REIT II, Inc.Notes to Consolidated Financial StatementsHotel revenue is derived from the operations of the Courtyard Kauai Coconut Beach Hotel and consistsconsisted primarily of guest room, food and beverage, and other ancillary revenues such as laundry and parking.parking at hotel properties. Hotel revenue isrevenues were recognized as the services arewere rendered.Accounts ReceivableAccounts receivable During the periods presented, our hotel revenues were derived from the operations of the Courtyard Kauai Coconut Beach Hotel, which was sold on August 15, 2017.propertiesproperties.$2.4 millionthe loan, presented in the consolidated balance sheets as a direct deduction from the carrying value of the corresponding loan and $2.2 million asamortized over the initial term of December 31, 2015 and 2014, respectively, and included straight-line rental revenue receivablesthe corresponding loan. Amortization of $0.3 million and $0.6 million as of December 31, 2015 and 2014, respectively.Prepaid Expenses and Other AssetsPrepaid expenses and other assets of $1.1 million and $1.4 million as of December 31, 2015 and 2014, respectively, included prepaid directors’ and officers’ insurance, as well as prepaid insurance of our consolidated properties.Furniture, Fixtures, and EquipmentFurniture, fixtures, and equipment are recorded at cost and are depreciated according todeferred loan costs will begin in the Company’s capitalization policy,period during which uses the straight-lineloan is originated using the effective interest method over their estimated useful livesthe term of five to seven years. Furniture, fixtures and equipmentthe loan. The Company capitalizes initial direct costs associated with properties classified as held for saleleasing activities. The costs are not depreciated. Maintenancecapitalized upon the execution of the lease and repairs are charged to operations as incurred. Accumulated depreciation associated with our furniture, fixtures, and equipment was $8.1 million and $6.4 million asamortized over the initial term of December 31, 2015 and 2014, respectively.Deferred Financing Fees are amortized to interest expense of our notes payable using a straight-line method that approximates the effective interest method over the life of the related debt. Deferred financing fees, net were $2.4 million and $0.4 million as of December 31, 2018 and 2017, respectively. Accumulated amortization of deferred financing fees was $2.5$0.6 million and $2.2 million as of December 31, 20152018 and 2014,2017, respectively.Derivative Financial InstrumentsOur objective in using derivatives is to add stability to interest expense and to manage our exposure to interest rate movements or other identified risks and to minimize the variability caused by foreign currency translation risk related to our net investment in foreign real estate. To accomplish these objectives, we use various types of derivative instruments to manage fluctuations in cash flows resulting from interest rate risk attributable to changes in the benchmark interest rate of LIBOR. These instruments include LIBOR-based interest rate swaps and caps. For our net investments in foreign real estate, we may use foreign exchange put/call options to eliminate the impact of foreign currency exchange movements on our financial position.We measure our derivative instruments and hedging activities at fair value and record them as an asset or liability, depending on our rights or obligations under the applicable derivative contract. Changes in fair value of derivative instruments not designated as hedges are recognized in earnings in the affected period.As of December 31, 2015, we do not have any derivatives designated as net investment hedges, fair value hedges or cash flow hedges. No derivatives were being used for trading or speculative purposes. See Note 4, Assets and Liabilities Measured at Fair Value, and Note 11, Derivative Instruments and Hedging Activities, for further information regarding our derivative financial instruments. 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 Internal Revenue 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.F-12F-11 Behringer Harvard Opportunity REIT II,Asresultrefund of foreign income tax of approximately $0.8 million and (ii) the reversal of our previously estimated taxes payable on the 2015 sale of two foreign investments during 2015, AJS and Holstenplatz, we recorded estimated foreign income tax of approximately $2.7$0.8 million. The foreign income tax was calculated on gains recognized at the exchange rate in effect on the date of sale and calculated using current tax rates. (“OCI”). Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations and comprehensive income (loss).iswas the functional currency for the operations of Alte Jakobstraße (“AJS”) and Holstenplatz, which were two foreign investments we sold in 2015. As a result of the sale of AJS and Holstenplatz. We sold AJS in February 2015 and Holstenlatz in September 2015. We also maintainHolstenplatz, we no longer have foreign operations. However, subsequent to their sale, we still maintained a Euro-denominated bank account that iswas comprised primarily of the remaining undistributed proceeds from the sale of these properties, which we translated into U.S. dollars at the current exchange rate at each reporting period. three years ended December 31, 2015, 2014,2018 and 2013,2017, the cumulative foreign currency translation adjustment was a loss of $0.4 million, a loss of $0.8less than $0.1 million and a gain of $0.3$0.5 million, respectively.When the Company has substantially liquidated its investment in a foreign entity, the cumulative translation adjustment (“CTA”) balance is required to be released into earnings. In accordance with ASU 2013-05, upon disposal of the property, we would recognize the CTA as an adjustment to the gain on sale. During the first quarter of 2015, we recognized a CTA of approximately $0.6 million as a reduction to the gain on sale of our AJS office building, which we sold on February 21, 2015. We sold our wholly owned investment in the Holstenplatz office building, located in Hamburg, Germany, on September 1, 2015. We recognized a CTA credit of approximately $0.4 million as an increase to the gain on sale of Holstenplatz. With the sale of Holstenplatz, we no longer have foreign operations.Other Comprehensive Income (Loss)Items of other comprehensive income (loss) consist of gains and losses affecting equity that are excluded from net income (loss) under GAAP. The components of OCI consist of cumulative foreign currency translation gains and losses and the unrealized gain on derivative instruments.Stock-Based CompensationWe have adopted a stock-based incentive award plan for our directors and consultants and for employees, directors and consultants of our affiliates. We have not issued any stock-based awards under the plan as of December 31, 2015.20152018 and 2014,2017, 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. in target assets 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 year ended December 31, 2015,2018, excluding Babcock22 Exchange, the investment we disposed of in 2018, approximately 27.4%, 13.1%, 20.7%, 2.1%, 22.3% and AJS (which were sold in the first quarter of 2015) and Holstenplatz and Wimberly (which were sold in the third quarter of 2015), 38% and 20%14.4% of our total revenues were derived from our properties located in HawaiiFlorida, Texas, Tennessee, Illinois, Georgia and Texas,Indiana, respectively. Additionally, excluding our properties soldthe investment we disposed of in 2015, 39%2018, approximately 68.5%, 38%,22.3% and 19%9.2% of our total revenues for the year ended December 31, 2015 were from our multifamily hotel, andproperties, student housing investments,properties and medical office building, respectively. To the extent that our portfolio is concentrated in limited geographic regions or types of assets, downturns relating generally to such region orF-13Behringer Harvard Opportunity REIT II, Inc.Notes to Consolidated Financial StatementsF-12 Net (loss) per share is calculated based onby dividing net (loss) income by the weighted averageweighted-average number of shares of common sharesstock outstanding during eachthe applicable period. The weighted average shares outstanding used to calculate both basic and diluted loss per share were the same for each of the three years ended December 31, 2015, 2014 and 2013, as there were no potentially dilutive securities outstanding.Subsequent EventsWeevaluated subsequent events for recognition or disclosure in our consolidated financial statements.In May 2014,Financial Accounting Standards Board (“FASB”)Company adopted guidance issued by the FASB that that requires companies to measure investments in equity securities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income, using a modified-retrospective transition method. Since the Company had no investments in equity securities, except those accounted for under the equity method prior to January 1, 2018, the adoption of this standard had no effect on its consolidated financial statements when adopted.update (“ASU 2014-09”)acquisition of an asset or as a business combination. The guidance provides a test to ASC Topic 606, Revenue from Contractsdetermine 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. Additionally, assets acquired, liabilities assumed, and any noncontrolling interest will be measured at their relative fair values. The Company anticipates acquisitions of real estate assets, if any, will likely qualify as an asset acquisition. Therefore, any transaction costs associated with Customers. ASU 2014-09an asset acquisition will be capitalized and accounted for in accordance with this guidance. As a result of this guidance, during the year ended December 31, 2018, the Company capitalized $1.1 million of transaction costs associated with the acquisition of the Axis at Westmont, which qualified as an asset acquisition, as opposed to expensing these costs.ASU 2014-09The new guidance requires an entitycompanies to recognizeapply a five-step model in accounting for revenue when it transfers promised goods or servicesarising from contracts with customers, as well as enhance disclosures regarding revenue recognition. Lease contracts are excluded from this revenue recognition criteria; however, the sale of real estate is required to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. ASU 2014-09 is effective for public companies for interim and annual reporting periods beginning after December 15, 2017, as adjusted by a one-year deferral offollow the new revenuemodel. The Company has adopted this standard confirmed by FASB inusing the July 2015 meeting. In addition, early adoption will be permitted as of the original effective date in ASU 2014-09, which for public companies was annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods. Either full retrospective adoption or modified retrospective adoption is permitted. We are currently evaluating the impact of thetransition method. The adoption of ASU 2014-09this pronouncement had no effect on our consolidated financial statements.statements since, with the disposal of the Courtyard Kauai Coconut Beach Hotel in August 2017, all revenues now consist of rental income from leasing arrangements, which is specifically excluded from the standard.F-13 2014,2018, the FASB issuedSEC adopted the final rule amending certain disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded. In addition, the amendments expand the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an update (“ASU 2014-15”), Disclosureanalysis of Uncertainties about an Entity’s Ability to Continue aschanges in each caption of stockholders' equity presented in the balance sheet must be provided in a Going Concern. ASU 2014-15 requires management’s assessment of a company’s ability to continue as a going concernnote or separate statement. The rule was effective on November 5, 2018 and provide related footnote disclosures when conditions give rise to substantial doubt about a company’s ability to continue as a going concern within one year from the financial statement issuance date. ASU 2014-15 applies to all companies and iswill be effective for the annual period endingquarter that begins after December 15, 2016, and all annual andthe effective date. Since the Company already includes a year to date consolidated statement of stockholders’ equity in our interim periods thereafter. We do not believefinancial statement filings, the adoption of this guidance will haveresult in the inclusion of a material impact onquarter to date consolidated statement of stockholders equity in our disclosures.January 2015,June 2016, the FASB issued (“ASU 2015-01”), Simplifying Income Statement Presentation by Eliminatingan accounting standards update which replaces the Conceptincurred loss impairment methodology currently in use with a methodology that reflects expected credit losses and requires consideration of Extraordinary Items. ASU 2015-01 eliminates the concepta broader range of an extraordinary item from U.S. GAAP. An entity is no longer requiredreasonable and supportable information to (i) segregate an extraordinary item from the results of ordinary operations; (ii) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; and (iii) disclose income taxes and earnings per share data applicable to an extraordinary item. ASU 2015-01 does not affect disclosureinform credit loss estimates. The new guidance for events or transactions that are unusual in nature or infrequent in occurrence. ASU 2015-01 is effective for interim and annual reporting periods in fiscal years that beginbeginning after December 15, 2015. The adoption of ASU 2015-01, effective January 1, 2016,2019, including interim periods within those fiscal years. This guidance will not have a material impact on the Company’s consolidated financial statements.cash flows.
do not apply to its current operations. As of December 31, 2018 Debt securities: Adjusted Cost Gross Unrealized Gains Gross Unrealized
Losses Fair Value Corporate and Government Bonds $ 14,575 $ 15 $ (204 ) $ 14,386 F-14F-14 Behringer Harvard Opportunity REIT II,In February 2015,FASB issued an update (“ASU No. 2015-02”)investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to ASC Topic 810, Amendments towhich fair value has been below cost basis, the Consolidation Analysis. ASU 2015-02 makes several modifications to the consolidation guidance for VIEs and general partners’ investments in limited partnerships, as well as modifications to the evaluation of whether limited partnerships are VIEs or voting interest entities. The amendments in ASU 2015-02 are effective for public companies in interim and annual reporting periods in fiscal years beginning after December 15, 2015. Adoption of ASU 2015-02, effective January 1, 2016, may result in additional disclosures, however, we do not believe this adoption will impact the status of our eight consolidated investments and one unconsolidated joint venture as of December 31, 2015.In April 2015, the FASB issued an update (“ASU 2015-03”) to ASC Topic 835, Interest - Imputation of Interest, Simplifying the Presentation of Debt Issuance Costs. The amendments in ASU 2015-03 require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amountfinancial condition of the related debt liability, consistent with debt discounts, insteadissuer 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 being presented as a deferred charge. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this updated guidance. ASU 2015-03 is effective for public companies in interim and annual reporting periods beginning after December 15, 2015. The new guidance requires retrospective application.investment’s amortized cost basis. As of December 31, 2015, we have $1.7 million of net deferred financing costs2018, the Company did not recognize any impairment charges.reclassified from assetsreceived for an asset or paid to transfer a reductionliability (an exit price) in the carrying amount of our debt. The adoption of this guidance, effective January 1, 2016, will change the classification of deferred financing fees on our balance sheet, but it will not otherwise have an impact on our financial statements.4. Assets and Liabilities Measured at Fair ValueFair value measurements are determined based on the assumptions thatprincipal or most advantageous 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.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 2in 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.includebe used to measure fair value:• Level 1 – Quoted prices in active markets for identical assets or liabilities. • Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. similarthese investments; however, the markets for these 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 MeasurementsCurrently, we 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.We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. However, asnot active. As of December 31, 2015, we have assessed the significance2018, all of the impactCompany’s Debt Securities were classified as Level 2 assets and there were no transfers between the level classifications during the year ended December 31, 2018.credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.F-15Behringer Harvard Opportunity REIT II, Inc.Notes to Consolidated Financial StatementsThe following fair value hierarchy table presents information about our assets measured at fair value on a recurring basis as of December 31, 2015 and 2014:December 31, 2015 Level 1 Level 2 Level 3 Total Assets Derivative financial instruments $ — $ 2 $ — $ 2 December 31, 2014 Level 1 Level 2 Level 3 Total Assets Derivative financial instruments $ — $ 28 $ — $ 28 Courtyard Kauai Coconut Beach Hotel was our only remaining asset with an interest rate cap as of December 31, 2015 and it had a nominal value.Derivative financial instruments classified as assets are included in prepaid expenses and other assets on the balance sheet. As of December 31, 2018 Due in 1 year $ 2,835 Due in 1 year through 5 years 10,670 Due in 5 years through 10 years 881 Due after 10 years - Total $ 14,386 2015,2017, we recorded a $1.4$4.1 million non-cash impairment charge as a result of a measurable decrease in the fair value of 22 Exchange, which was one of our student housing investments.investments that also had a retail component. In estimating the fair value of 22 Exchange, we used management’s internal discounted cash flow analysis prepared with consideration of the current local market. The discounted cash flow estimate iswas considered Level 3 under the fair value hierarchy described above.F-15 2015:As of December 31, 2015 Level 1 Level 2 Level 3 Loss Assets $ — $ — $ 25,000 $ 25,000 $ (1,417 ) For the year ended December 31, 2017 Level 1 Level 2 Level 3 Total
Fair ValueLoss Assets Buildings and improvements, net(1) $ — $ — $ 19.0million $ 19.0million $ (4.1 million) (1) We recorded a non-cash impairment charge of $1.4$4.1 million during the year ended December 31, 20152017 as a result of a measurable decrease in the fair value of 22 Exchange.Fair Value
as of
December 31, 2017Unobservable Input Buildings and improvements, net(1) $ 19.0 million Discounted cash flow Discount rate
Terminal capitalization rate(1) We recorded a non-cash impairment charge of $4.1 million during the year ended December 31, 2017 on our investment in 22 Exchange, which was one of our student housing investments. Quantitative Information about Level 3 Fair Value Measurements Description Valuation
Techniques Unobservable Input Range
(Weighted Average) $ 25,000 Discounted cash flow Discount rate
Terminal capitalization rate 7.5% - 8.0%
6.5% - 7.5%(1)Due to the current local market in Akron, Ohio, we recorded a non-cash impairment charge of $1.4 million on our investment in 22 Exchange, a student housing property, ended December 31, 2015.There were no impairment charges recorded during the years ended December 31, 2014 and 2013.F-16Behringer Harvard Opportunity REIT II, Inc.Notes to Consolidated Financial Statements20152018 and 2014,2017, management estimated that the carrying value of cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses and other assets, accounts payable, accrued expenses,and other liabilities, payables/receivables frompayables to related parties, and distributions payable to noncontrolling interests and accrued property tax were at amounts that reasonably approximated their fair value based on their highly-liquid nature and short-term maturities. The notes payable of $178.7 million as of December 31, 2015 and $216.3 million, excluding $9.1 million of contractual obligations on real estate held for sale as of December 31, 2014, have a fair value of approximately $179.3 million and $217.1 million as of December 31, 2015 and 2014, respectively, based upon interest rates for debt with similar terms and remaining maturities that management believes we could obtain. basis.in the fair value hierarchy. The fair value iswas estimated using a discounted cash flow analysis valuation on the estimated 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 December 31, 20152018 and 2014.
2017. As of December 31, 2018 As of December 31, 2017 Carrying Amount Estimated Fair
Value Carrying Amount Estimated Fair
Value Notes payable $ 141,423 $ 140,986 $ 90,321 $ 91,449 F-17F-16 Behringer Harvard Opportunity REIT II,2015,2018, we consolidated eight2015:Property Name Description Location Date Acquired
Interest(1) Medical office building Palm Beach Gardens, Florida October 20, 2010(1)80.8%Courtyard Kauai Coconut Beach HotelHotelKauai, HawaiiOctober 20, 2010 8081.8 % Student housing Athens, Georgia April 25, 2011 85 % Lakes of Margate Multifamily Margate, Florida October 19, 2011 92.5 % Arbors Harbor Town(1) Multifamily Memphis, Tennessee December 20, 2011 94%22 ExchangeStudent housingAkron, OhioApril 16, 201390100% Parkside Apartments (“Parkside”) Multifamily Sugar Land, Texas August 8, 2013 90 % Lakewood Flats at Fishers Fishers Multifamily Dallas, TexasFishers, Indiana October 10, 2014November 30, 2017100 % Axis at Westmont Fishers Multifamily Westmont, Illinois November 27, 2018 100 % ____________________________(1) WeOn December 28, 2018, we acquired the noncontrolling member’s 6% ownership interest in Arbors Harbor Town for $1.9 million and as a portfolioresult, now own 100% of eight medical office buildings, known as the Original Florida MOB Portfolio, on October 8, 2010. We acquired a medical office building known as Gardens Medical Pavilion on October 20, 2010. Collectively, the Original Florida MOB Portfolio and Gardens Medical Pavilion were referred to as the Florida MOB Portfolio. The Florida MOB Portfolio consisted of nine medical office buildings. On September 20, 2013, we sold the Original Florida MOB Portfolio. As of December 31, 2015, we own approximately 80.8% of the remaining building, Gardens Medical Pavilion.this property.During2015,2017. Additionally, NOI is all gross revenues from the property less all operating expenses, including property taxes and management fees but excluding depreciation.recordedacquired the Flats at Fishers, a non-cash impairment charge306-unit multifamily property located in Fishers, Indiana from an unrelated third party for an aggregate purchase price of $1.4approximately $36.9 million, excluding closing and other related transaction costs. In connection with the acquisition, we incurred and expensed an aggregate of approximately $0.6 million in acquisition fees and acquisition expense reimbursements payable to Lightstone. The acquisition was funded with (i) approximately $27.0 million of funds that had been temporarily held in escrow by a qualified intermediary in connection with the sale of the Courtyard Kauai Coconut Beach and (ii) available cash.a resultthe acquiring entity. Accordingly, the consideration paid by us to complete the acquisition of a measurable decreasethe Flats at Fishers has been allocated to the assets acquired based upon their fair values as of the date of the acquisition. Approximately $6.9 million was allocated to land and improvements, $29.3 million was allocated to building and improvements, and $0.7 million was allocated to other assets.F-17 fair valueCompany’s consolidated statements of our 22 Exchange investment. See Note 4, Assetsoperations from the Axis at Westmont and Liabilities Measuredthe Flats at Fair Value - Nonrecurring Fair Value Measurements,Fishers since their respective dates of acquisition for additional information. For the Years Ended December 31, 2018 2017 Rental revenue $ 4,197 $ 245 Net loss $ (367 ) $ (789 ) For the Years Ended December 31, 2018 2017 Pro forma rental revenue $ 32,790 $ 45,489 Pro forma net (loss) income attributable to the Company's shares $ (6,310 ) $ 21,794 Pro forma net (loss) income per share, basic and diluted $ (0.26 ) $ 0.87 1875 LawrenceOn May 30, 2014, we sold 1875 Lawrence for a contract sales price of approximately $46.7 million. We recorded a gain on sale of real estate property of $11.5 million and loss on early extinguishment of debt of $0.5 million, which was comprised of the write-off of deferred financing fees of $0.4 million and an early termination fee of $0.1 million. A portion of the proceeds from the sale were used to pay off in full the existing indebtedness of approximately $15.6 million associated with the office building. - Continuing Operationsdisposal of the 1875 Lawrence property doesfollowing dispositions did not represent a strategic shift;shift that had a major effect on the Company’s operations and financial results and therefore it is presenteddid not qualify to be reported as discontinued operations and their operating results are reflected in the Company’s results from continuing operations in the consolidated statements of operations for all periods presented through their respective dates of disposition:years ended December 31, 2014Company and 2013.Babcock Self StorageJanuary 8, 2015,August 15, 2017, we sold Babcockthe Courtyard Kauai Coconut Beach Hotel, a 311-room hotel located in Kapaa, Hawaii for a contractcontractual sales price of $62.0 million. In connection with the transaction, the third-party buyer assumed the existing outstanding mortgage indebtedness of $36.0 million. The net proceeds from the disposition of the Courtyard Kauai Coconut Beach Hotel were approximately $5.4 million. We$24.0 million, after the payment of closing costs, expenses, pro rations and other working capital adjustments and 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 recorded a gain on sale of real estate of $2$20.9 million.F-18 and lossof 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. These funds were subsequently used in connection with our acquisition of the Flats at Fishers on early extinguishmentNovember 30, 2017, as discussed above.debtReal Estateless than $0.1$0.5 million related to the receipt of certain escrow reimbursements from the finalization of an insurance claim for Lakewood Flats, which was composeddisposed of in August 2016.write-off of deferred financing fees and an early termination fee. A portion of the proceeds from the sale were used to pay off in full the existing indebtedness of approximately $2.1 million associated with the storage facility. Babcock was classified as held for sale on our consolidated balance sheet atyear ended December 31, 2014.Alte JakobstraßeOn February 21, 2015, we sold AJS, which is located2017, in Berlin, Germany, for a contract sales price of approximately €12.4 million (approximately $14.1 million). We recorded aaddition to the gain on sale of real estate of approximately $3.3$20.9 million which is netdisclosed above, we recognized an aggregate gain of a CTA charge of approximately $0.6 million. We recognized a loss on early extinguishment of debt of less than $0.1$0.7 million which was composed of the write-off of deferred financing fees and an early termination fee. A portion of the proceeds from the sale were used to fully satisfy the existing indebtedness associated with the property of approximately €5.7 million (approximately $6.5 million). The Company recorded a provision for income tax of approximately $1.7 million during 2015 as a result of foreign income tax related to the sale. AJS was classified as held for sale on our consolidated balance sheet at December 31, 2014.F-18Behringer Harvard Opportunity REIT II, Inc.Notes to Consolidated Financial StatementsHolstenplatzOn September 1, 2015, we sold Holstenplatz, which is located in Hamburg, Germany, for a contract sales pricereceipt of approximately €16.4 million (approximately $18.4 million). We paid off the balance of the Holstenplatz debt of $8.1 million on its maturity date of April 30, 2015. We recorded a gain on sale of real estate of approximately $8.6 million, which includes a CTA credit of approximately $0.4 million. The Company recorded a provision for income tax of approximately $1 million as a result of foreign income tax related to the sale.The foreign income tax for our AJS and Holstenplatz sales were calculated on gains recognized at the exchange rate in effect on the sale dates of February 21, 2015 and September 1, 2015, respectively, and were calculated using current tax rates. All U.S. dollar amounts related to the AJS and Holstenplatz sales were based on the exchange rate in effect on their respective sale dates.Wimberly at DeerwoodOn September 9, 2015, we sold Wimberly at Deerwood, a 322-unit multifamily community in Jacksonville, Florida, for a contract sales price of approximately $43.5 million. We recorded a gain on sale of real estate of $8.9 million and loss on early extinguishment of debt of $0.6 million, which was composed of the write-off of deferred financing fees of $0.3 million and an early termination fee of $0.3 million. A portion of the proceedscertain escrow reimbursements from the sale of the asset were used to pay off in full the existing indebtedness of approximately $26.4 million secured by the property.Sale of Real Estate Reported in Continuing OperationsThe following table presents our sale of real estateinsurance claim for the years ended December 31, 2015 and 2014 (in millions):Date of Sale Property Ownership Interest Sales Contract Price Gain on Sale of Real Estate May 30, 2014 1875 Lawrence 100% $ 46.7 $ 46.3 $ 11.5 January 8, 2015 Babcock Self Storage 85% $ 5.4 $ 5.2 $ 2.0 February 21, 2015 Alte Jakobstraße 99.7% $ 14.1 $ 13.0 $ 3.3 September 1, 2015 Holstenplatz 100% $ 18.4 $ 18.0 $ 8.6 September 9, 2015 Wimberly 95% $ 43.5 $ 42.9 $ 8.9 (1)A portion of the net cash proceeds was used to pay off the property-associated debt of $15.6 million, $2.1 million, $6.5 million and $26.4 million for 1875 Lawrence, Babcock, AJS and Wimberly, respectively. The Holstenplatz debt was paid off on April 30, 2015.The Company does not view any of the four 2015 disposals or the 2014 disposal as a strategic shift. Therefore, the results of operations for Babcock, AJS, Holstenplatz, and Wimberly are presented in continuing operations in the consolidated statements of operations for the years ended December 31, 2015, 2014, and 2013 and the results of operations for 1875 Lawrence are included in continuing operations for the years ended December 31, 2014 and 2013.The following table presents net income attributable to the Company for the three years ended December 31, 2015, 2014 and 2013 related to Babcock, AJS, Holstenplatz, Wimberly, and 1875 Lawrence. Net income for the year ended December 31, 2015 includes the gains on sale of Babcock, AJS, Holstenplatz, and Wimberly for a total of $22.8 million. Net income for the year ended December 31, 2014 includes the gain on sale of 1875 Lawrence of $11.5 million (in millions): For the Year Ended December 31, Description 2015 2014 2013 Net income (loss) attributable to the Company $ 17.4 $ 9.3 $ (3.6 ) Discontinued OperationsEffective as of April 1, 2014, we early adopted the revised guidance in Accounting Standards Update No. 2014-08 regarding discontinued operations. Accordingly, we have no discontinued operations for the years ended December 31, 2015 and 2014. See Note 16, Discontinued Operations, for additional disclosures regarding discontinued operations for the year ended December 31, 2013.F-19Behringer Harvard Opportunity REIT II, Inc.Notes to Consolidated Financial Statements Real Estate Held for SaleAs of December 31, 2014, Babcock and AJS were classified as real estate held for sale on our consolidated balance sheet. We sold both of these properties in the first quarter of 2015. The Company does not view the sales of Babcock and AJS as a strategic shift. Therefore, the results of operations for the two properties are presented in continuing operations for the years ended December 31, 2015, 2014 and 2013. See Note 6, Real Estate and Real Estate-Related Investments, under the caption Sales of Real Estate Reported in Continuing Operations.We did not have any real estate assets classified as held for sale as of December 31, 2015.The major classes of assets and liabilities associated with our real estate held for sale as of December 31, 2014 were as follows:Description Amount Land and improvements, net $ 3,195 Building and improvements, net 9,581 Lease intangibles, net 175 Assets associated with real estate held for sale $ 12,951 Notes payable $ 9,122 Other 90 Obligations associated with real estate held for sale $ 9,212 F-20Behringer Harvard Opportunity REIT II, Inc.Notes to Consolidated Financial Statements8. Investment in Unconsolidated Joint VentureOn May 24, 2013, we (the “Lender”)$13.7$15.3 million (the “Initial Advance”) to an unaffiliated third-party entity (the “Borrower”) that owns an apartment complex under development in Denver, Colorado (“Prospect(the “Prospect Park”). The Borrower also hashad a senior construction loan with a third-party construction lender (the “Senior Lender”), in an aggregate original principal amount of $35.6$40.0 million. The senior construction loan iswas guaranteed by the owners of the developer. We also havehad a personal guaranty from the owners of the developer guaranteeing completion of the projectProspect Park and payment of any cost overruns. Our mezzanine loan iswas secured by all of the membership interests of the Borrower and iswas subordinate to the senior construction loan. Our Initial Advance has anadvances of $15.3 million initially had annual stated interest rate ofrates ranging from 10% forto 18%.first three yearsterms of the term, followed by two one-year extension options at which pointmezzanine loan, we participate in the annual interest rate would increaseresidual interests of Prospect Park attributable to 14%.a sale or refinancing even though we have no actual ownership interest. We evaluated this ADC Arrangement and determined that theits characteristics arewere similar to a jointly-owned investment or partnership. Accordingly, theour investment, waswhich is a variable interest entity (“VIE”) is accounted for as an unconsolidated joint venture under the equity method of accounting instead of loan accounting sinceaccounting.will participatereceived aggregate proceeds of approximately $21.6 million representing the repayment in full of the outstanding principal and accrued interest due on our mezzanine loan. Additionally, the Borrower has placed approximately $15.1 million of the net proceeds from the sale into an escrow account to be used for settlement of the amount due to us for our participation in the residual interests through the sale or refinancing of the property.As a result of projected cost overruns, an event of default was declared by the Senior Lender on April 28, 2014, and we declared an event of default under the mezzanine loan agreement on May 5, 2014.Prospect Park. The events of default were cured by the Borrower and developer, agreeing to cover cost overruns totaling $6.6 million, increasing our financing by $1.5 million (the “Additional Advance”) at an annual interest rate of 18%, and the Senior Lender increasing their loan to $40 million. The termscarrying value of our Initial Advance remainedunconsolidated investment in Prospect Park, which represented the same underminimum amount payable to us for our participation in the amended loan agreement.Both the senior loan and our mezzanine loan were in technical default atresidual interests of Prospect Park, was $10.9 million as of both December 31, 2015 due to a delay in completion of the project. The Senior Lender2018 and 2017, respectively. In January 2019, the Company are working on modificationsreceived proceeds of their respective loans to waive any event of default and extendapproximately $10.9 million, representing the completion date. As of December 31, 2015, the outstanding principal balance underminimum amount payable for our mezzanine loan was $15.3 million. Currently, the borrower is funding any cost overruns. We expect the project to be fully completedparticipation in the second quarterresidual interests of 2016.willwould continue to be accounted for as an unconsolidated joint venture under the equity method of accounting. We will continuecontinued to monitor this situation and any impact these events might have had on our ability to ultimately realize ourthe investment. The ADC Arrangement iswas reassessed at each reporting period.In connection with thiswe capitalized acquisition-related costs and fees totaling $0.4 million duringin Prospect Park for the year ended December 31, 2013. Interest capitalized for2018. For the yearsyear ended December 31, 2015, 2014, and 2013 was $0.5 million, $0.5 million and $0.3 million, respectively. For the years ended December 31, 2015, 2014 and 2013,2017, we recorded no equity in earnings (losses) of unconsolidated joint venture$17.9 million related to our unconsolidated investment in Prospect Park.F-19 The following table sets forth our ownership interest in Prospect Park:Property Name Ownership Interest at December 31, Carrying Amount at December 31, 2015 2014 2015 2014 Prospect Park N/A N/A $14,482 $13,973 F-21Behringer Harvard Opportunity REIT II,20152018 and 2014:Description 2015 2014 38,000 38,000 30-day LIBOR + .95% 5/9/2017 Florida MOB Portfolio—Gardens Medical Pavilion 13,298 13,678 4.9% 1/1/2018 River Club and the Townhomes at River Club 24,299 24,664 5.26% 5/1/2018 Lakes of Margate 14,496 14,723 5.49% and 5.92% 1/1/2020 Arbors Harbor Town 25,130 25,591 3.985% 1/1/2019 22 Exchange 19,500 19,500 3.93% 5/5/2023 10,469 10,828 5% 6/1/2018 Lakewood Flats 33,500 33,500 30-day LIBOR + 1.5% 11/5/2019 — 9,125 3.887% 4/30/2015 — 26,685 30-day LIBOR + 2.28% 3/1/2023 $ 178,692 $ 216,294 Notes Payable included with Obligations related to real estate held for sale: Babcock Self Storage n/a 2,137 5.80% 8/30/2018 Alte Jakobstraße n/a 6,985 2.3% 12/30/2015 n/a $ 9,122 Total notes payable obligations $ 178,692 $ 225,416 _____________________________(1)As anticipated, we extended our debt secured by Courtyard Kauai Coconut Beach Hotel by 18 months from its initial maturity date of November 9, 2015 to May 9, 2017.(2)30-day London Interbank Offer Rate ("LIBOR") was 0.43% at December 31, 2015.(3) Includes approximately $0.4 million of unamortized premium related to debt we assumed at acquisition.(4) We paid off2017:Property Interest Rate Weighted Average
Interest Rate as of
December 31, 2018 Maturity Date Amount Due at
Maturity As of
December 31, 2018 As of
December 31, 2017 River Club and the Townhomes at River Club LIBOR + 1.78% 3.93 % May 1, 2025 $ 28,419 $ 30,359 $ - River Club and the Townhomes at River Club (Repaid in full on May 1, 2018) - 23,511 Gardens Medical Pavilion LIBOR + 1.90% 3.61 % June 1, 2021 12,300 12,900 - Lakes of Margate 5.49% and 5.92% 5.75 % January 1, 2020 13,384 13,687 13,973 Arbors Harbor Town (Repaid in full on December 28, 2018) - 24,153 Arbors Harbor Town 4.53% 4.53 % December 28, 2025 29,000 29,000 - 22 Exchange (Extinguished through a deed-in-lieu of foreclosure on December 28, 2018) - 18,963 Parkside 4.45% 4.45 % June 1, 2025 15,782 17,877 - Parkside (Repaid in full on June 1, 2018) - 9,721 Axis at Westmont 4.39% 4.39 % February 1, 2026 34,343 37,600 - Total notes payable 4.28 % $ 133,228 141,423 90,321 Less: Deferred financing costs (2,407 ) (400 ) Total notes payable, net $ 139,016 $ 89,921 balance of the Holstenplatz debt on April 30, 2015. We sold the investment in September 2015.(5) We sold Wimberly in September 2015 andCompany entered into a portion of the sales proceeds was used to pay off the existing indebtedness in full.(6) As of December 31, 2014, Babcock and AJS were classified as real estate held for sale on our consolidated balance sheet. The properties were soldnon-recourse mortgage loan (the “River Club Mortgage”) in the first quarteramount of 2015 and$30.4 million. The River Club Mortgage has a portionterm of the sales proceeds for each property were used to pay off the existing indebtedness in full.At December 31, 2015, our notes payable balance was $178.7 million and consisted of the notes payable related to our consolidated properties. 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 Courtyard Kauai Coconut Beach Hotel, 22 Exchange, and Parkside notes payable. Interest capitalized for theseven years, ended December 31, 2015, 2014 and 2013 was $0.5 million, $0.5 million, and $0.3 million respectively, in connection with our equity method investment in Prospect Park.As anticipated, we extended our debt secured by Courtyard Kauai Coconut Beach Hotel by 18 months from its initial maturity date of November 9, 2015 to May 9, 2017. The loan will continue to bearbears interest at a variable annual rate of 30-day LIBORLibor plus 0.95%1.78% and requires monthly interest-only payments ofduring the first five years and interest only duringand principal payments pursuant to a 30-year amortization schedule for the remaining two years through its term,stated maturity with the entire unpaid principalbalance due upon maturity. The River Club Mortgage is cross-collateralized by the River Club and interest duethe Townhomes at maturity.On January 8, 2015, we sold our Babcock property to an unaffiliated third party. We used a portionRiver Club. At closing, approximately $23.4 million of the proceeds from the saleRiver Club Mortgage were used to fully satisfyrepay in full the existing indebtednessnon-recourse mortgage loan.F-20 $2.1 million. On February 21, 2015, we sold AJS, located in Berlin, Germany, to an unaffiliated third party and used a portion$9.6 million of the proceeds from the saleParkside Mortgage were used to payoffrepay in full the existing indebtednessnon-recourse mortgage loan.approximately €5.7 million, or approximately $6.5 million based$13.0 million. The Gardens Medical Mortgage has a term of three years, bears interest at Libor plus 1.90% and requires monthly interest and principal payments through its stated maturity with the entire unpaid balance due upon maturity. The Gardens Medical Mortgage is collateralized by the Gardens Medical Pavilion.exchangeassets of the Axis at Westmont, bears interest at a fixed annual rate in effectof 4.39% and requires monthly interest only payments until March 1, 2021, at which time monthly principal and interest payments of $188,064 are required. Any unpaid principal and interest is due on the maturity date, February 21, 2015. Babcock and AJS were classified as held for sale on our consolidated1, 2026. The Company has the right to prepay the entire outstanding amount of the loan provided that if prepayment is made prior to November 1, 2025, a prepayment premium is required. The fair value of the Axis at Westmont Mortgage approximated its outstanding balance sheet as of December 31, 2014.F-22Behringer Harvard Opportunity REIT II, Inc.Notes to Consolidated Financial StatementsWe paid off the Holstenplatz debt of approximately $8.1 million on its maturity date of April 30, 2015.assumption.property was classified as real estate held for sale on our condensed consolidatedArbors Harbor Town Mortgage has a term of seven years, bears interest at 4.53% and requires monthly interest payments through its stated maturity with the entire unpaid balance sheet as of June 30, 2015 and we sold it on September 1, 2015. On September 9, 2015, we sold Wimberly to an unaffiliated third party and used a portiondue upon maturity. The Arbors Harbor Town Mortgage is collateralized by the Arbors Harbor Town. At closing, approximately $23.7 million of the proceeds from the saleArbors Harbor Town Mortgage were used to fully satisfyrepay in full the existing indebtednessnon-recourse mortgage loan and an additional $1.9 million of approximately $26.4 million.We are subjectthe proceeds were used to customary affirmative, negative,acquire the 6.0% membership interest in the property held by a minority owner, and as a result, we now own 100.0% of this property.covenants and representations, warranties, and borrowing conditions,covenants. The Company is currently in compliance with all as set forth in our loan agreements, including, among other things, maintaining minimumof its debt covenants.ratios,requirements for its 22 Exchange loan for all of the quarterly periods in 2017 and as a result, the lender elected to value ratiossweep the cash from operations beginning in January 2018. Additionally, the cash flow from operations was not sufficient to fully pay the scheduled monthly debt service due on January 5, 2018, which constituted an event of default, and liquidity. Astherefore the 22 Exchange loan which was scheduled to mature in May 2023 became due on demand. The Company received notice on January 9, 2018 that the 22 Exchange loan had been transferred to a special servicer effective immediately. Subsequently, the special servicer placed the property in receivership and commenced foreclosure proceedings. On December 28, 2018, the Company and the 10.0% noncontrolling memberrelinquished their ownership of December 31, 2015, we believe we were in compliance22 Exchangethrough a deed-in-lieu of foreclosure transaction with the covenants under our lender. Upon relinquishment of the property,the Companywas relieved of approximately $22.6 million of mortgage obligations, including accrued and unpaid interest associated with the mortgageloan agreements.summarizesprovides information with respect to the contractual maturities and scheduled principal repayments of our contractual obligations for principal paymentsindebtedness as of December 31, 2015: 2019 2020 2021 2022 2023 Thereafter Total Principal maturities $ 831 $ 13,924 $ 13,235 $ 948 $ 1,582 $ 110,903 $ 141,423 Less: deferred financing costs (2,407 ) Total notes payable, net $ 139,016 Year 2016 $ 1,912 2017 40,135 2018 46,845 2019 57,809 2020 13,772 Thereafter 17,813 Total contractual obligations for principal payments $ 178,286 Unamortized premium 406 Total notes payable $ 178,692 (1)Our debt secured by Courtyard Kauai Coconut Beach Hotel, with a principal balance of $38 million at December 31, 2015, was scheduled to mature on November 9, 2015. As anticipated, we extended the term of the loan by 18 months to May 9, 2017. The loan requires monthly payments of interest only during its remaining term, with the unpaid principal and interest due at maturity.F-21 remaining office property, Gardens Medical Pavilion, due to us under non-cancelable leases in effect as of December 31, 20152018 are as follows:Year Amount Due 2016 $ 1,246 2017 1,242 2018 936 2019 874 2020 880 Thereafter 2,781 Total $ 7,959 Year Amount Due 2019 $ 1,395 2020 1,184 2021 1,113 2022 968 2023 889 Thereafter 943 Total $ 6,492 hotel, and student housing properties, as leases associated with these properties typically are for periods of one year or less. We have one remaining office property at December 31, 2015, Gardens Medical Pavilion, located in Palm Beach Gardens, Florida.F-23Behringer Harvard Opportunity REIT II, Inc.Notes to Consolidated Financial Statements Derivative Instruments and Hedging ActivitiesWe 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 December 31, 2015, we had one remaining interest rate cap and it was not designated as a hedging instrument. We had an interest rate cap associated with the debt on our Wimberly property, however this debt was paid off when the property sold on September 9, 2015.As anticipated, during 2015 we extended our debt secured by Courtyard Kauai Coconut Beach Hotel by 18 months from its initial maturity date of November 9, 2015 to May 9, 2017. The loan requires monthly payments of interest only during its remaining term, with the unpaid principal and interest due at maturity. The loan had a principal balance of $38 million at December 31, 2015. We also renewed and extended the term of the interest rate cap related to the debt secured by Courtyard Kauai Coconut Beach Hotel for an additional term of 18 months with a maturity date of May 15, 2017.Derivative instruments classified as assets were reported at their combined fair values of less than $0.1 million in prepaid expenses and other assets at December 31, 2015 and 2014. During the year ended December 31, 2014, we recorded a reclassification of unrealized loss to interest expense of less than $0.1 million to adjust the carrying amount of the interest rate caps. During the year ended December 31, 2015, we had no reclassification of unrealized loss to interest expense. The reclassification out of OCI in our statement of equity for the year ended December 31, 2014 was due to all derivatives being designated as non-hedging instruments as of January 1, 2013.The following table summarizes the notional value of our one remaining derivative financial instrument. The notional value provides an indication of the extent of our involvement in this instrument, but does not represent exposure to credit, interest rate, or market risks:Type / Description Notional Value Index Maturity Not Designated as Hedging Instruments Interest rate cap - Courtyard Kauai Coconut Beach Hotel $ 38,000 3.00% 30-day LIBOR May 15, 2017 The table below presents the fair value of our derivative financial instruments, as well as their classification on the consolidated balance sheets as of December 31, 2015 and 2014, respectively: Balance Sheet Asset Derivatives Derivatives not designated as hedging instruments: Location 2014 Interest rate derivative contracts Prepaid expenses and other assets $ 2 $ 28
| Derivatives Not Designated as Hedging Instruments | |
| Amount of Loss | |
| Year ended December 31, | |
| 2015 | 2014 |
| $26 | $215 |
Income Taxes
We have maintained and intend to maintain our election as a REIT under the Internal Revenue Code. In order for us to continue to qualify as a REIT we must meet a number of organizational and operational requirements, including a requirement to distribute annual dividends to our shareholders equal to a minimum of 90% of our REIT taxable income, computed without regard to the dividends paid deduction and our net capital gains. As a REIT, we generally will not be subject to federal income tax on our taxable income at the corporate level to the extent such income is distributed to our shareholders annually. Any current year taxable income generated by the Company may be offset by carrying forward unused prior year net operating losses (“NOLs”). If our taxable income after application of NOL carryforwards exceeds our dividends in a tax year, REIT tax rules allow us to designate dividends from the subsequent tax year in order to avoid current taxation on undistributed income. If we fail to qualify as a REIT in any taxable year, we will be subject to federal and state income taxes at regular corporate rates, including any applicable alternative minimum tax (“AMT”). In addition, we may not be able to requalify as a REIT for the four subsequent taxable years. Taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to applicable federal, state, and local income and margin taxes. Our operating partnerships are flow-through entities and are not subject to federal income taxes at the entity level.
For the year ended December 31, 2015,2018, we had estimated federal taxable income of approximately $3.8 million
| F-22 |
Lightstone Real Estate Investment Trust V, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share/unit data and where indicated in millions)
For the year ended December 31, 2017, we had a federal taxable income of approximately $1.8 million and had remaining federal NOL carryovers of approximately $13.1$11.4 million atas of December 31, 2015. The Company has continued to establish a valuation allowance against its deferred tax assets as2017. We did not pay any distributions during the utilization of any deferred tax asset is not at a level of more likely than not that they will be realized prior to their expiration. During 2015,year ended December 31, 2017. Additionally, during the year ended December 31, 2017, we recorded provision foran aggregate income tax benefit of approximately $1.6 million consisting of (i) a refund of foreign income tax of approximately $2.7$0.8 million as a resultand (ii) the reversal of our previously estimated foreign income taxtaxes payable $0.8 million related to the sales of AJS and Holstenplatz which were both located in Germany. The foreign income tax related to both dispositions was calculated on gains recognized at the exchange rate in effect on the date of sale and calculated using current tax rates.
We have a TRS which is subject to federal and state income taxes. AtAs of December 31, 2015,2018, our TRS had NOL carryforwards of approximately $4.5$5.0 million which expire in years 2030 to 2035. Because NOL’s are subject to certain change of ownership, continuity of business, and separate return year limitations, and because it is unlikely the available NOL’s will be utilized or because we consider any amounts possibly utilized to be immaterial, no benefits related to these NOL’s have been recognized in our consolidated financial statements. We have no significant temporary differences or tax credits associated with our TRS.
We have reviewed our tax positions under GAAP guidance that clarifies 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 status as a REIT will be sustained in any tax examination.
12. Stockholders’ Equity
Capitalization
As of December 31, 2015,2018, our authorized capital was 350,000,000 shares of common stock, 50,000,000 shares of preferred stock, and 1,000 shares of convertible stock. All shares of such stock have a par value of $.0001 per share.
As of December 31, 2015,2018, we had issued 26.7 million shares of our common stock, including 22,471 shares owned by the Advisor and 2.2 million shares issued through the DRP. As of December 31, 2015,2018, we had redeemed 1.13.3 million shares of our common stock and had 25,585,19823.4 million shares of common stock outstanding. As of December 31, 2015,2018, we had 1,000 shares of convertible stock held by an affiliate of Behringer.
The shares of convertible stock will be converted into shares of common stock automatically if (1) we have made total distributions on then outstanding shares of our common stock equal to the issue price of those shares plus a 10% cumulative, non-compounded, annual return on the issue price of those outstanding shares, or (2) we list our common stock for trading on a national securities exchange if the sum of the prior distributions on then outstanding shares of the common stock plus the aggregate market value of the common stock (based on the 30-day average closing price) meets the same 10% performance threshold. In general, the convertible stock will convert into shares of common stock with a value equal to the lesser of (A) 20% of the excess of our enterprise value plus the aggregate value of distributions paid to date on then outstanding shares of our common stock over the aggregate issue price of those outstanding shares plus a 10% cumulative, non-compounded, annual return on the issue price of those outstanding shares, or (B) 15% of the excess of our enterprise value plus the aggregate value of distributions paid to date on then outstanding shares of the common stock over the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares. At the date of issuance of the shares of convertible stock, management determined the fair value under GAAP was less than the nominal value paid for the shares; therefore, the difference is not material.
The timing of the conversion of any or all of the convertible stock may be deferred by our board of directors if it determines that full conversion may jeopardize our qualification as a REIT. Any such deferral will in no event otherwise alter the terms of the convertible stock, and such stock shall be converted at the earliest date after our board of directors determines that such conversion will not jeopardize our qualification as a REIT. Our board of directors is authorized to amend our charter, without the approval of the stockholders, to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series that we have authority to issue.
| F-23 |
Lightstone Real Estate Investment Trust V, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share/unit data and where indicated in millions)
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.
From our inception through December 31, 2017, we had redeemed 2.1 million shares of our common stock at an average price per share of $6.89 per share. During 2018, we redeemed approximately 1.2 million shares of our common stock at an average price per share of $7.10 per share.
The terms on which we redeemredeemed shares may differprior to July 1, 2018 differed 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 (“Ordinary Redemptions”). From April
Prior to July 1, 2012 through May 15, 2014, our board of directors suspended accepting Ordinary Redemptions. On May 15, 2014, our board of directors adopted2018, the Third Amended and Restated Share Redemption Program and reopened the share redemption program for Ordinary Redemptions, to be effective on that date. In addition, for periods beginning on or after May 15, 2014, the cash available for redemptions was increased from $1 million to no more than $10 million in any twelve-month period. The redemption limitations apply to all redemptions, whether Ordinary or Exceptional Redemptions.
On August 9, 2017, our board of directors may determine, whether pursuantadopted a Fourth Amended and Restated Share Redemption Program (the “Fourth Amended Share Redemption Program”) which became effective July 1, 2018. The material changes made to formulasthe program were as follows. We no longer process redemptions upon death, “qualifying disability,” or processes as established by the board of directors, theconfinement to a long-term care facility on terms different than those on which we process all other redemptions. The price at which we redeem shares submitted for redemption pricewill be a percentage of the shares, which may differ between Ordinary Redemptions and Exceptional Redemptions; provided, however, that we must provide at least 30 days’ noticeestimated NAV per Share as of the Effective Date (as defined in the Fourth Amended Share Redemption Program), as follows:
| For Redemptions with an Effective Date Between | |
| July 1, 2018 and June 30, 2019: | 92.5% of the estimated NAV per Share |
| July 1, 2019 and June 30, 2020: | 95.0% of the estimated NAV per Share |
| July 1, 2020 and June 30, 2021: | 97.5% of the estimated NAV per Share |
| Thereafter: | 100% of the estimated NAV per Share |
Pursuant to stockholders before applying this new price determined by our boardthe terms of directors.
On December 28, 2018, our board of directors adopted a Fifth Amended and Restated Share Redemption Program (the “Fifth Amended Share Redemption Program”) which became effective on January 31, 2019. The only material change to the program was to change the measurement period for the limitations on the number and dollar amount of shares that may be accepted for redemption from a rolling 12 month-period to a calendar year. On March 26, 2019, our board of directors set the cash available for redemptions at $2.5 million for the quarterly period ended March 31, 2019.
| F-24 |
Lightstone Real Estate Investment Trust V, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share/unit data and where indicated in millions)
Distributions
U.S. federal tax law requires a REIT distribute at least 90% of its annual REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles, or GAAP) determined without regard to the deduction for dividends paid and excluding any net capital gain. In order to continue to qualify for REIT status, we may be required to make distributions in excess of cash available. Distributions are authorized at the discretion of our board of directors based on itstheir analysis of our performance over the previous periods and expectations of performance for future periods. TheseSuch 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 deems relevant. The board’sOur board of directors’ decision will be substantially influenced by itstheir 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.
| Year | Distributions Declared | Distributions Paid | ||||||
| 2014 | $ | 13.0 | $ | 13.0 | ||||
2015(1) | 64.1 | 25.7 | ||||||
We did not paymake any distributions during the year ended December 31, 2013.
Description(1) | 2015 | 2014 | ||||
| Ordinary income | — | — | ||||
| Capital gains | 25.8 | % | 58.4 | % | ||
| Return of capital | 74.2 | % | 41.6 | % | ||
| Total | 100.0 | % | 100.0 | % | ||
13. Related Party Transactions
Advisor
Our external advisor and certain of its affiliates may receive fees and compensation in connection with the management, acquisition, management,financing and saledisposition of our assets based on thean advisory management agreement, as periodically amended and restated.
From January 4, 2008 through February 10, 2017, we were party to various advisory management agreements, each with a term of one year or less, with the Behringer Advisor. On February 10, 2017, we and Restated Advisory Management Agreement
Concurrently, we entered intoengaged the Fourth Amended and Restated Advisory Management Agreement (the “Fourth Advisory Agreement”) with our Advisor to among other things, revise the acquisitionprovide us with advisory services pursuant to various advisory management agreements, each with an initial term of one year. The fees earned by and advisory fees, asset management fee, and the debt financing fee that may be paidexpenses reimbursed to the Advisor are substantially the same as the fees earned by and to fix certain expense reimbursement provisions. The Fourth Advisory Agreement was effective as of January 1, 2014. Effective as of June 6, 2015, we entered into the First Amendment to Fourth Amended and Restated Advisory Management Agreement to (i) reduce the administrative services fee to be paidexpenses reimbursed to the Advisor for calendar year 2015 from $1.8 million to $1.5 million and (ii) reimburse the Advisor for certain due diligence services provided in connection with asset dispositions or debt financings separately from the administrative services fee. In addition, we renewed the term of the Fourth Advisory Agreement for one year. As amended, the Fourth Advisory Agreement will expire on June 6, 2016. In all other material respects, the terms of the Fourth Advisory Agreement remain unchanged.Behringer Advisor. The following discussion reflects the terms of the Fourth Advisory Agreement, as amended, anddescribes the fees and expenses paid or reimbursedpayable to our external advisor and its respective affiliates under the Advisor thereunder since January 1, 2014.
We pay 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, the Advisor and its affiliates will receivewe pay acquisition and advisory fees of 1.5% of the funds advanced in respect of a loan investment. WeDuring the year ended December 31, 2018, we incurred acquisition and advisory fees payable to Lightstone of approximately $1.0 million in connection with our acquisition of the Advisor of less than $0.1 million, $1 million and $2.3 million for the years ended December 31, 2015, 2014 and 2013, respectively, as a result of acquisitions and improvements made to our assets. We had one acquisition in the year ended December 31, 2014.Axis at Westmont. During the year ended December 31, 2013,2017, we made four separate real estate acquisitions, oneincurred acquisition and advisory fees payable to Lightstone of which was a loan investment. approximately $0.6 million in connection with our acquisition of the Flats at Fishers.
We had no acquisitions during the year ended December 31, 2015.
Our external advisor and its affiliates are also responsible for paying all of the investment-related expenses that we or the Advisorexternal advisor or its affiliates incur that are due to third parties or related to the additional services provided by the Advisorour 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 yearsyear ended December 31, 2015, 2014 and 2013,2018, we incurred approximately $0.1 million in acquisition expense reimbursements ofpayable to Lightstone in connection with our one acquisition, the Axis at Westmont. For the year ended December 31, 2017, we incurred less than $0.1 million $0.2 million and $0.2 million, respectively.
We generally pay the Advisor or its affiliatesour 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 will pay directly all third partythird-party costs associated with obtaining the debt financing. Before January 1, 2014,During the year ended December 31, 2018 and 2017, we paid the Advisor a debt financing fee of 1%. We incurred debt financing fees of approximately $0.8 million and $0.2 million, respectively.
| F-25 |
Lightstone Real Estate Investment Trust V, Inc.
Notes to Consolidated Financial Statements
(Dollar and $0.5 million, for the years ended December 31, 2014share amounts in thousands, except per share/unit data and 2013, respectively. We incurred no financing fees for the year ended December 31, 2015.
We pay the Advisor or its affiliates 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 such fees forDuring the years ended December 31, 2015, 2014 or 2013.
We pay a monthly asset management fee of one-twelfth of 1.0% of the sum of the higher of the cost or value of each asset. Pursuant to the Fourth Advisory Agreement, we pay the Advisor or its affiliates a monthly asset management fee which, effective January 1, 2014, was reduced to 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 valuea NAV per shareShare unless the asset was acquired after our publication of an estimated valuea NAV per shareShare (in which case the value of the asset will be the contractcontractual purchase price of the asset). In addition, pursuant to the Fourth Advisory Agreement, the Advisor agreed to waive asset management fees previously accrued during the period from August 2013 to December 2013During each of $0.3 million. Therefore, we reversed this accrual in the second quarter of 2014. For the years ended December 31, 2015, 20142018 and 2013,2017, we expensed $2.5incurred $1.6 million $2.2 million and $3.4 million,
Our external advisor is responsible for paying all of the year ended December 31, 2013 includesexpenses it incurs associated with persons employed by the external advisor to the extent that they provide services related to us for which our external advisor receives an acquisition, asset management, fees related to our discontinued operations.
Notwithstanding the fees and cost reimbursements payable to our Advisorexternal advisor pursuant to the Fourth Advisory Agreement,our advisory management agreement, under our charter we may not reimburse the Advisorexternal 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 quartersyear ended December 31, 2015,2018, 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 not excessive.
Property Manager
From January 4, 2008 through February 10, 2017, we were party to various property management and leasing agreements between us, our operating partnership, and certain affiliates of Behringer (collectively, the “Behringer Manager”). On February 10, 2017, we and the Behringer Manager terminated the then existing property management and leasing agreements effective as of the close of business.
Concurrently, we engaged an affiliate of Lightstone (the “Lightstone Manager”) pursuant to a property management and leasing agreement. The fees earned by and expenses reimbursed to the Lightstone Manager are substantially the same as the fees earned by and expenses reimbursed to the Behringer Manager. The following discussion describes the fees and expenses payable to our affiliated property manager and its respective affiliates under both the various property management and leasing agreements.
| F-26 |
Lightstone Real Estate Investment Trust V, Inc.
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share/unit data and where indicated in millions)
We pay our property manager and affiliate of the Advisor, Behringer Harvard Opportunity II Management Services, LLC (“BHO II Management”), or its affiliates,our external advisor, fees for the management, leasing, and construction supervision of our properties. Before January 1, 2014, property management fees were 4.5% of the gross revenues of the properties managed by BHO II Management or its affiliates, plus leasing commissions based upon the customary leasing commission applicable to the same geographic location of the respective property. Effective January 1, 2014, we entered into the First Amendment to the Amended and Restated Property Management and Leasing Agreement, which reduced the property management fee paid tois 4.0% of gross revenues of the properties managed by BHO II Management or its affiliates.our property manager. We pay BHO II Management or its affiliatesour 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 BHO II Managementour 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 BHO II Managementour property manager directly for its services, we will pay BHO II Managementour property manager a management fee or oversight fee, as applicable, based only on our economic interest in the property. WeDuring the years ended December 31, 2018 and 2017, we incurred and expensed property management fees or oversight fees to BHO II Management of approximately $0.6 million, $0.6$0.1 million and $0.9$0.2 million,for respectively, payable to the years ended December 31, 2015, 2014property manager and 2013, respectively.
We pay the Advisor or its affiliatesour 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 of $0.1 million for the years ended December 31, 20142018 and 2013. We incurred no construction management fees for the year ended December 31, 2015.
We are dependent on the Advisorour external advisor and BHO II Managementour property manager for certain services that are essential to us, including asset acquisition, financing and 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.
| Twelve Months ended December 31, | |||||||||||
| 2015 | 2014 | 2013 | |||||||||
| Interest paid, net of amounts capitalized | $ | 6,286 | $ | 7,443 | $ | 7,765 | |||||
| Income tax paid, net of overpayment | 1,703 | 29 | — | ||||||||
| Non-cash investing activities and financing activities: | |||||||||||
| Proceeds held in escrow through sale of real estate interests | 912 | — | — | ||||||||
| Capital expenditures for real estate in accounts payable | — | — | 20 | ||||||||
| Capital expenditures for real estate in accrued liabilities | 224 | 237 | 539 | ||||||||
| Assumed debt on acquisition of real estate investment | — | — | 11,306 | ||||||||
| Assumed debt on disposition of real estate investment | — | — | 17,983 | ||||||||
| Accrued distributions payable | 38,378 | — | — | ||||||||
| Accrued distributions to noncontrolling interest | 52 | 19 | 20 | ||||||||
14. Subsequent Events
Acquisition of April 1, 2014, we early adoptedValley Ranch Apartments located in Ann Arbor, Michigan
On February 14, 2019, the revised guidance in Accounting Standards Update No. 2014-08 regarding discontinued operations. For sales of real estate or assets classified as held for sale after April 1, 2014, we will evaluate whetherCompany, through a disposal transaction meets the criteria of a strategic shift and will have a major effect on our operations and financial results to determine if the results of operations and gains on sale of real estate will be presented as part of our continuing operations or as discontinued operations in our consolidated statements of operations. If the disposal represents a strategic shift, it will be classified as discontinued operations for all periods presented; if not, it will be presented in continuing operations.
| Property Name | Date of Disposition | Contract Sales Price | ||||
Interchange Business Center(1) | April 12, 2013 | $ | 40.4 | |||
Original Florida MOB Portfolio(2) | September 20, 2013 | $ | 63.0 | |||
| Rental revenue | $ | 8,637 | |
| Expenses | |||
| Property operating expenses | 4,141 | ||
| Interest expense | 983 | ||
| Real estate taxes | 597 | ||
| Property management fees | 401 | ||
| Asset management fees | 50 | ||
| Depreciation and amortization | 2,603 | ||
| Total expenses | 8,775 | ||
Loss on early extinguishment of debt(1) | (265 | ) | |
| Interest income, net | 4 | ||
| Loss from discontinued operations | (399 | ) | |
| Gain on sale of real estate | 31,558 | ||
| Income from discontinued operations | 31,159 | ||
| Income attributable to noncontrolling interests | (5,454 | ) | |
| Income from discontinued operations attributable to the Company | $ | 25,705 | |
| Capital expenditures | $ | 1,250 | |
| 2015 Quarters Ended | ||||||||||||||||||
| Description | March 31 | June 30 | September 30 | December 31 | ||||||||||||||
| Revenue | $ | 13,314 | $ | 12,779 | $ | 12,539 | $ | 11,618 | ||||||||||
Income (loss) from continuing operations(1) | 338 | (1,878 | ) | 13,117 | (3,900 | ) | (2 | ) | ||||||||||
| Add: Net (income)/loss attributable to noncontrolling interest | (511 | ) | (82 | ) | (262 | ) | 156 | |||||||||||
| Net income (loss) attributable to common shareholders | $ | (173 | ) | $ | (1,960 | ) | $ | 12,855 | $ | (3,744 | ) | |||||||
| Basic and diluted weighted average shares outstanding | 25,776 | 25,704 | 25,667 | 25,607 | ||||||||||||||
| Basic and diluted income (loss) per share | $ | (0.01 | ) | $ | (0.07 | ) | $ | 0.50 | $ | (0.15 | ) | |||||||
| 2014 Quarters Ended | ||||||||||||||||
| Description | March 31 | June 30 | September 30 | December 31 | ||||||||||||
| Revenue | $ | 12,245 | $ | 12,027 | $ | 11,357 | $ | 12,968 | ||||||||
Income (loss) from continuing operations(3) | (2,849 | ) | 9,025 | (2,644 | ) | (3,866 | ) | |||||||||
| Add: Net (income)/loss attributable to noncontrolling interest | (35 | ) | 159 | 154 | 53 | |||||||||||
| Net income (loss) attributable to common shareholders | $ | (2,884 | ) | $ | 9,184 | $ | (2,490 | ) | $ | (3,813 | ) | |||||
| Basic and diluted weighted average shares outstanding | 26,011 | 25,993 | 25,935 | 25,836 | ||||||||||||
| Basic and diluted income (loss) per share | $ | (0.11 | ) | $ | 0.35 | $ | (0.10 | ) | $ | (0.14 | ) | |||||
In connection with the acquisition of the Valley Ranch Apartments, the Company simultaneously entered into a $43.4 million mortgage loan (the “Valley Ranch Mortgage”) scheduled to mature on March 1, 2026. The specialloan requires monthly interest payments through its maturity date and bears interest at 4.16% through its maturity. The loan is collateralized by the Valley Ranch Apartments and is non-recourse to the Company.
The acquisition was funded with cash distribution, which represents a portion ofon hand and proceeds from asset sales, was paid on January 5, 2016.
In connection with the acquisition, the Advisor received an aggregate redemption payment of approximately $0.5 million. In addition, effective December 31, 2015 the price at which we redeem shares under our share redemption program changed as a result of the adjustment to our estimated value per share to reflect the payment of the special cash distribution to stockholders of record as of December 31, 2015.
*****
Balance at Beginning of Period | Charged to Costs and Expenses | Charged to Other Accounts | Deductions | Balance at End of Period | |||||||||||||||
| As of December 31, 2015 | |||||||||||||||||||
| Allowance for doubtful accounts | $ | 2 | $ | 369 | $ | — | $ | 260 | $ | 111 | |||||||||
| As of December 31, 2014 | |||||||||||||||||||
| Allowance for doubtful accounts | 46 | 304 | — | 348 | 2 | ||||||||||||||
| As of December 31, 2013 | |||||||||||||||||||
| Allowance for doubtful accounts | 44 | 313 | — | 311 | 46 | ||||||||||||||
| Initial cost | |||||||||||||||||||||||||||||||
| Property Name | Location | Encumbrances | Land and Improvements | Building and Improvements | Cost capitalized subsequent to acquisition (1) | Gross amount carried at close of period | Accumulated Depreciation | Year of Construction | Date Acquired | Depreciable Life | |||||||||||||||||||||
| Gardens Medical Pavilion | Palm Beach Gardens, Florida | $ | 13,298 | $ | 5,675 | $ | 13,158 | $ | 4,209 | $ | 23,042 | $ | 3,866 | 1995 | 10/20/2010 | (2) | |||||||||||||||
| Courtyard Kauai Coconut Beach Hotel | Kauai, Hawaii | 38,000 | 11,801 | 20,948 | 10,430 | 43,179 | 5,136 | 1977 | 10/20/2010 | (3) | |||||||||||||||||||||
| River Club and the Townhomes at River Club | Athens, Georgia | 24,299 | 6,639 | 24,789 | 2,669 | 34,097 | 6,643 | 1996 & 1989 | 4/25/2011 | (2) | |||||||||||||||||||||
| Lakes of Margate | Margate, Florida | 14,496 | 9,776 | 13,061 | 4,106 | 26,943 | 3,862 | 1987 | 10/19/2011 | (2) | |||||||||||||||||||||
| Arbors Harbor Town | Memphis, Tennessee | 25,130 | 5,413 | 24,713 | 2,748 | 32,874 | 5,132 | 1991 | 12/20/2011 | (2) | |||||||||||||||||||||
| 22 Exchange | Akron, Ohio | 19,500 | 2,380 | 24,786 | (2,357 | ) | 24,809 | 62 | 2010 | 4/16/2013 | (2) | ||||||||||||||||||||
| Parkside Apartments | Sugar Land, Texas | 10,469 | 3,143 | 18,148 | 1,668 | 22,959 | 1,966 | 1998 | 8/8/2013 | (2) | |||||||||||||||||||||
| Lakewood Flats | Dallas, Texas | 33,500 | 8,196 | 49,703 | 77 | 57,976 | 2,441 | 2013 | 10/10/2014 | (2) | |||||||||||||||||||||
| Totals | 178,692 | 53,023 | 189,306 | 23,550 | 265,879 | 29,108 | |||||||||||||||||||||||||
| 2015 | 2014 | 2013 | |||||||||
| Real Estate: | |||||||||||
| Balance at beginning of period | $ | 329,643 | $ | 308,808 | $ | 294,054 | |||||
| Acquisitions | — | 57,899 | 82,019 | ||||||||
Improvements(1) | 2,044 | 4,477 | 8,227 | ||||||||
| Disposals/written-off | (77 | ) | (19 | ) | (75 | ) | |||||
Reclassification(2) | (390 | ) | (689 | ) | (254 | ) | |||||
Establishment of new basis for impaired asset(3) | (4,149 | ) | — | — | |||||||
| Cost of real estate sold | (61,192 | ) | (40,833 | ) | (75,163 | ) | |||||
Balance at end of the period(4) | $ | 265,879 | $ | 329,643 | $ | 308,808 | |||||
| Accumulated depreciation: | |||||||||||
| Balance at beginning of period | $ | 27,569 | $ | 23,779 | $ | 19,921 | |||||
| Depreciation expense | 11,109 | 11,077 | 11,855 | ||||||||
| Disposals/written-off | (6,838 | ) | (7,287 | ) | (7,997 | ) | |||||
Accumulated depreciation on impaired asset(3) | (2,732 | ) | — | — | |||||||
Balance at end of the period(4) | $ | 29,108 | $ | 27,569 | $ | 23,779 | |||||
EXHIBIT INDEX
| * | Filed or furnished herewith. |
| ** | In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
| F-28 |