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LVPR Lightstone Value Plus REIT II

Filed: 12 Nov 20, 4:12pm

 

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended September 30, 2020

 

OR

 

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

 

For the transition period from                     to

 

Commission file number 000-54047

 

LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland 83-0511223

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

1985 Cedar Bridge Avenue, Suite 1  
Lakewood, New Jersey 08701
(Address of Principal Executive Offices) (Zip Code)

 

(732) 367-0129

(Registrant’s Telephone Number, Including Area Code)

 

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

 

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

Yes   þ 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).  

Yes  þ      No ¨

 

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

 

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

 

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

Yes ¨ No þ

 

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

 

As of November 10, 2020, there were approximately 17.4 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust II, Inc., including shares issued pursuant to the distribution reinvestment plan.  

 

 

 

 

 

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

 

INDEX

 

    Page
PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements (unaudited)  
   
  Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 3
   
  Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 4
     
  Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2020 and 2019 5
     
  Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019 6
     
  Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 7
   
  Notes to Consolidated Financial Statements 8
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
   
Item 4. Controls and Procedures 33
   
PART II OTHER INFORMATION  
   
Item 1. Legal Proceedings 33
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
   
Item 3. Defaults Upon Senior Securities 34
   
Item 4. Mine Safety Disclosures 34
   
Item 5. Other Information 34
   
Item 6. Exhibits 34

 

2

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

 

  September 30, 2020  December 31, 2019 
   (unaudited)     
Assets        
Investment property:        
  Land and improvements $36,687  $36,662 
  Building and improvements  203,573   200,362 
  Furniture and fixtures  35,819   32,861 
  Construction in progress  114   4,612 
Gross investment property  276,193   274,497 
Less accumulated depreciation  (48,578)  (40,545)
Net investment property  227,615   233,952 
         
Investments in unconsolidated affiliated entities  15,599   16,394 
Cash and cash equivalents  17,189   21,242 
Marketable securities, available for sale  6,648   8,890 
Restricted cash  4,041   8,974 
Accounts receivable and other assets  3,120   3,903 
Total Assets $274,212  $293,355 
         
Liabilities and Stockholders' Equity        
Accounts payable and other accrued expenses $8,213  $8,160 
Margin loan  2,535   4,744 
Mortgages payable, net  136,347   136,177 
Notes payable  3,343   - 
Due to related party  634   587 
Distributions payable  -   3,065 
Total liabilities  151,072   152,733 
         
Commitments and contingencies        
         
Stockholders' Equity:        
Company's stockholders' equity:        
Preferred shares, $0.01 par value, 10.0 million shares authorized,  none issued and outstanding  -   - 
Common stock, $0.01 par value; 100.0 million shares authorized, 17.4 million and 17.5 million shares issued and outstanding, respectively  174   175 
Additional paid-in-capital  147,100   147,924 
Accumulated other comprehensive (loss)/income  (5)  172 
Accumulated deficit  (35,822)  (19,863)
Total Company stockholders' equity  111,447   128,408 
         
Noncontrolling interests  11,693   12,214 
         
Total Stockholders' Equity  123,140   140,622 
         
Total Liabilities and Stockholders' Equity $274,212  $293,355 

  

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

   

3

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(unaudited)

 

  For the Three Months Ended September 30,  For the Nine Months Ended September 30, 
  2020  2019  2020  2019 
Revenues $7,430  $19,616  $24,271  $58,301 
                 
Expenses:                
Property operating expenses  5,860   12,690   19,996   37,910 
Real estate taxes  903   954   2,674   2,827 
General and administrative costs  1,147   1,137   3,535   3,548 
Depreciation and amortization  2,690   2,813   8,051   8,629 
                 
Total operating expenses  10,600   17,594   34,256   52,914 
                 
Operating (loss)/income  (3,170)  2,022   (9,985)  5,387 
                 
Interest and dividend income  125   136   394   419 
Interest expense  (1,471)  (2,157)  (4,864)  (6,921)
                 
Loss on sale of marketable securities, available for sale  -   -   (245)  - 
Earnings from investments in unconsolidated affiliated entities  (596)  (4)  (1,594)  (161)
                 
Other income/(expense), net  35   (8)  36   40 
                 
Net loss  (5,077)  (11)  (16,258)  (1,236)
                 
Less: net loss/(income) attributable to noncontrolling interests  98   (41)  299   (58)
                 
Net loss applicable to Company's common shares $(4,979) $(52) $(15,959) $(1,294)
                 
Net loss per Company's common share, basic and diluted $(0.29) $-  $(0.92) $(0.07)
                 
Weighted average number of common shares outstanding, basic and diluted  17,430   17,624   17,434   17,712 

  

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

4

 

  

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(unaudited)

 

  For the Three Months Ended September 30,  For the Nine Months Ended September 30, 
  2020  2019  2020  2019 
Net loss $(5,077) $(11) $(16,258) $(1,236)
                 
Other comprehensive income/(loss):                
Holding gain/(loss) on marketable securities, available for sale  131   80   (422)  851 
                 
Reclassification adjustment for loss included in net loss  -   -   245   - 
Other comprehensive income/(loss):  131   80   (177)  851 
                 
Comprehensive (loss)/income  (4,946)  69   (16,435)  (385)
                 
Less: Comprehensive (loss)/income attributable to noncontrolling interests  98   (41)  299   (58)
                 
Comprehensive (loss)/income attributable to the Company's common shares $(4,848) $28  $(16,136) $(443)

  

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

 

5

 

 

  

PART I. FINANCIAL INFORMATION:  

ITEM 1. FINANCIAL STATEMENTS.

 

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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in thousands)

(unaudited)

  

        Additional  Accumulated Other        Total 
  Common Stock  Paid-In  Comprehensive     Noncontrolling  Stockholders' 
  Shares  Amount  Capital  (Loss)/Income  Accumulated Deficit  Interests  Equity 
BALANCE, June 30, 2019  17,692  $177  $149,725  $(46) $(20,676) $12,824  $142,004 
                             
Net loss  -   -   -   -   (52)  41   (11)
Other comprehensive income  -   -   -   80   -   -   80 
Distributions declared (a)  -   -   -   -   (3,080)  -   (3,080)
Contributions of noncontrolling interests  -   -   -   -   -   32   32 
Distributions to noncontrolling interests  -   -   -   -   -   (326)  (326)
Redemption and cancellation of shares  (90)  (1)  (901)  -   -   -   (902)
                             
BALANCE, September 30, 2019  17,602  $176  $148,824  $34  $(23,808) $12,571  $137,797 

 

(a) Distributions per share were $0.175.  

  

        Additional  Accumulated Other        Total 
  Common Stock  Paid-In  Comprehensive     Noncontrolling  Stockholders' 
  Shares  Amount  Capital  (Loss)/Income  Accumulated Deficit  Interests  Equity 
BALANCE, December 31, 2018  17,874  $179  $151,538  $(817) $(13,277) $13,466  $151,089 
                             
Net loss  -   -   -   -   (1,294)  58   (1,236)
Other comprehensive income  -   -   -   851   -   -   851 
Distributions declared (a)  -   -   -   -   (9,237)  -   (9,237)
Contributions of noncontrolling interests  -   -   -   -   -   89   89 
Distributions to noncontrolling interests  -   -   -   -   -   (1,042)  (1,042)
Redemption and cancellation of shares  (272)  (3)  (2,714)  -   -   -   (2,717)
                             
BALANCE, September 30, 2019  17,602  $176  $148,824  $34  $(23,808) $12,571  $137,797 

 

(a) Distributions per share were $0.525.

  

        Additional           Total 
  Common Stock  Paid-In  Accumulated Other     Noncontrolling  Stockholders' 
  Shares  Amount  Capital  Comprehensive Loss  Accumulated Deficit  Interests  Equity
BALANCE, June 30, 2020  17,430  $174  $147,100  $(136) $(30,843) $11,787  $128,082 
                             
Net loss  -   -   -   -   (4,979)  (98)  (5,077)
Other comprehensive income  -   -   -   131   -   -   131 
Contributions of noncontrolling interests  -   -   -   -   -   4   4 
                             
BALANCE, September 30, 2020  17,430  $174  $147,100  $(5) $(35,822) $11,693  $123,140 

   

        Additional           Total 
  Common Stock  Paid-In  Accumulated Other     Noncontrolling  Stockholders' 
  Shares  Amount  Capital  Comprehensive Loss  Accumulated Deficit  Interests  Equity
BALANCE, December 31, 2019  17,512  $175  $147,924  $172  $(19,863) $12,214  $140,622 
                             
Net loss  -   -   -   -   (15,959)  (299)  (16,258)
Other comprehensive loss  -   -   -   (177)  -   -   (177)
Contributions of noncontrolling interests  -   -   -   -   -   105   105 
Distributions to noncontrolling interests  -   -   -   -   -   (327)  (327)
Redemption and cancellation of shares  (82)  (1)  (824)  -   -   -   (825)
                             
BALANCE, September 30, 2020  17,430  $174  $147,100  $(5) $(35,822) $11,693  $123,140 

  

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

 

6

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(unaudited)

 

  For the Nine Months Ended September 30, 
  2020  2019 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss $(16,258) $(1,236)
Adjustments to reconcile net loss to net cash (used in)/provided by operating activities:        
Depreciation and amortization  8,051   8,629 
Amortization of deferred financing costs  308   309 
Loss on sale of marketable securities, available for sale  245   - 
Earnings from investments in unconsolidated affiliated entities  1,594   161 
Other non-cash adjustments  170   (22)
Changes in assets and liabilities:        
Decrease/(increase) in accounts receivable and other assets  595   (145)
Increase in accounts payable and other accrued expenses  1,734   95 
Increase in due to related party  47   51 
         
Net cash (used in)/provided by operating activities  (3,514)  7,842 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchase of investment property  (3,377)  (5,652)
Proceeds from disposition of investment property  -   12,955 
Proceeds from the sale of marketable debt securities  1,820   - 
Investments in unconsolidated affiliated entities  (968)  (58)
Distributions from unconsolidated affiliated entities  169   666 
         
Net cash(used in)/provided by investing activities  (2,356)  7,911 
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Payments on mortgages payable  (138)  (8,302)
Payments on margin loan, net  (2,209)  (348)
Proceeds from notes payable  3,343   - 
Redemption and cancellation of common shares  (825)  (2,717)
Distributions to noncontrolling interests  (327)  (1,042)
Contributions of noncontrolling interests  105   89 
Distributions to common stockholders  (3,065)  (9,310)
         
Net cash used in financing activities  (3,116)  (21,630)
         
Net change in cash, cash equivalents and restricted cash  (8,986)  (5,877)
Cash, cash equivalents and restricted cash, beginning of year  30,216   30,660 
Cash, cash equivalents and restricted cash, end of period $21,230  $24,783 
         
Supplemental cash flow information for the periods indicated is as follows:        
         
Cash paid for interest $2,147  $6,725 
Distributions declared but not paid $-  $3,080 
Holding loss/gain on marketable securities, available for sale $177  $851 
Investment property acquired but not paid $67  $343 
Assets classified as held for sale $-  $10,741 
Liabilities classified as held for sale $-  $512 
         
The following is a summary of the Company’s cash, cash equivalents, and restricted cash total as presented in our statements of cash flows for the periods presented:        
Cash and cash equivalents $17,189  $23,005 
Restricted cash  4,041   1,778 
Total cash, cash equivalents and restricted cash $21,230  $24,783 

 

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

 

7

 

 

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

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

  

 1.Business and Structure

 

Lightstone Value Plus Real Estate Investment Trust II, Inc. (‘‘Lightstone REIT II’’), is a Maryland corporation, formed on April 28, 2008, which elected to qualify as a real estate investment trust (‘‘REIT’’) for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2009.

 

Lightstone REIT II is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business will be conducted through Lightstone Value Plus REIT II LP, a Delaware limited partnership (the ‘‘Operating Partnership’’). As of September 30, 2020, Lightstone REIT II held an approximately 99% general partnership interest in the Operating Partnership’s common units.

 

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

 

The Company has and will continue to seek to acquire a diverse portfolio of real estate assets and real estate-related investments, including hotels, other commercial and/or residential properties, primarily located in the United States. All such properties may be acquired and operated by the Company alone or jointly with another party. The Company may also originate or acquire mortgage loans secured by real estate. Although the Company expects that most of its investments will be of these types, it may invest in whatever types of real estate-related investments that it believes are in its best interests.

 

The Company currently has one operating segment. As of September 30, 2020, we (i) majority owned and consolidated the operating results and financial condition of 14 limited service hotels containing a total of 1,802 rooms, (ii) held an unconsolidated 48.6% membership interest in Brownmill, LLC (“Brownmill”), an affiliated entity that owns two retail properties, and (iii) held an unconsolidated 50.0% membership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”), an affiliated real estate entity that owns and operates a 183-room limited service hotel located in Long Island City, New York (the “Hilton Garden Inn – Long Island City”). The Company accounts for its membership interests in Brownmill and the Hilton Garden Inn Joint Venture under the equity method of accounting.

 

As of September 30, 2020, seven of our consolidated limited service hotels are held in a joint venture (the “Joint Venture”) formed between us and Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”), a related party REIT also sponsored by The Lightstone Group, LLC. The Company and Lightstone I have 97.5% and 2.5% membership interests in the Joint Venture, respectively. Additionally, as of September 30, 2020, certain of our consolidated hotels also have ownership interests held by unrelated minority owners. The membership interests of Lightstone I and the unrelated minority owners are accounted for as noncontrolling interests.

 

The Company’s advisor is Lightstone Value Plus REIT II LLC (the “Advisor”), which is majority owned by David Lichtenstein. On May 20, 2008, the Advisor contributed $2 to the Operating Partnership in exchange for 200 limited partner common units in the Operating Partnership. The Advisor also owns 20,000 shares of the Company’s common stock (“Common Shares”) which were issued on May 20, 2008 for $200, or $10.00 per share. Mr. Lichtenstein also is a majority owner of the equity interests of the Lightstone Group, LLC. The Lightstone Group, LLC served as the Company’s sponsor (the ‘‘Sponsor’’) during its initial public offering (the “Offering”) and follow-on offering (the “Follow-on Offering”, and collectively, ���the Offerings”), which terminated on August 15, 2012 and September 27, 2014, respectively. The Advisor, together with the Company’s board of directors (the “Board of Directors”), is primarily responsible for making investment decisions on behalf of the Company and managing its day-to-day operations. Through his ownership and control of the Lightstone Group, LLC, Mr. Lichtenstein is the indirect owner and manager of Lightstone SLP II LLC, a Delaware limited liability company (the “Associate General Partner”), which has subordinated profits interests in the Operating Partnership which were acquired for aggregate consideration of $17.7 million in connection with the Company’s Offerings. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT II or the Operating Partnership.

 

The Company does not have any employees. The Advisor receives compensation and fees for services related to the investment and management of the Company’s assets.

 

8

 

 

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

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

The Company’s Advisor has certain affiliates which may manage the properties the Company acquires. However, the Company also contracts with other unaffiliated third-party property managers, principally for the management of its hospitality properties.

 

The Company’s Common Shares are not currently listed on a national securities exchange. The Company may seek to list its Common Shares for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its Common Shares until they are listed for trading. In the event the Company does not obtain listing prior to September 27, 2024, which is the tenth anniversary of the termination of its Follow-On Offering, its charter requires that the Board of Directors must either (i) seek stockholder approval of an extension or amendment of this listing deadline; or (ii) seek stockholder approval to adopt a plan of liquidation of the corporation.

 

 Noncontrolling Interests

 

Limited Partner

 

On May 20, 2008, the Advisor contributed $2 to the Operating Partnership in exchange for 200 limited partner common units in the Operating Partnership. The Advisor has the right to convert limited partner common units into cash or, at the Company’s option, an equal number of Common Shares.

 

Associate General Partner

 

In connection with the Company’s Offerings, which concluded on September 27, 2014, the Associate General Partner contributed (i) cash of approximately $12.9 million and (ii) equity interests totaling 48.6% in Brownmill, which were valued at $4.8 million, to the Operating Partnership in exchange for 177.0 Subordinated Profits Interests in the Operating Partnership with an aggregate value of $17.7 million.

 

As the indirect majority owner of the Associate General Partner, Mr. Lichtenstein is the beneficial owner of a 99% interest in such Subordinated Profits Interests and thus receives an indirect benefit from any distributions made in respect thereof.

 

These Subordinated Profits Interests may entitle the Associate General Partner to a portion of any regular and liquidation distributions that the Company makes to its stockholders, but only after its stockholders have received a stated preferred return.

  

Other Noncontrolling Interests in Consolidated Subsidiaries

 

Other noncontrolling interests consist of the (i) membership interest in the Joint Venture held by Lightstone I and (ii) membership interests held by minority owners in certain of the Company’s hotels.

 

The Advisor and its affiliates and Associate General Partner are related parties of the Company. Certain of these entities are entitled to compensation and fees for services related to the investment, management and disposition of the Company’s assets during its acquisition, operational and liquidation stages. The compensation levels during the Company's acquisition and operational stages are based on the cost of acquired properties/investments and the annual revenue earned from such properties/investments, and other such fees and reimbursements as outlined in each of the respective agreements. See Note 8 for additional information.

   

 2.Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of Lightstone REIT II and its Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). As of September 30, 2020, Lightstone REIT II had a 99% general partnership interest in the common units of the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary.

 

9

 

 

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

Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

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

 

GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate, depreciable lives, and revenue recognition. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.

 

The consolidated balance sheet as of December 31, 2019 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.

 

To qualify or maintain our qualification as a REIT, we engage in certain activities through wholly-owned taxable REIT subsidiaries (“TRS”). As such, we are subject to U.S. federal and state income and franchise taxes from these activities.

 

Revenue Recognition

 

The following table represents the total revenues from hotel operations on a disaggregated basis:

 

  For the Three Months Ended September 30,  For the Nine Months Ended September 30, 
  2020  2019  2020  2019 
Revenues                
Room $7,160  $18,052  $22,983  $54,121 
Food, beverage and other  270   1,564   1,288   4,180 
                 
Total revenues $7,430  $19,616  $24,271  $58,301 

 

 

Restricted cash

 

As required by the Company’s lenders, restricted cash is held in escrow accounts for anticipated capital expenditures, real estate taxes, debt service payments and other reserves for certain of our consolidated properties. Capital reserves are typically utilized for non-operating expenses such as major capital expenditures. Alternatively, a lender may require its own formula for an escrow of capital reserves. As of December 31, 2019, restricted cash also included approximately $7.2 million of the proceeds from the October 2019 sale of the Company’s SpringHill Suites by Marriott hotel, located in Peabody, Massachusetts. These funds were temporarily placed in escrow with a qualified intermediary to potentially facilitate a like-kind exchange transaction in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended. However, the Company decided not to pursue a like-kind exchange transaction and the funds were subsequently released in May 2020.

 

COVID-19 Pandemic Operations and Liquidity Update

 

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic leading many countries, including the United States, particularly at the individual state level, to impose various restrictions and other measures, including, but not limited to, mandatory closures, quarantines, limitations on travel, “shelter in place” rules and certain other measures in an effort to reduce its duration and spread. The COVID-19 pandemic has continued to evolve and while most states have initiated a phased approach allowing for reductions and/or lifting of restrictions, the situation remains highly unpredictable and dynamic.

  

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

As a result of the COVID-19 pandemic, room demand for the Company’s consolidated and unconsolidated hotels began to significantly decline in March 2020 and these trends have continued through the third quarter. The COVID-19 pandemic has had a significant negative impact on the Company's operations and financial results to date and the Company currently expects that the COVID-19 pandemic will continue to have a significant negative impact on its results of operations, financial position and cash flow for the remainder of 2020 and into 2021. The Company cannot estimate when room demand will recover for its hotels.

 

Additionally, the Company has an unconsolidated 48.6% membership interest in Brownmill, which owns two retail properties located in New Jersey that have been subject to various restrictions. If Brownmill’s retail properties are negatively impacted for an extended period because its tenants are unable to pay their rent, the Company’s equity earnings and the carrying value of its investment in Brownmill could be materially and adversely impacted.

 

In light of the impact of the COVID-19 pandemic on the operating results of its hotels, the Company has taken various actions to preserve its liquidity, including the following:

 

·The Company has implemented cost reduction strategies for all of its hotels, which has led to reductions in both operating expenses and planned capital expenditures.
·On June 2, 2020, the Company and the lender agreed to certain changes to the terms of the Company’s revolving credit facility (the “Revolving Credit Facility”), including (i) the deferral of monthly debt service for payments previously due from April 1, 2020 through September 30, 2020, which are now due at maturity; (ii) subject to certain conditions, the interest rate spread may be reduced by 100 bps to LIBOR + 2.15%, subject to a 3.00% floor, for the six-month period beginning September 1, 2020 through February 28, 2021; (iii) the Company deposited $2.5 million into a cash collateral account to be applied against the monthly debt service payments due from October 1, 2020 through March 1, 2021; and (iv) waiver of all financial covenants for periods before June 30, 2021. The Company is currently in discussions with the lender to further extend the waiver of all financial covenants as well as the maturity date of the Revolving Credit Facility. However, there can be no assurances that it will be successful in such endeavors. See Note 5 for additional information.
·On October 28, 2020, the servicer agreed to waive the minimum debt yield financial covenant for the Company’s nonrecourse mortgage indebtedness collateralized by its Courtyard by Marriott Hotel located in Paso Robles, California (the “Courtyard Paso Robles Mortgage Loan”) for periods through June 30, 2021. See Note 5 for additional information.
·On March 19, 2020, the Company’s board of directors determined to suspend regular quarterly distributions. See Note 7 for additional information.
·On March 19, 2020, the Company’s board of directors approved the suspension of all redemptions under the Company’s shareholder redemption program. See Note 7 for additional information.
·In April 2020, the Company received an aggregate of $3.3 million from loans provided under the federal Paycheck Protection Program. See Note 6 for additional information.
·In May 2020, the Company had approximately $7.2 million of funds released to it from an escrow account.

 

Based on these actions, along with its cash and cash equivalents on hand, the Company believes that it will have sufficient liquidity to meet its obligations for at least twelve months from the date of issuance of these financial statements. See Note 5 for additional information.

 

New Accounting Pronouncements

 

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

 

3.

Investments in Unconsolidated Affiliated Entities

 

The entities listed below are partially owned by the Company. The Company accounts for these investments under the equity method of accounting as the Company exercises significant influence, but does not exercise financial and operating control over these entities. A summary of the Company’s investments in the unconsolidated affiliated entities is as follows:

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

       As of 
Entity Date of Ownership Ownership %  September 30,
2020
  December 31,
2019
 
Brownmill Various  48.58% $4,498  $4,630 
Hilton Garden Inn Joint Venture March 27, 2018  50.00%  11,101   11,764 
Total investments in unconsolidated affiliated real estate entities       $15,599  $16,394 

 

Brownmill

 

During 2010 through 2012, the Company entered into various contribution agreements with Lightstone Holdings LLC (‘‘LGH’’), a wholly-owned subsidiary of the Company’s Sponsor, pursuant to which LGH contributed to the Company an approximate aggregate 48.6% equity interest in exchange for the Company issuing an aggregate of 48 units of Subordinated Profits Interests, at $100,000 per unit (at an aggregate total value of $4.8 million), to Lightstone SLP II LLC.

 

As of September 30, 2020, the Company owns a 48.6% membership interest in Brownmill. The Company’s interest in Brownmill is a non-managing interest. An affiliate of the Company’s Sponsor is the majority owner and manager of Brownmill. Profit and cash distributions are allocated in accordance with each investor’s ownership percentage. The Company accounts for its investment in Brownmill in accordance with the equity method of accounting. During the nine months ended September 30, 2020, the Company made capital a contribution of $95 and received distributions from Brownmill aggregating $125.

 

Brownmill owns two retail properties known as Browntown Shopping Center, located in Old Bridge, New Jersey, and Millburn Mall, located in Vauxhaull, New Jersey, which collectively, are referred to as the “Brownmill Properties.”

 

Brownmill Financial Information

 

The Company’s carrying value of its interest in Brownmill differs from its share of member’s equity reported in the condensed balance sheet of Brownmill due to the Company’s basis of its investment in excess of the historical net book value of Brownmill. The Company’s additional basis allocated to depreciable assets is being recognized on a straight-line basis over the lives of the appropriate assets.

 

The following table represents the condensed income statements for Brownmill for the periods indicated:

 

  For the Three Months Ended
September 30,
  For the Nine Months Ended
September 30,
 
  2020  2019  2020  2019 
Revenue $703  $857  $2,523  $2,631 
                 
Property operating expenses  457   410   1,563   1,206 
Depreciation and amortization  169   354   501   704 
                 
Operating income  77   93   459   721 
                 
Interest expense and other, net  (158)  (172)  (477)  (532)
                 
Net (loss)/income $(81) $(79) $(18) $189 
Company's share of net (loss)/income $(39) $(38) $(9) $92 
                 
Additional depreciation and amortization expense (1)  (31)  (32)  (93)  (95)
                 
Company's earnings from investment $(70) $(70) $(102) $(3)

 

1)Additional depreciation and amortization expense relates to the amortization of the difference between the cost of the interest in Brownmill and the amount of the underlying equity in net assets of Brownmill.

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

The following table represents the condensed balance sheets for Brownmill:

 

  As of  As of 
  September 30,
2020
  December 31,
2019
 
Real estate, at cost (net) $13,676  $13,507 
Cash and restricted cash  822   1,016 
Other assets  1,365   1,440 
         
Total assets $15,863  $15,963 
         
Mortgage payable $13,893  $14,061 
Other liabilities  772   648 
Members' capital  1,198   1,254 
         
Total liabilities and members' capital $15,863  $15,963 

 

Hilton Garden Inn Joint Venture

 

On March 27, 2018, the Company and Lightstone Value Plus Real Estate Investment Trust III, Inc. (“Lightstone REIT III”), a related party REIT also sponsored by the Company’s Sponsor, acquired, through the Hilton Garden Inn Joint Venture, a 183-room, limited-service hotel located at 29-21 41st Avenue, Long Island City, New York (the “Hilton Garden Inn - Long Island City”) from an unrelated third party, for aggregate consideration of approximately $60.0 million, which consisted of $25.0 million of cash and $35.0 million of proceeds from a loan from a financial institution (the “Hilton Garden Inn Mortgage”), excluding closing and other related transaction costs. The Company and Lightstone REIT III each have a 50.0% membership interest in the Hilton Garden Inn Joint Venture.

 

The Company paid approximately $12.9 million for a 50.0% membership interest in the Hilton Garden Inn Joint Venture. The Company’s membership interest in the Hilton Garden Inn Joint Venture is a co-managing interest. The Company accounts for its membership interest in the Hilton Garden Inn Joint Venture in accordance with the equity method of accounting because it exerts significant influence over but does not control the Hilton Garden Inn Joint Venture.  All capital contributions and distributions of earnings from the Hilton Garden Inn Joint Venture are made on a pro rata basis in proportion to each member’s equity interest percentage. Any distributions in excess of earnings from the Hilton Garden Inn Joint Venture are made to the members pursuant to the terms of the Hilton Garden Inn Joint Venture’s operating agreement. The Company commenced recording its allocated portion of profit/loss and cash distributions beginning as of March 27, 2018 with respect to its membership interest of 50.0% in the Hilton Garden Inn Joint Venture.

 

On June 2, 2020, the Hilton Garden Inn Joint Venture and the lender agreed to certain changes to the terms of the Hilton Garden Inn Mortgage, including (i) the deferral of monthly debt service for payments previously due from April 1, 2020 through September 30, 2020, which are now due at maturity (March 27, 2023); (ii) subject to certain conditions, the interest rate spread may be reduced by 100 bps to LIBOR + 2.15%, subject to a 4.03% floor, for the six-month period beginning September 1, 2020 through February 28, 2021; (iii) the Hilton Garden Inn Joint Venture deposited $1.2 million into a cash collateral account to be applied against the monthly debt service payments due from October 1, 2020 through March 1, 2021; and (iv) waiver of all financial covenants for periods before June 30, 2021. The Hilton Garden Inn Joint Venture is currently in discussions with the lender to further extend the waiver of all financial covenants. However, there can be no assurances that it will be successful in such endeavors.

 

Subsequent to the Company’s acquisition of its 50.0% membership interest in the Hilton Garden Joint Venture through September 30, 2020, it has made an aggregate of $1.5 million of additional capital contributions (of which $0.9 million was made in 2020) and received aggregate distributions of $1.5 million (of which $44 was received in 2020).

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

Hilton Garden Inn Joint Venture Financial Information

 

The following table represents the condensed income statements for the Hilton Garden Inn Joint Venture for the period indicated:

 

  For the Three
Months Ended
September 30,
2020
  For the Three
Months Ended
September 30,
2019
  For the Nine
Months Ended
September 30,
2020
  For the Nine
Months Ended
September 30,
2019
 
Revenues $701  $3,016  $2,921  $8,110 
                 
Property operating expenses  674   1,750   2,635   5,020 
General and administrative costs  4   1   33   (21)
Depreciation and amortization  641   629   1,886   1,898 
Operating (loss)/income  (618)  636   (1,633)  1,213 
Interest expense  (435)  (505)  (1,352)  (1,531)
                 
Net (loss)/income $(1,053) $131  $(2,985) $(318)
                 
Company's share of net (loss)/income (50.00%) $(527) $66  $(1,493) $(159)

 

The following table represents the condensed balance sheets for the Hilton Garden Inn Joint Venture:

 

  As of  As of 
  September 30,
2020
  December 31,
2019
 
(amounts in thousands)        
Investment property, net $55,457  $56,775 
Cash  926   904 
Other assets  1,743   894 
         
Total assets $58,126  $58,573 
         
Mortgage payable, net $35,239  $34,821 
Other liabilities  1,255   794 
Members' capital  21,632   22,958 
         
Total liabilities and members' capital $58,126  $58,573 

 

4.Marketable Securities, Fair Value Measurements and Margin Loan

 

Marketable Securities

 

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

 

  As of September 30, 2020 
  Adjusted Cost  Gross Unrealized
Gains
  Gross Unrealized
Losses
  Fair Value 
Debt securities:                
Corporate Bonds $6,653  $           8  $           (13) $6,648 

 

  As of December 31, 2019 
  Adjusted Cost  Gross Unrealized
Gains
  Gross Unrealized
Losses
  Fair Value 
Debt securities:                
Corporate Bonds $8,718  $           172  $           -  $8,890 

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

During 2020, financial markets experienced significant volatility in response to the current COVID-19 pandemic, including significant changes in market interest rates and market prices of certain equity securities. During the three and nine months ended September 30, 2020, the Company experienced a holding gain of approximately $0.1 million and a holding loss of approximately $0.4 million on its available for sale marketable debt securities, respectively, These holding gains and losses are included in the Company’s consolidated statements of comprehensive income. As a result, the Company’s marketable debt securities had an aggregate net unrealized loss of approximately $5 as of September 30, 2020. 

 

The Company considers the declines in market value of its investments in marketable debt securities to be temporary in nature as the unrealized losses were caused primarily by financial market volatility associated with the current COVID-19 pandemic which resulting in significant reductions in market interest rates and market prices of certain equity securities. When evaluating its investments in marketable debt securities for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the marketable debt security before recovery of its amortized cost basis. During the three and nine months ended September 30, 2020 and 2019, the Company did not recognize any impairment charges on its investments in marketable debt securities. As of September 30, 2020, the Company does not consider any of its investments in marketable debt securities to be other-than-temporarily impaired.

 

The Company may sell certain of its investments in marketable debt securities prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management.

 

Fair Value Measurements

 

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

 

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

 

 Level 1 – Quoted prices in active markets for identical assets or liabilities.
   
 Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
   
 Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

As of September 30, 2020 and December 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 nine months ended September 30, 2020.

 

The fair values of the Company’s investments in Corporate Bonds are measured using readily available quoted prices for similar assets.

 

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

 

    
  As of
September 30,
2020
 
Due in 1 year $- 
Due in 1 year through 5 years  3,105 
Due in 5 year through 10 years  - 
Due after 10 years  3,543 
Total $6,648 

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

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

 

Margin loan

 

The Company has access to a margin loan from a financial institution that holds custody of certain of the Company’s marketable securities. The margin loan is collateralized by the marketable securities in the Company’s account. The amounts available to the Company under the margin loan are at the discretion of the financial institution and not limited to the amount of collateral in its account. The amount outstanding under this margin loan was $2.5 million and $4.7 million as of September 30, 2020 and December 31, 2019, respectively, and is due on demand. The margin loan bears interest at LIBOR + 0.85% (1.00% as of September 30, 2020).

 

5.Mortgages payable, net

 

Mortgages payable, net consisted of the following: 

 

     Weighted
Average
Interest Rate
         
Description Interest
Rate
  as of
September 30, 2020
  Maturity
Date
 Amount Due
at Maturity
  As of
September 30, 2020
  As of
December 31, 2019
 
Revolving Credit Facility  LIBOR + 2.15% (floor of 3.00%)   4.17% May 2021 $123,045  $123,045  $123,045 
                       
Courtyard – Paso Robles  5.49%   5.49% November 2023  13,022   13,668   13,806 
                       
Total mortgages payable      4.53%   $136,067   136,713   136,851 
                       
Less: Deferred financing costs                (366)  (674)
                       
Total mortgages payable, net               $136,347  $136,177 

 

Revolving Credit Facility

 

The Company, through certain subsidiaries, has a non-recourse Revolving Credit Facility with a financial institution. The Revolving Credit Facility provides the Company with a line of credit of up to $140.0 million pursuant to which it may designate properties as collateral that allow borrowings up to a 65.0% loan-to-value ratio subject to also meeting certain financial covenants, including a prescribed minimum debt yield. The Revolving Credit Facility provides for monthly interest-only payments and the entire principal balance is due upon its expiration.

 

The Revolving Credit Facility, which was entered into on May 17, 2018, has an initial maturity date of May 17, 2021, subject to two one-year options to extend at the sole discretion of the lender. The initial interest rate on the Revolving Credit Facility was LIBOR + 3.50% until it was reduced to LIBOR + 3.15% effective March 31, 2019. 

 

On June 2, 2020, the Company and the lender agreed to certain changes to the terms of Revolving Credit Facility, including (i) the deferral of monthly debt service for payments previously due from April 1, 2020 through September 30, 2020, which are now due at maturity; (ii) subject to certain conditions, the interest rate spread may be reduced by 100 bps to LIBOR + 2.15%, subject to a 3.00% floor, for the six-month period beginning September 1, 2020 through February 28, 2021; (iii) the Company deposited $2.5 million into a cash collateral account (which is classified as restricted cash on the consolidated balance sheets) to be applied against the monthly debt service payments due from October 1, 2020 through March 1, 2021; and (iv) waiver of all financial covenants for periods before June 30, 2021. The Company is currently in discussions with the lender to further extend the waiver of all financial covenants as well as the maturity date of the Revolving Credit Facility. However, there can be no assurances that it will be successful in such endeavors.

 

As of September 30, 2020, twelve of the Company’s hotel properties were pledged as collateral under the Revolving Credit Facility and the outstanding principal balance was approximately $123.0 million.

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

Courtyard – Paso Robles Mortgage Loan

 

In connection with the Company’s acquisition of the Courtyard – Paso Robles on December 14, 2017, it assumed the Courtyard – Paso Robles Mortgage Loan. The Courtyard – Paso Robles Mortgage Loan matures in November 2023, bears interest at a fixed rate of 5.49% and requires monthly principal and interest payments of approximately $79 through its stated maturity with a balloon payment of approximately $13.0 million due at maturity. The Courtyard – Paso Robles Mortgage Loan had an outstanding balance of approximately $13.7 million as of September 30, 2020.

 

On October 28, 2020, the servicer of the Courtyard – Paso Robles Mortgage Loan agreed to waive the minimum debt yield financial covenant for all periods through June 30, 2021.

 

Principal Maturities

 

The following table, based on the initial terms of the mortgages, sets forth their aggregate estimated contractual principal maturities, including balloon payments due at maturity, as of September 30, 2020:

 

  2020  2021  2022  2023  2024  Thereafter  Total 
Principal maturities $49  $123,245  $211  $13,208  $-  $-  $136,713 
                             
Less: deferred financing costs                          (366)
                             
Total principal maturities, net                         $136,347 

 

Pursuant to the Company’s loan agreements, escrows in the amount of $4.0 million and $1.8 million were held in restricted cash accounts as of September 30, 2020 and December 31, 2019, respectively. Such escrows will be released in accordance with the applicable loan agreements for payments of real estate taxes, debt service payments, insurance and capital improvement transactions, as required. Certain of our debt agreements also contain clauses providing for prepayment penalties.

 

6. Notes Payable

 

During April 2020, the Company, through various subsidiaries (each such entity, a “Borrower”), received aggregate funding of $3.3 million through loans (the “PPP Loans”) originated under the federal Paycheck Protection Program, which was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration.  The PPP Loans each have a term of five years and provide for an interest rate of 1.00%.  The payment of principal and interest on the PPP loan is deferred until the day that the forgiven amount is remitted to the lender (approximately five months after the forgiveness application is submitted to the lender, unless the Borrower appeals a denial of forgiveness) or ten months after the end of the Borrower’s covered period, whichever is earlier. Pursuant to the terms of the CARES Act, the proceeds of the PPP Loans may be used for payroll costs, mortgage interest, rent or utility costs.  

 

The promissory note for each of the PPP Loans contains customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note.   Under the terms of the CARES Act, each Borrower can apply for and be granted forgiveness for all or a portion of the PPP Loans.  Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act.  Although the Company intends for each Borrower to apply for loan forgiveness, no assurance can be given that any Borrower will ultimately obtain forgiveness under any relevant PPP Loan, in whole or in part. As of September 30, 2020, the PPP Loans had an outstanding balance of $3.3 million and are classified as Notes Payable on the consolidated balance sheets.

 

7. Equity

 

Distributions

 

On March 19, 2020, the Company’s Board of Directors determined to suspend regular quarterly distributions.

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

Future distributions declared will be at the discretion of the Board of Directors based on their analysis of the Company’s performance over the previous periods and expectations of performance for future periods. The Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, operating and interest expenses and our ability to refinance near-term debt. In addition, the Company currently intends to continue to comply with the REIT distribution requirement that it annually distribute no less than 90% of our taxable income. The Company cannot assure that distributions will be made or that it will maintain any particular level of distributions that it has previously established or may establish.

 

Share Repurchase Program

 

The Company’s share repurchase program may provide its stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to it, subject to certain restrictions. From the Company’s inception through December 31, 2019 it redeemed approximately 1.4 million common shares at an average price of $9.77 per share. For the period from January 1 through March 18, 2020, the Company redeemed 0.1 million common shares at an average price of $10.00 per share.

 

On March 19, 2020, the Board of Directors amended the share repurchase program to remove stockholder notice requirements and also approved the suspension of all redemptions effective immediately.

 

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 attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the applicable period.

 

8. Related Party Transactions

 

The Company has agreements with the Advisor and Lightstone Value Plus REIT Management LLC (the “Property Manager”) to pay certain fees in exchange for services performed by these entities and other related party entities. The Company’s ability to secure financing and subsequent real estate operations are dependent upon its Advisor, Property Manager and their affiliates to perform such services as provided in these agreements.

 

The following table represents the fees incurred associated with the payments to the Company’s Advisor for the periods indicated:

 

  For the Three Months Ended September 30,  For the Nine Months Ended September 30, 
  2020  2019  2020  2019 
Development fees (1) $-  $-  $32  $62 
Asset management fees (general and administrative costs)  736   750   2,192   2,283 
                 
Total $736  $750  $2,224  $2,345 

 

(1) Generally, capitalized and amortized over the estimated useful life of the associated asset.

 

In connection with the Company’s Offering and Follow-On Offering, Lightstone SLP II LLC, an affiliate of the Company’s Sponsor, contributed (i) cash of approximately $12.9 million and (ii) equity interests in Brownmill valued at $4.8 million to the Operating Partnership in exchange for 177.0 Subordinated Profits Interests in the Operating Partnership with an aggregate value of $17.7 million, which are included in noncontrolling interests in the consolidated balance sheets. These Subordinated Profit Interests, the purchase price of which will be repaid only after stockholders receive a stated preferred return and their net investment, entitle Lightstone SLP II, LLC to a portion of any regular distributions made by the Operating Partnership.

 

9. Financial Instruments

 

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable and other assets, accounts payable and other accrued expenses, margin loan, due to related party, and distributions payable approximated their fair values because of the short maturity of these instruments. The estimated fair value of our mortgages payable is as follows:

 

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

Notes to Consolidated Financial Statements

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

(Unaudited)

 

             
  As of September 30, 2020  As of December 31, 2019 
  Carrying Amount  Estimated Fair Value  Carrying Amount  Estimated Fair Value 
Mortgages payable $136,713  $136,732  $136,851  $137,303 

 

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

 

10. Commitments and Contingencies

 

Legal Proceedings

 

From time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes.

 

As of the date hereof, the Company is not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

 

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PART I. FINANCIAL INFORMATION, CONTINUED:

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Lightstone Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Lightstone Value Plus Real Estate Investment Trust II, Inc., a Maryland corporation, and, as required by context, Lightstone Value Plus REIT II LP and its wholly owned subsidiaries, which we collectively refer to as the “Operating Partnership”. Dollar amounts are presented in thousands, except per share data and where indicated in millions.

 

Forward-Looking Statements

 

Certain information included in this Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by us with the United States Securities and Exchange Commission (the “SEC”), contain or will contain, forward-looking statements. All statements, other than statements of historical facts, including, among others, statements regarding our possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives, are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of Lightstone Value Plus Real Estate Investment Trust II, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that actual results may differ materially from those contemplated by such forward-looking statements.

 

Such statements are based on assumptions and expectations which may not be realized and are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, may differ from the results discussed in the forward-looking statements.

 

Risks and other factors that might cause differences, some of which could be material, include, but are not limited to, economic and market conditions, competition, tenant or joint venture partner(s) bankruptcies, our lack of operating history, the availability of cash flows from operations to pay distributions, changes in governmental, tax, real estate and zoning laws and regulations, failure to increase tenant occupancy and operating income, rejection of leases by tenants in bankruptcy, financing and development risks, construction and lease-up delays, cost overruns, the level and volatility of interest rates, the rate of revenue increases versus expense increases, the financial stability of various tenants and industries, the our failure to make additional investments in real estate properties, the failure to upgrade our tenant mix, restrictions in current financing arrangements, the failure to fully recover tenant obligations for common area maintenance, insurance, taxes and other property expenses, the our failure to continue to qualify as a real estate investment trust (“REIT”), the failure to refinance debt at favorable terms and conditions, an increase in impairment charges, loss of key personnel, failure to achieve earnings/funds from operations targets or estimates, conflicts of interest with the Advisor and the Sponsor and their affiliates, failure of joint venture relationships, significant costs related to environmental issues and uncertainties regarding the impact of the current COVID-19 pandemic, and restrictions and other measures intended to prevent its spread on our business and the economy generally, as well as other risks listed from time to time in this Form 10-Q, our Form 10-K and in the Company’s other reports filed with the SEC.

 

We believe these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are qualified in their entirety by these cautionary statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time unless required by law.

 

Overview

 

Lightstone Value Plus Real Estate Investment Trust II, Inc. (the “Lightstone REIT II”), together with Lightstone Value Plus REIT II, LP (the “Operating Partnership” and collectively “the Company”, also referred to as “we”, “our” or “us”) has and intends to continue to acquire and operate commercial (including hospitality and retail properties) and residential real estate assets, as well as other real estate-related investments, principally in the United States. Our acquisitions and investments are principally conducted through our Operating Partnership and generally include both portfolios and individual properties. Our commercial holdings currently consist of hospitality and retail (multi-tenanted shopping centers) properties. All of such properties have been and will continue to be acquired and operated by us alone or jointly with others.

 

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Our advisor is Lightstone Value Plus REIT II LLC (the “Advisor”), which is majority owned by David Lichtenstein. Mr. Lichtenstein also is the majority owner of the equity interests of The Lightstone Group, LLC. The Lightstone Group, LLC served as our sponsor (the ‘‘Sponsor’’) during our public offerings which terminated on September 27, 2014. Our Advisor, together with our board of directors (the “Board of Directors”), is and will continue to be primarily responsible for making investment decisions and managing our day-to-day operations. Through his ownership and control of The Lightstone Group, LLC, Mr. Lichtenstein is the indirect owner of our Advisor and the indirect owner and manager of Lightstone SLP II LLC, the associate general partner of our Operating Partnership. Mr. Lichtenstein also acts as our Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT II or the Operating Partnership.

 

We do not have employees. We have entered into an advisory agreement pursuant to which the Advisor supervises and manages our day-to-day operations and selects our real estate and real estate related investments, subject to oversight by our Board of Directors. We pay the Advisor fees for services related to the investment and management of our assets, and we will reimburse the Advisor for certain expenses incurred on our behalf.

 

As of September 30, 2020, our Advisor owned 20,000 shares of common stock which were issued on May 20, 2008 for $200,000, or $10.00 per share. Effective October 1, 2009, the Operating Partnership commenced operations. As of September 30, 2020, we held a 99% general partnership interest in our Operating Partnership’s common units.

 

Our shares of common stock are not currently listed on a national securities exchange. We may seek to list our shares of common stock for trading on a national securities exchange only if a majority of our independent directors believe listing would be in the best interest of our stockholders. We do not intend to list our shares at this time. We do not anticipate that there would be any market for our shares of common stock until they are listed for trading. In the event we do not obtain listing prior to the tenth anniversary of the completion or termination of our follow on offering (the “Follow On Offering”), which was terminated on September 27, 2014, our charter requires that our Board of Directors must either (i) seek stockholder approval of an extension or amendment of this listing deadline; or (ii) seek stockholder approval to adopt a plan of liquidation of the corporation.

 

On May 20, 2008, our Advisor contributed $2,000 to our Operating Partnership in exchange for 200 limited partner common units in our Operating Partnership. The limited partner has the right to convert Operating Partnership common units into cash or, at our option, an equal number of our shares of our common stock, as allowed by our limited partnership agreement.

 

From our inception through the termination of the Follow-On Offering, Lightstone SLP II LLC, which is wholly owned by our Sponsor, contributed (i) cash of approximately $12.9 million and (ii) equity interests totaling 48.6% in Brownmill LLC (“Brownmill”), which were valued at $4.8 million, to the Operating Partnership in exchange for 177.0 subordinated profits interests (the “Subordinated Profits Interests”) in the Operating Partnership with an aggregate value of $17.7 million.

 

Beginning with the year ended December 31, 2009, we qualified to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our ordinary taxable income to stockholders. As a REIT, we generally will not be subject to U.S. federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, it will then be subject to federal income taxes on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. As of September 30, 2020, we continue to comply with the requirements for maintaining our REIT status.

 

To maintain our qualification as a REIT, we engage in certain activities through a wholly-owned taxable REIT subsidiary (“TRS”). As such, we are subject to U.S. federal and state income and franchise taxes from these activities.

 

Current Environment

 

Our operating results are substantially impacted by the overall health of local, U.S. national and global economies and may be influenced by market and other challenges. Additionally, our business and financial performance may be adversely affected by current and future economic and other conditions; including, but not limited to, availability or terms of financings, financial markets volatility, political upheaval or uncertainty, natural and man-made disasters, terrorism and acts of war, unfavorable changes in laws and regulations, outbreaks of contagious diseases, cybercrime, loss of key relationships, and recession.

 

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COVID-19 Pandemic

 

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic leading many countries, including the United States, particularly at the individual state level, to impose various restrictions and other measures, including, but not limited to, mandatory closures, quarantines, limitations on travel, “shelter in place” rules and certain other measures in an effort to reduce its duration and spread. The COVID-19 pandemic has continued to evolve and while most states have initiated a phased approach allowing for reductions and/or lifting of restrictions, the situation remains highly unpredictable and dynamic.

 

As a result of the COVID-19 pandemic, room demand for our consolidated and unconsolidated hotels began to significantly decline in March 2020 and these trends continued throughout the third quarter. The COVID-19 pandemic has had a significant negative impact on our operations and financial results to date and we currently expect that the COVID-19 pandemic will continue to have a significant negative impact on our results of operations, financial position and cash flow for the remainder of 2020 and into 2021. We cannot estimate when room demand will recover for our hotels.

 

Additionally, we have an unconsolidated 48.6% membership interest in Brownmill, which owns two retail properties located in New Jersey that have been subject to various restrictions. If Brownmill’s retail properties are negatively impacted for an extended period because our tenants are unable to pay their rent, our equity earnings and the carrying value of our investment in Brownmill could be materially and adversely impacted.

 

In light of the impact of the COVID-19 pandemic on the operating results of our hotels, we have taken various actions to preserve our liquidity, including the following:

 

·We have implemented cost reduction strategies for all of our hotels, which has led to reductions in both operating expenses and planned capital expenditures.
·On June 2, 2020, we and the lender agreed to certain changes to the terms of our revolving credit facility (the “Revolving Credit Facility”), including (i) the deferral of monthly debt service for payments previously due from April 1, 2020 through September 30, 2020, which are now due at maturity; (ii) subject to certain conditions, the interest rate spread may be reduced by 100 bps to LIBOR + 2.15, subject to a 3.00% floor,% for the six-month period beginning September 1, 2020 through February 28, 2021; (iii) we deposited $2.5 million into a cash collateral account to be applied against the monthly debt service payments due from October 1, 2020 through March 1, 2021; and (iv) waiver of all financial covenants for periods before June 30, 2021. We are currently in discussions with the lender to further extend the waiver of all financial covenants as well as the maturity date of the Revolving Credit Facility. However, there can be no assurances that we will be successful in such endeavors. See Note 5 of the Notes to Consolidated Financial Statements for additional information.
·On October 28, 2020, the servicer agreed to waive the minimum debt yield financial covenant for our nonrecourse mortgage indebtedness collateralized by our Courtyard by Marriott Hotel located in Paso Robles, California (the “Courtyard Paso Robles Mortgage Loan”) for periods through June 30, 2021. See Note 5 of the Notes to Consolidated Financial Statements for additional information.
·On March 19, 2020, our board of directors determined to suspend regular quarterly distributions. See Note 7 of the Notes to Consolidated Financial Statements for additional information.
·On March 19, 2020, our board of directors approved the suspension of all redemptions under our shareholder redemption program. See Note 7 of the Notes to Consolidated Financial Statements for additional information.
·In April 2020, we received an aggregate of $3.3 million from loans provided under the federal Paycheck Protection Program. See Note 6 of the Notes to Consolidated Financial Statements for additional information. In May 2020, we had approximately $7.2 million of funds released to us from an escrow account.

 

Based on these actions, along with its cash and cash equivalents on hand, we believe that we will have sufficient liquidity to meet our obligations for at least twelve months from the date of issuance of these financial statements. See Note 5 of the Notes to Consolidated Financial Statements for additional information.

 

We are not currently aware of any other material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from our operations, other than those referred to above or throughout this Form 10-Q.

 

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Portfolio Summary –

 

  Location Year Built  Leasable Square Feet  Percentage Occupied as of
September 30, 2020
  Annualized Revenues based on rents as of
September 30, 2020
 Annualized Revenues per square foot as of September 30, 2020 
Unconsolidated Affiliated Entities:                    
                     
Retail                    
Brownmill LLC (2 retail properties) Old Bridge and Vauxhall, New Jersey  1962   155,928   70.1%  $2.7 million $17.41 

 

Hospitality Location Year Built  Year to Date
Available Rooms
 Percentage Occupied
for the Nine Months Ended

September 30, 2020
  Revenue per Available Room ("RevPAR") for
the Nine Months
Ended September 30, 2020
  Average Daily Rate ("ADR") for the
Nine Months Ended

September 30, 2020
 
Hilton Garden Inn - Long Island City Long Island City, New York  2014  50,142  49.5% $54.33  $109.87 

 

Consolidated Properties:

 

Hospitality Location Year Built  Year to Date
Available Rooms
  Percentage Occupied
for the Nine Months Ended
September 30, 2020
  RevPAR for the Nine Months
Ended September 30, 2020
  Average Daily Rate for the
Nine Months Ended
September 30, 2020
 
Fairfield Inn - East Rutherford East Rutherford, New Jersey  1990   38,634   41.30% $36.81  $89.13 
                       
TownePlace Suites - Little Rock Little Rock, Arkansas  2009   25,208   63.47%  45.42   71.56 
                       
Aloft - Tucson Tucson, Arizona  1971   42,196   45.14%  62.67   138.82 
                       
Aloft - Philadelphia Philadelphia, Pennsylvania  2008   37,264   53.04%  52.07   98.17 
                       
Four Points by Sheraton - Philadelphia Philadelphia, Pennsylvania  1985   48,498   35.97%  30.94   86.02 
                       
Courtyard - Willoughby Willoughby, Ohio  1999   24,660   38.61%  38.63   100.06 
                       
Fairfield Inn - DesMoines West Des Moines, Iowa  1997   27,948   41.78%  36.15   86.51 
                       
SpringHill Suites - DesMoines West Des Moines, Iowa  1999   26,578   42.00%  35.93   85.53 
                       
Hampton Inn - Miami Miami, Florida  1996   34,524   40.60%  45.34   111.68 
                       
Hampton Inn & Suites - Fort Lauderdale Fort Lauderdale, Florida  1996   28,496   64.40%  73.63   114.34 
                       
Courtyard - Parsippany Parsippany, New Jersey  2001   41,374   23.77%  31.75   133.54 
                       
Hyatt Place - New Orleans New Orleans, Louisiana  1996   46,580   38.04%  41.22   108.35 
                       
Residence Inn - Needham Needham, Massachusetts  2013   36,168   59.20%  64.00   108.11 
                       
Courtyard - Paso Robles Paso Robles, California  2007   35,620   49.64%  61.79   124.48 
                       
     Hospitality Total   493,748   44.5% $46.55  $104.66 

 

Annualized base rent is defined as the minimum monthly base rent due as of September 30, 2020 annualized, excluding periodic contractual fixed increases and rents calculated based on a percentage of tenants’ sales. The annualized base rent disclosed in the table above includes all concessions, abatements and reimbursements of rent to tenants.

 

Critical Accounting Policies and Estimates

 

There were no material changes during the nine months ended September 30, 2020 to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2019 except for as discussed in Note 2 to the financial statements.

 

Results of Operations

 

Disposition of Alabama Hotels

 

On May 9, 2019, we completed the disposition of two limited services hotels (collectively, the “Alabama Hotels”) for an aggregate contractual sales price of $13.3 million resulting in a second quarter gain on disposition of real estate and other assets of $0.1 million.

 

The Alabama Hotels were comprised of the following properties:

 

 ·a Holiday Inn Express Hotel & Suites (the “Holiday Inn — Opelika”) located in Opelika, Alabama; and
 ·

a Holiday Inn Express Hotel & Suites (“Holiday Inn Express – Auburn”) located in Auburn, Alabama.

 

Disposition of SpringHill Suites - Peabody

 

On October 24, 2019, we completed the disposition of a SpringHill Suites hotel located in Peabody, Massachusetts, (the “SpringHill Suites – Peabody”) for an aggregate contractual sales price of $19.0 million resulting in a third quarter gain on disposition of real estate and other assets of $8.3 million.

 

The dispositions of the Alabama Hotels and the SpringHill Suites – Peabody are collectively referred to as the “2019 Disposed Hotels”.

 

The 2019 Disposed Hotels did not qualify to be reported as discontinued operations since the dispositions did not represent a strategic shift in our operations that had a major effect on our operations and financial results. Accordingly, the operating results of the 2019 Disposed Hotels are reflected in our results from continuing operations for all periods presented through their respective dates of disposition.

 

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We currently have one operating segment. As of September 30, 2020 we (i) majority owned and consolidated the operating results and financial condition of 14 limited service hotels containing a total of 1,802 rooms, (ii) held an unconsolidated 48.6% membership interest in Brownmill LLC (“Brownmill”), an affiliated entity that owns two retail properties, and (iii) held an unconsolidated 50.0% membership interest in the Hilton Garden Inn Joint Venture, an affiliated entity that owns and operates the Hilton Garden Inn – Long Island City, a 183-room limited service hotel. We account for our unconsolidated membership interests in Brownmill and the Hilton Garden Inn Joint Venture under the equity method of accounting.

 

As of September 30, 2020, seven of our consolidated limited service hotels are held in a joint venture (the “Joint Venture”) formed between us and Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”), a related party REIT also sponsored by our Sponsor. We and Lightstone I have 97.5% and 2.5% membership interests in the Joint Venture, respectively. Additionally, as of September 30, 2020, certain of our consolidated hotels also have ownership interests held by unrelated minority owners. The membership interests of Lightstone I and the unrelated minority owners are accounted for as noncontrolling interest

 

Comparison of the three months ended September 30, 2020 vs. September 30, 2019

 

Consolidated

 

Our consolidated revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation and amortization for the three months ended September 30, 2020 and 2019 are attributable to our consolidated hospitality properties, including the 2019 Disposed Hotels through their respective dates of disposition. Properties owned by us during the entire periods presented are referred to as our “Same Store” properties. Overall, our hospitality portfolio experienced decreases in (i) the percentage of rooms occupied from 77.4% to 49.0% for the third quarters of 2019 and 2020, respectively, (ii) revenue per available room (“RevPAR”) from $97.29 to $43.19 for the third quarters of 2019 and 2020, respectively, and (iii) the average daily rate per room (“ADR”) from $125.75 to $88.08 for the third quarters of 2019 and 2020, respectively.

 

Revenues

 

Revenues decreased by $12.2 million to $7.4 million during the three months ended September 30, 2020, compared to $19.6 million for the same period in 2019. Excluding the effect of the disposition of the SpringHill Suites – Peabody, revenues for our Same Store Hotels decreased by $10.2 million. This decrease reflects lower occupancy, RevPAR and ADR during the 2020 quarterly period compared to the same period in 2019, all of which were primarily attributable to reduced room demand during the 2020 period resulting from the COVID-19 pandemic.

 

Property operating expenses

 

Property operating expenses decreased by $6.8 million to $5.9 million during the three months ended September 30, 2020 compared to $12.7 million for the same period in 2019. Excluding the effect of the disposition of the SpringHill Suites – Peabody, property operating expenses for our Same Store Hotels decreased by $5.6 million. This decrease reflects the lower occupancy during the 2020 period resulting from the COVID-19 pandemic.

 

Real estate taxes

 

Real estate taxes decreased slightly by $0.1 million to $0.9 million during the three months ended September 30, 2020 compared to $1.0 million for the same period in 2019.

 

General and administrative expenses

 

General and administrative expenses for the three months ended September 30, 2020 and 2019 were relatively flat at $1.1 million.

 

Depreciation and amortization

 

Depreciation and amortization expense decreased slightly by $0.1 million to $2.7 million during the three months ended September 30, 2020 compared to $2.8 million for the same period in 2019. Excluding the effect of the disposition of the SpringHill Suites – Peabody, depreciation and amortization expense for our Same Store Hotels increased slightly by $0.1 million.

 

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Interest expense

 

Interest expense was $1.5 million during the three months ended September 30, 2020 compared to $2.2 million for the same period in 2019. Interest expense is primarily attributable to financings associated with our hotels and reflects both changes in market interest rates on our variable rate indebtedness and the weighted average principal outstanding during the periods.

 

Earnings from investments in unconsolidated affiliated real estate entities

 

Our loss from investments in unconsolidated affiliated real estate entities was $0.6 million during the three months ended September 30, 2020 compared to a loss of $4 for the same period in 2019. Our loss from investments in unconsolidated affiliated real estate entities is attributable to our ownership interests in the Hilton Garden Inn Joint Venture  and Brownmill. We account for our membership interests in the Hilton Garden Inn Joint Venture and Brownmill under the equity method of accounting commencing on the date that we acquired our interests.

 

Noncontrolling interests

 

The income or loss allocated to noncontrolling interests relates to the interest in our Operating Partnership held by our Advisor, the membership interest held by Lightstone I in the Joint Venture, and the ownership interests held by unrelated minority owners in certain of our hotels.

 

Comparison of the nine months ended September 30, 2020 vs. September 30, 2019

 

Consolidated

 

Our consolidated revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation and amortization for the nine months ended September 30, 2020 and 2019 are attributable to our consolidated hospitality properties, including the 2019 Disposed Hotels through their respective dates of disposition. Properties owned by us during the entire periods presented are referred to as our “Same Store” properties. Overall, our hospitality portfolio experienced decreases in (i) the percentage of rooms occupied from 74.8% to 44.5% for the nine months ended September 30, 2019 and 2020, respectively, (ii) revenue per available room (“RevPAR”) from $98.05 to $46.55 for the nine months ended September 30, 2019 and 2020, respectively, and (iii) the average daily rate per room (“ADR”) from $131.03 to $104.66 for the nine months ended September 30, 2019 and 2020, respectively.

 

Revenues

 

Revenues decreased by $34.0 million to $24.3 million during the nine months ended September 30, 2020, compared to $58.3 million for the same period in 2019. Excluding the effect of the disposition of the 2019 Disposed Hotels, revenues for our Same Store Hotels decreased by $27.8 million. This decrease reflects lower occupancy, RevPAR and ADR during the 2020 period compared to the same period in 2019, all of which were primarily attributable to reduced room demand during the 2020 period resulting from the COVID-19 pandemic.

 

Property operating expenses

 

Property operating expenses decreased by $17.9 million to $20.0 million during the nine months ended September 30, 2020 compared to $37.9 million for the same period in 2019. Excluding the effect of the disposition of the 2019 Disposed Hotels, property operating expenses for our Same Store Hotels decreased by $13.6 million. This decrease reflects the lower occupancy during the 2020 period resulting from the COVID-19 pandemic.

 

Real estate taxes

 

Real estate taxes decreased by slightly by $0.1 million to $2.7 million during the nine months ended September 30, 2020 compared to $2.8 million for the same period in 2019.

 

General and administrative expenses

 

General and administrative expenses for the three months ended September 30, 2020 and 2019 were relatively flat at $3.5 million.

 

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Depreciation and amortization

 

Depreciation and amortization expense decreased by $0.5 million to $8.1 million during the nine months ended September 30, 2020 compared to $8.6 million for the same period in 2019. Excluding the effect of the disposition of the 2019 Disposed Hotels, depreciation and amortization expense for our Same Store Hotels increased by $0.3 million.

 

Interest expense

 

Interest expense was $4.9 million during the nine months ended September 30, 2020 compared to $6.9 million for the same period in 2019. Interest expense is primarily attributable to financings associated with our hotels and reflects both changes in market interest rates on our variable rate indebtedness and the weighted average principal outstanding during the periods.

 

Earnings from investments in unconsolidated affiliated real estate entities

 

Our loss from investments in unconsolidated affiliated real estate entities was $1.6 million during the nine months ended September 30, 2020 compared to $0.2 million for the same period in 2019. Our loss from investments in unconsolidated affiliated real estate entities is attributable to our ownership interests in the Hilton Garden Inn Joint Venture  and Brownmill. We account for our membership interests in the Hilton Garden Inn Joint Venture and Brownmill under the equity method of accounting commencing on the date that we acquired our interests.

 

Noncontrolling interests

 

The income or loss allocated to noncontrolling interests relates to the interest in our Operating Partnership held by our Advisor, the membership interest held by Lightstone I in the Joint Venture, and the ownership interests held by unrelated minority owners in certain of our hotels.

 

Financial Condition, Liquidity and Capital Resources

 

Overview:

 

Revenues, interest and dividend income, proceeds from the sale of marketable securities, distributions from unconsolidated affiliated investments and borrowings are our principal sources of funds to pay operating expenses, scheduled debt service, capital expenditures (excluding non-recurring capital expenditures) and distributions, if any, required to maintain our status as a REIT.

 

We currently believe that these cash resources along with our available cash on hand of $17.2 million and marketable securities, available for sale, of $6.6 million, both as of September 30, 2020 will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not currently anticipate a need to raise funds from other than these sources within the next 12 months.

 

As of September 30, 2020, we have mortgage indebtedness totaling $136.7 million, notes payable of $3.3 million and a margin loan of $2.5 million. We have and intend to continue to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of our independent directors and is disclosed to our stockholders. Market conditions will dictate the overall leverage limit; as such our aggregate long-term permanent borrowings may be less than 75% of aggregate fair market value of all properties. We may also incur short-term indebtedness, having a maturity of two years or less.

 

Our charter provides that the aggregate amount of borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. Market conditions will dictate the overall leverage limit; as such our aggregate borrowings may be less than 300% of net assets. As of September 30, 2020, our total borrowings aggregated $142.6 million which represented 83% of our net assets.

 

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

 

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Any future properties that we may acquire or develop may be funded through a combination of borrowings and the proceeds received from the disposition of certain of our assets. These borrowing may consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. Such mortgages may be put in place either at the time we acquire a property or subsequent to our purchasing a property for cash. In addition, we may acquire properties that are subject to existing indebtedness where we choose to assume the existing mortgages. Generally, though not exclusively, we intend to seek to encumber our properties with non-recourse debt. This means that a lender’s rights on default will generally be limited to foreclosing on the property. However, we may, at our discretion, secure recourse financing or provide a guarantee to lenders if we believe this may result in more favorable terms. When we give a guaranty for a property owning entity, we will be responsible to the lender for the satisfaction of the indebtedness if it is not paid by the property owning entity.

 

We may also obtain lines of credit to be used to acquire properties. If obtained, these lines of credit will be at prevailing market terms and will be repaid from proceeds from the sale or refinancing of properties, working capital and/or permanent financing. Our Sponsor and/or its affiliates may guarantee our lines of credit although they are not obligated to do so. We expect that such properties may be purchased by our Sponsor’s affiliates on our behalf, in our name, in order to minimize the imposition of a transfer tax upon a transfer of such properties to us.

 

In addition to meeting working capital needs and distributions, if any, made to maintain our status as a REIT, our capital resources are used to make certain payments to our Advisor, including payments related to asset acquisition fees and asset management fees, the reimbursement of acquisition-related expenses to our Advisor. We also reimburse our advisor for actual expenses it incurs for administrative and other services provided to us.

 

We have agreements with the Advisor to pay certain fees in exchange for services performed by the Advisor and/or its affiliated entities. Upon the liquidation of assets, we may pay our Advisor or its affiliates a real estate disposition commission. Additionally, our Operating Partnership may be required to make distributions to Lightstone SLP II LLC, an affiliate of the Advisor.

 

The following table represents the fees incurred associated with the payments to the Company’s Advisor for the periods indicated:

 

  For the Three Months Ended September 30,  For the Nine Months Ended September 30, 
  2020  2019  2020  2019 
Development fees (1) $-  $-  $32  $62 
Asset management fees (general and administrative costs)  736   750   2,192   2,283 
                 
Total $736  $750  $2,224  $2,345 

  

(1) Generally, capitalized and amortized over the estimated useful life of the associated asset.

 

Summary of Cash Flows

 

The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below:

 

  For the Nine Months Ended September 30, 
  2020  2019 
Net cash (used in)/provided by operating activities $(3,514) $7,842 
Net cash (used in)/provided by investing activities  (2,356)  7,911 
Net cash used in financing activities  (3,116)  (21,630)
   (8,986)  (5,877)
Cash, cash equivalents and restricted cash, beginning of year  30,216   30,660 
Cash, cash equivalents and restricted cash, end of the period $21,230  $24,783 

  

We believe that our cash available on hand and any proceeds from the sale of marketable securities, together with our expected earnings, and/or distributions from our investments will provide us with sufficient resources to fund our operating expenses, debt service, capital contributions, distributions, if any, required to maintain our status as a REIT. We also expect to use these sources of liquidity along with selective dispositions of assets and/or financings to fund any future investment activities.

 

Because of the impact of the COVID-19 pandemic on our operating performance, we have recently negotiated, or are in the process of negotiating certain amendments with respect to our outstanding indebtedness, including forbearance of scheduled debt service, reductions in interest rates and waivers of financial covenants. See “Contractual Obligations” for additional information.

 

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Operating activities

 

The cash used in operating activities of $3.5 million for the nine months ended September 30, 2020 consisted of our net loss of $16.3 million offset by net changes in operating assets and liabilities of $2.4 million and depreciation and amortization, loss from investments in unconsolidated affiliated real estate entities, amortization of deferred financing costs and other non-cash items aggregating $10.4 million. The net use of cash in operating activities of $3.5 million during the nine months ended September 30, 2020 was principally attributable to the effect of the COVID-19 pandemic on our operating performance.

 

Investing activities

 

The cash used in investing activities of $2.4 million for the nine months ended September 30, 2020 consists primarily of the following:

 

·capital expenditures of $3.4 million;

 

·proceeds of $1.8 million from the sale of marketable debt securities;

 

·$1.0 million of contributions to unconsolidated affiliated real estate entities; and

 

·$0.2 million of distributions from unconsolidated affiliated real estate entities.

  

Financing activities

 

The cash used in financing activities of $3.1 million for the nine months ended September 30, 2020 consists primarily of the following:

 

·distributions to our common shareholders of $3.1 million;

 

·distributions to our noncontrolling interests of $0.3 million;

 

·proceeds from notes payable of $3.3 million;

 

·redemptions and cancellation of common stock of $0.8 million; and

 

·net margin loan payments of $2.2 million.

  

Distributions

 

On March 19, 2020, the Board of Directors determined to suspend regular quarterly distributions.

 

Future distributions declared will be at the discretion of the Board of Directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. The Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, operating and interest expenses and our ability to refinance near-term debt. In addition, we currently intend to continue to comply with the REIT distribution requirement that we annually distribute no less than 90% of our taxable income. We cannot assure that distributions will be made or that we will maintain any particular level of distributions that we have previously established or may establish.

 

Share Repurchase Program

 

Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to us, subject to certain restrictions. From our inception through December 31, 2019 we redeemed approximately 1.4 million common shares at an average price of $9.77 per share. For the period from January 1 through March 18, 2020, we redeemed 0.1 million common shares at an average price of $10.00 per share.

 

On March 19, 2020, the Board of Directors amended the share repurchase program to remove stockholder notice requirements and also approved the suspension of all redemptions effective immediately.

  

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Contractual Obligations

 

The following is a summary of the estimated contractual obligations related to our mortgage debt over the next five years and thereafter as of September 30, 2020.

 

Contractual Obligations 2020  2021  2022  2023  2024  Thereafter  Total 
Principal maturities $49  $123,245  $211  $13,208  $   $-  $136,713 
                             
Interest payments  1,122   5,025   742   670                  -   7,559 
  Total $1,171  $128,270  $953  $13,878  $-  $-  $144,272 

  

Revolving Credit Facility

 

We, through certain subsidiaries, have a non-recourse Revolving Credit Facility with a financial institution. The Revolving Credit Facility provides us with a line of credit of up to $140.0 million pursuant to which we may designate properties as collateral that allow borrowings up to a 65.0% loan-to-value ratio subject to also meeting certain financial covenants, including a prescribed minimum debt yield. The Revolving Credit Facility provides for monthly interest-only payments and the entire principal balance is due upon its expiration.

 

The Revolving Credit Facility, which was entered into on May 17, 2018, has an initial maturity date of May 17, 2021, subject to two one-year options to extend at the sole discretion of the lender. The initial interest rate on the Revolving Credit Facility was LIBOR + 3.50% until it was reduced to LIBOR + 3.15% effective March 31, 2019.

 

On June 2, 2020, we and the lender agreed to certain changes to the terms of Revolving Credit Facility, including (i) the deferral of monthly debt service for payments previously due from April 1, 2020 through September 30, 2020, which are now due at maturity; (ii) subject to certain conditions, the interest rate spread may be reduced by 100 bps to LIBOR + 2.15%, subject to a 3.00% floor, for the six-month period beginning September 1, 2020 through February 28, 2021; (iii) we deposited $2.5 million into a cash collateral account to be applied against the monthly debt service payments due from October 1, 2020 through March 1, 2021; and (iv) waiver of all financial covenants for periods before June 30, 2021. We are currently in discussions with the lender to further extend the waiver of all financial covenants as well as the maturity date of the Revolving Credit Facility. However, there can be no assurances that we will be successful in such endeavors.

 

As of September 30, 2020, we had pledged 12 of our hotel properties as collateral under the Revolving Credit Facility and the outstanding principal balance was approximately $123.0 million.

 

Courtyard – Paso Robles Mortgage Loan

 

In connection with our acquisition of the Courtyard – Paso Robles on December 14, 2017, we assumed the Courtyard - Paso Robles Mortgage Loan. The Courtyard – Paso Robles Mortgage Loan matures in November 2023, bears interest at a fixed rate of 5.49% and requires monthly principal and interest payments of approximately $79 through its stated maturity with a balloon payment of approximately $13.0 million due at maturity. The Courtyard – Paso Robles Mortgage Loan had an outstanding balance of approximately $13.7 million as of September 30, 2020.

 

On October 28, 2020, the servicer of the Courtyard – Paso Robles Mortgage Loan agreed to waive the minimum debt yield financial covenant for all periods through June 30, 2021.

 

PPP Loans

 

During April 2020, we, through various subsidiaries (each such entity, a “Borrower”) received aggregate funding of $3.3 million through loans (the “PPP Loans”) originated under the federal Paycheck Protection Program, which was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration.  The PPP Loans each have a term of five years and provide for an interest rate of 1.00%.  The payment of principal and interest on the PPP loan is deferred until the day that the forgiven amount is remitted to the lender (approximately five months after the forgiveness application is submitted to the lender, unless the Borrower appeals a denial of forgiveness) or ten months after the end of the Borrower’s covered period, whichever is earlier. Pursuant to the terms of the CARES Act, the proceeds of the PPP Loans may be used for payroll costs, mortgage interest, rent or utility costs.  

 

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The promissory note for each of the PPP Loans contains customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note.   Under the terms of the CARES Act, each Borrower can apply for and be granted forgiveness for all or a portion of the PPP Loans.  Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act. Although we intend for each Borrower to apply for forgiveness, no assurance may be given that any Borrower will ultimately obtain forgiveness under any relevant PPP Loan in whole or in part.

 

As of September 30, 2020, the PPP Loans had an outstanding balance of $3.3 million, which is classified as Notes Payable on the consolidated balance sheets.

 

In addition to the mortgages payable and PPP Loans described above, a margin loan that was made available to us from a financial institution that holds custody of certain of our marketable securities. The margin loan is collateralized by the marketable securities in our account. The amounts available to us under the margin loan are at the discretion of the financial institution and not limited to the amount of collateral in our account. The amount outstanding under this margin loan was $2.5 million as of September 30, 2020 and is due on demand. The margin loan bears interest at LIBOR + 0.85% (1.00% as of September 30, 2020).

 

Funds from Operations and Modified Funds from Operations

 

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.

 

Because of these factors, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has published a standardized measure of performance known as funds from operations ("FFO"), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT's operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.

 

We 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.

  

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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 straight-line rent receivables and amortization of market lease and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.

 

We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.

 

Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. FFO and MFFO should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.

 

Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guidelines or the SEC or another regulatory body could standardize the allowable adjustments across the publicly registered, non-listed REIT industry, and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.

 

The below table illustrates the items deducted from or added to net income in the calculation of FFO and MFFO. Items are presented net of non-controlling interest portions where applicable.

 

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  For the Three Months Ended September 30,  For the Nine Months Ended September 30, 
  2020  2019  2020  2019 
Net loss $(5,077) $(11) $(16,258) $(1,236)
FFO adjustments:                
Depreciation and amortization of real estate assets  2,690   2,813   8,051   8,629 
Gain on disposition of real estate  -   5   -   (69)
Adjustments to equity in earnings from unconsolidated affiliated entities  433   518   1,279   1,386 
FFO  (1,954)  3,325   (6,928)  8,710 
MFFO adjustments:                
                 
Other adjustments:                
Acquisition and other transaction related costs expensed(1)  -   -   -   - 
Adjustments to equity in earnings from unconsolidated affiliated entities  1   (20)  (4)  (28)
Amortization of above or below market leases and liabilities(2)  -   -   -   - 
Accretion of discounts and amortization of premiums on debt investments  -   -   -   - 
Mark-to-market adjustments(3)                
Non-recurring (gains)/losses from extinguishment/sale of debt, derivatives or securities holdings(4)  -   -   245   - 
MFFO  (1,953)  3,305   (6,687)  8,682 
Straight-line rent(5)  -   -   -   - 
MFFO - IPA recommended format $(1,953) $3,305  $(6,687) $8,682 
                 
Net loss $(5,077) $(11) $(16,258) $(1,236)
Less: loss/(income) attributable to noncontrolling interests  98   (41)  299   (58)
Net loss applicable to Company's common shares $(4,979) $(52) $(15,959) $(1,294)
Net loss per common share, basic and diluted $(0.29) $(0.00) $(0.92) $(0.07)
                 
FFO $(1,954) $3,325  $(6,928) $8,710 
Less: FFO attributable to noncontrolling interests  40   (69)  126   (189)
FFO attributable to Company's common shares $(1,914) $3,256  $(6,802) $8,521 
FFO per common share, basic and diluted $(0.11) $0.18  $(0.39) $0.48 
                 
MFFO - IPA recommended format $(1,953) $3,305  $(6,687) $8,682 
Less: MFFO attributable to noncontrolling interests  40   (69)  127   (189)
MFFO attributable to Company's common shares $(1,913) $3,236  $(6,560) $8,493 
                 
Weighted average number of common shares outstanding, basic and diluted  17,430   17,624   17,434   17,712 

  

(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.

 

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 (3)Management believes that adjusting for mark-to-market adjustments is appropriate because they are nonrecurring items that may not be reflective of ongoing operations and reflects unrealized impacts on value based only on then current market conditions, although they may be based upon current operational issues related to an individual property or industry or general market conditions.  Mark-to-market adjustments are made for items such as ineffective derivative instruments, certain marketable securities and any other items that GAAP requires we make a mark-to-market adjustment for. The need to reflect mark-to-market adjustments is a continuous process and is analyzed on a quarterly and/or annual basis in accordance with GAAP.
   
(4)Management believes that adjusting for gains or losses related to extinguishment/sale of debt, derivatives or securities holdings is appropriate because they are items that may not be reflective of ongoing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods.
   
(5)Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance.

 

The table below presents our cumulative distributions declared and cumulative FFO attributable to our common shares:

 

  For the period April, 28, 2008 
  (date of inception) through 
  September 30, 2020 
FFO attributable to Company's common shares $66,043 
Distributions declared and paid $85,040 

 

New Accounting Pronouncements  

 

See Note 2 of the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been adopted during 2020, if any, and certain accounting standards that we have not yet been required to implement and may be applicable to our future operations.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

As of the end of the period covered by this report, management, including our chief executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of the evaluation, our chief executive officer and principal financial officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.

 

There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There were no significant deficiencies or material weaknesses identified in the evaluation, and therefore, no corrective actions were taken.

 

PART II. OTHER INFORMATION:

 

ITEM 1. LEGAL PROCEEDINGS.

 

From time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes.

 

As of the date hereof, the Company is not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

 

 

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

 

Recent Sales of Unregistered Securities

 

During the period covered by this Form 10-Q, we did not sell any equity securities that were not registered under the Securities Act of 1933.

   

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

None.

 

ITEM 5. OTHER INFORMATION

None.

 

ITEM 6. EXHIBITS

 

Exhibit

Number

 

 

Description

   
31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1* Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
32.2* Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
101* XBRL (eXtensible Business Reporting Language).The following financial information from Lightstone Value Plus Real Estate Investment Trust II, Inc. on Form 10-Q for the quarter ended September 30, 2020, filed with the SEC on November 12, 2020, formatted in XBRL includes: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Operations, (3) Consolidated Statements of Comprehensive Income, (4) Consolidated Statements of Stockholders’ Equity, (5) Consolidated Statements of Cash Flows and (6) the Notes to the Consolidated Financial Statement.

  

 *Filed herewith

 

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SIGNATURES

 

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

 

 LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC.
  
Date: November 12, 2020By:   /s/ David Lichtenstein
 David Lichtenstein
 Chairman and Chief Executive Officer
(Principal Executive Officer) 

  

Date: November 12, 2020By:   /s/ Seth Molod
 Seth Molod
 

Chief Financial Officer

(Duly Authorized Officer and Principal Financial and Accounting Officer)

 

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