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 March 31, 2017
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-54047
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Maryland | 83-0511223 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
| 1985 Cedar Bridge Avenue, Suite 1 | ||
| Lakewood, New Jersey | 08701 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(732) 367-0129
(Registrant’s Telephone Number, Including Area Code)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ¨ | Accelerated filer ¨ | |
| Non-accelerated filer þ | Smaller reporting company ¨ | |
| Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No þ
As of May 8, 2017, there were approximately 18.3 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
| 2 |
PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
| March 31, 2017 | December 31, 2016 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Investment property: | ||||||||
| Land and improvements | $ | 44,137 | $ | 44,137 | ||||
| Building and improvements | 174,772 | 174,234 | ||||||
| Furniture and fixtures | 39,651 | 38,827 | ||||||
| Construction in progress | 476 | 675 | ||||||
| Gross investment property | 259,036 | 257,873 | ||||||
| Less accumulated depreciation | (28,121 | ) | (25,430 | ) | ||||
| Net investment property | 230,915 | 232,443 | ||||||
| Investment in unconsolidated affiliated entity | 5,843 | 5,836 | ||||||
| Cash and cash equivalents | 35,432 | 43,179 | ||||||
| Marketable securities, available for sale | 9,233 | 8,738 | ||||||
| Restricted escrows | 3,610 | 3,488 | ||||||
| Accounts receivable and other assets | 4,951 | 4,189 | ||||||
| Total Assets | $ | 289,984 | $ | 297,873 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Accounts payable and other accrued expenses | $ | 7,589 | $ | 6,581 | ||||
| Margin loan | 3,779 | 3,854 | ||||||
| Mortgages payable, net | 126,960 | 127,140 | ||||||
| Due to related party | 415 | 418 | ||||||
| Distributions payable | 3,174 | 3,248 | ||||||
| Total liabilities | 141,917 | 141,241 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' Equity: | ||||||||
| Company's stockholders' equity: | ||||||||
| Preferred shares, $0.01 par value, 10,000 shares authorized, none issued and outstanding | - | - | ||||||
| Common stock, $0.01 par value; 100,000 shares authorized, 18,346 and 18,411 shares issued and outstanding, respectively | 183 | 184 | ||||||
| Additional paid-in-capital | 156,613 | 157,259 | ||||||
| Accumulated other comprehensive loss | (706 | ) | (1,456 | ) | ||||
| Accumulated deficit | (24,092 | ) | (19,552 | ) | ||||
| Total Company stockholders' equity | 131,998 | 136,435 | ||||||
| Noncontrolling interests | 16,069 | 20,197 | ||||||
| Total Stockholders' Equity | 148,067 | 156,632 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 289,984 | $ | 297,873 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2017 | 2016 | |||||||
| Rental revenue | $ | 20,606 | $ | 19,889 | ||||
| Expenses: | ||||||||
| Property operating expenses | 12,848 | 12,744 | ||||||
| Real estate taxes | 726 | 852 | ||||||
| General and administrative costs | 1,411 | 1,409 | ||||||
| Depreciation and amortization | 2,697 | 2,549 | ||||||
| Total operating expenses | 17,682 | 17,554 | ||||||
| Operating income | 2,924 | 2,335 | ||||||
| Interest and dividend income | 142 | 382 | ||||||
| Loss on sale of marketable securities, available for sale | (307 | ) | - | |||||
| Interest expense | (1,973 | ) | (1,943 | ) | ||||
| Other (expense)/income, net | (27 | ) | 233 | |||||
| Income/(loss) from investment in unconsolidated affiliated entity | 56 | (6 | ) | |||||
| Net income | 815 | 1,001 | ||||||
| Less: net (income)/loss attributable to noncontrolling interests | (42 | ) | 3 | |||||
| Net income applicable to Company's common shares | $ | 773 | $ | 1,004 | ||||
| Net income per Company's common share, basic and diluted | $ | 0.04 | $ | 0.05 | ||||
| Weighted average number of common shares outstanding, basic and diluted | 18,373 | 18,571 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2017 | 2016 | |||||||
| Net income | $ | 815 | $ | 1,001 | ||||
| Other comprehensive income/(loss): | ||||||||
| Holding gain/(loss) on marketable securities, available for sale | 443 | (77 | ) | |||||
| Reclassification adjustment for loss included in net income | 307 | - | ||||||
| Other comprehensive income/(loss) | 750 | (77 | ) | |||||
| Comprehensive income | 1,565 | 924 | ||||||
| Less: Comprehensive (income)/loss attributable to noncontrolling interests | (42 | ) | 3 | |||||
| Comprehensive income attributable to the Company's common shares | $ | 1,523 | $ | 927 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 5 |
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Amounts in thousands)
(Unaudited)
| Common Stock | ||||||||||||||||||||||||||||
| Additional | Total | Total | ||||||||||||||||||||||||||
| Paid-In | Accumulated Other | Noncontrolling | Stockholder's | |||||||||||||||||||||||||
| Shares | Amount | Capital | Comprehensive Loss | Accumulated Deficit | Interests | Equity | ||||||||||||||||||||||
| BALANCE, December 31, 2016 | 18,411 | $ | 184 | $ | 157,259 | $ | (1,456 | ) | $ | (19,552 | ) | $ | 20,197 | $ | 156,632 | |||||||||||||
| Net income | - | - | - | - | 773 | 42 | 815 | |||||||||||||||||||||
| Other comprehensive income | - | - | - | 750 | - | - | 750 | |||||||||||||||||||||
| Distributions declared | - | - | - | - | (5,313 | ) | - | (5,313 | ) | |||||||||||||||||||
| Distributions to noncontrolling interests | - | - | - | - | - | (4,170 | ) | (4,170 | ) | |||||||||||||||||||
| Redemption and cancellation of shares | (65 | ) | (1 | ) | (646 | ) | - | - | - | (647 | ) | |||||||||||||||||
| BALANCE, March 31, 2017 | 18,346 | $ | 183 | $ | 156,613 | $ | (706 | ) | $ | (24,092 | ) | $ | 16,069 | $ | 148,067 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 6 |
PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | 815 | $ | 1,001 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 2,697 | 2,549 | ||||||
| Amortization of deferred financing costs | 166 | 166 | ||||||
| Income/(loss) from investment in unconsolidated affiliated entity | (56 | ) | 6 | |||||
| Loss on sale of marketable securities, available for sale | 307 | - | ||||||
| Other non-cash adjustments | (35 | ) | 95 | |||||
| Changes in assets and liabilities: | ||||||||
| Increase in accounts receivable and other assets | (760 | ) | (1,535 | ) | ||||
| Increase in accounts payable and other accrued expenses | 972 | 872 | ||||||
| Decrease in due to related party | (3 | ) | (502 | ) | ||||
| Net cash provided by operating activities | 4,103 | 2,652 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of investment property | (1,099 | ) | (1,634 | ) | ||||
| Purchase of marketable securities | (3,556 | ) | - | |||||
| Proceeds from sale of marketable securities | 3,504 | - | ||||||
| Funding of notes receivable to related party | - | (8,000 | ) | |||||
| Release/(funding) of restricted escrows and deposits | (122 | ) | 4,605 | |||||
| Distributions from unconsolidated affiliated entity | 49 | - | ||||||
| Net cash used in investing activities | (1,224 | ) | (5,029 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payments on mortgages payable | (346 | ) | (937 | ) | ||||
| Payment on margin loan | (75 | ) | (304 | ) | ||||
| Redemption and cancellation of common shares | (647 | ) | (308 | ) | ||||
| Distributions to noncontrolling interests | (4,170 | ) | - | |||||
| Contributions to noncontrolling interests | - | 12 | ||||||
| Distributions to common stockholders | (5,388 | ) | (3,279 | ) | ||||
| Net cash used in financing activities | (10,626 | ) | (4,816 | ) | ||||
| Net change in cash and cash equivalents | (7,747 | ) | (7,193 | ) | ||||
| Cash and cash equivalents, beginning of year | 43,179 | 37,381 | ||||||
| Cash and cash equivalents, end of period | $ | 35,432 | $ | 30,188 | ||||
| Supplemental cash flow information for the periods indicated is as follows: | ||||||||
| Cash paid for interest | $ | 1,795 | $ | 1,770 | ||||
| Distributions declared | $ | 5,313 | $ | 3,238 | ||||
| Unrealized loss on marketable securities, available for sale | $ | 443 | $ | (77 | ) | |||
| Non cash purchase of investment property | $ | 64 | $ | 469 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 7 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
| 1. | 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 March 31, 2017.
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 and follow-on offering, 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’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 August 15, 2022, the tenth anniversary of the termination of its initial public offering, its charter requires that the Board of Directors must either (i) seek stockholder approval of an extension or amendment of this listing deadline; or (ii) seek stockholder approval to adopt a plan of liquidation of the corporation.
Noncontrolling Interests
The noncontrolling interests consist of (i) parties of the Company that hold units in the Operating Partnership, (ii) membership interests held by Lightstone Value Plus Real Estate Investment Trust, Inc., a REIT also sponsored by the Company’s Sponsor, in a joint venture, and (iii) the membership interests held by minority owners of certain of the Company’s hotels.
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 units into cash or, at the option of the Company, an equal number of common shares of the Company, as allowed by the limited partnership agreement.
Lightstone SLP II LLC, which is wholly owned by the Company’s Sponsor, committed to purchase subordinated profits interests in the Operating Partnership (“Subordinated Profits Interests”) at a cost of $100,000 per unit for each $1.0 million in subscriptions up to ten percent of the proceeds from the primary shares under the initial public offering and the follow-on Offering. Lightstone SLP II LLC had the option to purchase the Subordinated Profits Interests with either cash or an interest in real property of equivalent value. From the Company’s inception through the termination of its follow-on offering, the Company’s Sponsor made cash contributions of $12.9 million and contributed equity interests totaling 48.6% in Brownmill, LLC (“Brownmill”), which were valued at $4.8 million, in exchange for a total of 177.0 Subordinated Profits Interests with an aggregate value of $17.7 million in fulfillment of its commitment.
| 8 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
| 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 March 31, 2017, 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, 2016. 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, 2016 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.
New Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance that clarifies the definition of a business and assists in the evaluation of whether a transaction will be accounted for as an acquisition of an asset or as a business combination. The guidance provides a test to determine when a set of assets and activities acquired is not a business. When substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. Under the updated guidance, an acquisition of a single property will likely be treated as an asset acquisition as opposed to a business combination and associated transaction costs will be capitalized rather than expensed as incurred. Additionally, assets acquired, liabilities assumed, and any noncontrolling interest will be measured at their relative fair values. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted. This guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued guidance that requires amounts that are generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for public companies for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted and the pronouncement requires a retrospective transition method of adoption. This guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In August 2016, the issued FASB an accounting standards update which provides guidance on the classification of certain cash receipts and cash payments in the statement of cash flows, including those related to debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, and distributions received from equity method investees. This guidance is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. The guidance must be adopted on a retrospective basis and must be applied to all periods presented, but may be applied prospectively if retrospective application would be impracticable. This guidance will not have a material impact on the Company’s consolidated financial statements.
| 9 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
In January 2016, the FASB issued an accounting standards update that generally requires companies to measure investments in equity securities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income. The new guidance must be applied using a modified-retrospective approach and is effective for periods beginning after December 15, 2017 and early adoption is not permitted. If the Company had adopted this standard during the year ended December 31, 2016, it would have resulted in an increase/(decrease) to net income of approximately $0.2 million and ($0.1 million) for the three months ended March 31, 2017 and 2016, respectively.
In May 2014, the FASB issued an accounting standards update that provides for a single five-step model to be applied to all revenue contracts with customers as well as requires additional financial statement disclosures that will enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. While the Company has not decided on the implementation method, we do not expect the adoption of this standard to have a material impact on its financial position, results of operations or cash flows.
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. | Marketable Securities and Fair Value Measurements |
Marketable Securities
The following is a summary of the Company’s available for sale securities as of the dates indicated:
| As of March 31, 2017 | ||||||||||||||||
| Adjusted Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Equity Securities | $ | 9,939 | $ | 14 | $ | (720 | ) | $ | 9,233 | |||||||
| As of December 31, 2016 | ||||||||||||||||
| Adjusted Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Equity Securities | $ | 10,194 | $ | $ | (1,456 | ) | $ | 8,738 | ||||||||
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% (1.83% as of March 31, 2017).
When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. As of March 31, 2017 and December 31, 2016, 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:
| 10 |
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)
| • | 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 March 31, 2017 and December 31, 2016, all of the Company’s equity securities and were classified as Level 1 assets and there were no transfers between the level classifications during the three months ended March 31, 2017.
| 4. | Mortgages payable, net |
Mortgages payable, net consisted of the following:
| Description | Interest Rate | Weighted Average Interest Rate as of March 31, 2017 | Maturity Date | Amount
Due at Maturity | As
of March 31, 2017 | As
of December 31, 2016 | ||||||||||||||
| Promissory Note, secured by four properties | 4.94% | 4.94 | % | August 2018 | $ | 21,754 | $ | 22,542 | $ | 22,688 | ||||||||||
| Revolving Loan, secured by nine properties | LIBOR + 4.95% | 5.91 | % | January 2018 | 73,616 | 73,616 | 73,616 | |||||||||||||
| Courtyard - Parsippany | LIBOR + 3.50% | 4.23 | % | August 2018 | 7,126 | 7,384 | 7,431 | |||||||||||||
| Residence Inn - Baton Rouge | 5.36% | 5.36 | % | November 2018 | 3,480 | 3,618 | 3,640 | |||||||||||||
| Promissory Note, secured by three properties | 4.94% | 4.94 | % | August 2018 | 14,008 | 14,516 | 14,610 | |||||||||||||
| Courtyard - Baton Rouge | 5.56% | 5.56 | % | May 2017 | 5,873 | 5,885 | 5,922 | |||||||||||||
| Total mortgages payable | 5.50 | % | $ | 125,857 | $ | 127,561 | $ | 127,907 | ||||||||||||
| Less: Deferred financing costs | (601 | ) | (767 | ) | ||||||||||||||||
| Total mortgages payable, net | $ | 126,960 | $ | 127,140 | ||||||||||||||||
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 March 31, 2017:
| Remainder of | ||||||||||||||||||||||||||||
| 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | ||||||||||||||||||||||
| Principal maturities | $ | 6,806 | $ | 120,755 | $ | $ | - | $ | - | $ | - | $ | 127,561 | |||||||||||||||
| Less: Deferred financing costs | (601 | ) | ||||||||||||||||||||||||||
| Total principal maturiteis, net | 126,960 | |||||||||||||||||||||||||||
Debt Compliance
Pursuant to the Company’s debt agreements, approximately $3.6 million and $3.5 million was held in restricted escrow accounts as of March 31, 2017 and December 31, 2016, respectively. Such escrows are subject to release in accordance with the applicable debt agreement for the payment of real estate taxes, insurance and capital improvements, as required. Certain of our debt agreements also contain clauses providing for prepayment penalties and require the maintenance of certain ratios, including debt service coverage and fixed leverage charge ratio. As of March 31, 2017, the Company is in compliance with respect to all of its financial debt covenants.
| 11 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
Additionally, the Company’s mortgage loan (outstanding principal balance of $5.9 million as of March 31, 2017) secured by the Courtyard – Baton Rouge matured on May 1, 2017 and was repaid in full with cash on hand. The Company’s revolving credit facility secured by nine of its hotel properties (outstanding principal balance of $73.6 million as of March 31, 2017) matures in January 2018 and has two, one-year options to extend solely at the discretion of the lender. The Company currently intends to seek to extend, refinance and/or repay in full, using a combination of cash on hand and/or cash proceeds from the potential sale of assets that may occur in the future, such existing indebtedness on or before its applicable stated maturity. Other than these financings, the Company has no additional significant maturities of mortgage debt over the next 12 months.
| 5. | 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.
Catch-Up Distribution
On March 30, 2009, our Board of Directors declared the annualized distribution rate for each quarterly of $0.00178082191 per share per day (the “Initial Annualized Distribution Rate”), and equaled a daily amount that, if paid each day for a 365-day period, would equal a 6.5% annualized rate based on the share price of $10.00.
On September 25, 2015, the Board of Directors resolved that future distributions declared to shareholders of record on the close of business on the last day of the quarter during the applicable quarter would be targeted to be paid at a rate of $0.0019178 per day (the “Revised Annualized Distribution Rate”), which would equal a daily amount that, if paid each day for a 365-day period, would equal a 7.0% annualized rate based on a share price of $10.00, which would be an increase over the prior quarterly distributions of an annualized rate of 6.5%.
On February 28, 2017, our Board of Directors declared a special distribution, payable to stockholders of record on February 28, 2017, for the difference between the Revised Annualized Distribution Rate and the Initial Annualized Distribution Rate for the period from October 1, 2009 through September 30, 2015. This distribution was calculated based on stockholders of record each day during the applicable period at a rate of $0.000136986 per share per day, and equals a daily amount that, if paid each day for a 365-day period, would equal an 0.5% annualized rate based on the share price of $10.00. The Company had previously commenced making regular quarterly distributions to shareholders at the Revised Annualized Distribution Rate for quarterly periods commencing on October 1, 2015. Additionally, on February 28, 2017, the Board of Directors also declared a special distribution on the Subordinated Profits Interests for the period commencing with their issuance through December 31, 2016 at the Revised Annualized Distribution Rate. The special distributions declared on February 28, 2017 are collectively referred to as the “Catch-Up Distribution.” The Catch-Up Distribution, which was paid on March 15, 2017, totaled $6.3 million ($2.1 million and $4.2 million on common shares and Subordinated Profits Interests, respectively.)
| 6. | 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 and Property Manager for the periods indicated:
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2017 | 2016 | |||||||
| Asset Management Fees | $ | 604 | $ | 588 | ||||
| Development Fees | $ | - | $ | 33 | ||||
| Total | $ | 604 | $ | 621 | ||||
| 7. | Financial Instruments |
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted escrows, accounts receivable and other assets, accounts payable and 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 March 31, 2017 | As of December 31, 2016 | |||||||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
| Mortgages payable | $ | 127,561 | $ | 127,667 | $ | 127,907 | $ | 128,052 | ||||||||
The fair value of our mortgages payable was determined by discounting the future contractual interest and principal payments by market interest rates.
| 8. | 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.
| 9. | Subsequent Events |
Distribution Payments
On April 17, 2017, the distribution for the three-month period ending March 31, 2017 of $3.2 million was paid in cash.
Distribution Declaration
On May 11, 2017, the Board of Directors authorized and the Company declared a distribution for the three-month period ending June 30, 2017. The distribution will be calculated based on shareholders of record each day during this three-month period at a rate of $0.0019178 per day, and will equal a daily amount that, if paid each day for a 365-day period, would equal a 7.0% annualized rate based on a share price of $10.00. The distribution will be paid in cash on or about July 15, 2017 to shareholders of record as of June 30, 2017.
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PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Lightstone Value Plus Real Estate Investment Trust II, Inc. and Subsidiaries and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Lightstone Value Plus Real Estate Investment Trust II, Inc., a Maryland corporation, and, as required by context, Lightstone Value Plus REIT II LP and its wholly owned subsidiaries, which we collectively refer to as the “Operating Partnership”. Dollar amounts are presented in thousands, except per share data and where indicated in millions.
Forward-Looking Statements
Certain information included in this Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by us with the 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”) and Lightstone Value Plus REIT II, LP, (the “Operating Partnership”) and its subsidiaries are collectively referred to as the ‘‘Company’’ and the use of ‘‘we,’’ ‘‘our,’’ ‘‘us’’ or similar pronouns refers to the Lightstone REIT II, its Operating Partnership or the Company as required by the context in which such pronoun is used.
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We do not have employees. We entered into an advisory agreement, dated February 17, 2009, with Lightstone Value Plus REIT II LLC, a Delaware limited liability company, which we refer to as the “Advisor,” pursuant to which the Advisor supervises and manages our day-to-day operations and selects our real estate and real estate related investments, subject to oversight by our board of directors. We pay the Advisor fees for services related to the investment and management of our assets, and we will reimburse the Advisor for certain expenses incurred on our behalf.
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.
| 15 |
Portfolio Summary –
| Location | Year Built | Leasable Square Feet | Percentage
Occupied as of March 31, 2017 | Annualized
Revenues based on rents as of March 31, 2017 | Annualized
Revenues per square foot as of March 31, 2017 | |||||||||||||||
| Unconsolidated Affiliated Real Estate Entitiy: | ||||||||||||||||||||
| Retail | ||||||||||||||||||||
| Brownmill LLC (2 retail properties) | Old Bridge and Vauxhall, New Jersey | 1962 | 155,928 | 72 | % | $ | 2.4 million | $ | 15.66 | |||||||||||
| Consolidated Properties: | ||||||||||||||||||||
| Hospitality | Year to Date | Percentage
Occupied for the Three Months Ended | Revenue
per Available Room ("RevPAR") for the Three Months | Average
Daily Rate For the Three Months Ended | ||||||||||||||||
| Location | Year Built | Available Rooms | March 31, 2017 | Ended March 31, 2017 | March 31, 2017 | |||||||||||||||
| TownePlace Suites - Metairie | Harahan, Louisiana | 2000 | 11,160 | 86 | % | $ | 91.15 | $ | 106.45 | |||||||||||
| SpringHill Suites - Peabody | Peabody, Massachusetts | 2002 | 14,760 | 70 | % | $ | 70.61 | $ | 101.41 | |||||||||||
| Fairfield Inn - East Rutherford | East Rutherford, New Jersey | 1990 | 12,690 | 63 | % | $ | 71.05 | $ | 112.95 | |||||||||||
| TownePlace Suites - Fayetteville | Johnson/Springdale, Arkansas | 2009 | 8,280 | 71 | % | $ | 69.68 | $ | 97.87 | |||||||||||
| TownePlace Suites - Little Rock | Little Rock, Arkansas | 2009 | 8,280 | 73 | % | $ | 56.76 | $ | 77.99 | |||||||||||
| Holiday Inn - Opelika | Opelika, Alabama | 2009 | 7,830 | 76 | % | $ | 74.18 | $ | 97.16 | |||||||||||
| Aloft - Tucson | Tucson, Arizona | 1971 | 13,860 | 87 | % | $ | 139.62 | $ | 160.59 | |||||||||||
| Hampton Inn – Fort Myers Beach | Fort Myers Beach, Florida | 2001 | 10,800 | 92 | % | $ | 165.30 | $ | 179.61 | |||||||||||
| Aloft - Philadelphia | Philadelphia, Pennsylvania | 2008 | 12,240 | 58 | % | $ | 64.30 | $ | 110.16 | |||||||||||
| Four Points by Sheraton - Philadelphia | Philadelphia, Pennsylvania | 1985 | 15,930 | 80 | % | $ | 71.89 | $ | 90.24 | |||||||||||
| Courtyard - Willoughby | Willoughby, Ohio | 1999 | 8,100 | 70 | % | $ | 78.98 | $ | 112.73 | |||||||||||
| Fairfield Inn - DesMoines | West Des Moines, Iowa | 1997 | 9,180 | 58 | % | $ | 60.08 | $ | 103.10 | |||||||||||
| SpringHill Suites - DesMoines | West Des Moines, Iowa | 1999 | 8,730 | 55 | % | $ | 53.99 | $ | 98.91 | |||||||||||
| Hampton Inn - Miami | Miami, Florida | 1996 | 11,340 | 86 | % | $ | 126.90 | $ | 147.47 | |||||||||||
| Hampton Inn & Suites - Fort Lauderdale | Fort Lauderdale, Florida | 1996 | 9,360 | 82 | % | $ | 150.76 | $ | 183.52 | |||||||||||
| Courtyard - Parsippany | Parsippany, New Jersey | 2001 | 13,590 | 49 | % | $ | 73.31 | $ | 150.24 | |||||||||||
| Residence Inn - Baton Rouge | Baton Rouge, Louisiana | 2000 | 9,720 | 90 | % | $ | 104.33 | $ | 115.95 | |||||||||||
| Holiday Inn Express - Auburn | Auburn, Alabama | 2002 | 7,380 | 66 | % | $ | 68.45 | $ | 103.03 | |||||||||||
| Aloft - Rogers | Rogers, Arkansas | 2008 | 11,700 | 49 | % | $ | 63.84 | $ | 130.73 | |||||||||||
| Fairfield Inn - Jonesboro | Jonesboro, Arkansas | 2009 | 7,470 | 80 | % | $ | 94.50 | $ | 117.52 | |||||||||||
| Courtyard - Baton Rouge | Baton Rouge, Louisiana | 1997 | 10,890 | 85 | % | $ | 91.04 | $ | 107.70 | |||||||||||
| Hospitality Total | 223,290 | 73 | % | $ | 88.29 | $ | 121.70 | |||||||||||||
Annualized base rent is defined as the minimum monthly base rent due as of March 31, 2017 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 three months ended March 31, 2017 to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2016.
Results of Operations
For the Three Months Ended March 31, 2017 vs. March 31, 2016
Rental revenue
Rental revenue increased by $0.7 million to $20.6 million during the three months ended March 31, 2017 compared to $19.9 million for the same period in 2016 resulting from increased occupancy levels and RevPAR during the period.
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Property operating expenses
Property operating expenses increased by $0.1 million to $12.8 million during the three months ended March 31, 2017 compared to $12.7 million for the same period in 2016 primarily resulting from increased occupancy expense during the period.
Real estate taxes
Real estate taxes decreased by $0.2 million to $0.7 million during the three months ended March 31, 2017 compared to $0.9 million for the same period in 2016. The decrease is primarily attributable to a decrease in an assessment as a result of an appeal to the local taxing authority.
General and administrative expenses
General and administrative expenses of $1.4 million during the three months ended March 31, 2017 were unchanged compared to $1.4 million for the same period in 2016.
Depreciation and amortization
Depreciation and amortization expense increased by $0.1 million to $2.7 million during the three months ended March 31, 2017 compared to $2.6 million for the same period in 2016.
Interest and dividend income
Interest and dividend income decreased by $0.3 million to $0.1 million during the three months ended March 31, 2017 compared to $0.4 million for the same period in 2016. The decrease is primarily attributable to the repayment in full of our notes receivable – related party.
Earnings from investment in unconsolidated affiliated entity
Our income from investment in unconsolidated affiliated entity during the three months ended March 31, 2017 was $56 compared to a loss of $6 for the same period in 2016. Our earnings from investment in unconsolidated affiliated entity are attributable to our ownership interest in Brownmill, LLC, which we account for under the equity method of accounting.
Interest expense
Interest expense was $2.0 million during the three months ended March 31, 2017 compared to $1.9 million for the same period in 2016. Interest expense during both periods primarily consisted of interest related to our mortgage indebtedness.
Noncontrolling interests
The income or loss allocated to noncontrolling interests relates to the interest in our Operating Partnership held by our Sponsor, membership interests held by Lightstone Value Plus Real Estate Investment Trust I, Inc, a related party REIT also sponsored by our Sponsor in the Joint Venture, and the interests held by minority owners of certain of our hotels.
Financial Condition, Liquidity and Capital Resources
Overview:
For the three months ended March 31, 2017, our primary sources of funds were $4.1 million of cash flows from our operations.
Our future sources of funds will primarily consist of (i) cash flows from our operations, (ii) proceeds from our borrowings or sale of our investments in marketable securities and (iii) 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 $127.6 million and a margin loan of $3.8 million. The Company’s mortgage loan (outstanding principal balance of $5.9 million as of March 31, 2017) secured by the Courtyard – Baton Rouge matured on May 1, 2017 and was repaid in full with cash on hand. 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.
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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 March 31, 2017, our total borrowings aggregated $131.3 million which represented 75% of our net assets.
Our future 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 non-recourse debt. This means that a lender’s rights on default will generally be limited to foreclosing on the property. However, we may, at our discretion, secure recourse financing or provide a guarantee to lenders if we believe this may result in more favorable terms. When we give a guaranty for a property owning entity, we will be responsible to the lender for the satisfaction of the indebtedness if it is not paid by the property owning entity.
In general the types of future financing executed by us to a large extent will be dictated by the nature of the investment and current market conditions. For long-term real estate investments, it is our intent to finance future acquisitions using long-term fixed rate debt. However there may be certain types of investments and market circumstances which may result in variable rate debt being the more appropriate choice of financing. To the extent floating rate debt is used to finance the purchase of real estate, management will evaluate a number of protections against significant increases in interest rates, including the purchase of interest rate caps instruments.
We may also obtain lines of credit to be used to acquire properties. If obtained, these lines of credit will be at prevailing market terms and will be repaid from offering proceeds, proceeds from the sale or refinancing of properties, working capital and/or permanent financing. Our Sponsor and/or its affiliates may guarantee our lines of credit although they are not obligated to do so. We may draw upon lines of credit to acquire properties pending our receipt of proceeds from our public offerings. We expect that such properties may be purchased by our Sponsor’s affiliates on our behalf, in our name, in order to minimize the imposition of a transfer tax upon a transfer of such properties to us.
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.
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 may include asset acquisition fees and asset management fees, and the reimbursement of acquisition related expenses to our Advisor. During our operational stage, we will pay our Property Managers and/or other third-party property managers a property management fee and our Advisor an asset management fee. We may 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.
The following table represents the fees incurred associated with the payments to our Advisor and our Property Managers:
| For the Three Months Ended March 31, | ||||||||
| 2017 | 2016 | |||||||
| Asset Management Fees | $ | 604 | $ | 588 | ||||
| Development Fees | $ | - | $ | 33 | ||||
| Total | $ | 604 | $ | 621 | ||||
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Summary of Cash Flows
The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below:
| For the Tree Months Ended March 31, | ||||||||
| 2017 | 2016 | |||||||
| Net cash provided by operating activities | $ | 4,103 | $ | 2,652 | ||||
| Net cash used in investing activities | (1,224 | ) | (5,029 | ) | ||||
| Net cash used in financing activities | (10,626 | ) | (4,816 | ) | ||||
| (7,747 | ) | (7,193 | ) | |||||
| Cash and cash equivalents, beginning of the period | 43,179 | 37,381 | ||||||
| Cash and cash equivalents, end of the period | $ | 35,432 | $ | 30,188 | ||||
Our principal sources of cash flow were derived from cash flows from our operations. In the future, we expect to continue to operate properties which should provide a relatively consistent stream of cash flow to provide us with resources to fund our operating expenses, scheduled debt service and any quarterly distributions authorized by our Board of Directors.
Our principal demands for liquidity currently are distributions and scheduled debt service on our mortgages payable.
Operating activities
The net cash provided by operating activities of approximately $4.1 million during the 2017 period primarily related to net income of $0.8 million, depreciation and amortization, amortization of deferred financing costs and other non-cash items aggregating $3.1 million and changes in assets and liabilities of $0.2 million.
Investing activities
The net cash used in investing activities of approximately $1.2 million during the 2017 period primarily reflects $1.1 million of capital expenditures and the funding of $0.1 million of restricted escrows.
Financing activities
The net cash used in financing activities of approximately $10.6 million during the 2017 period primarily consists of (i) distributions to common stockholders of $5.4 million, (ii) distributions to our noncontrolling interests of $4.2 million (iii) payments on our mortgages payable and margin loan of $0.4 million and (iv) $0.6 million of redemptions of common shares.
We believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.
Distribution Reinvestment Plan (“DRIP”) and Share Repurchase Program
Our DRIP provides our stockholders with an opportunity to purchase additional shares of our common stock at a discount by reinvesting distributions. Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to us, subject to certain restrictions. From our inception through December 31, 2016 we repurchased approximately 512,297 shares of common stock. For the three months ended March 31, 2017 we repurchased 64,754 shares of common stock pursuant to our share repurchase program at an average price per share of $9.98. We funded share repurchases for the periods noted above from the cumulative proceeds of the sale of our shares pursuant to our DRIP.
On January 19, 2015, the Board of Directors suspended our DRIP effective April 15, 2015. For so long as the DRIP remains suspended, all future distributions will be in the form of cash.
Our Board of Directors reserves the right to terminate either program for any reason without cause by providing written notice of termination of the DRIP to all participants or written notice of termination of the share repurchase program to all stockholders.
Contractual Obligations
The following is a summary of the estimated contractual obligations related to our mortgage debt over the next five years and thereafter as of March 31, 2017.
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| Remainder of | ||||||||||||||||||||||||||||
| Contractual Obligations | 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | |||||||||||||||||||||
| Principal maturities | $ | 6,806 | $ | 120,755 | $ | - | $ | - | $ | - | $ | - | $ | 127,561 | ||||||||||||||
| Interest payments | 5,270 | 2,342 | - | - | - | - | 7,612 | |||||||||||||||||||||
| Total | $ | 12,076 | $ | 123,097 | $ | - | $ | - | $ | - | $ | - | $ | 135,173 | ||||||||||||||
In addition to the mortgage 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 $3.8 million as of March 31, 2017 and is due on demand. The margin loan bears interest at Libor plus 0.85% (1.83% as of March 31, 2017).
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.
Because of these factors, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has published a standardized measure of performance known as funds from operations ("FFO"), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT's operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards set forth in the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding gains or losses from sales of property and real estate related impairments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.
We believe that the use of FFO provides a more complete understanding of our performance to investors and to management and reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.
Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT's definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.
Because of these factors, the Investment Program Association (the "IPA"), an industry trade group, published a standardized measure of performance known as modified funds from operations ("MFFO"), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP.
| 20 |
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.
| 21 |
| For the Three Months Ended March 31, | ||||||||
| 2017 | 2016 | |||||||
| Net income | $ | 815 | $ | 1,001 | ||||
| FFO adjustments: | ||||||||
| Depreciation and amortization of real estate assets | 2,697 | 2,549 | ||||||
| Adjustments to equity in earnings from unconsolidated affiliated entity, net | 141 | 148 | ||||||
| FFO | 3,653 | 3,698 | ||||||
| MFFO adjustments: | ||||||||
| Other adjustments: | ||||||||
| Acquisition and other transaction related costs expensed(1) | - | - | ||||||
| Adjustments to equity in earnings from unconsolidated affilaited entity, net | (19 | ) | (6 | ) | ||||
| Amortization of above or below market leases and liabilities(2) | - | - | ||||||
| Accretion of discounts and amortizatio of premiums on debt investments | - | - | ||||||
| Mark-to-market adjustments(3) | (26 | ) | 62 | |||||
| Non-recurring (gains)/losses from extinguishment/sale of debt, derivatives or securities holdings(4) | 307 | - | ||||||
| MFFO | 3,915 | 3,754 | ||||||
| Straight-line rent(5) | - | - | ||||||
| MFFO - IPA recommended format | $ | 3,915 | $ | 3,754 | ||||
| Net income | $ | 815 | $ | 1,001 | ||||
| Less: loss/(income) attributable to noncontrolling interests | (42 | ) | 3 | |||||
| Net income applicable to Company's common shares | $ | 773 | $ | 1,004 | ||||
| Net income per common share, basic and diluted | $ | 0.04 | $ | 0.05 | ||||
| FFO | $ | 3,653 | $ | 3,698 | ||||
| Less: FFO attributable to noncontrolling interests | (117 | ) | (71 | ) | ||||
| FFO attributable to Company's common shares | $ | 3,536 | $ | 3,627 | ||||
| FFO per common share, basic and diluted | $ | 0.19 | $ | 0.20 | ||||
| MFFO - IPA recommended format | $ | 3,915 | $ | 3,754 | ||||
| Less: MFFO attributable to noncontrolling interests | (116 | ) | (73 | ) | ||||
| MFFO attributable to Company's common shares | $ | 3,799 | $ | 3,681 | ||||
| Weighted average number of common shares outstanding, basic and diluted | 18,373 | 18,571 | ||||||
| (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. |
| 22 |
| (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 | ||||
| March 31, 2017 | ||||
| FFO | $ | 45,856 | ||
| Distributions declared | $ | 50,507 | ||
Distribution Payments
On March 15, 2017, special distributions of $6.3 million ($2.1 million and $4.2 million on common shares and Subordinated Profits Interests, respectively) were paid in cash (see Note 5 of the Notes to Consolidated Financial Statements).
On April 17, 2017, the distribution for the three-month period ending March 31, 2017 of $3.2 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 2017, if any, and certain accounting standards that we have not yet been required to implement and may be applicable to our future operations.
Subsequent Events
See Note 9 of the Notes to Consolidated Financial Statements for further information related to subsequent events during the period from April 1, 2017 through the date of this filing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The primary market risk to which we are currently and expect to continue to be exposed is interest rate risk.
We are currently and expect to continue to be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund the expansion and refinancing of our real estate investment portfolio and operations. Our interest rate risk management objectives have been and will continue to be to limit the impact of interest rate changes on our earnings, prepayment penalties and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes. As of March 31, 2017, we had one interest rate swap with an insignificant intrinsic value.
As of March 31, 2017, we held marketable securities with a fair value of $9.2 million, which are available for sale for general investment purposes. We regularly review the market prices of our investments for impairment purposes. As of March 31, 2017, a hypothetical adverse 10.0% movement in market values would result in a hypothetical loss in fair value of approximately $0.9 million.
| 23 |
The following table shows the estimated principal maturities for our mortgage debt during the next five years and thereafter as of March 31, 2017:
| Remainder of | ||||||||||||||||||||||||||||
| 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | ||||||||||||||||||||||
| Principal maturities | $ | 6,806 | $ | 120,755 | $ | $ | - | $ | - | $ | - | $ | 127,561 | |||||||||||||||
Additionally, the Company’s mortgage loan (outstanding principal balance of $5.9 million as of March 31, 2017) secured by the Courtyard – Baton Rouge matured on May 1, 2017 and was repaid in full with cash on hand. The Company’s revolving credit facility secured by nine of its hotel properties (outstanding principal balance of $73.6 million as of March 31, 2017) matures in January 2018 and has two, one-year options to extend solely at the discretion of the lender. The Company currently intends to seek to extend, refinance and/or repay in full, using a combination of cash on hand and/or cash proceeds from the potential sale of assets that may occur in the future, such existing indebtedness on or before its applicable stated maturity. Other than these financings, the Company has no additional significant maturities of mortgage debt over the next 12 months.
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted escrows and deposits, prepaid expenses and other assets, accounts payable and accrued expenses, margin loan, due to/from 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:
The fair value of our mortgages payable was determined by discounting the future contractual interest and principal payments by market interest rates.
| As of March 31, 2017 | As of December 31, 2016 | |||||||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
| Mortgages payable | $ | 127,561 | $ | 127,667 | $ | 127,907 | $ | 128,052 | ||||||||
In addition to changes in interest rates, the value of our real estate and real estate related investments is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of tenants, which may affect our ability to obtain or refinance debt in the future. As of March 31, 2017, we had no off-balance sheet arrangements.
We cannot predict the effect of adverse changes in interest rates on our debt and, therefore, our exposure to market risk, nor can we provide any assurance that long-term debt will be available at advantageous pricing. Consequently, future results may differ materially from the estimated adverse changes discussed above.
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, management, including our chief executive officer and chief 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 chief 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 the quarter ended March 31, 2017 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.
From time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes.
| 24 |
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.
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 quarter ended March 31, 2017, 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.
None.
| 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 March 31, 2017, filed with the SEC on May 15, 2017, 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
| 25 |
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: May 15, 2017 | By: | /s/ David Lichtenstein |
| David Lichtenstein | ||
| Chairman and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: May 15, 2017 | By: | /s/ Donna Brandin |
| Donna Brandin | ||
| Chief Financial Officer | ||
| (Duly Authorized Officer and Principal Financial and Accounting Officer) | ||
| 26 |
EXHIBIT 31.1
Certifications
I, David Lichtenstein, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Lightstone Value Plus Real Estate Investment Trust II, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| /s/ David Lichtenstein | |
| David Lichtenstein | |
| Chairman and Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: May 15, 2017 |
EXHIBIT 31.2
Certifications
I, Donna Brandin, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Lightstone Value Plus Real Estate Investment Trust II, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| /s/ Donna Brandin | |
| Donna Brandin | |
| Chief Financial Officer and Treasurer | |
| (Principal Financial and Accounting Officer) | |
| Date: May 15, 2017 |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, David Lichtenstein, the Chief Executive Officer and Chairman of the Board of Directors of Lightstone Value Plus Real Estate Investment Trust II, Inc. (the “Company”) certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) The Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2017 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C 78m); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ David Lichtenstein | |
| David Lichtenstein | |
| Chairman and Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: May 15, 2017 |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, Donna Brandin, the Chief Financial Officer, Treasurer and Principal Accounting Officer of Lightstone Value Plus Real Estate Investment Trust II, Inc. (the “Company”) certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) The Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2017 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C 78m); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Donna Brandin | |
| Donna Brandin | |
| Chief Financial Officer and Treasurer | |
| (Principal Financial and Accounting Officer) | |
| Date: May 15, 2017 |
Document And Entity Information - shares shares in Millions |
3 Months Ended | |
|---|---|---|
Mar. 31, 2017 |
May 08, 2017 |
|
| Document Information [Line Items] | ||
| Document Type | 10-Q | |
| Amendment Flag | false | |
| Document Period End Date | Mar. 31, 2017 | |
| Document Fiscal Year Focus | 2017 | |
| Document Fiscal Period Focus | Q1 | |
| Entity Registrant Name | LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II INC | |
| Entity Central Index Key | 0001436975 | |
| Current Fiscal Year End Date | --12-31 | |
| Entity Filer Category | Non-accelerated Filer | |
| Entity Common Stock, Shares Outstanding | 18.3 |
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares shares in Thousands |
Mar. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Preferred shares, par value | $ 0.01 | $ 0.01 |
| Preferred shares, shares authorized | 10,000 | 10,000 |
| Preferred shares, shares issued | 0 | 0 |
| Preferred shares, shares outstanding | 0 | 0 |
| Common stock, par value | $ 0.01 | $ 0.01 |
| Common stock, shares authorized | 100,000 | 100,000 |
| Common stock, shares issued | 18,346 | 18,411 |
| Common stock, shares outstanding | 18,346 | 18,411 |
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) $ in Thousands |
3 Months Ended | |
|---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
| Rental revenue | $ 20,606 | $ 19,889 |
| Expenses: | ||
| Property operating expenses | 12,848 | 12,744 |
| Real estate taxes | 726 | 852 |
| General and administrative costs | 1,411 | 1,409 |
| Depreciation and amortization | 2,697 | 2,549 |
| Total operating expenses | 17,682 | 17,554 |
| Operating income | 2,924 | 2,335 |
| Interest and dividend income | 142 | 382 |
| Loss on sale of marketable securities, available for sale | (307) | 0 |
| Interest expense | (1,973) | (1,943) |
| Other (expense)/income, net | (27) | 233 |
| Income/(loss) from investment in unconsolidated affiliated entity | 56 | (6) |
| Net income | 815 | 1,001 |
| Less: net (income)/loss attributable to noncontrolling interests | (42) | 3 |
| Net income applicable to Company's common shares | $ 773 | $ 1,004 |
| Net income per Company's common share, basic and diluted | $ 0.04 | $ 0.05 |
| Weighted average number of common shares outstanding, basic and diluted | 18,373 | 18,571 |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) $ in Thousands |
3 Months Ended | |
|---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
| Net income | $ 815 | $ 1,001 |
| Other comprehensive income/(loss): | ||
| Holding gain/(loss) on marketable securities, available for sale | 443 | (77) |
| Reclassification adjustment for loss included in net income | 307 | 0 |
| Other comprehensive income/(loss) | 750 | (77) |
| Comprehensive income | 1,565 | 924 |
| Less: Comprehensive (income)/loss attributable to noncontrolling interests | (42) | 3 |
| Comprehensive income attributable to the Company's common shares | $ 1,523 | $ 927 |
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - 3 months ended Mar. 31, 2017 - USD ($) $ in Thousands |
Total |
Common Stock [Member] |
Additional Paid-In Capital [Member] |
Accumulated Other Comprehensive Loss [Member] |
Accumulated Deficit [Member] |
Total Noncontrolling Interests [Member] |
|---|---|---|---|---|---|---|
| BALANCE at Dec. 31, 2016 | $ 156,632 | $ 184 | $ 157,259 | $ (1,456) | $ (19,552) | $ 20,197 |
| BALANCE (in shares) at Dec. 31, 2016 | 18,411 | |||||
| Net income | 815 | $ 0 | 0 | 0 | 773 | 42 |
| Other comprehensive income | 750 | 0 | 0 | 750 | 0 | 0 |
| Distributions declared | (5,313) | 0 | 0 | 0 | (5,313) | 0 |
| Distributions to noncontrolling interests | (4,170) | 0 | 0 | 0 | 0 | (4,170) |
| Redemption and cancellation of shares | (647) | $ (1) | (646) | 0 | 0 | 0 |
| Redemption and cancellation of shares (in shares) | (65) | |||||
| BALANCE at Mar. 31, 2017 | $ 148,067 | $ 183 | $ 156,613 | $ (706) | $ (24,092) | $ 16,069 |
| BALANCE (in shares) at Mar. 31, 2017 | 18,346 |
Organization |
3 Months Ended | ||||
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Mar. 31, 2017 | |||||
| Organization [Abstract] | |||||
| 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 March 31, 2017. 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 and follow-on offering, 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’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 August 15, 2022, the tenth anniversary of the termination of its initial public offering, its charter requires that the Board of Directors must either (i) seek stockholder approval of an extension or amendment of this listing deadline; or (ii) seek stockholder approval to adopt a plan of liquidation of the corporation. Noncontrolling Interests The noncontrolling interests consist of (i) parties of the Company that hold units in the Operating Partnership, (ii) membership interests held by Lightstone Value Plus Real Estate Investment Trust, Inc., a REIT also sponsored by the Company’s Sponsor, in a joint venture, and (iii) the membership interests held by minority owners of certain of the Company’s hotels. 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 units into cash or, at the option of the Company, an equal number of common shares of the Company, as allowed by the limited partnership agreement. Lightstone SLP II LLC, which is wholly owned by the Company’s Sponsor, committed to purchase subordinated profits interests in the Operating Partnership (“Subordinated Profits Interests”) at a cost of $100,000 per unit for each $1.0 million in subscriptions up to ten percent of the proceeds from the primary shares under the initial public offering and the follow-on Offering. Lightstone SLP II LLC had the option to purchase the Subordinated Profits Interests with either cash or an interest in real property of equivalent value. From the Company’s inception through the termination of its follow-on offering, the Company’s Sponsor made cash contributions of $12.9 million and contributed equity interests totaling 48.6% in Brownmill, LLC (“Brownmill”), which were valued at $4.8 million, in exchange for a total of 177.0 Subordinated Profits Interests with an aggregate value of $17.7 million in fulfillment of its commitment. |
Summary of Significant Accounting Policies |
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Mar. 31, 2017 | |||||
| Summary of Significant Accounting Policies [Abstract] | |||||
| 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 March 31, 2017, 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, 2016. 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, 2016 included herein has been derived from the consolidated balance sheet included in the Company's Annual Report on Form 10-K. New Accounting Pronouncements In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance that clarifies the definition of a business and assists in the evaluation of whether a transaction will be accounted for as an acquisition of an asset or as a business combination. The guidance provides a test to determine when a set of assets and activities acquired is not a business. When substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. Under the updated guidance, an acquisition of a single property will likely be treated as an asset acquisition as opposed to a business combination and associated transaction costs will be capitalized rather than expensed as incurred. Additionally, assets acquired, liabilities assumed, and any noncontrolling interest will be measured at their relative fair values. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted. This guidance is not expected to have a material impact on the Company’s consolidated financial statements. In November 2016, the FASB issued guidance that requires amounts that are generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for public companies for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted and the pronouncement requires a retrospective transition method of adoption. This guidance is not expected to have a material impact on the Company’s consolidated financial statements. In August 2016, the issued FASB an accounting standards update which provides guidance on the classification of certain cash receipts and cash payments in the statement of cash flows, including those related to debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, and distributions received from equity method investees. This guidance is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. The guidance must be adopted on a retrospective basis and must be applied to all periods presented, but may be applied prospectively if retrospective application would be impracticable. This guidance will not have a material impact on the Company’s consolidated financial statements. In January 2016, the FASB issued an accounting standards update that generally requires companies to measure investments in equity securities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income. The new guidance must be applied using a modified-retrospective approach and is effective for periods beginning after December 15, 2017 and early adoption is not permitted. If the Company had adopted this standard during the year ended December 31, 2016, it would have resulted in an increase/(decrease) to net income of approximately $0.2 million and ($0.1 million) for the three months ended March 31, 2017 and 2016, respectively. In May 2014, the FASB issued an accounting standards update that provides for a single five-step model to be applied to all revenue contracts with customers as well as requires additional financial statement disclosures that will enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. While the Company has not decided on the implementation method, we do not expect the adoption of this standard to have a material impact on its financial position, results of operations or cash flows. 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. |
Marketable Securities and Fair Value Measurements |
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| Marketable Securities, Margin Loan and Fair Value Measurements [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Marketable Securities and Fair Value Measurements |
Marketable Securities The following is a summary of the Company’s available for sale securities as of the dates indicated:
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% (1.83% as of March 31, 2017). When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. As of March 31, 2017 and December 31, 2016, 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:
As of March 31, 2017 and December 31, 2016, all of the Company’s equity securities and were classified as Level 1 assets and there were no transfers between the level classifications during the three months ended March 31, 2017. |
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Mortgages payable, net |
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| Mortgages payable [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mortgages payable, net |
Mortgages payable, net consisted of the following:
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 March 31, 2017:
Debt Compliance Pursuant to the Company’s debt agreements, approximately $3.6 million and $3.5 million was held in restricted escrow accounts as of March 31, 2017 and December 31, 2016, respectively. Such escrows are subject to release in accordance with the applicable debt agreement for the payment of real estate taxes, insurance and capital improvements, as required. Certain of our debt agreements also contain clauses providing for prepayment penalties and require the maintenance of certain ratios, including debt service coverage and fixed leverage charge ratio. As of March 31, 2017, the Company is in compliance with respect to all of its financial debt covenants. Additionally, the Company’s mortgage loan (outstanding principal balance of $5.9 million as of March 31, 2017) secured by the Courtyard – Baton Rouge matured on May 1, 2017 and was repaid in full with cash on hand. The Company’s revolving credit facility secured by nine of its hotel properties (outstanding principal balance of $73.6 million as of March 31, 2017) matures in January 2018 and has two, one-year options to extend solely at the discretion of the lender. The Company currently intends to seek to extend, refinance and/or repay in full, using a combination of cash on hand and/or cash proceeds from the potential sale of assets that may occur in the future, such existing indebtedness on or before its applicable stated maturity. Other than these financings, the Company has no additional significant maturities of mortgage debt over the next 12 months. |
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Equity |
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Mar. 31, 2017 | |||||
| Equity [Abstract] | |||||
| 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. Catch-Up Distribution On March 30, 2009, our Board of Directors declared the annualized distribution rate for each quarterly of $0.00178082191 per share per day (the “Initial Annualized Distribution Rate”), and equaled a daily amount that, if paid each day for a 365-day period, would equal a 6.5% annualized rate based on the share price of $10.00. On September 25, 2015, the Board of Directors resolved that future distributions declared to shareholders of record on the close of business on the last day of the quarter during the applicable quarter would be targeted to be paid at a rate of $0.0019178 per day (the “Revised Annualized Distribution Rate”), which would equal a daily amount that, if paid each day for a 365-day period, would equal a 7.0% annualized rate based on a share price of $10.00, which would be an increase over the prior quarterly distributions of an annualized rate of 6.5%. On February 28, 2017, our Board of Directors declared a special distribution, payable to stockholders of record on February 28, 2017, for the difference between the Revised Annualized Distribution Rate and the Initial Annualized Distribution Rate for the period from October 1, 2009 through September 30, 2015. This distribution was calculated based on stockholders of record each day during the applicable period at a rate of $0.000136986 per share per day, and equals a daily amount that, if paid each day for a 365-day period, would equal an 0.5% annualized rate based on the share price of $10.00. The Company had previously commenced making regular quarterly distributions to shareholders at the Revised Annualized Distribution Rate for quarterly periods commencing on October 1, 2015. Additionally, on February 28, 2017, the Board of Directors also declared a special distribution on the Subordinated Profits Interests for the period commencing with their issuance through December 31, 2016 at the Revised Annualized Distribution Rate. The special distributions declared on February 28, 2017 are collectively referred to as the “Catch-Up Distribution.” The Catch-Up Distribution, which was paid on March 15, 2017, totaled $6.3 million ($2.1 million and $4.2 million on common shares and Subordinated Profits Interests, respectively.) |
Related Party Transactions |
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| Related Party Transactions [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 and Property Manager for the periods indicated:
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Financial Instruments |
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| Financial Instruments [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| Financial Instruments |
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted escrows, accounts receivable and other assets, accounts payable and 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:
The fair value of our mortgages payable was determined by discounting the future contractual interest and principal payments by market interest rates. |
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Commitments and Contingencies |
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Mar. 31, 2017 | |||||
| Commitments and Contingencies [Abstract] | |||||
| 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. |
Subsequent Events |
3 Months Ended | ||||
|---|---|---|---|---|---|
Mar. 31, 2017 | |||||
| Subsequent Events [Abstract] | |||||
| Subsequent Events |
Distribution Payments On April 17, 2017, the distribution for the three-month period ending March 31, 2017 of $3.2 million was paid in cash. Distribution Declaration On May 11, 2017, the Board of Directors authorized and the Company declared a distribution for the three-month period ending June 30, 2017. The distribution will be calculated based on shareholders of record each day during this three-month period at a rate of $0.0019178 per day, and will equal a daily amount that, if paid each day for a 365-day period, would equal a 7.0% annualized rate based on a share price of $10.00. The distribution will be paid in cash on or about July 15, 2017 to shareholders of record as of June 30, 2017. |
Summary of Significant Accounting Policies (Policies) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2017 | ||
| Summary of Significant Accounting Policies [Abstract] | ||
| Basis of Presentation | 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 March 31, 2017, 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, 2016. 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, 2016 included herein has been derived from the consolidated balance sheet included in the Company's Annual Report on Form 10-K. |
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| New Accounting Pronouncements | New Accounting Pronouncements In January 2017, the Financial Accounting Standards Board (“FASB”) issued guidance that clarifies the definition of a business and assists in the evaluation of whether a transaction will be accounted for as an acquisition of an asset or as a business combination. The guidance provides a test to determine when a set of assets and activities acquired is not a business. When substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. Under the updated guidance, an acquisition of a single property will likely be treated as an asset acquisition as opposed to a business combination and associated transaction costs will be capitalized rather than expensed as incurred. Additionally, assets acquired, liabilities assumed, and any noncontrolling interest will be measured at their relative fair values. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted. This guidance is not expected to have a material impact on the Company’s consolidated financial statements. In November 2016, the FASB issued guidance that requires amounts that are generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for public companies for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted and the pronouncement requires a retrospective transition method of adoption. This guidance is not expected to have a material impact on the Company’s consolidated financial statements. In August 2016, the issued FASB an accounting standards update which provides guidance on the classification of certain cash receipts and cash payments in the statement of cash flows, including those related to debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, and distributions received from equity method investees. This guidance is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. The guidance must be adopted on a retrospective basis and must be applied to all periods presented, but may be applied prospectively if retrospective application would be impracticable. This guidance will not have a material impact on the Company’s consolidated financial statements. In January 2016, the FASB issued an accounting standards update that generally requires companies to measure investments in equity securities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income. The new guidance must be applied using a modified-retrospective approach and is effective for periods beginning after December 15, 2017 and early adoption is not permitted. If the Company had adopted this standard during the year ended December 31, 2016, it would have resulted in an increase/(decrease) to net income of approximately $0.2 million and ($0.1 million) for the three months ended March 31, 2017 and 2016, respectively. In May 2014, the FASB issued an accounting standards update that provides for a single five-step model to be applied to all revenue contracts with customers as well as requires additional financial statement disclosures that will enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the standard. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. While the Company has not decided on the implementation method, we do not expect the adoption of this standard to have a material impact on its financial position, results of operations or cash flows. 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. |
Marketable Securities and Fair Value Measurements (Tables) |
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Mar. 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Marketable Securities, Margin Loan and Fair Value Measurements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Available for Sale Securities | The following is a summary of the Company’s available for sale securities as of the dates indicated:
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Mortgages payable, net (Tables) |
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Mar. 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mortgages payable [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Mortgages Payable | Mortgages payable, net consisted of the following:
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| Schedule of Estimated Contractual 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 March 31, 2017:
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Related Party Transactions (Tables) |
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Mar. 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Related Party Transactions [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Fees to Related Parties | The following table represents the fees incurred associated with the payments to the Company’s Advisor and Property Manager for the periods indicated:
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Financial Instruments (Tables) |
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Mar. 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||
| Financial Instruments [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||
| Summary of Estimated Fair Value of Debt | The estimated fair value of our mortgages payable is as follows:
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Summary of Significant Accounting Policies (Details Textual) - USD ($) $ in Millions |
3 Months Ended | |
|---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
| Summary of Significant Accounting Policies [Line Items] | ||
| Percentage general partnership interest in common units operating partnership | 99.00% | |
| New Accounting Pronouncement or Change in Accounting Principle, Effect of Change on Net Income | $ 0.2 | $ 0.1 |
Marketable Securities and Fair Value Measurements (Details) - USD ($) $ in Thousands |
3 Months Ended | 12 Months Ended |
|---|---|---|
Mar. 31, 2017 |
Dec. 31, 2016 |
|
| Schedule of Available-for-sale Securities [Line Items] | ||
| Fair Value | $ 9,233 | $ 8,738 |
| Equity Securities [Member] | ||
| Schedule of Available-for-sale Securities [Line Items] | ||
| Adjusted Cost | 9,939 | 10,194 |
| Gross Unrealized Gains | 14 | |
| Gross Unrealized Losses | (720) | (1,456) |
| Fair Value | $ 9,233 | $ 8,738 |
Marketable Securities and Fair Value Measurements (Details Textual) - Margin Loan [Member] |
3 Months Ended |
|---|---|
Mar. 31, 2017 | |
| Debt Instrument [Line Items] | |
| Libor | 1.83% |
| Interest rate, Libor plus | 0.85% |
Mortgages payable, net (Details 1) - USD ($) $ in Thousands |
Mar. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Debt Instrument [Line Items] | ||
| Remainder of 2017 | $ 6,806 | |
| 2018 | 120,755 | |
| 2019 | 0 | |
| 2020 | 0 | |
| 2021 | 0 | |
| Thereafter | 0 | |
| Total | 127,561 | $ 127,907 |
| Less: Deferred financing costs | (601) | (767) |
| Total principal maturiteis, net | $ 126,960 | $ 127,140 |
Mortgages payable, net (Details Textual) - USD ($) $ in Thousands |
Mar. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Debt Instrument [Line Items] | ||
| Restricted escrows | $ 3,610 | $ 3,488 |
| Secured Debt | 126,960 | 127,140 |
| Promissory Note, secured by four properties [Member] | ||
| Debt Instrument [Line Items] | ||
| Restricted escrows | 3,600 | 3,500 |
| Secured Debt | 22,542 | 22,688 |
| Revolving Loan, secured by nine properties [Member] | ||
| Debt Instrument [Line Items] | ||
| Secured Debt | 73,616 | 73,616 |
| Courtyard Baton Rouge [Member] | ||
| Debt Instrument [Line Items] | ||
| Secured Debt | $ 5,885 | $ 5,922 |
Equity (Details Textual) - USD ($) |
1 Months Ended | |||||
|---|---|---|---|---|---|---|
Feb. 28, 2017 |
Sep. 25, 2015 |
Mar. 30, 2009 |
Mar. 31, 2017 |
Mar. 15, 2017 |
Dec. 31, 2016 |
|
| Stockholders Equity Note [Line Items] | ||||||
| Distribution Rate Per Day | $ 0.000136986 | $ 0.0019178 | $ 0.00178082191 | |||
| Number Of Days Used To Calculate Dividend Per Day | 365 days | 365 days | 365 days | |||
| Annualized Distribution Rate | 0.50% | 7.00% | 6.50% | |||
| Share Price | $ 10.00 | $ 10.00 | $ 10.00 | |||
| Annualized Rate | 6.50% | |||||
| Dividends Payable | $ 3,174,000 | $ 6,300,000 | $ 3,248,000 | |||
| Common Shares [Member] | ||||||
| Stockholders Equity Note [Line Items] | ||||||
| Dividends Payable | 2,100,000 | |||||
| Subordinated Profits Interests [Member] | ||||||
| Stockholders Equity Note [Line Items] | ||||||
| Dividends Payable | $ 4,200,000 | |||||
Related Party Transactions (Details) - Related Party [Member] - USD ($) $ in Thousands |
3 Months Ended | |
|---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
| Related Party Transaction [Line Items] | ||
| Asset Management Fees | $ 604 | $ 588 |
| Development Fees | 0 | 33 |
| Total | $ 604 | $ 621 |
Financial Instruments (Details) - USD ($) $ in Thousands |
Mar. 31, 2017 |
Dec. 31, 2016 |
|---|---|---|
| Debt Instrument [Line Items] | ||
| Carrying Amount | $ 127,561 | $ 127,907 |
| Mortgages payable [Member] | ||
| Debt Instrument [Line Items] | ||
| Carrying Amount | 127,561 | 127,907 |
| Estimated Fair Value | $ 127,667 | $ 128,052 |
Subsequent Events (Details Textual) - USD ($) |
1 Months Ended | 3 Months Ended | |||
|---|---|---|---|---|---|
May 11, 2017 |
Feb. 28, 2017 |
Sep. 25, 2015 |
Mar. 30, 2009 |
Mar. 31, 2017 |
|
| Subsequent Event [Line Items] | |||||
| Distribution payment | $ 3,200,000 | ||||
| Distribution on per day basis | $ 0.000136986 | $ 0.0019178 | $ 0.00178082191 | ||
| Number of days used to calculate daily amount of distribution | 365 days | 365 days | 365 days | ||
| Annualized rate of dividend | 0.50% | 7.00% | 6.50% | ||
| Share price | $ 10.00 | $ 10.00 | $ 10.00 | ||
| Subsequent Event [Member] | |||||
| Subsequent Event [Line Items] | |||||
| Distribution on per day basis | $ 0.0019178 | ||||
| Number of days used to calculate daily amount of distribution | 365 days | ||||
| Annualized rate of dividend | 7.00% | ||||
| Share price | $ 10.00 | ||||
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