UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended September 30, 20172018

 

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 000-52610

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland20-1237795

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

1985 Cedar Bridge Avenue, Suite 1 
Lakewood, New Jersey08701
(Address of Principal Executive Offices)(Zip Code)

 

(732) 367-0129

(Registrant’s Telephone Number, Including Area Code)

 

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

Yes þNo  ¨

 

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

Yes  þ    No ¨

 

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

 

Large accelerated filer  ¨ Accelerated filer  ¨
Non-accelerated filer   þ Smaller reporting company  ¨þ
  Emerging growth company¨

 

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

 

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

Yes ¨  No þ

 

As of November 1, 2017,2018, there were approximately 24.924.0 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust, Inc., including shares issued pursuant to the dividend reinvestment plan.  

 

 

  

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

 

INDEX

 

    Page
PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements (unaudited)  
   
  Consolidated Balance Sheets as of September 30, 2017 (unaudited)2018 and December 31, 20162017 3
   
  Consolidated Statements of Operations (unaudited) for the Three and Nine Monthsmonths Ended September 30, 20172018 and 20162017 4
     
  Consolidated Statements of Comprehensive Income/Loss (unaudited)Income for the Three and Nine Monthsmonths Ended September 30, 20172018 and 20162017 5
     
  Consolidated Statement of Stockholders’ Equity (unaudited) for the Nine Monthsmonths Ended September 30, 20172018 6
     
  Consolidated Statements of Cash Flows (unaudited) for the Nine Monthsmonths Ended September 30, 20172018 and 20162017 7
   
  Notes to Consolidated Financial Statements 8
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 1920
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 3536
   
Item 4. Controls and Procedures 3537
   
PART II OTHER INFORMATION  
   
Item 1. Legal Proceedings 3637
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 3637
   
Item 3. Defaults Upon Senior Securities 3637
   
Item 4. Mine Safety Disclosures 3637
   
Item 5. Other Information 3637
   
Item 6. Exhibits 3637

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)


 

As of

September 30, 2017

 

As of

December 31, 2016

  As of
 September 30, 2018		  As of
 December 31, 2017		 
 (Unaudited)     (unaudited)    
Assets                
        
Investment property:                
Land and improvements $49,667  $60,485  $44,647  $49,681 
Building and improvements  162,689   203,054   153,419   164,418 
Furniture and fixtures  2,118   17,613   2,236   2,154 
Construction in progress  979   962   270   204 
        
Gross investment property  215,453   282,114   200,572   216,457 
Less accumulated depreciation  (36,377)  (49,773)  (39,548)  (37,956)
Net investment property  179,076   232,341   161,024   178,501 
Investment in related parties  153,936   142,752   114,791   159,792 
Cash and cash equivalents  127,381   105,539   61,829   116,434 
Marketable securities, available for sale  53,851   52,495   120,166   57,944 
Restricted escrows  4,362   2,818 
Restricted cash  9,157   2,785 
Tenant and other accounts receivable  1,083   1,875   979   1,143 
Mortgage receivable  -   4,893 
Intangible assets, net  376   693 
Intangible assets  220   337 
Prepaid expenses and other assets  2,958   3,889   2,923   2,738 
Total Assets $523,023  $547,295  $471,089  $519,674 
                
Liabilities and Stockholders' Equity                
Mortgages payable, net $157,879  $183,313  $117,186  $157,927 
Notes payable, net  18,598   18,586 
Notes payable  18,613   18,602 
Accounts payable, accrued expenses and other liabilities  21,653   18,827   21,451   20,388 
Due to related parties  553   573   293   496 
Tenant allowances and deposits payable  1,009   1,429   1,052   1,483 
Distributions payable  4,396   4,432   4,240   4,387 
Deferred rental income  685   1,105   829   716 
Acquired below market lease intangibles, net  340   446 
Acquired below market lease intangibles  199   305 
Total Liabilities  205,113   228,711   163,863   204,304 
                
Commitments and contingencies                
                
Stockholders' equity:                
Company's Stockholders Equity:                
Preferred shares, $0.01 par value, 10,000 shares authorized, none issued and outstanding  -   -   -   - 
Common stock, $0.01 par value; 60,000 shares authorized, 24,896 and 25,101 shares issued and outstanding, respectively  249   251 
Common stock, $0.01 par value; 60,000 shares authorized, 24,012 and 24,847 shares issued and outstanding, respectively  240   248 
Additional paid-in-capital  194,986   197,036   187,908   194,497 
Accumulated other comprehensive income  13,571   15,954 
Accumulated other comprehensive (loss)/income  (1,273)  15,467 
Accumulated surplus  90,302   84,240   105,122   86,956 
        
Total Company's stockholders' equity  299,108   297,481   291,997   297,168 
  -   -       
Noncontrolling interests  18,802   21,103   15,229   18,202 
                
Total Stockholders' Equity  317,910   318,584   307,226   315,370 
                
Total Liabilities and Stockholders' Equity $523,023  $547,295  $471,089  $519,674 

 

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

3

3 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)

 

 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended September 30,  Nine Months Ended September 30, 
 2017  2016  2017  2016  2018  2017  2018  2017 
                  
Revenues:                                
Rental income $8,085  $9,391  $24,705  $28,559  $4,511  $8,085  $14,151  $24,705 
Tenant recovery income  738   930   2,553   3,122   485   738   1,877   2,553 
Other service income  2,069   2,739   7,834   8,489   -   2,069   -   7,834 
                
Total revenues  10,892   13,060   35,092   40,170   4,996   10,892   16,028   35,092 
                                
Expenses:                                
Property operating expenses  5,652   6,784   18,513   20,880   1,600   5,652   5,005   18,513 
Real estate taxes  602   673   1,951   2,387   318   602   1,283   1,951 
General and administrative costs  2,174   1,042   4,615   3,680   1,084   2,174   3,291   4,615 
Depreciation and amortization  2,738   2,705   8,252   8,595   1,639   2,738   5,217   8,252 
                
Total operating expenses  11,166   11,204   33,331   35,542   4,641   11,166   14,796   33,331 
                                
Operating (loss)/income  (274)  1,856   1,761   4,628 
Operating income/(loss)  355   (274)  1,232   1,761 
                                
Other (expense)/income, net  (69)  6   (75)  142 
Mark to market adjustment on derivative financial instruments  26   130   83   (282)
Other income/(loss), net  116   (43)  228   8 
Interest and dividend income  5,635   4,646   15,432   14,764   4,590   5,635   14,328   15,432 
Interest expense  (3,581)  (3,065)  (10,776)  (10,128)  (2,005)  (3,581)  (7,333)  (10,776)
Gain on disposition of real estate  -   10,483   7,137   10,483 
Loss on sale and redemption of marketable securities  (18)  (15)  (67)  (952)  (3)  (18)  (81)  (67)
Unrealized gain on marketable equity securities  1,436   -   1,096   - 
Gain on satisfaction of mortgage receivable  -   -   3,216   -   -   -   -   3,216 
Gain on disposition of real estate  10,483   3,799   10,483   23,705 
                
Net income  12,202   7,357   20,057   31,877   4,489   12,202   16,607   20,057 
                                
Less: net income attributable to noncontrolling interests  (392)  (310)  (915)  (1,166)  (465)  (392)  (1,108)  (915)
Net income attributable to Company's common shares $4,024  $11,810  $15,499  $19,142 
                                
Net income attributable to Company's common shares $11,810  $7,047  $19,142  $30,711 
Net income per Company’s common share, basic and diluted $0.47  $0.28  $0.77  $1.21  $0.17  $0.47  $0.63  $0.77 
                                
Weighted average number of common shares outstanding, basic and diluted  24,931   25,379   24,993   25,479   24,299   24,931   24,575   24,993 

 

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, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)INCOME

(Amounts in thousands)

(Unaudited)

 

 For the Three Months Ended September 30,  For the Nine Months Ended September 30,  For the Three Months Ended September 30,  For the Nine Months Ended September 30, 
 2017  2016  2017  2016  2018  2017  2018  2017 
                  
Net income $12,202  $7,357  $20,057  $31,877  $4,489  $12,202  $16,607  $20,057 
                                
Other comprehensive income                
Holding (loss)/gain on available for sale securities  (48)  (1,979)  (2,789)  2,713 
Other comprehensive income/(loss)                
Holding gain/(loss) on marketable securities, available for sale  127   (48)  (1,370)  (2,789)
Reclassification adjustment for loss included in net income  18   15   67   952   3   18   81   67 
                                
Other comprehensive (loss)/income  (30)  (1,964)  (2,722)  3,665 
Other comprehensive gain/(loss)  130   (30)  (1,289)  (2,722)
                                
Comprehensive income  12,172   5,393   17,335   35,542   4,619   12,172   15,318   17,335 
                                
Less: Comprehensive income attributable to noncontrolling interests  (379)  (933)  (576)  (1,452)  (468)  (379)  (1,083)  (576)
                                
Comprehensive income attributable to Company's common shares $11,793  $4,460  $16,759  $34,090  $4,151  $11,793  $14,235  $16,759 

 

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

5

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Amounts in thousands)

(Unaudited)

 

 Common  

Additional

Paid-In

 

Accumulated

Other

Comprehensive

  Accumulated  Noncontrolling  Total Stockholders'  Common  Additional
Paid-In-		 Accumulated
Other
Comprehensive		 Accumulated Noncontrolling Total Stockholders' 
 Shares  Amount  Capital  Income  Surplus  Interests  Equity  Shares  Amount  Capital  Income/(loss)  Surplus  Interests  

Equity

 
BALANCE, December 31, 2016  25,101  $251  $197,036  $15,954  $84,240  $21,103  $318,584 
                            
BALANCE, December 31, 2017  24,847  $248  $194,497  $15,467  $86,956  $18,202  $315,370 
Reclassification of other accumulated comprehensive income to accumulated surplus (See Note 3)  -   -   -   (15,476)  15,476   -   - 
Net income  -   -   -   -   19,142   915   20,057   -   -   -   -   15,499   1,108   16,607 
Other comprehensive losss  -   -   -   (2,383)  -   (339)  (2,722)
Transfer of membership interests (See Note 7)  -   -   1,500   -   -   (1,500)  - 
Other comprehensive loss  -   -   -   (1,264)  -   (25)  (1,289)
Distributions declared  -   -   -   -   (13,080)  -   (13,080)  -   -   -   -   (12,809)  -   (12,809)
Distributions paid to noncontrolling interests  -   -   -   -   -   (2,885)  (2,885)  -   -   -   -   -   (2,562)  (2,562)
Contributions received from noncontrolling interests  -   -   -   -   -   8   8   -   -   -   -   -   6   6 
Redemption and cancellation of shares  (205)  (2)  (2,050)  -   -   -   (2,052)  (835)  (8)  (8,089)  -   -   -   (8,097)
BALANCE, September 30, 2017  24,896  $249  $194,986  $13,571  $90,302  $18,802  $317,910 
BALANCE, September 30, 2018  24,012  $240  $187,908  $(1,273) $105,122  $15,229  $307,226 

 

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

6

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)(Unaudited)

 

 For the Nine Months Ended September 30,  For the Nine Months Ended September 30, 
 2017  2016  2018  2017 
          
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net income $20,057  $31,877  $16,607  $20,057 
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization  8,252   8,595   5,217   8,252 
Mark to market adjustment on derivative financial instruments  (83)  282 
Unrealized gain on marketable equity securities, available for sale  (1,096)  - 
Loss on sale of marketable securities, available for sale  67   952   81   67 
Gain on disposition of real estate  (10,483)  (23,705)  (7,137)  (10,483)
Gain on satisfaction of mortgage receivable  (3,216)  -   -   (3,216)
Other non-cash adjustments  568   427   126   485 
Changes in assets and liabilities:                
(Decrease)/increase in prepaid expenses and other assets  (339)  97 
Increase/(decrease) in tenant and other accounts receivable  426   (122)
Increase in prepaid expenses and other assets  (467)  (339)
Decrease in tenant and other accounts receivable  211   426 
Decrease in tenant allowances and deposits payable  (287)  (634)  (219)  (287)
Increase in accounts payable, accrued expenses and other liabilities  3,676   2,053   2,224   3,781 
(Decrease)/increase in due to related parties  (20)  679 
Decrease in deferred rental income  (127)  (30)
Decrease in due to related parties  (203)  (20)
(Decrease)/increase in deferred rental income  126   (127)
        
Net cash provided by operating activities  18,491   20,471   15,470   18,596 
                
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchase of investment property, net  (2,290)  (2,557)  (1,032)  (2,290)
Contributions in preferred investments in related parties  (13,739)  (51,032)
Purchase of marketable securities  (72,477)  (5,081)
Collections on mortgage receivable  -   8,109 
Proceeds from sale and redemption of marketable securities  9,982   936 
Proceeds from preferred investments in related parties  2,300   42,237   60,000   2,300 
Investment in joint venture  255   (17)
Collections on mortgage receivable  8,109   110 
Purchase of marketable securities  (5,081)  - 
Proceeds from sale and redemption of marketable securities  936   28,395 
Distributions from investment in unconsolidated affiliated real estate entity  -   1,989 
Proceeds from joint venture  765   372 
Investments in joint venture  (644)  (117)
Investments in related parties  (15,120)  (13,739)
Proceeds from sale of investment property and other real estate assets  32,651   60,691   -   32,651 
(Funding)/refund of restricted escrows  (1,439)  5,436 
Net cash provided by investing activities  21,702   85,252 
        
Net cash (used in)/provided by investing activities  (18,526)  23,141 
                
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from mortgage financing  -   20,400 
Mortgage payments  (306)  (62,937)  (21,568)  (306)
Payment of loan fees and expenses  -   (733)
Redemption and cancellation of common stock  (2,052)  (3,179)  (8,097)  (2,052)
Contributions received from noncontrolling interests  8   6   6   8 
Distributions paid to noncontrolling interests  (2,885)  (9,861)  (2,562)  (2,885)
Distributions paid to Company's common stockholders  (13,116)  (13,426)  (12,956)  (13,116)
        
Net cash used in financing activities  (18,351)  (69,730)  (45,177)  (18,351)
                
Net change in cash and cash equivalents  21,842   35,993 
Cash and cash equivalents, beginning of year  105,539   68,459 
Cash and cash equivalents, end of period $127,381  $104,452 
Net change in cash, cash equivalents and restricted cash  (48,233)  23,386 
Cash, cash equivalents and restricted cash, beginning of year  119,219   108,357 
Cash, cash equivalents and restricted cash, end of period $70,986  $131,743 
                
Supplemental cash flow information for the periods indicated is as follows:                
                
Cash paid for interest $5,694  $6,192  $5,163  $5,694 
Distributions declared but not paid $4,396  $4,471  $4,240  $4,396 
Non cash purchase of investment property $336  $16  $125  $336 
Unrealized loss on marketable securities $1,289  $2,722 
Assets transferred due to foreclosure $27,028  $-  $13,521  $27,028 
Liabilities extinguished in foreclosure $(27,028) $- 
Liabilities credited in foreclosure $20,658  $27,028 
Reclassification of accumulated other comprehensive income to accumulated surplus $15,476  $- 
Transfer of membership interests from noncontrolling interests to additional paid-in-capital $1,500  $- 

 

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


7

7 

 

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

Notes to Consolidated Financial Statements

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

 

1.Organization

 

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

 

Lightstone REIT is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT, L.P., a Delaware limited partnership formed on July 12, 2004 (the “Operating Partnership”), in which Lightstone REIT as the general partner, held a 98% interest as of September 30, 2017.2018.

 

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

 

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

 

The Company’s stock is not currently listed on a national securities exchange. The Company may seek to list its stock for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its shares of common stock until they are listed for trading. In the event the Company does not obtain listing prior to October 10, 2018 (the tenth anniversary of the completion of its initial public 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.

On October 20, 2017, the Company filed a definitive proxy statement with the Securities and Exchange Commission pursuant to which it is seeking stockholder approval to amend its charter to remove the requirement that the Company must either list its stock on a national securities exchange or seek stockholder approval to adopt a plan of liquidation of the corporation on or before October 10, 2018 (the “Charter Amendment”). In the event that the stockholders do not approve the Charter Amendment and the Company does not obtain listing of its stock on a national securities exchange prior to October 10, 2018 its charter requires that the Board of Directors must seek stockholder approval to adopt a plan of liquidation of the corporation.

 

As of September 30, 2017,2018, on a collective basis, the Company wholly or majority owned and consolidated the operating results and financial condition of 2 retail properties containing a total of approximately 0.5 million square feet of retail space, 1410 industrial properties containing a total of approximately 1.00.5 million square feet of industrial space and one multi-family residential property containing a total of 199 units. All of the Company’s properties are located within the United States. As of September 30, 2017,2018, the retail properties, the industrial properties and the multi-family residential properties were 85%83%, 74%68% and 96%97% occupied based on a weighted-average basis, respectively.

 

Noncontrolling Interests

 

As of September 30, 2017,2018, the noncontrolling interests consist of (i) parties of the Company that hold units in the Operating Partnership and (ii) certain interests in consolidated subsidiaries. The units include SLP units, limited partner units and common units. The noncontrolling interests in consolidated subsidiaries include ownership interests in Pro-DFJV Holdings LLC (“PRO”) held by the Company’s Sponsor and 50-01 2nd St. Associates LLC (the “2nd Street Joint Venture”) held by the Company’s Sponsor and other affiliates. PRO’s holdings principally consist of Marco OP Units and Marco II OP Units (see Note 3).

8

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

Notes to Consolidated Financial Statements

(Dollar amounts The 2nd Street Joint Venture owns Gantry Park, a multi-family apartment building located in thousands, except per share/unit data and where indicated in millions)(Unaudited)Queens, NY.

 

2.Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of the Lightstone REIT and its Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). All inter-company balances and transactions have been eliminated in consolidation.


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

Notes to Consolidated Financial Statements

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

 

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of the Company and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2017. The unaudited interim consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair presentation of the results for the periods presented. The accompanying unaudited consolidated financial statements of Lightstone Value Plus Real Estate Investment Trust, Inc. and its Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

 

GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate and real-estate related investments, marketable securities, 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, 20162017 included herein has been derived from the consolidated balance sheet included in the Company's Annual Report on Form 10-K.

 

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

 

NewRecently Adopted Accounting Pronouncements

 

InEffective January 2017,1, 2018, the Company adopted guidance issued by the Financial Accounting Standards Board (“FASB”) that requires amounts that are generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this standard using the retrospective transition method.

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

The 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:

  September 30, 
  2018  2017 
Cash and cash equivalents $61,829  $127,381 
Restricted cash  9,157   4,362 
Total cash, cash equivalents and restricted cash $70,986  $131,743 

Effective January 1, 2018, the Company adopted guidance issued by the FASB that that requires companies to measure investments in equity securities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income, using a modified-retrospective approach. This resulted in a $15.5 million reclassification of aggregate net unrealized gains from accumulated other comprehensive income (“AOCI”) to opening accumulated surplus see Note 3.

Effective January 1, 2018, the Company adopted guidance issued by the FASB that clarifies the definition of a business and assists in the evaluation of whether a transaction will be accounted for as an acquisition of an asset or as a business combination. The guidance provides a test to determine when a set of assets and activities acquired is not a business. When substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. Under the updated guidance, an acquisition of a single property will likely be treated as an asset acquisition as opposed to a business combination and associated transaction costs will be capitalized rather than expensed as incurred. Additionally, assets acquired, liabilities assumed, and any noncontrolling interest will be measured at their relative fair values.  This guidance is effectiveThe Company anticipates future acquisitions of real estate assets, if any, will likely qualify as an asset acquisition. Therefore, any future transaction costs associated with an asset acquisition will be capitalized and accounted for fiscal years and interim periods within those years beginning after December 15, 2017,in accordance with early adoption permitted. This guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In November 2016, the FASB issued guidance that requires amounts that are generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for public companies for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted and the pronouncement requires a retrospective transition method of adoption. This guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued an accounting standards update which provides guidance on the classification of certain cash receipts and cash payments in the statement of cash flows, including those related to debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, and distributions received from equity method investees.  This guidance is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years.  The guidance must be adopted on a retrospective basis and must be applied to all periods presented, but may be applied prospectively if retrospective application would be impracticable.  This guidance will not have a material impact on the Company’s consolidated financial statements.

this guidance.

9

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

Notes to Consolidated Financial Statements

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

Effective January 1, 2018, the Company adopted guidance issued by the FASB that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance.  The new guidance requires companies to apply a five-step model in accounting for revenue arising from contracts with customers, as well as enhance disclosures regarding revenue recognition. Lease contracts are excluded from this revenue recognition criteria; however, the sale of real estate is required to follow the new model. The Company has adopted this standard for the year beginning on January 1, 2018 using the modified retrospective approach. The adoption of this pronouncement had no effect on our consolidated financial statements since, with the disposal of the DoubleTree – Danvers in September 2017, substantially all revenues now consist of rental income from leasing arrangements, which is specifically excluded from the standard.

New Accounting Pronouncements

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

 

In June 2016, the FASB issued an accounting standards update which replaces the incurred loss impairment methodology currently in use with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.  The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  This guidance will not have a material impact on the Company’s consolidated financial statements.

 

In JanuaryFebruary 2016, the FASB issued an accounting standards update that eliminateswhich supersedes the requirement for public business entitiesexisting lease accounting model, and modifies both lessee and lessor accounting. The new guidance will require lessees to disclose the methodrecognize a liability to make lease payments and significant assumptions used to estimate the fair value that is required to be disclosed for financial instrumentsa right-of-use asset, initially measured at amortized costthe present value of lease payments, for both operating and financing leases, with classification affecting the pattern of expense recognition in the statement of earnings. For leases with a term of 12 months or less, lessees will be permitted to make an accounting policy election by class of underlying asset to not recognize lease liabilities and lease assets. The standard offers several practical expedients for transition and certain expedients specific to lessees or lessors. Both lessees and lessors are permitted to make an election to apply a package of practical expedients available for implementation under the standard. The Company intends to apply the package of practical expedients and certain other transition expedients. For transition, the Company intends to recognize all effects of transition in the beginning of the adoption reporting period on January 1, 2019. We expect that the adoption of this standard will result in the recognition of right-of-use assets and related lease liability accounts on the consolidated balance sheet and is effective for periods beginning after December 15, 2017 and early adoptionbut is not permitted. This guidance will notexpected to have a material effect on our consolidated financial position or our results of operations, however, the ultimate impact of adopting this standard will depend on the Company’s consolidated financial statements.

In January 2016,lease portfolio as of the FASB issued an accounting standards update that generally requires companies to measure investments in equity securities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income. The new guidance must be applied using a modified-retrospective approach and is effective for periods beginning after December 15, 2017 and early adoption is not permitted. If this standard had been in effect for the three and nine months ended September 30, 2017 it would have resulted in a decrease in net income of approximately $30 and $2.7 million, respectively and if this standard had been in effect for the three and nine months ended September 30, 2016 it would have resulted in a decrease and an increase to net income of approximately $2.0 million and $3.7 million, respectively.

[In May 2014, the FASB issued an accounting standards update that provides for a single five-step model to be applied to all revenue contracts with customers as well as requires additional financial statement disclosures that will enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows relating to customer contracts.  Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard.  This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.  The Company is continuing to evaluate the standard; however, we do not expect its adoption to have a significant impact on the consolidated financial statements, as substantially all revenues consist of rental income from leasing arrangements, which is specifically excluded from the standard.date.

  

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

 

Reclassifications 

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


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

Notes to Consolidated Financial Statements

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

3.Marketable Securities, and Fair Value Measurements and Notes Payable

 

Marketable Securities:

 

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

 

 As of September 30, 2017  As of September 30, 2018 
 Adjusted Cost  Gross Unrealized
Gains		  Gross Unrealized
Losses		  Fair Value  Adjusted Cost  Gross Unrealized
Gains		  Gross Unrealized
Losses		  Fair Value 
Marketable Securities:                
Equity securities:                
Equity Securities, primarily REITs $1,405  $165  $-  $1,570  $1,405  $315  $(5) $1,715 
Marco OP Units and Marco II OP Units  19,227   14,585   -   33,812   19,227   17,757   -   36,984 
Corporate Bonds and Preferred Equities  16,463   516   -   16,979 
  20,632   18,072   (5)  38,699 
Debt securities:                
Corporate Bonds and Preferred Securities  81,102   57   (1,055)  80,104 
Mortgage Backed Securities ("MBS")  1,915   -   (298)  1,617   1,663   -   (300)  1,363 
  82,765   57   (1,355)  81,467 
Total $39,010  $15,266  $(298) $53,978  $103,397  $18,129  $(1,360) $120,166 

  

 As of December 31, 2016  As of December 31, 2017 
 Adjusted Cost  Gross Unrealized
Gains		  Gross Unrealized
Losses		  Fair Value  Adjusted Cost  Gross Unrealized
Gains		  Gross Unrealized
Losses		  Fair Value 
Marketable Securities:                
Equity securities:                
Equity Securities, primarily REITs $1,405  $325  $-  $1,730  $1,405  $263  $-  $1,668 
Marco OP Units and Marco II OP Units  19,227   17,949   -   37,176   19,227   16,708   -   35,935 
Corporate Bonds and Preferred Equities  11,382   -   (397)  10,985 
Mortgage Backed Securities ("MBS")  2,918   -   (314)  2,604 
  20,632   16,971   -   37,603 
Debt securities:                
Corporate Bonds and Preferred Securities  18,494   371   (81)  18,784 
Mortgage Backed Securities  1,856   -   (299)  1,557 
  20,350   371   (380)  20,341 
Total $34,932  $18,274  $(711) $52,495  $40,982  $17,342  $(380) $57,944 

 

As of both September 30, 2018 and December 31, 2017, the Company held an aggregate of 209,243 Marco OP Units and Marco II OP Units, of which 89,695 were owned by PRO. The Marco OP Units and the Marco II OP Units are exchangeable for a similar number of common operating partnership units (“Simon OP Units”) of Simon Property Group, L.P., (“Simon OP”), the operating partnership of Simon Property Group, Inc. (“Simon”). Subject to the various conditions, the Company may elect to exchange the Marco OP Units and/or the Marco II OP Units to Simon OP Units which must be immediately delivered to Simon in exchange for cash or similar number of shares of Simon’s common stock (“Simon Stock”).

 

10

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

 

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

NotesOn January 1, 2018, the Company adopted guidance issued by the FASB that required it to Consolidated Financial Statements

(Dollar amounts in thousands, except per share/unit datachange the way it accounts for marketable equity securities. The Company’s marketable equity securities are measured at fair value and where indicated in millions)(Unaudited)starting January 1, 2018 unrealized gains and losses are recognized on the consolidated statements of operations. Upon adoption, the Company reclassified $15.5 million of aggregate net unrealized gains from AOCI to opening accumulated surplus.

 

The Company considers the declines in market value of certain of its investments to be temporary in nature as the unrealized losses were caused primarily by changes in market interest rates or widening credit spreads. When evaluating these investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. During the nine months ended September 30, 20172018 and 2016,2017, the Company did not recognize any impairment charges. As of September 30, 2017,2018, the Company does not consider any of its investments to be other-than-temporarily impaired.

 

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

 

Notes Payable11 

Margin Loan

 

The Company has access

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

Notes to a margin loan (the “Margin Loan”) from a financial institution that holds custody of certain of the Company’s marketable securities. The Margin Loan, which is due on demand, bears interest at Libor plus 0.85% (2.09% as of September 30, 2017)Consolidated Financial Statements

(Dollar amounts in thousands, except per share/unit data and is collateralized by the marketable securitieswhere indicated in the Company’s account. The amounts available to the Company under the Margin Loan are at the discretion of the financial institution and not limited to the amount of collateral in its account. There were no amounts outstanding under this Margin Loan as of September 30, 2017 and December 31, 2016.millions)(Unaudited) 

 

Line of Credit

On September 14, 2012, the Company entered into a non-revolving credit facility (the “Line of Credit”) with a financial institution which permits borrowings up to $25.0 million. The Line of Credit expires on June 19, 2019 and bears interest at Libor plus 1.35% (2.59% as of September 30, 2017). The Line of Credit is collateralized by approximately 252,000 Marco OP Units and PRO guaranteed the Line of Credit. The amount outstanding under the Line of Credit was $18.6 million as of September 30, 2017 and December 31, 2016 and is included in Notes Payable on the consolidated balance sheets.

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.
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.

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

 

 Fair Value Measurement Using     Fair Value Measurement Using    
As of September 30, 2017 Level 1  Level 2  Level 3  Total 
As of September 30, 2018 Level 1  Level 2  Level 3  Total 
                  
Marketable Securities:                                
Equity Securities, primarily REITs $1,570  $-  $-  $1,570  $1,715  $-  $     -  $1,715 
Marco OP and OP II Units  -   33,812   -   33,812   -   36,984   -   36,984 
Corporate Bonds and Preferred Equities  -   16,979   -   16,979 
Corporate Bonds and Preferred Securities  -   80,104   -   80,104 
MBS  -   1,617   -   1,617   -   1,363   -   1,363 
Total $1,570  $52,408  $-  $53,978  $1,715  $118,451  $-  $120,166 

 

 Fair Value Measurement Using     Fair Value Measurement Using    
As of December 31, 2016 Level 1  Level 2  Level 3  Total 
As of December 31, 2017 Level 1  Level 2  Level 3  Total 
                  
Marketable Securities:                                
Equity Securities, primarily REITs $1,730  $-  $-  $1,730  $1,668  $-  $     -  $1,668 
Marco OP and OP II Units  -   37,176   -   37,176   -   35,935   -   35,935 
Corporate Bonds and Preferred Equities  -   10,985   -   10,985 
Corporate Bonds and Preferred Securities  -   18,784   -   18,784 
MBS  -   2,604   -   2,604   -   1,557   -   1,557 
Total $1,730  $50,765  $-  $52,495  $1,668  $56,276  $-  $57,944 

 

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

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

4.Mortgage Receivable

In June 2011, the Company acquired a senior mortgage note (the “Senior Mortgage”) with an outstanding principal balance of $8.8 million for $5.6 million from, an unaffiliated third party. The purchase price reflected a discount of $3.2 million to the then outstanding principal balance.

The Senior Mortgage was originated by Banc of America in July 2007 with an initial principal balance of $9.1 million. It was collateralized by a Holiday Inn Express located in East Brunswick, New Jersey and bore interest at a fixed rate of 6.33% per annum with scheduled monthly principal and interest payments of approximately $56 through its stated maturity in August 2017. However, the Senior Mortgage was transferred to special servicing in February 2010 due to payment defaults. Because the Senior Mortgage was in default, the aforementioned discount was not amortized by the Company.

As a result of the payment defaults, the borrower was required to transfer any excess cash flow from the underlying collateral to the Company on a monthly basis. The Company applied the cash receipts method of income recognition, whereby the Company recognized any excess cash, after the required funding for real estate taxes and insurance and other escrow-related disbursements, as interest income until such time as the borrower was current on all amounts owed to the Company for interest and then any remaining cash was applied as a reduction to the Company’s carrying amount of the Senior Mortgage.

In June 2017, the Company received a payment of approximately $8.1 million in full satisfaction of the Senior Mortgage and recorded a gain on satisfaction of mortgage receivable of $3.2 million representing the difference between the $8.1 million received and the Company’s $4.9 million carrying value of the Senior Mortgage.

12

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

Notes to Consolidated Financial Statements

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

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

  As of
September 30,
2018		 
Due in 1 year $18,677 
Due in 1 year through 5 years  44,716 
Due in 5 years through 10 years  16,711 
Due after 10 years  1,363 
Total $81,467 

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

Notes Payable

Margin Loan

The Company has access to a margin loan (the “Margin Loan”) from a financial institution that holds custody of certain of the Company’s marketable securities. The Margin Loan, which is due on demand, bears interest at Libor plus 0.85% (3.11% as of September 30, 2018) and is collateralized by the marketable securities in the Company’s account. The amounts available to the Company under the Margin Loan are at the discretion of the financial institution and not limited to the amount of collateral in its account. There were no amounts outstanding under this Margin Loan as of September 30, 2018 and December 31, 2017.

Line of Credit

The Company has a non-revolving credit facility (the “Line of Credit”) with a financial institution which permits borrowings up to $25.0 million. The Line of Credit expires on June 19, 2019 and bears interest at Libor plus 1.35% (3.61% as of September 30, 2018). The Line of Credit is collateralized by approximately 209,000 Marco OP Units and PRO guaranteed the Line of Credit. The amount outstanding under the Line of Credit was $18.6 million as of September 30, 2018 and December 31, 2017 and is included in Notes Payable on the consolidated balance sheets. The Company currently intends to seek to extend or replace the Line of Credit on or before its expiration. If we are unable to extend or replace the Line of Credit, we will repay the then outstanding balance in full at the expiration date using working capital, cash proceeds from the sale of assets and/or redemptions of our preferred investments in related parties. 

5.4.Mortgages Payable, Net

 

Mortgages payable, net consists of the following:

 

Property Interest Rate Weighted Average
Interest Rate as of
September 30, 2017		  Maturity Date Amount Due at
Maturity		  As of
 September 30, 2017		  As of
 December 31, 2016		  Interest Rate Weighted
Average
Interest Rate
as of
September 30,
2018		 Maturity Date Amount Due at
Maturity		 As of
 September 30,
2018		 As of
 December 31,
2017		 
             
Oakview Plaza (Extinguished in foreclosure on September 15, 2017) $-  $-  $25,583 
                               
Gulf Coast Industrial Portfolio 9.83%  9.83% Due on demand  50,205   50,205   50,205   9.83%  9.83% Due on demand $30,642  $30,642  $50,205 
                                      
St. Augustine Outlet Center LIBOR + 4.50%  5.52% August 2018  20,400   20,400   20,400   (Repaid in full - see below)  -   -   20,400 
                                      
Gantry Park 4.48%  4.48% November 2024  65,317   74,500   74,500   4.48%  4.48% November 2024  65,317   73,638   74,500 
                                      
DePaul Plaza LIBOR + 2.75%  3.76% June 2020  13,494   14,582   14,888   LIBOR + 2.75%   4.62% June 2020  13,494   14,174   14,480 
                                      
Total mortgages payable  6.23%   $149,416  $159,687  $185,576       5.92% $109,453   118,454   159,585 
                                      
Less: Deferred financing costs            (1,808)  (2,263)              (1,268)  (1,658)
                                      
Total mortgages payable, net           $157,879  $183,313              $117,186  $157,927 

The Company’s non-recourse mortgage loan (the “Oakview Plaza Mortgage”) secured by a retail power center locatedLIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollar amounts in Omaha, Nebraska (“Oakview Plaza”) maturedthousands, except per share/unit data and where indicated in January 2017 and was not repaid which constituted a maturity default. The Oakview Plaza Mortgage was transferred to a special servicer and on September 15, 2017, ownership of Oakview Plaza was transferred to the lender via foreclosure (the “Oakview Plaza Foreclosure”). The carrying value of the assets transferred and the liabilities extinguished in connection with the Oakview Plaza Foreclosure both approximated $27.0 million. The balance of the Oakview Plaza Mortgage as of the date of foreclosure was $25.6 million and the associated accrued default interest was $1.0 million.millions)(Unaudited)

 

Libor as of September 30, 20172018 and December 31, 20162017 was 1.24%2.26% and 0.531.57%, respectively. The Company’s loans are secured by the indicated real estate and are non-recourse to the Company.Company, unless otherwise indicated.

 

The following table showsOn May 29, 2018, the contractuallyCompany repaid in full its $20.4 million recourse mortgage loan secured by the St. Augustine Outlet Center located in St. Augustine, Florida, with a scheduled principal maturities of the Company’s mortgage debt during the next five years and thereafter as of September 30, 2017:maturity in August 2018.  

  2017  2018  2019  2020  2021  Thereafter  Total 
Principal maturities $50,307  $21,967  $1,621  $14,924  $1,328  $69,540  $159,687 
                             
Less: Deferred financing costs                          (1,808)
                             
Total principal maturities, net                         $157,879 

 

Certain of the Company’s debt agreements require the maintenance of certain ratios, including debt service coverage. The Company is currently in compliance with all of its financial debt covenants other than the debt associated withnon-recourse mortgage indebtedness originally secured by a portfolio of industrial properties (collectively, the Gulf“Gulf Coast Industrial PortfolioPortfolio”) located in New Orleans, Louisiana (seven properties), Baton Rouge, Louisiana (three properties) and San Antonio, Texas (four properties), as discussed below. Additionally, certain of our mortgages payable also contain clauses providing for prepayment penalties.

 

As a result of not meeting certain debt service coverage ratios on the non-recourse mortgage indebtedness secured by the Gulf Coast Industrial Portfolio (the “Gulf Coast Industrial Portfolio Mortgage”), the lender elected to retain the excess cash flow from these properties beginning in July 2011.  During the third quarter of 2012, the Gulf Coast Industrial Portfolio Mortgage was transferred to a special servicer, who discontinued scheduled debt service payments and notified the Company that the Gulf Coast Industrial Portfolio Mortgage was in default and although originally due in February 2017 became due on demand.

On June 5, 2018, the special servicer completed a partial foreclosure of the Gulf Coast Industrial Portfolio pursuant to which it foreclosed on the four properties located in San Antonio, Texas (the “San Antonio Assets”). The San Antonio Assets were sold in a foreclosure sale by the special servicer for an aggregate amount of approximately $20.7 million. (See Note 6)

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

As a result, the remaining outstanding principal of the Gulf Coast Industrial Portfolio Mortgage was approximately $30.6 million as of September 30, 2018. The Company accrues default interest expense on the Gulf Coast Industrial Portfolio Mortgage pursuant to the terms of its loan agreement.

Additionally, the Company previously accrued default interest expense on a non-recourse mortgage loan (the “Oakview Plaza Mortgage”), pursuant to the terms of its loan agreement during the period from January 2017 through September 2017. The Oakview Plaza Mortgage was secured by a retail shopping center located in Omaha, Nebraska (“Oakview Plaza”). The lender foreclosed on Oakview Plaza in September 2017.

Default interest expense related to the Gulf Coast Industrial Mortgage of $0.3 million and $1.3 million was accrued during the three and nine months ended September 30, 2018, respectively, and default interest expense related to both the Gulf Coast Industrial Portfolio Mortgage and the Oakview Plaza Mortgage of $0.8 million and $2.5 million was accrued during the three and nine months ended September 30, 2017, respectively. Cumulative accrued default interest expense (solely related the Gulf Coast Industrial Portfolio Mortgage) of $12.5 million and $11.2 million is included in accounts payable, accrued expenses and other liabilities on our consolidated balance sheets as of September 30, 2018 and December 31, 2017, respectively.    Additionally, the Company believes the continued loss of excess cash flow from the Gulf Coast Industrial Portfolio orand the lossspecial servicer’s placement of these propertiesthe non-recourse mortgage indebtedness in default will not have a material impact on its results of operations or financial position.

 

Other than the Gulf Coast Industrial Portfolio Mortgage, the Company has no additional significant maturities of mortgage debt over the next 12 months.

13

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

Notes to Consolidated Financial Statements

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

Although

The following table shows the lender is not currently charging or being paid interest atcontractually scheduled principal maturities of the stated default rate, the Company is accruing default interest expense on the Gulf Coast Industrial Portfolio Mortgage pursuant to the terms of its loan agreement. Additionally, the Company accrued default interest expense on the Oakview Plaza Mortgage pursuant to the terms of its loan agreement from January 2017 through September 15, 2017. Default interest expense of $0.8 million and $2.5 million was accruedCompany’s mortgage debt during the threenext five years and nine months ended September 30, 2017 and default interest expense of $0.5 million and $1.5 million was accrued during the three and nine months ended September 30, 2016. Additionally, as disclosed above, in connection with the Oakview Plaza Foreclosure, approximately $1.0 million of default interest related to the Oakview Plaza Mortgage was extinguished. As a result, cumulative accrued default interest expense (solely related the Gulf Coast Industrial Portfolio Mortgage) of $10.7 million and $9.2 million is included in accounts payable, accrued expenses and other liabilities on our consolidated balance sheetsthereafter as of September 30, 2017 and December 31, 2016, respectively.  However, the Company does not expect to pay any of the accrued default interest expense as these mortgage loans are non-recourse to it.2018:

 

In addition, the Company’s recourse mortgage loan secured by the St. Augustine Outlet Center located in St. Augustine, Florida (outstanding principal balance of $20.4 million as of September 30, 2017) initially matures in August 2018 and has two one-year extensions, subject to satisfaction of certain conditions. The Company currently intends to exercise the extension option before the initial maturity. Other than these financings, the Company has no additional significant maturities of mortgage debt over the next 12 months.

  2018  2019  2020  2021  2022  Thereafter  Total 
                      
Principal maturities $31,041  $1,621  $14,924  $1,328  $1,389  $68,151  $118,454 
                             
Less: Deferred financing costs                          (1,268)
                             
Total principal maturities, net                         $117,186 

  

6.Dispositions

DoubleTree – Danvers

On September 7, 2017, the Company disposed of a hotel and water park (the “DoubleTree – Danvers”) located in Danvers, Massachusetts, to an unrelated third party for aggregate consideration of approximately $31.5 million. In connection with the disposition, the Company recorded a gain on the disposition of real estate of approximately $10.5 million during the third quarter of 2017.

The disposition of the DoubleTree – Danvers did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift in the Company’s operations that had a major effect on the Company’s operations and financial results (see note 10). Accordingly, the operating results of the DoubleTree – Danvers are reflected in the Company’s results from continuing operations for all periods presented through its respective date of disposition.

Oakview Plaza

The Oakview Plaza Mortgage secured by Oakview Plaza matured in January 2017 and was not repaid which constituted a maturity default. The Oakview Plaza Mortgage was transferred to a special servicer and on September 15, 2017, ownership of Oakview Plaza was transferred to the lender via the Oakview Plaza Foreclosure. The carrying value of the assets transferred and the liabilities extinguished in connection with the Oakview Plaza Foreclosure both approximated $27.0 million. The balance of the Oakview Plaza Mortgage as of the date of foreclosure was $25.6 million and the associated accrued default interest was $1.0 million.

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

7.5.Net Earnings Per Share

 

Basic net earnings per share is calculated by dividing net income attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the applicable period. Diluted net income per share includes the potentially dilutive effect, if any, which would occur if our outstanding options to purchase our common stock were exercised. For all periods presented, there were no exercises of outstanding options and, therefore, dilutive net income per share is equivalent to basic net income per share.

 

146.Disposition

  

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIESGulf Coast Industrial Portfolio – San Antonio Assets

Notes

As previously discussed in Note 4, on June 5, 2018, the special servicer for the Gulf Coast Industrial Portfolio Mortgage completed a partial foreclosure of the Gulf Coast Industrial Portfolio pursuant to Consolidated Financial Statementswhich it foreclosed on the San Antonio Assets. The San Antonio Assets were sold in a foreclosure sale by the special servicer for an aggregate amount of approximately $20.7 million.

(Dollar amounts

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

The aggregate carrying value of the assets transferred and the liabilities extinguished in thousands, except per share/unit dataconnection with the foreclosure of the San Antonio Assets were approximately $13.6 million and where indicated$20.7 million, respectively.

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

The disposition of San Antonio Assets did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the operating results of the San Antonio Assets are reflected in millions)(Unaudited)the Company’s results from continuing operations for all periods presented through their respective date of disposition.

 

8.7.Related Party Transactions

 

The Company has agreements 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 affiliated entities. The Company’s ability to secure financing and subsequent real estate operations are dependent upon its Advisor, Property Manager and their affiliates to perform such services as provided in these agreements. 


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

Notes to Consolidated Financial Statements

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

 

The Company, pursuant to the related party arrangements, has recorded the following amounts for the periods indicated:

 

 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended September 30,  Nine Months Ended September 30, 
 2017  2016  2017  2016  2018  2017  2018  2017 
Asset management fees (general and administrative costs) $556  $562  $1,684  $1,804  $392  $556  $1,283  $1,684 
Property management fees (property operating expenses)  199   190   576   739   120   199   409   576 
Development fees and leasing commissions*  125   29   706   80   62   125   182   706 
Total $880  $781  $2,966  $2,623  $574  $880  $1,874  $2,966 

 

* Generally, capitalized and amortized over the estimated useful life of the associated asset.

 

In connection with the Company’s initial public offering, Lightstone SLP, LLC, an affiliate of the Company’s Sponsor, haspreviously purchased an aggregate of $30.0 million of SLP units which are included in noncontrolling interests in the consolidated balance sheets. These SLP units, the purchase price of which will be repaid only after stockholders receive a stated preferred return and their net investment, entitle Lightstone SLP, LLC to a portion of any regular distributions made by the Operating Partnership.

 

During the three and nine months ended September 30, 2017,2018, distributions of $0.5 million and $1.5 million were declared and paid on the SLP units.

 

TheOn September 19, 2018, the Company’s Sponsor hastransferred approximately 9.14% of its ownership in PRO, valued at the estimated fair value of $1.5 million to the Operating Partnership, accounted for as an increase in equity of the Company and decrease in non-controlling interest. As of September 30, 2018 and December 31, 2017, the Sponsor, had a 10.03% and a 19.17% membership interest in PRO, a subsidiary of the Operating Partnership,respectively, which is accounted for as noncontrolling interests.

 

Preferred Investments

 

The Company has entered into several agreements with various related party entities that provide for it to make preferred contributions pursuant to certain instruments (the “Preferred Investments”) that entitle the Company to certain prescribed monthly preferred distributions. The Preferred Investments had an aggregate balance of $152.7$113.4 million and $141.3$158.3 million as of September 30, 20172018 and December 31, 2016,2017, respectively, and are classified as held-to-maturity securities, recorded at cost and included in investments in related parties on the consolidated balance sheets. The fair value of these investments approximated their carrying values based on market rates for similar instruments.

During the nine months ended September 30, 2017,2018, the Company made $13.7an aggregate $15.1 million of additional contributions and redeemed $2.3the entire $60.0 million ofoutstanding on the 485 7th Avenue Preferred InvestmentsInvestment and as of September 30, 2017,2018, remaining contributions of up to $64.8$4.1 million were unfunded. During the three and nine months ended September 30, 2017, the Company recognized investment income of $4.6 million and $12.9 million, respectively, and during the three and nine months ended September 30, 2016, the Company recognized investment income of $4.0 million and $12.2 million, respectively, which is included in interest and dividend income on the consolidated statements of operations. The Company did not enter into any new Preferred Investments during the nine months ended September 30, 2017.2018.

 

The Preferred Investments are summarized as follows:

 

    Preferred Investment Balance Unfunded Contributions Investment Income     Preferred Investment Balance  Unfunded Contributions  Investment Income 
 Dividend   As of
September 30,		 As of
December 31,		 As of
September 30,		 Three Months Ended September 30, Nine Months Ended September 30,     As of As of As of Three Months Ended
September 30,		 

Nine Months Ended

September 30,

 
Preferred Investments Rate 2017 2016 2017 2017 2016 2017 2016  Dividend Rate  September 30, 2018  December 31, 2017  September 30, 2018  2018  2017  2018  2017 
365 Bond Street  12% $-  $-  $-  $-  $-  $-  $2,252 
40 East End Avenue  8% to 12%  30,000   30,000   -   920   613   2,463   1,795 
40 East End Avenue(1)  8% to 12% $30,000  $30,000  $-  $920  $920  $2,730  $2,463 
30-02 39th Avenue  9% to 12%  10,000   12,300   40,000   307   436   946   1,009   12%  10,000   10,000   -   307   307   910   946 
485 7th Avenue  12%  60,000   60,000   -   1,840   1,840   5,460   5,480   12%  -   60,000   -   -   1,840   1,095   5,460 
East 11th Street  12%  40,994   31,271   16,506   1,155   1,073   3,135   1,675   12%  57,500   46,119   -   1,763   1,155   4,970   3,135 
Miami Moxy  12%  11,699   7,682   8,302   346   -   905   -   12%  15,933   12,195   4,067   457   346   1,229   905 
Total Preferred Investments     $152,693  $141,253  $64,808  $4,568  $3,962  $12,909  $12,211      $113,433  $158,314  $4,067  $3,447  $4,568  $10,934  $12,909 

Note:

(1) - The dividend rate increased from 8% to 12% during March 2017 in connection with the procurement of construction financing on this project.

 

The Joint Venture

 

We haveThe Company has a 2.5% membership interest in a joint venture (the “Joint Venture”) with Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a related party REIT also sponsored by our Sponsor. The Joint Venture previously acquired our membership interests in a portfolio of 11 hotels in a series of transactions completed during 2015. During the third quarter of 2017, the Joint Venture sold its ownership interests in four of the hotels to an unrelated third party and asparty. On November 6, 2017, the Joint Venture acquired a 170-room select service hotel located in New Orleans, Louisiana (the “Hyatt – New Orleans”)from an unrelated third party. As a result, the Joint Venture holds ownership interests in the seven remainingeight hotels as of September 30, 2017.

2018.

15

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

Notes to Consolidated Financial Statements

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

We account

The Company accounts for ourits 2.5% membership interest in the Joint Venture under the cost method and as of September 30, 20172018 and December 31, 2016,2017, the carrying value of ourits investment was $1.2$1.4 million and $1.5 million, respectively, which is included in investment in related parties on the consolidated balance sheets.

 

9.8.Financial Instruments

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted escrows, tenants’cash, tenant and other accounts receivable, interest receivable from related parties, accounts payable, and accrued expenses and other liabilities and due to related parties approximated their fair values because of the short maturity of these instruments. The estimated fair value of the notes payable (line of credit) approximated its carrying value ($18.6 million) because of its floating interest rate. The carrying amount reported in the consolidated balance sheets for the mortgage receivable approximated its fair value based upon current market information that would have been used by a market participant to estimate the fair value of such loan.

 

The estimated fair value (in millions) of the Company’s mortgage debt is summarized as follows:

 

  As of September 30, 2017  As of December 31, 2016 
  Carrying Amount  Estimated Fair
Value		  Carrying Amount  Estimated Fair
Value		 
Mortgages payable $159.7  $158.0  $185.6  $183.2 

  As of September 30, 2018  As of December 31, 2017 
  Carrying
Amount		  

Estimated Fair

Value

  Carrying
Amount		  

Estimated Fair

Value

 
Mortgages payable $118.5  $116.7  $159.6  $158.6 
                 

The fair value of the mortgages payable was determined by discounting the future contractual interest and principal payments by estimated current market interest rates.

 

10.9.Segment Information

 

The Company currently operates in threehas historically operated within four business segments as of September 30, 2017:which are: (i) retail real estate (the “Retail Segment”), (ii) multi-family residential real estate (the “Multi-family“Multi-Family Residential Segment”) and, (iii) industrial real estate (the “Industrial Segment”) and (iv) hospitality (the “Hospitality Segment”). Prior to the disposition of the DoubleTree – DanversHowever, during the third quarter of 2017, the Company also had onesold its only remaining hotel that was classified as aconsolidated hospitality property (the “Hospitality Segment”).and therefore, no longer has a Hospitality Segment. The Company’s Advisor and its affiliates provide leasing, property and facilities management, acquisition, development, construction and tenant-related services for its portfolio. The Company’s revenues for the three and nine months ended September 30, 20172018 and 20162017 were exclusively derived from activities in the United States. No revenues from foreign countries were received or reported. The Company had no long-lived assets in foreign locations as of September 30, 20172018 and December 31, 2016.2017. The accounting policies of the segments are the same as those described in Note 2: Summary of Significant Accounting Policies of the Company’s December 31, 20162017 Annual Report on Form 10-K. Unallocated assets, revenues and expenses relate to corporate related accounts, including the Company’s Preferred Investments in Related Parties (see Note 8)7).

 

The Company evaluates performance based upon net operating income/(loss) from the combined properties in each real estate segment.

16

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

Notes to Consolidated Financial Statements

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

 

Selected results of operations for the three and nine months ended September 30, 20172018 and 2016,2017, and total assets as of September 30, 20172018 and December 31, 20162017 regarding the Company’s operating segments are as follows:

 

  For the Three Months Ended September 30, 2017 
  Retail  Multi-Family  Industrial  Hospitality  Unallocated  Total 
                   
Total revenues $2,452   2,118  $1,581  $4,741  $-  $10,892 
                         
Property operating expenses  905   492   631   3,620   4   5,652 
Real estate taxes  361   19   162   60   -   602 
General and administrative costs  39   3   6   107   2,019   2,174 
                         
Net operating income/(loss)  1,147   1,604   782   954   (2,023)  2,464 
                         
Depreciation and amortization  1,387   407   458   486   -   2,738 
               -         
Operating (loss)/income $(240) $1,197  $324  $468  $(2,023) $(274)
                        ��
As of September 30, 2017:                        
Total Assets $71,896  $68,382  $50,351  $2,777  $329,617  $523,023 

  For the Three Months Ended September 30, 2016 
  Retail  Multi-Family  Industrial  Hospitality  Unallocated  Total 
                   
Total revenues $2,904  $2,283  $1,341  $6,532  $-  $13,060 
                         
Property operating expenses  811   536   523   4,913   1   6,784 
Real estate taxes  356   32   208   77   -   673 
General and administrative costs  (9)  8   1   64   978   1,042 
                         
Net operating income/(loss)  1,746   1,707   609   1,478   (979)  4,561 
                         
Depreciation and amortization  1,161   420   415   709   -   2,705 
                         
Operating income/(loss) $585  $1,287  $194  $769  $(979) $1,856 
                         
As of December 31, 2016:                        
Total Assets $100,105  $71,170  $49,509  $25,071  $301,440  $547,295 

  For the Nine Months Ended September 30, 2017 
  Retail  Multi-Family  Industrial  Hospitality  Unallocated  Total 
                   
Total revenues $7,805  $6,443  $4,683  $16,161  $-  $35,092 
                         
Property operating expenses  2,782   1,430   1,679   12,617   5   18,513 
Real estate taxes  1,120   55   555   221   -   1,951 
General and administrative costs  129   33   (10)  225   4,238   4,615 
                         
Net operating income/(loss)  3,774   4,925   2,459   3,098   (4,243)  10,013 
                         
Depreciation and amortization  3,759   1,218   1,339   1,936   -   8,252 
                         
Operating income/(loss) $15  $3,707  $1,120  $1,162  $(4,243) $1,761 

  For the Nine Months Ended September 30, 2016 
  Retail  Multi-Family  Industrial  Hospitality  Unallocated  Total 
                   
Total revenues $8,546  $10,405  $4,115  $17,104  $-  $40,170 
                         
Property operating expenses  2,648   3,064   1,543   13,623   2   20,880 
Real estate taxes  1,079   463   607   238   -   2,387 
General and administrative costs  54   54   87   235   3,250   3,680 
                         
Net operating income/(loss)  4,765   6,824   1,878   3,008   (3,252)  13,223 
                         
Depreciation and amortization  3,468   1,790   1,237   2,100   -   8,595 
                         
Operating income/(loss) $1,297  $5,034  $641  $908  $(3,252) $4,628 

  For the Three Months Ended September 30, 2018 
  Retail  Multi-Family  Industrial  Hospitality  Unallocated  Total 
                         
Total revenues $1,774   2,256   966  $-  $-  $4,996 
                         
Property operating expenses  727   497   376   -   -   1,600 
Real estate taxes  212   18   88   -   -   318 
General and administrative costs  5   (4)  (1)  -   1,084   1,084 
                         
Net operating income/(loss)  830   1,745   503   -   (1,084)  1,994 
                         
Depreciation and amortization  889   411   339   -   -   1,639 
                        
Operating (loss)/income $(59) $1,334  $164  $-  $(1,084) $355 
                         
As of September 30, 2018:                        
Total Assets $69,098  $66,845  $37,018  $-  $298,128  $471,089 
                         
  For the Three Months Ended September 30, 2017 
  Retail  Multi-Family  Industrial  Hospitality  Unallocated  Total 
                         
Total revenues $2,452   2,118  $1,581  $4,741  $-  $10,892 
                         
Property operating expenses  905   492   631   3,620   4   5,652 
Real estate taxes  361   19   162   60   -   602 
General and administrative costs  39   3   6   107   2,019   2,174 
                         
Net operating income/(loss)  1,147   1,604   782   954   (2,023)  2,464 
                         
Depreciation and amortization  1,387   407   458   486   -   2,738 
                        
Operating (loss)/income $(240) $1,197  $324  $468  $(2,023) $(274)
                         
As of December 31, 2017:                        
Total Assets $70,758  $67,966  $49,461  $61,316  $270,173   519,674 
                         
  For the Nine Months Ended September 30, 2018 
  Retail  Multi-Family  Industrial  Hospitality  Unallocated  Total 
                   
Total revenues $5,345   6,702  $3,981  $-  $-  $16,028 
                         
Property operating expenses  2,170   1,485   1,350   -   -   5,005 
Real estate taxes  735   54   494   -   -   1,283 
General and administrative costs  1   1   (8)  -   3,297   3,291 
                         
Net operating income/(loss)  2,439   5,162   2,145   -   (3,297)  6,449 
                         
Depreciation and amortization  2,756   1,231   1,230   -   -   5,217 
                        
Operating (loss)/income $(317) $3,931  $915  $-  $(3,297) $1,232 
                         
  For the Nine Months Ended September 30, 2017 
  Retail  Multi-Family  Industrial  Hospitality  Unallocated  Total 
                   
Total revenues $7,805  $6,443  $4,683  $16,161  $-  $35,092 
                         
Property operating expenses  2,782   1,430   1,679   12,617   5   18,513 
Real estate taxes  1,120   55   555   221   -   1,951 
General and administrative costs  129   33   (10)  225   4,238   4,615 
                         
Net operating income/(loss)  3,774   4,925   2,459   3,098   (4,243)  10,013 
                         
Depreciation and amortization  3,759   1,218   1,339   1,936   -   8,252 
                         
Operating income/(loss) $15  $3,707  $1,120  $1,162  $(4,243) $1,761 
17

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

Notes to Consolidated Financial Statements

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

 

11.10.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.

 

12.11.Subsequent Events

 

Distribution Payment

 

On October 16, 2017,15, 2018, the distribution for the three-month period ending September 30, 20172018 of $4.4$4.2 million was paid in cash.

 

Distribution Declaration

 

On November 14, 2017,8, 2018 the Board of Directors authorized and the Company declared a distribution for the three-month period ending December 31, 2017.2018. The distribution will be calculated based on shareholders of record each day during this three-month period at a rate of $0.0019178 per day, and will equal a daily amount that, if paid each day for a 365-day period, would equal a 7.0% annualized rate based on a share price of $10.00. The distribution will be paid in cash on or about January 15, 20182019 to shareholders of record as of December 31, 2017.2018. 

19 

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, 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, Inc., a Maryland corporation, and, as required by context, Lightstone Value Plus REIT, L.P. 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 Securities and Exchange Commission, or 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, 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, 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 failure of the Company (defined herein) 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 (“CAM”), insurance, taxes and other property expenses, the failure of the Company 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, Sponsor and their affiliates, failure of joint venture relationships, significant costs related to environmental issues 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.

  

Overview

 

Lightstone Value Plus Real Estate Investment Trust, Inc. (the “Lightstone REIT”) and Lightstone Value Plus REIT, LP, (the “Operating Partnership”) and its subsidiaries are collectively referred to as the ‘‘Company’’ and the use of ‘‘we,’’ ‘‘our,’’ ‘‘us’’ or similar pronouns refers to the Lightstone REIT, its Operating Partnership or the Company as required by the context in which such pronoun is used.


Lightstone REIT has and mayexpects to continue to acquireinvest in and operate in the future commercial, residential and hospitality properties, principally in the United States. Principally through the Operating Partnership, our acquisitionsinvestments have included both portfolios and individual properties. Our commercial holdings currently consist of retail (primarily multi-tenant shopping centers), lodging, industrial properties and residential properties comprised of multi-family complexes. The Company also has and will continue to seek to originate, acquire and manage a diverse portfolio of real estate-related investments.

 

We do not have employees. We have an advisory agreement with Lightstone Value Plus REIT LLC, a Delaware limited liability company, which we refer to as the “Advisor,” pursuant to which the Advisor supervises 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 reimburse the Advisor for certain expenses incurred on our behalf.

 

Current Environment

 

Our operating results as well as our investment opportunities are impacted by the health of the North American economies.  Our business and financial performance may be adversely affected by current and future economic conditions, such as an availability of credit, financial markets volatility and recession.

 

Our business may be affected by market and economic challenges experienced by the U.S. and global economies. These conditions may materially affect the value and performance of our properties, and may affect our ability to pay distributions, the availability or the terms of financing that we have or may anticipate utilizing, and our ability to make principal and interest payments on, or refinance, any outstanding debt when due.

 

We are not aware of any other material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting real estate generally, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from the acquisition and operation of real estate and real estate related investments, other than those referred to in this Form 10-Q.

20

Portfolio Summary –

 

 Location Year Built (Range of
years built)		 Gross Leasable
Area (GLA") in
Square Feet		  Percentage Occupied as
of September 30, 2017		  Annualized Revenues based
on rents at
September 30, 2017		 Annualized Revenues per
square foot at September
30, 2017		  Location Year Built
(Range of
years built)		 Gross Leasable
Area (GLA") in
Square Feet		  

Percentage
Occupied

as of
September 30,
2018

  Annualized
Revenues based
on rents at
September 30,
2018		 

Annualized
Revenues per
square foot at

September 30,
2018

 
Wholly Owned and Consolidated Real Estate Properties:                                
                                
Retail                                
St. Augustine Outlet Center St. Augustine, FL 1998  335,455   83.0% $3.7 million $13.33  St. Augustine, FL 1998  327,862   79.8%  $3.3 million $12.65 
DePaul Plaza Bridgeton, MO 1985  187,090   87.6% $1.9 million $11.88  Bridgeton, MO 1985  187,090   89.5%  $2.0 million $12.23 
  Retail Total  522,545   84.7%        Retail Total  514,952   83.4%      
                            
Industrial                                
7 Flex/Office/Industrial Buildings within the Gulf Coast Industrial Portfolio New Orleans, LA 1980-2000  339,700   58.4% $2.2 million $10.94  New Orleans, LA 1980-2000  339,700   58.5%  $2.2 million $11.00 
4 Flex/Industrial Buildings within the Gulf Coast Industrial Portfolio San Antonio, TX 1982-1986  484,369   82.6% $2.0 million $5.02 
3 Flex/Industrial Buildings within the Gulf Coast Industrial Portfolio Baton Rouge, LA 1985-1987  182,792   80.9% $1.1 million $7.10  Baton Rouge, LA 1985-1987  182,792   85.2%  $1.1 million $7.34 
                
  Industrial Total  1,006,861   74.1%        Industrial Total  522,492   67.8%      
                                  
Multi - Family Residential Location Year Built (Range of
years built)		 Leasable Units  Percentage Occupied as
of September 30, 2017		  

Annualized Revenues based
on rents at

September 30, 2017

 Annualized Revenues per
unit at September 30, 2017		  Location Year Built
(Range of
years built)		  Leasable
Units		  Percentage
Occupied
as of
September 30,
2018		 Annualized
Revenues based
on rents at
September 30,
2018		 

Annualized
Revenues per
unit at

September 30,
2018

 
                               
Gantry Park (Multi-Family Apartment Building) Queens, NY 2013  199   96.0% $8.2 million $43,082  Queens, NY 2013  199   97.0%$8.50 $44,168 

 

Annualized revenue is defined as the minimum monthly payments due as of September 30, 20172018 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 nine months ended September 30, 20172018 to our critical accounting policies as reported in our Annual Report on Form 10-K, for the year ended December 31, 2016.2017, except for the newly adopted accounting standards discussed in Note 2 to the financial statements.

 

Results of Operations

Dispositions

DoubleTree – Danvers

On September 7, 2017, we disposed of a hotel and water park (the “DoubleTree – Danvers”) located in Danvers, Massachusetts, to an unrelated third party for aggregate consideration of approximately $31.5 million. In connection with the disposition, we recorded a gain on the disposition of real estate of approximately $10.5 million during the third quarter of 2017.

Oakview Plaza

Our non-recourse mortgage loan (the “Oakview Plaza Mortgage”) secured by a retail power center located in Omaha, Nebraska (“Oakview Plaza”) matured in January 2017 and was not repaid which constituted a maturity default. The Oakview Plaza Mortgage was transferred to a special servicer and on September 15, 2017, ownership of Oakview Plaza was transferred to the lender via foreclosure (the “Oakview Plaza Foreclosure”). The carrying value of the assets transferred and the liabilities extinguished in connection with the Oakview Plaza Foreclosure both approximated $27.0 million. The balance of the Oakview Plaza Mortgage as of the date of foreclosure was $25.6 million and the associated accrued default interest was $1.0 million.

Southeastern Michigan Multi-Family Properties

On May 17, 2016, the Company disposed of three of the four apartment communities contained in the Southeastern Michigan Multi-Family Properties to an unrelated third party for aggregate consideration of approximately $50.6 million. In connection with the disposition, the Company recorded a gain on the disposition of real estate of approximately $19.9 million during the second quarter of 2016. Approximately $38.2 million of the proceeds were used to repay in full the outstanding principal balance of the mortgage that was secured by the Southeastern Michigan Multi-Family Properties.

On July 26, 2016, the remaining apartment community in the Southeastern Michigan Multi-Family Properties was disposed of to the same unrelated third party for approximately $10.3 million. In connection with the disposition, the Company recorded a gain on the disposition of real estate of approximately $3.8 million during the third quarter of 2016. The complete disposition of the Southeastern Michigan Multi-Family Properties resulted in an aggregate gain on the disposition of real estate of approximately $23.7 million during the nine months ended September 30, 2016.

The dispositions of the DoubleTree – Danvers, Oakville Plaza and the Southeastern Michigan Multi-Family Properties did not qualify to be reported as discontinued operations since none of the dispositions represented a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the operating results of the DoubleTree – Danvers, Oakville Plaza and the Southeastern Michigan Multi-Family Properties are reflected in the Company’s results from continuing operations for all periods presented through their respective dates of disposition. The operating results of the apartment communities contained in the Southeastern Michigan Properties were included in our Multi-Family Residential Segment, the DoubleTree – Danvers in our Hospitality Segment and Oakville in our Retail Segment, through their respective dates of disposition.

 

Our primary financial measure for evaluating each of our properties is net operating income (“NOI”). NOI represents revenues less property operating expenses, real estate taxes and general and administrative expenses. We believe that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate company because it is a direct measure of the actual operating results of our properties.

 

Dispositions

Gulf Coast Industrial Portfolio – San Antonio Assets

As a result of not meeting certain debt service coverage ratios on the non-recourse mortgage indebtedness (the “Gulf Coast Industrial Portfolio Mortgage”) originally secured by a portfolio of industrial properties (collectively, the “Gulf Coast Industrial Portfolio”) located in New Orleans, Louisiana (seven properties), Baton Rouge, Louisiana (three properties) and San Antonio, Texas (four properties), the lender elected to retain the excess cash flow from these properties beginning in July 2011.  During the third quarter of 2012, the Gulf Coast Industrial Portfolio Mortgage was transferred to a special servicer.

On June 5, 2018, the special servicer completed a partial foreclosure of the Gulf Coast Industrial Portfolio pursuant to which it foreclosed on the four properties located in San Antonio, Texas (the “San Antonio Assets”). The San Antonio Assets were sold in a foreclosure sale by the special servicer for an aggregate amount of approximately $20.7 million. Since our performance obligations were met at the closing of the foreclosure sales and we have no continuing involvement with the San Antonio Assets an aggregate gain on disposition of assets of approximately $7.1 million was recognized during the second quarter of 2018.

The dispositions of (i) the San Antonio Assets on June 5, 2018, (ii) a hotel and water park located in Danvers, Massachusetts (the “DoubleTree – Danvers”) on September 7, 2017 and (iii) a retail power center located in Omaha, Nebraska (“Oakview Plaza”) on September 15, 2017 did not qualify to be reported as discontinued operations since none of the dispositions represented a strategic shift that had a major effect on our operations and financial results. Accordingly, the operating results of the San Antonio Assets (Industrial Segment), the DoubleTree – Danvers (Hospitality Segment) and Oakview Plaza (Retail Segment) are reflected in our results from continuing operations for all periods presented through their respective dates of disposition.


For the Three Months Ended September 30, 20172018 vs. September 30, 20162017

 

Consolidated

 

Revenues

 

Our revenues are comprised of rental revenues,income, tenant recovery income and other service income. Total revenues decreased by approximately $2.2$5.9 million to $10.9$5.0 million for the three months ended September 30, 20172018 compared to $13.1$10.9 million for the same period in 2016.2017. See “Segment Results of Operations for the Three Months Ended September 30, 20172018 compared to September 30, 2016”2017” for additional information on revenues by segment.

 

Property operating expenses

Property operating expenses decreased by approximately $1.1$4.1 million to $5.7$1.6 million for the three months ended September 30, 20172018 compared to $6.8$5.7 million for the same period in 2016.2017. This decrease is primarily reflectsis attributable to lower expenses in our Hospitality Segment principally due toas a result of the disposition of the DoubleTree – Danvers.Danvers and to a lesser extent the San Antonio Assets and Oakview Plaza.

 

Real estate taxes

Real estate taxes expense were relatively flat decreasingdecreased by approximately $0.1$0.3 million to $0.6$0.3 million for the three months ended September 30, 20172018 compared to $0.7$0.6 million for the same period in 2016.2017.  This decrease is primarily attributable to lower expenses as a result of the dispositions of the DoubleTree – Danvers, the San Antonio Assets and Oakview Plaza.

 

General and administrative expenses

 

General and administrative expenses increaseddecreased by approximately $1.2$1.1 million to $2.2$1.1 million for the three months ended September 30, 20172018 compared to $1.0$2.2 million for the same period in 2016.  This increase was primarily2017 principally due to an increase inlower professional fees.fees and asset management fees as a result of the dispositions of the DoubleTree – Danvers, the San Antonio Assets and Oakview Plaza.

Depreciation and amortization

 

Depreciation and amortization expenses were flat at $2.7 million for both the three months ended September 30, 2017 and 2016.

Interest and dividend income

Interest and dividend income increasedexpense decreased by approximately $1.0$1.1 million to $5.6$1.6 million for the three months ended September 30, 20172018 compared to $4.6$2.7 million for the same period in 2016. The increase reflects an increase2017.  This decrease is primarily attributable to lower expense resulting from the dispositions of $0.7 million in investment income from our Preferred Investments (see Note 8)the DoubleTree – Danvers, the San Antonio Assets and an increase in earnings on our investments.

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Interest expense

Interest expense, including amortization of deferred financing costs, increased by approximately by approximately $0.5 million to $3.6 million for the three months ended September 30, 2017 compared to $3.1 million for the same period in 2016. The increase primarily relates to the accrual of default interest in 2017 on the Oakview Plaza Mortgage.Plaza.

 

Gain on disposition of real estate

 

During the third quarter of 2017 we recognized a gain on disposition of real estate of approximately $10.5 million related to the sale of the DoubleTree – Danvers.

Interest and dividend income

Interest and dividend income decreased by approximately $1.0 million to $4.6 million for the three months ended September 30, 2018 compared to $5.6 million for the same period in 2017. The decrease reflects lower investment income of $1.2 million from our Preferred Investments offset by increased interest and dividend income from our investments in marketable securities of $0.2 million.

Interest expense

Interest expense, including amortization of deferred financing costs, decreased by approximately $1.6 million to $2.0 million for the three months ended September 30, 2018 compared to $3.6 million for the same period in 2017. This decrease primarily reflects lower interest expense resulting from reductions in mortgage indebtedness in connection with the dispositions of the San Antonio Assets and Oakview Plaza as well as the repayment of the St. Augustine Outlet Center Mortgage.


Unrealized gain on marketable equity securities

During the third quarter of 2016three months ended September 30, 2018, we recognized arecorded an unrealized gain on dispositionmarketable equity securities of real estate$1.4 million which represents the change in the fair value of approximately $3.8 million relatedour marketable equity securities during the three months ended September 30, 2018. No unrealized gain on marketable equity securities was recorded for the 2017 period as these amounts were previously recorded as a component of other comprehensive income prior the adoption, on January 1, 2018, of guidance issued by FASB that now requires companies to measure investments in marketable equity securities, except those accounted for under the sale of the remaining apartment community containedequity method, at fair value and recognize any changes in our Southeastern Michigan Multi-Family Properties.fair value in net income.

 

Noncontrolling interests

 

The net earnings allocated to noncontrolling interests relates to (i) parties of the interestsCompany that hold units in the Operating Partnership held by our Sponsor as well as common units held by our limited partners (ii) the interest in PRO-DFJV Holdings LLC (“PRO”) held by our Sponsor and (iii) the ownership interests in 50-01 2nd St2nd St. Associates LLC (the “2nd Street Joint Venture”) held by our Sponsor and other affiliates.

 

Segment Results of Operations for the Three Months Ended September 30, 20172018 compared to September 30, 20162017

 

Retail Segment

 

 For the Three Months Ended September 30,  Variance Increase/(Decrease)  For the Three Months Ended
September 30,		  Variance
Increase/(Decrease)		 
 2017  2016  $  %  2018  2017  $  % 
 (unaudited)             
Revenues $2,452  $2,904  $(452)  -15.6% $1,774  $2,452  $(678)  -27.7%
NOI  1,147   1,746   (599)  -34.3%  830   1,147   (317)  -27.6%
Average Occupancy Rate for period  84.7%  85.9%      -1.2%  82.3%  84.7%      -2.4%

The following table represents lease expirations for the Retail Segment as of September 30, 2017:2018:

 

Lease
Expiration
Year		 Number of
Expiring
Leases		  GLA of Expiring
Leases (Sq. Ft.)		  Annualized Base Rent
of Expiring
Leases ($)		  Percent of
Total GLA		  Percent of Total
Annualized Base
Rent		  Number of
Expiring
Leases		  GLA of Expiring
Leases (Sq. Ft.)		  Annualized Base
Rent of Expiring
Leases ($)		  Percent of
Total GLA		  Percent of Total
Annualized
Base Rent		 
2017  6   15,337   188,733   3.9%  3.6%
2018  11   43,285   658,666   10.9%  12.6%  5   16,472   254,481   4.3%  5.4%
2019  16   72,742   1,404,525   18.4%  27.0%  17   73,449   1,159,082   19.4%  24.6%
2020  10   156,195   1,555,082   39.3%  29.9%  11   155,734   1,608,852   41.1%  34.1%
2021  5   27,564   418,471   7.0%  8.0%  5   34,959   375,987   9.2%  8.0%
2022  3   7,818   126,832   2.0%  2.4%  4   14,318   270,853   3.8%  5.7%
2023  1   28,000   479,920   7.1%  9.2%  2   30,700   535,621   8.1%  11.4%
2024  1   1,163   53,375   0.3%  1.0%  1   1,163   54,977   0.3%  1.2%
2025  4   15,517   270,237   3.9%  5.2%  4   15,517   274,032   4.1%  5.8%
2026  2   28,687   56,382   7.2%  1.1%  2   28,687   56,382   7.6%  1.2%
2027  -   -   -   -   - 
Thereafter  -   -   -   -   -   1   7,959   123,365   2.1%  2.6%
  59   396,308   5,212,223   100.0%  100.0%  52   378,958   4,713,632   100.0%  100.0%

  

As of September 30, 2017,2018, we had three tenants, Kohl’s Inc., Saks & Company and H& M&M Hennes & Mauritz L.P., each with one store, representing approximately 19.0%19.9%, 5.4% and 5.0%5.1%, respectively, of the total GLA in our Retail Segment. Additionally, as of that date, we did not have any other tenants whose GLA was 5% or more of the total GLA in our Retail Segment.

 

Revenues and NOI decreased for the three months ended September 30, 20172018 compared to the same period in 20162017. Revenues and NOI decreased by approximately $0.4 million and $0.3 million, respectively, for the three months ended September 30, 2018 compared to the same period in 2017 as a result of the disposition of Oakview Plaza. Revenues and NOI decreased by approximately $0.3 million and $0.1 million, respectively, for the three months ended September 30, 2018 compared to the same period in 2017 for our remaining retail properties primarily as a result of the lower average occupancy rate during the 20172018 period.

23

24 

 

Multi-Family Residential Segment

 For the Three Months Ended September 30,  Variance Increase/(Decrease)  For the Three Months Ended
September 30,		  Variance
Increase/(Decrease)		 
 2017  2016  $  %  2018  2017  $  % 
 (unaudited)             
Revenues $2,118  $2,283  $(165)  -7.2% $2,256  $2,118  $138   6.5%
NOI  1,604   1,707   (103)  -6.0%  1,745   1,604   141   8.8%
Average Occupancy Rate for period  96.0%  64.7%      31.3%  96.3%  96.0%      0.3%

 

Revenues and NOI decreasedincreased slightly for the three months ended September 30, 20172018 compared to the same period in 20162017 primarily as a result of the disposition of an apartment community contained in the Southeastern Michigan Multi-Family Properties on July 26, 2016. Revenues and NOI decreased by approximately $0.1 million and $0.1 million, respectively, for the three months ended September 30, 2017 compared to the same period in 2016 for the Southeastern Michigan Multi-Family Properties. Revenues and NOI were relatively flathigher average occupancy for Gantry Park, our only remaining multi-family residential property.

 

Industrial Segment

 

 For the Three Months Ended September 30,  Variance Increase/(Decrease)  For the Three Months Ended
September 30,		  Variance
Increase/(Decrease)		 
 2017  2016  $  %  2018  2017  $  % 
 (unaudited)             
Revenues $1,581  $1,341  $240   17.9% $966  $1,581  $(615)  -38.9%
NOI  782   609   173   28.4%  503   782   (279)  -35.7%
Average Occupancy Rate for period  73.3%  61.4%      11.9%  66.6%  73.3%      -6.7%

 

The following table represents lease expirations for our Industrial Segment as of September 30, 2016:2018

 

Lease
Expiration
Year		 Number of
Expiring
Leases		  GLA of Expiring
Leases (Sq. Ft.)		  Annualized Base Rent
of Expiring
Leases ($)		  Percent of
Total GLA		  Percent of Total
Annualized
Base Rent		  Number of
Expiring
Leases		  GLA of Expiring
Leases (Sq. Ft.)		  Annualized Base
Rent of Expiring
Leases ($)		  Percent of
Total GLA		  Percent of Total
Annualized
Base Rent		 
2017  11   37,380   -   5.0%  0.0%
2018  32   243,433   1,711,343   32.7%  34.4%  5   12,853   128,293   3.6%  - 
2019  19   103,085   583,374   13.8%  11.7%  5   24,081   215,836   6.8%  - 
2020  24   158,916   1,381,840   21.3%  27.8%  10   110,723   1,238,929   31.2%  41.5%
2021  3   10,054   89,567   1.3%  1.8%  6   22,214   198,748   6.3%  6.7%
2022  11   104,475   692,166   14.0%  13.9%  7   62,046   519,958   17.5%  17.4%
2023  1   88,800   519,480   11.9%  10.4%  6   122,578   1,027,006   34.6%  34.4%
Thereafter  -   -   -   -   - 
  101   746,143   4,977,770   100.0%  100.0%  39   354,495   3,328,770   100.0%  100.0%

  

As of September 30, 2017,2018, we had two tenants, Carrier Enterprise, LLC and PSS World Medical, Inc., representing approximately 17.0% and 7.8%, respectively, of the total GLA in our Industrial Segment. Additionally, as of that date, we did not have any other tenants whose GLA was 5% or more of the total GLA in our Industrial Segment.

 

Revenues and NOI increaseddecreased for the three months ended September 30, 20172018 compared to the same period in 20162017 primarily as a result of the higher average occupancy rate duringdisposition of the 2017 period.San Antonio Assets on June 5, 2018.

 

Hospitality Segment

 

 For the Three Months Ended September 30,  Variance Increase/(Decrease)  For the Three Months Ended
September 30,		 
 2017  2016  $  %  2018  2017 
 (unaudited)         
Revenues $4,741  $6,532  $(1,791)  -27.4% $-  $4,741 
NOI  954   1,478   (524)  -35.5%  -   954 
Average Occupancy Rate for period  76.4%  84.8%      -8.4%  0.0%  76.4%
Rev PAR $108.25  $113.56  $(5.31)  -4.7% $-  $108.25 

  

Revenues and NOI decreased duringOn September 7, 2017, the three months ended September 30, 2017 compared to the same period in 2016 resulting from the dispositionCompany disposed of the DoubleTree – Danvers, which was ourits only remaining consolidated hospitality property on September 7, 2017, as well as decreased occupancy levels and RevPAR during the 2017 period.therefore, no longer has a Hospitality Segment.


For the Nine Months Ended September 30, 20172018 vs. September 30, 20162017

 

Consolidated

 

Revenues

 

Our revenues are comprised of rental revenues,income, tenant recovery income and other service income. Total revenues decreased by approximately $5.1$19.1 million to $35.1$16.0 million for the nine months ended September 30, 20172018 compared to $40.2$35.1 million for the same period in 2016.2017. See “Segment Results of Operations for the nine months endedNine Months Ended September 30, 20172018 compared to September 30, 2016”2017” for additional information on revenues by segment.

 

Property operating expenses

 

Property operating expenses decreased by approximately $2.4$13.5 million to $18.5$5.0 million for the nine months ended September 30, 20172018 compared to $20.9$18.5 million for the same period in 2016.2017. This decrease is primarily reflectsattributable to lower expenses in our Multi-Family Residential Segment principally due to the disposition of the Southeastern Michigan Multi-Family Properties and our Hospitality Segment principally due toas a result of the disposition of the DoubleTree – Danvers.Danvers and to a lesser extent the San Antonio Assets and Oakview Plaza.

 

Real estate taxes

 

Real estate taxes expense decreased by approximately $0.4$0.7 million to $2.0$1.3 million for the nine months ended September 30, 20172018 compared to $2.4$2.0 million for the same period in 2016.2017.  This decrease is primarily reflectsattributable to lower expenses in our Multi-Family Residential Segment principally due toresulting from the dispositiondispositions of the Southeastern Michigan Multi-Family Properties.DoubleTree – Danvers, the San Antonio Assets and Oakview Plaza.

 

General and administrative expenses

 

General and administrative expenses increaseddecreased by approximately $0.9$1.3 million to $4.6$3.3 million for the nine months ended September 30, 20172018 compared to $3.7$4.6 million for the same period in 2016.  This increase was primarily2017 principally due to an increasea decrease in professional fees.fees, lower asset management fees as a result of the dispositions of the DoubleTree – Danvers, the San Antonio Assets and Oakview Plaza.

 

Depreciation and amortization

 

Depreciation and amortization expense decreased by approximately $0.3$3.0 million to $8.3$5.2 million for the nine months ended September 30, 20172018 compared to $8.6 million the same period in 2016.  This decrease primarily reflects lower depreciation expense in our Multi-Family Residential Segment principally due to the disposition of the Southeastern Michigan Multi-Family Properties.

Interest and dividend income

Interest and dividend income increased by approximately $0.6 million to $15.4 million for the nine months ended September 30, 2017 compared to $14.8$8.2 million for the same period in 2016. The increase reflects an increase2017.  This decrease is primarily attributable to lower expense resulting from the dispositions of $0.7 million in investment income from our Preferred Investments (see Note 8) partially offset by lower interest and dividend income from our investments in marketable securities of $0.1 million.

Interest expense

Interest expense, including amortization of deferred financing costs, increased by approximately $0.7 million to $10.8 million for the nine months ended September 30, 2017 compared to $10.1 million for the same period in 2016. The increase primarily relates to the accrual of default interest on theDoubleTree – Danvers, Oakview Plaza Mortgage.and the San Antonio Assets.

 

Gain on disposition of real estate

 

During the nine months ended September 30, 2018 we recognized a second quarter gain on disposition of real estate of approximately $7.1 million related to the foreclosure sale of the San Antonio Assets. During the nine months ended September 30, 2017 we recognized a third quarter gain on disposition of real estate of approximately $10.5 million related to the sale of the DoubleTree – Danvers.

Interest and dividend income

Interest and dividend income decreased by approximately $1.1 million to $14.3 million for the nine months ended September 30, 2018 compared to $15.4 million for the same period in 2017. The decrease reflects lower investment income of $2.0 million from our Preferred Investments partially offset by higher interest and dividend income from our investments in marketable securities of $0.9 million.

Interest expense

Interest expense, including amortization of deferred financing costs, decreased by approximately $3.5 million to $7.3 million for the nine months ended September 30, 2018 compared to $10.8 million for the same period in 2017. This decrease primarily reflects lower interest expense resulting from reductions in mortgage indebtedness in connection with the dispositions of the San Antonio Assets and Oakview Plaza.


Unrealized loss on marketable equity securities

During the nine months ended September 30, 20162018, we recognizedrecorded an unrealized loss on marketable equity securities of $1.1 million which represents the change in the fair value of our marketable equity securities during the nine months ended September 30, 2018. No unrealized loss on marketable equity securities was recorded for the 2017 period as these amounts were previously recorded as a gaincomponent of other comprehensive income prior the adoption, on dispositionJanuary 1, 2018, of real estate of approximately $23.7 million relatedguidance issued by FASB that now requires companies to measure investments in equity securities, except those accounted for under the sale of the Southeastern Michigan Multi-Family Properties.equity method, at fair value and recognize any changes in fair value in net income.

 

Gain on satisfaction of mortgage receivable

 

During the second quarter of 2017 we recognized a gain on satisfaction of mortgage receivable of approximately $3.2 million related to the repayment in full of our mortgage receivable collateralized by a Holiday Inn Express located in East Brunswick, New Jersey which we acquired at a discount in 2011. See Note 4.

 

Noncontrolling interests

 

The net earnings allocated to noncontrolling interests relates to (i) parties of the interestsCompany that hold units in the Operating Partnership held by our Sponsor as well as common units held by our limited partners (ii) the interest in PRO-DFJV Holdings LLC (“PRO”) held by our Sponsor and (iii) the ownership interests in 50-01 2nd St Associates LLC (the “2ndthe 2nd Street Joint Venture”)Venture held by our Sponsor and other affiliates. 

 

Segment Results of Operations for the Nine Months Ended September 30, 20172018 compared to September 30, 20162017

 

Retail Segment

 

 For the Nine Months Ended September 30,  Variance Increase/(Decrease)  For the Nine Months Ended
September 30,		  Variance
Increase/(Decrease)		 
 2017  2016  $  %  2018  2017  $  % 
 (unaudited)             
Revenues $7,805  $8,546  $(741)  -8.7% $5,345  $7,805  $(2,460)  -31.5%
NOI  3,774   4,765   (991)  -20.8%  2,439   3,774   (1,335)  -35.4%
Average Occupancy Rate for period  97.0%  86.6%      11.0%  80.9%  97.0%      -16.1%

Revenues and NOI decreased by approximately $1.8 million and $1.2 million, respectively, for the nine months ended September 30, 20172018 compared to the same period in 20162017 as a result of the disposition of Oakview Plaza. Revenues and NOI decreased by approximately $0.7 million and $0.2 million, respectively, for the nine months ended September 30, 2018 compared to the same period in 2017 for our remaining retail properties primarily as a result of the lower average occupancy rate during the 20172018 period.

 

Multi-Family Residential Segment

  For the Nine Months Ended
September 30,		  Variance
Increase/(Decrease)		 
  2018  2017  $  % 
          
Revenues $6,702  $6,443  $259   4.0%
NOI  5,162   4,925   237   4.8%
Average Occupancy Rate for period  97.4%  86.4%      11.0%

Revenues and NOI increased for the three months ended September 30, 2018 compared to the same period in 2017 primarily as a result of higher average occupancy for Gantry Park, our only multi-family residential property.


Industrial Segment

  For the Nine Months Ended September 30,  Variance Increase/(Decrease) 
  2017  2016  $  % 
  (unaudited)       
Revenues $6,443  $10,405  $(3,962)  -38.1%
NOI  4,925   6,824   (1,899)  -27.8%
Average Occupancy Rate for period  86.4%  86.0%      0.4%

  For the Nine Months Ended
September 30,		  Variance
Increase/(Decrease)		 
  2018  2017  $  % 
          
Revenues $3,981  $4,683  $(702)  -15.0%
NOI  2,145   2,459   (314)  -12.8%
Average Occupancy Rate for period  71.3%  71.8%      -0.5%

 

Revenues and NOI decreased for the nine months ended September 30, 2017 compared to the same period in 2016 primarily as a result of the disposition of the four apartment communities contained in the Southeastern Michigan Multi-Family Properties during 2016. Revenues and NOI decreased by approximately $3.9$0.8 million and $1.8$0.5 million, respectively, for the nine months ended September 30, 20172018 compared to the same period in 2016 for2017 as a result of the Southeastern Michigan Multi-Family Properties.disposition of the San Antonio Assets on June 5, 2018. Revenues and NOI were relatively flat for Gantry Park, our only remaining multi-family residential property.

Industrial Segment

  For the Nine Months Ended September 30,  Variance Increase/(Decrease) 
  2017  2016  $  % 
  (unaudited)       
Revenues $4,683  $4,115  $568   13.8%
NOI  2,459   1,878   581   30.9%
Average Occupancy Rate for period  71.8%  62.1%      9.7%

As of September 30, 2017, we did not have any tenants whose GLA was 5% or more of the total GLA in our Industrial Segment.

Revenuesincreased by approximately $0.1 million and NOI increased$0.2 million, respectively, for the nine months ended September 30, 20172018 compared to the same period in 2016 primarily as a result of the higher average occupancy rate during the 2017 period.for our remaining industrial properties.

26

 

Hospitality Segment

 For the Nine Months Ended September 30,  Variance Increase/(Decrease)  For the Nine Months Ended
September 30,		 
 2017  2016  $  %  2018  2017 
 (unaudited)         
Revenues $16,161  $17,104  $(943)  -5.5% $-  $16,161 
NOI  3,098   3,008   90   3.0%  -   3,098 
Average Occupancy Rate for period  70.2%  67.6%      2.6%  0.0%  70.2%
Rev PAR $92.12  $86.61  $5.51   6.4% $-  $92.12 

  

Revenues decreased and NOI increased slightly during the nine months ended September 30, 2017 compared to the same period in 2016 resulting from the disposition of the DoubleTree – Danvers onOn September 7, 2017, partially offset by increased occupancy levels and RevPAR atthe Company disposed of the DoubleTree – Danvers, which was ourits only remaining consolidated hospitality property.property and therefore, no longer has a Hospitality Segment.

 

Financial Condition, Liquidity and Capital Resources

 

Overview:

 

Rental revenue,income, interest and dividend income and borrowings are our principal source of funds to pay operating expenses, scheduled debt service, capital expenditures and distributions, excluding non-recurring capital expenditures.

 

We expect to meet our short-term liquidity requirements, including the funding of our remaining contributions for investments in related parties (Preferred Investments) of up to $4.1 million as of September 30, 2018, generally through working capital and borrowings. As of September 30, 2018, we had approximately $61.8 million of cash and cash equivalents on hand and $120.2 million of marketable securities, available for sale. We believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.

 

We currently have $159.7$117.2 million of outstanding mortgage debt and an $18.6 million outstanding under a line of credit. 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 the independent directors and is disclosed to our stockholders. We may also incur short-term indebtedness, having a maturity of two years or less.

Our borrowings consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. We typically have obtained level payment financing, meaning that the amount of debt service payable would be substantially the same each year. As such, most of the mortgages on our properties provide for a so-called “balloon” payment and are at a fixed interest rate.

Additionally, in order to leverage our investments in marketable securities and seek a higher rate of return, we borrowed using a margin loan collateralized by the securities held with the financial institution that provided the margin loan. This loan is due on demand and will be paid upon the liquidation of securities.

On May 29, 2018, we repaid in full our $20.4 million recourse mortgage loan secured by the St. Augustine Outlet Center (“St. Augustine Outlet Center Mortgage”) located in St. Augustine, Florida, with a scheduled maturity in August 2018.


Certain of our debt agreements require the maintenance of certain ratios, including debt service coverage. We are currently in compliance with all of its financial debt covenants other than the debt originally associated with a portfolio of industrial properties (collectively, the “Gulf Coast Industrial Portfolio”) located in New Orleans, Louisiana (seven properties), Baton Rouge, Louisiana (three properties) and San Antonio, Texas (four properties), as discussed below.

As a result of not meeting certain debt service coverage ratios on the non-recourse mortgage indebtedness secured by the Gulf Coast Industrial Portfolio (the “Gulf Coast Industrial Portfolio Mortgage”), the lender elected to retain the excess cash flow from these properties beginning in July 2011.  During the third quarter of 2012, the Gulf Coast Industrial Portfolio Mortgage was transferred to a special servicer, who discontinued scheduled debt service payments and notified the Company that the Gulf Coast Industrial Portfolio Mortgage was in default and although originally due in February 2017 became due on demand.

On June 5, 2018, the special servicer completed a partial foreclosure of the Gulf Coast Industrial Portfolio pursuant to which it foreclosed on the four properties located in San Antonio, Texas (the “San Antonio Assets”.) The San Antonio Assets were sold in a foreclosure sale by the special servicer for an aggregate amount of approximately $20.7 million. (See Note 6)

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

As a result, the remaining outstanding principal balance of the Gulf Coast Industrial Portfolio Mortgage was approximately $30.6 million as of September 30, 2018. We accrue default interest expense on the Gulf Coast Industrial Portfolio Mortgage pursuant to the terms of its loan agreement.

Additionally, the Company previously accrued default interest expense on a non-recourse mortgage loan (the “Oakview Plaza Mortgage”), pursuant to the terms of its loan agreement during the period from January 2017 through September 2017. The Oakview Plaza Mortgage was secured by a retail shopping center located in Omaha, Nebraska (“Oakview Plaza”). The lender foreclosed on Oakview Plaza in September 2017.

Default interest expense related to the Gulf Coast Industrial Portfolio Mortgage of $0.3 million and $1.3 million was accrued during the three and nine months ended September 30, 2018, respectively, and default interest expense related to both the Gulf Coast Industrial Mortgage and the Oakview Plaza Mortgage of $0.8 million and $2.5 million was accrued during the three and nine months ended September 30, 2017, respectively. Cumulative accrued default interest expense (solely related to the Gulf Coast Industrial Portfolio Mortgage) of $12.5 million and $11.2 million is included in accounts payable, accrued expenses and other liabilities on our consolidated balance sheets as of September 30, 2018 and December 31, 2017, respectively.  Additionally, we believe the continued loss of excess cash flow from the Gulf Coast Industrial Portfolio and the special servicer’s placement of the non-recourse mortgage indebtedness in default will not have a material impact on our results of operations or financial position.

Other than the Gulf Coast Industrial Portfolio Mortgage, we have no additional significant maturities of mortgage debt over the next 12 months.

 

Our charter provides that the aggregate amount of 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. As of September 30, 2017,2018, our total borrowings of $178.3$137.1 million represented 50%39% of net assets.

Our borrowings consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. We typically have obtained level payment financing, meaning that the amount of debt service payable would be substantially the same each year. As such, most of the mortgages on our properties provide for a so-called “balloon” payment and are at a fixed interest rate.

Additionally, in order to leverage our investments in marketable securities and seek a higher rate of return, we borrowed using a margin loan collateralized by the securities held with the financial institution that provided the margin loan. This loan is due on demand and will be paid upon the liquidation of securities.

 

Any future properties that we may acquire or investments we may make may be funded through a combination of borrowings, proceeds generated from the sale and redemption of our marketable securities, available for sale, proceeds received from the selective disposition of our properties and proceeds received from the redemption of our preferred investments in related parties. These borrowings 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 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 or real estate-related assets. 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 or permanent financing. Our Sponsor or its affiliates may guarantee the lines of credit although they will not be obligated to do so.

 

In addition to meeting working capital needs and distributions, if any, to our stockholders, our capital resources are used to make certain payments to our Advisor and our Property Manager, including payments related to asset acquisition fees, development fees and leasing commissions, asset management fees, the reimbursement of acquisition related expenses to our Advisor and property management fees. We also reimburse our Advisor and its affiliates for actual expenses it incurs for administrative and other services provided to us. Additionally, the Operating Partnership may be required to make distributions to Lightstone SLP, LLC, an affiliate of the Advisor.

 

The following table represents the fees incurred associated with the payments to our Advisor and our Property Manager for the periods indicated:

 

 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended
September 30,		  Nine Months Ended
September 30,		 
 2017  2016  2017  2016  2018  2017  2018  2017 
Asset management fees (general and administrative costs) $556  $562  $1,684  $1,804  $392  $556  $1,283  $1,684 
Property management fees (property operating expenses)  199   190   576   739   120   199   409   576 
Development fees and leasing commissions*  125   29   706   80   62   125   182   706 
Total $880  $781  $2,966  $2,623  $574  $880  $1,874  $2,966 

 

* Generally, capitalized and amortized over the estimated useful life of the associated asset.

*Generally, capitalized and amortized over the estimated useful life of the associated asset.

 

As of September 30, 2017, we had approximately $127.4 million of cash and cash equivalents on hand and $54.0 million of marketable securities, available for sale.

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 Nine Months Ended September 30, 
  2017  2016 
  (unaudited) 
Cash flows provided by operating activities $18,491  $20,471 
Cash flows provided by investing activities  21,702   85,252 
Cash flows used in financing activities  (18,351)  (69,730)
Net change in cash and cash equivalents  21,842   35,993 
         
Cash and cash equivalents, beginning of the year  105,539   68,459 
Cash and cash equivalents, end of the period $127,381  $104,452 
  For the Nine Months Ended
September 30,		 
  2018  2017 
    
Net cash flows provided by operating activities $15,470  $18,596 
Net cash flows (used in)/provided by investing activities  (18,526)  23,141 
Net cash flows used in financing activities  (45,177)  (18,351)
Net change in cash and cash equivalents  (48,233)  23,386 
         
Cash and cash equivalents, beginning of year  119,219   108,357 
Cash and cash equivalents, end of the period $70,986  $131,743 

 

Our principal sources of cash flow are derived from the operation of our rental properties, interest and dividend income on our marketable securities and real estate-related investments, as well as loan proceeds investment income, and proceeds from redemptions of preferred investments in related parties. We intend that our properties and real estate-related investments will provide a relatively consistent stream of cash flow that provides us with resources to fund operating expenses, debt service and quarterly distributions.distributions if declared by our board of directors.

 

Our principal demands for liquidity are (i) our property operating expenses, (ii) real estate taxes, (iii) insurance costs, (iv) leasing costs and related tenant improvements, (v) capital expenditures, (vi) acquisition, investment and development activities, (vii) scheduled debt service and (viii) distributions to our stockholders and noncontrolling interests. The principal sources of funding for our operations are operating cash flows and proceeds from (i) the sale and redemption of marketable securities, (ii) the selective disposition of properties or interests in properties, (iii) redemptions of our preferred investments in related parties, (iv) the issuance of equity and debt securities and (v) the placement of mortgage loans or other indebtedness.

Operating activities

 

Net cash flows provided by operating activities of $18.5$15.5 million for the nine months ended September 30, 20172018 consists of the following:

 

·cash inflows of approximately $16.0$13.8 million from our net income after adjustment for non-cash items; and

 

·cash inflows of approximately $2.5$1.7 million associated with the net changes in operating assets and liabilities.

Investing activities

 

The net cash provided byused in investing activities of $21.7$18.5 million for the nine months ended September 30, 20172018 consists primarily of the following:

 

·net purchases of investment property of approximately $2.3$1.0 million;

 

·net proceeds from preferred investments in related parties of $11.4$45.0 million; and

 

·net purchases of marketable securities of $4.1$62.5 million;

·funding of restricted escrows of $1.4 million;

·proceeds from the disposition of investment property and other real estate assets of $32.7 million; and

·collection of mortgage receivable of $8.1 million.

 

Financing activities

 

The net cash used byin financing activities of approximately $18.4$45.2 million for the nine months ended September 30, 20172018 is primarily related to the following:

 

·distributions to our common shareholders of $13.1$13.0 million;

 

·redemptions and cancellation of common stock of $2.1$8.1 million;

 

·aggregate distributions to our noncontrolling interests of $2.9$2.5 million; and

 

·debt principal payments $0.3$21.6 million.

 

Preferred Investments

 

We have entered into several agreements with various related party entities that provide for us to make preferred contributions pursuant to certain instruments (the “Preferred Investments”) that entitle us to monthly preferred distributions. The Preferred Investments had an aggregate balance of $152.7$113.4 million and $141.3$158.3 million as of September 30, 20172018 and December 31, 2016,2017, respectively, and are classified as held-to-maturity securities, recorded at cost and included in investments in related parties on the consolidated balance sheets. The fair value of these investments approximated their carrying values based on market rates for similar instruments.

During the three and nine months ended September 30, 2017,2018, we made an aggregate $15.1 million of additional contributions and redeemed $60.0 million of the Company recognized investment incomePreferred Investments and as of $4.6 million and $12.9 million, respectively, and during the three and nine months ended September 30, 2016, the Company recognized investment income2018, remaining contributions of $4.0up to $4.1 million and $12.2 million, respectively, which is included in interest and dividend income on the consolidated statements of operations.were unfunded.

 

The Preferred Investments are summarized as follows:

 

   Preferred Investment Balance  Unfunded Contributions  Investment Income     Preferred
Investment Balance		  Unfunded
Contributions		  Investment Income 
 Dividend As of
September 30,		 As of
December 31,		 As of
September 30,		 Three Months Ended September 30, Six Months Ended September 30,     As of
September 30,		 As of
December 31,		 As of
September 30,		 Three Months Ended
September 30,		 Nine Months Ended
September 30,		 
Preferred Investments Rate 2017  2016  2017  2017  2016  2017  2016  Dividend Rate  2018  2017  2018  2018  2017  2018  2017 
365 Bond Street 12% $-  $-  $-  $-  $-  $-  $2,252 
40 East End Avenue 8% to 12%  30,000   30,000   -   920   613   2,463   1,795 
40 East End Avenue(1)  8% to 12%  $30,000  $30,000  $   -  $920  $920  $2,730  $2,463 
30-02 39th Avenue 9% to 12%  10,000   12,300   40,000   307   436   946   1,009   12%  10,000   10,000   -   307   307   910   946 
485 7th Avenue 12%  60,000   60,000   -   1,840   1,840   5,460   5,480   12%  -   60,000   -   -   1,840   1,095   5,460 
East 11th Street 12%  40,994   31,271   16,506   1,155   1,073   3,135   1,675   12%  57,500   46,119   -   1,763   1,155   4,970   3,135 
Miami Moxy 12%  11,699   7,682   8,302   346   -   905   -   12%  15,933   12,195   4,067   457   346   1,229   905 
Total Preferred Investments   $152,693  $141,253  $64,808  $4,568  $3,962  $12,909  $12,211      $113,433  $158,314  $4,067  $3,447  $4,568  $10,934  $12,909 

Note:

(1) - The dividend rate increased from 8% to 12% during March 2017 in connection with the procurement of construction financing on this project.

 

Distribution Reinvestment PlanProgram (“DRIP”) and Share Repurchase Program

 

Our DRIP provides our stockholders with an opportunity to purchase additional shares of our common stock at a discount by reinvesting distributions. 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 restrictions. From our inception through December 31, 20162017 we repurchased approximately 3.13.9 million shares of common stock. For the nine months ended September 30, 2017,2018, we repurchased 205,189835,075 shares of common stock for $10.00$9.70 per share, pursuant to our share repurchase program. We funded share repurchases for the periods noted above from the cumulative proceeds of the sale of our shares pursuant to our DRIP.DRIP and from our operating funds.


On May 10, 2018, the Board of Directors amended the share repurchase program to (i) change to the price for all purchases under our share repurchase program from $10.00 per share to 92% of the estimated net asset value per share of the Company’s common stock (previously the purchase price was $10.00 per share) and (ii) increase the number of shares repurchased during any calendar year from two (2.0%) of the weighted average number of shares outstanding during the prior calendar year to five (5.0%) of the weighted average number of shares outstanding during the previous twelve months.

On January 19, 2015, the Board of Directors suspended our DRIP effective April 15, 2015. For so long

On October 16, 2018, the Company mailed a prospectus related to its amended and restated DRIP to its existing stockholders. The DRIP was reactivated as amended and restated effective on October 25, 2018.

Pursuant to the DRIP remains suspended,following its reactivation, the Company’s stockholders who elect to participate may invest all futureor a portion of the cash distributions that the Company pays them on shares of the Company’s common stock in additional shares of the Company’s common stock without paying any fees or commissions. The purchase price for shares under the DRIP will be inequal to 95% of the formCompany’s current estimated per-share net asset value (the “Estimated Per-Share NAV”), as determined by the Company’s board of cash.directors and reported by the Company from time to time, and will therefore initially be $11.11 per share, based on the Estimated Per-Share NAV of $11.69 as of September 30, 2017 which was published on December 11, 2017.

 

Our Board of Directors reserves the right to terminate either program for any reason without cause by providing written notice of termination of the DRIP to all participants or written notice of termination of the share repurchase program to all stockholders.

 

Contractual Obligations

 

The following is a summary of our contractual obligations outstanding over the next five years and thereafter as of September 30, 2017.2018.

 

Contractual
Obligations		 Remainder of 2017  2018  2019  2020  2021  Thereafter  Total  2018  2019  2020  2021  2022  Thereafter  Total 
               
Mortgage Payable $50,307  $21,967  $1,621  $14,924  $1,328  $69,540  $159,687  $31,041  $1,621  $14,924  $1,328  $1,389  $68,151  $118,454 
Interest Payments1  1,286   4,727   3,867   3,534   3,191   9,112   25,717 
Interest Payments1,2  1,012   4,011   3,605   3,191   3,130   5,983   20,932 
                                                        
Total Contractual Obligations $51,593  $26,694  $5,488  $18,458  $4,519  $78,652  $185,404  $32,053  $5,632  $18,529  $4,519  $4,519  $74,134  $139,386 

 

1)The non-recourse mortgage associated with the Gulf Coast Industrial Portfolio is due on demand and therefore, no future interest payments on this mortgage isare included in thisthese amounts.

 

Certain of our debt agreements require the maintenance of certain ratios, including debt service coverage. We are currently in compliance with all of its financial debt covenants other than the debt associated with the Gulf Coast Industrial Portfolio as discussed below.

As a result of not meeting certain debt service coverage ratios on the non-recourse mortgage indebtedness secured by the Gulf Coast Industrial Portfolio (the “Gulf Coast Industrial Portfolio Mortgage”), the lender elected to retain the excess cash flow from these properties beginning in July 2011.  During the third quarter of 2012, the Gulf Coast Industrial Portfolio Mortgage was transferred to a special servicer, who discontinued scheduled debt service payments and notified the Company that the Gulf Coast Industrial Portfolio Mortgage was in default and although originally due in February 2017 became due on demand. We believe the continued loss of excess cash flow from the Gulf Coast Industrial Portfolio will not have a material impact on our results of operations or financial position.

Our non-recourse mortgage loan (the “Oakview Plaza Mortgage”) secured by a retail power center located in Omaha, Nebraska (“Oakview Plaza”) matured in January 2017 and was not repaid which constituted a maturity default. The Oakview Plaza Mortgage was transferred to a special servicer and on September 15, 2017, ownership of Oakview Plaza was transferred to the lender via the Oakview Plaza Foreclosure”. The carrying value of the assets transferred and the liabilities extinguished in connection with the Oakview Plaza Foreclosure both approximated $27.0 million. The balance of the Oakview Plaza Mortgage as of the date of foreclosure was $25.6 million and the associated accrued default interest was $1.0 million.

Although the lender is not currently charging or being paid interest at the stated default rate, we are accruing default interest expense on the Gulf Coast Industrial Portfolio Mortgage pursuant to the terms of its loan agreement. Additionally, we accrued default interest expense on the Oakview Plaza Mortgage pursuant to the terms of its loan agreement from January 2017 through the date of the Oakview Plaza Foreclosure (September 15, 2017). Default interest expense of $0.8 million and $2.5 million was accrued during the three and nine months ended September 30, 2017 and default interest expense of $0.5 million and $1.5 million was accrued during the three and nine months ended September 30, 2016. Additionally, as disclosed above, in connection with the Oakview Plaza Foreclosure, approximately $1.0 million of default interest related to the Oakview Plaza Mortgage was extinguished. As a result, cumulative accrued default interest expense (solely related the Gulf Coast Industrial Portfolio Mortgage) of $10.7 million and $9.2 million is included in accounts payable, accrued expenses and other liabilities on our consolidated balance sheets as of September 30, 2017 and December 31, 2016, respectively.  However, we do not expect to pay any of the accrued default interest expense as this mortgage loan is non-recourse to it.

In addition, our recourse mortgage loan secured by the St. Augustine Outlet Center located in St. Augustine, Florida (outstanding principal balance of $20.4 million as of September 30, 2017) initially matures in August 2018 and has two one-year extension options, subject to satisfaction of certain conditions. We currently intend to seek to exercise the extension option before the initial maturity. Other than these financings, we have no additional significant maturities of mortgage debt over the next 12 months.

Notes Payable

  

Margin Loan

 

We have access to a margin loan (the “Margin Loan”) from a financial institution that holds custody of certain of our marketable securities. The Margin Loan, which is due on demand, bears interest at Libor plus 0.85% (2.09%(3.11% as of September 30, 2017)2018) and 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. There were no amounts outstanding under the Margin Loan as of September 30, 20172018 and December 31, 2016.2017.

 

Line of Credit

 

On September 14, 2012, we entered intoWe have a non-revolving credit facility (the “Line of Credit”) with a financial institution which permits borrowings up to $25.0 million. The Line of Credit expires on June 19, 2019 and bears interest at Libor plus 1.35% (2.59%(3.61% as of September 30, 2017)2018). The Line of Credit is collateralized by approximately 252,000209,000 Marco OP Units and PRO guaranteed the Line of Credit. The amount outstanding under the Line of Credit was $18.6 million as of September 30, 20172018 and is included in Notes Payable on the consolidated balance sheets. We currently intend to seek to extend or replace the Line of Credit on or before its expiration. If we are unable to extend or replace the Line of Credit, we will repay the then outstanding balance in full at the expiration date using working capital, cash proceeds from the sale of assets and/or redemptions of our preferred investments in related parties.

32 

 

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.

 

Because of these factors, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has published a standardized measure of performance known as funds from operations ("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's operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.

 

We define FFO, a non-GAAP measure, consistent with the standards set forth in the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding gains or losses from sales of property and real estate related impairments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.

 

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's definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.

 

Because of these factors, the Investment Program Association (the "IPA"), an industry trade group, published a standardized measure of performance known as modified funds from operations ("MFFO"), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP.

We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline") issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction-related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and excludeacquisition 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.

 

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 in the calculation of FFO and MFFO. Items are presented net of non-controlling interest portions where applicable.

  For the Three Months Ended  For the Nine Months Ended 
  September 30, 2017  September 30, 2016  September 30, 2017  September 30, 2016 
Net income $12,202  $7,357  $20,057  $31,877 
FFO adjustments:                
Depreciation and amortization:                
Depreciation and amortization of real estate assets  2,738   2,705   8,252   8,595 
Equity in depreciation and amortization for unconsolidated affiliated real estate entities  -   -   -   - 
Adjustments to equity in earnings from unconsolidated entities, net  -   -   -   - 
Gain on disposal of investment property  (10,483)  (3,799)  (10,483)  (23,705)
Gain on satisfaction of mortgage receivable  -   -   (3,216)  - 
                 
FFO  4,457   6,263   14,610   16,767 
MFFO adjustments:                
Other Adjustment                
Acquisition and other transaction related costs expensed(1)  -   -   -   20 
Amortization of above or below market leases and liabilities(2)  (33)  (28)  (97)  (84)
Loss on debt extinguishment  -   -   -   2 
Accretion of discounts and amortization of premiums on debt investments  -   -   -   - 
Mark-to-market adjustments(3)  (26)  (130)  (83)  282 
Non-recurring (losses)/gains from extinguishment/sale of debt, derivatives or securities holdings(4)  -   -   -   - 
Loss on sale of marketable securities  18   15   67   952 
                 
MFFO  4,416   6,120   14,497   17,939 
Straight-line rent(5) $12  $65  $(44) $101 
MFFO - IPA recommended format(6) $4,428  $6,185  $14,453  $18,040 
                 
Net income $12,202  $7,357  $20,057  $31,877 
Less: loss attributable to noncontrolling interests  (392)  (310)  (915)  (1,166)
Net income applicable to Company's common shares $11,810  $7,047  $19,142  $30,711 
Net income  per common share, basic and diluted $0.47  $0.28  $0.77  $1.21 
                 
FFO $4,457  $6,263  $14,610  $16,767 
Less: FFO attributable to noncontrolling interests  (404)  (449)  (1,296)  (1,359)
FFO attributable to Company's common shares $4,053  $5,814  $13,314  $15,408 
FFO per common share, basic and diluted $0.16  $0.23  $0.53  $0.60 
                 
MFFO - IPA recommended format $4,428  $6,185  $14,453  $18,040 
Less: MFFO attributable to noncontrolling interests  (411)  (442)  (1,289)  (1,372)
MFFO attributable to Company's common shares $4,017  $5,743  $13,164  $16,668 
                 
Weighted average number of common shares outstanding, basic and diluted  24,931   25,379   24,993   25,479 

 

  For the Three Months Ended  For the Nine Months Ended 
  September 30,
2018		  September 30,
2017		  September 30,
2018		  September 30,
2017		 
Net income $4,489  $12,202  $16,607  $20,057 
FFO adjustments:                
Depreciation and amortization:                
Depreciation and amortization of real estate assets  1,639   2,738   5,217   8,252 
Equity in depreciation and amortization for unconsolidated affiliated real estate entities  -   -   -   - 
Adjustments to equity in earnings from unconsolidated entities, net  -   -   -   - 
Gain on disposal of investment property      (10,483)  (7,137)  (10,483)
Gain on satisfaction of mortgage receivable  -   -   -   (3,216)
                 
FFO  6,128   4,457   14,687   14,610 
MFFO adjustments:                
Other Adjustment                
Acquisition and other transaction related costs expensed(1)  -   -   -   - 
Amortization of above or below market leases and liabilities(2)  (35)  (33)  (105)  (97)
Loss on debt extinguishment      -       - 
Accretion of discounts and amortization of premiums on debt investments  -   -   -   - 
Mark-to-market adjustments(3)  (1,448)  (26)  (1,259)  (83)
Non-recurring (losses)/gains from extinguishment/sale of debt, derivatives or securities holdings(4)  3   18   198   67 
                 
MFFO  4,648   4,416   13,521   14,497 
Straight-line rent(5) $13  $12  $125  $(44)
MFFO - IPA recommended format(6) $4,661  $4,428  $13,646  $14,453 
                 
Net income $4,489  $12,202  $16,607  $20,057 
Less: loss attributable to noncontrolling interests  (465)  (392)  (1,108)  (915)
Net income applicable to Company's common shares $4,024  $11,810  $15,499  $19,142 
Net income  per common share, basic and diluted $0.17  $0.47  $0.63  $0.77 
                 
FFO $6,128  $4,457  $14,687  $14,610 
Less: FFO attributable to noncontrolling interests  (608)  (404)  (1,503)  (1,296)
FFO attributable to Company's common shares $5,520  $4,053  $13,184  $13,314 
FFO per common share, basic and diluted $0.23  $0.16  $0.54  $0.53 
                 
MFFO - IPA recommended format $4,661  $4,428  $13,646  $14,453 
Less: MFFO attributable to noncontrolling interests  (470)  (411)  (1,391)  (1,289)
MFFO attributable to Company's common shares $4,191  $4,017  $12,255  $13,164 
                 
Weighted average number of common shares outstanding, basic and diluted  24,299   24,931   24,575   24,993 

Notes:

(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.
(2)Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.

33

(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 equity 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.
(4)Management believes that adjusting for gains or losses related to extinguishment/sale of debt, derivatives or securities holdings is appropriate because they are items that may not be reflective of ongoing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods.
(5)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.
(6)Our MFFO results include certain unusual items as set forth in the table below. We believe it is helpful to our investors in understanding our operating results to both highlight them and present adjusted MFFO excluding their impact (as shown below).

 

 For the Three Months Ended  For the Nine Months Ended  For the Three Months Ended  For the Nine Months Ended 
 September 30, 2017  September 30, 2016  September 30, 2017  September 30, 2016  September 30,
2018		  September 30,
2017		  September 30,
2018		  September 30,
2017		 
Gulf Coast Industrial Portfolio - Default interest expense(a) $(514) $(541) $(1,523) $(1,538) $(313) $(514) $(1,266) $(1,523)
Oakview Plaza - Default interest expenes(b)  (273)  -   (991)  -   -   (273)  -   (991)
Total default interest expense  (787)  (541)  (2,514)  (1,538)
Total before allocations to noncontrolling interests  (313)  (787)  (1,266)  (2,514)
Allocations to noncontrolling interests  15   10   48   30   6   15   25   48 
Total after allocations to noncontrolling interests $(772) $(531) $(2,466) $(1,508) $(307) $(772) $(1,241) $(2,466)

  

(a)Represents the accrual of default interest expense on our non-recourse mortgage loan collateralized by our Gulf Coast Industrial Portfolio Although the lender for the Gulf Coast Industrial Portfolio is currently not charging us or being paid interest at the stated default rate, we have accruedWe accrue interest at the default rate pursuant to the terms of the respective loan agreement. Additionally, we have had various discussions with the special servicer to restructure the terms of the non-recourse mortgage loan and do not expect to pay any of the accrued default interest.
(b)Represents the accrual of default interest expense on our non-recourse mortgage loan secured by Oakview Plaza. The Oakview Plaza Mortgage Loan matured in January 2017 and was not repaid which constituted a maturity default. In connection with the Oakview Plaza Foreclosure which occurred on September 15, 2017, approximately $1.0 million of accrued default interest was extinguished.

 

Excluding the impact of these unusual items from our MFFO, after taking into consideration allocations to noncontrolling interests, our adjusted MFFO would have been $5,642$4,498 and $6,274$4,789 for the three months ended September 30, 20172018 and 2016,2017, respectively and $16,483$13,498 and $18,176$15,630 for the nine months ended September 30, 20172018 and 2016,2017, respectively.

 

The table below presents our cumulative distributions paid and cumulative FFO attributable to the Company’s common shares:

 

 From inception through  From inception
through		 
 September 30, 2017  September 30,
2018		 
      
FFO attributable to Company’s common shares $190,420  $206,210 
Distributions paid $194,172  $211,524 

  

On October 16, 2017,15, 2018, the distribution for the three-month period ending September 30, 20172018 of $4.4$4.2 million was paid in cash.

 

The amount of distributions paid to our stockholders in the future will be determined by our Board and is dependent on a number of factors, including funds available for payment of dividends, our financial condition, capital expenditure requirements and annual distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code.

 

35 

New Accounting Pronouncements

 

See Note 2 to the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been adopted during 2017,2018, if any, and certain accounting standards that we have not yet been required to implement and may be applicable to our future operations.

Subsequent Events

See Note 12 of the Notes to Consolidated Financial Statements for further information related to subsequent events during the period from October 1, 2017 through the date of this filing.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk.

 

We may be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund the expansion and refinancing of our real estate investment portfolio and operations. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes. As of September 30, 2018, we had one interest rate swap with an insignificant intrinsic value.

 

As of September 30, 2017,2018, we held various marketable securities with a fair value of approximately $54.0$120.2 million, which are available for sale for general investment return purposes. We regularly review the market prices of these investments for impairment purposes. As of September 30, 2017,2018, a hypothetical adverse 10% movement in market values would result in a hypothetical loss in fair value of approximately $5.4$12.0 million.

 

The following table shows the contractually scheduled principal maturities of our mortgage debt during the next five years and thereafter as of September 30, 2017:2018:

 

Remainder of

2017

  2018  2019  2020  2021  Thereafter  Total 
                    
$50,307  $21,967  $1,621  $14,924  $1,328  $69,540  $159,687 
  2018  2019  2020  2021  2022  Thereafter  Total 
Mortgages Payable $31,041   1,621   14,924   1,328   1,389   68,151  $118,454 

  

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted escrows, tenants’cash, tenant and other accounts receivable, accounts payable, and accrued expenses and other liabilities and due to related parties approximated their fair values because of the short maturity of these instruments. The estimated fair value of the notes payable (line of credit) approximated its carrying value ($18.6 million) because of its floating interest rate.

 

The estimated fair value of the Company’s mortgage debt is summarized as follows:

 

  As of September 30, 2017  As of December 31, 2016 
  Carrying Amount  Estimated Fair
Value		  Carrying Amount  Estimated Fair
Value		 
Mortgages payable $159.7  $158.0  $185.6  $183.2 

  As of September 30, 2018  As of December 31, 2017 
  Carrying
Amount		  

Estimated Fair

Value

  Carrying
Amount		  

Estimated Fair

Value

 
Mortgages payable $118.5  $116.7  $159.6  $158.6 
                 

The fair value of the mortgage payable was determined by discounting the future contractual interest and principal payments by estimated current market interest rates.

 

In addition to changes in interest rates, the value of our real estate and real estate related investments is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of lessees, which may affect our ability to refinance our debt if necessary.

 

We cannot predict the effect of adverse changes in interest rates on our debt and, therefore, our exposure to market risk, nor can we provide any assurance that long-term debt will be available at advantageous pricing. Consequently, future results may differ materially from the estimated adverse changes discussed above.


ITEM 4. CONTROLS AND PROCEDURES.

 

As of the end of the period covered by this report, management, including our chief executive officer and chiefprincipal 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 chiefprincipal 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.

PART II. OTHER INFORMATION:

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time in the ordinary course of business, we 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.

 

ITEM 1A. RISK FACTORS

 

We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. For the quarternine months ended September 30, 2017,2018, there were no such material developments.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

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

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit

Number

 

Description

   
31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15 d-14(a) of the Securities Exchange Act, as amended.
32.1* Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
32.2* Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
101* XBRL (eXtensible Business Reporting Language). The following financial information from Lightstone Value Plus Real Estate Investment Trust, Inc. on Form 10-Q for the quarter ended September 30, 2017,2018, filed with the SEC on November 14, 2017,2018, formatted in XBRL includes: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Operations, (3) Consolidated Statements of Comprehensive Income, (4) Consolidated Statements of Stockholders’ Equity, (5) Consolidated Statements of Cash Flows and (6) the Notes to the Consolidated Financial Statement.

 

*Filed herewith


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, INC.

  
Date:     November 14, 20172018By:/s/ David Lichtenstein
 David Lichtenstein
 

Chairman and Chief Executive Officer

(Principal (Principal Executive Officer)

  
Date:     November 14, 20172018By:/s/ Donna BrandinSeth Molod
 Donna BrandinSeth Molod
 

Chief Financial Officer and Treasurer

(Duly Authorized Officer and Principal Financial and Accounting Officer)

 

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