UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20202021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-54047
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Maryland | 83-0511223 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| 1985 Cedar Bridge Avenue, Suite 1 | ||
| Lakewood, New Jersey | 08701 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(732)367-0129
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yesþ No ¨
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).YesþNo ☐
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of thethe Exchange Act.
| Large accelerated filer | Accelerated filer | ||
| Non-accelerated filer | Smaller reporting company | ||
| Emerging growth company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
Yes ¨ No x
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. ¨☐
As of August 11, 2020,10, 2021, there were approximately million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust II, Inc., including shares issued pursuant to the distribution reinvestment plan.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
INDEX
i
PART I. FINANCIAL INFORMATION, CONTINUED:INFORMATION:
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:STATEMENTS:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
| June 30, 2020 | December 31, 2019 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Investment property: | ||||||||
| Land and improvements | $ | 36,684 | $ | 36,662 | ||||
| Building and improvements | 203,540 | 200,362 | ||||||
| Furniture and fixtures | 35,744 | 32,861 | ||||||
| Construction in progress | 98 | 4,612 | ||||||
| Gross investment property | 276,066 | 274,497 | ||||||
| Less accumulated depreciation | (45,894 | ) | (40,545 | ) | ||||
| Net investment property | 230,172 | 233,952 | ||||||
| Investments in unconsolidated affiliated entities | 16,047 | 16,394 | ||||||
| Cash and cash equivalents | 18,117 | 21,242 | ||||||
| Marketable securities, available for sale | 6,517 | 8,890 | ||||||
| Restricted cash | 3,921 | 8,974 | ||||||
| Accounts receivable and other assets | 3,374 | 3,903 | ||||||
| Total Assets | $ | 278,148 | $ | 293,355 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Accounts payable and other accrued expenses | $ | 7,093 | $ | 8,160 | ||||
| Margin loan | 2,710 | 4,744 | ||||||
| Mortgages payable, net | 136,290 | 136,177 | ||||||
| Notes payable | 3,343 | - | ||||||
| Due to related party | 630 | 587 | ||||||
| Distributions payable | - | 3,065 | ||||||
| Total liabilities | 150,066 | 152,733 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' Equity: | ||||||||
| Company's stockholders' equity: | ||||||||
| Preferred shares, $0.01 par value, 10.0 million shares authorized, none issued and outstanding | - | - | ||||||
| Common stock, $0.01 par value; 100.0 million shares authorized, 17.4 million and 17.5 million shares issued and outstanding, respectively | 174 | 175 | ||||||
| Additional paid-in-capital | 147,100 | 147,924 | ||||||
| Accumulated other comprehensive (loss)/income | (136 | ) | 172 | |||||
| Accumulated deficit | (30,843 | ) | (19,863 | ) | ||||
| Total Company stockholders' equity | 116,295 | 128,408 | ||||||
| Noncontrolling interests | 11,787 | 12,214 | ||||||
| Total Stockholders' Equity | 128,082 | 140,622 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 278,148 | $ | 293,355 | ||||
| June 30, 2021 | December 31, 2020 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Investment property: | ||||||||
| Land and improvements | $ | 36,699 | $ | 36,689 | ||||
| Building and improvements | 203,576 | 203,561 | ||||||
| Furniture and fixtures | 36,133 | 36,010 | ||||||
| Construction in progress | 141 | 77 | ||||||
| Gross investment property | 276,549 | 276,337 | ||||||
| Less accumulated depreciation | (56,508 | ) | (51,269 | ) | ||||
| Net investment property | 220,041 | 225,068 | ||||||
| Investments in unconsolidated affiliated entities | 16,007 | 15,359 | ||||||
| Cash and cash equivalents | 15,321 | 15,348 | ||||||
| Marketable securities, available for sale | 6,945 | 6,902 | ||||||
| Restricted cash | 3,561 | 3,075 | ||||||
| Accounts receivable and other assets | 4,483 | 2,836 | ||||||
| Total Assets | $ | 266,358 | $ | 268,588 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Accounts payable and other accrued expenses | $ | 9,339 | $ | 7,859 | ||||
| Margin loan | 2,446 | 2,599 | ||||||
| Mortgages payable, net | 136,096 | 136,400 | ||||||
| Notes payable | 5,625 | 3,343 | ||||||
| Due to related party | 544 | 618 | ||||||
| Total liabilities | 154,050 | 150,819 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| Company’s stockholders’ equity: | ||||||||
| Preferred shares, $ par value, million shares authorized, issued and outstanding | - | - | ||||||
| Common stock, $ par value; million shares authorized, million shares issued and outstanding | 174 | 174 | ||||||
| Additional paid-in-capital | 147,100 | 147,100 | ||||||
| Accumulated other comprehensive income | 41 | 82 | ||||||
| Accumulated deficit | (46,471 | ) | (41,186 | ) | ||||
| Total Company stockholders’ equity | 100,844 | 106,170 | ||||||
| Noncontrolling interests | 11,464 | 11,599 | ||||||
| Total Stockholders’ Equity | 112,308 | 117,769 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 266,358 | $ | 268,588 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 1 |
PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(unaudited)
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||||
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||
| Revenues | $ | 3,596 | $ | 20,921 | $ | 16,841 | $ | 38,685 | $ | 11,718 | $ | 3,596 | $ | 19,165 | $ | 16,841 | ||||||||||||||||
| Expenses: | ||||||||||||||||||||||||||||||||
| Property operating expenses | 4,148 | 13,087 | 14,136 | 25,220 | 7,792 | 4,148 | 13,698 | 14,136 | ||||||||||||||||||||||||
| Real estate taxes | 889 | 906 | 1,771 | 1,873 | 801 | 889 | 1,728 | 1,771 | ||||||||||||||||||||||||
| General and administrative costs | 1,182 | 1,098 | 2,388 | 2,411 | 1,150 | 1,182 | 2,415 | 2,388 | ||||||||||||||||||||||||
| Depreciation and amortization | 2,716 | 2,829 | 5,361 | 5,816 | 2,560 | 2,716 | 5,252 | 5,361 | ||||||||||||||||||||||||
| Total operating expenses | 8,935 | 17,920 | 23,656 | 35,320 | 12,303 | 8,935 | 23,093 | 23,656 | ||||||||||||||||||||||||
| Operating (loss)/income | (5,339 | ) | 3,001 | (6,815 | ) | 3,365 | ||||||||||||||||||||||||||
| Operating loss | (585 | ) | (5,339 | ) | (3,928 | ) | (6,815 | ) | ||||||||||||||||||||||||
| Interest and dividend income | 126 | 139 | 269 | 283 | 67 | 126 | 137 | 269 | ||||||||||||||||||||||||
| Interest expense | (1,576 | ) | (2,324 | ) | (3,393 | ) | (4,764 | ) | (1,558 | ) | (1,576 | ) | (2,904 | ) | (3,393 | ) | ||||||||||||||||
| Gain on forgiveness of debt | 1,481 | 0 | 1,481 | 0 | ||||||||||||||||||||||||||||
| Loss on sale of marketable securities, available for sale | - | - | (245 | ) | - | 0 | 0 | 0 | (245 | ) | ||||||||||||||||||||||
| Earnings from investments in unconsolidated affiliated entities | (482 | ) | 157 | (998 | ) | (157 | ) | (99 | ) | (482 | ) | (182 | ) | (998 | ) | |||||||||||||||||
| Other expense, net | 15 | 82 | 1 | 48 | ||||||||||||||||||||||||||||
| Net (loss)/income | (7,256 | ) | 1,055 | (11,181 | ) | (1,225 | ) | |||||||||||||||||||||||||
| Less: net loss/(income) attributable to noncontrolling interests | 127 | (42 | ) | 201 | (17 | ) | ||||||||||||||||||||||||||
| Net (loss)/income applicable to Company's common shares | $ | (7,129 | ) | $ | 1,013 | $ | (10,980 | ) | $ | (1,242 | ) | |||||||||||||||||||||
| Other income, net | 48 | 15 | 18 | 1 | ||||||||||||||||||||||||||||
| Net loss | (646 | ) | (7,256 | ) | (5,378 | ) | (11,181 | ) | ||||||||||||||||||||||||
| Net (loss)/income per Company's common share, basic and diluted | $ | (0.41 | ) | $ | 0.06 | $ | (0.63 | ) | $ | (0.07 | ) | |||||||||||||||||||||
| Less: net loss attributable to noncontrolling interests | 5 | 127 | 93 | 201 | ||||||||||||||||||||||||||||
| Net loss applicable to Company’s common shares | $ | (641 | ) | $ | (7,129 | ) | $ | (5,285 | ) | $ | (10,980 | ) | ||||||||||||||||||||
| Net loss per Company’s common share, basic and diluted | $ | (0.04 | ) | $ | (0.41 | ) | $ | (0.30 | ) | $ | (0.63 | ) | ||||||||||||||||||||
| Weighted average number of common shares outstanding, basic and diluted | 17,430 | 17,713 | 17,437 | 17,756 | 17,430 | 17,430 | 17,430 | 17,437 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 2 |
PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
LOSS
(Amounts in thousands)
(unaudited)
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net (loss)/income | $ | (7,256 | ) | $ | 1,055 | $ | (11,181 | ) | $ | (1,225 | ) | |||||
| Other comprehensive income/(loss): | ||||||||||||||||
| Holding gain/(loss) on marketable securities, available for sale | 612 | 246 | (553 | ) | 771 | |||||||||||
| Reclassification adjustment for loss included in net loss | - | - | 245 | - | ||||||||||||
| Other comprehensive income/(loss): | 612 | 246 | (308 | ) | 771 | |||||||||||
| Comprehensive (loss)/income | (6,644 | ) | 1,301 | (11,489 | ) | (454 | ) | |||||||||
| Less: Comprehensive (loss)/income attributable to noncontrolling interests | 127 | (42 | ) | 201 | (17 | ) | ||||||||||
| Comprehensive (loss)/income attributable to the Company's common shares | $ | (6,517 | ) | $ | 1,259 | $ | (11,288 | ) | $ | (471 | ) | |||||
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net loss | $ | (646 | ) | $ | (7,256 | ) | $ | (5,378 | ) | $ | (11,181 | ) | ||||
| Other comprehensive loss: | ||||||||||||||||
| Holding (loss)/gain on marketable securities, available for sale | (19 | ) | 612 | (41 | ) | (553 | ) | |||||||||
| Reclassification adjustment for loss included in net loss | - | - | - | 245 | ||||||||||||
| Other comprehensive (loss)/income: | (19 | ) | 612 | (41 | ) | (308 | ) | |||||||||
| Comprehensive loss | (665 | ) | (6,644 | ) | (5,419 | ) | (11,489 | ) | ||||||||
| Less: Comprehensive loss attributable to noncontrolling interests | 5 | 127 | 93 | 201 | ||||||||||||
| Comprehensive loss attributable to the Company’s common shares | $ | (660 | ) | $ | (6,517 | ) | $ | (5,326 | ) | $ | (11,288 | ) | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
PART I. FINANCIAL INFORMATION:INFORMATION, CONTINUED:
ITEM 1. FINANCIAL STATEMENTS.STATEMENTS, CONTINUED:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in thousands)
(unaudited)
| Additional | Accumulated Other | Total | ||||||||||||||||||||||||||
| Common Stock | Paid-In | Comprehensive | Accumulated | Noncontrolling | Stockholders' | |||||||||||||||||||||||
| Shares | Amount | Capital | Loss | Surplus/(Deficit) | Interests | Equity | ||||||||||||||||||||||
| BALANCE, March 31, 2019 | 17,782 | $ | 178 | $ | 150,624 | $ | (292 | ) | $ | (18,601 | ) | $ | 13,160 | $ | 145,069 | |||||||||||||
| Net income | - | - | - | - | 1,013 | 42 | 1,055 | |||||||||||||||||||||
| Other comprehensive income | - | - | - | 246 | - | - | 246 | |||||||||||||||||||||
| Distributions declared (a) | - | - | - | - | (3,088 | ) | - | (3,088 | ) | |||||||||||||||||||
| Contributions of noncontrolling interests | - | - | - | - | - | 24 | 24 | |||||||||||||||||||||
| Distributions to noncontrolling interests | - | - | - | - | - | (402 | ) | (402 | ) | |||||||||||||||||||
| Redemption and cancellation of shares | (90 | ) | (1 | ) | (899 | ) | - | - | - | (900 | ) | |||||||||||||||||
| BALANCE, June 30, 2019 | 17,692 | $ | 177 | $ | 149,725 | $ | (46 | ) | $ | (20,676 | ) | $ | 12,824 | $ | 142,004 | |||||||||||||
| Additional | Accumulated Other | Total | ||||||||||||||||||||||||||
| Common Stock | Paid-In | Comprehensive | Accumulated | Noncontrolling | Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Loss | Deficit | Interests | Equity | ||||||||||||||||||||||
| BALANCE, March 31, 2020 | 17,430 | $ | 174 | $ | 147,100 | $ | (748 | ) | $ | (23,714 | ) | $ | 11,858 | $ | 134,670 | |||||||||||||
| Net loss | - | - | - | - | (7,129 | ) | (127 | ) | (7,256 | ) | ||||||||||||||||||
| Other comprehensive income | - | - | - | 612 | - | - | 612 | |||||||||||||||||||||
| Contributions of noncontrolling interests | - | - | - | - | - | 56 | 56 | |||||||||||||||||||||
| BALANCE, June 30, 2020 | 17,430 | $ | 174 | $ | 147,100 | $ | (136 | ) | $ | (30,843 | ) | $ | 11,787 | $ | 128,082 | |||||||||||||
| Additional | Accumulated Other | Total | ||||||||||||||||||||||||||
| Common Stock | Paid-In | Comprehensive | Accumulated | Noncontrolling | Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Loss | Deficit | Interests | Equity | ||||||||||||||||||||||
| BALANCE, December 31, 2019 | 17,512 | $ | 175 | $ | 147,924 | $ | 172 | $ | (19,863 | ) | $ | 12,214 | $ | 140,622 | ||||||||||||||
| Net loss | - | - | - | - | (10,980 | ) | (201 | ) | (11,181 | ) | ||||||||||||||||||
| Other comprehensive loss | - | - | - | (308 | ) | - | - | (308 | ) | |||||||||||||||||||
| Contributions of noncontrolling interests | - | - | - | - | - | 101 | 101 | |||||||||||||||||||||
| Distributions to noncontrolling interests | - | - | - | - | - | (327 | ) | (327 | ) | |||||||||||||||||||
| Redemption and cancellation of shares | (82 | ) | (1 | ) | (824 | ) | - | - | - | (825 | ) | |||||||||||||||||
| BALANCE, June 30, 2020 | 17,430 | $ | 174 | $ | 147,100 | $ | (136 | ) | $ | (30,843 | ) | $ | 11,787 | $ | 128,082 | |||||||||||||
(a) Distributions per share were $0.175.
| �� | Additional | Accumulated Other | Total | |||||||||||||||||||||||||
| Common Stock | Paid-In | Comprehensive | Accumulated | Noncontrolling | Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Income | Deficit | Interests | Equity | ||||||||||||||||||||||
| BALANCE, March 31, 2021 | 17,430 | $ | 174 | $ | 147,100 | $ | 60 | $ | (45,830 | ) | $ | 11,517 | $ | 113,021 | ||||||||||||||
| Net loss | - | - | - | - | (641 | ) | (5 | ) | (646 | ) | ||||||||||||||||||
| Other comprehensive loss | - | - | - | (19 | ) | - | - | (19 | ) | |||||||||||||||||||
| Contributions of noncontrolling interests | - | - | - | - | - | 6 | 6 | |||||||||||||||||||||
| Distributions to noncontrolling interests | - | - | - | - | - | (54 | ) | (54 | ) | |||||||||||||||||||
| BALANCE, June 30, 2021 | 17,430 | $ | 174 | $ | 147,100 | $ | 41 | $ | (46,471 | ) | $ | 11,464 | $ | 112,308 | ||||||||||||||
| Additional | Accumulated Other | Total | ||||||||||||||||||||||||||
| Common Stock | Paid-In | Comprehensive | Accumulated | Noncontrolling | Stockholders' | |||||||||||||||||||||||
| Shares | Amount | Capital | Loss | Surplus/(Deficit) | Interests | Equity | ||||||||||||||||||||||
| BALANCE, December 31, 2018 | 17,874 | $ | 179 | $ | 151,538 | $ | (817 | ) | $ | (13,277 | ) | $ | 13,466 | $ | 151,089 | |||||||||||||
| Net loss | - | - | - | - | (1,242 | ) | 17 | (1,225 | ) | |||||||||||||||||||
| Other comprehensive income | - | - | - | 771 | - | - | 771 | |||||||||||||||||||||
| Distributions declared (a) | - | - | - | - | (6,157 | ) | - | (6,157 | ) | |||||||||||||||||||
| Contributions of noncontrolling interests | - | - | - | - | - | 57 | 57 | |||||||||||||||||||||
| Distributions to noncontrolling interests | - | - | - | - | - | (716 | ) | (716 | ) | |||||||||||||||||||
| Redemption and cancellation of shares | (182 | ) | (2 | ) | (1,813 | ) | - | - | - | (1,815 | ) | |||||||||||||||||
| BALANCE, June 30, 2019 | 17,692 | $ | 177 | $ | 149,725 | $ | (46 | ) | $ | (20,676 | ) | $ | 12,824 | $ | 142,004 | |||||||||||||
| Additional | Accumulated Other | Total | ||||||||||||||||||||||||||
| Common Stock | Paid-In | Comprehensive | Accumulated | Noncontrolling | Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Income | Deficit | Interests | Equity | ||||||||||||||||||||||
| BALANCE, December 31, 2020 | 17,430 | $ | 174 | $ | 147,100 | $ | 82 | $ | (41,186 | ) | $ | 11,599 | $ | 117,769 | ||||||||||||||
| Net loss | - | - | - | - | (5,285 | ) | (93 | ) | (5,378 | ) | ||||||||||||||||||
| Other comprehensive loss | - | - | - | (41 | ) | - | - | (41 | ) | |||||||||||||||||||
| Contributions of noncontrolling interests | - | - | - | - | - | 12 | 12 | |||||||||||||||||||||
| Distributions to noncontrolling interests | - | - | - | - | - | (54 | ) | (54 | ) | |||||||||||||||||||
| BALANCE, June 30, 2021 | 17,430 | $ | 174 | $ | 147,100 | $ | 41 | $ | (46,471 | ) | $ | 11,464 | $ | 112,308 | ||||||||||||||
(a) Distributions per share were $0.175.
| Additional | Accumulated Other | Total | ||||||||||||||||||||||||||
| Common Stock | Paid-In | Comprehensive | Accumulated | Noncontrolling | Stockholders' | |||||||||||||||||||||||
| Shares | Amount | Capital | Loss | Deficit | Interests | Equity | ||||||||||||||||||||||
| BALANCE, March 31, 2020 | 17,430 | $ | 174 | $ | 147,100 | $ | (748 | ) | $ | (23,714 | ) | $ | 11,858 | $ | 134,670 | |||||||||||||
| Net loss | - | - | - | - | (7,129 | ) | (127 | ) | (7,256 | ) | ||||||||||||||||||
| Other comprehensive income | - | - | - | 612 | - | - | 612 | |||||||||||||||||||||
| Contributions of noncontrolling interests | - | - | - | - | - | 56 | 56 | |||||||||||||||||||||
| BALANCE, June 30, 2020 | 17,430 | $ | 174 | $ | 147,100 | $ | (136 | ) | $ | (30,843 | ) | $ | 11,787 | $ | 128,082 | |||||||||||||
| Additional | Accumulated Other | Total | ||||||||||||||||||||||||||
| Common Stock | Paid-In | Comprehensive | Accumulated | Noncontrolling | Stockholders' | |||||||||||||||||||||||
| Shares | Amount | Capital | Loss | Deficit | Interests | Equity | ||||||||||||||||||||||
| BALANCE, December 31, 2019 | 17,512 | $ | 175 | $ | 147,924 | $ | 172 | $ | (19,863 | ) | $ | 12,214 | $ | 140,622 | ||||||||||||||
| Net loss | - | - | - | - | (10,980 | ) | (201 | ) | (11,181 | ) | ||||||||||||||||||
| Other comprehensive loss | - | - | - | (308 | ) | - | - | (308 | ) | |||||||||||||||||||
| Contributions of noncontrolling interests | - | - | - | - | - | 101 | 101 | |||||||||||||||||||||
| Distributions to noncontrolling interests | - | - | - | - | - | (327 | ) | (327 | ) | |||||||||||||||||||
| Redemption and cancellation of shares | (82 | ) | (1 | ) | (824 | ) | - | - | - | (825 | ) | |||||||||||||||||
| BALANCE, June 30, 2020 | 17,430 | $ | 174 | $ | 147,100 | $ | (136 | ) | $ | (30,843 | ) | $ | 11,787 | $ | 128,082 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(unaudited)
| For the Six Months Ended June 30, | ||||||||||||||||
| For the Six Months Ended June 30, | 2021 | 2020 | ||||||||||||||
| 2020 | 2019 | |||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
| Net loss | $ | (11,181 | ) | $ | (1,225 | ) | $ | (5,378 | ) | $ | (11,181 | ) | ||||
| Adjustments to reconcile net loss to net cash (used in)/provided by operating activities: | ||||||||||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
| Depreciation and amortization | 5,361 | 5,816 | 5,252 | 5,361 | ||||||||||||
| Amortization of deferred financing costs | 205 | 206 | 200 | 205 | ||||||||||||
| Loss on sale of marketable securities, available for sale | 245 | - | 0 | 245 | ||||||||||||
| Gain on forgiveness of debt | (1,481 | ) | 0 | |||||||||||||
| Earnings from investments in unconsolidated affiliated entities | 998 | 157 | 182 | 998 | ||||||||||||
| Other non-cash adjustments | 172 | (54 | ) | (17 | ) | 172 | ||||||||||
| Changes in assets and liabilities: | ||||||||||||||||
| Decrease/(increase) in accounts receivable and other assets | 345 | (1,229 | ) | |||||||||||||
| (Increase)/decrease in accounts receivable and other assets | (1,681 | ) | 345 | |||||||||||||
| Increase in accounts payable and other accrued expenses | 270 | 1,150 | 1,496 | 270 | ||||||||||||
| Increase in due to related party | 43 | 135 | ||||||||||||||
| Net cash (used in)/provided by operating activities | (3,542 | ) | 4,956 | |||||||||||||
| Decrease/(increase) in due to related party | (74 | ) | 43 | |||||||||||||
| Net cash used in operating activities | (1,501 | ) | (3,542 | ) | ||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
| Purchase of investment property | (2,905 | ) | (4,676 | ) | (257 | ) | (2,905 | ) | ||||||||
| Proceeds from disposition of investment property | - | 12,955 | ||||||||||||||
| Proceeds from the sale of marketable debt securities | 1,820 | - | 0 | 1,820 | ||||||||||||
| Investments in unconsolidated affiliated entities | (821 | ) | (58 | ) | (1,417 | ) | (821 | ) | ||||||||
| Distributions from unconsolidated affiliated entities | 169 | 304 | 587 | 169 | ||||||||||||
| Net cash(used in)/provided by investing activities | (1,737 | ) | 8,525 | |||||||||||||
| Net cash used in investing activities | (1,087 | ) | (1,737 | ) | ||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
| Payments on mortgages payable | (92 | ) | (8,258 | ) | (100 | ) | (92 | ) | ||||||||
| Payments on margin loan, net | (2,034 | ) | (152 | ) | ||||||||||||
| Payments on margin loan | (153 | ) | (2,034 | ) | ||||||||||||
| Proceeds from notes payable | 3,343 | - | 3,746 | 3,343 | ||||||||||||
| Payment of loan fees and expenses | (404 | ) | - | |||||||||||||
| Redemption and cancellation of common shares | (825 | ) | (1,815 | ) | - | (825 | ) | |||||||||
| Distributions to noncontrolling interests | (327 | ) | (716 | ) | (54 | ) | (327 | ) | ||||||||
| Contributions of noncontrolling interests | 101 | 57 | 12 | 101 | ||||||||||||
| Distributions to common stockholders | (3,065 | ) | (6,223 | ) | - | (3,065 | ) | |||||||||
| Net cash used in financing activities | (2,899 | ) | (17,107 | ) | ||||||||||||
| Net cash provided by/(used in) financing activities | 3,047 | (2,899 | ) | |||||||||||||
| Net change in cash, cash equivalents and restricted cash | (8,178 | ) | (3,626 | ) | 459 | (8,178 | ) | |||||||||
| Cash, cash equivalents and restricted cash, beginning of year | 30,216 | 30,660 | 18,423 | 30,216 | ||||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 22,038 | $ | 27,034 | $ | 18,882 | $ | 22,038 | ||||||||
| Supplemental cash flow information for the periods indicated is as follows: | ||||||||||||||||
| Cash paid for interest | $ | 1,901 | $ | 4,638 | $ | 2,572 | $ | 1,901 | ||||||||
| Distributions declared but not paid | $ | - | $ | 3,088 | ||||||||||||
| Gain on forgiveness of debt | $ | 1,481 | $ | 0 | ||||||||||||
| Holding loss/gain on marketable securities, available for sale | $ | 308 | $ | 771 | $ | 41 | $ | 308 | ||||||||
| Investment property acquired but not paid | $ | 39 | $ | 316 | $ | 0 | $ | 39 | ||||||||
| The following is a summary of the Company’s cash, cash equivalents, and restricted cash total as presented in our statements of cash flows for the periods presented: | ||||||||||||||||
| Cash and cash equivalents | $ | 18,117 | $ | 24,214 | $ | 15,321 | $ | 18,117 | ||||||||
| Restricted cash | 3,921 | 2,820 | 3,561 | 3,921 | ||||||||||||
| Total cash, cash equivalents and restricted cash | $ | 22,038 | $ | 27,034 | $ | 18,882 | $ | 22,038 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 5 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
| 1. |
Lightstone Value Plus Real Estate Investment Trust II, Inc. (‘‘Lightstone REIT II’’), is a Maryland corporation, formed on April 28, 2008, which elected to qualify as a real estate investment trust (‘‘REIT’’) for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2009.
Lightstone REIT II is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business will be conducted through Lightstone Value Plus REIT II LP, a Delaware limited partnership (the ‘‘Operating Partnership’’). As of June 30, 2020,2021, Lightstone REIT II held an approximately 99% 99% general partnership interest in the Operating Partnership’s common units.
Lightstone REIT II and the Operating Partnership and its subsidiaries are collectively referred to as the ‘‘Company’’ and the use of ‘‘we,’’ ‘‘our,’’ ‘‘us’’ or similar pronouns refers to Lightstone REIT II, its Operating Partnership or the Company as required by the context in which such pronoun is used.
The Company has and will continue to seek to acquire a diverse portfolio of real estate assets and real estate-related investments, including hotels, other commercial and/or residential properties, primarily located in the United States. All such properties may be acquired and operated by the Company alone or jointly with another party. The Company may also originate or acquire mortgage loans secured by real estate. Although the Company expects that most of its investments will be of these types, it may invest in whatever types of real estate-related investments that it believes are in its best interests.
The Company currently has one operating segment. As of June 30, 2020,2021, we (i) majority owned and consolidated the operating results and financial condition of 14 limited service hotels containing a total of 1,802 rooms, (ii) held an unconsolidated 48.6%48.6% membership interest in Brownmill, LLC (“Brownmill”(the “Brownmill Joint Venture”), an affiliated entity that owns two retail properties, and (iii) held an unconsolidated 50.0%50.0% membership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”), an affiliated real estate entity that owns and operates a 183-room183-room limited service hotel located in Long Island City, New York (the “Hilton Garden Inn – Long Island City”). The Company accounts for its membership interests in the Brownmill Joint Venture and the Hilton Garden Inn Joint Venture under the equity method of accounting.
As of June 30, 2020,2021, seven of our consolidated limited service hotels are held in a joint venture (the “Joint Venture”) formed between us and Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”), a related party REIT also sponsored by The Lightstone Group, LLC. The Company and Lightstone I have 97.5% and 2.5% 2.5% membership interests in the Joint Venture, respectively. Additionally, as of June 30, 2020,2021, certain of our consolidated hotels also have ownership interests held by unrelated minority owners. The membership interests of Lightstone I and the unrelated minority owners are accounted for as noncontrolling interests.
The Company’s advisor is Lightstone Value Plus REIT II LLC (the “Advisor”), which is majority owned by David Lichtenstein. On May 20, 2008, the Advisor contributed $2$2 to the Operating Partnership in exchange for 200 limited partner common units in the Operating Partnership. The Advisor also owns shares of the Company’s common stock (“Common Shares”) which were issued on May 20, 2008 for $200,$200, or $10.00$ per share. Mr. Lichtenstein also is a majority owner of the equity interests of the Lightstone Group, LLC. The Lightstone Group, LLC served as the Company’s sponsor (the ‘‘Sponsor’’) during its initial public offering (the “Offering”) and follow-on offering (the “Follow-on Offering”, and collectively, “the Offerings”), which terminated on August 15, 2012 and September 27, 2014, respectively. The Advisor, pursuant to the terms of an advisory agreement, together with the Company’s board of directors (the “Board of Directors”), is primarily responsible for making investment decisions on behalf of the Company and managing its day-to-day operations. Through his ownership and control of the Lightstone Group, LLC, Mr. Lichtenstein is the indirect owner and manager of Lightstone SLP II LLC, a Delaware limited liability company (the “Associate General Partner”), which has subordinated profits interests in the Operating Partnership which were acquired for aggregate consideration of $17.7$17.7 million in connection with the Company’s Offerings. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT II or the Operating Partnership.
The Company does not have any employees. The Advisor receives compensation and fees for services related to the investment and management of the Company’s assets.
| 6 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
The Company’s Advisor has certain affiliates which may manage the properties the Company acquires. However, the Company also contracts with other unaffiliated third-party property managers, principally for the management of its hospitality properties.
The Company’s Common Shares are not currently listed on a national securities exchange. The Company may seek to list its Common Shares for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its Common Shares until they are listed for trading. In the event the Company does not obtain listing prior to September 27, 2024, which is the tenth anniversary of the termination of its Follow-On Offering, its charter requires that the Board of Directors must either (i) seek stockholder approval of an extension or amendment of this listing deadline; or (ii) seek stockholder approval to adopt a plan of liquidation of the corporation.
Noncontrolling Interests
Limited Partner
On May 20, 2008, the Advisor contributed $2$2 to the Operating Partnership in exchange for 200 limited partner common units in the Operating Partnership. The Advisor has the right to convert limited partner common units into cash or, at the Company’s option, an equal number of Common Shares.
Associate General Partner
In connection with the Company’s Offerings, which concluded on September 27, 2014, the Associate General Partner contributed (i) cash of approximately $12.9$12.9 million and (ii) equity interests totaling 48.6%48.6% in the Brownmill Joint Venture, which were valued at $4.8$4.8 million, to the Operating Partnership in exchange for 177.0 Subordinated Profits Interests in the Operating Partnership with an aggregate value of $17.7$17.7 million.
As the indirect majority owner of the Associate General Partner, Mr. Lichtenstein is the beneficial owner of a 99%99% interest in such Subordinated Profits Interests and thus receives an indirect benefit from any distributions made in respect thereof.
These Subordinated Profits Interests may entitle the Associate General Partner to a portion of any regular and liquidation distributions that the Company makes to its stockholders, but only after its stockholders have received a stated preferred return. There have been no distributions declared on the Subordinated Profits Interests for quarterly periods after March 31, 2020. Since the Company’s inception, the cumulative distributions declared and paid on the Subordinated Profits Interests were $7.9 million. Any future distributions on the Subordinated Profits Interests will always be subordinated until stockholders receive a stated preferred return, as described above.
Other Noncontrolling Interests in Consolidated Subsidiaries
Other noncontrolling interests consist of the (i) membership interest in the Joint Venture held by Lightstone I and (ii) membership interests held by minority owners in certain of the Company’s hotels.
The Advisor and its affiliates and Associate General Partner are related parties of the Company. Certain of these entities are entitled to compensation and fees for services related to the investment, management and disposition of the Company’s assets during its acquisition, operational and liquidation stages. The compensation levels during the Company'sCompany’s acquisition and operational stages are based on the cost of acquired properties/investments and the annual revenue earned from such properties/investments, and other such fees and reimbursements as outlined in each of the respective agreements. See Note 8 for additional information.
| 2. | Summary of Significant Accounting Policies |
Basis of Presentation
The consolidated financial statements include the accounts of Lightstone REIT II and its Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). As of June 30, 2020,2021, Lightstone REIT II had a 99%99% general partnership interest in the common units of the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary.
| 7 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of the Company and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.2020. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. The accompanying unaudited consolidated financial statements of the Lightstone Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 108 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of AmericaGAAP for complete financial statements.
GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate, depreciable lives, and revenue recognition. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.
The consolidated balance sheet as of December 31, 20192020 included herein has been derived from the consolidated balance sheet included in the Company'sCompany’s Annual Report on Form 10-K.
The unaudited consolidated statements of operations for interim periods are not necessarily indicative of results for the full year or any other period.
To qualify or maintain our qualification as a REIT, we engage in certain activities through wholly-owned taxable REIT subsidiaries (“TRS”). As such, we are subject to U.S. federal and state income and franchise taxes from these activities.
Revenue Recognition
The following table represents the total revenues from hotel operations on a disaggregated basis:basis:
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| Revenues | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Room | $ | 3,372 | $ | 19,648 | $ | 15,823 | $ | 36,069 | ||||||||
| Food, beverage and other | 224 | 1,273 | 1,018 | 2,616 | ||||||||||||
| Total revenues | $ | 3,596 | $ | 20,921 | $ | 16,841 | $ | 38,685 | ||||||||
Restricted cash
As required by the Company’s lenders, restricted cash is held in escrow accounts for anticipated capital expenditures, real estate taxes, debt service payments and other reserves for certain of our consolidated properties. Capital reserves are typically utilized for non-operating expenses such as major capital expenditures. Alternatively, a lender may require its own formula for an escrow of capital reserves. As of December 31, 2019, restricted cash also included approximately $7.2 million of the proceeds from the October 2019 sale of the Company’s SpringHill Suites by Marriott hotel, located in Peabody, Massachusetts. These funds were temporarily placed in escrow with a qualified intermediary to potentially facilitate a like-kind exchange transaction in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended. However, the Company decided not to pursue a like-kind exchange transaction and the funds were subsequently released in May 2020.
| Schedule of total revenues from hotel operations on a disaggregated basis | ||||||||||||||||
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| Revenues | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Room | $ | 11,255 | $ | 3,372 | $ | 18,467 | $ | 15,823 | ||||||||
| Food, beverage and other | 463 | 224 | 698 | 1,018 | ||||||||||||
| Total revenues | $ | 11,718 | $ | 3,596 | $ | 19,165 | $ | 16,841 | ||||||||
COVID-19 Pandemic Operations and Liquidity Update
DuringThe World Health Organization declared COVID-19 a global pandemic on March 11, 2020 and since that time many of the second quarter of 2020,previously imposed restrictions and other measures which were instituted in response have been subsequently reduced or lifted. However, the COVID-19 pandemic continuedremains highly unpredictable and dynamic and its duration and extent continue to evolvebe dependent on various developments, such as the emergence of variants to the virus that may cause additional strains of COVID-19, the administration and ultimate effectiveness of vaccines, and the eventual timeline to achieve a sufficient level of herd immunity among the general population. Accordingly, the COVID-19 pandemic may continue to have negative effects on the health of the U.S. economy for the foreseeable future.
The extent to which the Company’s business may be affected by the ongoing COVID-19 pandemic will largely depend on both a globalcurrent and national level. With respect to the United States, many states have begun a phased approach as to reopeningfuture developments, all of businesseswhich are highly uncertain and venues, which have been subject to various restrictions and other measures. While certain states have begun to reduce and/or lift restrictions, the situation remains both dynamic and unpredictable.cannot be reasonably predicted.
| 8 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
As a result of the COVID-19 pandemic, room demand for the Company’s consolidated and unconsolidated hotels began to significantly decline in March 2020 and these trends continued throughoutwhile there has been sequential improvement since then; room demand continues to be below historical levels. Since March 2020, the second quarter. The COVID-19 pandemic has had a significant negative impact on the Company'sCompany’s operations, financial position and financial results to datecash flow and the Company currently expects that the COVID-19 pandemicit will continue to have a significant negative impact on its results of operations, financial position and cash flowdo so for the remainder of 2020 and into 2021.foreseeable future. The Company cannot currently estimate if and when room demand will recoverreturn to pre-pandemic levels for its hotels.
Additionally, the Company has an unconsolidated 48.6%48.6% membership interest in the Brownmill Joint Venture, which owns two retail properties located in New Jersey that have been subject to various restrictions. If Brownmill’sthe Brownmill Joint Venture’s retail properties are negatively impacted for an extended period because its tenants are unable to pay their rent, the Company’s equity earnings and the carrying value of its investment in the Brownmill Joint Venture could be materially and adversely impacted.
In light of the past, present and potential future impact of the COVID-19 pandemic on the operating results of its hotels, the Company has taken various actions to preserve its liquidity, including the following:
| The Company |
| ● | Amendments to Revolving Credit Facility – |
On June 2, 2020, the Company’s revolving credit facility (the “Revolving Credit Facility”) was amended to provide for (i) the deferral of the six monthly debt service payments aggregating $2.6 million for the period from April 1, 2020 through September 30, 2020, which are now due on November 15, 2021; (ii) a 100 bps reduction in the interest rate spread to LIBOR + 2.15%, subject to a 3.00% floor, for the six-month period from September 1, 2020 through February 28, 2021; (iii) the Company pre-funding $2.5 million into a cash collateral reserve account to cover the six monthly debt service payments due from October 1, 2020 through March 1, 2021; and (iv) a waiver of all financial covenants for quarter-end periods before June 30, 2021.
Subsequently, on March 31, 2021, the Revolving Credit Facility was further amended providing for (i) the Company to pledge the membership interests in another hotel as additional collateral within 45 days, (ii) the Company to fund an additional $2.5 million into the cash collateral reserve account; (iii) a waiver of all financial covenants for quarter-end periods through September 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods beginning December 31, 2021 through March 31, 2023; (iv) an extension of the maturity date from May 17, 2021 to September 15, 2022 upon completion of the pledge of the additional collateral; (v) one additional one-year extension option at the lender’s sole discretion; and (vi) certain limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.
On May 13, 2021, the Company pledged the additional collateral and extended the maturity date of the Revolving Credit Facility to September 15, 2022.
See Note 5 for additional information.
| On March 19, 2020, the |
| ● | The Company had $7.2 million of funds previously held in escrow with a qualified intermediary to facilitate a potential like-kind exchange transaction in accordance with Section 1031 of the |
| ● | The Hilton Garden Inn Joint Venture has obtained various amendments to its non-recourse mortgage loan secured by the |
Based on these actions, theLIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
The Company believes that these actions, along with its available on hand cash and cash equivalents, restricted cash and marketable securities will provide it will havewith sufficient liquidity to meet its obligations for at least 12 months from the next twelve months. However, the Company’s Revolving Credit Facility is initially scheduled to mature on May 17, 2021 and while it has two one-year extension options, they are both at the sole discretiondate of the lender. Although the Company currently intends to request the lender exercise the first one-year extension option, there can be no assurance the Company will be successful in obtaining an extension to the maturityissuance of the Revolving Credit Facility. See Note 5 for additional information.these financial statements.
New Accounting Pronouncements
The Company has reviewed and determined that recently issued accounting pronouncements will not have a material impact on its financial position, results of operations and cash flows, or do not apply to its current operations.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
| 3. | Investments in Unconsolidated Affiliated Entities |
The entities listed below are partially owned by the Company. The Company accounts for these investments under the equity method of accounting as the Company exercises significant influence, but does not exercise financial and operating control over these entities. A summary of the Company’s investments in the unconsolidated affiliated entities is as follows:
| Summary of investments in unconsolidated entities | ||||||||||||||||||||||||||||||
| As of | As of | |||||||||||||||||||||||||||||
| Entity | Date of Ownership | Ownership % | June 30, 2020 | December 31, 2019 | Date of Ownership | Ownership % | June 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Brownmill | Various | 48.58 | % | $ | 4,473 | $ | 4,630 | Various | 48.58 | % | $ | 4,924 | $ | 4,710 | ||||||||||||||||
| Hilton Garden Inn Joint Venture | March 27, 2018 | 50.00 | % | 11,574 | 11,764 | March 27, 2018 | 50.00 | % | 11,083 | 10,649 | ||||||||||||||||||||
| Total investments in unconsolidated affiliated real estate entities | $ | 16,047 | $ | 16,394 | $ | 16,007 | $ | 15,359 | ||||||||||||||||||||||
Brownmill Joint Venture
During 2010 through 2012, the Company entered into various contribution agreements with Lightstone Holdings LLC (‘‘LGH’’), a wholly-owned subsidiary of the Company’s Sponsor, pursuant to which LGH contributed to the Company an approximate aggregate 48.6% equity48.6% membership interest in the Brownmill Joint Venture in exchange for the Company issuing an aggregate of 48 units of Subordinated Profits Interests, at $100,000$100,000 per unit (at an aggregate total value of $4.8$4.8 million), to Lightstone SLP II LLC.
As of June 30, 2020,2021, the Company owns a 48.6% membership interest in Brownmill. The Company’s interest inthe Brownmill Joint Venture, which is a non-managing interest. An affiliate of the Company’s Sponsor is the majority owner and manager of Brownmill.the Brownmill Joint Venture. Profit and cash distributions are allocated in accordance with each investor’s ownership percentage. The Company accounts for its investment in the Brownmill Joint Venture in accordance with the equity method of accounting. During the six months ended June 30, 2021, the Company made contributions to the Brownmill Joint Venture aggregating $68 and received distributions from the Brownmill Joint Venture aggregating $87. During the six months ended June 30, 2020, the Company received distributions from the Brownmill Joint Venture aggregating $125.$125.
The Brownmill Joint Venture owns two retail properties known as Browntown Shopping Center, located in Old Bridge, New Jersey, and Millburn Mall, located in Vauxhaull, New Jersey, which collectively, are referred to as the “Brownmill Properties.”
Brownmill Joint Venture Financial Information
The Company’s carrying value of its interest in the Brownmill Joint Venture differs from its share of member’s equity reported in the condensed balance sheet of the Brownmill Joint Venture due to the Company’s basis of its investment in excess of the historical net book value of Brownmill.the Brownmill Joint Venture. The Company’s additional basis allocated to depreciable assets is being recognized on a straight-line basis over the lives of the appropriate assets.
The following table represents the condensed income statements for Brownmill for the periods indicated:
| 10 |
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenue | $ | 895 | $ | 865 | $ | 1,820 | $ | 1,774 | ||||||||
| Property operating expenses | 454 | 334 | 1,106 | 796 | ||||||||||||
| Depreciation and amortization | 167 | 175 | 332 | 350 | ||||||||||||
| Operating income | 274 | 356 | 382 | 628 | ||||||||||||
| Interest expense and other, net | (150 | ) | (170 | ) | (319 | ) | (360 | ) | ||||||||
| Net income | $ | 124 | $ | 186 | $ | 63 | $ | 268 | ||||||||
| Company's share of net income | $ | 60 | $ | 90 | $ | 30 | $ | 130 | ||||||||
| Additional depreciation and amortization expense (1) | (31 | ) | (31 | ) | (62 | ) | (63 | ) | ||||||||
| Company's earnings from investment | $ | 29 | $ | 59 | $ | (32 | ) | $ | 67 | |||||||
1)Additional depreciation and amortization expense relates to the amortization of the difference between the cost of the interest in Brownmill and the amount of the underlying equity in net assets of Brownmill.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
The following table represents the condensed income statements for the Brownmill Joint Venture for the periods indicated:
| Schedule of condensed income statements | ||||||||||||||||
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue | $ | 975 | $ | 895 | $ | 2,025 | $ | 1,820 | ||||||||
| Property operating expenses | 416 | 454 | 721 | 1,106 | ||||||||||||
| Depreciation and amortization | 191 | 167 | 367 | 332 | ||||||||||||
| Operating income | 368 | 274 | 937 | 382 | ||||||||||||
| Interest expense and other, net | (163 | ) | (150 | ) | (329 | ) | (319 | ) | ||||||||
| Net income | $ | 205 | $ | 124 | $ | 608 | $ | 63 | ||||||||
| Company’s share of net income | $ | 99 | $ | 60 | $ | 295 | $ | 30 | ||||||||
| Additional depreciation and amortization expense (1) | (31 | ) | (31 | ) | (62 | ) | (62 | ) | ||||||||
| Company’s earnings from investment | $ | 68 | $ | 29 | $ | 233 | $ | (32 | ) | |||||||
| 1) | Additional depreciation and amortization expense relates to the amortization of the difference between the cost of the interest in Brownmill and the amount of the underlying equity in net assets of Brownmill. |
The following table represents the condensed balance sheets for Brownmill:
| Schedule of condensed balance sheets | As of | As of | ||||||||||||||
| As of | As of | June 30, 2021 | December 31, 2020 | |||||||||||||
| June 30, 2020 | December 31, 2019 | |||||||||||||||
| Real estate, at cost (net) | $ | 13,790 | $ | 13,507 | $ | 14,196 | $ | 14,234 | ||||||||
| Cash and restricted cash | 890 | 1,016 | 1,052 | 1,038 | ||||||||||||
| Other assets | 1,440 | 1,440 | 1,542 | 1,279 | ||||||||||||
| Total assets | $ | 16,120 | $ | 15,963 | $ | 16,790 | $ | 16,551 | ||||||||
| Mortgage payable | $ | 13,970 | $ | 14,061 | $ | 13,714 | $ | 13,834 | ||||||||
| Other liabilities | 970 | 648 | 809 | 1,018 | ||||||||||||
| Members' capital | 1,180 | 1,254 | ||||||||||||||
| Total liabilities and members' capital | $ | 16,120 | $ | 15,963 | ||||||||||||
| Members’ capital | 2,267 | 1,699 | ||||||||||||||
| Total liabilities and members’ capital | $ | 16,790 | $ | 16,551 | ||||||||||||
Hilton Garden Inn Joint Venture
On March 27, 2018, the Company and Lightstone Value Plus Real Estate Investment Trust III, Inc. (“Lightstone REIT III”), a related party REIT also sponsored by the Company’s Sponsor, acquired, through the Hilton Garden Inn Joint Venture, a 183-room, limited-service hotel located at 29-21 41st Avenue, Long Island City, New York (the “Hilton Garden Inn - Long Island City”) from an unrelated third party, for aggregate consideration of approximately $60.0$60.0 million, which consisted of $25.0$25.0 million of cash and $35.0$35.0 million of proceeds from a loan from a financial institution (the “Hilton“Hilton Garden Inn Mortgage”), excluding closing and other related transaction costs. The Company and Lightstone REIT III each have a 50.0% membership interest in the Hilton Garden Inn Joint Venture.
The Company paid approximately $12.9$12.9 million for a 50.0%50.0% membership interest in the Hilton Garden Inn Joint Venture. The Company’s membership interest in the Hilton Garden Inn Joint Venture is a co-managing interest. The Company accounts for its membership interest in the Hilton Garden Inn Joint Venture in accordance with the equity method of accounting because it exerts significant influence over but does not control the Hilton Garden Inn Joint Venture. All capital contributions and distributions of earnings from the Hilton Garden Inn Joint Venture are made on a pro rata basis in proportion to each member’s equity interest percentage. Any distributions in excess of earnings from the Hilton Garden Inn Joint Venture are made to the members pursuant to the terms of the Hilton Garden Inn Joint Venture’s operating agreement. The Company commenced recording its allocated portion of profit/loss and cash distributions beginning as of March 27, 2018 with respect to its membership interest of 50.0%50.0% in the Hilton Garden Inn Joint Venture.
On June 2, 2020,In light of the impact of the COVID-19 pandemic on the operating results of the Hilton Garden Inn – Long Island City, the Hilton Garden Inn Joint Venture and the lender agreedhas entered into certain amendments with respect to certain changes to the terms of the Hilton Garden Inn Mortgage including (i) the deferral of monthly debt service for payments previously due from April 1, 2020 through September 30, 2020, which will now be due at maturity;(ii) subject to certain conditions, the interest rate spread will be reduced by 100 bps to Libor plus 2.15% for the six-month period beginning September 1, 2020 through February 28, 2021; (iii) the Hilton Garden Inn Joint Venture deposited $1.2 million into a cash collateral account to be applied against the monthly debt service payments due from October 1, 2020 through March 1, 2021; and (iv) waiver of all financial covenants until June 30, 2021.as discussed below.
Subsequent to the Company’s acquisition of its 50.0% membership interest in the Hilton Garden Joint Venture through June 30, 2020, it has made an aggregate of $1.5 million of additional capital contributions (of which $0.8 million was made in 2020) and received aggregate distributions of $1.5 million (of which $44 was received in 2020).
| 11 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
On June 2, 2020, the Hilton Garden Inn Mortgage was amended to provide for (i) the deferral of the six monthly debt service payments aggregating $0.9 million for the period from April 1, 2020 through September 30, 2020 until March 27, 2023; (ii) a 100 bps reduction in the interest rate spread to LIBOR + 2.15%, subject to a 4.03% floor, for the six-month period from September 1, 2020 through February 28, 2021; (iii) the Hilton Garden Inn Joint Venture pre-funding $1.2 million into a cash collateral reserve account to cover the six monthly debt service payments due from October 1, 2020 through March 1, 2021; and (iv) waiver of all financial covenants for quarter-end periods before June 30, 2021.
Additionally, on April 7, 2021, the Hilton Garden Inn Joint Venture and the lender further amended the terms of the Hilton Garden Inn Mortgage to provide for (i) the Hilton Garden Inn Joint Venture to make a principal paydown of $1.7 million; (ii) the Hilton Garden Inn Joint Venture to fund an additional $0.7 million into the cash collateral reserve account; (iii) a waiver of all financial covenants for quarter-end periods through September 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods beginning December 31, 2021 through December 31, 2022; (iv) a 11-month interest-only payment period from May 1, 2021 through March 31, 2022; and (v) certain restrictions on distributions to the members of the Hilton Garden Inn Joint Venture during the interest-only payment period.
Subsequent to the Company’s acquisition of its 50.0% membership interest in the Hilton Garden Joint Venture through June 30, 2021, it has made an aggregate of $2.8 million of additional capital contributions, of which $1.3 million was made during the second quarter of 2021 and received aggregate distributions of $2.0 million, of which $0.5 million was received during the second quarter of 2021.
Hilton Garden Inn Joint Venture Financial Information
The following table represents the condensed income statements for the Hilton Garden Inn Joint Venture for the period indicated:
| Schedule of condensed income statements | ||||||||||||||||||||||||||||||||
| For the Three Months Ended June 30, 2020 | For the Three Months Ended June 30, 2019 | For the Six Months Ended June 30, 2020 | For the Six Months Ended June 30, 2019 | For the Three Months Ended June 30, 2021 | For the Three Months Ended June 30, 2020 | For the Six Months Ended June 30, 2021 | For the Six Months Ended June 30, 2020 | |||||||||||||||||||||||||
| Revenues | $ | 680 | $ | 3,086 | $ | 2,220 | $ | 5,094 | $ | 1,764 | $ | 680 | $ | 3,183 | $ | 2,220 | ||||||||||||||||
| Property operating expenses | 616 | 1,765 | 1,961 | 3,270 | 1,037 | 616 | 1,909 | 1,961 | ||||||||||||||||||||||||
| General and administrative costs | 11 | (22 | ) | 29 | (22 | ) | 8 | 11 | 18 | 29 | ||||||||||||||||||||||
| Depreciation and amortization | 615 | 627 | 1,245 | 1,269 | 621 | 615 | 1,256 | 1,245 | ||||||||||||||||||||||||
| Operating (loss)/income | (562 | ) | 716 | (1,015 | ) | 577 | ||||||||||||||||||||||||||
| Operating income/(loss) | 98 | (562 | ) | 0 | (1,015 | ) | ||||||||||||||||||||||||||
| Interest expense | (460 | ) | (520 | ) | (917 | ) | (1,026 | ) | (434 | ) | (460 | ) | (831 | ) | (917 | ) | ||||||||||||||||
| Net (loss)/income | $ | (1,022 | ) | $ | 196 | $ | (1,932 | ) | $ | (449 | ) | |||||||||||||||||||||
| Company's share of net (loss)/income (50.00%) | $ | (511 | ) | $ | 98 | $ | (966 | ) | $ | (225 | ) | |||||||||||||||||||||
| Net loss | $ | (336 | ) | $ | (1,022 | ) | $ | (831 | ) | $ | (1,932 | ) | ||||||||||||||||||||
| Company’s share of net loss (50.00%) | $ | (168 | ) | $ | (511 | ) | $ | (416 | ) | $ | (966 | ) | ||||||||||||||||||||
The following table represents the condensed balance sheets for the Hilton Garden Inn Joint Venture:
| Schedule of condensed balance sheets | ||||||||
| As of | As of | |||||||
| June 30, 2021 | December 31, 2020 | |||||||
| Investment property, net | $ | 53,629 | $ | 54,826 | ||||
| Cash | 1,661 | 885 | ||||||
| Other assets | 1,185 | 1,211 | ||||||
| Total assets | $ | 56,475 | $ | 56,922 | ||||
| Mortgage payable, net | $ | 33,462 | $ | 34,988 | ||||
| Other liabilities | 1,418 | 1,207 | ||||||
| Members’ capital | 21,595 | 20,727 | ||||||
| Total liabilities and members’ capital | $ | 56,475 | $ | 56,922 | ||||
| As of | As of | |||||||
| June 30, 2020 | December 31, 2019 | |||||||
| Investment property, net | $ | 55,961 | $ | 56,775 | ||||
| Cash | 866 | 904 | ||||||
| Other assets | 1,759 | 894 | ||||||
| Total assets | $ | 58,586 | $ | 58,573 | ||||
| Mortgage payable, net | $ | 35,225 | $ | 34,821 | ||||
| Other liabilities | 782 | 794 | ||||||
| Members' capital | 22,579 | 22,958 | ||||||
| Total liabilities and members' capital | $ | 58,586 | $ | 58,573 | ||||
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
| 4. | Marketable Securities, Fair Value Measurements and Margin Loan |
Marketable Securities
The following is a summary of the Company’s available for sale securities as of the dates indicated:
| Summary of Available for Sale Securities | ||||||||||||||||||||||||||||||||
| As of June 30, 2020 | As of June 30, 2021 | |||||||||||||||||||||||||||||||
| Adjusted Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||||||||
| Marketable Securities: | ||||||||||||||||||||||||||||||||
| Equity securities: | ||||||||||||||||||||||||||||||||
| Preferred Equities | $ | 3,620 | $ | 186 | $ | 0 | $ | 3,806 | ||||||||||||||||||||||||
| Adjusted Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||||||||
| Debt securities: | ||||||||||||||||||||||||||||||||
| Corporate Bonds | $ | 6,653 | $ | - | $ | (136 | ) | $ | 6,517 | 3,098 | 41 | 0 | 3,139 | |||||||||||||||||||
| Total | $ | 6,718 | $ | 227 | $ | 0 | $ | 6,945 | ||||||||||||||||||||||||
| As of December 31, 2019 | ||||||||||||||||
| Adjusted Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Debt securities: | ||||||||||||||||
| Corporate Bonds | $ | 8,718 | $ | 172 | $ | - | $ | 8,890 | ||||||||
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
| As of December 31, 2020 | ||||||||||||||||
| Adjusted Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Marketable Securities: | ||||||||||||||||
| Equity securities: | ||||||||||||||||
| Preferred Equities | $ | 3,620 | $ | 102 | $ | 0 | $ | 3,722 | ||||||||
| Debt securities: | ||||||||||||||||
| Corporate Bonds | 3,098 | 82 | 0 | 3,180 | ||||||||||||
| Total | $ | 6,718 | $ | 184 | $ | 0 | $ | 6,902 | ||||||||
During the first half of 2020, financial markets experienced significant volatility in response to the current COVID-19 pandemic, including significant changes in market interest rates and market prices of certain equity securities during the six months ended June 30, 2020. During the first and second quarter of 2020, the Company experienced a holding loss of approximately $1.2 million and a holding gain of approximately $0.6 million on its available for sale marketable debt securities, respectively, which resulted in a net holding loss of approximately $0.6 million for the six months ended June 30, 2020. These holding gains and losses are included in the Company’s consolidated statements of comprehensive income. As a result, the Company’s marketable debt securities had an aggregate net unrealized loss of approximately $0.1 million as of June 30, 2020.
The Company considers the declines in market value of its investments in marketable debt securities to be temporary in nature as the unrealized losses were caused primarily by financial market volatility associated with the current COVID-19 pandemic which resulting in significant reductions in market interest rates and market prices of certain equity securities. When evaluating its investments in marketable debt securities for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the marketable debt security before recovery of its amortized cost basis. During the three and six months ended June 30, 20202021 and 2019,2020, the Company did not recognize any impairment charges on its investments in marketable debt securities. As of June 30, 2020,2021, the Company does not consider any of itshad no investments in marketable debt securities to be other-than-temporarily impaired.with unrealized losses.
The Company may sell certain of its investments in marketable debt securities prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:
| Level 1 – Quoted prices in active markets for identical assets or liabilities. | ||
| Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | ||
| Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
| 13 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
As of June 30, 20202021 and December 31, 2019, all of2020, the Company’s debt securitiespreferred equities and corporate bonds were classified as Level 2 assets and there were no transfers between the level classifications. There were no transfers between the level classifications during the six months ended June 30, 2020.2021.
The fair values of the Company’s investments in Corporate Bondspreferred equities and corporate bonds are measured using readily available quoted prices for similar assets.
The following table summarizes the estimated fair value of our investments in marketable debt securities with stated contractual maturity dates, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities:
| As of June 30, 2020 | ||||
| Due in 1 year | $ | - | ||
| Due in 1 year through 5 years | 3,068 | |||
| Due in 5 year through 10 years | - | |||
| Due after 10 years | 3,449 | |||
| Total | $ | 6,517 | ||
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
| Summary of the estimated fair value of our investments in marketable debt securities with stated contractual maturity dates | ||||
| As of June 30, 2021 | ||||
| Due in 1 year | $ | 0 | ||
| Due in 1 year through 5 years | 3,139 | |||
| Due in 5 year through 10 years | 0 | |||
| Due after 10 years | 0 | |||
| Total | $ | 3,139 | ||
The Company did not have any other significant financial assets or liabilities, which would require revised valuations that are recognized at fair value.
Margin loan
The Company has access to a margin loan from a financial institution that holds custody of certain of the Company’s marketable securities. The margin loan is collateralized by the marketable securities in the Company’s account. The amounts available to the Company under the margin loan are at the discretion of the financial institution and not limited to the amount of collateral in its account. The amount outstanding under this margin loan was $2.7$2.4 million and $4.7$2.6 million as of June 30, 20202021 and December 31, 2019,2020, respectively, and is due on demand. The margin loan bears interest at Libor plusLIBOR + 0.85% (1.01% (0.95% as of June 30, 2020)2021).
| 5. | Mortgages payable, net |
Mortgages payable, net consisted of the following:
| Schedule of Mortgages Payable | ||||||||||||||||||||||||||||||||||||||||||
| Weighted Average Interest Rate | ||||||||||||||||||||||||||||||||||||||||||
| Description | Interest Rate | Weighted Average Interest Rate as of June 30, 2020 | Maturity Date | Amount Due at Maturity | As of June 30, 2020 | As of December 31, 2019 | Interest Rate | as of June 30, 2021 | Maturity Date | Amount Due at Maturity | As of June 30, 2021 | As of December 31, 2020 | ||||||||||||||||||||||||||||||
| Revolving Credit Facility | LIBOR + 3.15% | 4.43 | % | May 2021 | $ | 123,045 | $ | 123,045 | $ | 123,045 | LIBOR + 3.15% (floor of 4.00%) | 3.68 | % | September 2022 | $ | 123,045 | $ | 123,045 | $ | 123,045 | ||||||||||||||||||||||
| Courtyard – Paso Robles | 5.49 | % | 5.49 | % | November 2023 | 13,022 | 13,714 | 13,806 | 5.49% | 5.49 | % | November 2023 | 13,022 | 13,519 | 13,619 | |||||||||||||||||||||||||||
| Total mortgages payable | 4.53 | % | $ | 136,067 | 136,759 | 136,851 | 3.57 | % | $ | 136,067 | 136,564 | 136,664 | ||||||||||||||||||||||||||||||
| Less: Deferred financing costs | (469 | ) | (674 | ) | (468 | ) | (264 | ) | ||||||||||||||||||||||||||||||||||
| Total mortgages payable, net | $ | 136,290 | $ | 136,177 | $ | 136,096 | $ | 136,400 | ||||||||||||||||||||||||||||||||||
Revolving Credit Facility
The Company, through certain subsidiaries, has a non-recourse Revolving Credit Facility with a financial institution. The Revolving Credit Facility provides the Company with a line of credit of up to $140.0$140.0 million pursuant to which it may designate properties as collateral that allow borrowings up to a 65.0%65.0% loan-to-value ratio subject to also meeting certain financial covenants, including a prescribed minimum debt yield. The Revolving Credit Facility provides for monthly interest-only payments and the entire principal balance is due upon its expiration.
| 14 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
The Revolving Credit Facility, which was entered into on May 17, 2018, hashad an initial maturity date of May 17, 2021,which was subject to two one-yearcertain options to extend at the sole discretion of the lender. The initial interest rate on the Revolving Credit Facility was Libor plusLIBOR + 3.50% until it was reduced to Libor plusLIBOR + 3.15%, subject to a 4.00% floor, effective March 31, 2019.
On June 2, 2020, the Company and the lender agreed to certain changes to the terms of Revolving Credit Facility, including (i) the deferral of monthly debt service for payments previously dueaggregating $2.6 million for the period from April 1, 2020 through September 30, 2020, which willare now be due at maturity;on November 15, 2021; (ii) subject to certain conditions, the interest rate spread willmay be reduced by 100 bps to Libor plusLIBOR + 2.15%, subject to a 3.00% floor, for the six-month period beginning September 1, 2020 through February 28, 2021; (iii) the Company deposited $2.5$2.5 million into a cash collateral account (which is classified as restricted cash on the consolidated balance sheets) to be applied against the monthly debt service payments due from October 1, 2020 through March 1, 2021; and (iv) waiver of all financial covenants untilfor periods before June 30, 2021.
Subsequently, on March 31, 2021, the Revolving Credit Facility was further amended providing for (i) the Company to pledge its membership interest in another hotel as additional collateral within 45 days, (ii) the Company to fund an additional $2.5 million into the cash collateral reserve account (which was included in restricted cash on the Company’s consolidated balance sheet as of March 31, 2021); (iii) a waiver of all financial covenants for quarter-end periods through September 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods beginning December 31, 2021 through March 31, 2023; (iv) an extension of the maturity date from May 17, 2021 to September 15, 2022 upon completion of the pledge of the additional collateral; (v) one additional one-year extension option at the lender’s sole discretion; and (vi) certain limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.
On May 13, 2021, the Company pledged the additional collateral and extended the maturity date of the Revolving Credit Facility to September 15, 2022.
As of June 30, 2020, twelve2021, 13 of the Company’s hotel properties were pledged as collateral under the Revolving Credit Facility and the outstanding principal balance was approximately $123.0 million.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited) Additionally, no additional borrowings were available under the Revolving Credit Facility as of June 30, 2021.
Courtyard – Paso Robles Mortgage Loan
In connection with the Company’s acquisition of the Courtyard – Paso Robles on December 14, 2017, it assumed an existing $14.0 million non-recourse mortgage loan collateralized by the Courtyard – Paso Robles (the “Courtyard - Paso Robles Mortgage Loan”).Loan. The Courtyard – Paso Robles Mortgage Loan matures in November 2023, bears interest at a fixed rate of 5.49%5.49% and requires monthly principal and interest payments of approximately $79$79 through its stated maturity with a balloon payment of approximately $13.0$13.0 million due at maturity. The Courtyard – Paso Robles Mortgage Loan had an outstanding balance of approximately $13.7$13.5 million as of June 30, 2020.2021.
The Company is current with respect to schedule debt service forOn October 28, 2020, the servicer of the Courtyard – Paso Robles Mortgage Loan. However, in light ofLoan agreed to waive the COVID-19 pandemic, it has requested the loan be transferred to a special servicer in order to seek certain modifications to the loan’s terms. However, there can be no assurance that the Company will be successful in obtaining any modifications to the loan’s terms.minimum debt yield financial covenant for all periods through June 30, 2021.
Principal Maturities
The following table, based on the initial terms of the mortgages, sets forth their aggregate estimated contractual principal maturities, including balloon payments due at maturity, as of June 30, 2020:2021, after taking into consideration the extension of the maturity of the Revolving Credit Facility:
| Schedule of Estimated Contractual Principal Maturities | ||||||||||||||||||||||||||||
| 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | ||||||||||||||||||||||
| Principal maturities | $ | 100 | $ | 123,256 | $ | 13,208 | $ | 0 | $ | 0 | $ | 0 | $ | 136,564 | ||||||||||||||
| Less: deferred financing costs | (468 | ) | ||||||||||||||||||||||||||
| Total principal maturities, net | $ | 136,096 | ||||||||||||||||||||||||||
| 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | ||||||||||||||||||||||
| Principal maturities | $ | 95 | $ | 123,245 | $ | 211 | $ | 13,208 | $ | - | $ | - | $ | 136,759 | ||||||||||||||
| Less: deferred financing costs | (469 | ) | ||||||||||||||||||||||||||
| Total principal maturities, net | $ | 136,290 | ||||||||||||||||||||||||||
| 15 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
Pursuant to the Company’s loan agreements, escrows in the amount of $3.9$3.6 million and $1.8$3.1 million were held in restricted cash accounts as of June 30, 20202021 and December 31, 2019,2020, respectively. Such escrows will be released in accordance with the applicable loan agreements for payments of real estate taxes, debt service payments, insurance and capital improvement transactions, as required. Certain of our debt agreements also contain clauses providing for prepayment penalties.
| 6. | Notes Payable |
During April 2020, the Company, through various subsidiaries (each such entity, a “Borrower” and collectively, the “Borrowers”), received aggregate funding of $3.3$3.3 million through loans (the “PPP Loans”) originated under the federal Paycheck Protection Program, which was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. SBA. During the first quarter of 2021, the Borrowers received an additional aggregate funding of $3.7 million of PPP Loans.
The PPP Loans each have a term of five 5years and provide for an interest rate of 1.00%1.00%. Equal paymentsThe payment of principal and interest begin no later than 10on the PPP Loan is deferred until the day that the forgiven amount is remitted to the lender (approximately five months followingafter the origination datesforgiveness application is submitted to the lender, unless the Borrower appeals a denial of forgiveness) or ten months after the end of the PPP loans and are amortized over the remaining term.Borrower’s covered period, whichever is earlier. Pursuant to the terms of the CARES Act, the proceeds of the PPP Loans may be used for payroll costs, mortgage interest, rent or utility costs.
The promissory note for each of the PPP Loans contains customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note. Under the terms of the CARES Act, each Borrower can apply for and be granted forgiveness for all or a portion of the PPP Loans. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act. NoAlthough the Company intends for each Borrower to apply for loan forgiveness, no assurance is providedcan be given that any Borrower will ultimately obtain forgiveness under any relevant PPP Loan, in whole or in part. In the event all or any portion of the PPP Loans is forgiven, the amount forgiven will be applied to outstanding principal and recorded as income. During the second quarter of 2021 notice was received from the SBA that $1.5 million of PPP Loans and related accrued interest had been legally forgiven and therefore, the Company recognized a gain on forgiveness of debt for that amount on its consolidated statements of operations during the second quarter of 2021.
As of June 30, 2021 and December 31, 2020, the PPP Loans had an outstanding balance of $3.3$5.6 million and $3.3 million, respectively, and are classified as Notes Payable on the consolidated balance sheets.
| 7. | Equity |
Distributions on Common Shares
On March 19, 2020, the Company’s Board of Directors determined to suspend regular quarterly distributions.distributions and, as a result, has not declared any distributions on the Company’s Common Shares since the suspension.
Future distributions declared on the Company’s Common Shares, if any, will be at the discretion of the Board of Directors based on their analysis of the Company’s performance over the previous periods and expectations of performance for future periods. The Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, revenues and other sources of income, operating and interest expenses and ourthe Company’s ability to refinance near-term debt. In addition,debt as well as the Company currently intends to continue to comply with the REITIRS’s annual distribution requirement that it annuallyREITs distribute no less than 90%90% of ourtheir taxable income. The Company cannot assure that any future distributions will be made or that it will maintain any particular level of distributions that it has previously established or may establish.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
Share Repurchase Program
The Company’s share repurchase programSRP may provide its stockholders with limited, interim liquidity by enabling them to sell their shares of common stockCommon Shares back to it,the Company, subject to certain restrictions. From the Company’s inception through December 31, 2019 it redeemed approximately 1.4 million common shares at an average price of $9.77 per share. For the six months ended June 30, 2020, the Company redeemed 0.1 million common shares at an average price of $10.00 per share.
On March 19, 2020, the Board of Directors amended the share repurchase programSRP to remove stockholder notice requirements and also approved the suspension of all redemptions effective immediately. On March 25, 2020, the Board of Directors determined to suspend the SRP effective immediately.
| 16 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
Effective May 10, 2021, the Board of Directors reopened the SRP to allow, subject to various conditions as set forth below, for redemptions submitted in connection with a stockholder’s death or hardship and set the price for all such purchases to 100% of the NAV per Share ($ as of December 31, 2020).
Deaths that occurred subsequent to January 1, 2020 are eligible for consideration. Beginning January 1, 2022, requests for redemptions in connection with a stockholder’s death must be submitted and received by the Company within one year of the stockholder’s date of death for consideration.
On an annual basis, the Company will not redeem in excess of % of the number of shares outstanding as of the end of the preceding year for either death or hardship redemptions, respectively. Redemption requests are expected to be processed on a quarterly basis and may be subject to pro ration if either type of redemption requests exceed the annual limitation.
Earnings per Share
The Company had no potentially dilutive securities outstanding during the periods presented. Accordingly, earnings per share is calculated by dividing net incomeincome/loss attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the applicable period.
| 8. | Related Party Transactions |
The Company has various agreements, including an advisory agreement, with the Advisor and Lightstone Value Plus REIT Management LLC (the “Property Manager”) to pay certain fees in exchange for services performed by these entities and other related partythe Advisor and/or its affiliated entities. TheAdditionally, the Company’s ability to secure financing and subsequentits real estate operations are dependent upon its Advisor Property Manager and theirits affiliates to perform such services as provided in these agreements. Amounts the Company owes to the Advisor and its affiliated entities are principally for asset management fees, and are classified as due to related parties on the consolidated balance sheets.
The following table represents the fees incurred associated with the payments to the Company’s Advisor for the periods indicated:
| Schedule of fees to related parties | ||||||||||||||||||||||||||||||||
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
| Development fees (1) | $ | - | $ | 57 | $ | 32 | $ | 62 | $ | 0 | $ | 0 | $ | 0 | $ | 32 | ||||||||||||||||
| Asset management fees (general and administrative costs) | 734 | $ | 758 | $ | 1,456 | $ | 1,534 | 738 | 734 | 1,475 | 1,456 | |||||||||||||||||||||
| Total | $ | 734 | $ | 815 | $ | 1,488 | $ | 1,596 | $ | 738 | $ | 734 | $ | 1,475 | $ | 1,488 | ||||||||||||||||
(1)
| (1) | Generally, capitalized and amortized over the estimated useful life of the associated asset. |
The advisory agreement has a one-year term and is renewable for an unlimited number of successive one-year periods upon the mutual consent of the Advisor and the Company’s independent directors. Payments to the Advisor or its affiliates may include asset acquisition fees and the reimbursement of acquisition-related expenses, development fees and the reimbursement of development-related costs, financing coordination fees, asset management fees or asset management participation, and construction management fees. The Company may also reimburse the Advisor and its affiliates for actual expenses it incurs for administrative and other services provided for it. Upon the liquidation of the Company’s assets, it may pay the Advisor or its affiliates a disposition commission.
In connection with the Company’s Offering and Follow-On Offering, Lightstone SLP II LLC, an affiliate of the Company’s Sponsor, contributed (i) cash of approximately $12.9$12.9 million and (ii) equity interests in the Brownmill Joint Venture valued at $4.8 million to the Operating Partnership in exchange for 177.0 Subordinated Profits Interests in the Operating Partnership with an aggregate value of $17.7$17.7 million, which are included in noncontrolling interests in the consolidated balance sheets. These Subordinated Profit Interests, the purchase price of which will be repaid only after stockholders receive a stated preferred return and their net investment, entitle Lightstone SLP II, LLC to a portion of any regular distributions made by the Operating Partnership. There have been no distributions declared on the Subordinated Profits Interests for quarterly periods after March 31, 2020. Since the Company’s inception, the cumulative distributions declared and paid on the Subordinated Profits Interests were $7.9 million. Any future distributions on the Subordinated Profits Interests will always be subordinated until stockholders receive a stated preferred return, as described above.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
| 9. | Financial Instruments |
The carrying amounts reported in the consolidated balance sheets forof cash and cash equivalents, restricted cash, accounts receivable and other assets, accounts payable and other accrued expenses, margin loan, notes payable and due to related party and distributions payable approximated their fair values as of June 30, 2021 and December 31, 2020 because of the short maturity of these instruments. The carrying amount and estimated fair value of our mortgages payable isare as follows:
| As of June 30, 2020 | As of December 31, 2019 | |||||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||
| Mortgages payable | $ | 136,759 | $ | 137,897 | $ | 136,851 | $137,303 | |||||||
| Schedule of Mortgages payable and the related estimated fair value | ||||||||||||||||
| As of June 30, 2021 | As of December 31, 2020 | |||||||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
| Mortgages payable | $ | 136,564 | $ | 136,712 | $ | 136,664 | $ | 136,743 | ||||||||
The fair value of our mortgages payable was determined by discounting the future contractual interest and principal payments by market interest rates.
| 10. | Commitments and Contingencies |
Legal Proceedings
From time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes.
As of the date hereof, the Company is not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.
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PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Lightstone Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Lightstone Value Plus Real Estate Investment Trust II, Inc., a Maryland corporation, and, as required by context, Lightstone Value Plus REIT II LP and its wholly owned subsidiaries, which we collectively refer to as the “Operating Partnership”. Dollar amounts are presented in thousands, except per share data and where indicated in millions.
Forward-Looking Statements
Certain information included in this Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by us with the United States Securities and Exchange Commission (the “SEC”), contain or will contain, forward-looking statements. All statements, other than statements of historical facts, including, among others, statements regarding our possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives, are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of Lightstone Value Plus Real Estate Investment Trust II, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that actual results may differ materially from those contemplated by such forward-looking statements.
Such statements are based on assumptions and expectations which may not be realized and are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, may differ from the results discussed in the forward-looking statements.
Risks and other factors that might cause differences, some of which could be material, include, but are not limited to, economic and market conditions, competition, tenant or joint venture partner(s) bankruptcies, our lack of operating history, the availability of cash flows from operations to pay distributions, changes in governmental, tax, real estate and zoning laws and regulations, failure to increase tenant occupancy and operating income, rejection of leases by tenants in bankruptcy, financing and development risks, construction and lease-up delays, cost overruns, the level and volatility of interest rates, the rate of revenue increases versus expense increases, the financial stability of various tenants and industries, the our failure to make additional investments in real estate properties, the failure to upgrade our tenant mix, restrictions in current financing arrangements, the failure to fully recover tenant obligations for common area maintenance, insurance, taxes and other property expenses, the our failure to continue to qualify as a real estate investment trust (“REIT”), the failure to refinance debt at favorable terms and conditions, an increase in impairment charges, loss of key personnel, failure to achieve earnings/funds from operations targets or estimates, conflicts of interest with the Advisor and the Sponsor and their affiliates, failure of joint venture relationships, significant costs related to environmental issues and uncertainties regarding the impact of the current COVID-19 pandemic, and restrictions and other measures intended to prevent its spread on our business and the economy generally, as well as other risks listed from time to time in this Form 10-Q, our Form 10-K and in the Company’s other reports filed with the SEC.
We believe these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are qualified in their entirety by these cautionary statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time unless required by law.
OverviewStructure
Lightstone Value Plus Real Estate Investment TrustREIT II Inc. (the “Lightstoneis a Maryland corporation, formed on April 28, 2008, elected to be taxed as a real estate investment trust for U.S. federal income tax purposes (“REIT”) beginning with the taxable year ending December 31, 2009.
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Lightstone REIT II”II is structured as an umbrella partnership REIT (“UPREIT”), together withand substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT II LP (the “Operating Partnership”), a Delaware limited partnership formed on April 30, 2008. As of June 30, 2021, we held a 99% general partnership interest in our Operating Partnership’s common units.
Lightstone REIT II and the Operating Partnership and its subsidiaries are collectively “the Company”, also referred to as “we”, “our”the “Company” and the use of “we,” “our,” “us” or “us”) hassimilar pronouns in this annual report refers to Lightstone REIT II, its Operating Partnership or the Company as required by the context in which such pronoun is used.
We have and intends towill continue to seek to acquire and operate commercial (including hospitality and retail properties) and residentiala diverse portfolio of real estate assets as well as otherand real estate-related investments, principallyincluding hotels, other commercial and/or residential properties, primarily located in the United States. Our acquisitions and investments are principally conducted through our Operating Partnership and generally include both portfolios and individual properties. Our commercial holdings currently consist of hospitality and retail (multi-tenanted shopping centers) properties. All of such properties have been and will continue tomay be acquired and operated by us alone or jointly with others.another party. We may also originate or acquire mortgage loans secured by real estate. Although we expect that most of our investments will be of these types, we may invest in whatever types of real estate-related investments that we believe are in our best interests.
We currently have one operating segment. As of June 30, 2021, we (i) majority owned and consolidated the operating results and financial condition of 14 limited service hotels containing a total of 1,802 rooms, (ii) held an unconsolidated 48.6% membership interest in Brownmill, LLC (“the Brownmill Joint Venture”), an affiliated entity that owns two retail properties, and (iii) held an unconsolidated 50.0% membership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”), an affiliated entity that owns and operates a 183-room limited service hotel located in Long Island City, New York (the “Hilton Garden Inn – Long Island City”). We account for our unconsolidated membership interests in the Brownmill Joint Venture and the Hilton Garden Inn Joint Venture under the equity method of accounting.
As of June 30, 2021, seven of our consolidated limited service hotels are held in a joint venture (the “Joint Venture”) formed between us and Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”), a related party REIT also sponsored by The Lightstone Group, LLC. We and Lightstone I have 97.5% and 2.5% membership interests in the Joint Venture, respectively. Additionally, as of June 30, 2021, certain of our consolidated hotels also have ownership interests held by unrelated minority owners. The membership interests of Lightstone I and the unrelated minority owners are accounted for as noncontrolling interests.
Our advisor is Lightstone Value Plus REIT II LLC (the “Advisor”), which is majority owned by David Lichtenstein. On May 20, 2008, the Advisor contributed $2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. Our Advisor also owns 20,000 shares of common stock (“Common Shares”) which were issued on May 20, 2008 for $200,000, or $10.00 per share. Mr. Lichtenstein also is the majority owner of the equity interests of The Lightstone Group, LLC. The Lightstone Group, LLC served as ourthe sponsor (the ‘‘Sponsor’’) during our initial public offeringsoffering and follow-on offering (the “Follow-On Offering”, and collectively, the “Offerings”), which terminated on August 15, 2012 and September 27, 2014.2014, respectively. Our Advisor, pursuant to the terms of an advisory agreement, together with our board of directors (the “Board of Directors”), is and will continue to be primarily responsible for making investment decisions on our behalf and managing our day-to-day operations. Through his ownership and control of The Lightstone Group, LLC, Mr. Lichtenstein is the indirect owner of our Advisor and the indirect owner and manager of Lightstone SLP II LLC, a Delaware limited liability company (the “Associate General Partner”), which owns 177.0 subordinated profits interests (“Subordinated Profits Interests”) in the associate general partnerOperating Partnership which were acquired for aggregate consideration of $17.7 million in connection with our Operating Partnership.Offerings. Mr. Lichtenstein also acts as our Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT II or the Operating Partnership.
We do not have any employees. We have entered into an advisory agreement pursuant to which theThe Advisor supervisesreceives compensation and manages our day-to-day operations and selects our real estate and real estate related investments, subject to oversight by our Board of Directors. We pay the Advisor fees for services related to the investment and management of our assets, and we will reimburse the Advisor for certain expenses incurred on our behalf.
As of June 30, 2020, our Advisor owned 20,000 shares of common stock which were issued on May 20, 2008 for $200,000, or $10.00 per share. Effective October 1, 2009, the Operating Partnership commenced operations. As of June 30, 2020, we held a 99% general partnership interest in our Operating Partnership’s common units.assets.
Our sharesAdvisor has affiliates which may manage certain of common stockthe properties we acquire. However, we also contract with other unaffiliated third-party property managers, principally for the management of our hospitality properties.
Our Common Shares are not currently listed on a national securities exchange. We may seek to list our shares of common stockCommon Shares for trading on a national securities exchange only if a majority of our independent directors believe listing would be in the best interest of our stockholders. We do not intend to list our sharesCommon Shares at this time. We do not anticipate that there would be any market for our shares of common stockCommon Shares until they are listed for trading. In the event we do not obtain listing prior to September 27, 2024, which is the tenth anniversary of the completion or termination of our follow on offering (the “Follow On Offering”), which was terminated on September 27, 2014,Follow-On Offering, our charter requires that our Board of Directors must either (i) seek stockholder approval of an extension or amendment of this listing deadline; or (ii) seek stockholder approval to adopt a plan of liquidation of the corporation.
On May 20, 2008, our Advisor contributed $2,000 to our Operating Partnership in exchange for 200 limited partner common units in our Operating Partnership. The limited partner has the right to convert Operating Partnership common units into cash or, at our option, an equal number of our shares of our common stock, as allowed by our limited partnership agreement.
From our inception through the termination of the Follow-On Offering, Lightstone SLP II LLC, which is wholly owned by our Sponsor, contributed (i) cash of approximately $12.9 million and (ii) equity interests totaling 48.6% in Brownmill LLC (“Brownmill”), which were valued at $4.8 million, to the Operating Partnership in exchange for 177.0 subordinated profits interests (the “Subordinated Profits Interests”) in the Operating Partnership with an aggregate value of $17.7 million.
Beginning with the year ended December 31, 2009, we qualified to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our ordinary taxable income to stockholders. As a REIT, we generally will not be subject to U.S. federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, it will then be subject to federal income taxes on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. As of June 30, 2020, we continue to comply with the requirements for maintaining our REIT status.
To maintain our qualification as a REIT, we engage in certain activities through a wholly-owned taxable REIT subsidiary (“TRS”). As such, we are subject to U.S. federal and state income and franchise taxes from these activities.
Current Environment
Our operating results are substantially impacted by the overall health of local, U.S. national and global economies and may be influenced by market and other challenges. Additionally, our business and financial performance may be adversely affected by current and future economic and other conditions; including, but not limited to, availability or terms of financings, financial markets volatility, political upheaval or uncertainty, natural and man-made disasters, terrorism and acts of war, unfavorable changes in laws and regulations, outbreaks of contagious diseases, cybercrime, loss of key relationships, and recession.
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These and other market and economic challenges could materially affect (i) the value and performance of our investments, (ii) our ability to pay future distributions, if any, (iii) the availability or terms of financings, (iv) our ability to make scheduled principal and interest payments, and (v) our ability to refinance any outstanding debt when contractually due.
COVID-19 Pandemic Operations and Liquidity Update
DuringThe World Health Organization declared COVID-19 a global pandemic on March 11, 2020 and since that time many of the second quarter of 2020,previously imposed restrictions and other measures which were instituted in response have been subsequently reduced or lifted. However, the COVID-19 pandemic continuedremains highly unpredictable and dynamic and its duration and extent continue to evolvebe dependent on various developments, such as the emergence of variants to the virus that may cause additional strains of COVID-19, the administration and ultimate effectiveness of vaccines, and the eventual timeline to achieve a sufficient level of herd immunity among the general population. Accordingly, the COVID-19 pandemic may continue to have negative effects on the health of the U.S. economy for the foreseeable future.
The extent to which our business may be affected by the ongoing COVID-19 pandemic will largely depend on both a globalcurrent and national level. With respect to the United States, many states have begun a phased approach as to reopeningfuture developments, all of businesseswhich are highly uncertain and venues, which have been subject to various restrictions and other measures. While certain states have begun to reduce and/or lift restrictions, the situation remains both dynamic and unpredictable.cannot be reasonably predicted.
As a result of the COVID-19 pandemic, room demand for our consolidated and unconsolidated hotels began to significantly decline in March 2020 and these trends continued throughoutwhile there has been sequential improvement since then; room demand continues to be below historical levels. Since March 2020, the second quarter. The COVID-19 pandemic has had a significant negative impact on our operations, financial position and financial results to datecash flow and we currently expect that the COVID-19 pandemicit will continue to have a significant negative impact on our results of operations, financial position and cash flowdo so for the remainder of 2020 and into 2021.foreseeable future. We cannot currently estimate if and when room demand will recoverreturn to pre-pandemic levels for our hotels.
Additionally, we have an unconsolidated 48.6% membership interest in the Brownmill Joint Venture, which owns two retail properties located in New Jersey that have been subject to various restrictions. If Brownmill’sthe Brownmill Joint Venture’s retail properties are negatively impacted for an extended period because our tenants are unable to pay their rent, our equity earnings and the carrying value of our investment in the Brownmill Joint Venture could be materially and adversely impacted.
In light of the past, present and potential future impact of the COVID-19 pandemic on the operating results of our hotels, we have taken various actions to preserve our liquidity, including, the following:but not limited to, those described below:
| We |
| ● | Amendments to Revolving Credit Facility – |
On June 2, 2020, our revolving credit facility (the “Revolving Credit Facility”) was amended to provide for (i) the deferral of the six monthly debt service payments aggregating $2.6 million for the period from April 1, 2020 through September 30, 2020 until November 15, 2021; (ii) a 100 bps reduction in the interest rate spread to LIBOR + 2.15%, subject to a 3.00% floor, for the six-month period from September 1, 2020 through February 28, 2021; (iii) our pre-funding $2.5 million into a cash collateral reserve account to cover the six monthly debt service payments due from October 1, 2020 through March 1, 2021; and (iv) a waiver of all financial covenants for quarter-end periods before June 30, 2021.
Subsequently, on March 31, 2021, the Revolving Credit Facility was further amended providing for (i) us to pledge our membership interest in another hotel as additional collateral within 45 days, (ii) us to fund an additional $2.5 million into the cash collateral reserve account; (iii) a waiver of all financial covenants for quarter-end periods through September 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods beginning December 31, 2021 through March 31, 2023; (iv) an extension of the maturity date from May 17, 2021 to September 15, 2022 upon completion of the pledge of the additional collateral; (v) one additional one-year extension option at the lender’s sole discretion; and (vi) certain limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.
On May 13, 2021, we pledged the additional collateral and extended the maturity date of the Revolving Credit Facility to September 15, 2022.
See Note 5 of the Notes to Consolidated Financial Statements for additional information.
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| On March 19, 2020, |
| ● | We had $7.2 million of |
| ● | The Hilton Garden Inn Joint Venture has obtained various amendments to its non-recourse mortgage loan secured by the Hilton Garden Inn – Long Island City. See Note |
Based onWe believe that these actions, we believe that wealong with our available on hand cash and cash equivalents, restricted cash and marketable securities, will haveprovide us with sufficient liquidity to meet our obligations for at least 12 months from the next twelve months. However, our Revolving Credit Facility is initially scheduled to mature on May 17, 2021 and while we have two one-year extension options, they are both at the sole discretiondate of the lender. Although we currently intend to request the lender exercise the first one-year extension option, there can be no assurance we will be successful in obtaining an extension to the maturityissuance of the Revolving Credit Facility. See Note 5 of the Notes to Consolidated Financial Statements for additional information.these financial statements.
We are not currently aware of any other material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from our operations, other than those referred to above or throughout this Form 10-Q. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period.
Portfolio Summary –
| Location | Year Built | Leasable Square Feet | Percentage Occupied as of June 30, 2021 | Annualized Revenues based on rents as of June 30, 2021 | Annualized Revenues per square foot as of June 30, 2021 | ||||||||||||||||||||||||||||||||||
| Location | Year Built | Leasable Square Feet | Percentage Occupied as of June 30, 2020 | Annualized Revenues based on rents as of June 30, 2020 | Annualized Revenues per square foot as of June 30, 2020 | ||||||||||||||||||||||||||||||||||
| Unconsolidated Affiliated Entities: | |||||||||||||||||||||||||||||||||||||||
| Retail | |||||||||||||||||||||||||||||||||||||||
| Brownmill LLC (2 retail properties) | Old Bridge and Vauxhall, New Jersey | 1962 | 155,928 | 68.3 | % | $2.7 million | $ | 17.41 | Old Bridge and Vauxhall, New Jersey | 1962 | 155,928 | 78.2 | % | $2.9 million | $ | 18.47 | |||||||||||||||||||||||
| Year to Date | Percentage Occupied for the Six Months Ended | Revenue per Available Room ("RevPAR") for the Six Months | Average Daily Rate ("ADR") for the Six Months Ended | Year to Date | Percentage Occupied for the Six Months Ended | Revenue per Available Room (“RevPAR”) for the Six Months | Average Daily Rate (“ADR”) for the Six Months Ended | ||||||||||||||||||||||||||||||||
| Hospitality | Location | Year Built | Available Rooms | June 30, 2020 | Ended June 30, 2020 | June 30, 2020 | Location | Year Built | Available Rooms | June 30, 2021 | Ended June 30, 2021 | June 30, 2021 | |||||||||||||||||||||||||||
| Hilton Garden Inn - Long Island City | Long Island City, New York | 2014 | 33,306 | 55.6 | % | $ | 62.16 | $ | 111.86 | Long Island City, New York | 2014 | 33,123 | 75.2 | % | $ | 94.49 | $ | 125.69 | |||||||||||||||||||||
| Consolidated Properties: | ||||||||||||||||||||||
| Year to Date | Percentage Occupied for the Six Months Ended | RevPAR for the Six Months | Average Daily Rate for the Six Months Ended | |||||||||||||||||||
| Hospitality | Location | Year Built | Available Rooms | June 30, 2020 | Ended June 30, 2020 | June 30, 2020 | ||||||||||||||||
| Fairfield Inn - East Rutherford | East Rutherford, New Jersey | 1990 | 25,662 | 42.1 | % | $ | 39.20 | $ | 93.14 | |||||||||||||
| TownePlace Suites - Little Rock | Little Rock, Arkansas | 2009 | 16,744 | 59.7 | % | $ | 43.38 | $ | 72.67 | |||||||||||||
| Aloft - Tucson | Tucson, Arizona | 1971 | 28,028 | 48.6 | % | $ | 74.80 | $ | 153.80 | |||||||||||||
| Aloft - Philadelphia | Philadelphia, Pennsylvania | 2008 | 24,752 | 55.4 | % | $ | 51.02 | $ | 92.02 | |||||||||||||
| Four Points by Sheraton - Philadelphia | Philadelphia, Pennsylvania | 1985 | 32,214 | 35.5 | % | $ | 31.58 | $ | 89.02 | |||||||||||||
| Courtyard - Willoughby | Willoughby, Ohio | 1999 | 16,380 | 33.2 | % | $ | 34.14 | $ | 102.79 | |||||||||||||
| Fairfield Inn - DesMoines | West Des Moines, Iowa | 1997 | 18,564 | 36.1 | % | $ | 30.95 | $ | 85.65 | |||||||||||||
| SpringHill Suites - DesMoines | West Des Moines, Iowa | 1999 | 17,654 | 35.8 | % | $ | 30.43 | $ | 85.03 | |||||||||||||
| Hampton Inn - Miami | Miami, Florida | 1996 | 22,932 | 46.7 | % | $ | 58.81 | $ | 125.80 | |||||||||||||
| Hampton Inn & Suites - Fort Lauderdale | Fort Lauderdale, Florida | 1996 | 18,928 | 54.6 | % | $ | 75.66 | $ | 138.69 | |||||||||||||
| Courtyard - Parsippany | Parsippany, New Jersey | 2001 | 27,482 | 25.0 | % | $ | 37.00 | $ | 148.21 | |||||||||||||
| Hyatt Place - New Orleans | New Orleans, Louisiana | 1996 | 30,940 | 27.8 | % | $ | 46.14 | $ | 165.70 | |||||||||||||
| Residence Inn - Needham | Needham, Massachusetts | 2013 | 24,024 | 55.4 | % | $ | 63.58 | $ | 114.82 | |||||||||||||
| Courtyard - Paso Robles | Paso Robles, California | 2007 | 23,660 | 44.1 | % | $ | 54.58 | $ | 123.67 | |||||||||||||
Hospitality Total | 327,964 | 42.2 | % | $ | 48.25 | $ | 114.41 | |||||||||||||||
| 22 |
| Consolidated Properties: | ||||||||||||||||||||
| Year to Date | Percentage Occupied for the Six Months Ended | RevPAR for the Six Months | Average Daily Rate for the Six Months Ended | |||||||||||||||||
| Hospitality | Location | Year Built | Available Rooms | June 30, 2021 | Ended June 30, 2021 | June 30, 2021 | ||||||||||||||
| Fairfield Inn - East Rutherford | East Rutherford, New Jersey | 1990 | 25,521 | 45.4 | % | $ | 41.81 | $ | 92.15 | |||||||||||
| TownePlace Suites - Little Rock | Little Rock, Arkansas | 2009 | 16,652 | 77.0 | % | $ | 53.94 | $ | 70.04 | |||||||||||
| Aloft - Tucson | Tucson, Arizona | 1971 | 27,874 | 47.8 | % | $ | 52.83 | $ | 110.49 | |||||||||||
| Aloft - Philadelphia | Philadelphia, Pennsylvania | 2008 | 24,616 | 61.0 | % | $ | 54.70 | $ | 89.67 | |||||||||||
| Four Points by Sheraton - Philadelphia | Philadelphia, Pennsylvania | 1985 | 32,037 | 48.4 | % | $ | 38.38 | $ | 79.28 | |||||||||||
| Courtyard - Willoughby | Willoughby, Ohio | 1999 | 16,290 | 52.7 | % | $ | 52.57 | $ | 99.76 | |||||||||||
| Fairfield Inn - Des Moines | West Des Moines, Iowa | 1997 | 18,462 | 46.3 | % | $ | 43.26 | $ | 93.48 | |||||||||||
| SpringHill Suites - Des Moines | West Des Moines, Iowa | 1999 | 17,557 | 46.8 | % | $ | 43.02 | $ | 91.97 | |||||||||||
| Hampton Inn - Miami | Miami, Florida | 1996 | 22,806 | 79.4 | % | $ | 74.22 | $ | 93.44 | |||||||||||
| Hampton Inn & Suites - Fort Lauderdale | Fort Lauderdale, Florida | 1996 | 18,824 | 88.1 | % | $ | 98.84 | $ | 112.25 | |||||||||||
| Courtyard - Parsippany | Parsippany, New Jersey | 2001 | 27,331 | 32.4 | % | $ | 30.85 | $ | 95.09 | |||||||||||
| Hyatt Place - New Orleans | New Orleans, Louisiana | 1996 | 30,902 | 82.5 | % | $ | 48.50 | $ | 58.81 | |||||||||||
| Residence Inn - Needham | Needham, Massachusetts | 2013 | 23,892 | 72.6 | % | $ | 76.38 | $ | 105.24 | |||||||||||
| Courtyard - Paso Robles | Paso Robles, California | 2007 | 23,530 | 72.7 | % | $ | 98.71 | $ | 135.71 | |||||||||||
| Hospitality Total | 326,294 | 60.4 | % | $ | 56.60 | $ | 93.69 | |||||||||||||
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Annualized base rent is defined as the minimum monthly base rent due as of June 30, 20202021 annualized, excluding periodic contractual fixed increases and rents calculated based on a percentage of tenants’ sales. The annualized base rent disclosed in the table above includes all concessions, abatements and reimbursements of rent to tenants.
Critical Accounting Policies and Estimates
There were no material changes during the six months ended June 30, 20202021 to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 20192020 except for as discussed in Note 2 to the financial statements.
Results of Operations
Disposition of Alabama Hotels
On May 9, 2019, we completed the disposition of two limited services hotels (collectively, the “Alabama Hotels”) for an aggregate contractual sales price of $13.3 million resulting in a second quarter gain on disposition of real estate and other assets of $0.1 million.
The Alabama Hotels were comprised of the following properties:
|
Disposition of SpringHill Suites - Peabody
On October 24, 2019, we completed the disposition of a SpringHill Suites hotel located in Peabody, Massachusetts, (the “SpringHill Suites – Peabody”) for an aggregate contractual sales price of $19.0 million resulting in a third quarter gain on disposition of real estate and other assets of $8.3 million.
The dispositions of the Alabama Hotels and the SpringHill Suites – Peabody are collectively referred to as the “2019 Disposed Hotels”.
The 2019 Disposed Hotels did not qualify to be reported as discontinued operations since the dispositions did not represent a strategic shift in our operations that had a major effect on our operations and financial results. Accordingly, the operating results of the 2019 Disposed Hotels are reflected in our results from continuing operations for all periods presented through their respective dates of disposition.
We currently have one operating segment. As of June 30, 20202021 we (i) majority owned and consolidated the operating results and financial condition of 14 limited service hotels containing a total of 1,802 rooms, (ii) held an unconsolidated 48.6% membership interest in Brownmill LLC (“Brownmill”(the “Brownmill Joint Venture”), an affiliated entity that owns two retail properties, and (iii) held an unconsolidated 50.0% membership interest in the Hilton Garden Inn Joint Venture, an affiliated entity that owns and operates the Hilton Garden Inn – Long Island City, a 183-room limited service hotel. We account for our unconsolidated membership interests in the Brownmill Joint Venture and the Hilton Garden Inn Joint Venture under the equity method of accounting.
As of June 30, 2020,2021, seven of our consolidated limited service hotels are held in a joint venture (the “Joint Venture”) formed between us and Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”), a related party REIT also sponsored by our Sponsor. We and Lightstone I have 97.5% and 2.5% membership interests in the Joint Venture, respectively. Additionally, as of June 30, 2020,2021, certain of our consolidated hotels also have ownership interests held by unrelated minority owners. The membership interests of Lightstone I and the unrelated minority owners are accounted for as noncontrolling interest
Comparison of the three months ended June 30, 20202021 vs. June 30, 20192020
Consolidated
Our consolidated revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation and amortization for the three months ended June 30, 20202021 and 20192020 are attributable to our consolidated hospitality properties, including the 2019 Disposed Hotels through their respective datesall of disposition. Propertieswhich were owned by us during the entire periods presented are referredpresented.
Although our operating performance during the 2021 and 2020 quarterly periods were both negatively impacted by the COVID-19 pandemic, our hospitality portfolio first began to as our “Same Store” properties.experience a significant drop in room demand beginning in March 2020. However, since that time many of the previously imposed restrictions and other measures which were instituted because of the COVID-19 pandemic have been subsequently reduced or lifted. As a result, we have experienced some sequential improvement in room demand but it continues to be below historical levels. Overall, our hospitality portfolio experienced decreasesincreases in (i) the percentage of rooms occupied from 79.9%24.4% to 24.4%66.4% for the second quarters of 20192020 and 2020,2021, respectively, (ii) revenue per available room (“RevPAR”) from $106.21$20.57 to $20.57$68.58 for the second quarters of 20192020 and 2020,2021, respectively, and (iii) the average daily rate per room (“ADR”) from $132.97$84.19 to $84.19$103.25 for the second quarters of 20192020 and 2020,2021, respectively.
Revenues
Revenues decreasedincreased by $17.3$8.1 million to $3.6$11.7 million during the three months ended June 30 2020,, 2021, compared to $20.9$3.6 million for the same period in 2019. Excluding the effect of the disposition of the 2019 Disposed Hotels, revenues for our Same Store Hotels decreased by $15.0 million.2020. This decreaseincrease reflects lowerhigher occupancy RevPAR and ADR during the 20202021 quarterly period compared to the same period in 2019, all of which were primarily attributable to reduced room demand during the 2020 period resulting from the COVID-19 pandemic.period.
Property operating expenses
Property operating expenses decreasedincreased by $9.0$3.7 million to $4.1$7.8 million during the three months ended June 30 2020, 2021 compared to $13.1 million$4.1million for the same period in 2019. Excluding the effect of the disposition of the 2019 Disposed Hotels, property operating expenses for our Same Store Hotels decreased by $7.4 million.2020. This decreaseincrease reflects the lowerhigher occupancy during the 2020 period resulting from the COVID-19 pandemic.2021 quarterly period.
Real estate taxes
Real estate taxes decreased slightly by $0.1 million to $0.8 million during the three months ended June 30, 2021 compared to $0.9 million for the three months ended June 30, 2020 and 2019 were relatively flat at $0.9 million.same period in 2020.
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General and administrative expenses
General and administrative expenses increased slightly by $0.1 million towere unchanged at $1.2 million during both the three months ended June 30, 2020 compared to $1.1 million for the same period in 2019.2021 and 2020.
Depreciation and amortization
Depreciation and amortization expense decreased by slightly by $0.1 million to $2.7$2.6 million during the three months ended June 30 2020, 2021 compared to $2.8$2.7 million for the same period in 2019. Excluding the effect of the disposition of the 2019 Disposed Hotels, depreciation and amortization expense for our Same Store Hotels increased slightly by $0.1 million.2020.
Interest expense
Interest expense was unchanged at $1.6 million during both the three months ended June 30 2020 compared to $2.3 million for the same period in 2019., 2021 and 2020. Interest expense is primarily attributable to financings associated with our hotels and reflects both changes in market interest rates on our variable rate indebtedness and the weighted average principal outstanding during the periods.
Gain on forgiveness of debt
During the second quarter of 2021 notice was received from the SBA that $1.5 million of PPP Loans and related accrued interest had been legally forgiven and therefore, we recognized a gain on forgiveness of debt for that amount during the three months ended June 30, 2021.
Earnings from investments in unconsolidated affiliated real estate entities
Our loss from investments in unconsolidated affiliated real estate entities was $0.5$0.1 million during the three months ended June 30 2020 , 2021compared to income of $0.2$0.5 million for the same period in 2019.2020. Our loss from investments in unconsolidated affiliated real estate entities is attributable to our ownership interests in the Hilton Garden Inn Joint Venture and Brownmill.the Brownmill Joint Venture. We account for our membership interests in the Hilton Garden Inn Joint Venture and the Brownmill Joint Venture under the equity method of accounting commencing on the date that we acquired our interests.accounting.
Noncontrolling interests
The income or loss allocated to noncontrolling interests relates to the interest in our Operating Partnership held by our Advisor, the membership interest held by Lightstone I in the Joint Venture, and the ownership interests held by unrelated minority owners in certain of our hotels.
Comparison of the six months ended June 30, 20202021 vs. June 30, 20192020
Consolidated
Our consolidated revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation and amortization for the six months ended June 30, 20202021 and 20192020 are attributable to our consolidated hospitality properties, including the 2019 Disposed Hotels through their respective datesall of disposition. Propertieswhich were owned by us during the entire periods presented are referredpresented.
Although our operating performance during the 2021 and 2020 periods were both negatively impacted by the COVID-19 pandemic, our hospitality portfolio first began to as our “Same Store” properties. experience a significant drop in room demand beginning in March 2020. However, since that time many of the previously imposed restrictions and other measures which were instituted because of the COVID-19 pandemic have been subsequently reduced or lifted. As a result, we have experienced some sequential improvement in room demand but it continues to be below historical levels. Overall, our hospitality portfolio experienced decreasesincreases in (i) the percentage of rooms occupied from 73.5%42.2% to 42.2%60.4% for the six months ended June 30, 2019 2020 and 2020,2021, respectively, (ii)and revenue per available room (“RevPAR”) from $98.44$48.25 to $48.25$56.60 for the six months ended June 30, 2019 2020 and 2020,2021, respectively, and (iii)a decrease in the average daily rate per room (“ADR”) from $133.85$114.41 to $114.41$93.69 for the six months ended June 30, 2019 2020 and 2020,2021, respectively.
Revenues
Revenues decreasedincreased by $21.9$2.4 million to $16.8$19.2 million during the six months ended June 30, 2020,2021, compared to $38.7$16.8 million for the same period in 2019. Excluding2020. This increase reflects the effect ofhigher occupancy and RevPAR during the disposition of2021 period partially offset by the 2019 Disposed Hotels, revenues for our Same Store Hotels decreased by $17.6 million. This decrease reflects lower occupancy, RevPAR and ADR during the 2020 quarterly period compared to the same period in 2019, all of which were primarily attributable to reduced room demand during the 2020 period resulting from the COVID-19 pandemic.2021 period.
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Property operating expenses
Property operating expenses decreased by $11.1$0.4 million to $14.1$13.7 million during the six months ended June 30, 20202021 compared to $25.2$14.1 million for the same period in 2019. Excluding the effect of the disposition of the 2019 Disposed Hotels, property operating expenses for our Same Store Hotels decreased by $8.0 million. This decrease reflects the lower occupancy during the 2020 period resulting from the COVID-19 pandemic.2020.
Real estate taxes
Real estate taxes decreased by slightly by $0.1 million to $1.8$1.7 million during the six months ended June 30, 20202021 compared to $1.9$1.8 million for the same period in 2019.2020.
General and administrative expenses
General and administrative expenses for the threesix months ended June 30, 20202021 and 20192020 were relatively flat at $2.4 million.
Depreciation and amortization
Depreciation and amortization expense decreased slightly by $0.4$0.1 million to $5.4$5.3 million during the six months ended June 30, 20202021 compared to $5.8$5.4 million for the same period in 2019. Excluding the effect of the disposition of the 2019 Disposed Hotels, depreciation and amortization expense for our Same Store Hotels increased by $0.3 million.2020.
Interest expense
Interest expense was $3.4$2.9 million during the six months ended June 30, 20202021 compared to $4.8$3.4 million for the same period in 2019.2020. Interest expense is primarily attributable to financings associated with our hotels and reflects both changes in market interest rates on our variable rate indebtedness and the weighted average principal outstanding during the periods.
Gain on forgiveness of debt
During the second quarter of 2021 notice was received from the SBA that $1.5 million of PPP Loans and related accrued interest had been legally forgiven and therefore, we recognized a gain on forgiveness of debt for that amount during the six months ended June 30, 2021
Earnings from investments in unconsolidated affiliated real estate entities
Our loss from investments in unconsolidated affiliated real estate entities was $1.0$0.2 million during the six months ended June 30, 2020 2021compared to $0.2$1.0 million for the same period in 2019.2020. Our loss from investments in unconsolidated affiliated real estate entities is attributable to our ownership interests in the Hilton Garden Inn Joint Venture and Brownmill. We account for our membership interests in the Hilton Garden Inn Joint Venture and Brownmill under the equity method of accounting commencing on the date that we acquired our interests.
Noncontrolling interests
The income or loss allocated to noncontrolling interests relates to the interest in our Operating Partnership held by our Advisor, the membership interest held by Lightstone I in the Joint Venture, and the ownership interests held by unrelated minority owners in certain of our hotels.
Financial Condition, Liquidity and Capital Resources
Overview:
Revenues, interest and dividend income, proceeds from the sale of marketable securities, distributions from unconsolidated affiliated investmentsentities and borrowings are our principal sources of funds to pay operating expenses, scheduled debt service, capital expenditures (excluding non-recurring capital expenditures), contributions to our unconsolidated affiliated entities, redemptions and cancellations of shares of our common stock, if approved, and distributions, if any, required to maintain our status as a REIT.
We currently believe that these cash resources along with our available cash on hand of $18.1$15.3 million, restricted cash of $3.6 million and marketable securities available for sale, of $6.5$6.9 million, bothall as of June 30, 20202021, will be sufficient to satisfy our cash requirements for the foreseeable future and we do not currently anticipate a need to raise funds from other than these sources within the next 12 months. However, to the extent that cash flow from operations and available cash on hand, restricted cash and marketable securities are not sufficient to cover our cash needs, we may use proceeds from additional borrowings and/or selective asset sales to fund such needs.
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As of June 30, 2020, 2021, we have mortgage indebtedness totaling $136.8$136.6 million, $5.6 million of PPP Loans (classified as notes payable of $3.3 millionon our consolidated balance sheet) and a margin loan of $2.7$2.4 million. We have and intend to continue to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of our independent directors and is disclosed to our stockholders. Market conditions will dictate the overall leverage limit; as such our aggregate long-term permanent borrowings may be less than 75% of aggregate fair market value of all properties. We may also incur short-term indebtedness, having a maturity of two years or less.
Our charter provides that the aggregate amount of our borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. Market conditions will dictate theour overall leverage limit; as such our aggregate borrowings may be less than 300% of net assets. As of June 30, 2020,2021, our total borrowings aggregated $142.8$144.6 million which represented 82%86% of our net assets.
Additionally, in order to leverage our investments in marketable securities and seek a higher rate of return, we borrowed usinghave access to borrowings under a margin loan collateralized by the securities held with the financial institution that provided the margin loan. This loan is due on demand and willany outstanding balance must be paid upon the liquidation of securities.
Any future properties that we may acquire or develop may be funded through a combination of borrowings and the proceeds received from the selective disposition of certain of our real estate assets. These borrowingborrowings may consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. Such mortgages may be put in place either at the time we acquire a property or subsequent to our purchasing a property for cash. In addition, we may acquire properties that are subject to existing indebtedness where we choose to assume the existing mortgages. Generally, though not exclusively, we intend to seek to encumber our properties with debt, which will be on a non-recourse debt.basis. This means that a lender’s rights on default will generally be limited to foreclosing on the property. However, we may, at our discretion, secure recourse financing or provide a guarantee to lenders if we believe this may result in more favorable terms. When we give a guaranty for a property owning entity, we will be responsible to the lender for the satisfaction of the indebtedness if it is not paid by the property owning entity.
We may also obtain lines of credit to be used to acquire properties. If obtained, these lines of credit will be at prevailing market terms and will be repaid from proceeds from the sale or refinancing of properties, working capital and/or permanent financing. Our Sponsor and/or its affiliates may guarantee our lines of credit although they are not obligated to do so. We expect that such properties may be purchased by our Sponsor’s affiliates on our behalf, in our name, in order to minimize the imposition of a transfer tax upon a transfer of such properties to us.
We have various agreements, including an advisory agreement, with the Advisor to pay certain fees in exchange for services performed by the Advisor and/or its affiliated entities. Additionally, our ability to secure financing and our real estate operations are dependent upon our Advisor and its affiliates to perform such services as provided in these agreements.
In addition to meeting working capital needs and distributions, if any, made to maintain our status as a REIT, our capital resources are used to make certain payments to our Advisor,, including payments related to asset acquisition fees and asset management fees, the reimbursement of acquisition-related expenses to our Advisor. We also reimburse our advisor for actual expenses it incurs for administrative and other services provided to us.
We have agreements withThe advisory agreement has a one-year term and is renewable for an unlimited number of successive one-year periods upon the mutual consent of the Advisor to pay certain fees in exchange for services performed by the Advisor and/or its affiliated entities. Upon the liquidation of assets, we may payand our Advisor or its affiliates a real estate disposition commission. Additionally, our Operating Partnership may be required to make distributions to Lightstone SLP II LLC, an affiliate of the Advisor.independent directors.
The following table represents the fees incurred associated with the payments to the Company’s Advisor for the periods indicated:
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
| Development fees (1) | $ | - | $ | 57 | $ | 32 | $ | 62 | $ | - | $ | - | $ | - | $ | 32 | ||||||||||||||||
| Asset management fees (general and administrative costs) | 734 | 758 | 1,456 | 1,534 | 738 | 734 | 1,475 | 1,456 | ||||||||||||||||||||||||
| Total | $ | 734 | $ | 815 | $ | 1,488 | $ | 1,596 | $ | 738 | $ | 734 | �� | $ | 1,475 | $ | 1,488 | |||||||||||||||
(1) Generally, capitalized and amortized over the estimated useful life of the associated asset.
| (1) | Generally, capitalized and amortized over the estimated useful life of the associated asset. |
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Summary of Cash Flows
The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below:
| For the Six Months Ended June 30, | ||||||||
| 2020 | 2019 | |||||||
| Net cash (used in)/provided by operating activities | $ | (3,542 | ) | $ | 4,956 | |||
| Net cash (used in)/provided by investing activities | (1,737 | ) | 8,525 | |||||
| Net cash used in financing activities | (2,899 | ) | (17,107 | ) | ||||
| (8,178 | ) | (3,626 | ) | |||||
| Cash, cash equivalents and restricted cash, beginning of year | 30,216 | 30,660 | ||||||
| Cash, cash equivalents and restricted cash, end of the period | $ | 22,038 | $ | 27,034 | ||||
| For the Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net cash used in operating activities | $ | (1,501 | ) | $ | (3,542 | ) | ||
| Net cash used in investing activities | (1,087 | ) | (1,737 | ) | ||||
| Net cash provided by/(used in) financing activities | 3,047 | (2,899 | ) | |||||
| 459 | (8,178 | ) | ||||||
| Cash, cash equivalents and restricted cash, beginning of year | 18,423 | 30,216 | ||||||
| Cash, cash equivalents and restricted cash, end of the period | $ | 18,882 | $ | 22,038 | ||||
We believe that our cash available on hand, restricted cash and any proceeds from the sale of marketable securities, together with our expected earnings, and/or distributions from our investments will provide us with sufficient resources to fund our operating expenses, debt service, capital contributions, distributions, if any, required to maintain our status as a REIT. We alsoGenerally, we expect to meet our cash needs with our cash on hand, restricted cash and cash flow from operations. However, to the extent that our cash on hand and cash flow from operations are not sufficient to cover our cash needs, we may use these sources of liquidity along with selective dispositions of assetsproceeds from additional borrowings and/or financingsselective asset sales to fund any future investment activities.such needs.
Because of the impactIn light of the COVID-19 pandemicpandemic’s impact on our operating performance, we have recentlysuccessfully negotiated or are invarious changes to the processterms of negotiating certain amendments with respect to our outstanding indebtedness,Revolving Credit Facility, including forbearance of scheduled debt service, reductions in interest rates, waiver periods and waiversmodifications of financial covenants.covenants and various extension options. See “Contractual Mortgage Obligations” for additional information.
Operating activities
The cash used in operating activities of $3.5$1.5 million for the six months ended June 30, 20202021 consisted of our net loss of $11.2$5.4 million and depreciation and amortization, loss from investments in unconsolidated affiliated entities, amortization of deferred financing costs and other non-cash items aggregating $4.1 million offset by net changes in operating assets and liabilities of $0.7 million and depreciation and amortization, loss from investments in unconsolidated affiliated real estate entities, amortization of deferred financing costs and other non-cash items aggregating $7.0$0.3 million. The net use of cash in operating activities of $3.5$1.5 million during the six months ended June 30, 20202021 was principally attributable to the effect of the COVID-19 pandemic on our operating performance.
Investing activities
The cash used in investing activities of $1.7$1.1 million for the six months ended June 30, 20202021 consists primarily of the following:
| capital expenditures of |
| $ |
| ● | $ |
Financing activities
The cash used inprovided by financing activities of $2.9$3.0 million for the six months ended June 30, 20202021 consists primarily of the following:
| proceeds from notes payable of |
| ● | debt principal payments of $0.1 million; |
| ● | payments of loan fees and |
| ● | net margin loan payments of |
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Distributions on Common Shares
On March 19, 2020, the Board of Directors determined to suspend regular quarterly distributions.distributions on our Common Shares and as a result, no distributions have been declared since the suspension.
Future distributions declared on our Common Shares, if any, will be at the discretion of the Board of Directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. The Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, revenues and sources of income, operating and interest expenses and our ability to refinance near-term debt. In addition, we currently intend to continue to comply withdebt as well as the REITIRS’s annual distribution requirement that we annuallyREITs distribute no less than 90% of ourtheir taxable income. We cannot assure that any future distributions will be made or that we will maintain any particular level of distributions that we have previously established or may establish.
Share Repurchase Program
Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to us, subject to certain restrictions. From our inception through December 31, 2019 we redeemed approximately 1.4 million common shares at an average price of $9.77 per share. For the six months ended June 30, 2020, we redeemed 0.1 million common shares at an average price of $10.00 per share.
On March 19, 2020, the Board of Directors amended the share repurchase program to remove stockholder notice requirements and also approved the suspension of all redemptions effective immediately.
Contractual Mortgage Obligations
The following is a summary of theour estimated contractual mortgage obligations related to our mortgage debtoutstanding over the next five years and thereafter as of June 30, 2020.2021, after taking into consideration the extension of the maturity of the Revolving Credit Facility.
| Contractual Obligations | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Contractual Mortgage Obligations | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Principal maturities | $ | 95 | $ | 123,245 | $ | 211 | $ | 13,208 | $ | $ | - | $136,759 | $ | 100 | $ | 123,256 | $ | 13,208 | $ | - | $ | - | $ | - | $ | 136,564 | ||||||||||||||||||||||||||||
| Interest payments | 1,315 | 5,025 | 742 | 670 | - | 7,752 | 5,481 | 4,679 | 670 | - | - | - | 10,830 | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | 1,410 | $ | 128,270 | $ | 953 | $ | 13,878 | $ | - | $ | - | $144,511 | |||||||||||||||||||||||||||||||||||||||||
| Total Contractual Mortgage Obligations | $ | 5,581 | $ | 127,935 | $ | 13,878 | $ | - | $ | - | $ | - | $ | 147,394 | ||||||||||||||||||||||||||||||||||||||||
Note:
| (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 June 30, 2021 was used. |
Revolving Credit Facility
We, through certain subsidiaries, have a non-recourse Revolving Credit Facility with a financial institution. The Revolving Credit Facility provides us with a line of credit of up to $140.0 million pursuant to which we may designate properties as collateral that allow borrowings up to a 65.0% loan-to-value ratio subject to also meeting certain financial covenants, including a prescribed minimum debt yield. The Revolving Credit Facility provides for monthly interest-only payments and the entire principal balance is due upon its expiration.
The Revolving Credit Facility, which was entered into on May 17, 2018, hashad an initial maturity date of May 17, 2021, which was subject to two one-yearcertain options to extend at the sole discretion of the lender. The initial interest rate on the Revolving Credit Facility was Libor plusLIBOR + 3.50% until it was reduced to Libor plusLIBOR + 3.15%, subject to a 4.00% floor, effective March 31, 2019.
On June 2, 2020, we and the lender agreed to certain changes to the terms of Revolving Credit Facility, including (i) the deferral of monthly debt service for payments previously dueaggregating $2.6 million for the period from April 1, 2020 through September 30, 2020, which willare now be due at maturity;on November 15, 2021; (ii) subject to certain conditions, the interest rate spread willmay be reduced by 100 bps to Libor plusLIBOR + 2.15%, subject to a 3.00% floor, for the six-month period beginning September 1, 2020 through February 28, 2021; (iii) we deposited $2.5 million into a cash collateral account to be applied against the monthly debt service payments due from October 1, 2020 through March 1, 2021; and (iv) waiver of all financial covenants untilfor periods before June 30, 2021.
Subsequently, on March 31, 2021, our Revolving Credit Facility was further amended to provide for (i) us to pledge our membership interest in another hotel as additional collateral within 45 days, (ii) us to fund an additional $2.5 million into the cash collateral reserve account (which is include in restricted cash on our consolidated balance sheet as of March 31, 2021); (iii) a waiver of all financial covenants for quarter-end periods through September 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods beginning December 31, 2021 through March 31, 2023; (iv) an extension of the maturity date from May 17, 2021 to September 15, 2022 upon completion of the pledge of the additional collateral; (v) one additional one-year extension option at the lender’s sole discretion; and (vi) certain limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.
On May 13, 2021, we pledged the additional collateral and extended the maturity date of the Revolving Credit Facility to September 15, 2022.
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As of June 30, 2020,2021, we had pledged 1213 of our hotel properties as collateral under the Revolving Credit Facility and the outstanding principal balance was approximately $123.0 million. Additionally, no additional borrowings were available under the Revolving Credit Facility as of June 30, 2021.
Courtyard – Paso Robles Mortgage Loan
In connection with oursour acquisition of the Courtyard – Paso Robles on December 14, 2017, we assumed an existing $14.0 million non-recourse mortgage loan collateralized by the Courtyard – Paso Robles (the “Courtyard - Paso Robles Mortgage Loan”).Loan. The Courtyard – Paso Robles Mortgage Loan matures in November 2023, bears interest at a fixed rate of 5.49% and requires monthly principal and interest payments of approximately $79 through its stated maturity with a balloon payment of approximately $13.0 million due at maturity. The Courtyard – Paso Robles Mortgage Loan had an outstanding balance of approximately $13.7$13.6 million as of June 30, 2020.2021.
We are current with respect to schedule debt service forOn October 28, 2020, the servicer of the Courtyard – Paso Robles Mortgage Loan. However, in light ofLoan agreed to waive the COVID-19 pandemic, we have requested the loan be transferred to a special servicer in order to seek certain modifications to the loan’s terms. However, there can be no assurance that we will be successful in obtaining any modifications to the loan’s terms.minimum debt yield financial covenant for all periods through June 30, 2021.
PPP Loans
During April 2020 and the first quarter of 2021, we, through various subsidiaries (each such entity, a Borrower”“Borrower” and collectively, the “Borrowers”) received aggregate funding of $3.3 million and $3.7 million, respectively, through loans (the “PPP Loans”) originated under the federal Paycheck Protection Program, which was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. SBA.
The PPP Loans each have a term of five years and provide for an interest rate of 1.00%. Equal paymentsThe payment of principal and interest begin no later than 10on the PPP loan is deferred until the day that the forgiven amount is remitted to the lender (approximately five months followingafter the origination datesforgiveness application is submitted to the lender, unless the Borrower appeals a denial of forgiveness) or ten months after the end of the PPP Loans and are amortized over the remaining term.Borrower’s covered period, whichever is earlier. Pursuant to the terms of the CARES Act, the proceeds of the PPP Loans may be used for payroll costs, mortgage interest, rent or utility costs.
The promissory note for each of the PPP Loans contains customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note. Under the terms of the CARES Act, each Borrower can apply for and be granted forgiveness for all or a portion of the PPP Loans. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act. NoAlthough we intend for each Borrower to apply for forgiveness, no assurance is providedmay be given that any Borrowerall of the Borrowers will ultimately obtain forgiveness under any relevant PPP Loan in whole or in part. In the event all or any portion of the PPP Loans is forgiven, the amount forgiven will be applied to outstanding principal and recorded as income. During the second quarter of 2021 notice was received from the SBA that $1.5 million of PPP Loans and related accrued interest, had been legally forgiven and therefore, we recognized a gain forgiveness of debt in that amount on our consolidated statements of operations for the three and six months ended June 30, 2021.
As of June 30, 2020,2021, the PPP Loans had an outstanding balance of $3.3$5.6 million, which is classified as Notes Payable on the consolidated balance sheets.
In addition to the mortgages payable and PPP Loans described above, a margin loan that was made available to us from a financial institution that holds custody of certain of our marketable securities. The margin loan is collateralized by the marketable securities in our account. The amounts available to us under the margin loan are at the discretion of the financial institution and not limited to the amount of collateral in our account.
The amount outstanding under this margin loan was $2.7$2.4 million as of June 30, 20202021 and is due on demand. The margin loan bears interest at Libor plusLIBOR + 0.85% (1.01%(0.95% as of June 30, 2020)2021).
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.
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Because of these factors, the National Association of Real Estate Investment Trusts ("NAREIT"(“NAREIT”), an industry trade group, has published a standardized measure of performance known as funds from operations ("FFO"(“FFO”), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT'sREIT’s operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.
We calculate FFO, a non-GAAP measure, consistent with the standards established over time by the Board of Governors of NAREIT, as restated in a White Paper approved by the Board of Governors of NAREIT effective in December 2018 (the "White Paper"“White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Our FFO calculation complies with NAREIT'sNAREIT’s definition.
We believe that the use of FFO provides a more complete understanding of our performance to investors and to management and 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.
Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT'sNAREIT’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"“IPA”), an industry trade group, published a standardized measure of performance known as modified funds from operations ("MFFO"(“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.
We define MFFO, a non-GAAP measure, consistent with the IPA'sIPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline"“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 straight-line 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, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. FFO and MFFO should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.
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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 or MFFO accordingly.
The below table illustrates the items deducted from or added to net income in the calculation of FFO and MFFO. Items are presented net of non-controlling interest portions where applicable.
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net (loss)/income | $ | (7,256 | ) | $ | 1,055 | $ | (11,181 | ) | $ | (1,225 | ) | |||||
| FFO adjustments: | ||||||||||||||||
| Depreciation and amortization of real estate assets | 2,716 | 2,829 | 5,361 | 5,816 | ||||||||||||
| Gain on disposition of real estate | - | (74 | ) | - | (74 | ) | ||||||||||
| Adjustments to equity in earnings from | ||||||||||||||||
| unconsolidated affiliated entities | 420 | 430 | 846 | 794 | ||||||||||||
| FFO | (4,120 | ) | 4,240 | (4,974 | ) | 5,311 | ||||||||||
| MFFO adjustments: | ||||||||||||||||
| Other adjustments: | ||||||||||||||||
| Acquisition and other transaction related costs | ||||||||||||||||
| expensed(1) | - | - | - | - | ||||||||||||
| Adjustments to equity in earnings from | ||||||||||||||||
| unconsolidated affiliated entities | (4 | ) | (4 | ) | (5 | ) | (8 | ) | ||||||||
| Amortization of above or below market leases and | ||||||||||||||||
| liabilities(2) | - | - | - | - | ||||||||||||
| Accretion of discounts and amortization of premiums | ||||||||||||||||
| on debt investments | - | - | - | - | ||||||||||||
| Mark-to-market adjustments(3) | ||||||||||||||||
| Non-recurring (gains)/losses from extinguishment/sale | ||||||||||||||||
| of debt, derivatives or securities holdings(4) | - | - | 245 | - | ||||||||||||
| MFFO | (4,124 | ) | 4,236 | (4,734 | ) | 5,303 | ||||||||||
| Straight-line rent(5) | - | - | - | - | ||||||||||||
| MFFO - IPA recommended format | $ | (4,124 | ) | $ | 4,236 | $ | (4,734 | ) | $ | 5,303 | ||||||
| Net (loss)/income | $ | (7,256 | ) | $ | 1,055 | $ | (11,181 | ) | $ | (1,225 | ) | |||||
| Less: loss/(income) attributable to noncontrolling interests | 127 | (42 | ) | 201 | (17 | ) | ||||||||||
| Net (loss)/income applicable to Company's common shares | $ | (7,129 | ) | $ | 1,013 | $ | (10,980 | ) | $ | (1,242 | ) | |||||
| Net (loss)/income per common share, basic and diluted | $ | (0.41 | ) | $ | 0.06 | $ | (0.63 | ) | $ | (0.07 | ) | |||||
| FFO | $ | (4,120 | ) | $ | 4,240 | $ | (4,974 | ) | $ | 5,311 | ||||||
| Less: FFO attributable to noncontrolling interests | 69 | (86 | ) | 87 | (120 | ) | ||||||||||
| FFO attributable to Company's common shares | $ | (4,051 | ) | $ | 4,154 | $ | (4,887 | ) | $ | 5,191 | ||||||
| FFO per common share, basic and diluted | $ | (0.23 | ) | $ | 0.23 | $ | (0.28 | ) | $ | 0.29 | ||||||
| MFFO - IPA recommended format | $ | (4,124 | ) | $ | 4,236 | $ | (4,734 | ) | $ | 5,303 | ||||||
| Less: MFFO attributable to noncontrolling interests | 69 | (86 | ) | 87 | (120 | ) | ||||||||||
| MFFO attributable to Company's common shares | $ | (4,055 | ) | $ | 4,150 | $ | (4,647 | ) | $ | 5,183 | ||||||
| Weighted average number of common shares | ||||||||||||||||
| outstanding, basic and diluted | 17,430 | 17,713 | 17,437 | 17,756 | ||||||||||||
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net loss | $ | (646 | ) | $ | (7,256 | ) | $ | (5,378 | ) | $ | (11,181 | ) | ||||
| FFO adjustments: | ||||||||||||||||
| Depreciation and amortization of real estate assets | 2,560 | 2,716 | 5,252 | 5,361 | ||||||||||||
| Gain on disposition of real estate | - | - | - | - | ||||||||||||
| Adjustments to equity in earnings from unconsolidated affiliated entities | 434 | 420 | 868 | 846 | ||||||||||||
| FFO | 2,348 | (4,120 | ) | 742 | (4,974 | ) | ||||||||||
| MFFO adjustments: | ||||||||||||||||
| Acquisition and other transaction related costs expensed(1) | - | - | - | - | ||||||||||||
| Adjustments to equity in earnings from unconsolidated affiliated entities | (15 | ) | (4 | ) | (25 | ) | (5 | ) | ||||||||
| Gain on forgiveness of debt(2) | (1,481 | ) | - | (1,481 | ) | - | ||||||||||
| Accretion of discounts and amortization of premiums on debt investments | - | - | - | - | ||||||||||||
| Mark-to-market adjustments(3) | (105 | ) | - | (83 | ) | - | ||||||||||
| Non-recurring (gains)/losses from extinguishment/sale of debt, derivatives or securities holdings(2) | - | - | 245 | |||||||||||||
| MFFO | 747 | (4,124 | ) | (847 | ) | (4,734 | ) | |||||||||
| Straight-line rent(4) | - | - | - | - | ||||||||||||
| MFFO - IPA recommended format | $ | 747 | $ | (4,124 | ) | $ | (847 | ) | $ | (4,734 | ) | |||||
| Net loss | $ | (646 | ) | $ | (7,256 | ) | $ | (5,378 | ) | $ | (11,181 | ) | ||||
| Less: loss attributable to noncontrolling interests | 5 | 127 | 93 | 201 | ||||||||||||
| Net loss applicable to Company’s common shares | $ | (641 | ) | $ | (7,129 | ) | $ | (5,285 | ) | $ | (10,980 | ) | ||||
| Net loss per common share, basic and diluted | $ | (0.04 | ) | $ | (0.41 | ) | $ | (0.30 | ) | $ | (0.63 | ) | ||||
| FFO | $ | 2,348 | $ | (4,120 | ) | $ | 742 | $ | (4,974 | ) | ||||||
| Less: FFO attributable to noncontrolling interests | (53 | ) | 69 | (16 | ) | 87 | ||||||||||
| FFO attributable to Company’s common shares | $ | 2,295 | $ | (4,051 | ) | $ | 726 | $ | (4,887 | ) | ||||||
| FFO per common share, basic and diluted | $ | 0.13 | $ | (0.23 | ) | $ | 0.04 | $ | (0.28 | ) | ||||||
| MFFO - IPA recommended format | $ | 747 | $ | (4,124 | ) | $ | (847 | ) | $ | (4,734 | ) | |||||
| Less: MFFO attributable to noncontrolling interests | (7 | ) | 69 | 30 | 87 | |||||||||||
| MFFO attributable to Company’s common shares | $ | 740 | $ | (4,055 | ) | $ | (817 | ) | $ | (4,647 | ) | |||||
| Weighted average number of common shares outstanding, basic and diluted | 17,430 | 17,430 | 17,430 | 17,437 | ||||||||||||
| (1) | The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to investors. In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for non-listed REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition costs, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our advisor or third parties. Acquisition fees and expenses under GAAP are considered operating expenses and as expenses included in the determination of net income and income from continuing operations, both of which are performance measures under GAAP. Such fees and expenses are paid in cash, and therefore such funds will not be available to distribute to investors. Such fees and expenses negatively impact our operating performance during the period in which properties are being acquired. Therefore, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property. Acquisition fees and expenses will not be paid or reimbursed, as applicable, to our advisor even if there are no further proceeds from the sale of shares in our offering, and therefore such fees and expenses would need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties or from ancillary cash flows. |
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| (2) |
| (3) | Management believes that adjusting for mark-to-market adjustments is appropriate because they are nonrecurring items that may not be reflective of ongoing operations and reflects unrealized impacts on value based only on then current market conditions, although they may be based upon current operational issues related to an individual property or industry or general market conditions. Mark-to-market adjustments are made for items such as ineffective derivative instruments, certain marketable securities and any other items that GAAP requires we make a mark-to-market adjustment for. The need to reflect mark-to-market adjustments is a continuous process and is analyzed on a quarterly and/or annual basis in accordance with GAAP. |
| Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance. |
The table below presents our cumulative distributions declared and cumulative FFO attributable to our common shares:
| For the period April, 28, 2008 | ||||
| (date of inception) through | ||||
| June 30, 2020 | ||||
| FFO attributable to Company's common shares | $ | 67,958 | ||
| Distributions declared | $ | 85,040 | ||
| For the period April, 28, 2008 | ||||
| (date of inception) through | ||||
| June 30, 2021 | ||||
| FFO attributable to Company’s common shares | $ | 64,479 | ||
| Distributions declared and paid | $ | 85,040 | ||
New Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been adopted during 2020,2021, if any, and certain accounting standards that we have not yet been required to implement and may be applicable to our future operations.
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, management, including our chief executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of the evaluation, our chief executive officer and principal financial officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.
There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There were no significant deficiencies or material weaknesses identified in the evaluation, and therefore, no corrective actions were taken.
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From time to time in the ordinary course of business, the Companywe may become subject to legal proceedings, claims or disputes.
As of the date hereof, the Company iswe are not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on itsour results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, the Company haswe have not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
During the period covered by this Form 10-Q, we did not sell any equity securities that were not registered under the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
None.
*Filed herewith
| * | Filed herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. | ||
| Date: August 12, | By: | /s/ David Lichtenstein |
| David Lichtenstein | ||
| Chairman and Chief Executive Officer (Principal Executive Officer) | ||
| Date: August 12, 2021 | By: | /s/ Seth Molod |
| Seth Molod | ||
Chief Financial Officer (Duly Authorized Officer and | ||
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