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Lightstone Value Plus REIT V (LVVP)

Filed: 15 May 19, 3:14pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2019

 

Commission File Number: 000-53650

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland 20-8198863
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

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

(Address of principal executive offices) (Zip Code)

 

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

 

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

 

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

 

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

Yesx 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:

 

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

 

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

 

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

Yes¨ Nox

 

As of May 1, 2019, the Registrant had approximately 23.4 million shares of common stock outstanding.

 

 

 

 

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST V, INC.

INDEX

 

    Page
PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements  (Unaudited)  
   
  Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 3
   
  Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018 4
     
  Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018 5
     
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 6
   
  Notes to Consolidated Financial Statements 7
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
   
Item 4. Controls and Procedures 28
   
PART II OTHER INFORMATION  
   
Item 1. Legal Proceedings 29
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
   
Item 3. Defaults Upon Senior Securities 30
   
Item 4. Mine Safety Disclosures 30
   
Item 5. Other Information 30
   
Item 6. Exhibits 30

 

 2 

 

 

PART I

FINANCIAL INFORMATION

 

Item 1.Financial Statements.

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Consolidated Balance Sheets

(dollars in thousands, except per share amounts)

 

  March 31, 2019  December 31, 2018 
  (unaudited)    
Assets        
Investment property:        
Land and improvements $70,301  $46,175 
Building and improvements  241,567   194,726 
Furniture, fixtures and equipment  6,487   6,285 
Gross investment property  318,355   247,186 
Less accumulated depreciation  (48,818)  (46,182)
Net investment property  269,537   201,004 
         
Investment in unconsolidated joint venture  -   10,944 
Cash and cash equivalents  18,740   29,607 
Marketable securities, available for sale  5,059   14,386 
Restricted cash  3,048   3,045 
Note receivable, net  5,980   - 
Prepaid expenses and other assets  3,554   5,471 
Total Assets $305,918  $264,457 
         
Liabilities and Stockholders' Equity        
Notes payable, net $181,545  $139,016 
Accounts payable and accrued and other liabilities  3,888   3,634 
Payables to related parties  19   316 
Accrued property tax  2,167   1,670 
         
Total liabilities  187,619   144,636 
         
Commitments and Contingencies        
         
Stockholders' Equity:        
Preferred stock, $.0001 par value per share; 50,000,000 shares authorized, none issued and outstanding  -   - 
Convertible stock, $.0001 par value per share; 1,000 shares authorized, issued and outstanding  -   - 
Common stock, $.0001 par value per share; 350,000,000 shares authorized, 23,431,408 and 23,431,408 shares issued and outstanding, respectively  2   2 
Additional paid-in-capital  214,537   214,537 
Accumulated other comprehensive income/(loss)  3   (217)
Accumulated deficit  (96,988)  (95,295)
Total Company stockholders' equity  117,554   119,027 
Noncontrolling interests  745   794 
         
Total Stockholder's Equity  118,299   119,821 
         
Total Liabilities and Stockholders' Equity $305,918  $264,457 

 

See Notes to Consolidated Financial Statements.

 

 3 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Consolidated Statements of Operations and Comprehensive Loss

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

(Unaudited)

 

  For the Three Months Ended March 31, 
  2019  2018 
       
Rental revenues $8,533  $6,599 
         
Expenses        
Property operating expenses  2,789   2,591 
Real estate taxes  1,190   1,098 
General and administrative  1,483   1,445 
Depreciation and amortization  3,100   2,429 
Total operating expenses  8,562   7,563 
         
Operating income/(loss)  (29)  (964)
         
Interest expense, net  (1,987)  (1,324)
Interest income  245   133 
Gain on sale of real estate and other assets  -   247 
Other income, net  65   103 
Net loss  (1,706)  (1,805)
Net loss/(income) attributable to noncontrolling interests  13   (27)
Net loss attributable to the Company's shares $(1,693) $(1,832)
Weighted average shares outstanding:        
Basic and diluted  23,431   24,608 
Basic and diluted loss per share $(0.07) $(0.07)
Comprehensive loss:        
Net loss $(1,706) $(1,805)
Other comprehensive income/(loss):        
Holding gain/(loss) on marketable securities, available for sale  168   (139)
Reclassification adjustment for loss included in net loss  52   - 
Foreign currency translation gain  -   22 
Total other comprehensive income/(loss)  220   (117)
Comprehensive loss:  (1,486)  (1,922)
Comprehensive loss/(income) attributable to noncontrolling interest  13   (27)
Comprehensive loss attributable to the Company's shares $(1,473) $(1,949)

 

See Notes to Consolidated Financial Statements.

 

 4 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Consolidated Statement of Stockholders’ Equity

(dollars and shares in thousands)

(Unaudited)

 

        Additional  Accumulated
Other
         Total 
   Convertible Stock  Common Stock  Paid-In  Comprehensive  Accumulated  Noncontrolling   Stockholders' 
  Shares  Amount  Shares  Amount  Capital  Loss  Deficit  Interests   Equity 
                            
BALANCE, December 31, 2017  1  $-   24,647  $2  $224,923  $(27) $(90,108) $4,845  $139,635 
                                     
Net loss  -   -   -   -   -   -   (1,832)  27   (1,805)
Distributions to noncontrolling interest holders  -   -   -   -   -   -   -   (136)  (136)
Redemption and cancellation of shares  -   -   (111)  -   (576)  -   -   -   (576)
Other comprehensive loss:                                    
Holding loss on marketable securities, available for sale  -   -   -   -   -   (139)  -   -   (139)
Foreign currency translation gain  -   -   -   -   -   22   -   -   22 
                                     
BALANCE, March 31, 2018  1  $-   24,536  $2  $224,347  $(144) $(91,940) $4,736  $137,001 

  

        Additional  Accumulated
Other
         Total 
  Convertible Stock  Common Stock  Paid-In  Comprehensive  Accumulated  Noncontrolling   Stockholders' 
  Shares  Amount  Shares  Amount  Capital  (Loss)/Income  Deficit  Interests   Equity 
                            
BALANCE, December 31, 2018  1  $-   23,432  $2  $214,537  $(217) $(95,295) $794  $119,821 
                                     
Net loss  -   -   -   -   -   -   (1,693)  (13)  (1,706)
Distributions to noncontrolling interest holders  -   -   -   -   -       -   (36)  (36)
Other comprehensive loss:                                    
Holding gain on marketable securities, available for sale  -   -   -   -   -   168   -   -   168 
Reclassification adjustment for loss included in net loss  -   -   -   -   -   52   -   -   52 
                                     
BALANCE, March 31, 2019  1  $-   23,432  $2  $214,537  $3  $(96,988) $745  $118,299 

 

See Notes to Consolidated Financial Statements.

 

 5 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Consolidated Statements of Cash Flows

(dollars in thousands)

(Unaudited)

 

  For the Three Months Ended March 31, 
  2019  2018 
       
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss $(1,706) $(1,805)
Adjustments to reconcile net loss to net cash provided by operating activities:        
Depreciation and amortization  3,100   2,429 
Amortization of deferred financing fees  150   77 
Non-cash interest income  (98)  - 
Other non-cash adjustments  (373)  (191)
Changes in operating assets and liabilities:        
Decrease/(increase) in prepaid expenses and other assets  2,992   (184)
Increase in accounts payable and accrued and other liabilities and accrued property tax  1,021   307 
(Decrease)/increase in payables to related parties  (297)  36 
Net cash provided by operating activities  4,789   669 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchase of investment property  (72,427)  (536)
Purchases of marketable securities  (1,399)  (14,941)
Proceeds from sale of marketable securities  10,893   - 
Funding of note receivable  (5,868)  - 
Acquisition fee paid on note receivable  (139)  - 
Proceeds from disposition of investment in unconsolidated joint venture  10,944   - 
Cash used in investing activities  (57,996)  (15,477)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from notes payable  43,414   - 
Payments on notes payable  (211)  (396)
Payment of loan fees and expenses  (824)  - 
Redemptions of common stock  -   (576)
Distributions to noncontrolling interest holders  (36)  (144)
Net cash provided by/(used in) financing activities  42,343   (1,116)
         
Effect of exchange rate changes on cash, cash equivalents, and restricted cash  -   22 
Net change in cash, cash equivalents and restricted cash  (10,864)  (15,902)
Cash, cash equivalents and restricted cash, beginning of year  32,652   57,360 
Cash, cash equivalents and restricted cash, end of period $21,788  $41,458 
         
Supplemental cash flow information for the periods indicated is as follows:        
Cash paid for interest $401  $931 
Loan origination fee on note receivable $120  $- 
Capital expenditures for real estate in accrued liabilities and accounts payable $9  $60 
Accrued distributions payable to noncontrolling interests $-  $19 
Holding gain/loss on marketable securities, available for sale $220  $139 
         
The following is a summary of the Company’s cash, cash equivalents, and restricted cash total as presented in our statements of cash flows for the periods presented:        
Cash $18,740  $36,960 
Restricted cash  3,048   4,498 
Total cash and restricted cash $21,788  $41,458 

 

See Notes to Consolidated Financial Statements.

 

 6 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

1.Organization

 

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

 

Substantially all of our business is conducted through Lightstone REIT V OP LP, which was previously named Behringer Harvard Opportunity OP II LP prior to November 1, 2017, a limited partnership organized in Delaware (the “Operating Partnership”).  As of March 31, 2019, our wholly-owned subsidiary, BHO II, Inc., a Delaware corporation, owned a 0.1% partnership interest in the Operating Partnership as its sole general partner.  As of March 31, 2019, our wholly-owned subsidiary, BHO Business Trust II, a Maryland business trust, was the sole limited partner of the Operating Partnership and owned the remaining 99.9% interest in the Operating Partnership.

 

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

 

In connection with our initial capitalization, we issued 22.5 thousand shares of our common stock and 1.0 thousand shares of our convertible stock to our previous advisor on January 19, 2007.  These shares of convertible stock were transferred to an affiliate of Lightstone on February 10, 2017. As of March 31, 2019, we had 23.4 million shares of common stock outstanding and 1.0 thousand shares of convertible stock outstanding held by an affiliate of Lightstone.

 

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.

 

Noncontrolling Interests

 

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

 

2.Summary of Significant Accounting Policies

 

Interim Unaudited Financial Information

 

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

 

 7 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

Principles of Consolidation and Basis of Presentation

 

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

 

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

 

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

 

Reclassifications  

 

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

 

Earnings per Share

 

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

 

Recently Adopted Accounting Pronouncements

 

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

 

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

 

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

 

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

 

 8 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

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

 

New Accounting Pronouncements

 

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

  

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

 

3.Real Estate Asset Acquisition

 

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

 

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

 

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

 

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

 

4.Note Receivable

 

500 West 22nd Street Mezzanine Loan

 

On February 28, 2019, the Company entered into a $12.0 million Mezzanine Loan Promissory Note (the “500 West 22nd Street Mezzanine Loan”) with an unaffiliated third party (the “500 West 22nd Street Mezzanine Loan Borrower”). On the same date, the Company funded $8.0 million of the 500 West 22nd Street Mezzanine Loan. The 500 West 22nd Street Mezzanine Loan is recorded in note receivable, net on the consolidated balance sheet. In connection with the funding of $8.0 million of the 500 West 22nd Street Mezzanine Loan, our Advisor received an aggregate of approximately $0.1 million in acquisition fees from the Company. The acquisition fee is accounted for as adirect deduction from the carrying value of the500 West 22nd Street Mezzanine Loanand is being amortized over the initial term of the500 West 22nd Street Mezzanine Loan and amortized to interest expense using a straight-line method that approximates the effective interest method.

 

The 500 West 22nd Street Mezzanine Loan, is due August 31, 2021 and is collateralized by the ownership interests of the 500 West 22nd Street Mezzanine Loan Borrower. The 500 West 22nd Street Mezzanine Loan Borrower owns a parcel of land located at 500 West 22nd Street, New York, New York. The 500 West 22nd Street Mezzanine Loan bears interest at a rate of LIBOR + 11.0% per annum with a floor of 13.493% (13.493% as of March 31, 2019). The Company received an origination fee of 1.0% of the loan balance, or approximately $0.1 million, which ispresented in the consolidated balance sheets as a direct deduction from the carrying value of the500 West 22nd Street Mezzanine Loanand will be amortized,to interest income using a straight-line method that approximates the effective interest method,over the initial term of the500 West 22nd Street Mezzanine Loan. The 500 West 22nd Street Mezzanine Loan may be extended two additional six- month periods by the 500 West 22nd Street Mezzanine Loan Borrower provided certain conditions are met, including the establishment of an additional reserve for interest and the payment of an extension fee equal to 0.25% of the outstanding loan balance.

 

 9 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

Upon funding of the 500 West 22nd Street Mezzanine Loan, the Company retained approximately $2.1 million of the proceeds to establish a reserve for interest and other items, which ispresented in the consolidated balance sheets as a direct deduction from the carrying value of the500 West 22nd Street Mezzanine Loanand will beapplied against the first 8.0% of monthly interest due during the initial term of the 500 West 22nd Street Mezzanine Loan. The additional monthly interest due is added to the balance of the 500 West 22nd Street Mezzanine Loan and payable at maturity.

 

During the three months ended March 31, 2019, the Company recorded $0.1 million of interest income related to the note receivable and as of March 31, 2019, the balance of the 500 West 22nd Street Mezzanine Loan was $8.0 million and the remaining reserves for interest and other items aggregated $2.0 million.

 

5.Financial Instruments

 

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

 

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

 

  As of March 31, 2019  As of December 31, 2018 
  Carrying
Amount
  Estimated Fair
Value
  Carrying
Amount
  Estimated Fair
Value
 
Notes payable $184,626  $185,919  $141,423  $140,986 

 

 10 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

6.Marketable Securities and Fair Value Measurements

 

Marketable Securities

 

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

 

  As of March 31, 2019 
  Adjusted Cost  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair Value 
Debt securities:                   
Corporate and Government Bonds $5,029  $38  $(8) $5,059 

 

  As of December 31, 2018 
  Adjusted Cost  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair Value 
Debt securities:                
Corporate and Government Bonds $14,575  $15  $(204) $14,386 

 

When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. As of March 31, 2019, the Company did not recognize any impairment charges.

 

Fair Value Measurements

 

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

 

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

 

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.

 

The fair values of the Company’s investments in debt securities are measured using quoted prices for these investments; however, the markets for these assets are not active. As of March 31, 2019, all of the Company’s debt securities were classified as Level 2 assets and there were no transfers between the level classifications during the three months ended March 31, 2019.

 

 11 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

The 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
March 31, 2019
 
Due in 1 year $1,499 
Due in 1 year through 5 years  3,560 
Due in 5 years through 10 years  - 
Due after 10 years  - 
Total $5,059 

 

7.Notes Payable

 

Notes payable consists of the following:

 

Property Interest Rate Weighted Average
Interest Rate as of
March 31, 2019
  Maturity Date Amount Due at
Maturity
  As of
 March 31, 2019
  As of
 December 31, 2018
 
                 
River Club and the Townhomes at River Club LIBOR + 1.78%  4.21%  May 1, 2025 $28,419  $30,359  $30,359 
                     
Gardens Medical Pavilion LIBOR + 1.90%  4.34%  June 1, 2021  12,300   12,840   12,900 
                     
Lakes of Margate 5.49% and 5.92%  5.75%  January 1, 2020  13,384   13,610   13,687 
                     
Arbors Harbor Town 4.53%  4.53% December 28, 2025  29,000   29,000   29,000 
                     
Parkside 4.45%  4.45%  June 1, 2025  15,782   17,803   17,877 
                     
Axis at Westmont 4.39%  4.39%  February 1, 2026  34,343   37,600   37,600 
                     
Vally Ranch Apartments 4.16%  4.16%  March 1, 2026  43,414   43,414   - 
                     
Total notes payable    4.43%   $176,642   184,626   141,423 
                     
Less: Deferred financing costs              (3,081)  (2,407)
                     
Total notes payable, net             $181,545  $139,016 

 

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

 

On February 14, 2019, the Company entered into a seven-year $43.4 million mortgage loan (the “Valley Ranch Apartments Loan”) scheduled to mature on March 1, 2026. The Valley Ranch Apartments Loan bears interest at 4.16% and requires monthly interest-only payments through its stated maturity. The Valley Ranch Apartments Loan is collateralized by the Valley Ranch Apartments and is non-recourse to the Company. In connection with the Valley Ranch Apartments Loan, our Advisor received an aggregate of approximately $0.4 million in financing fees.

 

The following table provides information with respect to the contractual maturities and scheduled principal repayments of our indebtedness as of March 31, 2019.

 

  2019  2020  2021  2022  2023  Thereafter  Total 
Principal maturities $621  $13,924  $13,235  $948  $1,582  $154,316  $184,626 
                             
Less: deferred financing costs                          (3,081)
                             
Total notes payable, net                         $181,545 

 

In addition, the Company’s non-recourse mortgage loan secured by the Lakes of Margate (outstanding principal balance of $13.6 million as of March 31, 2019) matures in January 2020. We currently expect to refinance all or a portion of this maturing indebtedness on or before its scheduled maturity. However, if we are unable to refinance the outstanding indebtedness at favorable terms, we will look to repay the then outstanding balance with available cash and/or proceeds from selective asset sales.

 

 12 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

8.Leases

 

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

 

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

 

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

 

As of March 31, 2019, the approximate fixed future minimum rental payments, excluding variable lease consideration, from the Company’s office property, Gardens Medical Pavilion, due to us under non-cancelable are as follows:

 

2019  2020  2021  2022  2023  Thereafter  Total 
$1,187  $1,471  $1,118  $973  $895  $767  $6,411 

 

Pursuant to the lease agreements, tenants of the property may be required to reimburse the Company for some or the entire portion of the particular tenant's pro rata share of the real estate taxes and operating expenses of the property. Such amounts are not included in the future minimum lease payments above, but are included in rental revenues on the accompanying consolidated statements of operations. Rental revenue of approximately $0.8 million and $0.5 million for the three months ended March 31, 2019 and 2018, respectively, related to variable lease payments was included in rental revenues on the accompanying consolidated statements of operations.

 

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

 

9.Distributions

 

U.S. federal tax law requires a REIT distribute at least 90% of its annual REIT taxable income (which does not equal net income, as calculated in accordance with GAAP) determined without regard to the deduction for dividends paid and excluding any net capital gain. In order to continue to qualify for REIT status, we may be required to make distributions in excess of cash available. Distributions are authorized at the discretion of our board of directors based on its analysis of our performance over the previous periods and expectations of performance for future periods. These analyses may include actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, general financial and market conditions, proceeds from asset sales, and other factors that our board of directors deems relevant. Our board of director’s decisions will be substantially influenced by the obligation to ensure that we maintain our federal tax status as a REIT. We cannot provide assurance that we will pay distributions at any particular level, or at all.

 

 13 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

10.Related Party Transactions

 

Advisor

 

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

 

The following discussion describes the fees and expenses payable to our external advisor and its respective affiliates under the various advisory management agreements.

 

We pay our external advisor acquisition and advisory fees of 1.5% of the amount paid in respect of the purchase, development, construction, or improvement of each asset we acquire, including any debt attributable to those assets. In addition, we pay acquisition and advisory fees of 1.5% of the funds advanced in respect of a loan investment. For the three months ended March 31, 2019 we incurred acquisition and advisory fees payable to our external advisor of approximately $1.4 million. We incurred no acquisition and advisory fees for the three months ended March 31, 2018 because we had no acquisitions during this period.

 

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

 

Our external advisor and its affiliates are also responsible for paying all of the investment-related expenses that we or the external advisor or its affiliates incur that are due to third parties or related to the additional services provided by our external advisor as described above with respect to investments we do not make, other than certain non-refundable payments made in connection with any acquisition. For the three months ended March 31, 2019 and 2018, we incurred no acquisition expense reimbursements.

 

Prior to June 10, 2018 we paid our external advisor a debt financing fee of 0.5% of the amount available under any loan or line of credit made available to us and pay directly all third-party costs associated with obtaining the debt financing, on June 10, 2018 we amended the advisory management agreement with our advisor and increased the debt financing fee to 1.0% of the amount available under any loan or line of credit made available to us and pay directly all third-party costs associated with obtaining the debt financing. For the three months ended March 31, 2019, we incurred $0.4 million of debt financing fees. We incurred no debt financing fees for the three months ended March 31, 2018.

 

We pay our external advisor a development fee in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the project if such affiliate provides the development services and if a majority of our independent directors determines that such development fee is fair and reasonable to us.  We incurred no development fees for the three months ended March 31, 2019 and 2018.

 

We pay our external advisor a monthly asset management fee of one-twelfth of 0.7% of the value of each asset. The value of our assets will be the value as determined in connection with the establishment and publication of an estimated net asset value (“NAV”) per share unless the asset was acquired after our publication of a NAV per share (in which case the value of the asset will be the contractual purchase price of the asset). For the three months ended March 31, 2019 and 2018, we expensed $0.5 million and $0.4 million, respectively, of asset management fees payable to our external advisor.

 

 14 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

Our external advisor is responsible for paying all of the expenses it incurs associated with persons employed by the external advisor to the extent that they provide services to us for which our external advisor receives an acquisition, asset management, or debt financing fee, including wages and benefits of the applicable personnel. Instead of reimbursing our external advisor for specific expenses paid or incurred in connection with providing services to us, we pay our external advisor an administrative services fee, which is an allocation of a portion of the actual costs that the external advisor paid or incurred providing these services to us (the “Administrative Services Reimbursement”). The Administrative Services Reimbursement is intended to reimburse the external advisor for all its costs associated with providing services to us. For the calendar year ending December 31, 2018, the Administrative Services Reimbursement was up to $1.325 million annually, pro-rated for the first six months of the year and up to $1.30 million annually, pro-rated for the second six months of the year. On February 10, 2018, the advisory management agreements were extended an additional four months through June 10, 2018. For the period January 1, 2018 through June 10, 2018, the Administrative Services Reimbursement is up to $1.3 million annually, pro-rated for the period. On June 10, 2018, the advisory management agreements were extended an additional year through June 10, 2019. For the period June 10, 2018 through June 10, 2019, the Administrative Services Reimbursement is up to $1.29 million. The Administrative Services Reimbursement is payable in four equal quarterly installments within 45 days of the end of each calendar quarter. In addition, under the various advisory management agreements, we are to reimburse the external advisor for certain due diligence services provided in connection with asset acquisitions and dispositions and debt financings separately from the Administrative Services Reimbursement. We incurred and expensed $0.3 million for both the three months ended March 31, 2019 and 2018 of such costs for administrative services and due diligence services.

 

Notwithstanding the fees and cost reimbursements payable to our external advisor pursuant to our advisory management agreement, under our charter we may not reimburse the external advisor for any amount by which our operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of: (i) 2% of our average invested assets, or (ii) 25% of our net income determined without reduction for any additions to reserves for depreciation, bad debts, or other similar non-cash reserves and excluding any gain from the sale of our assets for that period unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the four fiscal quarters ended March 31, 2019, our total operating expenses (including the asset management fee) exceeded the limit on total operating expenses; however, our independent directors determined the excess expenses were justified primarily as a result of the timing of the redeployment of our cash proceeds from asset sales and financings.

 

Property Manager

 

The Company engaged an affiliate of Lightstone (the “Lightstone Manager”) pursuant to a property management and leasing agreement. The fees earned by and expenses reimbursed to the Lightstone Manager are substantially the same as the fees earned by and expenses reimbursed to the Behringer Manager. The following discussion describes the fees and expenses payable to our affiliated property manager and its respective affiliates under both the various property management and leasing agreements.

 

We pay our property manager and affiliate of our external advisor, fees for the management, leasing, and construction supervision of our properties which is 4.0% of gross revenues of the properties managed by our property manager. We pay our property manager an oversight fee equal to 0.5% of the gross revenues of the property managed for any property for which we contract directly with a third-party property manager.  In no event will our property manager or its affiliates receive both a property management fee and an oversight fee with respect to any particular property.  In the event we own a property through a joint venture that does not pay our property manager directly for its services, we will pay our property manager a management fee or oversight fee, as applicable, based only on our economic interest in the property.   For both the three months ended March 31, 2019 and 2018, we incurred and expensed property management fees or oversight fees to the related-party property manager of $0.1 million.

 

We pay our property manager a construction management fee in an amount not to exceed 5% of all hard construction costs incurred in connection with, but not limited to capital repairs and improvements, major building reconstruction and tenant improvements, if such affiliate supervises construction performed by or on behalf of us or our affiliates. We incurred no construction management fees for the three months ended March 31, 2019 and 2018.

 

As of both March 31, 2019 and December 31, 2018, we had a payable to our external advisor and its affiliates of less than $0.1 million. These balances consist of accrued fees, including asset management fees, administrative service expenses, property management fees, and other miscellaneous costs payable to our external advisor and property manager.

 

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

 

 15 

 

 

Lightstone Value Plus Real Estate Investment Trust V, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

 

11.Investment in Unconsolidated Joint Venture

 

We provided mezzanine financing totaling $15.3 million to an unaffiliated third-party entity (the “Borrower”) that owned an apartment complex in Denver, Colorado (the “Prospect Park”). The Borrower also had a senior construction loan with a third-party construction lender (the “Senior Lender”) in an aggregate original principal amount of $40.0 million. The senior construction loan was guaranteed by the owners of the developer. We also had a personal guaranty from the owners of the developer guaranteeing completion of Prospect Park and payment of any cost overruns. Our mezzanine loan was secured by all of the membership interests of the Borrower and was subordinate to the senior construction loan. Our advances of $15.3 million initially had annual stated interest rates ranging from 10% to 18%.

 

Pursuant to the terms of the mezzanine loan, we participate in the residual interests of Prospect Park attributable to a sale or refinancing even though we had no actual ownership interest. We previously evaluated this ADC Arrangement and determined that its characteristics were similar to a jointly-owned investment or partnership. Accordingly, our investment, which was a variable interest entity (“VIE”) was accounted for as an unconsolidated joint venture under the equity method of accounting instead of loan accounting.

 

On December 15, 2017, the Borrower sold Prospect Park to an unrelated third-party for a contractual sales price of approximately $100.5 million. In connection with the sale, the Borrower repaid the Senior Construction Loan in full and we received aggregate proceeds of approximately $21.6 million representing the repayment in full of the outstanding principal and accrued interest due on our mezzanine loan. Additionally, the Borrower placed approximately $15.1 million of the net proceeds from the sale into an escrow account to be used for settlement of the amount due to us for our participation in the residual interests of Prospect Park. The carrying value of our unconsolidated investment in Prospect Park, which represented the minimum amount payable to us for our participation in the residual interests of Prospect Park, was $10.9 million as of December 31, 2018.

 

On January 4, 2019, the Company and the Borrower received payments of $10.9 million and $1.9 million, respectively, from the escrow account. As a result, the carrying value of our unconsolidated investment in Prospect Park has been reduced to zero and approximately $2.3 million remains in the escrow account to be used for settlement of any potential remaining amount due to us for our participation in the residual interests of Prospect Park and any additional amounts received will be recognized upon receipt.

 

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

 

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

 

Forward-Looking Statements

 

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

 

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy, and other future conditions.  These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements.  Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors described below:

 

market and economic challenges experienced by the U.S. and global economies or real estate industry as a whole and the local economic conditions in the markets in which our investments are located;

 

the availability of cash flow from operating activities for distributions, if any;

 

conflicts of interest arising out of our relationships with our advisor and its affiliates;

 

our ability to retain or replace our executive officers and other key individuals who provide advisory and property management services to us;

 

our level of debt and the terms and limitations imposed on us by our debt agreements;

 

the availability of credit generally, and any failure to obtain debt financing at favorable terms or a failure to satisfy the conditions and requirements of that debt;

 

our ability to make accretive investments in a diversified portfolio of assets; 

 

future changes in market factors that could affect the ultimate performance of our development or redevelopment projects, including but not limited to construction costs, plan or design changes, schedule delays, availability of construction financing, performance of developers, contractors and consultants, and growth in rental rates and operating costs;

 

our ability to secure leases at favorable rental rates;

 

our ability to acquire and/or sell assets at a price and on a timeline consistent with our investment objectives;

 

impairment charges;

 

unfavorable changes in laws or regulations impacting our business, our assets, or our key relationships; and

 

factors that could affect our ability to qualify as a real estate investment trust. 

 

 17 

 

 

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

 

Cautionary Note

 

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

 

Executive Overview

 

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

 

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

 

Liquidity and Capital Resources

 

We had unrestricted cash and cash equivalents of $18.7 million as of March 31, 2019. Our principal demands for funds going forward will be for the payment of (a) operating expenses, (b) interest and principal payments on our outstanding indebtedness, (c) share redemptions and distributions, if any, authorized by our board of directors. Generally, we expect to meet cash needs for the payment of operating expenses, interest on our outstanding indebtedness and share redemptions with our cash flow from operations and to fund authorized distributions (if any) from available cash flow from operations and/or proceeds received from asset sales. To the extent that our cash flow from operations is not sufficient to cover these items, we expect to use cash generated from borrowings and selective asset sales to fund such needs.

 

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

 

In addition to our debt obligations, we consider other factors in evaluating our liquidity. For example, to the extent our portfolio is concentrated in certain geographic regions and types of assets, downturns relating generally to such regions and assets may result in tenants defaulting on their lease obligations at a number of our properties within a short time period.  Such defaults could negatively affect our liquidity and adversely affect our ability to fund our ongoing operations.

 

 18 

 

 

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

 

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

 

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

 

Debt Financings

 

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

 

As of March 31, 2019, our outstanding notes payable were $181.5 million, net of deferred financing fees of $3.1 million, and had a weighted average interest rate of 4.4%. As of December 31, 2018, the Company had notes payable of $139.0 million, net of deferred financing fees of $2.4 million, with a weighted average interest rate of 4.3%.

 

Our loan agreements stipulate that we comply with certain reporting and financial covenants.  These covenants include, among other things, maintaining minimum debt service coverage ratios, loan to value ratios, and liquidity.  We are currently in compliance with all of our debt covenants.

 

Our non-recourse mortgage loan secured by the Lakes of Margate (outstanding principal balance of $13.6 million as of March 31, 2019) matures in January 2020. We currently expect to refinance all or a portion of this maturing indebtedness on or before its scheduled maturity. However, if we are unable to refinance the outstanding indebtedness at favorable terms, we will look to repay the outstanding balance with available cash and/or proceeds from selective asset sales.

 

One of our principal short-term and long-term liquidity requirements includes the repayment of maturing debt.  The following table provides information with respect to the contractual maturities and scheduled principal repayments of our indebtedness as of March 31, 2019 (dollars in thousands).

 

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Contractual Obligations 2019  2020  2021  2022  2023  Thereafter  Total 
Mortgage Payable $621  $13,924  $13,235  $948  $1,582  $154,316  $184,626 
Interest Payments  6,398   7,587   7,240   6,879   6,829   13,134   48,067 
                             
Total Contractual Obligations $7,019  $21,511  $20,475  $7,827  $8,411  $167,450  $232,693 

 

Results of Operations

 

As of March 31, 2019, we had eight consolidated real estate investments (four wholly owned properties and four properties consolidated through investments in joint ventures). 

 

On February 14, 2019, we acquired the Valley Ranch Apartments (the “2019 Acquisition”) and on November 27, 2018 we acquired the Axis at Westmont (the “2018 Acquisition” and collectively, the “Acquisitions”) Additionally, on January 4, 2019 we received proceeds of approximately $10.9 million representing the minimum amount payable for our participation in the residual interests of our equity method investment in Prospect Park. Any additional amounts received will be recognized upon receipt.

 

On December 28, 2018, we disposed of 22 Exchange (the “Disposition”) and the disposition of this property did not qualify to be reported as discontinued operations since it did not represent a strategic shift that had a major effect on our operations and financial results. Accordingly, the operating results of this property are reflected in our results from continuing operations for all periods presented through its date of disposition.

 

As of March 31, 2018, we had eight real estate investments, seven of which were consolidated (one wholly owned property and six properties consolidated through investments in joint ventures) and our equity method investment in Prospect Park. 

 

Our results of operations for the respective periods presented reflect increases in most categories principally resulting from our acquisition and disposition activities. The increases from the Acquisitions are partially offset by the decrease resulting from the Disposition. Properties owned by us during the entire periods presented are referred to as our “Same Store” properties.

 

Three months ended March 31, 2019 as compared to the three months ended March 31, 2018.

 

The following table provides summary information about our results of operations for the three months ended March 31, 2019 and 2018 (dollars in thousands):

 

  Three Months Ended        Change  Change  Change 
  March 31,  Increase/  Percentage  due to  due to  due to 
  2019  2018  (Decrease)  Change  Acquisitions(1)  Disposition(2)  Same Store(3) 
Rental revenues $8,533  $6,599  $1,934   29.0% $2,270  $(716) $380 
Property operating expenses  2,789   2,591   198   8.0%  672   (341)  (133)
Real estate taxes  1,190   1,098   92   8.0%  233   (184)  43 
General and administrative  1,483   1,445   38   3.0%  23   (116)  131 
Depreciation and amortization  3,100   2,429   671   28.0%  851   (296)  116 
Interest expense, net  1,987   1,324   663   50.0%  684   (431)  410 
Gain on sale of real estate   -   247   (247)  (100.0)%   -   (247)   - 

 

 

 

(1)Represents the effect on our operating results for the periods indicated resulting from our 2018 acquisition of the Axis at Westmont and our 2019 acquisition of the Valley Ranch Apartments.
(2)Represents the effect on our results for the periods indicated principally resulting from our 2018 disposition of 22 Exchange.
(3)Represents the change for the three months ended March 31, 2019 compared to the same period in 2018 for real estate and real estate-related investments owned by us during the entire periods presented (“Same Store”). Our results for Same Store properties for the three months ended March 31, 2019 and 2018 include Gardens Medical Pavilion, River Club and the Townhomes at River Club, Lakes of Margate, Arbors Harbor Town, Parkside and Flats at Fishers.

 

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The following table reflects total rental revenues and total property operating expenses for the three months ended March 31, 2019 and 2018 for: (i) our Same Store properties (ii) the Acquisitions and (iii) the Disposition (dollars in thousands):

 

  Three Months Ended March 31,    
Description 2019  2018  Change 
Rental Revenues:            
Same Store $6,263  $5,883  $380 
Acquisitions  2,270   -   2,270 
Disposition  -   716   (716)
Total rental revenues $8,533  $6,599  $1,934 
             
Property operating expenses:            
Same Store $2,117  $2,250  $(133)
Acquisitions  672   -   672 
Disposition  -   341   (341)
Total property and hotel operating expenses $2,789  $2,591  $198 

 

The tables below reflect occupancy and effective monthly rental rates for our operating properties owned as of March 31, 2019:

 

  Occupancy  Effective Monthly Rent per
Square Foot/Unit/Bed(1)
    
  As of March 31,  Year Ended March 31,    
Property 2019  2018  2019  2018    
Gardens Medical Pavilion  76%  70% $2.27  $2.22   per sq. ft. 
River Club and the Townhomes at River Club  98%  97%  426.37   411.55   per bed 
Lakes of Margate  92%  93%  1,392.39   1,327.31   per unit 
Arbors Harbor Town  92%  94%  1,243.64   1,214.11   per unit 
Parkside  91%  91%  1,141.06   1,105.63   per unit 
Flats at Fishers  93%  73%  1,075.17   1,055.52   per unit 
Axis at Westmont (2)  93%  N/A   1,114.82   N/A   per unit 
Valley Ranch Apratments (3)  93%  N/A   1,383.99   N/A   per unit 

 

 

(1)Effective monthly rent is calculated as in-place contracted monthly rental revenue, including any premiums due for short-term or month-to-month leases, less any concessions or discounts.

 

(2)The Axis at Westmont was acquired on November 27, 2018

 

(3)The Valley Ranch Apartments was acquired on February 14, 2019

 

Revenues.  Rental revenues for the three months ended March 31, 2019 were $8.5 million, an increase of $1.9 million, compared to $6.6 million for the same period in 2018.  Excluding the effect of our acquisition and disposition activities, our rental revenues increased by $0.4 million for our Same Store properties.

 

Property Operating Expenses.    Property operating expenses for the three months ended March 31, 2019 were $2.8 million, an increase of $0.2 million, compared to $2.6 million for the same period in 2018. Excluding the effect of our acquisition and disposition activities, our property operating expenses decreased by $0.1 million for our Same Store properties.

 

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Real Estate Taxes.  Real estate taxes for the three months ended March 31, 2019 and 2018 was relatively unchanged at $1.1 million as the decrease resulting from the Disposition was substantially offset by increases resulting from the Acquisitions.

 

General and Administrative Expenses.   General and administrative expenses for the three months ended March 31, 2019 were $1.5 million, an increase of $0.1 million, compared to $1.4 million for the same period in 2018. Excluding the effect of our acquisition and disposition activities, our general and administrative expenses increased by $0.1 million for our Same Store properties. General and administrative expenses primarily consists of audit fees, legal fees, board of directors’ fees, and other administrative expenses, including certain costs paid to our advisor (see Note 9 of the financial statements).

 

Depreciation and Amortization.   Depreciation and amortization expense for the three months ended March 31, 2019 was $3.1 million, an increase of $0.7 million, compared to $2.4 million for the same period in 2018. Excluding the effect of our acquisition and disposition activities, depreciation and amortization was relatively unchanged for our Same Store properties.

 

Interest Expense, net.  Interest expense for the three months ended March 31, 2019 was $2.0 million, an increase of $0.7 million, compared to $1.3 million for the same period in 2018. Excluding the effect of our acquisition and disposition activities, interest expense increased by $0.4 million for our Same Store properties as a result of higher average notes payable balance resulting from our financing activities and a higher weighted average interest rate during the 2019 period attributable to increases in interest rates.

 

Interest Income, net.  Interest income for the three months ended March 31, 2019 was $0.2 million, an increase of $0.1 million, compared to $0.1 million for the same period in 2018, which represents the interest earned on our note receivable which was entered into on February 28, 2019 (see Note 4 of the financial statements).

 

Summary of Cash Flows

 

Operating activities

 

The net cash flows provided by operating activities of $4.8 million for the three months ended March 31, 2019 consists of the following:

 

·cash inflows of approximately $1.5 million from our net loss after adjustment for non-cash items; and

 

·cash inflows of approximately $3.3 million associated with the net changes in operating assets and liabilities.

 

Investing activities

 

The net cash used in investing activities of $58.0 million for the three months ended March 31, 2019 consists primarily of the following:

 

·the acquisition of the Valley Ranch Apartments for $71.5 million;

 

·funding of note receivable of $5.9 million;

 

·capital expenditures of $0.9 million;

 

·proceeds of approximately $10.9 million related to our equity method investment in Prospect Park; and

 

·net proceeds from the sale of marketable securities, available for sale of $9.5 million.

 

Financing activities

 

The net cash provided by financing activities of $42.3 million for the three months ended March 31, 2019 consists primarily of the following:

 

·debt principal payments of $0.2 million; and

 

·net proceeds from notes payable of $42.5 million.

 

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Funds from Operations and Modified Funds from Operations

 

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and 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 generally accepted accounting principles in the United States of America (“GAAP”).

 

We calculate FFO, a non-GAAP measure, consistent with the standards established over time by the Board of Governors of NAREIT, as restated in a White Paper approved by the Board of Governors of NAREIT effective in December 2018 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Our FFO calculation complies with NAREIT's definition.

 

We believe that the use of FFO provides a more complete understanding of our performance to investors and to management and reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.

 

Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT'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 exclude acquisition and transaction-related fees and expenses (which includes costs incurred in connection with strategic alternatives), amounts relating to deferred rent receivables and amortization of market lease and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.

 

 23 

 

 

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.

 

 24 

 

 

Our calculations of FFO and MFFO are presented below (dollars and shares in thousands, except per share amounts):

 

  For the Three Months Ended
March 31,
 
Description 2019  2018 
Net loss $(1,706) $(1,805)
FFO adjustments:        
Depreciation and amortization of real estate assets  3,100   2,429 
Gain on sale of real estate  -   (247)
FFO  1,394   377 
MFFO adjustments:        
Other adjustments:        
Acquisition and other transaction related costs expensed(1)  -   11 
Noncash adjustments:        
Amortization of above or below market leases and liabilities(2)  (19)  (3)
Loss on debt extinguishment(3)  -   - 
Loss on sale of marketable securities  52   - 
Accretion of discounts and amortization of premiums on debt investments  -   (42)
MFFO before straight-line rent  1,427   343 
Straight-line rent(5)  -   (2)
MFFO - IPA recommended format $1,427  $341 
         
Net loss $(1,706) $(1,805)
Less: loss/(income) attributable to noncontrolling interests  13   (27)
Net loss applicable to Company's common shares $(1,693) $(1,832)
Net loss per common share, basic and diluted $(0.07) $(0.07)
         
FFO $1,394  $377 
Less: FFO attributable to noncontrolling interests  (155)  (149)
FFO attributable to Company's common shares $1,239  $228 
FFO per common share, basic and diluted $0.05  $0.01 
         
MFFO - IPA recommended format $1,427  $341 
Less: MFFO attributable to noncontrolling interests  (152)  (144)
MFFO attributable to company's common shares $1,275  $197 
         
Weighted average number of common shares outstanding, basic and diluted  23,431   24,608 

 

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.

 

 25 

 

 

3)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.
4)Management believes that adjusting for mark-to-market adjustments is appropriate because they are nonrecurring items that may not be reflective of ongoing operations and reflects unrealized impacts on value based only on then current market conditions, although they may be based upon current operational issues related to an individual property or industry or general market conditions. Mark-to-market adjustments are made for items such as ineffective derivative instruments, certain marketable securities and any other items that GAAP requires we make a mark-to-market adjustment for. The need to reflect mark-to-market adjustments is a continuous process and is analyzed on a quarterly and/or annual basis in accordance with GAAP.
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
 
  March 31, 2018 
Default interest expense(a) $(423)
Allocations to noncontrolling interests  42 
Total after allocations to noncontrolling interests $(381)

 

(a)Represents the accrual of default interest expense on our non-recourse mortgage loan which was collateralized by 22 Exchange. Although the lender for 22 Exchange did not charge us and was not paid interest at the stated default rate, we accrued interest at the default rate pursuant to the terms of the respective loan agreement. On December 28, 2018, we and the 10.0% noncontrolling member relinquished our ownership of 22 Exchange through a deed-in-lieu of foreclosure transaction with the lender.

 

Excluding the impact of this unusual item from our MFFO, after taking into consideration allocations to noncontrolling interests, our adjusted MFFO attributable to Company's common shares would have been $578 for the three months ended March 31, 2018.

 

Distributions

 

U.S. federal tax law requires a REIT distribute at least 90% of its annual REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles, or GAAP) determined without regard to the deduction for dividends paid and excluding any net capital gain. In order to continue to qualify for REIT status, we may be required to make distributions in excess of cash available. Distributions are authorized at the discretion of our board of directors based on its analysis of our performance over the previous periods and expectations of performance for future periods. These analyses may include actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, general financial and market conditions, proceeds from asset sales, and other factors that our board of directors deems relevant. The board of director’s decisions will be substantially influenced by the obligation to ensure that we maintain our federal tax status as a REIT. We cannot provide assurance that we will pay distributions at any particular level, or at all.

 

 26 

 

 

Off-Balance Sheet Arrangements

 

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

 

Critical Accounting Policies and Estimates

 

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

 

Other than as disclosed in Note 2 to the financial statements, our critical accounting policies and estimates have not changed significantly from the discussion found in the Management Discussion and Analysis and Results of Operations in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 2019.

 

 27 

 

 

Item 4.Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our principal executive officer and principal financial officer, evaluated, as of March 31, 2019, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e) using the criteria established inInternal Control-New Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective, as of March 31, 2019, to provide reasonable assurance that information required to be disclosed by us in this report is recorded, processed, summarized, and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

 

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

 

Changes in Internal Control over Financial Reporting

 

There has been no change in internal control over financial reporting that occurred during the quarter ended March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 28 

 

 

PART II

 

OTHER INFORMATION

 

Item 1.Legal Proceedings.

 

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

 

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

 

Recent Sales of Unregistered Securities

 

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

 

Share Redemption Program

 

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

 

From our inception through December 31, 2018, we had redeemed 3.3 million shares of our common stock at an average price per share of $6.97 per share. During the quarter ended March 31, 2019, we did not redeem any shares.

 

The terms on which we redeemed shares prior to July 1, 2018 differed between redemptions upon a stockholder’s death, “qualifying disability” (as defined in the share redemption program) or confinement to a long-term care facility (collectively, Exceptional Redemptions) and all other redemptions or Ordinary Redemptions.

 

Prior to July 1, 2018, the per share redemption price for Ordinary Redemptions and Exceptional Redemptions was equal to the lesser of 80% and 90%, respectively, of (i) the then current estimated NAV per Share and (ii) the average price per share the investor paid for all of his shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock) less the Special Distributions (as defined in the share redemption program).

 

On August 9, 2017, our board of directors adopted a Fourth Amended and Restated Share Redemption Program (the “Amended Share Redemption Program”) to be effective July 1, 2018. Under the Amended Share Redemption Program, beginning July 1, 2018, we will no longer process redemptions upon death, “qualifying disability,” or confinement to a long-term care facility on terms different than those on which we process all other redemptions. Additionally, the price at which we will redeem shares submitted for redemption will be a percentage of the estimated NAV per Share as of the Effective Date (as defined in the Amended Share Redemption Program), as follows:

 

For Redemptions with an Effective Date Between 
July 1, 2018 and June 30, 2019:92.5% of the estimated NAV per Share
July 1, 2019 and June 30, 2020:95.0% of the estimated NAV per Share
July 1, 2020 and June 30, 2021:97.5% of the estimated NAV per Share
Thereafter:100% of the estimated NAV per Share

 

Pursuant to the terms of the Fourth Amended Share Redemption Program, any shares approved for redemption are redeemed on a periodic basis as determined from time to time by our board of directors, and no less frequently than annually.  We will not redeem, during any twelve-month period, more than 5% of the weighted average number of shares outstanding during the twelve-month period immediately prior to the date of redemption.  In addition, the cash available for redemptions is limited to no more than $10.0 million in any twelve-month period.  Any redemption requests are honored pro rata among all requests received based on funds available and are not honored on a first come, first served basis.

 

On December 28, 2018, our board of directors adopted a Fifth Amended and Restated Share Redemption Program (the “Fifth Amended Share Redemption Program”) which became effective on January 31, 2019. The only material change to the program was to change the measurement period for the limitations on the number and dollar amount of shares that may be accepted for redemption from a rolling 12 month-period to a calendar year. On March 26, 2019, our board of directors set the cash available for redemptions at $2.5 million for the quarterly period ended March 31, 2019. On April 15, 2019, the Company redeemed approximately 0.3 million shares of our common stock, for quarterly period ended March 31, 2019, for approximately $2.4 million. On May 9, 2019, our board of directors set the cash available for redemptions at $2.5 million per quarter, for each of the quarterly periods ending June 30, 2019, September 30, 2019 and December 31, 2019.

 

 29 

 

 

Item 3.Defaults Upon Senior Securities.

 

None.

 

Item 4.Mine Safety Disclosures.

 

None.

 

Item 5.Other Information.

 

None. 

 

Item 6.Exhibits.

 

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

 

 30 

 

 

SIGNATURE

 

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

 

 LIGHTSTONE VALUE PLUS REAL ESTATE
 INVESTMENT TRUST V, INC.
  
Date: May 15, 2019By:/s/ Mitchell C. Hochberg
  Mitchell C. Hochberg
  Chief Executive Officer
  (Principal Executive Officer)

 

Date: May 15, 2019By:/s/ Seth Molod
  Seth Molod
  Chief Financial Officer
  (Duly Authorized Officer and Principal Financial and
  Accounting Officer)

 

 31 

 

 

Index to Exhibits

 

Exhibit Number Description
31.1* Rule 13a-14(a)/15d-14(a) Certification
31.2* Rule 13a-14(a)/15d-14(a) Certification
32.1* Section 1350 Certification**
32.2* Section 1350 Certification**
101* The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, filed on May 15, 2019, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Equity, (iv) Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements.

 

*Filed or furnished herewith
**In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section.  Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

 

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