10-Q 1 tm1919552-1_10q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2019

¨	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 11, 2019, there were approximately 17.6 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, 2019 and December 31, 2018		3

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018		4

	Consolidated Statements of Comprehensive Income /(Loss) for the Three and Nine Months Ended September 30, 2019 and 2018		5

	Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018		6

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018		7

	Notes to Consolidated Financial Statements		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 4.	Controls and Procedures		30

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings		31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		31

Item 3.	Defaults Upon Senior Securities		31

Item 4.	Mine Safety Disclosures		31

Item 5.	Other Information		31

Item 6.	Exhibits		32

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, 2019			December 31, 2018
	(unaudited)
Assets
Investment property:
Land and improvements	$	36,635		$	40,584
Building and improvements		199,903			216,029
Furniture and fixtures		32,658			38,362
Construction in progress		2,574			3,457
Gross investment property		271,770			298,432
Less accumulated depreciation		(37,914	)		(38,550	)
Net investment property		233,856			259,882

Investments in unconsolidated affiliated entities		16,951			17,721
Cash and cash equivalents		23,005			27,293
Marketable securities, available for sale		8,752			7,901
Restricted cash		1,778			3,367
Accounts receivable and other assets		4,324			4,703
Assets held for sale		10,741			-
Total Assets	$	299,407		$	320,867

Liabilities and Stockholders' Equity
Accounts payable and other accrued expenses	$	7,792		$	8,107
Margin loan		4,712			5,060
Mortgages payable, net		144,906			152,900
Due to related party		608			557
Distributions payable		3,080			3,154
Liabilities held for sale		512			-
Total liabilities		161,610			169,778

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, 17.6 million and 17.9 million shares issued and outstanding, respectively		176			179
Additional paid-in-capital		148,824			151,538
Accumulated other comprehensive income/(loss)		34			(817	)
Accumulated deficit		(23,808	)		(13,277	)
Total Company stockholders' equity		125,226			137,623
Noncontrolling interests		12,571			13,466
Total Stockholders' Equity		137,797			151,089
Total Liabilities and Stockholders' Equity	$	299,407		$	320,867

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

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,
	2019			2018			2019			2018
Revenues	$	19,616		$	19,991		$	58,301		$	60,823

Expenses:
Property operating expenses		12,690			13,444			37,910			39,905
Real estate taxes		954			905			2,827			2,605
General and administrative costs		1,137			1,199			3,548			3,836
Depreciation and amortization		2,813			2,926			8,629			8,646

Total operating expenses		17,594			18,474			52,914			54,992

Operating income		2,022			1,517			5,387			5,831

Interest and dividend income		136			117			419			378
Loss on sale of marketable securities, available for sale		-			-			-			(31	)
Earnings from investments in unconsolidated affiliated entities		(4	)		52			(161	)		199
Interest expense		(2,157	)		(2,345	)		(6,921	)		(7,398	)
Other (expense)/income, net		(8	)		11			40			(35	)

Net loss		(11	)		(648	)		(1,236	)		(1,056	)

Less: net income attributable to noncontrolling interests		(41	)		(7	)		(58	)		(54	)

Net loss applicable to Company's common shares	$	(52	)	$	(655	)	$	(1,294	)	$	(1,110	)

Net loss per Company's common share, basic and diluted	$	-		$	(0.04	)	$	(0.07	)	$	(0.06	)

Weighted average number of common shares outstanding, basic and diluted		17,624			17,996			17,712			18,084

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

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(Amounts in thousands)

(Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Net loss	$	(11	)	$	(648	)	$	(1,236	)	$	(1,056	)

Other comprehensive income/(loss):
Holding gain/(loss) on marketable securities, available for sale		80			243			851			(108	)
Reclassification adjustment for loss included in net loss		-			-			-			31

Other comprehensive income/(loss)		80			243			851			(77	)

Comprehensive income/(loss)		69			(405	)		(385	)		(1,133	)

Less: Comprehensive income attributable to noncontrolling interest		(41	)		(7	)		(58	)		(54	)

Comprehensive income/(loss) attributable to the Company's common shares	$	28		$	(412	)	$	(443	)	$	(1,187	)

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

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)

	Common Stock						Additional Paid-In			Accumulated Other Comprehensive			Accumulated			Noncontrolling			Total Stockholders'
	Shares			Amount			Capital			Loss			Deficit			Interests			Equity
BALANCE, June 30, 2018		18,073		$	181		$	153,920		$	(531	)	$	(4,969	)	$	15,047		$	163,648

Net loss		-			-			-			-			(655	)		7			(648	)
Other comprehensive income		-			-			-			243			-			-			243
Distributions declared (a)		-			-			-			-			(3,170	)		-			(3,170	)
Distributions to noncontrolling interests		-			-			-			-			-			(349	)		(349	)
Redemption and cancellation of shares		(108	)		(1	)		(1,064	)		-			-			-			(1,065	)

BALANCE, September 30, 2018		17,965		$	180		$	152,856		$	(288	)	$	(8,794	)	$	14,705		$	158,659

(a) Distributions per share were $0.175.

	Common Stock						Additional Paid-In			Accumulated Other Comprehensive			Accumulated			Noncontrolling			Total Stockholders'
	Shares			Amount			Capital			Loss			Deficit			Interests			Equity
BALANCE, December 31, 2017		18,199		$	182		$	155,162		$	(211	)	$	1,771		$	15,687		$	172,591

Net loss		-			-			-			-			(1,110	)		54			(1,056	)
Other comprehensive loss		-			-			-			(77	)		-			-			(77	)
Distributions declared (a)		-			-			-			-			(9,455	)		-			(9,455	)
Contributions of noncontrolling interests		-			-			-			-			-			644			644
Distributions to noncontrolling interests		-			-			-			-			-			(1,680	)		(1,680	)
Redemption and cancellation of shares		(234	)		(2	)		(2,306	)		-			-			-			(2,308	)

BALANCE, September 30, 2018		17,965		$	180		$	152,856		$	(288	)	$	(8,794	)	$	14,705		$	158,659

(a) Distributions per share were $0.525.

	Common Stock						Additional Paid-In			Accumulated Other Comprehensive			Accumulated			Noncontrolling			Total Stockholders'
	Shares			Amount			Capital			(Loss)/Income			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.

	Common Stock						Additional Paid-In			Accumulated Other Comprehensive			Accumulated			Noncontrolling			Total Stockholders'
	Shares			Amount			Capital			(Loss)/Income			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.

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

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,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,236	)	$	(1,056	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		8,629			8,646
Amortization of deferred financing costs		309			670
Earnings from investments in unconsolidated affiliated entities		161			(199	)
Other non-cash adjustments		(22	)		153
Changes in assets and liabilities:
Increase in accounts receivable and other assets		(145	)		(1,091	)
Increase in accounts payable and other accrued expenses		95			723
Increase/(decrease) in due to related party		51			(388	)

Net cash provided by operating activities		7,842			7,458

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment property		(5,652	)		(4,144	)
Proceeds from sale of marketable securities		-			1,239
Proceeds from disposition of investment property, net		12,955			-
Investments in unconsolidated affiliated entities		(58	)		(13,266	)
Distributions from unconsolidated affiliated entities		666			525

Net cash provided by/(used in) investing activities		7,911			(15,646	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgages payable		-			140,000
Payments on mortgages payable		(8,302	)		(130,509	)
Payment of loan fees and expenses		-			(1,130	)
Payments on margin loan, net		(348	)		(1,623	)
Redemption and cancellation of common shares		(2,717	)		(2,308	)
Contributions from noncontrolling interests		89			644
Distributions to noncontrolling interests		(1,042	)		(1,680	)
Distributions to common stockholders		(9,310	)		(9,496	)

Net cash used in financing activities		(21,630	)		(6,102	)

Net change in cash, cash equivalents and restricted cash		(5,877	)		(14,290	)
Cash, cash equivalents and restricted cash, beginning of year		30,660			50,173
Cash, cash equivalents and restricted cash, end of period	$	24,783		$	35,883

Supplemental cash flow information for the periods indicated is as follows:

Cash paid for interest	$	6,725		$	3,632
Distributions declared but not paid	$	3,080		$	3,154
Holding gain on marketable securities, available for sale	$	851		$	77
Assets classified as held for sale	$	10,741		$	-
Liabilities classified as held for sale	$	512		$	-
Investment property acquired but not paid	$	343		$	2

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	$	23,005		$	32,587
Restricted cash		1,778			3,296
Total cash and restricted cash	$	24,783		$	35,883

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

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.	*Organization*

Lightstone Value Plus Real Estate Investment Trust II, Inc. (the “Lightstone REIT II”) is a Maryland corporation formed on April 28, 2008, which has qualified as a real estate investment trust (“REIT”) for U.S. federal income tax purposes since its taxable year ending December 31, 2009. The Lightstone REIT II was formed primarily for the purpose of engaging in the business of investing in and owning commercial and residential real estate properties located principally in North America, as well as other real estate-related securities, such as collateralized debt obligations, commercial mortgage-backed securities and mortgage and mezzanine loans secured, directly or indirectly, by the same types of properties which it may acquire directly.

The Lightstone REIT II is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT II LP (the “Operating Partnership”), a Delaware limited partnership formed on April 30, 2008, in which Lightstone REIT II as the general partner, held a 99% interest as of September 30, 2019.

The 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 the Lightstone REIT II, its Operating Partnership or the Company as required by the context in which such pronoun is used.

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

The Sponsor has various majority owned and controlled affiliated property managers, which may manage certain of 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 shares of common stock are not currently listed on a national securities exchange. The Company may seek to list its shares of common stock for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its shares of common stock until they are listed for trading. In the event the Company does not obtain listing prior to the tenth anniversary of the completion or termination of the Follow-on Offering, which was terminated on September 27, 2014, 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

Partners of Operating Partnership

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

From the Company’s inception through the termination of the Follow-On Offering on September 27, 2014, Lightstone SLP II LLC, which is wholly owned by the 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. See Notes 4 and 10 for additional information.

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)

Other Noncontrolling Interests in Consolidated Subsidiaries

Other noncontrolling interests consist of (i) a 2.5% membership interest held by Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”), a related party REIT also sponsored by the Company’s Sponsor, in a joint venture (the “Joint Venture”) formed between the Company and Lightstone I that currently owns 7 of our hotels as of September 30, 2019 and (ii) the membership interests held by minority owners in certain of our hotels.

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, 2019, the 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.

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

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

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,
Revenues	2019		2018		2019		2018
Room	$	18,052	$	18,845	$	54,121	$	57,355
Food, beverage and other		1,564		1,146		4,180		3,468

Total revenues	$	19,616	$	19,991	$	58,301	$	60,823

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)

Recently Adopted Accounting Pronouncements

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

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued an accounting standards update (“ASU”) that amends the existing lease accounting guidance and requires lessees to recognize a lease liability and a right-of-use lease asset for all leases on their balance sheets. Lessees of operating leases will continue to recognize lease expense in a manner similar to current accounting. The Company adopted the ASU on January 1, 2019, using the modified retrospective approach, whereby the Company applied the standard at the beginning of the period of adoption and has presented financial information for periods prior to January 1, 2019 in accordance with prior guidance. Upon adoption, the Company elected the following practical expedients provided by the standard: (i) an entity need not reassess whether any expired or existing contract is a lease or contains a lease, (ii) an entity need not reassess the lease classification of any expired or existing leases, (iii) an entity need not reassess initial direct costs for any existing leases and (iv) the evaluation of lease and non-lease components of a contract. The Company also elected the short-term lease exception provided for in the standard and therefore will only recognize right-of-use lease assets and related lease liabilities for leases with a term greater than one year.

The implementation of the ASU had no cumulative effect on accumulated deficit and the adoption resulted in the recognition of right-of-use lease assets of $0.3 million and related lease liabilities of $0.3 million as of January 1, 2019.

New Accounting Pronouncements

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

3.	*Leases*

On January 1, 2019, the Company adopted the ASU and elected the practical expedients which permitted it to not reassess its prior conclusions about lease identification, classification, and initial direct costs. The Company has operating leases related to land used as a parking lot and vehicles. These leases have remaining terms of 3 months to 3 years, some of which include options to extend the leases for additional years. One of our leases contains renewal options which are solely at the Company’s discretion and are not included in the lease term since it is not considered reasonably certain the Company will exercise those options. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Consequently on January 1, 2019, the Company recognized right-of-use lease assets of $0.3 million and related lease liabilities of $0.3 million. Since most of the Company's leases do not provide an implicit rate, we used our incremental borrowing rate of 5.7% calculated based on information available at adoption.

As of September 30, 2019, the Company's right-of-use lease assets of $0.2 million are included in accounts receivable and other assets and its related lease liabilities of $0.2 million are presented in accounts payable and accrued expenses on the Company's consolidated balance sheets.

During the three and nine months ended September 30, 2019, the Company's total operating lease cost, which is included in property operating expenses on the Company's consolidated statements of operations, was $38 and $121, respectively, and during the nine months ended September 30, 2019, the operating cash outflows from operating leases was $121. As of September 30, 2019, the weighted average operating lease term was 19 months.

The adoption of this standard had minimal impact on the Company's consolidated statements of operations.

The maturities of the lease liabilities as of September 30, 2019 for the Company’s operating leases are as follows:

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)

2019	$	40
2020		160
2021		51
Thereafter		-
Total lease payments	$	251
Less: imputed interest	$	(27	)
Present value of lease liabilities	$	224

4.	*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:

					As of
Entity	Date of Ownership	Ownership %			September 30, 2019		December 31, 2018
Brownmill	Various		48.58	%	$	4,733	$	4,967
Hilton Garden Inn Joint Venture	March 27, 2018		50.00	%		12,218		12,754
Total investments in unconsolidated affiliated real estate entities					$	16,951	$	17,721

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, 2019, 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, 2019, the Company received distributions from Brownmill aggregating $0.2 million.

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:

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)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Revenue	$	857		$	913		$	2,631		$	2,792

Property operating expenses		410			354			1,206			1,148
Depreciation and amortization		354			177			704			534

Operating income		93			382			721			1,110

Interest expense and other, net		(172	)		(174	)		(532	)		(558	)

Net (loss)/income	$	(79	)	$	208		$	189		$	552
Company's share of net (loss)/income (48.58%)	$	(38	)	$	101		$	92		$	268

Additional depreciation and amortization expense ⁽¹⁾		(32	)		(32	)		(95	)		(97	)

Company's earnings from investment	$	(70	)	$	69		$	(3	)	$	171

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

The following table represents the condensed balance sheets for Brownmill:

	As of		As of
	September 30, 2019		December 31, 2018
Real estate, at cost (net)	$	13,698	$	14,239
Cash and restricted cash		1,007		1,055
Other assets		1,237		1,226

Total assets	$	15,942	$	16,520

Mortgage payable	$	14,116	$	14,278
Other liabilities		400		530
Members' capital		1,426		1,712

Total liabilities and members' capital	$	15,942	$	16,520

Hilton Garden Inn Joint Venture

On March 27, 2018, the Company and its Sponsor’s other public program, Lightstone Value Plus Real Estate Investment Trust III, Inc. (“Lightstone REIT III”), acquired, through LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”) a 183-room, limited-service hotel located at 29-21 41^st 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, excluding closing and other related transaction costs. The Company and Lightstone REIT III each have 50.0% joint venture ownership interests, respectively, 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 ownership interest in the Hilton Garden Inn Joint Venture is a co-managing interest. The Company accounts for its ownership 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.

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)

Subsequent to the Company’s acquisition of its membership interest in the Hilton Garden Joint Venture through September 30, 2019, it has made an aggregate of $0.7 million (including $0.1 million during the nine months ended September 30, 2019) of additional capital contributions and received aggregate distributions of $1.0 million (including $0.4 million during the nine months ended September 30, 2019).

Hilton Garden Inn Joint Venture Financial Information

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

	For the Three Months Ended September 30, 2019			For the Three Months Ended September 30, 2018			For the Nine Months Ended September 30, 2019			For the Period March 27, 2018 through September 30, 2018
Revenues	$	3,016		$	2,856		$	8,110		$	6,040

Property operating expenses		1,750			1,754			5,020			3,725
General and administrative costs		1			13			(21	)		15
Depreciation and amortization		629			639			1,898			1,274
Operating income/(loss)		636			450			1,213			1,026
Interest expense		(505	)		(482	)		(1,531	)		(970	)

Net income/(loss)	$	131		$	(32	)	$	(318	)	$	56

Company's share of net income/(loss) (50.00%)	$	66		$	(16	)	$	(159	)	$	28

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

	As of		As of
	September 30, 2019		December 31, 2018
Investment property, net	$	57,145	$	58,799
Cash		1,016		554
Other assets		1,232		1,218

Total assets	$	59,393	$	60,571

Mortgage payable, net	$	34,807	$	34,766
Other liabilities		720		867
Members' capital		23,866		24,938

Total liabilities and members' capital	$	59,393	$	60,571

5.	*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, 2019
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Debt securities:
Corporate Bonds	$	8,718	$	77	$	(43	)	$	8,752

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

Notes to Consolidated Financial Statements

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

(Unaudited)

	As of December 31, 2018
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Debt securities:
Corporate Bonds	$	8,718	$	-	$	(817	)	$	7,901

When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. As of September 30, 2019 and December 31, 2018, the Company did not recognize any impairment charges.

Fair Value Measurements

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

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

	•	Level 1 – Quoted prices in active markets for identical assets or liabilities.

	•	Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

	•	Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As of September 30, 2019 and December 31, 2018, 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, 2019.

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, 2019
Due in 1 year	$	-
Due in 1 year through 5 years		5,119
Due in 5 year through 10 years		-
Due after 10 years		3,633
Total	$	8,752

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 margin loan bears interest at Libor plus 0.85% (3.25% as of September 30, 2019).

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)

6.	*Held for Sale*

On August 19, 2019, certain wholly owned subsidiaries (collectively, the “ Peabody Sellers”) of the Operating Partnership and MCR Hospitality Fund REIT LLC (the “Peabody Buyer”), an unaffiliated third party, entered into a purchase and sale agreement (the “SpringHill Suites – Peabody Agreement”) pursuant to which the Peabody Sellers would dispose of a SpringHill Suites by Marriott hotel (the “SpringHill Suites – Peabody”) located in Peabody, Massachusetts to the Peabody Buyer for an aggregate contractual sales price of $19.0 million.

As of September 30, 2019, the SpringHill Suites – Peabody met the criteria to be classified as held for sale and therefore, its associated assets and liabilities are classified as held for sale in the consolidated balance sheet as of September 30, 2019.

On October 24, 2019, pursuant to the terms of the SpringHill Suites – Peabody Agreement, the Peabody Sellers completed the disposition of the SpringHill Suites – Peabody to the Peabody Buyer for an aggregate contractual sales price of $19.0 million. Approximately $8.8 million of the proceeds were used towards the repayment the Revolving Credit Facility.

The following summary presents the major components of assets and liabilities held for sale, of as the date indicated.

	As of
	September 30, 2019
Net investment property	$	10,466
Other assets		275

Total assets held for sale	$	10,741

Accounts payable and accrued expenses		512

Total liabilities held for sale	$	512

7.	*Disposition of Alabama Hotels*

On February 11, 2019, certain wholly owned subsidiaries (collectively, the “Alabama Sellers”) of the Company’s operating partnership and VAH Investments, LLC (the “Alabama Buyer”), an unaffiliated third party, entered into purchase and sale agreements (collectively, the “Alabama Hotel Agreements”) pursuant to which the Alabama Sellers would dispose of two limited services hotels (the “Alabama Hotels”) to the Alabama Buyer for an aggregate contractual sales price of $13.3 million.

The Alabama Hotels, which had an aggregate of 169 rooms, 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.

On May 9, 2019, pursuant to the terms of the Alabama Hotel Agreements, the Alabama Sellers completed the disposition of the Alabama Hotels to the Alabama Buyer for an aggregate contractual sales price of $13.3 million. In connection with the disposition of the Alabama Hotels, the Company recognized a net gain on the disposition of real estate of approximately $0.1 million (included in other income/(expense), net on the consolidated statements of operations) during the second quarter of 2019. Approximately $8.2 million of the proceeds were used for a required paydown of the Revolving Credit Facility (See Note 8).

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

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 Holiday Inn Express – Auburn was wholly owned by the Joint Venture. As a result, as of September 30, 2019, the Joint Venture held membership interests in seven hotels.

8.	*Mortgages payable, net*

Mortgages payable, net consisted of the following:

		Weighted Average Interest Rate
Description	Interest Rate	as of September 30, 2019			Maturity Date	Amount Due at Maturity		As of September 30, 2019			As of December 31, 2018
Revolving Credit Facility	LIBOR + 3.15%		5.70	%	May 2021	$	123,045	$	131,831		$	140,000

Courtyard – Paso Robles	5.49%		5.49	%	November 2023		13,022		13,852			13,985

Total mortgages payable			5.68	%		$	136,067		145,683			153,985

Less: Deferred financing costs									(777	)		(1,085	)

Total mortgages payable, net								$	144,906		$	152,900

Revolving Credit Facility

On May 17, 2018, the Company, through certain subsidiaries, entered into a nonrecourse revolving credit facility (the “Revolving Credit Facility”) with a bank of up to $140.0 million. The Revolving Credit Facility bore interest at Libor plus 3.50%, has an initial term of three years, subject to two, one-year extension options at the sole discretion of Western Alliance, and provides for monthly interest-only payments with the unpaid principal balance due at maturity. The Revolving Credit Facility’s maturity may be accelerated upon the occurrence of certain customary events of default. The Revolving Credit Facility provides for borrowings up to 65.0% of the loan-to-value ratio of properties designated as collateral and also requires the maintenance of certain financial ratios, including a minimum debt yield ratio, which may also be achieved through principal paydowns on the outstanding balance of the Revolving Credit Facility.

Effective March 31, 2019, the Company entered into a loan modification agreement with the lender for the Revolving Credit Facility, which, among other things, decreased the interest rate to Libor plus 3.15% and modified the requirements under the minimum debt yield ratio.

On May 9, 2019, the Company completed the disposition of the Alabama Hotels, two properties that were previously designated as collateral under the Revolving Credit Facility. Approximately $8.2 million of the proceeds from the disposition of the Alabama Hotels were used for a required paydown of the Revolving Credit Facility. (See Note 7). As a result, as of September 30, 2019, the Revolving Credit Facility had an outstanding balance of $131.8 million and was collateralized by 13 of the Company’s hotels. Subsequently, on October 24, 2019, the Company sold the SpringHill Suites – Peabody and at closing made a required principal paydown of approximately $8.8 million under the Revolving Credit Facility to reduce the outstanding principal balance to approximately $123.0 million (see Note 6).

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

Notes to Consolidated Financial Statements

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

(Unaudited)

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, 2019:

	2019		2020		2021		2022		2023		Thereafter		Total
Principal maturities	$	8,832	$	187	$	123,245	$	211	$	13,208	$	-	$	145,683

Less: deferred financing costs														(777	)

Total principal maturities, net													$	144,906

Restricted escrows

Pursuant to the Company’s loan agreements, escrows in the amount of $1.8 million and $3.4 million were held in restricted cash accounts as of September 30, 2019 and December 31, 2018, respectively. Such escrows will be released in accordance with the applicable loan agreements for payments of real estate taxes, insurance and capital improvement transactions, as required.

Debt Compliance

Certain of our debt agreements also contain clauses providing for prepayment penalties and the Revolving Credit Facility requires the maintenance of certain ratios, including a minimum debt yield ratio, which may also be achieved through principal paydowns. As of September 30, 2019, the Company was in compliance with the minimum debt yield ratio for the Revolving Credit Facility.

9.	*Equity*

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.

10.

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,
	2019		2018		2019		2018
Acquisition fees (1)	$	-	$	-	$	-	$	285
Development fees (2)		-		-		62		-
Asset management fees (general and administrative costs)		750		768		2,283		2,209

Total	$	750	$	768	$	2,345	$	2,494

(1) The acquisition fee for the Hilton Garden Inn Joint Venture of $285 was capitalized and included in investment in unconsolidated affiliated entities on the consolidated balance sheets.

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

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)

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.

During the three and nine months ended September 30, 2019, distributions of $0.3 million and $0.9 million were declared and paid on the Subordinated Profits Interests.

11.

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:

	As of September 30, 2019				As of December 31, 2018
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Mortgages payable	$	145,683	$	146,271	$	153,985	$	154,134

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

12.

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.

13.

Subsequent Events

Distribution Payments

On October 15, 2019, the distribution for the three-month period ending September 30, 2019 of $3.1 million was paid in cash.

Distribution Declaration

On November 12, 2019, the Company’s Board of Directors authorized and it declared a distribution of $0.175 per share for the quarterly period ending December 31, 2019. The quarterly distribution is the pro rata equivalent of an annual distribution of $0.70 per share, or an annualized rate of 7.0% assuming a purchase price of $10.00 per share. The distribution will be paid on or about the 15th day of the month following the quarter-end to stockholders of record at the close of business on the last day of the quarter-end.

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 and may differ from the amount of the distribution determined for this period. The Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, current rental revenues, 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 its taxable income. The Company cannot assure that regular distributions will continue to be made or that it will maintain any particular level of distributions that it has established or may establish.

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 as well as other risks listed from time to time in this Form 10-Q, our Form 10-K, our Registration Statements on Form S-11, as the same may be amended and supplemented from time to time, and in our 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.

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, 2019, 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, 2019, 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, 2019, 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 as well as our investment opportunities are impacted by the health of the North American economies. Our business and financial performance may be adversely affected by current and future economic conditions, such as availability of credit, financial markets volatility, and recession.

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

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

Portfolio Summary –

Location

Year Built

Leasable
Square Feet

Percentage
Occupied as of
September 30, 2019

Annualized
Revenues
based on rents as of
September 30, 2019

Annualized
Revenues
per square foot
as of September 30, 2019

Unconsolidated Affiliated Entities:

Retail

Brownmill LLC (2 retail properties)

Old Bridge and Vauxhall, New Jersey

1962

155,928

2.5 million

16.35

Percentage
Occupied
for the Nine

Revenue per
Available
Room
("RevPAR") for the Nine

Average Daily
Rate
For the Nine

Location

Year Built

Year to Date
Available
Rooms

Months Ended
September 30,
2019

Hospitality

Hilton Garden Inn - Long Island City (1)

Long Island City, New York

2014

49,959

151.47

165.39

(1) Acquired 50% joint venture ownership interest on March 27, 2018

						Percentage Occupied for the Nine			Revenue per Available Room ("RevPAR") for the Nine		Average Daily Rate For the Nine
	Location	Year Built		Year to Date Available Rooms		Months Ended September 30, 2019			Months Ended September 30, 2019		Months Ended September 30, 2019
Consolidated Properties:

Hospitality

SpringHill Suites - Peabody	Peabody, Massachusetts		2002		44,772		77.9	%	$	96.68	$	124.17

Fairfield Inn - East Rutherford	East Rutherford, New Jersey		1990		38,493		79.2	%	$	98.84	$	124.78

TownePlace Suites - Little Rock	Little Rock, Arkansas		2009		25,116		79.5	%	$	61.22	$	77.06

Aloft - Tucson	Tucson, Arizona		1971		42,042		75.5	%	$	109.03	$	144.50

Aloft - Philadelphia	Philadelphia, Pennsylvania		2008		37,128		76.6	%	$	93.84	$	122.55

Four Points by Sheraton - Philadelphia	Philadelphia, Pennsylvania		1985		48,321		74.8	%	$	86.35	$	115.40

Courtyard - Willoughby	Willoughby, Ohio		1999		24,570		82.3	%	$	98.09	$	119.13

Fairfield Inn - DesMoines	West Des Moines, Iowa		1997		27,846		66.6	%	$	68.99	$	103.61

SpringHill Suites - DesMoines	West Des Moines, Iowa		1999		26,481		57.9	%	$	59.97	$	103.67

Hampton Inn - Miami	Miami, Florida		1996		34,398		78.0	%	$	87.03	$	111.62

Hampton Inn & Suites - Fort Lauderdale	Fort Lauderdale, Florida		1996		28,392		83.0	%	$	109.44	$	131.85

Courtyard - Parsippany	Parsippany, New Jersey		2001		41,223		69.0	%	$	105.41	$	152.70

Hyatt Place - New Orleans	New Orleans, Louisiana		1996		46,410		64.1	%	$	107.58	$	167.71

Residence Inn - Needham	Needham, Massachusetts		2013		36,036		81.5	%	$	139.73	$	171.37

Courtyard - Paso Robles	Paso Robles, California		2007		35,490		82.6	%	$	120.04	$	145.38

			Hospitality Total		536,718		75.1	%	$	97.40	$	130.43

Annualized base rent is defined as the minimum monthly base rent due as of September 30, 2019 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, 2019 to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2018 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. In connection with the disposition of the Alabama Hotels, we recognized a net gain on the disposition of real estate of approximately $0.1 million (which is included in other income/(expense), net on the consolidated statements of operations) during the second quarter of 2019.

The Alabama Hotels, which had an aggregate of 169 rooms, 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.

We currently have one operating segment. As of September 30, 2019, we majority owned and consolidated the operating results and financial condition of 15 limited service hotels containing a total of 1,966 rooms. Additionally, we held a 48.6% membership interest in Brownmill, which owns two retail properties, and a 50.0% joint venture ownership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”), an affiliated real estate entity that owns and operate a 183-room limited service hotel located in Long Island City, New York (the “Hilton Garden Inn – Long Island City”), both of which we account for under the equity method of accounting. We acquired our 50.0% ownership interest in the Hilton Garden Inn Joint Venture on March 27, 2018.

For the Three Months Ended September 30, 2019 vs. September 30, 2018

Consolidated

Our revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation and amortization for the three months ended September 30, 2019 and 2018 are attributable to all of our consolidated hospitality properties. Overall, our hospitality portfolio experienced increases in (i) revenue per available room (“RevPAR”) from $95.94 to $99.80 for the 2018 and 2019 periods, respectively, and (ii) the average daily rate per room (“ADR”) from $124.48 to $127.16 for the 2018 and 2019 periods, respectively and (iii) an increase in the percentage of rooms occupied from 77.1% to 78.5% for the 2018 and 2019 periods, respectively.

Revenues

Revenues decreased by $0.4 million to $19.6 million during the three months ended September 30, 2019 compared to $20.0 million during the same period in 2018. The decrease was primarily attributable to lower revenues of $1.1 million resulting from the disposition of the Alabama Hotels partially offset by an increase in revenues from our remaining hospitality properties resulting from an increase in the percentage of rooms occupied, RevPAR and ADR.

Property operating expenses

Property operating expenses decreased by $0.7 million to $12.7 million during the three months ended September 30, 2019 compared to $13.4 million during the same period in 2018. The decrease was primarily attributable to lower property operating expenses of $0.9 million resulting from the disposition of the Alabama Hotels partially offset by higher property operating expenses reflecting the higher occupancy during the 2019 period as compared to the 2018.

Real estate taxes

Real estate taxes increased slightly by $0.1 million to $1.0 million during the three months ended September 30, 2019 compared to $0.9 million for the same period in 2018.

General and administrative expenses

General and administrative expenses decreased slightly by $0.1 million to $1.1 million during the three months ended September 30, 2019 compared to $1.2 million for the same period in 2018.

Depreciation and amortization

Depreciation and amortization expense decreased slightly by $0.1 million to $2.8 million during the three months ended September 30, 2019 compared to $2.9 million for the same period in 2018.

Interest expense

Interest expense decreased by $0.1 million to $2.2 million during the three months ended September 30, 2019 compared to $2.3 million for the same period in 2018. The decrease reflects lower amortization of deferred financing costs and interest expense (resulting from the $8.2 million paydown of our Revolving Credit Facility made in connection with the disposition of the Alabama Hotels) during the 2019 period.

Earnings from investments in unconsolidated affiliated real estate entities

Our earnings from investments in unconsolidated affiliated real estate entities during the three months ended September 30, 2019 was a loss of $4 compared to a gain of $52 for the same period in 2018. Our earnings from investments in unconsolidated affiliated real estate entities is attributable to our ownership interests in the Hilton Garden Inn Joint Venture (acquired March 27, 2018) and Brownmill. We account for our ownership interest 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, membership interests held by Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”), a related party REIT also sponsored by the Company’s Sponsor, in a joint venture formed with us that currently owns 7 of our hotels, and the interests held by minority owners in certain of our hotels.

For the Nine Months Ended September 30, 2019 vs. September 30, 2018

Consolidated

The revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation and amortization for the nine months ended September 30, 2018 are attributable to all of our consolidated hospitality properties, including the Alabama Hotels through their disposition on May 9, 2019. Our hospitality portfolio experienced decreases in (i) the percentage of rooms occupied from 76.6% to 74.9% for the 2018 and 2019 periods, respectively and (ii) RevPAR from $98.40 to $96.93 for the 2018 and 2019 periods, respectively, partially offset by an increase in the ADR from $128.51 to $129.37 for the 2018 and 2019 periods, respectively.

Revenues

Revenues decreased by $2.5 million to $58.3 million during the nine months ended September 30, 2019 compared to $60.8 million during the same period in 2018. The decrease reflects the lower percentage of rooms occupied and RevPAR, partially offset by the increase in ADR, during the 2019 period compared to the 2018 period, as well as lower revenues of $1.7 million attributable to the disposition of the Alabama Hotels.

Property operating expenses

Property operating expenses decreased by $2.0 million to $37.9 million during the nine months ended September 30, 2019 compared to $39.9 million during the same period in 2018. The decrease in property operating expenses reflects the lower occupancy during the 2019 period as compared to the 2018 period ,as well as lower operating expenses of $1.4 million attributable to the disposition of the Alabama Hotels.

Real estate taxes

Real estate taxes increased slightly by $0.2 million to $2.8 million during the nine months ended September 30, 2019 compared to $2.6 million for the same period in 2018.

General and administrative expenses

General and administrative expenses decreased by $0.3 million to $3.5 million during the nine months ended September 30, 2019 compared to $3.8 million for the same period in 2018.

Depreciation and amortization

Depreciation and amortization expense was relatively unchanged at approximately $8.6 million during both the nine months ended September 30, 2019 and 2018.

Interest expense

Interest expense decreased by $0.5 million to $6.9 million during the nine months ended September 30, 2019 compared to $7.4 million for the same period in 2018. The decrease reflects lower amortization of deferred financing costs and interest expense (resulting from the $8.2 million paydown of our Revolving Credit Facility made in connection with the disposition of the Alabama Hotels) during the 2019 period.

Earnings from investments in unconsolidated affiliated real estate entities

Our earnings from investments in unconsolidated affiliated real estate entities during the nine months ended September 30, 2019 was a loss of $0.2 million compared to a gain of $0.2 million for the same period in 2018. Our earnings from investments in unconsolidated affiliated real estate entities is attributable to our ownership interests in the Hilton Garden Inn Joint Venture (acquired March 27, 2018) and Brownmill. We account for our ownership interest 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, membership interests held by Lightstone I in a joint venture formed with us that currently owns 7 of our hotels, and the interests held by minority owners in certain of our hotels.

Financial Condition, Liquidity and Capital Resources

Overview:

Revenues, interest and dividend income, 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), redemptions and cancellations of shares of our common stock, if approved, and distributions to our shareholders and noncontrolling interests, if any, required to maintain our status as a REIT. For the nine months ended September 30, 2019, our primary sources of funds were approximately $13.0 million of proceeds from the sale of the Alabama Hotels, $7.8 million of cash flows from our operations and $0.7 million of distributions from our unconsolidated affiliated investments.

We currently believe that these cash resources along with our with our current available cash on hand of $23.0 million and marketable securities, available for sale, of $8.8 million as well as proceeds generated from the potential sale of operating properties will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve 12 months.

Our future sources of funds are expected to primarily consist of (i) cash flows from our operations, (ii) proceeds from our borrowings (iii) distributions from our unconsolidated affiliated investments, (iv) proceeds from the selective sale of our operating properties and/or marketable securities and (v) the release of funds held in restricted escrows. We currently believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.

We currently have mortgage indebtedness totaling $145.7 million and a margin loan of $4.7 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, 2019, our total borrowings aggregated $150.4 million which represented 86% 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.

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

We may also obtain lines of credit to be used to acquire properties. These lines of credit will be at prevailing market terms and will be repaid from proceeds from the sale or refinancing of properties, working capital or permanent financing. Our Sponsor or its affiliates may guarantee the lines of credit although they will not be obligated to do so.

In addition to making investments in accordance with our investment objectives, we have used and expect to continue to use our capital resources to make certain payments to our Advisor and our Property Managers during the various phases of our organization and operation.

During our acquisition and development stage, payments include asset acquisition fees and asset management fees, and the reimbursement of acquisition related expenses to our Advisor. During our operational stage, we pay our Property Managers and/or other unaffiliated third-party property managers a property management fee and our Advisor an asset management fee. We also reimburse our Advisor and its affiliates for actual expenses it incurs for administrative and other services provided to us. Additionally, our Operating Partnership may be required to make distributions to Lightstone SLP II LLC, an affiliate of the Advisor.

Pursuant to an advisory agreement, our Advisor is entitled to receive an asset management fee equal to 0.95% of our average invested assets, as defined. The asset management fee is payable quarterly and based on balances as of the end of each month in the quarterly period.

Pursuant to the various agreements discussed above, 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,
	2019		2018		2019		2018
Acquisition fees (1)	$	-	$	-	$	-	$	285
Development fees (2)		-		-		62		-
Asset management fees (general and administrative costs)		750		768		2,283		2,209

Total	$	750	$	768	$	2,345	$	2,494

(1)

The acquisition fee for the Hilton Garden Inn Joint Venture of $285 was capitalized and included in investment in unconsolidated affiliated entities on the consolidated balance sheets.

(2)

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,
	2019			2018
Net cash provided by operating activities	$	7,842		$	7,458
Net cash provided by/(used in) investing activities		7,911			(15,646	)
Net cash used in financing activities		(21,630	)		(6,102	)
		(5,877	)		(14,290	)
Cash, cash equivalents and restricted cash, beginning of year		30,660			50,173
Cash, cash equivalents and restricted cash, end of the period	$	24,783		$	35,883

During the nine months ended September 30, 2019, our principal sources of cash flow have been derived from revenues, interest and dividend income, proceeds from the sale of the Alabama Hotels and distributions from unconsolidated affiliated investments and our principal demands for liquidity were distributions to our shareholders and noncontrolling interests, redemptions and cancellations of shares of our common stock and debt service on our borrowings, including an $8.2 million required paydown of our Revolving Credit Facility.

Operating activities

Net cash flows provided by operating activities of $7.8 million for the nine months ended September 30, 2019 consisted our net loss of $1.2 million offset by depreciation and amortization, loss from investments in unconsolidated affiliated real estate entities, amortization of deferred financing costs and other non-cash items aggregating $9.1 million.

Investing activities

The net cash provided by investing activities of $7.9 million for the nine months ended September 30, 2019 consists primarily of the following:

capital expenditures of $5.7 million;

proceeds of $13.0 million from the disposition of the Alabama Hotels; and

$0.7 million of distributions from unconsolidated affiliated real estate entities.

Financing activities

The net cash used in financing activities of $21.6 million for the nine months ended September 30, 2019 consists primarily of the following:

distributions to our common shareholders of $9.3 million;

debt principal payments of $8.3 million;

aggregate distributions to our noncontrolling interests of $1.0 million;

redemptions and cancellation of common stock of $2.7 million; and

net margin loan payments of $0.3 million.

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, 2018 we redeemed approximately 1.0 million common shares at an average price per share of $9.69 per share. For the nine months ended September 30, 2019, we redeemed 0.3 million common shares at an average price per share of $10.00 per share.

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

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, 2019.

	Remainder of
Contractual Obligations	2019		2020		2021		2022		2023		Thereafter		Total
Principal maturities	$	8,832	$	187	$	123,245	$	211	$	13,208	$	-	$	145,683
Interest payments		1,876		7,228		3,419		742		670		-		13,935
Total	$	10,708	$	7,415	$	126,664	$	953	$	13,878	$	-	$	159,618

Revolving Credit Facility

Effective March 31, 2019, the Company entered into a Loan Modification Agreement with the lender for the Revolving Credit Facility, which, among other things, decreased the interest rate to Libor plus 3.15% and modified the requirements under the minimum debt yield ratio.

On May 9, 2019, we completed the disposition of the Alabama Hotels, two properties that were previously designated as collateral under the Revolving Credit Facility. Approximately $8.2 million of the proceeds from the disposition of the Alabama Hotels were used for a required paydown of the Revolving Credit Facility. As of September 30, 2019, the Revolving Credit Facility had an outstanding balance of $131.8 million and was collateralized by 13 of the Company’s hotels. Subsequently, on October 24, 2019, we sold the SpringHill Suites – Peabody and at closing made a required principal paydown of approximately $8.8 million under the Revolving Credit Facility to reduce the outstanding principal balance to approximately $123.0 million. See Note 8 of the Notes to Consolidated Financial Statements for additional information.

In addition to the mortgages payable 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 $4.7 million as of September 30, 2019 and is due on demand. The margin loan bears interest at Libor plus 0.85% (2.87% as of September 30, 2019).

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.

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.

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2019			2018			2019			2018
Net loss	$	(11	)	$	(648	)	$	(1,236	)	$	(1,056	)
FFO adjustments:
Depreciation and amortization of real estate assets		2,813			2,926			8,629			8,646
Loss/(gain) on disposition of real estate		5			-			(69	)		-
Adjustments to equity in earnings from unconsolidated affiliated entities		518			438			1,386			1,008
FFO		3,325			2,716			8,710			8,598
MFFO adjustments:

Other adjustments:
Acquisition and other transaction related costs expensed⁽¹⁾		-			9			-			107
Adjustments to equity in earnings from unconsolidated affiliated entities		(20	)		(6	)		(28	)		(27	)
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⁾					-						(1	)
Non-recurring (gains)/losses from extinguishment/sale of debt, derivatives or securities holdings⁽⁴⁾		-			-			-			440
MFFO		3,305			2,719			8,682			9,117
Straight-line rent⁽⁵⁾		-			-			-			-
MFFO - IPA recommended format	$	3,305		$	2,719		$	8,682		$	9,117

Net loss	$	(11	)	$	(648	)	$	(1,236	)	$	(1,056	)
Less: income attributable to noncontrolling interests		(41	)		(7	)		(58	)		(54	)
Net loss applicable to Company's common shares	$	(52	)	$	(655	)	$	(1,294	)	$	(1,110	)
Net loss per common share, basic and diluted	$	(0.00	)	$	(0.04	)	$	(0.07	)	$	(0.06	)

FFO	$	3,325		$	2,716		$	8,710		$	8,598
Less: FFO attributable to noncontrolling interests		(69	)		(64	)		(189	)		(226	)
FFO attributable to Company's common shares	$	3,256		$	2,652		$	8,521		$	8,372
FFO per common share, basic and diluted	$	0.18		$	0.15		$	0.48		$	0.46

MFFO - IPA recommended format	$	3,305		$	2,719		$	8,682		$	9,117
Less: MFFO attributable to noncontrolling interests		(69	)		(64	)		(189	)		(227	)
MFFO attributable to Company's common shares	$	3,236		$	2,655		$	8,493		$	8,890

Weighted average number of common shares outstanding, basic and diluted		17,624			17,996			17,712			18,084

(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.
(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, 2019
FFO attributable to Company's common shares	$	71,133
Distributions declared	$	81,975

Distribution Payments

On October 15, 2019, the distribution for the three-month period ending September 30, 2019 of $3.1 million was paid in cash.

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 2019, 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.

ITEM 1A. RISK FACTORS

We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. For the nine months ended September 30, 2019, there were no such material developments.

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

Recent Sales of Unregistered Securities

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

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, 2019, filed with the SEC on November 12, 2019, formatted in XBRL includes: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Operations, (3) Consolidated Statements of Comprehensive Income, (4) Consolidated Statements of Stockholders’ Equity, (5) Consolidated Statements of Cash Flows and (6) the Notes to the Consolidated Financial Statement.

*Filed herewith

SIGNATURES

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

	LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC.

Date: November 12, 2019	By:	/s/ David Lichtenstein
		David Lichtenstein
		Chairman and Chief Executive Officer (Principal Executive Officer)

Date: November 12, 2019

By:

/s/ Seth Molod

Seth Molod

Chief Financial Officer

(Duly Authorized Officer and Principal Financial and Accounting Officer)