UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For The Fiscal Year Ended December 31, 2019
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 000-55619
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Maryland | 46-1140492 |
| (State or other jurisdiction | (I.R.S. Employer Identification No.) |
| of incorporation or organization) |
| 1985 Cedar Bridge Avenue, Suite 1, Lakewood, NJ | 08701 |
| (Address of principal executive offices) | (Zip code) |
Registrant's telephone number, including area code: 732-367-0129
Securities registered under Section 12(b) of the Exchange Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
| None | None |
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.01 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer ¨ |
| Non-accelerated filer x | Smaller reporting company x |
|
Emerging growth company x |
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. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There is no established market for the Registrant’s common shares. As of June 30, 2019, the last business day of the most recently completed second quarter, there were 13.4 million shares of the registrant’s common stock held by non-affiliates of the registrant. On March 12, 2020, the board of directors of the Registrant approved an estimated value per share of the Registrant’s common stock of $9.30 per share derived from the estimated value of the Registrant’s assets less the estimated value of the Registrant’s liabilities divided by the number of shares outstanding, all as of December 31, 2019. For a full description of the methodologies used to value the Registrant's assets and liabilities in connection with the calculation of the estimated value per share, see Part II, Item 5, “Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information.” As of March 15, 2020, there were approximately 13.2 million shares of common stock held by non-affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
None.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC.
Table of Contents
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Special Note Regarding Forward-Looking Statements
This annual report on Form 10-K, together with other statements and information publicly disseminated by Lightstone Value Plus Real Estate Investment Trust III, Inc. (the “Lightstone REIT III”) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Exchange Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect actual results, performances or achievements. Factors which may cause actual results to differ materially from current expectations include, but are not limited to, (i) general economic and local real estate conditions, (ii) the availability of suitable acquisition opportunities, (iii) financing risks, such as the inability to obtain equity, debt, or other sources of financing on favorable terms, (iv) the level and volatility of interest rates and foreign currency exchange rates, (v) increases in operating costs, (vi) the inability of tenants to continue paying their rent obligations due to bankruptcy, insolvency or general downturn in their business and (vii) changes in governmental laws and regulations. Accordingly, there is no assurance that our expectations will be realized.
General Description of Business
Structure
Lightstone Value Plus Real Estate Investment Trust III, Inc. (‘‘Lightstone REIT III’’), is a Maryland corporation, formed on October 5, 2012, which elected to qualify to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2015.
Lightstone REIT III is structured as an umbrella partnership REIT (“UPREIT”), and substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT III LP, a Delaware limited partnership (the “Operating Partnership”). As of December 31, 2019, Lightstone REIT III held an approximately 99% general partnership interest in the Operating Partnership’s common units.
Lightstone REIT III and the Operating Partnership and its subsidiaries are collectively referred to as the “Company” and the use of “we,” “our,” “us” or similar pronouns in this annual report refers to the Lightstone REIT III, its Operating Partnership or the Company as required by the context in which such pronoun is used.
We have and will continue to seek to acquire a diverse portfolio of real estate assets and real estate-related investments, including hotels, other commercial and/or residential properties, primarily located in the United States. All such properties may be acquired and operated by us alone or jointly with another party. We may also originate or acquire mortgage loans secured by real estate. Although we expect that most of our investments will be of these types, we may make other investments. In fact, we may invest in whatever types of real estate-related investments that we believe are in our best interests.
We currently have one operating segment. As of December 31, 2019, we (i) majority owned and consolidated the operating results and financial condition of eight limited service hotels containing a total of 872 rooms, (ii) held an unconsolidated 22.5% membership interest in RP Maximus Cove, L.L.C. (the “Cove Joint Venture”), which we subsequently disposed of on February 12, 2020, and (iii) an unconsolidated 50.0% membership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”). We account for our unconsolidated membership interests in both the Cove Joint Venture and the Hilton Garden Inn Joint Venture under the equity method of accounting.
Our advisor is Lightstone Value Plus REIT III LLC (the “Advisor”), which is majority owned by David Lichtenstein. On July 16, 2014, the Advisor contributed $2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. Our Advisor also owns 20,000 shares of our common stock (“Common Shares”) which were issued on December 24, 2012 for $200,000, or $10.00 per share. Mr. Lichtenstein also is the majority owner of the equity interests of the Lightstone Group, LLC. The Lightstone Group, LLC served as our sponsor (the ‘‘Sponsor’’) during our initial public offering (the “Offering”) which terminated on March 31, 2017. Mr. Lichtenstein owns 222,222 Common Shares which were issued on December 11, 2014 for $2.0 million, or $9.00 per share. Subject to the oversight of our board of directors (the “Board of Directors”), the Advisor has primary responsibility for making investment decisions on our behalf and managing our day-to-day operations. Through his ownership and control of The Lightstone Group, LLC, Mr. Lichtenstein is the indirect owner and manager of Lightstone SLP III LLC, a Delaware limited liability company (the “Special Limited Partner”), which owns 242 subordinated participation interests (“Subordinated Participation Interests”) in the Operating Partnership which were acquired for $12.1 million in connection with our Offering. Mr. Lichtenstein also acts as our Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT III or the Operating Partnership.
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We do not have employees. The Advisor receives compensation and fees for services related to the investment and management of our assets.
Our Advisor has affiliated property managers (the “Property Managers”), which may manage certain of the properties we acquire. We also use other unaffiliated third-party property managers, principally for the management of our hospitality properties.
Our Common Shares are not currently listed on a national securities exchange. We may seek to list our Common Shares for trading on a national securities exchange only if a majority of our independent directors believe listing would be in the best interest of our stockholders. We do not intend to list our Common Shares at this time. We do not anticipate that there would be any active market for our Common Shares until they are listed for trading. In the event we do not begin the process of achieving a liquidity event prior to March 31, 2025, which is the eighth anniversary of the termination of our Offering, our charter requires either (a) an amendment to our charter to extend the deadline to begin the process of achieving a liquidity event, or (b) the holding of a stockholders meeting to vote on a proposal for an orderly liquidation of our portfolio.
Noncontrolling Interests – Partners of the Operating Partnership
Limited Partner
On July 16, 2014, the Advisor contributed $2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The Advisor has the right to convert the limited partner units into cash or, at our option, an equal number of our Common Shares.
Special Limited Partner
In connection with our Offering, which terminated on March 31, 2017, the Special Limited Partner purchased from the Operating Partnership an aggregate of approximately 242 Subordinated Participation Interests for consideration of $12.1 million. The Subordinated Participation Interests were each purchased for $50,000 in consideration and may be entitled to receive liquidation distributions upon the liquidation of Lightstone REIT III.
As the majority owner of the Special Limited Partner, Mr. Lichtenstein is the beneficial owner of a 99% interest in such Subordinated Participation Interests and will thus receive an indirect benefit from any distributions made in respect thereof.
These Subordinated Participation Interests entitle the Special Limited Partner to a portion of any regular and liquidation distributions that we make to our stockholders, but only after our stockholders have received a stated preferred return.
Operating Partnership Activity
Our Operating Partnership commenced its operations on December 11, 2014. Since then we have and will continue to seek to primarily acquire and operate hospitality properties and to a lesser extent, other commercial and residential properties principally in North America through our Operating Partnership. Our commercial holdings may consist of full-service or select-service hotels, including extended-stay hotels and to a lesser extent, retail (primarily multi-tenanted shopping centers), industrial and office properties. All such properties may be acquired and operated by us alone or jointly with another party. In addition, we may invest up to 20% of our net assets in collateralized debt obligations, commercial mortgage-backed securities (“CMBS”) and mortgage and mezzanine loans secured, directly or indirectly, by the same types of properties which we may acquire directly.
Related Parties
Our Advisor and its affiliates and the Special Limited Partner are related parties of the Company. Certain of these entities are entitled to compensation for services related to the investment, management and disposition of our assets during our acquisition, operational and liquidation stages. The compensation levels during our acquisition and operational stages are based on the cost of acquired properties/investments and the annual revenue earned from such properties/investments, and other such fees and expense reimbursements as outlined in each of the respective agreements.
Primary Business Objectives and Strategies
Our primary objective is to achieve capital appreciation with a secondary objective of income without subjecting principal to undue risk. We intend to achieve this goal primarily through investments in real estate properties.
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Acquisition and Investment Policies
We have and/or intend to continue to primarily acquire commercial properties (including full-service or select-service hotels and extended-stay hotels) and residential real estate assets, as well as other real estate-related investments principally in North America. Our acquisitions may include both portfolios and individual properties. Full-service hotels generally provide a full complement of guest amenities including restaurants, concierge and room service, porter service or valet parking. Select-service hotels typically do not include these amenities. Extended-stay hotels offer upscale, high-quality, residential style lodging with a comprehensive package of guest services and amenities for extended-stay business and leisure travelers. We have no limitation as to the brand of franchise or license with which our hotels are associated. We generally intend to hold each acquired property for a period of three to six years although we may hold our properties for differing timelines depending on various factors.
Even though we have and intend to continue primarily to acquire hotels, we have and may continue to purchase other types of real estate. Assets other than hotels may include, without limitation, office buildings, shopping centers, business and industrial parks, manufacturing facilities, single-tenant properties, multifamily properties, student housing properties, warehouses and distribution facilities and medical office properties. We have and expect to invest mainly in direct real estate investments and other equity interests; however, we may also invest in debt interests, which may include bridge or mezzanine loans, including in furtherance of a loan-to-own strategy. We have not established any limits on the percentage of our portfolio that may be comprised of various categories of assets which present differing levels of risk.
We have and may continue to enter into joint ventures, tenant-in-common investments or other co-ownership arrangements for the acquisition, development or improvement of properties with third parties or certain affiliates of our Advisor, including other present and future REITs and real estate limited partnerships sponsored by affiliates of our Advisor.
Financing Strategy and Policies
There is no limitation on the amount we may invest or borrow for the purchase of any single asset. Our charter allows us to incur leverage up to 300% of our total “net assets” (as defined in Section I.B of the NASAA REIT Guidelines) as of the date of any borrowing, which is generally expected to be approximately 75% of the cost of our investments. We may only exceed this 300% limit if a majority of our independent directors approves each borrowing in excess of this limit and we disclose such borrowing to our stockholders in our next quarterly report along with a justification for the excess borrowing. In all events, we expect that our secured and unsecured borrowings will be reasonable in relation to the net value of our assets and will be reviewed by our board of directors at least quarterly.
We do not currently intend to exceed the leverage limit in our charter. Careful use of debt will help us to achieve our diversification goals because we will have more funds available for investment. However, high levels of debt could cause us to incur higher interest charges and higher debt service payments, which would decrease the amount of cash available for distribution to our investors.
Distribution Objectives
U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with GAAP) determined without regard to the deduction for dividends paid and excluding any net capital gain. In order to continue to qualify or qualify for REIT status, we may be required to make distributions in excess of cash available.
Distributions, if any, are authorized at the discretion of our Board of Directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. Such analyses may include actual and anticipated operating cash flow, capital expenditure needs, general financial and market conditions, proceeds from asset sales and other factors that our board of directors deem relevant. Our Board of Directors’ decisions will be substantially influenced by their obligation to ensure that we maintain our federal tax status as a REIT. We may fund distributions with cash proceeds from borrowings if we do not generate sufficient cash flow from our operations to fund distributions. Our ability to pay regular distributions and the size of these distributions will depend upon a variety of factors. For example, our borrowing policy permits us to incur short-term indebtedness, having a maturity of two years or less, and we may have to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. We cannot assure that regular any future distributions will continue to be made or that we will maintain any particular level of distributions that we have previously established or may establish.
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We are an accrual basis taxpayer, and as such our REIT taxable income could be higher than the cash available to us. We may therefore borrow to make distributions, which could reduce the cash available to us, in order to distribute 90% of our REIT taxable income as a condition to our election to be taxed as a REIT. These distributions made with borrowed funds may constitute a return of capital to stockholders. “Return of capital” refers to distributions to investors in excess of net income. To the extent that distributions to stockholders exceed earnings and profits, such amounts constitute a return of capital for U.S. federal income tax purposes, but only to the extent of a stockholder’s adjusted tax basis in our shares, although such distributions might not reduce stockholders’ aggregate invested capital. Because our earnings and profits are reduced for depreciation and other non-cash items, it is likely that a portion of each distribution will constitute a tax-deferred return of capital for U.S. federal income tax purposes.
On June 19, 2019, our Board of Directors determined to suspend regular monthly distributions.
Previously, distributions in an amount equal to a 6.0% annualized rate were declared on a monthly basis beginning on January 14, 2015 through June 30, 2019 and were paid on or about the 15th day following each month end.
Future distributions declared, if any, will be at the discretion of our Board of Directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. Our Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, current revenues, operating and interest expenses and our ability to refinance near-term debt. In addition, we currently intend to continue to comply with the REIT distribution requirement that we annually distribute no less than 90% of our taxable income. We cannot assure that any future distributions will be made or that we will maintain any particular level of distributions that we have previously established or may establish.
Total distributions declared during the years ended December 31, 2019 and 2018 were $4.0 million and $8.1 million, respectively.
Share Repurchase Program
Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their Common Shares back to us, subject to restrictions. For the years ended December 31, 2019 and 2018, we repurchased 141,204 and 174,338 shares of common stock, respectively, at an average price per share of $9.77 and $9.64 per share, respectively.
On March 19, 2020, the Board of Directors amended the share repurchase program to remove stockholder notice requirements and also approved the suspension of all redemptions effective immediately.
Tax Status
We elected to qualify and be taxed as a REIT for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2015. As a REIT, we generally will not be subject to U.S. federal income tax on our net taxable income that we distribute currently to our stockholders. To maintain our REIT qualification under the Internal Revenue Code of 1986, as amended, (the “Code”), we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income, which does not equal net income, as calculated in accordance with accounting principles generally accepted in the United States of America, determined without regard to the deduction for dividends paid and excluding any net capital gain. If we fail to remain qualified for taxation as a REIT in any subsequent year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify as a REIT. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders.
We engage in certain activities through taxable REIT subsidiaries ("TRSs"), including when we acquire a hotel we usually establish a TRS which then enters into an operating lease agreement for the hotel. As such, we may be subject to U.S. federal and state income taxes and franchise taxes from these activities.
As of December 31, 2019 and 2018, we had no material uncertain income tax positions. Additionally, even if we continue to qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income, if any.
Competition
The hotel and other commercial real estate markets are highly competitive. This competition could reduce occupancy levels and revenues at our properties, which would adversely affect our operations. We face competition from many sources. We face competition from other hotels both in the immediate vicinity and the geographic market where our hotels are located. Overbuilding in the hotel industry may increase the number of rooms available and may decrease occupancy and room rates. In addition, increases in operating costs due to inflation may not be offset by increased room rates. We also face competition from nationally recognized hotel brands with which we will not be associated.
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We have or may compete in all of our markets with other owners and operators of retail, office, industrial and residential real estate. The continued development of new retail, office, industrial and residential properties has intensified the competition among owners and operators of these types of real estate in many market areas in which we intend to operate. We compete based on a number of factors that include location, rental rates, security, suitability of the property’s design to prospective tenants’ needs and the manner in which the property is operated and marketed. The number of competing properties in a particular market could have a material effect on our occupancy levels, rental rates and on the operating expenses of certain of our properties.
In addition, we compete with other entities engaged in real estate investment activities to locate suitable properties to acquire and to locate tenants and purchasers for our properties. These competitors include other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, governmental bodies and other entities. There are also other REITs with asset acquisition objectives similar to ours and others that may be organized in the future. Some of these competitors, including larger REITs, have substantially greater marketing and financial resources than we will have and generally may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of tenants. In addition, these same entities seek financing through similar channels to those sought by us. Therefore, we will compete for institutional investors in a market where funds for real estate investment may decrease.
Competition from these and other third party real estate investors may limit the number of suitable investment opportunities available to us. It may also result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms.
We believe that our senior management’s experience, coupled with our financing, professionalism, diversity of properties and reputation in the industry enables us to compete with the other real estate investment companies.
Because we are organized as an UPREIT, we believe we are well positioned within the hospitality industry and any industries in which we operate to potentially offer existing property owners the opportunity to contribute properties to us in tax-deferred transactions using our Operating Partnership units as transactional currency. As a result, we believe we may a competitive advantage over most of our competitors that are structured as traditional REITs and non-REITs in pursuing acquisitions with tax-sensitive sellers.
Environmental
As an owner of real estate, we are subject to various environmental laws of U.S. federal, state and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired directly or indirectly in the future.
Employees
We do not have employees. We have entered into an advisory agreement pursuant to which our 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 our Advisor fees for services related to the investment and management of our assets, and we reimburse our Advisor for certain expenses incurred on our behalf.
Available Information
We electronically file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and proxy statements, with the SEC. Stockholders may obtain copies of our filings with the SEC, free of charge, from the website maintained by the SEC at http://www.sec.gov, or at the SEC's Public Reference Room at 100 F. Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our office is located at 1985 Cedar Bridge Avenue, Lakewood, New Jersey 08701. Our telephone number is (732) 367-0129. Our website is www.lightstonecapitalmarkets.com.
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| Location | Year Built | Date Acquired | Year to Date Available Rooms | Percentage
Occupied for the Year Ended December 31, 2019 | Revenue
per Available Room for the Year Ended December 31, 2019 | Average
Daily Rate For the Year Ended December 31, 2019 | ||||||||||||||||||
| Wholly-Owned
and Consolidated Hospitality Properties: | ||||||||||||||||||||||||
| Hampton Inn – Des Moines | Des Moines, Iowa | 1987 | 2/4/2015 | 43,800 | 70.0 | % | $ | 77.25 | $ | 110.38 | ||||||||||||||
| Courtyard - Durham | Durham, North Carolina | 1996 | 5/15/2015 | 53,290 | 75.7 | % | 77.51 | 102.44 | ||||||||||||||||
| Hampton Inn – Lansing | Lansing, Michigan | 2013 | 3/10/2016 | 31,390 | 70.8 | % | 81.49 | 115.11 | ||||||||||||||||
| Courtyard - Warwick | Warwick, Rhode Island | 2003 | 3/23/2016 | 33,580 | 72.5 | % | 98.12 | 135.28 | ||||||||||||||||
| Home2 Suites – Salt Lake | Salt Lake City, Utah | 2013 | 8/2/2016 | 45,625 | 66.2 | % | 70.33 | 106.22 | ||||||||||||||||
| Home2 Suites – Tukwila | Tukwila, Washington | 2015 | 8/2/2016 | 50,735 | 88.1 | % | 129.92 | 147.51 | ||||||||||||||||
| Fairfield Inn – Austin | Austin, Texas | 2014 | 9/13/2016 | 30,660 | 73.9 | % | 81.13 | 109.77 | ||||||||||||||||
| Staybridge Suites – Austin | Austin, Texas | 2009 | 10/7/2016 | 29,200 | 77.4 | % | 79.19 | 102.25 | ||||||||||||||||
| Total | 318,280 | 74.7 | % | $ | 87.87 | $ | 117.65 | |||||||||||||||||
Unconsolidated Affiliated Real Estate Entities:
| Multi - Family Residential | Location | Year Built | Date Acquired | Leasable Units | Percentage
Occupied as of December 31, 2019 | Annualized
Revenues based on rents at December 31, 2019 | Annualized
Revenues per unit at December 31, 2019 | ||||||||||||||||
| The Cove (Multi-Family Complex)(1) | Tiburon, California | 1967 | January 31, 2017 | 281 | 95.8 | % | $ | 16.0 million | $ | 56,656 | |||||||||||||
| Hospitality | Location | Year Built | Date Acquired | Year to Date Available Rooms | Percentage Occupied for the Year Ended December 31, 2019 | Revenue per Available Room for the Year Ended December 31, 2019 | Average Daily Rate For the Year Ended December 31, 2019 | |||||||||||||||||
| Hilton Garden Inn - Long Island City | Long Island City, New York | 2014 | 3/27/2018 | 66,795 | 91.6 | % | $ | 153.84 | $ | 167.95 | ||||||||||||||
(1) On February 12, 2020, we disposed of our membership interest in the Cove Joint Venture.
Annualized revenue is defined as the minimum monthly payments due as of December 31, 2019 annualized, excluding periodic contractual fixed increases. The annualized base rent disclosed in the table above includes all concessions, abatements and reimbursements of rent to tenants.
From time to time in the ordinary course of business, we may become subject to legal proceedings, claims or disputes.
As of the date hereof, we are 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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES:
As of March 15, 2020, we had approximately 13.2 million shares of common stock outstanding, held by a total of 3,810 stockholders. The number of stockholders is based on the records of DST Systems Inc., which serves as our registrar and transfer agent.
Market Information
Our Common Shares are not currently listed on a national securities exchange. We may seek to list our Common Shares for trading on a national securities exchange only if a majority of our independent directors believe listing would be in the best interest of our stockholders. We do not intend to list our Common Shares at this time. We do not anticipate that there would be any active market for our Common Shares until they are listed for trading. In the event we do not begin the process of achieving a liquidity event prior to March 31, 2025, which is the eighth anniversary of the termination of our Offering, our charter requires either (a) an amendment to our charter to extend the deadline to begin the process of achieving a liquidity event, or (b) the holding of a stockholders meeting to vote on a proposal for an orderly liquidation of our portfolio.
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Estimated Net Asset Value (“NAV”) and NAV per Share of Common Stock (“NAV per Share”)
On March 12, 2020, our Board of Directors approved our estimated NAV of approximately $123.8 million and resulting estimated NAV per Share of $9.30, both as of December 31, 2019 and both after the Special Limited Partner’s purchase of Subordinated Participation Interests. In connection with our Offering, which terminated on March 31, 2017, the Special Limited Partner made cash purchases of Subordinated Participation Interests totaling $12.1 million. In the calculation of our estimated NAV, no allocation of value was made to the Special Limited partner’s Subordinated Participation Interests because the estimated NAV per Share did not exceed an aggregate $10.00 price per share plus a cumulative, pre-tax non-compounded annual return of 6.0% as of December 31, 2019.
The estimated value of our shares was calculated as of a particular point in time. The value of our shares will fluctuate over time in response to developments related to individual assets in the portfolio and the management of those assets and in response to the real estate and finance markets. There is no assurance of the extent to which the current estimated valuation should be relied upon for any purpose after its effective date regardless that it may be published on any statement issued by us or otherwise.
Process and Methodology
Our Advisor, along with any necessary material assistance or confirmation of a third-party valuation expert or service, is responsible for calculating our NAV, which we currently expect will be done on at least an annual basis unless our Common Shares are approved for listing on a national securities exchange. Our Board of Directors will review each estimate of NAV and approve the resulting NAV per Share.
Our estimated NAV per Share as of December 31, 2019 was calculated with the assistance of both our Advisor and Marshall & Stevens Incorporated (‘‘M&S’’), an independent third-party valuation engaged by us to assist with the valuation of our assets, liabilities and any allocations of value to the Special Limited Partner’s Subordinated Participation Interests. Our Advisor recommended and our Board of Directors established the estimated NAV per Share as of December 31, 2019 based upon the analyses and reports provided by our Advisor and M&S. The process for estimating the value of our assets, liabilities and allocations of value to the Special Limited Partner’s Subordinated Participation interests is performed in accordance with the provisions of the Investment Program Association Practice Guideline 2013-01, ‘‘Valuation of Publicly Registered Non-Listed REITs.’’ We believe that our valuations were developed in a manner reasonably designed to ensure their reliability.
The engagement of M&S with respect to our NAV per Share as of December 31, 2019 was approved by our Board of Directors, including all of our independent directors. M&S has extensive experience in conducting asset valuations, including valuations of commercial real estate, debt, properties and real estate- related investments.
With respect to our NAV per Share as of December 31, 2019, M&S prepared appraisal reports (the ‘‘Consolidated Appraisal Reports’’ and the “Hilton Garden Inn – Long Island City Appraisal Report”) and collectively, the “M&S Appraisal Reports”), summarizing key inputs and assumptions, on the 9 of the 10 properties in which we held ownership interests as of December 31, 2019. M&S also prepared a NAV report (the ‘‘December 2019 NAV Report’’) which estimated the NAV per Share as of December 31, 2019. The December 2019 NAV Report relied upon (i) the M&S Appraisal Reports for nine of the 10 properties in which we held ownership interests and (ii) our Advisor’s estimate of the value of our membership interest in the Cove Joint Venture, cash and cash equivalents, marketable securities, available for sale, restricted cash, due from/(to) related parties, other assets, mortgages payable, other liabilities and any allocation of value to Special Limited Partner’s Subordinated Participation Interests, to calculate estimated NAV per Share, all as of December 31, 2019.
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The table below sets forth the calculation of our estimated NAV and resulting estimated NAV per Share as of December 31, 2019 as well as the comparable calculation as of December 31, 2018.
| Dollar and share amounts are presented in thousands, except per share data. |
| As of December 31, 2019 | As of December 31, 2018 | |||||||||||||||
| Value | Per Share | Value | Per Share | |||||||||||||
| Net Assets: | ||||||||||||||||
| Real Estate Assets: | ||||||||||||||||
| Consolidated Real Estate Properties | $ | 138,805 | $ | 166,260 | ||||||||||||
| Investment in Unconsolidated Affiliated Real Estate Entity | 36,649 | 35,362 | ||||||||||||||
| Total real estate assets | 175,454 | $ | 13.18 | 201,622 | $ | 14.99 | ||||||||||
| Non-Real Estate Assets: | ||||||||||||||||
| Cash | 6,103 | 9,966 | ||||||||||||||
| Other assets | 11,477 | 6,655 | ||||||||||||||
| Total non-real estate assets | 17,580 | 1.32 | 16,621 | 1.24 | ||||||||||||
| Total Assets | 193,034 | 14.50 | 218,243 | 16.23 | ||||||||||||
| Liabilities: | ||||||||||||||||
| Mortgages payable | (65,974 | ) | (78,693 | ) | ||||||||||||
| Due to related parties | (451 | ) | (157 | ) | ||||||||||||
| Other liabilities | (2,827 | ) | (4,215 | ) | ||||||||||||
| Total liabilities | (69,252 | ) | (5.20 | ) | (83,065 | ) | (6.18 | ) | ||||||||
| Allocation of value to Special Limited Partner's Subordinated Participation Interests | - | - | (664 | ) | (0.05 | ) | ||||||||||
| Adjusted NAV after giving effect to Special Limited Partner's Purchases of Subordinated Participation Interests | $ | 123,782 | $ | 9.30 | $ | 134,514 | $ | 10.00 | ||||||||
| Shares of Common Stock Outstanding | 13,310 | 13,451 | ||||||||||||||
Use of Independent Valuation Firm:
As discussed above, our Advisor is responsible for calculating our NAV. In connection with determining our NAV, our Advisor may rely on the material assistance or confirmation of a third-party valuation expert or service. In this regard, M&S was selected by our Board of Directors to assist our Advisor in the calculation of our estimated NAV and resulting estimated NAV per Share as of December 31, 2019. M&S’s services included appraising the M&S Appraised Properties and preparing the December 2019 NAV Report. M&S is engaged in the business of appraising commercial real estate properties and is not affiliated with us or our Advisor. The compensation we paid to M&S was based on the scope of work and not on the appraised values of our real estate properties. The appraisals were performed in accordance with the Code of Ethics and the Uniform Standards of Professional Appraisal Practice, or USPAP, the real estate appraisal industry standards created by The Appraisal Foundation. The M&S Appraisal Reports were reviewed, approved, and signed by an individual with the professional designation of MAI licensed in the state where each real property is located. The use of the reports is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. In preparing its reports, M&S did not, and was not requested to; solicit third-party indications of interest for our common stock in connection with possible purchases thereof or the acquisition of all or any part of us.
M&S collected reasonably available material information that it deemed relevant in appraising these real estate properties. M&S relied in part on property-level information provided by our Advisor, including (i) property historical and projected operating revenues and expenses; and (ii) information regarding recent or planned capital expenditures.
In conducting their investigation and analyses, M&S took into account customary and accepted financial and commercial procedures and considerations as they deemed relevant. Although M&S reviewed information supplied or otherwise made available by us or our Advisor for reasonableness, they assumed and relied upon the accuracy and completeness of all such information and of all information supplied or otherwise made available to them by any other party and did not independently verify any such information. M&S assumed that any operating or financial forecasts and other information and data provided to or otherwise reviewed by or discussed with M&S were reasonably prepared in good faith on bases reflecting the then best currently available estimates and judgments of our management, our Board of Directors, and/or our Advisor. M&S relied on us to advise them promptly if any information previously provided became inaccurate or was required to be updated during the period of their review.
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In performing its analyses, M&S made numerous other assumptions as of various points in time with respect to industry performance, general business, economic, and regulatory conditions, and other matters, many of which are beyond their control and our control. M&S also made assumptions with respect to certain factual matters. For example, unless specifically informed to the contrary, M&S assumed that we have clear and marketable title to each real estate property appraised, that no title defects exist, that any improvements were made in accordance with law, that no hazardous materials are present or were present previously, that no significant deed restrictions exist, and that no changes to zoning ordinances or regulations governing use, density, or shape are pending or being considered. Furthermore, M&S’s analyses, opinions, and conclusions were necessarily based upon market, economic, financial, and other circumstances and conditions existing as of or prior to the date of the M&S Appraisal Reports, and any material change in such circumstances and conditions may affect M&S’s analyses and conclusions. The M&S Appraisal Reports contain other assumptions, qualifications, and limitations that qualify the analyses, opinions, and conclusions set forth therein. Furthermore, the prices at which our real estate properties may actually be sold could differ from M&S’s analyses.
M&S is actively engaged in the business of appraising commercial real estate properties similar to those owned by us in connection with public security offerings, private placements, business combinations, and similar transactions. We do not believe that there are any material conflicts of interest between M&S, on the one hand, and us, our Sponsor, our Advisor, and our affiliates, on the other hand. Our Advisor engaged M&S on behalf of our Board of Directors to deliver their reports to assist in the NAV calculation as of December 31, 2019 and M&S received compensation for those efforts. In addition, we agreed to indemnify M&S against certain liabilities arising out of this engagement. M&S has previously assisted in our prior NAV calculations and has also been engaged by us for certain valuation services with respect to our acquisitions. M&S may from time to time in the future perform other services for us and our Sponsor or other affiliates of the Sponsor, so long as such other services do not adversely affect the independence of M&S as certified in the M&S Appraisal Reports. During the past year M&S has also been engaged to provide appraisal services to another non-traded REIT sponsored by our Sponsor as well as to affiliates of our Sponsor for which it was paid usual and customary fees.
Although M&S considered any comments received from us and our Advisor relating to their reports, the final appraised values of the M&S Appraised Properties were determined by M&S. The reports were addressed to our Board of Directors to assist our Board of Directors in calculating an estimated NAV per Share as of December 31, 2019. The reports were not addressed to the public, may not be relied upon by any other person to establish an estimated value per share of our common stock, and do not constitute a recommendation to any person to purchase or sell any shares of our common stock.
Our goal in calculating our estimated NAV is to arrive at values that are reasonable and supportable using what we deem to be appropriate valuation methodologies and assumptions. The reports, including the analysis, opinions, and conclusions set forth in such reports, are qualified by the assumptions, qualifications, and limitations set forth in the respective reports. The following is a summary of our valuation methodologies used to value our assets and liabilities by key component:
Real Estate Assets:
As of December 31, 2019, we have ownership interests in (i) eight consolidated properties and (ii) two unconsolidated properties held through joint ventures (collectively, the ‘‘Real Estate Assets’’). With respect to our consolidated properties as of December 31, 2019, we majority owned eight hospitality properties, or select services hotels, containing a total of 872 rooms (collectively, the Consolidated Real Estate Properties”). With respect to our unconsolidated properties as of December 31, 2019, we held (i) a 22.5% membership interest in The Cove Joint Venture, an affiliated real estate entity, which owns a 281-unit luxury waterfront multi-family rental property located in Tiburon, California (“The Cove”) and (ii) held a 50.0% membership interest in the Hilton Garden Inn Joint Venture, an affiliated real estate entity, which owns the Hilton Garden Inn – Long Island City, a 183-room, limited service hotel located in Long Island City, New York (the “Hilton Garden Inn – Long Island City”). We do not consolidate our membership interests in The Cove Joint Venture or the Hilton Garden Inn Joint Venture but rather account for them both under the equity method of accounting.
As described above, we engaged M&S to provide an appraisal of the M&S Appraised Properties, which consisted of nine of the ten Real Estate Assets in which we held ownership interests as of December 31, 2019. M&S did not provide an appraisal for the Cove as of December 31, 2019 but rather relied on our Advisor’s estimated fair value as discussed below.
In preparing the appraisal reports, M&S, among other things:
| • | performed a site visit of each property in connection with this assignment or other assignments; |
| • | interviewed our officers or the Advisor’s personnel to obtain information relating to the physical condition of each appraised property, including known environmental conditions, status of ongoing or planned property additions and reconfigurations, and other factors for such leased properties; and |
| • | reviewed the acquisition criteria and parameters used by real estate investors for properties similar to the subject properties, including a search of real estate data sources and publications concerning real estate buyer’s criteria, discussions with sources deemed appropriate, and a review of transaction data for similar properties. |
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The following summarizes the valuation approach used for our Consolidated Real Estate Properties:
M&S employed the income approach and the sales comparison approach to estimate the value of the appraised properties included in our Consolidated Real Estate Properties. The income approach involves an economic analysis of the property based on its potential to provide future net annual income. As part of the valuation, a discounted cash flow analysis (‘‘DCF Analysis’’) and direct capitalization analysis was used in the income approach to determine the value of our interest in the portfolio. The indicated value by the income approach represents the amount an investor may pay for the expectation of receiving the net cash flow from the property.
The direct capitalization analysis is based upon the net operating income of the property capitalized at an appropriate capitalization rate for the property based upon property characteristics and competitive position and market conditions at the date of the appraisal.
In applying the DCF Analysis, pro forma statements of operations for the property including revenues and expenses are analyzed and projected over a multi-year period. The property is assumed to be sold at the end of the multi-year holding period. The reversion value of the property which can be realized upon sale at the end of the holding period is calculated based on the capitalization of the estimated net operating income of the property in the year of sale, utilizing a capitalization rate deemed appropriate in light of the age, anticipated functional and economic obsolescence and competitive position of the property at the time of sale. Net proceeds to owners are determined by deducting appropriate costs of sale. The discount rate selected for the DCF Analysis is based upon estimated target rates of return for buyers of similar properties.
The sales comparison approach utilizes indices of value derived from actual or proposed sales of comparable properties to estimate the value of the subject property. The appraiser analyzed such comparable sale data as was available to develop a market value conclusion for the subject property.
M&S prepared the Consolidated Appraisal Reports, summarizing key inputs and assumptions, for each of the appraised properties using financial information provided by us and our Advisor. From such review, M&S selected the appropriate cash flow discount rate, residual discount rate, and terminal capitalization rate in the DCF Analysis, the appropriate capitalization rate in the direct capitalization analysis and the appropriate price per unit in the sales comparison analysis.
The estimated values for our investments in real estate may or may not represent current market values and do not equal the book values of our real estate investments in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our consolidated investments in real estate are currently carried in our consolidated financial statements at their amortized cost basis, adjusted for any loss impairments and bargain purchase gains recognized to date. Our unconsolidated investments in real estate are accounted for under the equity method of accounting in our consolidated financial statements.
The following summarizes the key assumptions that were used in the discounted cash flow models to estimate the value of our Consolidated Real Estate Properties and the Hilton Garden Inn – Long Island City as of December 31, 2019:
| Consolidated Real Estate Properties (8 hospitality properties) | Unconsolidated Real Estate Property (1 hospitality property) | |||||||
| Weighted-average: | ||||||||
| Exit capitalization rate | 8.25 | % | 5.75 | % | ||||
| Discount rate | 8.91 | % | 6.75 | % | ||||
| Annual market rent growth rate | 3.56 | % | 3.05 | % | ||||
| Annual net operating income growth rate | 5.16 | % | 3.18 | % | ||||
| Holding period (in years) | 10.0 | 10.0 | ||||||
While we believe that the assumptions made by M&S are reasonable, a change in these assumptions would impact the calculations of the estimated value of Consolidated Real Estate Properties and the Hilton Garden Inn – Long Island City. Assuming all other factors remain unchanged, the following table summarizes the estimated change in the values (dollars in thousands) of the Consolidated Real Estate Properties and the Hilton Garden Inn – Long Island City (our 50% ownership) which would result from a 25 basis point increase or decrease in exit capitalization rates and discount rates:
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| Consolidated Real Estate Properties (8 hospitality properties) | Unconsolidated Real Estate Property (1 hospitality property) | |||||||
| Increase of 25 basis points: | ||||||||
| Exit capitalization rate | $ | (2,089 | ) | $ | (639 | ) | ||
| Discount rate | $ | (2,446 | ) | $ | (480 | ) | ||
| Decrease of 25 basis points: | ||||||||
| Exit capitalization rate | $ | 2,098 | $ | 699 | ||||
| Discount rate | $ | 2,381 | $ | 494 | ||||
As of December 31, 2019, the aggregate estimated fair value of our interests in the Consolidated Real Estate Properties was approximately $138.8 million and the aggregate cost of our Consolidated Real Estate Properties was approximately $129.3 million, including approximately $10.3 million of capital improvements invested subsequent to acquisition. The estimated fair value of our Consolidated Real Estate Properties compared to the original acquisition price plus subsequent capital improvements through December 31, 2019, results in an estimated overall increase in the real estate value of 7.3%.
As of December 31, 2019, the estimated fair value of our 50.0% membership interest in the Hilton Garden Inn Joint Venture of approximately $14.8 million was calculated based on the gross appraised value of the Hilton Garden Inn – Long Island City of $63.3 million less the fair value of the outstanding mortgage indebtedness of $34.6 million plus all other non-real estate assets and liabilities, net of $0.8 million. The estimated fair value of our 50.0% membership interest in the Hilton Garden Inn Joint Venture compared to our carrying value of $11.8 million, both as of December 31, 2019, equates to an increase in value of 25.5%.
The following summarizes the valuation approach used for The Cove Joint Venture:
On December 17, 2019, we and the other affiliated members in the Cove Joint Venture (collectively, the Redeemers”), along with Maximus and the Cover Joint Venture, entered into the Redemption Agreement providing for the Redeemers’ membership interests in the Cover Joint Venture to be redeemed at an aggregate redemption price of approximately $87.6 million.
On February 12, 2020, the Cove Joint Venture completed the redemption of the Redeemers’ membership interests in the Cove Joint Venture pursuant to the terms of the Redemption Agreement. In connection with the redemption of our 22.5% membership interest in the Cove Joint Venture, we received proceeds of approximately $21.9 million.
Because of the subsequent redemption of our 22.5% membership interest in the Cove Joint Venture, we did not engage M&S to perform an appraisal of the Cove as of December 31, 2019 but rather our Advisor determined the estimated fair value of our 22.5% ownership interest in the Cove Joint Venture to approximate the redemption proceeds we received on February 12, 2020. The estimated fair value of our 22.5% ownership interest in the Cove Joint Venture of $21.9 million compared to our carrying value of $14.2 million, both as of December 31, 2019, equates to an increase in value of 53.5%.
Cash and cash equivalents: The estimated values of our cash and cash equivalents equal its carrying value.
Marketable securities, available for sale: The estimated values of our marketable securities, available for sale, are based on Level 1 and Level 2 inputs. Level 1 inputs are inputs that are observable, either directly or indirectly, such as quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs 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. All of our marketable securities measured using Level 2 inputs were valued based on a market approach using readily available quoted market prices for similar assets.
Restricted cash: The estimated values of our restricted cash approximate their carrying values due to their short maturities.
Other assets: Our other assets consist of tenant accounts receivable, deposits, and prepaid expenses and other assets. The estimated values of these items approximate their carrying values due to their short maturities. Certain other items, primarily intangibles, have been eliminated for the purpose of the valuation because those items are already considered in our valuation of the respective investments in real estate properties or financial instruments.
Mortgages payable: Our mortgages payable include both variable and fixed interest rate debt facilities. The estimated value of our variable rate facility was assumed to approximate its outstanding principal balance because it bears interest at a variable rate. The estimated value for our fixed rate facility was estimated using a discounted cash flow analysis, which used inputs based on the remaining loan term and estimated current market interest rate for mortgage loans with similar characteristics, including remaining loan term and loan-to-value ratios. The current market interest rate was generally determined based on market rates for available comparable debt. The estimated market interest rate for our fixed rate facility was 4.75%.
Due to related parties: The estimated value of our due to related parties approximates its carrying value due to its short maturity.
Other liabilities: Our other liabilities consist of our accounts payable and accrued expenses and deposits payable. The carrying values of these items were considered to equal their fair value due to their short maturities.
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Allocations of Value to Special Limited Partner’s Subordinated Participation Interests: The Special Limited Partner’s Subordinated Participation Interests are classified in noncontrolling interests on our consolidated balance sheet. However, for purposes of our NAV, we do not estimate their fair value in accordance with GAAP. Rather, the IPA’s Practice Guideline 2013-01 provides for adjustments to the NAV for preferred securities, special interests and incentive fees based on the aggregate NAV of the company and payable to the sponsor in a hypothetical liquidation of the company as of the valuation date in accordance with the provisions of the partnership or advisory agreements and the terms of the preferred securities. Because our Subordinated Participation Interests are only payable to the Special Limited Partner in a liquidation event, we believe they should be valued for our NAV in accordance with these provisions.
Accordingly, pursuant to the terms of our operating agreement, no allocations of value are made to the Special Limited Partner’s Subordinated Participation Interests unless the estimated NAV per Share would have exceeded $10.00 per share plus a cumulative, pre-tax non-compounded annual return of 6.0% as of the indicated valuation date. In connection with our Offering, which terminated on March 31, 2017, the Special Limited Partner made cash purchases of Subordinated Participation Interests totaling approximately $12.1 million. In the calculation of our estimated NAV, no allocation of value was made to the Special Limited Partner’s Subordinated Participation Interests because the estimated NAV per Share did not exceed an aggregate $10.00 price per share plus a cumulative, pre-tax non-compounded annual return of 6.0% as of December 31, 2019.
Historical Estimated NAV and NAV per Share
Additional information on our historical reported estimated NAV and NAV per Share as of December 31, 2018 may be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed on April 1, 2019.
Limitations and Risks
As with any valuation methodology, the methodology used to determine our estimated NAV and resulting estimated NAV per Share is based upon a number of estimates and assumptions that may prove later not to be accurate or complete. Further, different market participants with different property-specific and general real estate and capital market assumptions, estimates, judgments and standards could derive different estimated NAVs per share, which could be significantly different from the estimated NAV per Share approved by our Board of Directors. The estimated NAV per Share approved by our Board of Directors does not represent the fair value of our assets less liabilities in accordance with GAAP, and such estimated NAV per Share is not a representation, warranty or guarantee that:
| • | a stockholder would be able to resell his or her shares of common stock at the estimated NAV per Share; |
| • | a stockholder would ultimately realize distributions per share of common stock equal to the estimated NAV per Share upon liquidation of our assets and settlement of our liabilities or a sale of the Company; |
| • | our shares of common stock would trade at the estimated NAV per Share on a national securities exchange; |
| • | an independent third-party appraiser or other third-party valuation firm would agree with the estimated NAV per Share; or |
| • | the methodology used to estimate our NAV per Share would be acceptable to FINRA or under the Employee Retirement Income Security Act with respect to their respective requirements. |
The Internal Revenue Service and the Department of Labor do not provide any guidance on the methodology an issuer must use to determine its estimated NAV per Share. FINRA guidance provides that NAV valuations be derived from a methodology that conforms to standard industry practice.
As with any valuation methodology, our methodology is based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive different estimated NAVs per share, and these differences could be significant. The estimated NAV per Share is not audited and does not represent the fair value of our assets less our liabilities in accordance GAAP, nor do they represent an actual liquidation value of our assets and liabilities or the amount shares of our common stock would trade at on a national securities exchange. As of the date of this filing, although we have not sought stockholder approval to adopt a plan of liquidation of the Company, certain distributions may be payable to the special limited partner for its subordinated participation interests in connection with a liquidation event. Accordingly, our estimated NAV reflects any allocations of value to the subordinated participation interests representing the amount that would be payable to the special limited partner in connection with a liquidation event pursuant to the guidelines for estimating NAV contained in IPA Practice Guideline 2013-01, ‘‘Valuation of Publicly Registered Non-Listed REITs.’’ Our estimated NAV per Share is based on the estimated value of our assets less the estimated value of our liabilities less any allocations to the special limited partner’s subordinated participation interests divided by the number of our diluted shares of common stock outstanding, all as of the date indicated. Our estimated NAV per Share does not reflect a discount for the fact we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. Our estimated NAV per Share does not take into account estimated disposition costs or fees or penalties, if any, that may apply upon the prepayment of certain of our debt obligations or the impact of restrictions on the assumption of certain debt. Our NAV per Share will fluctuate over time as a result of, among other things, future acquisitions or dispositions of assets, developments related to individual assets and the management of those assets and changes in the real estate and capital markets. Different parties using different assumptions and estimates could derive different NAVs and resulting estimated NAVs per share, and these differences could be significant. Markets for real estate and real estate-related investments can fluctuate and values are expected to change in the future. We currently expect that our Advisor will estimate our NAV on at least an annual basis. Our Board of Directors will review and approve each estimate of NAV and resulting estimated NAV per Share.
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The following factors may cause a stockholder not to ultimately realize distributions per share of common stock equal to the estimated NAV per Share upon liquidation:
| • | The methodology used to determine estimated NAV per Share includes a number of estimates and assumptions that may not prove to be accurate or complete as compared to the actual amounts received in the liquidation; |
| • | In a liquidation, certain assets may not be liquidated at their estimated values because of transfer fees and disposition fees, which are not reflected in the estimated NAV calculation; |
| • | In a liquidation, debt obligations may have to be prepaid and the costs of any prepayment penalties may reduce the liquidation amounts. Prepayment penalties are not included in determining the estimated value of liabilities in determining estimated NAV; |
| • | In a liquidation, the real estate assets may derive a portfolio premium which premium is not considered in determining estimated NAV; |
| • | In a liquidation, the potential buyers of the assets may use different estimates and assumptions than those used in determining estimated NAV; |
| • | If the liquidation occurs through a listing of the common stock on a national securities exchange, the capital markets may value the Company’s net assets at a different amount than the estimated NAV. Such valuation would likely be based upon customary REIT valuation methodology including funds from operation (‘‘FFO’’) multiples of other comparable REITs, FFO coverage of dividends and adjusted FFO payout of the Company’s anticipated dividend; and |
| • | If the liquidation occurs through a merger of the Company with another REIT, the amount realized for the common stock may not equal the estimated NAV per Share because of many factors including the aggregate consideration received, the make-up of the consideration (e.g., cash, stock or both), the performance of any stock received as part of the consideration during the merger process and thereafter, the reception of the merger in the market and whether the market believes the pricing of the merger was fair to both parties. |
Share Repurchase Program
Our share repurchase program may provide eligible stockholders with limited, interim liquidity by enabling them to sell shares of common stock back to us, subject to restrictions and applicable law. A selling stockholder must be unaffiliated with us, and must have beneficially held the shares of common stock for at least one year prior to offering the shares of common stock for sale to us through the share repurchase program. Subject to certain limitations, we may also redeem shares of common stock upon the request of the estate, heir or beneficiary of a deceased stockholder.
The prices at which stockholders who have held shares of common stock for the required one-year period may offer to sell shares of common stock back to us are as follows:
| • | in the case of the death of a stockholder: our NAV per Common Share; |
| • | the below percentages, except for in the case of the death of a stockholder: our estimated value per Common Share |
| • | 92.5% for stockholders who have continuously held their Common Shares for at least one year; |
| • | 95% for stockholders who have continuously held their Common Shares for at least two years; |
| • | 97.5% for stockholders who have continuously held their Common Shares for at least three years; and |
| • | 100% for stockholders who have continuously held their Common Shares for at least four years. |
Pursuant to the terms of our share repurchase program, we may make repurchases, if requested, at least once quarterly provided repurchases do not impair our capital or operations, as discussed further below. Each stockholder whose repurchase request is granted will receive the repurchase amount 30 days after the fiscal quarter in which we grant his, her or its repurchase request. Subject to certain limitations, we may also repurchase Common Shares upon the request of the estate, heir or beneficiary of a deceased stockholder. We may limit the number of Common Shares repurchased pursuant to our share repurchase program as follows: during any 12-month period, we will not repurchase in excess of 5.0% of the weighted average number of Common Shares outstanding during the prior calendar year; provided, however, that Common Shares repurchased in the case of the death of a stockholder will not count against this 5.0% limit.
For the years ended December 31, 2019 and 2018, we repurchased 141,204 and 174,338 shares of common stock, respectively, at an average price per share of $9.77 and $9.65 per share, respectively.
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On March 19, 2020, the Board of Directors amended the share repurchase program to remove stockholder notice requirements and also approved the suspension of all redemptions effective immediately.
Distributions
U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with GAAP) determined without regard to the deduction for dividends paid and excluding any net capital gain. In order to continue to qualify or qualify for REIT status, we may be required to make distributions in excess of cash available.
Distributions, if any, are authorized at the discretion of our Board of Directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. Such analyses may include actual and anticipated operating cash flow, capital expenditure needs, general financial and market conditions, proceeds from asset sales and other factors that our board of directors deem relevant. Our Board of Directors’ decisions will be substantially influenced by their obligation to ensure that we maintain our federal tax status as a REIT. We may fund distributions with cash proceeds from borrowings if we do not generate sufficient cash flow from our operations to fund distributions. Our ability to pay distributions and the size of these distributions will depend upon a variety of factors. For example, our borrowing policy permits us to incur short-term indebtedness, having a maturity of two years or less, and we may have to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. We cannot assure that any future distributions will be made or that we will maintain any particular level of distributions that we have previously established or may establish.
We are an accrual basis taxpayer, and as such our REIT taxable income could be higher than the cash available to us. We may therefore borrow to make distributions, which could reduce the cash available to us, in order to distribute 90% of our REIT taxable income as a condition to our election to be taxed as a REIT. These distributions made with borrowed funds may constitute a return of capital to stockholders. “Return of capital” refers to distributions to investors in excess of net income. To the extent that distributions to stockholders exceed earnings and profits, such amounts constitute a return of capital for U.S. federal income tax purposes, but only to the extent of a stockholder’s adjusted tax basis in our shares, although such distributions might not reduce stockholders’ aggregate invested capital. Because our earnings and profits are reduced for depreciation and other non-cash items, it is likely that a portion of each distribution will constitute a tax-deferred return of capital for U.S. federal income tax purposes.
Distributions Declared by our Board of Directors
On June 19, 2019, our Board of Directors determined to suspend regular monthly distributions.
Previously, distributions in an amount equal to a 6.0% annualized rate were declared on a monthly basis beginning on January 14, 2015 through June 30, 2019 and were paid on or about the 15th day following each month end.
Future distributions declared, if any, will be at the discretion of our Board of Directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. Our Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, current revenues, operating and interest expenses and our ability to refinance near-term debt. In addition, we currently intend to continue to comply with the REIT distribution requirement that we annually distribute no less than 90% of our taxable income. We cannot assure that future distributions will be made or that we will maintain any particular level of distributions that we have previously established or may establish.
Total distributions declared during the years ended December 31, 2019 and 2018 were $4.0 million and $8.1 million.
Recent Sales of Unregistered Securities
During the period covered by this Form 10-K, we did not sell any equity securities that were not registered under the Securities Act of 1933.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
You should read the following discussion and analysis together with our consolidated financial statements and notes thereto included in this Annual Report on Form 10-K. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see “Special Note Regarding Forward-Looking Statements” above for a description of these risks and uncertainties. Dollar amounts are presented in whole numbers, except per share data and where indicated in millions.
Overview
The Lightstone REIT III, together with the Operating Partnership (as defined below), the “Company”, also referred to as “we”, “our” or “us” herein) has and expects to continue to acquire and operate or develop in the future, hospitality, residential and/or commercial properties and/or make real estate-related investments, principally in the United States. Our acquisitions and investments are, principally conducted through the Operating Partnership, and may include both portfolios and individual properties. As of December 31, 2019, our portfolio of properties consisted of nine hospitality properties (eight consolidated and one unconsolidated) and one unconsolidated multi-family residential property. Our real estate investments have been and are expected to continue to be held by us alone or jointly with other parties.
We do not have employees. We entered into an advisory agreement with Lightstone Value Plus REIT III 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 qualify or 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.
Acquisitions and Investment Strategy
We have made and intend to continue to make direct or indirect real estate investments that will satisfy our primary investment objectives of preserving capital, making cash distributions as necessary to maintain our status as a REIT and achieving appreciation of our assets over the long term. The ability of our Advisor to identify and execute investment opportunities directly impacts our financial performance.
We will continue to seek to acquire and operate hotels and other commercial real estate assets, residential properties and make other real estate-related investments primarily located in the United States. We may acquire and operate all such properties alone or jointly with another party.
Current Environment
Our operating results are substantially impacted by the overall health of local, U.S. national and global economies and may be influenced by market and other challenges. Additionally, our business and financial performance may be adversely affected by current and future economic and other conditions; including, but not limited to, availability or terms of financings, financial markets volatility, political upheaval or uncertainty, natural and man-made disasters, terrorism and acts of war, unfavorable changes in laws and regulations, outbreaks of contagious diseases, cybercrime, loss of key relationships, and recession.
With respect to contagious diseases, the extent to which our business may be affected by the current outbreak of the Coronavirus will largely depend on both current and future developments, including its duration, spread and treatment, and related travel advisories and restrictions, which could impact overall demand in the hospitality industry, all of which are highly uncertain and cannot be reasonably predicted.
If demand for our hotel rooms is negatively impacted for an extended period, as a result of cancellations, travel restrictions, governmental travel advisories and/or state of emergency declarations, our business and financial results could be materially and adversely impacted.
While we believe there are certain cost reduction strategies we can implement, there can be no assurance that they would fully mitigate the adverse impact of any lost revenue.
These and other market and economic challenges could materially affect (i) the value and performance of our investments, (ii) our ability to pay future distributions, if any, (iii) the availability or terms of financings, (iv) our ability to make scheduled principal and interest payments, and (v) our ability to refinance any outstanding debt when contractually due.
We are not currently aware of any other material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from our operations, other than those referred to above or throughout this Form 10-K.
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Critical Accounting Estimates and Policies
General.
Our consolidated financial statements included in this annual report include our accounts and the Operating Partnership (over which we exercise financial and operating control). All inter-company balances and transactions have been eliminated in consolidation.
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of our financial statements requires us to make estimates and judgments about the effects of matters or future events that are inherently uncertain. These estimates and judgments may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
On an ongoing basis, we evaluate our estimates, including contingencies and litigation. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
To assist in understanding our results of operations and financial position, we have identified our critical accounting policies and discussed them below. These accounting policies are most important to the portrayal of our results and financial position, either because of the significance of the financial statement items to which they relate or because they require management's most difficult, subjective or complex judgments.
Investments in Real Estate
Accounting for Asset Acquisitions
When the Company makes an investment in real estate assets, the cost of real estate assets acquired in an asset acquisition are allocated to the acquired tangible assets, consisting of land, building and improvements, furniture and fixtures and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, acquired in-place leases, and the value of tenant relationships, based in each case on their relative fair values, at the date of acquisition, based on evaluation of information and estimates available at that date, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other relevant market data. As final information regarding relative fair value of the assets acquired, liabilities assumed and noncontrolling interests is received and estimates are refined, appropriate adjustments are made to the purchase price allocation. The allocations are finalized as soon as all the information necessary is available. Fees incurred related to asset acquisitions are capitalized as part of the cost of the investment.
Accounting for Real Estate Acquisitions
Upon the acquisition of real estate operating properties that meet the definition of a business, the Company estimates the fair value of acquired tangible assets and identified intangible assets and liabilities and certain liabilities such as assumed debt and contingent liabilities, at the date of acquisition, based on evaluation of information and estimates available at that date, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other relevant market data. Based on these estimates, the Company evaluates the existence of goodwill or a gain from a bargain purchase and allocates the fair value to the applicable assets, liabilities and noncontrolling interests, if any. As final information regarding fair value of the assets acquired, liabilities assumed and noncontrolling interests is received and estimates are refined, appropriate adjustments are made to the purchase price allocation. The allocations are finalized as soon as all the information necessary is available and in no case later than within twelve months from the acquisition date. Fees incurred related to the acquisition of real estate operating properties that meet the definition of a business are expensed as incurred within general and administrative costs within the consolidated statements of operations.
Carrying Value of Assets
The amounts to be capitalized as a result of periodic improvements and additions to real estate property, when applicable, and the periods over which the assets will be depreciated or amortized, are determined based on the application of accounting standards that may require estimates as to fair value and the allocation of various costs to the individual assets. Differences in the amount attributed to the assets may be significant based upon the assumptions made in calculating these estimates.
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Impairment Evaluation
Management evaluates the recoverability of its investments in real estate assets at the lowest identifiable level, the individual property level. Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value.
The Company evaluates the long-lived assets for potential impairment whenever events or changes in circumstances indicate that the undiscounted projected cash flows are less than the carrying amount for a particular property. The estimated cash flows used for the impairment analysis and the determination of estimated fair value are based on the Company’s plans for the respective assets and the Company’s views of market and economic conditions. The estimates consider matters such as future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition, and recent sales data for comparable properties. Changes in estimated future cash flows due to changes in the Company’s plans or views of market and economic conditions could result in recognition of impairment losses, which, under the applicable accounting guidance, may be substantial.
Depreciation and Amortization
Depreciation expense is computed based on the straight-line method over the estimated useful life of the applicable real estate asset. We generally use estimated useful lives of up to thirty-nine years for buildings and improvements and five to ten years for furniture and fixtures. Maintenance and repairs will be charged to expense as incurred.
Investments in Unconsolidated Entities.
We evaluate all investments in other entities for consolidation. We consider our percentage interest in the joint venture, evaluation of control and whether a variable interest entity exists when determining whether or not the investment qualifies for consolidation or if it should be accounted for as an unconsolidated investment under either the equity or cost method of accounting.
If an investment qualifies for the equity method of accounting, our investment is recorded initially at cost, and subsequently adjusted for equity in net income or loss and cash contributions and distributions. The net income or loss of an unconsolidated investment is allocated to its investors in accordance with the provisions of the operating agreement of the entity. The allocation provisions in these agreements may differ from the ownership interest held by each investor. Differences, if any, between the carrying amount of our investment in the respective joint venture and our share of the underlying equity of such unconsolidated entity are amortized over the respective lives of the underlying assets as applicable. These items are reported as a single line item in the statements of operations as income or loss from investments in unconsolidated affiliated entities. If an investment qualifies for the cost method of accounting, our investment is recorded initially at cost, and subsequently adjusted for cash contributions and distributions resulting from any capital events. Distributions received from the underlying entity are recorded as interest or dividend income.
We review investments for impairment in value whenever events or changes in circumstances indicate that the carrying amount of such investment may not be recoverable. An investment is impaired only if management’s estimate of the fair value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary. The ultimate realization of our investment in partially owned entities is dependent on a number of factors including the performance of that entity and market conditions. If we determine that a decline in the value of a partially owned entity is other than temporary, it will record an impairment charge.
Revenue Recognition
Our revenues are comprised primarily of revenues from the operations of hotels.
Room revenue is generated through contracts with customers whereby the customers agree to pay a daily rate for right to use a hotel room. The Company's contractual performance obligations are fulfilled at the end of the day that the customer is provided the room and revenue is recognized daily at the contract rate. Payment from the customer is secured at the end of the contract upon check-out by the customer from our hotel. The Company participates in frequent guest programs sponsored by the brand owners of our hotels whereby the brand owner allows guests to earn loyalty points during their hotel stay. The Company recognizes revenue at the amount earned that it will receive from the brand owner when a guest redeems their loyalty points by staying at one of the Company’s hotels.
Revenue from food, beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a hotel room and revenue is recognized when these goods or services are provided to the customer and the Company’s contractual performance obligations have been fulfilled.
Some contracts for rooms, food, beverage or other services require an upfront deposit which is recorded as deferred revenues (or contract liabilities) and recognized once the performance obligations are satisfied. The contractual liabilities are not significant.
The Company notes no significant judgments regarding the recognition of room, food and beverage or other revenues.
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Treatment of Management Compensation, Expense Reimbursements
Management of our operations is outsourced to our Advisor and certain other affiliates of our Sponsor. Fees related to each of these services are accounted for based on the nature of such service and the relevant accounting literature. Such fees include acquisition fees associated with the purchase of interests in real estate entities; asset management fees paid to our Advisor and property management fees paid to affiliates of our Advisor. These fees are expensed or capitalized to the basis of acquired assets, as appropriate.
Affiliates of our Advisor may also perform fee-based construction management services for both our development and redevelopment activities and tenant construction projects. These fees will be considered incremental to the construction effort and will be capitalized to the associated real estate project as incurred. Costs incurred for tenant construction will be depreciated over the shorter of their useful life or the term of the related lease. Costs related to development and redevelopment activities will be depreciated over the estimated useful life of the associated project.
Leasing activity at our properties may be outsourced to affiliates of our Advisor. Any corresponding leasing fees we pay will be capitalized and amortized over the life of the related lease.
Expense reimbursements made to both our Advisor and affiliates of our Advisor are expensed or capitalized to the basis of acquired assets, as appropriate.
Income Taxes
We elected to qualify and be taxed as a REIT for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2015. As a REIT, we generally are not subject to U.S. federal income tax on our net taxable income that we distribute currently to our stockholders. To maintain our REIT qualification under the Internal Revenue Code of 1986, as amended (the “Code”) we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If we fail to remain qualified for taxation as a REIT in any subsequent year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify as a REIT. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders.
We engage in certain activities through taxable REIT subsidiaries TRSs. When we purchase a hotel we establish a TRS and enter into an operating lease agreement for the hotel. As such, we are subject to U.S. federal and state income taxes and franchise taxes from these activities.
As of December 31, 2019 and 2018, we had no material uncertain income tax positions. Additionally, even if we continue to qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income.
Results of Operations
Acquisition and Disposition Activities
The following summarizes our acquisition and disposition activities during the years ended December 31, 2019 and 2018.
Disposition of SpringHill Suites – Green Bay
On October 24, 2019, we completed the disposition of the SpringHill Suites – Green Bay for an aggregate contractual sales price of $19.4 million, net of expenses of $0.2 million. In connection with the disposition of the SpringHill Suites – Green Bay, we recognized a net gain on the disposition of real estate of approximately $1.4 million (which is included in gain on disposition of investment property on the consolidated statements of operations) for the year ended December 31, 2019.
The disposition of the SpringHill Suites – Green Bay did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift in the Company’s operations that had a major effect on the Company’s operations and financial results. Accordingly, the operating results of the SpringHill Suites – Green Bay are reflected in the Company’s results from continuing operations for all periods presented through its date of disposition.
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We currently have one operating segment. As of December 31, 2019, we majority owned and consolidated the operating results and financial condition of 8 limited service hotels containing a total of 872 rooms. Additionally, we held an unconsolidated 22.5% membership interest in the Cove Joint Venture, which we subsequent disposed of on February 12, 2020 (see Note 4 of the Notes to Consolidated Financial Statements for additional information), and an unconsolidated 50.0% membership interest in the Hilton Garden Inn Joint Venture, both of which we account for under the equity method of accounting. We acquired our 50.0% membership interest in the Hilton Garden Inn Joint Venture on March 27, 2018.
2018:
On March 27, 2018, we acquired a 50.0% membership interest in the Hilton Garden Inn Joint Venture, an affiliated real estate entity that owns and operates the Hilton Garden Inn – Long Island City, a 183-room, limited-service hotel located in Long Island City, New York, that the Company does not consolidate but rather accounts for under the equity method of accounting.
See Notes 3 and 4 of the Notes to Consolidated Financial Statements for additional information on our acquisitions and dispositions.
Comparison of the year ended December 31, 2019 vs. December 31, 2018
Consolidated
Our consolidated revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation and amortization for the years ended December 31, 2019 and 2018 are attributable to our consolidated hospitality properties, including the SpringHill Suites – Green Bay through its date of disposition. Overall, our hospitality portfolio experienced an increase in the percentage of rooms occupied from 71.7% to 73.4% for 2018 and 2019, respectively, and decreases in revenue per available room (“RevPAR”) from $89.67 to $87.27 for 2018 and 2019, respectively, and the average daily rate per room (“ADR”) from $125.06 to $118.93 for 2018 and 2019, respectively.
Revenues
Revenues decreased by $1.5 million to $32.5 million during the year ended December 31, 2019 compared to $34.0 million for the same period in 2018. The decrease was primarily attributable to lower revenues of $1.3 resulting from the disposition of the SpringHill Suites – Green Bay. The remaining decrease in revenues of $0.2 million was a result of the lower RevPAR and ADR during 2019 compared to 2018 which was offset slightly by the increase in percentage of rooms occupied for the remaining hotels.
Property operating expenses
Property operating expenses decreased by $0.2 million to $20.7 million during the year ended December 31, 2019 compared to $20.9 million for the same period in 2018. The decrease was attributable to lower property operating expenses of $0.5 million resulting from the disposition of the SpringHill Suites – Green Bay partially offset by an increase of approximately $0.3 million due to the higher percentage of rooms occupied during 2019 compared to 2018.
Real estate taxes
Real estate taxes were relatively unchanged at approximately $1.6 million during both the years ended December 31, 2019 and 2018.
General and administrative expense
General and administrative expenses were relatively unchanged at approximately $3.0 million during both the years ended December 31, 2019 and 2018.
Depreciation and amortization
Depreciation and amortization expense increased slightly by $0.1 million to $5.7 million during the year ended December 31, 2019 compared to $5.6 million for the same period in 2018.
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Interest expense
Interest expense decreased by $0.8 million to $4.4 million during the year ended December 31, 2019 compared to $5.2 million for the same period in 2018. Interest expense is attributable to financings associated with our hotels and reflects both changes in market interest rates on our variable rate indebtedness and the weighted average principal outstanding during the periods.
Gain on disposition of investment property
During the year ended December 31, 2019, we recognized a gain on the disposition of investment property of approximately $1.4 million related to the disposition of the SpringHill Suites – Green Bay on October 24, 2019.
Earnings from investments in unconsolidated affiliated real estate entities
Our loss from investments in unconsolidated affiliated real estate entities during the year ended December 31, 2019 was $2.8 million compared to $2.7 million for the same period in 2018. Our loss from investments in unconsolidated affiliated real estate entities is attributable to our unconsolidated 50.0% membership interest in the Hilton Garden Inn Joint Venture (acquired March 27, 2018) and our unconsolidated 22.5% membership interest in the Cove Joint Venture (acquired January 31, 2017). We account for our membership interests in the Hilton Garden Inn Joint Venture and the Cove Joint Venture under the equity method of accounting commencing on the date that we acquired our interests. On February 12, 2020, we disposed of our membership interest in the Cove Joint Venture.
Financial Condition, Liquidity and Capital Resources
Overview:
Revenues, interest and dividend income, proceeds from the sale of marketable securities, distributions from unconsolidated affiliated investments and borrowings are our principal sources of funds to pay operating expenses, scheduled debt service, capital expenditures (excluding non-recurring capital expenditures), redemptions and cancellations of shares of our common stock, if approved, and distributions, if any, required to maintain our status as a REIT. For the year ended December 31, 2019, our primary sources of funds were approximately $3.3 million of cash flows from operations, $1.0 million of proceeds generated from the sale of our marketable securities and $1.8 million of distributions from our unconsolidated affiliated investments.
We currently believe that these cash resources along with our with our available cash on hand of $6.1 million and marketable securities, available for sale, of $3.2 million as of December 31, 2019 as well as any proceeds generated from the selective disposition of certain assets, including the redemption of our 22.5% membership interest in the Cove Joint Venture on February 12, 2020 which provided us with proceeds of approximately $21.9 million, will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not currently anticipate a need to raise funds from other than these sources within the next 12 months.
As of December 31, 2019, we have $66.0 million of outstanding mortgage debt. We have and intend to continue to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to our stockholders. Market conditions will dictate our overall leverage limit; as such our aggregate long-term permanent borrowings may be less than 75% of aggregate fair market value of all properties. We may also incur short-term indebtedness, having a maturity of two years or less.
Our charter provides that the aggregate amount of our 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 our overall leverage limit; as such our aggregate borrowings may be less than 300% of net assets. As of December 31, 2019, our total borrowings were $66.0 million which represented 64% of our net assets.
Our borrowings currently consist of mortgages cross-collateralized by a pool of properties. Our mortgages typically provide for either interest-only payments (generally for variable-rate indebtedness) or level payments (generally for fixed-rate indebtedness) with “balloon” payments due at maturity.
Any future properties that we may acquire or develop may be funded through a combination of borrowings and the proceeds received from the disposition of certain of our assets. These borrowing may consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. Such mortgages may be put in place either at the time we acquire a property or subsequent to our purchasing a property for cash. In addition, we may acquire properties that are subject to existing indebtedness where we choose to assume the existing mortgages. Generally, though not exclusively, we intend to seek to encumber our properties with non-recourse debt. This means that a lender’s rights on default will generally be limited to foreclosing on the property. However, we may, at our discretion, secure recourse financing or provide a guarantee to lenders if we believe this may result in more favorable terms. When we give a guaranty for a property owning entity, we will be responsible to the lender for the satisfaction of the indebtedness if it is not paid by the property owning entity.
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We may also obtain lines of credit to be used to acquire properties. If obtained, these lines of credit will be at prevailing market terms and will be repaid from proceeds from the sale or refinancing of properties, working capital and/or permanent financing. Our Sponsor and/or its affiliates may guarantee our lines of credit although they are not obligated to do so. We expect that such properties may be purchased by our Sponsor’s affiliates on our behalf, in our name, in order to minimize the imposition of a transfer tax upon a transfer of such properties to us.
In addition to meeting working capital needs and distributions, if any, made to maintain our status as a REIT, our capital resources are used to make certain payments to our Advisor, including payments related to asset acquisition fees and asset management fees, the reimbursement of acquisition-related expenses to our Advisor. We also reimburse our advisor for actual expenses it incurs for administrative and other services provided to us. Additionally, the Operating Partnership may be required to make distributions to Lightstone SLP III LLC, an affiliate of the Advisor.
We have agreements with the Advisor to pay certain fees in exchange for services performed by the Advisor and/or its affiliated entities. Upon the liquidation of assets, we may pay our Advisor or its affiliates a real estate disposition commission. Additionally, our Operating Partnership may be required to make distributions to Lightstone SLP III LLC, an affiliate of the Advisor.
The following table represents the fees incurred associated with the payments to the Company’s Advisor for the periods indicated:
| For the Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Acquisition fee (1) | $ | - | $ | 300,000 | ||||
| Disposition fee (2) | 39,200 | - | ||||||
| Finance fees (3) | 303,750 | - | ||||||
| Asset management fees (general and administrative costs) | 1,802,505 | 1,720,454 | ||||||
| Construction management fees (4) | 4,954 | 51,419 | ||||||
| Total | $ | 2,150,409 | $ | 2,071,873 | ||||
| (1) | Acquisition fees of $300,000 were capitalized and are reflected in the carrying value of our investment in the Hilton Garden Inn Joint Venture which is included in investments in unconsolidated affiliated real estate entities on the consolidated balance sheets. |
| (2) | Disposition fees of $39,200 were paid in connection with the disposition of the SpringHill Suites – Green Bay and expensed with the disposition’s closing costs. |
| (3) | Finance fees of $303,750 were capitalized and are reflected in the carrying value of our investment in the Cove Joint Venture which is included in investments in unconsolidated affiliated real estate entities on the consolidated balance sheets. |
| (4) | Generally, capitalized and amortized over the estimated useful life of the associated asset. |
Summary of Cash Flows
The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below:
Year
Ended | Year Ended December 31, 2018 | |||||||
| Cash flows provided by operating activities | $ | 3,274,266 | $ | 4,904,896 | ||||
| Cash flows provided by/(used in) investing activities | 18,655,902 | (22,145,972 | ) | |||||
| Cash flows used in financing activities | (20,025,656 | ) | (17,850,322 | ) | ||||
| Net change in cash, cash equivalents and restricted cash | 1,904,512 | (35,091,398 | ) | |||||
| Cash, cash equivalents and restricted cash, beginning of year | 11,638,681 | 46,730,079 | ||||||
| Cash, cash equivalents and restricted cash, end of year | $ | 13,543,193 | $ | 11,638,681 | ||||
Our principal sources of cash flow have been derived from operating cash flows and distributions received from our investments in unconsolidated affiliated real estate entities. We believe our cash available on hand and proceeds from the sale of our marketable securities, together with our expected earnings, and/or distributions from our investments will provide us with sufficient resources to fund our operating expenses, debt service, capital contributions, redemptions and cancellations of Common Shares, if approved, and distributions, if any, required to maintain our qualification as a REIT. We also expect to use these sources of liquidity along with selective dispositions of assets and/or financings to fund any future investment activities.
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Operating activities
The net cash provided by operating activities of $3.3 million during the year ended December 31, 2019 consisted of our net loss of $4.1 million and the gain from the disposition of the SpringHill Suites – Green Bay of $1.4 million offset by depreciation and amortization, loss from investments in unconsolidated affiliated real estate entities, amortization of deferred financing costs and other non-cash items aggregating $8.9 million.
Investing activities
The net cash provided by investing activities of $18.7 million during the year ended December 31, 2019 primarily consisted of proceeds from the sale of the SpringHill Suites – Green Bay of $19.4 million, aggregate distributions from the Cove Joint Venture and the Hilton Garden Inn Joint Venture of $1.8 million and the net sales of approximately $0.8 million of marketable securities offset by capital expenditures of $2.8 million and approximately $0.6 million of additional capital contributions to the Cove Joint Venture and the Hilton Garden Inn Joint Venture.
Financing activities
The cash used in financing activities of $20.0 million during the year ended December 31, 2019 consisted of $13.6 million in payments on our mortgages payable, payment of cash distributions of $4.7 million to our common stockholders, redemptions and cancellation of common stock of $1.4 million and $0.3 million of payments of loan fees and expenses.
Distributions
On June 19, 2019, our Board of Directors determined to suspend regular monthly distributions.
Previously, distributions in an amount equal to a 6.0% annualized rate were declared on a monthly basis beginning on January 14, 2015 through June 30, 2019 and were paid on or about the 15th day following each month end.
Future distributions declared, if any, will be at the discretion of our Board of Directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. Our Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, current revenues, operating and interest expenses and our ability to refinance near-term debt. In addition, we currently intend to continue to comply with the REIT distribution requirement that we annually distribute no less than 90% of our taxable income. We cannot assure that any future distributions will be made or that we will maintain any particular level of distributions that we have previously established or may establish.
Share Repurchase Program
Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to us, subject to certain restrictions. For the years ended December 31, 2019 and 2018, we repurchased 141,204 and 174,338 shares of common stock, respectively, at an average price per share of $9.77 and $9.65 per share, respectively.
On March 19, 2020, the Board of Directors amended the share repurchase program to remove stockholder notice requirements and also approved the suspension of all redemptions effective immediately.
Contractual Obligations
The following is a summary of our estimated contractual obligations outstanding over the next five years and thereafter as of December 31, 2019.
| Contractual Obligations | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | |||||||||||||||||||||
| Principal maturities | $ | 1,059,292 | $ | 26,509,613 | $ | 38,414,814 | $ | - | $ | - | $ | - | $ | 65,983,719 | ||||||||||||||
| Interest payments | 3,284,006 | 3,043,338 | 1,224,272 | - | - | - | 7,551,616 | |||||||||||||||||||||
| Total | $ | 4,343,298 | $ | 29,552,951 | $ | 39,639,086 | $ | - | $ | - | $ | - | $ | 73,535,335 | ||||||||||||||
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Revolving Credit Facility
We have a nonrecourse revolving credit facility (the “Revolving Credit Facility”) with a financial institution. The Revolving Credit Facility provides us with a line of credit of up to $60.0 million pursuant to which we may designate properties as collateral that allow borrowings up to a 65.0% loan-to-value ratio subject to also meeting certain financial covenants, including a prescribed minimum debt yield. The Revolving Credit Facility provides for monthly interest-only payments and the entire principal balance is due upon its expiration.
The Revolving Credit Facility, which was entered into on July 13, 2016, had an initial maturity date of July 13, 2019, subject to two one-year options to extend at the sole discretion of the lender. The initial interest rate on the Revolving Credit Facility was Libor plus 4.95% until it was reduced to Libor plus 3.50% effective June 18, 2018. On July 11, 2019, the Revolving Credit Facility was amended to extend the initial maturity date for 60 days to provide additional time to finalize the terms of a long-term extension. In connection with this amendment, the interest rate on the Revolving Credit Facility was reduced from Libor plus 3.50% to Libor plus 3.15%, effective July 1, 2019 and the requirements under the minimum debt yield ratio were modified effective as of March 31, 2019. On August 22, 2019, the Revolving Credit Facility was further amended to extend the maturity date to July 13, 2022, subject to two, one-year options to extend at the sole discretion of the lender. In connection with this amendment, we (i) made principal paydowns of approximately $0.6 million on both August 22, 2019 and December 31, 2019, (ii) were precluded from making any further draws under the Revolving Credit Facility on the properties currently pledged as collateral through January 31, 2020 and (iii) subject to certain conditions, may be required to make an additional principal paydown of approximately $0.6 million by April 1, 2020.
On October 24, 2019, we completed the disposition of the SpringHill Suites – Green Bay, which was previously designated as collateral under the Revolving Credit Facility. Approximately $12.0 million of the proceeds from the disposition of the SpringHill Suites – Green Bay were used for a required paydown of the Revolving Credit Facility. See Note 6 of the Notes to Consolidated Financial Statements for additional information.
As of December 31, 2019, we had pledged six of our hotel properties as collateral under the Revolving Credit Facility and the outstanding principal balance was approximately $39.0 million.
Home2 Suites Promissory Note
On October 5, 2016, we entered into an approximately $28.4 million promissory note (the “Home2 Suites Promissory Note”) with a financial institution. The Home2 Suites Promissory Note has a term of five years, bears interest at 4.73% and requires monthly principal and interest payments of $147,806 through its stated maturity with a balloon payment of approximately $26.1 million due at maturity. The Home2 Suites Promissory Note is cross-collateralized by two of our hotels. The Home2Suites Promissory Note had an outstanding balance of approximately $27.0 million as of December 31, 2019.
Debt Compliance
Certain of our debt agreements also contain clauses providing for prepayment penalties and the Revolving Credit Facility requires the maintenance of certain ratios, including a minimum debt yield ratio, which may also be achieved through principal paydowns. As of December 31, 2019, we were in compliance with all of our financial covenants.
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.
| 25 |
Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT's definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.
Because of these factors, the Investment Program Association (the "IPA"), an industry trade group, published a standardized measure of performance known as modified funds from operations ("MFFO"), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP.
We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline") issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction-related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses (which includes costs incurred in connection with strategic alternatives), amounts relating to deferred rent receivables and amortization of market lease and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Certain of the above adjustments are also made to reconcile net income (loss) to net cash provided by (used in) operating activities, such as for the amortization of a premium and accretion of a discount on debt and securities investments, amortization of fees, any unrealized gains (losses) on derivatives, securities or other investments, as well as other adjustments.
MFFO excludes non-recurring impairment of real estate-related investments. We assess the credit quality of our investments and adequacy of reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. We consider the estimated net recoverable value of a loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive situation of the region where the borrower does business.
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.
| 26 |
The below table illustrates the items deducted from or added to net loss in the calculation of FFO and MFFO during the periods presented. The table discloses MFFO in the IPA recommended format and MFFO without the straight-line rent adjustment which management also uses as a performance measure. Items are presented net of non-controlling interest portions where applicable.
For the Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Net loss | $ | (4,063,908 | ) | $ | (4,273,310 | ) | ||
| FFO adjustments: | ||||||||
| Adjustments to equity earnings from unconsolidated entities, net | 3,890,764 | 3,351,307 | ||||||
| Depreciation and amortization of real estate assets | 5,673,357 | 5,610,224 | ||||||
| Gain on sale of assets | (1,368,810 | ) | (12,750 | ) | ||||
| FFO | 4,131,403 | 4,675,471 | ||||||
| MFFO adjustments: | ||||||||
| Loss on sale of marketable securities | 38,359 | 56,458 | ||||||
| Acquisition and other transaction related costs expensed | 40,000 | (502 | ) | |||||
| Adjustments to equity earnings from unconsolidated affiliated real estate entities (loss on debt extinguishment)(1) | 342,163 | - | ||||||
| MFFO | 4,551,925 | 4,731,427 | ||||||
| Straight-line rent(2) | - | - | ||||||
| MFFO - IPA recommended format | $ | 4,551,925 | $ | 4,731,427 | ||||
| Net loss | $ | (4,063,908 | ) | $ | (4,273,310 | ) | ||
| Less: net (income)/loss attributable to noncontrolling interests | 48 | 51 | ||||||
| Net loss applicable to Company's common shares | $ | (4,063,860 | ) | $ | (4,273,259 | ) | ||
| Net loss per common share, basic and diluted | $ | (0.30 | ) | $ | (0.32 | ) | ||
| FFO | $ | 4,131,403 | $ | 4,675,471 | ||||
| Less: FFO attributable to noncontrolling interests | (60 | ) | (84 | ) | ||||
| FFO attributable to Company's common shares | $ | 4,131,343 | $ | 4,675,387 | ||||
| FFO per common share, basic and diluted | $ | 0.31 | $ | 0.35 | ||||
| MFFO - IPA recommended format | $ | 4,551,925 | $ | 4,731,427 | ||||
| Less: MFFO attributable to noncontrolling interests | (66 | ) | (84 | ) | ||||
| MFFO attributable to Company's common shares | $ | 4,551,859 | $ | 4,731,343 | ||||
| Weighted average number of common shares outstanding, basic and diluted | 13,366,468 | 13,537,316 | ||||||
| (1) | 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. |
| (2) | 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:
| For the period October 5, 2012 | ||||
| (date of inception) through | ||||
| December 31, 2019 | ||||
| FFO attributable to Company's common shares | $ | 15,916,405 | ||
| Cumulative distributions declared | $ | 25,876,083 | ||
New Accounting Pronouncements
See Note 2 to the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been adopted during 2019 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 10 of the Notes to Consolidated Financial Statements for further information related to subsequent events during the period from January 1, 2020 through the date of this filing.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
| 27 |
| ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | ||||
| Lightstone Value Plus Real Estate Investment Trust III, Inc. and Subsidiaries | ||||
| (a Maryland corporation) | ||||
| Index | ||||
| Page | ||||
| Report of Independent Registered Public Accounting Firm | 29 | |||
| Financial Statements: | ||||
| Consolidated Balance Sheets as of December 31, 2019 and 2018 | 30 | |||
| Consolidated Statements of Operations for the years ended December 31, 2019 and 2018 | 31 | |||
| Consolidated Statements of Comprehensive Loss for the years ended December 31, 2019 and 2018 | 32 | |||
| Consolidated Statements of Stockholders' Equity for the years ended December 31, 2019 and 2018 | 33 | |||
| Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018 | 34 | |||
| Notes to Consolidated Financial Statements | 35 | |||
| 28 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Lightstone Value Plus Real Estate Investment Trust III, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lightstone Value Plus Real Estate Investment Trust III, Inc. and Subsidiaries (the “Company") as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2019 and 2018, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ EisnerAmper LLP
We have served as the Company’s auditor since 2012.
EISNERAMPER LLP
Iselin, New Jersey
March 20, 2020
| 29 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, 2019 | December 31, 2018 | |||||||
| Assets | ||||||||
| Investment property: | ||||||||
| Land and improvements | $ | 21,656,730 | $ | 22,446,179 | ||||
| Building and improvements | 91,585,498 | 106,017,613 | ||||||
| Furniture and fixtures | 15,946,892 | 17,801,356 | ||||||
| Construction in progress | 160,000 | 792,307 | ||||||
| Gross investment property | 129,349,120 | 147,057,455 | ||||||
| Less accumulated depreciation | (17,551,394 | ) | (14,639,315 | ) | ||||
| Net investment property | 111,797,726 | 132,418,140 | ||||||
| Investments in unconsolidated affiliated real estate entities | 25,929,408 | 29,983,987 | ||||||
| Cash and cash equivalents | 6,102,573 | 9,965,724 | ||||||
| Marketable securities, available for sale | 3,228,759 | 3,708,223 | ||||||
| Restricted cash | 7,440,620 | 1,672,957 | ||||||
| Accounts receivable and other assets | 1,585,759 | 2,178,388 | ||||||
| Total Assets | $ | 156,084,845 | $ | 179,927,419 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Accounts payable and other accrued expenses | $ | 2,826,937 | $ | 3,529,293 | ||||
| Mortgages payable, net | 65,641,277 | 79,336,807 | ||||||
| Due to related parties | 451,337 | 157,114 | ||||||
| Distributions payable | - | 685,449 | ||||||
| Total liabilities | 68,919,551 | 83,708,663 | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders' Equity: | ||||||||
| Company's stockholders' equity: | ||||||||
| Preferred stock, $0.01 par value; 50.0 million shares authorized, none issued and outstanding | - | - | ||||||
| Common stock, $0.01 par value; 200.0 million shares authorized, 13.3 million and 13.5 million shares issued and outstanding, respectively | 133,102 | 134,515 | ||||||
| Additional paid-in-capital | 114,002,133 | 115,380,181 | ||||||
| Accumulated other comprehensive loss | (78,676 | ) | (450,285 | ) | ||||
| Accumulated deficit | (38,983,377 | ) | (30,937,879 | ) | ||||
| Total Company stockholders' equity | 75,073,182 | 84,126,532 | ||||||
| Noncontrolling interests | 12,092,112 | 12,092,224 | ||||||
| Total Stockholders' Equity | 87,165,294 | 96,218,756 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 156,084,845 | $ | 179,927,419 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 30 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Revenues | $ | 32,455,782 | $ | 33,966,599 | ||||
| Expenses: | ||||||||
| Property operating expenses | 20,657,994 | 20,852,350 | ||||||
| Real estate taxes | 1,582,044 | 1,627,650 | ||||||
| General and administrative costs | 2,966,954 | 2,962,769 | ||||||
| Depreciation and amortization | 5,673,357 | 5,610,224 | ||||||
| Total operating expenses | 30,880,349 | 31,052,993 | ||||||
| Operating income | 1,575,433 | 2,913,606 | ||||||
| Interest expense | (4,415,481 | ) | (5,224,217 | ) | ||||
| Gain on disposition of investment property | 1,368,810 | - | ||||||
| Loss from investments in unconsolidated affiliated real estate entities | (2,767,916 | ) | (2,695,001 | ) | ||||
| Other income, net | 175,246 | 732,302 | ||||||
| Net loss | (4,063,908 | ) | (4,273,310 | ) | ||||
| Less: net loss attributable to noncontrolling interests | 48 | 51 | ||||||
| Net loss applicable to Company's common shares | $ | (4,063,860 | ) | $ | (4,273,259 | ) | ||
| Net loss per Company's common shares, basic and diluted | $ | (0.30 | ) | $ | (0.32 | ) | ||
| Weighted average number of common shares outstanding, basic and diluted | 13,366,468 | 13,537,316 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 31 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Net loss | $ | (4,063,908 | ) | $ | (4,273,310 | ) | ||
| Other comprehensive income/(loss): | ||||||||
| Holding gain/(loss) on marketable securities | 333,256 | (506,750 | ) | |||||
| Reclassification adjustment for loss included in net loss | 38,359 | 56,458 | ||||||
| Other comprehensive income/(loss) | 371,615 | (450,292 | ) | |||||
| Comprehensive loss | (3,692,293 | ) | (4,723,602 | ) | ||||
| Less: Comprehensive loss attributable to noncontrolling interests | 42 | 58 | ||||||
| Comprehensive loss attributable to the Company's common shares | $ | (3,692,251 | ) | $ | (4,723,544 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
| 32 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Additional | Accumulated Other | Total | ||||||||||||||||||||||||||
| Common Stock | Paid-In | Comprehensive | Accumulated | Noncontrolling | Total | |||||||||||||||||||||||
| Shares | Amount | Capital | Loss | Deficit | Interests | Equity | ||||||||||||||||||||||
| BALANCE, December 31, 2017 | 13,625,769 | $ | 136,258 | $ | 117,061,644 | $ | - | $ | (18,548,148 | ) | $ | 12,092,402 | $ | 110,742,156 | ||||||||||||||
| Net loss | - | - | - | - | (4,273,259 | ) | (51 | ) | (4,273,310 | ) | ||||||||||||||||||
| Other comprehensive loss | - | - | - | (450,285 | ) | - | (7 | ) | (450,292 | ) | ||||||||||||||||||
| Distributions declared | - | - | - | - | (8,116,472 | ) | - | (8,116,472 | ) | |||||||||||||||||||
| Distributions paid to noncontrolling interests | - | - | - | - | - | (120 | ) | (120 | ) | |||||||||||||||||||
| Redemption and cancellation of shares | (174,338 | ) | (1,743 | ) | (1,681,463 | ) | - | - | - | (1,683,206 | ) | |||||||||||||||||
| BALANCE, December 31, 2018 | 13,451,431 | 134,515 | 115,380,181 | (450,285 | ) | (30,937,879 | ) | 12,092,224 | 96,218,756 | |||||||||||||||||||
| Net loss | - | - | - | - | (4,063,860 | ) | (48 | ) | (4,063,908 | ) | ||||||||||||||||||
| Other comprehensive income | - | - | - | 371,609 | - | 6 | 371,615 | |||||||||||||||||||||
| Distributions declared | - | - | - | - | (3,981,638 | ) | - | (3,981,638 | ) | |||||||||||||||||||
| Distributions paid to noncontrolling interests | - | - | - | - | - | (70 | ) | (70 | ) | |||||||||||||||||||
| Redemption and cancellation of shares | (141,204 | ) | (1,413 | ) | (1,378,048 | ) | - | - | - | (1,379,461 | ) | |||||||||||||||||
| BALANCE, December 31, 2019 | 13,310,227 | $ | 133,102 | $ | 114,002,133 | $ | (78,676 | ) | $ | (38,983,377 | ) | $ | 12,092,112 | $ | 87,165,294 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 33 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (4,063,908 | ) | $ | (4,273,310 | ) | ||
| Adjustments to reconcile net loss to net cash | ||||||||
| provided by operating activities: | ||||||||
| Loss from investments in unconsolidated affiliated real estate entities | 2,767,916 | 2,695,001 | ||||||
| Depreciation and amortization | 5,673,357 | 5,610,224 | ||||||
| Amortization of deferred financing costs | 282,695 | 475,663 | ||||||
| Gain on disposition of investment property | (1,368,810 | ) | - | |||||
| Other non-cash adjustments | 79,976 | 101,614 | ||||||
| Changes in assets and liabilities: | ||||||||
| Decrease/(increase) in accounts receivable and other assets | 403,573 | (189,919 | ) | |||||
| (Decrease)/increase in accounts payable and other accrued expenses | (794,756 | ) | 491,427 | |||||
| Increase/(decrease) in due to related parties | 294,223 | (5,804 | ) | |||||
| Net cash provided by operating activities | 3,274,266 | 4,904,896 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of investment property | (2,833,140 | ) | (3,058,003 | ) | ||||
| Proceeds from sale of marketable securities | 1,018,865 | 1,957,490 | ||||||
| Purchase of marketable securities | (205,335 | ) | (6,172,462 | ) | ||||
| Proceeds from disposition of investment property, net | 19,388,850 | - | ||||||
| Investments in unconsolidated affiliated real estate entities | (550,442 | ) | (15,435,497 | ) | ||||
| Distributions from unconsolidated affiliated real estate entities | 1,837,104 | 562,500 | ||||||
| Net cash provided by/(used in) investing activities | 18,655,902 | (22,145,972 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payments on mortgages payable | (13,638,270 | ) | (7,981,638 | ) | ||||
| Payment of loan fees and expenses | (340,766 | ) | (60,002 | ) | ||||
| Distributions to noncontrolling interests | (70 | ) | (120 | ) | ||||
| Distributions to common stockholders | (4,667,089 | ) | (8,125,356 | ) | ||||
| Redemption and cancellation of common shares | (1,379,461 | ) | (1,683,206 | ) | ||||
| Net cash used in financing activities | (20,025,656 | ) | (17,850,322 | ) | ||||
| Net change in cash, cash equivalents and restricted cash | 1,904,512 | (35,091,398 | ) | |||||
| Cash, cash equivalents and restricted cash, beginning of year | 11,638,681 | 46,730,079 | ||||||
| Cash, cash equivalents and restricted cash, end of year | $ | 13,543,193 | $ | 11,638,681 | ||||
| Supplemental cash flow information for the periods indicated is as follows: | ||||||||
| Cash paid for interest | $ | 4,231,871 | $ | 4,814,839 | ||||
| Distributions declared, but not paid | $ | - | $ | 685,449 | ||||
| Investment property acquired but not paid | $ | 92,404 | $ | 154,987 | ||||
| Holding gain/loss on marketable securities, available for sale | $ | 371,615 | $ | 450,292 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 34 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
1. Structure
Lightstone Value Plus Real Estate Investment Trust III, Inc. (‘‘Lightstone REIT III’’), is a Maryland corporation, formed on October 5, 2012, which elected to qualify as a real estate investment trust (‘‘REIT’’) for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2015.
The Lightstone REIT III is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business will be conducted through Lightstone Value Plus REIT III LP, a Delaware limited partnership (the ‘‘Operating Partnership’’). As of December 31, 2019, Lightstone REIT III held an approximately 99% general partnership interest in the Operating Partnership’s common units.
Lightstone REIT III and the Operating Partnership and its subsidiaries are collectively referred to as the “Company” and the use of “we,” “our,” “us” or similar pronouns refers to Lightstone REIT III, its Operating Partnership or the Company as required by the context in such pronoun used.
The Company has and will continue to seek to acquire a diverse portfolio of real estate assets and real estate-related investments, including hotels, other commercial and/or residential properties, primarily located in the United States. All such properties may be acquired and operated by the Company alone or jointly with another party. The Company may also originate or acquire mortgage loans secured by real estate. Although the Company expects that most of its investments will be of these types, it may make other investments. In fact, it may invest in whatever types of real estate-related investments that it believes are in its best interests.
The Company currently has one operating segment. As of December 31, 2019, the Company (i) majority owned and consolidated the operating results and financial condition of eight limited service hotels containing a total of 872 rooms, (ii) held an unconsolidated 22.5% membership interest in RP Maximus Cove, L.L.C. (the “Cove Joint Venture”) which the Company subsequently disposed of on February 12, 2020 and (iii) an unconsolidated 50.0% membership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”). The Company accounts for its unconsolidated membership interests in both the Cove Joint Venture and the Hilton Garden Inn Joint Venture under the equity method of accounting.
The Company’s advisor is Lightstone Value Plus REIT III LLC (the “Advisor”), which is majority owned by David Lichtenstein. On July 16, 2014, the Advisor contributed $2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The Advisor also owns 20,000 shares of our common stock (“Common Shares”) which were issued on December 24, 2012 for $200,000, or $10.00 per share. Mr. Lichtenstein also is a majority owner of the equity interests of the Lightstone Group, LLC. The Lightstone Group, LLC served as the Company’s sponsor (the ‘‘Sponsor’’) during its initial public offering (the “Offering”) which terminated on March 31, 2017. Mr. Lichtenstein owns 222,222 Common Shares which were issued on December 11, 2014 for $2.0 million, or $9.00 per share. Subject to the oversight of the Company’s board of directors (the “Board of Directors”), the Advisor has primary responsibility for making investment decisions on behalf of the Company and managing its day-to-day operations. Through his ownership and control of the Lightstone Group, LLC, Mr. Lichtenstein is the indirect owner and manager of Lightstone SLP III LLC, a Delaware limited liability company (the “Special Limited Partner”), which owns 242 subordinated participation interests (“Subordinated Participation Interests”) in the Operating Partnership which were acquired for $12.1 million in connection with the Offering. 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 III or the Operating Partnership.
The Company does not have any employees. The Advisor receives compensation and fees for services related to the investment and management of the Company’s assets.
The Company’s Advisor has certain affiliates which may manage the properties the Company acquires. However, the Company also contracts with other unaffiliated third-party property managers, principally for the management of its hospitality properties.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
The Company’s Common Shares are not currently listed on a national securities exchange. The Company may seek to list its Common Shares for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its Common Shares at this time. The Company does not anticipate that there would be any market for its Common Shares until they are listed for trading. In the event the Company does not begin the process of achieving a liquidity event prior to March 31, 2025, which is the eighth anniversary of the termination of its Offering, its charter requires either (a) an amendment to its charter to extend the deadline to begin the process of achieving a liquidity event, or (b) the holding of a stockholders meeting to vote on a proposal for an orderly liquidation of its portfolio.
Noncontrolling Interests – Partners of the Operating Partnership
Limited Partner
On July 16, 2014, the Advisor contributed $2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The Advisor has the right to convert limited partner units into cash or, at the Company’s option, an equal number of its Common Shares.
Special Limited Partner
In connection with the Company’s Offering, which terminated on March 31, 2017, the Special Limited Partner purchased from the Operating Partnership an aggregate of approximately 242 Subordinated Participation Interests for consideration of $12.1 million. The Subordinated Participation Interests were each purchased for $50,000 in consideration and may be entitled to receive liquidation distributions upon the liquidation of Lightstone REIT III.
As the majority owner of the Special Limited Partner, Mr. Lichtenstein is the beneficial owner of a 99% interest in such Subordinated Participation Interests and will thus receive an indirect benefit from any distributions made in respect thereof.
These Subordinated Participation Interests entitle the Special Limited Partner to a portion of any regular and liquidation distributions that the Company makes to its stockholders, but only after its stockholders have received a stated preferred return.
The Advisor and its affiliates and the Special Limited Partner are related parties of the Company. Certain of these entities are entitled to compensation for services related to the investment, management and disposition of our assets during the Company’s acquisition, operational and liquidation stages. The compensation levels during the acquisition and operational stages are based on the cost of acquired properties/investments and the annual revenue earned from such properties/investments, and other such fees and expense reimbursements as outlined in each of the respective agreements. See Note 8 – Related Party Transactions for additional information.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Lightstone REIT III and the Operating Partnership and its subsidiaries (over which Lightstone REIT III exercises financial and operating control). As of December 31, 2019, the Company had a 99% general partnership interest in the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate and depreciable lives. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
Investments in other real estate entities where the Company has the ability to exercise significant influence, but does not exercise financial and operating control, and is not considered to be the primary beneficiary are accounted for using the equity method. Investments in other real estate entities where the Company has virtually no influence will be accounted for using the cost method.
Cash, cash equivalents and restricted cash
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
As required by the Company’s lenders, restricted cash is held in escrow accounts for anticipated capital expenditures, real estate taxes, and other reserves for certain of our consolidated properties. Capital reserves are typically utilized for non-operating expenses such as major capital expenditures. Alternatively, a lender may require its own formula for an escrow of capital reserves. As of December 31, 2019, restricted cash also included approximately $5.2 million resulting from the sale of a SpringHill Suites by Marriott hotel (the “SpringHill Suites – Green Bay”) located in Green Bay, Wisconsin (see Note 3), temporarily placed in escrow with a qualified intermediary to potentially facilitate a like-kind exchange transaction in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended.
The following is a summary of the Company’s cash, cash equivalents, and restricted cash total as presented in our statements of cash flows for the periods presented:
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash and cash equivalents | $ | 6,102,573 | $ | 9,965,724 | ||||
| Restricted cash | 7,440,620 | 1,672,957 | ||||||
| Total cash, cash equivalents and restricted cash | $ | 13,543,193 | $ | 11,638,681 | ||||
Marketable Securities
Marketable securities consist of equity and debt securities that are designated as available-for-sale. Marketable debt securities are recorded at fair value and unrealized holding gains or losses are reported as a component of accumulated other comprehensive income. The Company’s marketable equity securities are recorded at fair value and unrealized holding gains and losses are recognized on the consolidated statements of operations.
Realized gains or losses resulting from the sale of these securities are determined based on the specific identification of the securities sold. An impairment charge is recognized when the decline in the fair value of a security below the amortized cost basis is determined to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the duration and severity of any decline in fair value below our amortized cost basis, any adverse changes in the financial condition of the issuers and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
Revenues
Revenues consist of amounts derived from hotel operations, including occupied hotel rooms and sales of food, beverage and other ancillary services and are presented on a disaggregated basis below. Revenues are recorded net of any sales or occupancy tax collected from our guests.
Room revenue is generated through contracts with customers whereby the customers agree to pay a daily rate for right to use a hotel room. The Company's contractual performance obligations are fulfilled at the end of the day that the customer is provided the room and revenue is recognized daily at the contract rate. Payment from the customer is secured at the end of the contract upon check-out by the customer from our hotels. The Company participates in frequent guest programs sponsored by the brand owners of our hotels whereby the brand owner allows guests to earn loyalty points during their hotel stay. The Company recognizes revenue at the amount earned that it will receive from the brand owner when a guest redeems their loyalty points by staying at one of the Company’s hotels.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
Revenue from food, beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a hotel room and revenue is recognized when these goods or services are provided to the customer and the Company’s contractual performance obligations have been fulfilled.
Some contracts for rooms, food, beverage or other services require an upfront deposit which is recorded as deferred revenues (or contract liabilities) and recognized once the performance obligations are satisfied. The contractual liabilities are not significant.
The Company notes no significant judgments regarding the recognition of room, food and beverage or other revenues.
For the Year Ended December 31, | ||||||||
| Revenues | 2019 | 2018 | ||||||
| Room | $ | 31,057,929 | $ | 32,696,125 | ||||
| Food, beverage and other | 1,397,853 | 1,270,474 | ||||||
| Total revenues | $ | 32,455,782 | $ | 33,966,599 | ||||
Accounts Receivable
The Company analyzes accounts receivable and historical bad debt levels, customer credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. The Company’s reported net income or loss is directly affected by management’s estimate of the collectability of accounts receivable.
Investments in Real Estate
Accounting for Asset Acquisitions
When the Company makes an investment in real estate assets, the cost of real estate assets acquired in an asset acquisition are allocated to the acquired tangible assets, consisting of land, building and improvements, furniture and fixtures and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, acquired in-place leases, and the value of tenant relationships, based in each case on their relative fair values, at the date of acquisition, based on evaluation of information including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other relevant market data. Fees incurred related to asset acquisitions are capitalized as part of the cost of the investment.
Accounting for Business Combinations
Upon the acquisition of real estate operating properties that meet the definition of a business, the Company estimates the fair value of acquired tangible assets and identified intangible assets and liabilities and certain liabilities such as assumed debt and contingent liabilities, at the date of acquisition, based on evaluation of information and estimates available at that date, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other relevant market data. Based on these estimates, the Company evaluates the existence of goodwill or a gain from a bargain purchase and allocates the initial purchase price to the applicable assets, liabilities and noncontrolling interests, if any. As final information regarding fair value of the assets acquired, liabilities assumed and noncontrolling interests is received and estimates are refined, appropriate adjustments are made to the purchase price allocation. The allocations are finalized as soon as all the information necessary is available and in no case later than within twelve months from the acquisition date. Fees incurred related to the acquisition of real estate operating properties that meet the definition of a business are expensed as incurred within general and administrative costs within the consolidated statements of operations.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
Carrying Value of Assets
The amounts to be capitalized as a result of periodic improvements and additions to real estate property, when applicable, and the periods over which the assets are depreciated or amortized, are determined based on the application of accounting standards that may require estimates as to fair value and the allocation of various costs to the individual assets. Differences in the amount attributed to the assets may be significant based upon the assumptions made in calculating these estimates.
Impairment Evaluation
Management evaluates the recoverability of its investments in real estate assets at the lowest identifiable level, the individual property level. Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value.
The Company evaluates the long-lived assets for potential impairment whenever events or changes in circumstances indicate that the undiscounted projected cash flows are less than the carrying amount for a particular property. The estimated cash flows used for the impairment analysis and the determination of estimated fair value is based on the Company’s plans for the respective assets and the Company’s views of market and economic conditions. The estimates consider matters such as future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition, and recent sales data for comparable properties. Changes in estimated future cash flows due to changes in the Company’s plans or views of market and economic conditions could result in recognition of impairment losses, which, under the applicable accounting guidance, may be substantial.
Depreciation and Amortization
Depreciation expense is computed based on the straight-line method over the estimated useful life of the applicable real estate asset. The Company generally uses estimated useful lives of up to thirty-nine years for buildings and improvements and five to ten years for furniture and fixtures. Maintenance and repairs are charged to expense as incurred.
Investments in Unconsolidated Entities
The Company evaluates all investments in other entities for consolidation. The Company considers its percentage interest in the joint venture, evaluation of control and whether a variable interest entity exists when determining whether or not the investment qualifies for consolidation or if it should be accounted for as an unconsolidated investment under either the equity or cost method of accounting.
If an investment qualifies for the equity method of accounting, the Company’s investment is recorded initially at cost, and subsequently adjusted for equity in net income or loss and cash contributions and distributions. The net income or loss of an unconsolidated investment is allocated to its investors in accordance with the provisions of the operating agreement of the entity. The allocation provisions in these agreements may differ from the ownership interest held by each investor. Differences, if any, between the carrying amount of the Company’s investment in the respective joint venture and our share of the underlying equity of such unconsolidated entity are amortized over the respective lives of the underlying assets as applicable. These items are reported as a single line item in the statements of operations as income or loss from investments in unconsolidated affiliated real estate entities.
If an investment qualifies for the cost method of accounting, our investment is recorded initially at cost, and subsequently adjusted for cash contributions and distributions resulting from any capital events. Distributions received from the underlying entity are recorded as interest or dividend income.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
The Company reviews investments for impairment in value whenever events or changes in circumstances indicate that the carrying amount of such investment may not be recoverable. An investment is impaired only if management’s estimate of the fair value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary. The ultimate realization of our investment in partially owned entities is dependent on a number of factors including the performance of that entity and market conditions. If the Company determines that a decline in the value of a partially owned entity is other than temporary, it will record an impairment charge.
Deferred Costs
The Company capitalizes initial direct costs associated with financing activities. The costs are capitalized upon the execution of the loan, presented in the consolidated balance sheets as a direct deduction from the carrying value of the corresponding loan and amortized over the initial term of the corresponding loan. Amortization of deferred loan costs will begin in the period during which the loan is originated using the effective interest method over the term of the loan.
Income Taxes
The Company elected to qualify as a REIT for U.S. federal income tax purposes commencing with the taxable year ended December 31, 2015. If the Company remains qualified as a REIT, it generally will not be subject to U.S. federal income tax on its net taxable income that it distributes to its stockholders. To maintain its REIT qualification, the Company must meet a number of organizational and operational requirements, including a requirement that it annually distribute to its stockholders at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If the Company fails to remain qualified for taxation as a REIT in any subsequent year and does not qualify for certain statutory relief provisions, its income for that year will be taxed at regular corporate rates, and it may be precluded from qualifying for treatment as a REIT for the four-year period following its failure to qualify as a REIT. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to stockholders.
The Company engages in certain activities through taxable REIT subsidiaries ("TRSs"), including when it acquires a hotel it usually establishes a TRS and enters into an operating lease agreement for the hotel. As such, the Company may be subject to U.S. federal and state income taxes and franchise taxes from these activities.
As of December 31, 2019 and 2018, we had no material uncertain income tax positions. Additionally, even if the Company continues to qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income, if any.
Concentration of Risk
The Company maintains its cash and cash equivalents in bank deposit accounts, which, at times, may exceed U.S. federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on its cash and cash equivalents.
Basic and Diluted Net Earnings per Common Share
Net earnings per common share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding.
Financial Instruments
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and other assets, accounts payable and other accrued expenses, due to/from related parties and distributions payable approximate their fair values because of the short maturity of these instruments.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
The estimated fair value of our mortgages payable is as follows:
| As of December 31, 2019 | As of December 31, 2018 | |||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
| Mortgages payable | $ | 65,983,719 | $ | 65,974,411 | $ | 79,621,989 | $ | 78,692,677 | ||||||||
The fair value of our mortgages payable was determined by discounting the future contractual interest and principal payments by market interest rates.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board issued an accounting standards update (“ASU”) that amends the existing lease accounting guidance and requires lessees to recognize a lease liability and a right-of-use asset for all leases on their balance sheets. Lessees of operating leases will continue to recognize lease expense in a manner similar to current accounting. The standard became effective for the Company on January 1, 2019.
The Company elected the following package of practical expedients provided by the standard: (i) an entity need not reassess whether any expired or existing contract is a lease or contains a lease, (ii) an entity need not reassess the lease classification of any expired or existing leases, and (iii) an entity need not reassess initial direct costs for any existing leases. The Company also elected the short-term lease exception provided for in the standard and therefore will only recognize right-of-use assets and lease liabilities for leases with a term greater than one year.
The Company did not recognize any right-of-use assets or lease liabilities upon adoption of the standard. The Company does not have any material leases such as ground leases or building leases or any material leases with a term greater than one year. From time to time the Company will enter into immaterial leases for miscellaneous office equipment such as copiers. The resulting right-of-use assets or lease liabilities would be immaterial in the aggregate and are recognized in the period they are incurred as lease expense.
The adoption of this standard did not have a material effect on our consolidated financial position or our results of operations.
New Accounting Pronouncements
The Company has reviewed and determined that other recently issued accounting pronouncements will not have a material impact on its financial position, results of operations and cash flows, or do not apply to its current operations.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current year presentation.
3. Disposition of SpringHill Suites – Green Bay
On August 19, 2019, certain wholly owned subsidiaries (collectively, the “Green Bay Sellers”) of the Operating Partnership and MCR Hospitality Fund REIT LLC (the “Green Bay Buyer”), an unaffiliated third party, entered into a purchase and sale agreement (the “SpringHill Suites – Green Bay Agreement”) pursuant to which the Green Bay Sellers would dispose of the SpringHill Suites – Green Bay to the Green Bay Buyer for a contractual sales price of $19.6 million.
On October 24, 2019, pursuant to the terms of the SpringHill Suites – Green Bay Agreement, the Green Bay Sellers completed the disposition of the SpringHill Suites – Green Bay to the Green Bay Buyer for $19.4 million, net of expenses of $0.2 million, resulting in a gain on the disposition of investment property of approximately $1.4 million.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
Additionally, approximately $12.0 million of the proceeds were used for a required paydown of the Company’s nonrecourse revolving credit facility (the “Revolving Credit Facility”) (See Note 6) and approximately $5.2 million of the proceeds were placed in escrow with a qualified intermediary to facilitate a potential like-kind exchange transaction in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended, and is classified as restricted cash on the consolidated balance sheet at December 31, 2019.
The disposition of the SpringHill Suites – Green Bay did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift in the Company’s operations that had a major effect on the Company’s operations and financial results. Accordingly, the operating results of the SpringHill Suites – Green Bay are reflected in the Company’s results from continuing operations for all periods presented through its date of disposition.
4. Investments in Unconsolidated Affiliated Real Estate Entities
The entities listed below are partially owned by the Company. The Company accounts for these investments under the equity method of accounting as the Company exercises significant influence, but does not exercise financial and operating control over these entities. A summary of the Company’s investments in the unconsolidated affiliated real estate entities is as follows:
| As of | ||||||||||||||||
| Entity | Date of Ownership | Ownership % | December 31, 2019 | December 31, 2018 | ||||||||||||
| RP Maximus Cove, L.L.C. (the "Cove Joint Venture") | January 31, 2017 | 22.50 | % | $ | 14,150,280 | $ | 17,214,909 | |||||||||
| LVP LIC Hotel JV LLC (the "Hilton Garden Inn Joint Venture") | March 27, 2018 | 50.00 | % | 11,779,128 | 12,769,078 | |||||||||||
| Total investments in unconsolidated affiliated real estate entities | $ | 25,929,408 | $ | 29,983,987 | ||||||||||||
The Cove Joint Venture
On January 31, 2017, the Company, through its wholly owned subsidiary, REIT III COVE LLC along with LSG Cove LLC, an affiliate of the Sponsor and a related party, REIT IV COVE LLC, a wholly owned subsidiary of Lightstone Real Estate Income Trust, Inc. (“Lightstone IV”), a real estate investment trust also sponsored by the Sponsor and a related party and Maximus Cove Investor LLC (“Maximus”), an unrelated third party, completed the acquisition of all of RP Cove, L.L.C’s membership interest in RP Maximus Cove, L.L.C. (the “Cove Joint Venture”) for aggregate consideration of approximately $255.0 million (the “Cove Transaction”). The Cove Joint Venture owns and operates The Cove at Tiburon (“the Cove”), a 281-unit, luxury waterfront multifamily residential property located in Tiburon, California. Prior to entering into The Cove Transaction, Maximus previously owned a separate noncontrolling interest in the Cove Joint Venture.
The Company paid approximately $20.0 million for a 22.5% membership interest in the Cove Joint Venture. The Company’s ownership interest in the Cove Joint Venture was a non-managing interest. The Company determined that the Cove Joint Venture was a variable interest entity but the Company was not the primary beneficiary. The Company accounted for its ownership interest in the Cove Joint Venture in accordance with the equity method of accounting because it exerted significant influence over but did not control the Cove Joint Venture. All capital contributions and distributions of earnings from the Cove Joint Venture were made on a pro rata basis in proportion to each member’s equity interest percentage. Any distributions in excess of earnings from the Cove Joint Venture are made to the members pursuant to the terms of the Cove Joint Venture’s operating agreement. An affiliate of Maximus is the asset manager of the Cove and receives certain fees as defined in the Property Management Agreement for the management of the Cove. The Company commenced recording its allocated portion of profit/loss and cash distributions beginning as of January 31, 2017 with respect to its 22.5% membership interest in the Cove Joint Venture.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
Subsequent to the Company’s acquisition of its 22.5% membership interest in the Cove Joint Venture through December 31, 2019, it made an aggregate of $2.6 million (including $0.5 million during the year ended December 31, 2019) of additional capital contributions and received aggregate distributions of $0.9 million (all during the year ended December 31, 2019).
On December 17, 2019, REIT III Cove LLC, REIT IV Cove LLC, LSG Cove LLC (collectively, the “Redeemers”), Maximus and the Cove Joint Venture entered into a redemption agreement (the “Redemption Agreement”), pursuant to which the Cove Joint Venture would redeem the membership interests of the Redeemers for an aggregate redemption price of approximately $87.6 million.
On February 12, 2020, the Cove Joint Venture completed the redemption of the Redeemers’ membership interests in the Cove Joint Venture pursuant to the terms of the Redemption Agreement for an aggregate redemption price of approximately $87.6 million. In connection, with the redemption of its 22.5% membership interest in the Cove Joint Venture, the Company received proceeds of approximately $21.9 million.
The Cove Joint Venture Financial Information
The Company’s carrying value of its interest in the Cove Joint Venture differed from its share of member’s equity reported in the condensed balance sheet of the Cove Joint Venture due to the Company’s basis of its investment in excess of the historical net book value of the Cove Joint Venture. The Company’s additional basis allocated to depreciable assets was being recognized on a straight-line basis over the lives of the appropriate assets.
The following table represents the condensed income statements for the Cove Joint Venture:
| (amounts in thousands) | For the Year Ended December 31, 2019 | For the Year Ended December 31, 2018 | ||||||
| Revenues | $ | 16,129 | $ | 14,604 | ||||
| Property operating expenses | 5,057 | 4,995 | ||||||
| General and administrative costs | 119 | 169 | ||||||
| Depreciation and amortization | 11,498 | 10,211 | ||||||
| Operating loss | (545 | ) | (771 | ) | ||||
| Loss on debt extinguisment | (1,521 | ) | - | |||||
| Interest expense and other, net | (9,424 | ) | (11,002 | ) | ||||
| Net loss | $ | (11,490 | ) | $ | (11,773 | ) | ||
| Company's share of net loss (22.5%) | $ | (2,585 | ) | $ | (2,649 | ) | ||
| Adjustment to depreciation and amortization expense (1) | (40 | ) | (97 | ) | ||||
| Company's loss from investment | $ | (2,625 | ) | $ | (2,746 | ) | ||
The following table represents the condensed balance sheets for the Cove Joint Venture:
| As of | As of | |||||||
| (amounts in thousands) | December 31, 2019 | December 31, 2018 | ||||||
| Real estate, at cost (net) | $ | 138,045 | $ | 148,441 | ||||
| Cash and restricted cash | 1,491 | 2,138 | ||||||
| Other assets | 1,141 | 1,810 | ||||||
| Total assets | $ | 140,677 | $ | 152,389 | ||||
| Mortgage payable, net | $ | 178,353 | $ | 174,098 | ||||
| Other liabilities | 1,339 | 2,776 | ||||||
| Members' deficit (1) | (39,015 | ) | (24,485 | ) | ||||
| Total liabilities and members' deficit | $ | 140,677 | $ | 152,389 | ||||
| 1. | The adjustment to depreciation and amortization expense related to the difference between the Company’s basis in the Cove Joint Venture and the amount of the underlying equity in net assets of the Cove Joint Venture. |
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
Hilton Garden Inn Joint Venture
On March 27, 2018, the Company and its Sponsor’s other public program, Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone REIT II”), acquired, through the Hilton Garden Inn Joint Venture, a 183-room, limited-service hotel located at 29-21 41st Avenue, Long Island City, New York (the “Hilton Garden Inn - Long Island City”) from an unrelated third party, for aggregate consideration of approximately $60.0 million, which consisted of $25.0 million of cash and $35.0 million of proceeds from a loan from a financial institution, excluding closing and other related transaction costs. The Company and Lightstone REIT II each have a 50.0% membership interest in the Hilton Garden Inn Joint Venture.
The Company paid approximately $12.9 million for a 50.0% membership interest in the Hilton Garden Inn Joint Venture. The Company’s membership interest in the Hilton Garden Inn Joint Venture is a co-managing interest. The Company accounts for its membership interest in the Hilton Garden Inn Joint Venture in accordance with the equity method of accounting because it exerts significant influence over but does not control the Hilton Garden Inn Joint Venture. All capital contributions and distributions of earnings from the Hilton Garden Inn Joint Venture are made on a pro rata basis in proportion to each member’s equity interest percentage. Any distributions in excess of earnings from the Hilton Garden Inn Joint Venture are made to the members pursuant to the terms of the Hilton Garden Inn Joint Venture’s operating agreement. The Company commenced recording its allocated portion of profit/loss and cash distributions beginning as of March 27, 2018 with respect to its membership interest of 50.0% in the Hilton Garden Inn Joint Venture.
Subsequent to the Company’s acquisition of its 50.0% membership interest in the Hilton Garden Joint Venture through December 31, 2019, it has made an aggregate of $0.7 million (including $0.1 million during the year ended December 31, 2019) of additional capital contributions and received aggregate distributions of $1.5 million (including $0.9 million during the year ended December 31, 2019).
Hilton Garden Inn Joint Venture Financial Information
The following table represents the condensed income statement for the Hilton Garden Inn Joint Venture for the period indicated:
| (amounts in thousands) | For the Year Ended December 31, 2019 | For the Period March 27, 2018 (date of investment) December 31, 2018 | ||||||
| Revenues | $ | 11,009 | $ | 9,044 | ||||
| Property operating expenses | 6,761 | 5,502 | ||||||
| General and administrative costs | - | 62 | ||||||
| Depreciation and amortization | 2,527 | 1,914 | ||||||
| Operating income | 1,721 | 1,566 | ||||||
| Interest expense and other, net | (2,006 | ) | (1,465 | ) | ||||
| Net (loss)/income | $ | (285 | ) | $ | 101 | |||
| Company's share of net (loss)/income (50.00%) | $ | (143 | ) | $ | 51 | |||
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
The following table represents the condensed balance sheet for the Hilton Garden Inn Joint Venture:
| As of | As of | |||||||
December 31, 2019 | December 31, 2018 | |||||||
| (amounts in thousands) | ||||||||
| Investment property, net | $ | 56,775 | $ | 58,799 | ||||
| Cash | 904 | 554 | ||||||
| Other assets | 894 | 1,218 | ||||||
| Total assets | $ | 58,573 | $ | 60,571 | ||||
| Mortgage payable, net | $ | 34,821 | $ | 34,766 | ||||
| Other liabilities | 794 | 867 | ||||||
| Members' capital | 22,958 | 24,938 | ||||||
| Total liabilities and members' capital | $ | 58,573 | $ | 60,571 | ||||
5. 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 December 31, 2019 | ||||||||||||||||
Adjusted Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Marketable Securities: | ||||||||||||||||
| Equity securities: | ||||||||||||||||
| Mutual funds | $ | 387,529 | $ | 805 | $ | - | $ | 388,334 | ||||||||
| Debt securities: | ||||||||||||||||
| Corporate Bonds | 2,919,095 | 60,550 | (139,220 | ) | 2,840,425 | |||||||||||
| Total | $ | 3,306,624 | $ | 61,355 | $ | (139,220 | ) | $ | 3,228,759 | |||||||
| As of December 31, 2018 | ||||||||||||||||
Adjusted Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Debt securities | $ | 4,158,515 | $ | - | $ | (450,292 | ) | $ | 3,708,223 | |||||||
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 December 31, 2019, the Company did not recognize any impairment charges.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:
| • | Level 1 – Quoted prices in active markets for identical assets or liabilities. | |
| • | Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
| • | Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
As of December 31, 2019, the Company’s equity securities were classified as Level 1 assets and the Company’s debt securities were classified as Level 2 assets. There were no transfers between the level classifications during the year ended December 31, 2019.
The fair values of the Company’s investments in equity securities are measured using quoted prices in active markets for identical assets and debt securities are measured using readily available quoted prices for similar assets.
The following table summarizes the estimated fair value of our investments in debt securities with stated contractual maturity dates, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities:
As of December 31, 2019 | ||||
| Due in 1 year | $ | - | ||
| Due in 1 year through 5 years | 2,233,390 | |||
| Due in 5 year through 10 years | - | |||
| Due after 10 years | 607,035 | |||
| Total | $ | 2,840,425 | ||
The Company did not have any other significant financial assets or liabilities, which would require revised valuations that are recognized at fair value.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
6. Mortgages payable, net
Mortgages payable, net consisted of the following:
| Weighted Average Interest Rate | ||||||||||||||||||||||
| Description | Interest Rate | as
of December 31, 2019 | Maturity Date | Amount
Due at Maturity | As
of December 31, 2019 | As
of December 31, 2018 | ||||||||||||||||
| Revolving Credit Facility | LIBOR + 3.50% | 5.71 | % | July 2022 | $ | 38,414,814 | $ | 38,988,014 | $ | 52,159,414 | ||||||||||||
| Promissory Note, secured by two properties | 4.73 | % | 4.73 | % | October 2021 | 26,127,572 | 26,995,705 | 27,462,575 | ||||||||||||||
| Total mortgages payable | 5.31 | % | $ | 64,542,386 | 65,983,719 | 79,621,989 | ||||||||||||||||
| Less: Deferred financing costs | (342,442 | ) | (285,182 | ) | ||||||||||||||||||
| Total mortgage payable, net | $ | 65,641,277 | $ | 79,336,807 | ||||||||||||||||||
The Company, through certain subsidiaries, has a Revolving Credit Facility with a financial institution. The Revolving Credit Facility provides the Company with a line of credit of up to $60.0 million pursuant to which it may designate properties as collateral that allow borrowings up to a 65.0% loan-to-value ratio subject to also meeting certain financial covenants, including a prescribed minimum debt yield. The Revolving Credit Facility provides for monthly interest-only payments and the entire principal balance is due upon its expiration.
The Revolving Credit Facility, which was entered into on July 13, 2016, had an initial maturity date of July 13, 2019, subject to two one-year options to extend at the sole discretion of the lender. The initial interest rate on the Revolving Credit Facility was Libor plus 4.95% until it was reduced to Libor plus 3.50% effective June 18, 2018. On July 11, 2019, the Company and the lender amended the Revolving Credit Facility to extend the initial maturity date for 60 days to provide additional time to finalize the terms of a long-term extension. In connection with this amendment, the interest rate on the Revolving Credit Facility was reduced from Libor plus 3.50% to Libor plus 3.15%, effective July 1, 2019 and the requirements under the minimum debt yield ratio were modified effective as of March 31, 2019. On August 22, 2019, the Company and the lender further amended the Revolving Credit Facility to extend the maturity date to July 13, 2022, subject to two, one-year options to extend at the sole discretion of the lender. In connection with this amendment, the Company (i) made a principal paydown of approximately $0.6 million on August 22, 2019, (ii) made an additional principal paydown of approximately $0.6 million on December 31, 2019, (iii) was precluded from making any further draws under the Revolving Credit Facility on the properties currently pledged as collateral through January 31, 2020 and (iv) subject to certain conditions, may be required to make an additional principal paydown of approximately $0.6 million by April 1, 2020.
On October 24, 2019, the Company completed the disposition of the SpringHill Suites – Green Bay, which was previously designated as collateral under the Revolving Credit Facility. Approximately $12.0 million of the proceeds from the disposition of the SpringHill Suites – Green Bay were used for a required paydown of the Revolving Credit Facility. See Note 3.
As of December 31, 2019, the Company had pledged six of its hotel properties as collateral under the Revolving Credit Facility.
On October 5, 2016, the Company entered into a promissory note (the “Promissory Note”) for $28.4 million. The Promissory Note has a term of five years, bears interest at 4.73% and requires monthly interest and principal payments of $147,806 through its stated maturity with the then remaining unpaid balance of approximately $26.1 million due upon maturity. The Promissory Note is cross-collateralized by two of the Company’s hotel properties (Home2 Suites – Tukwila and Home2 Suites – Salt Lake City).
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
Principal Maturities
The following table, based on the initial terms of the mortgage, sets forth their aggregate estimated contractual principal maturities, including balloon payments due at maturity, as of December 31, 2019:
| 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | ||||||||||||||||||||||
| Principal maturities | $ | 1,059,292 | $ | 26,509,613 | $ | 38,414,814 | $ | - | $ | - | $ | - | $ | 65,983,719 | ||||||||||||||
| Less: Deferred financing costs | (342,442 | ) | ||||||||||||||||||||||||||
| Total principal maturiteis, net | $ | 65,641,277 | ||||||||||||||||||||||||||
Debt Compliance
Pursuant to the Company’s debt agreements, approximately $2.3 million and $1.7 million was held in restricted escrow accounts as of December 31, 2019 and 2018, 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 the Revolving Credit Facility requires the maintenance of certain ratios, including a minimum debt yield ratio. As of December 31, 2019, the Company was in compliance with all of its financial debt covenants.
7. Stockholder’s Equity
Preferred Stock
The Company’s charter authorizes its board of directors to designate and issue one or more classes or series of preferred stock without approval of the stockholders of Common Shares. On July 11, 2014, the Company amended and restated its charter to authorize the issuance of 50,000,000 shares of preferred stock. Prior to the issuance of shares of each class or series, the Company’s board of directors is required by Maryland law and by the Company’s charter to set, subject to the Company’s charter restrictions on ownership and transfer of stock, the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption of each class or series of preferred stock so issued, which may be more beneficial than the rights, preferences and privileges attributable to Common Shares. The issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company. As of December 31, 2019 and December 31, 2018, the Company had no outstanding shares of preferred stock.
Common Shares
On July 11, 2014, the Company amended and restated its charter to authorize the issuance of 200,000,000 Common Shares. Under its charter, the Company cannot make some material changes to its business form or operations without the approval of stockholders holding at least a majority of the shares of our stock entitled to vote on the matter. These include (1) amendment of its charter, (2) its liquidation or dissolution, and (3) its merger, consolidation or the sale or other disposition of its assets. Share exchanges in which the Company is the acquirer, however, do not require stockholder approval.
All of the common stock offered by the Company will be duly authorized, fully paid and nonassessable. Subject to the restrictions on ownership and transfer of stock contained in the Company’s charter and except as may otherwise be specified in the charter, the holders of Common Shares are entitled to one vote per Common Share on all matters submitted to a stockholder vote, including the election of the Company’s directors. There is no cumulative voting in the election of directors. Therefore, the holders of a majority of outstanding Common Shares can elect the Company’s entire board of directors. Except as the Company’s charter may provide with respect to any series of preferred stock that the Company may issue in the future, the holders of Common Shares will possess exclusive voting power.
Holders of the Company’s Common Shares are entitled to receive such distributions as authorized from time to time by the Company’s Board of Directors and declared out of legally available funds, subject to any preferential rights of any preferred stock that the Company issues in the future. In any liquidation, each outstanding Common Share entitles its holder to share (based on the percentage of Common Shares held) in the assets that remain after the Company pays its liabilities and any preferential distributions owed to preferred stockholders. Holders of Common Shares do not have preemptive rights, which means that there is no automatic option to purchase any new Common Shares that the Company issues, nor do holders of Common Shares have any preference, conversion, exchange, sinking fund or redemption rights. Holders of Common Shares do not have appraisal rights unless the Board of Directors determines that appraisal rights apply, with respect to all or any classes or series of stock, to a particular transaction or all transactions occurring after the date of such determination in connection with which holders of such Common Shares would otherwise be entitled to exercise appraisal rights. Common Shares are nonassessable by the Company upon its receipt of the consideration for which the Board of Directors authorized its issuance.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
Distributions
On June 19, 2019, the Board of Directors determined to suspend regular monthly distributions.
Previously, distributions in an amount equal to a 6.0% annualized rate were declared on a monthly basis beginning on January 14, 2015 through June 30, 2019 and were paid on or about the 15th day following each month end.
Future distributions declared, if any, will be at the discretion of the Board of Directors based on their analysis of the Company’s performance over the previous periods and expectations of performance for future periods. The Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, current revenues, operating and interest expenses and our ability to refinance near-term debt. In addition, the Company currently intends to continue to comply with the REIT distribution requirement that it annually distribute no less than 90% of its taxable income. The Company cannot assure that regular distributions will be made or that it will maintain any particular level of distributions that it has previously established or may establish.
Total distributions declared during the years ended December 31, 2019 and 2018 were $4.0 million and $8.1 million, respectively.
Share Repurchase Program
The Company’s share repurchase program may provide its stockholders with limited, interim liquidity by enabling them to sell their Common Shares back to it, subject to restrictions. For the years ended December 31, 2019 and 2018, we repurchased 141,204 and 174,338 shares of common stock, respectively, at an average price per share of $9.77 and $9.64 per share, respectively.
On March 19, 2020, the Board of Directors amended the share repurchase program to remove stockholder notice requirements and also approved the suspension of all redemptions effective immediately.
8. Related Party and Other Transactions
The Company has agreements with the Advisor and its affiliates and the Special Limited Partner pursuant to which is has and/or will pay certain fees and liquidation distributions in exchange for services performed or consideration given by these entities and other affiliated entities. The following table summarizes all the compensation and fees the Company paid or may pay to the Advisor and its affiliates, including amounts to reimburse their costs in providing services. The Special Limited Partner has made contributions to the Operating Partnership in exchange for Subordinated Participation Interests in the Operating Partnership that may entitle the Special Limited Partner to subordinated distributions as described in the table below.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
| Operational Stage | ||
| Fees | Amount | |
| Acquisition Fee |
The Company pays to the Advisor or its affiliates 1.0% of the contractual purchase price of each property acquired (including its pro rata share (direct or indirect) of debt attributable to such property) or 1.0% of the amount advanced for a loan or other investment (including its pro rata share (direct or indirect) of debt attributable to such investment), as applicable.
‘‘Contractual purchase price’’ or the ‘‘amount advanced for a loan or other investment’’ means the amount actually paid or allocated in respect of the purchase, development, construction or improvement of a property, the amount of funds advanced with respect to a mortgage, or the amount actually paid or allocated in respect of the purchase of other real estate-related assets, in each case inclusive of any indebtedness assumed or incurred in respect of such asset but exclusive of acquisition fees and acquisition expenses. | |
| Acquisition Expenses | The Company reimburses the Advisor for expenses actually incurred related to selecting or acquiring assets on the Company’s behalf, regardless of whether or not the Company acquires the related assets. In addition, the Company pays third parties, or reimburses the Advisor or its affiliates, for any investment-related expenses due to third parties, including, but not limited to legal fees and expenses, travel and communications expenses, cost of appraisals, nonrefundable option payments on property not acquired, accounting fees and expenses and title insurance premiums, regardless of whether or not the Company acquires the related assets. In no event will the total of all acquisition fees, financing coordination fees and acquisition expenses (including those paid to third parties, as described above) payable with respect to a particular investment be unreasonable or exceed 5% of the contractual purchase price of each property including its pro rata share (direct or indirect) of debt attributable to such property) or 5% of the amount advanced for a loan or other investment (including its pro rata share (direct or indirect) of debt attributable to attributable to such investment), as applicable. | |
|
Construction Management Fee |
The Company may engage affiliates of the Advisor to provide construction management services for some of its properties. The Company will pay a construction management fee in an amount of up to 5% of the cost of any improvements that the affiliates of the Advisor may undertake. The affiliates of the Advisor may subcontract the performance of their duties to third parties. | |
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
| Fees | Amount | |
|
Asset Management Fee
|
The Company pays the Advisor or its assignees a monthly asset management fee equal to one-twelfth (1⁄12) of 0.75% of the Company’s average invested assets. Average invested assets means, for a specified period, the average of the aggregate book value of its assets invested, directly or indirectly, in equity interests in and loans secured by real estate, before deducting depreciation, bad debts or other non- cash reserves, computed by taking the average of such values at the end of each month during such period. | |
|
Property Management Fees
|
Property management fees with respect to properties managed by affiliates of the Advisor are payable monthly in an amount not to exceed the fee customarily charged in arm’s-length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of property managers in such area. The affiliates of the Advisor may subcontract the performance of their duties to third parties. The Company reimburses the affiliates of the Advisor for costs and expenses, which may include personnel costs for on-site personnel providing direct services for the properties and for roving maintenance personnel to the extent needed at the properties from time to time, and the cost of travel and entertainment, printing and stationery, advertising, marketing, signage, long distance phone calls and other expenses that are directly related to the management of specific properties. Notwithstanding the foregoing, the Company will not reimburse the affiliates of the Advisor for their general overhead costs or, other than as set forth above, for the wages and salaries and other employee-related expenses of their employees.
In addition, the Company pays the affiliates of the Advisor a separate fee for the one- time initial rent-up or leasing-up of newly constructed properties in an amount not to exceed the fee customarily charged in arm’s-length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area.
From the Company’s inception through December 31, 2019, no property management fees or separate fees have been incurred.
| |
| Operating Expenses |
The Company may reimburse the Advisor’s costs of providing administrative services at the end of each fiscal quarter, subject to the limitation that the Company will not reimburse the Advisor (except in limited circumstances) for any amount by which the total operating expenses at the end of the four preceding fiscal quarters exceeds the greater of (i) 2% of average invested assets (as defined above under ‘‘— Asset Management Fee’’) for that fiscal year, and (ii) 25% of net income other than any additions to reserves for depreciation, bad debt or other similar non-cash reserves and excluding any gain from the sale of assets for that period. From the Company’s inception through December 31, 2019, the Company has not reimbursed the Advisor for providing any administrative services.
Additionally, the Company reimburses the Advisor or its affiliates for personnel costs in connection with other services; however, the Company will not reimburse the Advisor for (a) services for which the Advisor or its affiliates are entitled to compensation in the form of a separate fee, or (b) the salaries and benefits of the named executive officers.
|
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
| Fees | Amount | |
|
Financing Coordination Fee |
If the Advisor provides services in connection with the financing of an asset, assumption of a loan in connection with the acquisition of an asset or origination or refinancing of any loan on an asset, the Company may pay the Advisor or its assignees a financing coordination fee equal to 0.75% of the amount available or outstanding under such financing. The Advisor may reallow some of or all this financing coordination fee to reimburse third parties with whom it may subcontract to procure such financing.
|
| Liquidation/Listing Stage | ||
|
Real Estate
|
For substantial services in connection with the sale of a property, the Company will pay to the Advisor or any of its affiliates a real estate disposition commission in an amount equal to the lesser of (a) one-half of a real estate commission that is reasonable, customary and competitive in light of the size, type and location of the property and (b) 2.0% of the contractual sales price of the property; provided, however, that in no event may the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed the lesser of 6.0% of the contractual sales price or a real estate commission that is reasonable, customary and competitive in light of the size, type and location of the property. The Company’s independent directors will determine whether the Advisor or its affiliates have provided a substantial amount of services to the Company in connection with the sale of a property. A substantial amount of services in connection with the sale of a property includes the preparation by the Advisor or its affiliates of an investment package for the property (including an investment analysis, an asset description and other due diligence information) or such other substantial services performed by the Advisor or its affiliates in connection with a sale. Disposition fees of $39,200 were paid in connection with the disposition of the SpringHill Suites – Green Bay and expensed with the disposition’s closing costs during the year ended December 31, 2019. No real estate disposition commissions were incurred during the year ended December 31, 2018.
| |
|
Annual Subordinated Performance Fee
|
The Company may pay the Advisor an annual subordinated performance fee calculated on the basis of the annual return to holders of Common Shares, payable annually in arrears, such that for any year in which holders of Common Shares receive payment of a 6.0% annual cumulative, pre-tax, non-compounded return on their respective net investments, the Advisor will be entitled to 15.0% of the total return in excess of such 6.0% per annum; provided, that the amount paid to the Advisor will not exceed 10.0% of the aggregate return for such year, and provided, further, that the amount paid to the Advisor will not be paid unless holders of Common Shares receive a return of their respective net investments. This fee will be payable only from realized appreciation in the Company’s assets upon their sale, other disposition or refinancing, which results in the return on stockholders’ respective net investments exceeding 6.0% per annum.
For purposes of the annual subordinated performance fee, “net investment” means $10.00 per Common Share, less a pro rata share of any proceeds received from the sale, other disposition or refinancing of assets.
From the Company’s inception through December 31, 2019, no annual subordinated performance fees have been incurred.
|
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
| Fees | Amount | |
|
Liquidation
|
Distributions from the Operating Partnership in connection with its liquidation initially will be made to the Company (which the Company will distribute to holders of Common Shares), until holders of Common Shares have received liquidation distributions from the Operating Partnership equal to their respective net investments plus a cumulative, pre-tax, non-compounded annual return of 6.0% on their respective net investments.
Thereafter, the Special Limited Partner will be entitled to receive liquidation distributions from the Operating Partnership until it has received liquidation distributions from the Operating Partnership equal to its net investment plus cumulative, pre-tax, non-compounded annual return of 6.0% on its net investment.
Thereafter, 85.0% of the aggregate amount of any additional liquidation distributions by the Operating Partnership will be payable to the Company (which the Company will distribute to holders of Common Shares), and the remaining 15.0% will be payable to the Special Limited Partner.
With respect to holders of Common Shares, “net investment” means $10.00 per Common Share, less a pro rata share of any proceeds received from the sale, other disposition or refinancing of assets. With respect to the Special Limited Partner, “net investment” means the value of all contributions of cash or property the Special Limited Partner has made to the Operating Partnership in consideration for its subordinated participation interests, measured as of the respective times of contribution, less a pro rata share of any proceeds received from the sale, other disposition or refinancing of assets.
From the Company’s inception through December 31, 2019, no liquidating distributions have been made.
|
Due to related parties and other transactions
In addition to certain agreements with the Sponsor (see Note 1), the Company has agreements with the Advisor to pay certain fees in exchange for services performed by the Advisor and/or its affiliated entities. Additionally, the Company’s ability to secure financing and its real estate operations are dependent upon its Advisor and its affiliates to perform such services as provided in these agreements. Amounts the Company owes to the Advisor and its affiliated entities are principally for asset management fees, and are classified as due to related parties on the consolidated balance sheets.
Affiliates of the Company’s Advisor may also perform fee-based construction management services for both its development and redevelopment activities and tenant construction projects. These fees will be considered incremental to the construction effort and will be capitalized to the associated real estate project as incurred. Costs incurred for tenant construction will be depreciated over the shorter of their useful life or the term of the related lease. Costs related to development and redevelopment activities will be depreciated over the estimated useful life of the associated project.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
The following table represents the fees incurred associated with the payments to the Company’s Advisor for the period indicated:
For the Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Acquisition fee (1) | $ | - | $ | 300,000 | ||||
| Disposition fee (2) | 39,200 | - | ||||||
| Finance fees (3) | 303,750 | - | ||||||
| Asset management fees (general and administrative costs) | 1,802,505 | 1,720,454 | ||||||
| Construction management fees (4) | 4,954 | 51,419 | ||||||
| Total | $ | 2,150,409 | $ | 2,071,873 | ||||
| (1) | Acquisition fees of $300,000 were capitalized and are reflected in the carrying value of our investment in the Hilton Garden Inn Joint Venture which is included in investments in unconsolidated affiliated real estate entities on the consolidated balance sheets. |
| (2) | Disposition fees of $39,200 were paid in connection with the disposition of the SpringHill Suites – Green Bay and expensed with the disposition’s closing costs. |
| (3) | Finance fees of $303,750 were capitalized and are reflected in the carrying value of our investment in the Cove Joint Venture which is included in investments in unconsolidated affiliated real estate entities on the consolidated balance sheets. |
| (4) | Generally, capitalized and amortized over the estimated useful life of the associated asset. |
9. Commitments and Contingencies
Management Agreements
The Company’s hotels operate pursuant to management agreements (the “Management Agreements”) with various third-party management companies. The management companies perform management functions including, but not limited to, hiring and supervising employees, establishing room prices, establishing administrative policies and procedures, managing expenditures and arranging and supervising public relations and advertising. The Management Agreements are for initial terms ranging from 1 year to 10 years however, the agreements can be cancelled for any reason by the Company after giving sixty days’ notice after the one year anniversary of the commencement of the respective agreement.
The Management Agreements provide for the payment of a base management fee equal to 3% to 3.5% of gross revenues, as defined, and an incentive management fee based on the operating results of the hotel, as defined. The base management fee and incentive management fee, if any, are recorded as a component of property operating expenses in the consolidated statements of operations.
Franchise Agreements
As of December 31, 2019, the Company’s hotels operated pursuant to various franchise agreements. Under the franchise agreements, the Company generally pays a fee equal to 3% to 5.5% of gross room sales, as defined, and a marketing fund charge from 2.0% to 2.5% of gross room sales. The franchise fee and marketing fund charge are recorded as a component of property operating expenses in the consolidated statements of operations.
The franchise agreements are generally for initial terms ranging from 15 years to 20 years, expiring between 2028 and 2034.
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, we are 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.
10. Subsequent Event
The extent to which the Company’s business may be affected by the current outbreak of the Coronavirus will largely depend on both current and future developments, including its duration, spread and treatment, and related travel advisories and restrictions, which could impact overall demand in the hospitality industry, all of which are highly uncertain and cannot be reasonably predicted.
If demand for the Company’s hotel rooms is negatively impacted for an extended period, as a result of cancellations, travel restrictions, governmental travel advisories and/or state of emergency declarations, the Company’s business and financial results could be materially and adversely impacted.
While the Company believes there are certain cost reduction strategies it can implement, there can be no assurance that they would fully mitigate the adverse impact of any lost revenue.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:
None.
| Item 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures. As of December 31, 2019, we conducted an evaluation under the supervision and with the participation of the Advisor’s management, including our Chairman and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chairman and Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2019 that our disclosure controls and procedures were adequate and effective.
Management’s Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system is a process designed by, or under the supervision of, our Chairman and Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes policies and procedures that:
| · |
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and disposition of assets; |
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provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with the authorization of our management and directors; and |
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provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. |
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment, they used the control criteria framework of the Committee of Sponsoring Organizations of the Treadway Commission published in its report entitled Internal Control—Integrated Framework (2013). Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2019.
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This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE REGISTRANT
Directors
The following table presents certain information as of March 15, 2020 concerning each of our directors serving in such capacity:
| Principal Occupation and | Year Term of | Served as a | ||||||
| Name | Age | Positions Held | Office Will Expire | Director Since | ||||
| David Lichtenstein | 59 | Chief Executive Officer and Chairman of the Board of Directors | 2020 | 2014 | ||||
| Edwin J. Glickman | 88 | Director | 2020 | 2014 | ||||
| George R. Whittemore | 70 | Director | 2020 | 2014 |
David Lichtenstein is our Chief Executive Officer and Chairman of our board of directors. Mr. Lichtenstein founded both American Shelter Corporation and The Lightstone Group. From 1988 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of The Lightstone Group, directing all aspects of the acquisition, financing and management of a diverse portfolio of multifamily, lodging, retail and industrial properties located in 20 states and Puerto Rico. From June 2004 to the present, Mr. Lichtenstein has served as the Chairman of the Board of Directors and Chief Executive Officer of Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”) and Chief Executive Officer of Lightstone Value Plus REIT LLC, its advisor. From April 2008 to the present, Mr. Lichtenstein has served as the Chairman of the Board of Directors and Chief Executive Offer of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”) and Lightstone Value Plus REIT II LLC, its advisor. From September 2014 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone Real Estate Income Trust Inc., (“Lightstone IV”), and as Chief Executive Officer of Lightstone Real Estate Income LLC, its advisor. From October 2014 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone Enterprises Limited (“Lightstone Enterprises”). Mr. Lichtenstein was appointed Chairman of the Board of Directors of Lightstone Value Plus Real Estate Investment Trust V, Inc. (“Lightstone V”), formerly known as Behringer Harvard Opportunity REIT II, Inc., effective as of September 28, 2017 and is Chairman and Chief Executive Officer of the its advisor. Mr. Lichtenstein was the president and/or director of certain subsidiaries of Extended Stay Hotels, Inc. (“Extended Stay”) that filed for Chapter 11 protection with Extended Stay. Extended Stay and its subsidiaries filed for bankruptcy protection on June 15, 2009 so they could reorganize their debts in the face of looming amortization payments. Extended Stay emerged from bankruptcy on October 8, 2010. Mr. Lichtenstein is no longer affiliated with Extended Stay. From July 2015 to the present, Mr. Lichtenstein has served as a member of the Board of Directors of the New York City Economic Development Corporation. Mr. Lichtenstein is also a member of the International Council of Shopping Centers and the National Association of Real Estate Investment Trusts, Inc., an industry trade group, as well as a member of the Board of Directors of Touro College and New York Medical College. Mr. Lichtenstein has been selected to serve as a director due to his experience and networking relationships in the real estate industry, along with his experience in acquiring and financing real estate properties.
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Edwin J. Glickman is one of our independent directors and the chairman of our audit committee. From April 2008 to the present, Mr. Glickman has served as a member of the board of directors of Lightstone II and from September 2014 to the present has served as a member of the board of directors of Lightstone IV. From December 2004 through January 2015, Mr. Glickman previously served as a member of the board of directors of Lightstone I. In January 1995, Mr. Glickman co-founded Capital Lease Funding, a leading mortgage lender for properties net leased to investment grade tenants, where he remained as Executive Vice President until May 2003 when he retired. Mr. Glickman was previously a trustee of publicly traded RPS Realty Trust from October 1980 through May 1996 and Atlantic Realty Trust from May 1996 to March 2006. Mr. Glickman graduated from Dartmouth College. Mr. Glickman has been selected to serve as an independent director due to his experience in mortgage lending and finance.
George R. Whittemore From July 2006 to the present, Mr. Whittemore has served as a member of the board of directors of Lightstone I, and from April 2008 to the present has served as a member of the board of directors of Lightstone II. Mr. Whittemore also presently serves as a director and chairman of the audit committee of Village Bank Financial Corporation in Richmond, Virginia, a publicly traded company. Mr. Whittemore previously served as a director of Condor Hospitality, Inc. in Norfolk, Nebraska, a publicly traded company, from November 1994 to March 2016. Mr. Whittemore previously served as a director and chairman of the audit committee of Prime Group Realty Trust from July 2005 until December 2012. Mr. Whittemore previously served as President and Chief Executive Officer of Condor Hospitality Trust, Inc. from November 2001 until August 2004 and as Senior Vice President and Director of both Anderson & Strudwick, Incorporated, a brokerage firm based in Richmond, Virginia, and Anderson & Strudwick Investment Corporation, from October 1996 until October 2001. Mr. Whittemore has also served as Director, President and Managing Officer of Pioneer Federal Savings Bank and its parent, Pioneer Financial Corporation, from September 1982 until August 1994, and as President of Mills Value Adviser, Inc., a registered investment advisor. Mr. Whittemore is a graduate of the University of Richmond. Mr. Whittemore has been selected to serve as an independent director due to his experience in accounting, banking, finance and real estate.
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Executive Officers:
The following table presents certain information as of March 15, 2020 concerning each of our executive officers serving in such capacities:
| Name | Age | Principal Occupation and Positions Held | ||
| David Lichtenstein | 59 | Chief Executive Officer and Chairman of the Board of Directors | ||
| Mitchell Hochberg | 67 | President and Chief Operating Officer | ||
| Joseph Teichman | 46 | General Counsel and Secretary | ||
| Seth Molod | 56 | Chief Financial Officer and Treasurer |
David Lichtenstein for biographical information about Mr. Lichtenstein, see ‘‘Management — Directors.”
Mitchell Hochberg is our President and Chief Operating Officer and also serves as President and Chief Operating Officer of Lightstone I, Lightstone II and Lightstone IV and their advisors. Mr. Hochberg also serves as the President of our sponsor and as the President and Chief Operating Officer of our advisor. From October 2014 to the present, Mr. Hochberg has served as President of Lightstone Enterprises. Mr. Hochberg was appointed Chief Executive Officer of Behringer Harvard Opportunity REIT I, Inc. (“BH OPP I”) and Lightstone V effective as of September 28, 2017. Prior to joining The Lightstone Group in August 2012, Mr. Hochberg served as principal of Madden Real Estate Ventures from 2007 to August 2012 when it combined with our sponsor. Mr. Hochberg held the position of President and Chief Operating Officer of Ian Schrager Company, a developer and manager of innovative luxury hotels and residential projects in the United States from early 2006 to early 2007 and prior to that Mr. Hochberg founded Spectrum Communities, a developer of luxury neighborhoods in the northeast of the United States, in 1985 where for 20 years he served as its President and Chief Executive Officer. Additionally, Mr. Hochberg serves on the board of directors of Orient-Express Hotels Ltd and as Chairman of the board of directors of Orleans Homebuilders, Inc. Mr. Hochberg received his law degree as a Harlan Fiske Stone Scholar from Columbia University School of Law and graduated magna cum laude from New York University College of Business and Public Administration with a Bachelor of Science degree in accounting and finance.
Joseph E. Teichman is our General Counsel and Secretary and also serves as General Counsel of Lightstone I, Lightstone II and Lightstone IV and their respective advisors. Mr. Teichman also serves as Executive Vice President and General Counsel of our sponsor and as General Counsel of our advisor. From October 2014 to the present, Mr. Teichman has served as Secretary and a Director of Lightstone Enterprises. Prior to joining The Lightstone Group in January 2007, Mr. Teichman practiced law at the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP in New York, NY from September 2001 to January 2007. Mr. Teichman earned a J.D. from the University of Pennsylvania Law School and a B.A. from Beth Medrash Govoha, Lakewood, New Jersey. Mr. Teichman is licensed to practice law in New York and New Jersey. Mr. Teichman was also a director of certain subsidiaries of Extended Stay that filed for Chapter 11 protection with Extended Stay. Extended Stay and its subsidiaries filed for bankruptcy protection on June 15, 2009 so they could reorganize their debts in the face of looming amortization payments. Extended Stay emerged from bankruptcy on October 8, 2010. Mr. Teichman is no longer affiliated with Extended Stay. Mr. Teichman is also a member of the Board of Directors of Yeshiva Orchos Chaim, Lakewood, New Jersey and was appointed to the Ocean County College Board of Trustees in February 2016.
Seth Molod is our Chief Financial Officer and Treasurer and also serves as the Chief Financial Officer and Treasurer of Lightstone I, Lightstone II, Lightstone IV and Lightstone V. Mr. Molod also serves as the Executive Vice President and Chief Financial Officer of our Sponsor and as the Chief Financial Officer of our Advisor and the advisors of Lightstone I, Lightstone II, Lightstone IV and Lightstone V. Prior to joining The Lightstone Group in August of 2018, Mr. Molod, 54, served as an Audit Partner, Chair of Real Estate Services and on the Executive Committee of Berdon LLP, a full service accounting, tax, financial and management advisory firm (“Berdon”). Mr. Molod joined Berdon in 1989. He has extensive experience advising some of the nation’s most prominent real estate owners, developers, managers, and investors in both commercial and residential projects. Mr. Molod has worked with many privately held real estate companies as well as institutional investors, REITs, and other public companies. Mr. Molod is a licensed certified public accountant in New Jersey and New York and a member of the American Institute of Certified Public Accountants. Mr. Molod holds a Bachelor of Business Administration degree in Accounting from Muhlenberg College.
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Section 16 (a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires each director, officer and individual beneficially owning more than 10% of our common stock to file initial statements of beneficial ownership (Form 3) and statements of changes in beneficial ownership (Forms 4 and 5) of our common stock with the Securities Exchange Commission ("SEC"). Officers, directors and greater than 10% beneficial owners are required by Securities and Exchange Commission rules to furnish us with copies of all such forms they file. Based solely on a review of the copies of such forms furnished to us during and with respect to the fiscal year ended December 31, 2019, or written representations that no additional forms were required, we believe that all of our officers and directors and persons that beneficially own more than 10% of the outstanding shares of our common stock complied with these filing requirements in 2018.
Information Regarding Audit Committee
Our Board established an audit committee in June 2014. The charter of audit committee is available at www.lightstonecapitalmarkets.com/sec-filings or in print to any stockholder who requests it c/o Lightstone Value Plus Real Estate Investment Trust III, Inc., 1985 Cedar Bridge Avenue, Lakewood, NJ 08701. Our audit committee consists of Messrs. Edwin J. Glickman and George R. Whittemore each of whom is “independent” within the meaning of the NYSE listing standards. The Board determined that Messrs. Glickman and Whittemore are qualified as audit committee financial experts as defined in Item 401 (h) of Regulation S-K. For more information regarding the relevant professional experience of Messrs. Glickman and Whittemore see “Directors”.
Code of Conduct and Ethics
We have adopted a Code of Conduct and Ethics that applies to all of our executive officers and directors, including but not limited to, our principal executive officer and principal financial officer. Our Code of Conduct and Ethics can be found at www.lightstonecapitalmarkets.com/sec-filings
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Executive Officers
Our officers will not receive any cash compensation from us for their services as our officers. Our board of directors (including a majority of our independent directors) will determine if and when any of our officers will receive restricted shares of our common stock. Additionally, our officers are officers of one or more of our affiliates and are compensated by those entities (including our sponsor), in part, for their services rendered to us. From our inception through December 31, 2019, the Company has not compensated the officers.
Compensation of Board of Directors
We pay our independent directors an annual fee of $40,000 and are responsible for reimbursement of their out-of-pocket expenses, as incurred.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Executive Officers:
The following table presents certain information as of March 15, 2020 concerning each of our directors and executive officers serving in such capacities:
| Name and Address of Beneficial Owner | Number
of Shares of Common Stock of the Lightstone REIT III Beneficially Owned | Percent of All Common Shares of the Lightstone REIT III | ||||||
| David Lichtenstein (1) | 242,222 | 1.8 | % | |||||
| Edwin J. Glickman | - | - | ||||||
| George R. Whittemore | - | - | ||||||
| Mitchell Hochberg | - | - | ||||||
| Seth Molod | - | - | ||||||
| Joseph Teichman | - | - | ||||||
| Our directors and executive officers as a group (6 persons) | 242,222 | 1.8 | % | |||||
| (1) | Includes 20,000 shares owned by our Advisor and 222,222 shares owned by an entity 100% owned by David Lichtenstein. Our Advisor is majority owned by David Lichtenstein. The beneficial owner’s business address is 1985 Cedar Bridge Avenue, Lakewood, New Jersey 08701. The Special Limited Partner, which is majority owned by Mr. Lichtenstein, will purchase subordinated participation interests in our operating partnership in exchange for cash or interest in real property. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
David Lichtenstein serves as the Chairman of our Board of Directors and our Chief Executive Officer. Our Advisor and its affiliates and the Special Limited Partner are majority owned and controlled by Mr. Lichtenstein. We have or may entered into agreements with our Advisor and its affiliates to pay certain fees, as described below, in exchange for services performed or consideration given by these and other affiliated entities. As a majority owner of those entities, Mr. Lichtenstein benefits from fees and other compensation that they receive pursuant to these agreements.
Property Managers
Our Advisor has certain affiliates which may manage the properties we acquire. We also use other unaffiliated third-party property managers, principally for the management of our hospitality properties.
We have agreed to pay our property managers a monthly management fee in an amount not to exceed the fee customarily charged in arm’s-length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of property managers in such area. We will reimburse our property managers for certain costs and expenses. We may also pay our property managers a separate fee for the one-time initial rent-up or leasing-up of newly constructed property in an amount not to exceed the fee customarily charged in arm’s length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area.
We may also engage our property managers to provide construction management services for some of our properties. We will pay a construction management fee in an amount of up to 5% of the cost of any improvements that our property managers undertake.
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Advisor
We pay our Advisor an acquisition fee equal to 1.0% of the gross contractual purchase price (including any mortgage assumed) of each property purchased and reimburse our Advisor for expenses that it incurs in connection with the purchase of a property. Acquisition fees and expenses are capped at 5% of the gross contractual purchase price of a property.
Until March 31, 2017, the date on which our Offering ended, and subject to the approval of our board of directors, we could have paid our Advisor annually an asset management subordinated participation by issuing a number of restricted Class B Units. No annual subordinated performance fees were issued during the Offering.
Beginning on March 31, 2017, the date on which our Offering ended, the Advisor is paid an advisor asset management fee of one-twelfth (1/12) of 0.75% of our average invested assets and we will reimburse some expenses of the Advisor relating to asset management.
If our Advisor provides services in connection with the financing of an asset, assumption of a loan in connection with the acquisition of an asset or origination or refinancing of any loan on an asset, we may pay our Advisor a financing coordination fee equal to 0.75% of the amount available or outstanding under such financing.
For substantial services in connection with the sale of a property, we will pay to our Advisor a commission in an amount equal to the lesser of (a) one-half of a real estate commission that is reasonable, customary and competitive in light of the size, type and location of the property and (b) 2.0% of the contractual sales price of the property. The commission will not exceed the lesser of 6.0% of the contractual sales price or commission that is reasonable, customary and competitive in light of the size, type and location of the property. Disposition fees of $39,200 were paid in connection with the disposition of the SpringHill Suites – Green Bay and expensed with the disposition’s closing costs during the year ended December 31, 2019. No real estate disposition commissions were incurred during the year ended December 31, 2018.
We may pay our Advisor an annual subordinated performance fee calculated on the basis of our annual return to holders of our Common Shares, payable annually in arrears, such that for any year in which holders of our Common Shares receive payment of a 6.0% annual cumulative, pre-tax, non-compounded return on their respective net investments, our Advisor will be entitled to 15.0% of the amount in excess of such 6.0% per annum return, provided, that the amount paid to the Advisor will not exceed 10.0% of the aggregate return for such year, and provided, further, that the annual subordinated performance fee will not be paid unless holders of our Common Shares receive a return of their respective net investments. No annual subordinated performance fees were incurred during the years ended December 31, 2019 and 2018, respectively.
We have agreements with the Advisor to pay certain fees in exchange for services performed by the Advisor and/or its affiliated entities. Additionally, our ability to secure financing and our real estate operations are dependent upon our Advisor and its affiliates to perform such services as provided in these agreements. As of December 31, 2019 and 2018, we owed the Advisor and its affiliated entities an aggregate of $451,337 and $157,114, respectively, which was principally for costs paid on our behalf, and is classified as due to related parties on the consolidated balance sheets.
The following table represents the fees incurred associated with the payments to the Company’s Advisor for the period indicated:
For the Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Acquisition fee (1) | $ | - | $ | 300,000 | ||||
| Disposition fee (2) | 39,200 | - | ||||||
| Finance fees (3) | 303,750 | - | ||||||
| Asset management fees (general and administrative costs) | 1,802,505 | 1,720,454 | ||||||
| Construction management fees (4) | 4,954 | 51,419 | ||||||
| Total | $ | 2,150,409 | $ | 2,071,873 | ||||
| (1) | Acquisition fees of $300,000 were capitalized and are reflected in the carrying value of our investment in the Hilton Garden Inn Joint Venture which is included in investments in unconsolidated affiliated real estate entities on the consolidated balance sheets. |
| (2) | Disposition fees of $39,200 were paid in connection with the disposition of the SpringHill Suites – Green Bay and expensed with the disposition’s closing costs. |
| (3) | Finance fees of $303,750 were capitalized and are reflected in the carrying value of our investment in the Cove Joint Venture which is included in investments in unconsolidated affiliated real estate entities on the consolidated balance sheets. |
| (4) | Generally, capitalized and amortized over the estimated useful life of the associated asset. |
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Special Limited Partner
In connection with the Company’s Offering, which terminated on March 31, 2017, (Lightstone SLP III LLC, a Delaware limited liability company (the “Special Limited Partner”), purchased from the Operating Partnership an aggregate of approximately 242 Subordinated Participation Interests for consideration of $12.1 million. The Subordinated Participation Interests were each purchased for $50,000 in consideration and may be entitled to receive liquidation distributions upon the liquidation of Lightstone REIT III.
As the majority owner of the Special Limited Partner, Mr. Lichtenstein is the beneficial owner of a 99% interest in such Subordinated Participation Interests and will thus receive an indirect benefit from any distributions made in respect thereof.
These Subordinated Participation Interests entitle the Special Limited Partner to a portion of any regular and liquidation distributions that we make to stockholders, but only after stockholders have received a stated preferred return. Although the actual amounts are dependent upon results of operations and, therefore, cannot be determined at the present time, distributions to the Special Limited Partner, as holder of the Subordinated Participation Interests, could be substantial.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accounting Firm Fees
The following table presents the aggregate fees billed to us for the years presented by our principal accounting firm:
| Year ended December 31, 2019 | Year ended December 31, 2018 | |||||||
| Audit Fees (a) | $ | 202,650 | $ | 193,725 | ||||
| Audit-Related Fees (b) | 12,500 | 16,250 | ||||||
| Tax Fees (c) | 79,560 | 86,500 | ||||||
| Total Fees | $ | 294,710 | $ | 296,475 | ||||
| (a) | Fees for audit services consisted of the audit of the Lightstone REIT III’s annual financial statements and interim reviews, including services normally provided in connection with statutory and regulatory filings and including registration statements and consents. |
| (b) | Fees for audit-related services related to audits of entities that the Company has acquired. |
| (c) | Fees for tax services. |
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In considering the nature of the services provided by the independent auditor, the audit committee determined that such services are compatible with the provision of independent audit services. The audit committee discussed these services with the independent auditor and Lightstone REIT III management to determine that they are permitted under the rules and regulations concerning auditor independence promulgated by the Securities and Exchange Commission to implement the related requirements of the Sarbanes-Oxley Act of 2002, as well as the American Institute of Certified Public Accountants.
AUDIT COMMITTEE REPORT
To the Directors of Lightstone Value Plus Real Estate Investment Trust III, Inc.:
We have reviewed and discussed with management Lightstone Value Plus Real Estate Investment Trust III, Inc.’s audited financial statements as of and for the year ended December 31, 2019.
We have discussed with the independent auditors the matters required to be discussed by Auditing Standard No. 16, “Communication with Audit Committees,” as amended, as adopted by the Public Company Accounting Oversight Board.
We have received and reviewed the written disclosures and the letter from the independent auditors required by Public Company Accounting Oversight Board Rule 3526, Communication with Audit Committees Concerning Independence and have discussed with the auditors the auditors’ independence.
Based on the reviews and discussions referred to above, we recommend to the board of directors that the financial statements referred to above be included in Lightstone Value Plus Real Estate Investment Trust III, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2019.
Audit Committee
George R. Whittemore
Edwin J. Glickman
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INDEPENDENT DIRECTORS’ REPORT
To the Stockholders of Lightstone Value Plus Real Estate Investment Trust III, Inc.:
We have reviewed the Company’s policies and determined that they are in the best interest of the Company’s stockholders. Set forth below is a discussion of the basis for that determination.
General
The Company has and intends to continue to primarily acquire full-service or select-service hotels, including extended-stay hotels. Even though the Company has and intends to continue primarily to acquire hotels, it has and may continue to purchase other types of real estate.
Assets other than hotels may include, without limitation, office buildings, shopping centers, business and industrial parks, manufacturing facilities, single-tenant properties, multifamily properties, student housing properties, warehouses and distribution facilities and medical office properties. The Company has and expects to invest mainly in direct real estate investments and other equity interests; however, it may also invest in debt interests, which may include bridge or mezzanine loans, including in furtherance of a loan-to-own strategy. We have not established any limits on the percentage of our portfolio that may be comprised of various categories of assets which present differing levels of risk.
Financing Policies
The Company has and intends to continue to utilize leverage to acquire its properties. The number of different properties the Company will acquire will be affected by numerous factors, including, the amount of funds available to us. When interest rates on mortgage loans are high or financing is otherwise unavailable on terms that are satisfactory to the Company, the Company may purchase certain properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time. There is no limitation on the amount the Company may invest in any single property or on the amount the Company can borrow for the purchase of any property.
The Company has and intends to continue to limit its aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to the Company’s stockholders. The Company may also incur short-term indebtedness, having a maturity of two years or less. By operating on a leveraged basis, the Company may have more funds available for investment in properties. This may allow the Company to make more investments than would otherwise be possible, resulting in a more diversified portfolio. Although the Company’s liability for the repayment of indebtedness is expected to be limited to the value of the property securing the liability and the rents or profits derived therefrom, the Company’s use of leveraging increases the risk of default on the mortgage payments and a resulting foreclosure of a particular property. To the extent that the Company does not obtain mortgage loans on the Company’s properties, the Company’s ability to acquire additional properties will be restricted. The Company will endeavor to obtain financing on the most favorable terms available.
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Policy on Sale or Disposition of Properties
The Company’s Board will determine whether a particular property should be sold or otherwise disposed of after considering the relevant factors, including performance or projected performance of the property and market conditions, with a view toward achieving its principal investment objectives.
The Company currently intends to hold its properties for a period of three to six years from the termination of the Company’s initial public offering, which occurred on March 31, 2017. At a future date, the Company’s Board may decide to liquidate the Company, list its shares on a national stock exchange, sell its properties individually or merge or otherwise consolidate the Company with a publicly-traded REIT or seek stockholder approval to amend its charter to remove the requirement that the Company must either list its stock on a national securities exchange or seek stockholder approval to adopt a plan of liquidation of the corporation on or before March 31, 2025. Alternatively, the Company may merge with, or otherwise be acquired by, the Sponsor or its affiliates. The Company may, however, sell properties prior to such time and if so, may invest the proceeds from any sale, financing, refinancing or other disposition of its properties into additional properties. Alternatively, the Company may use these proceeds to fund maintenance or repair of existing properties or to increase reserves for such purposes. The Company may choose to reinvest the proceeds from the sale, financing and refinancing of its properties to increase its real estate assets and its net income. Notwithstanding this policy, the Board, in its discretion, may distribute all or part of the proceeds from the sale, financing, refinancing or other disposition of all or any of the Company’s properties to the Company’s stockholders. In determining whether to distribute these proceeds to stockholders, the Board will consider, among other factors, the desirability of properties available for purchase, real estate market conditions, the likelihood of the listing of the Company’s shares on a national securities exchange and compliance with the applicable requirements under federal income tax laws.
When the Company sells a property, it intends to obtain an all-cash sale price. However, the Company may take a purchase money obligation secured by a mortgage on the property as partial payment, and there are no limitations or restrictions on the Company’s ability to take such purchase money obligations. The terms of payment to the Company will be affected by custom in the area in which the property being sold is located and the then prevailing economic conditions. If the Company receives notes and other property instead of cash from sales, these proceeds, other than any interest payable on these proceeds, will not be available for distributions until and to the extent the notes or other property are actually paid, sold, refinanced or otherwise disposed. Therefore, the distribution of the proceeds of a sale to the stockholders may be delayed until that time. In these cases, the Company will receive payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years.
Independent Directors
George R. Whittemore
Edwin J. Glickman
| 65 |
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC.
Annual Report on Form 10-K
For the fiscal year ended December 31, 2019
EXHIBIT INDEX
The following exhibits are included, or incorporated by reference, as part of this Annual Report on Form 10-K (and are numbered in accordance with Item 601 of Regulation S-K):
| * | As filed herewith |
| (1) | Included as an exhibit to our Post-Effective Amendment No. 2 to our Registration Statement on Form S-11 (Reg. No. 333-195292) filed with the Securities and Exchange Commission on September 11, 2015. |
| (2) | Included as Exhibit 3.2 to our Registration Statement on Form S-11 (Reg. No. 333-195292) submitted confidentially to the Securities and Exchange Commission on April 24, 2013. |
| (3) | Included as an exhibit to our Post-Effective Amendment No. 2 to our Registration Statement on Form S-11 (Reg. No. 333-195292) filed with the Securities and Exchange Commission on September 11, 2015. |
| (4) | Filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 29, 2015. |
| (5) | Filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 5, 2017. |
| Item 16. | Form 10-K Summary |
None.
| 66 |
Pursuant to the requirements of Section 13 or 15(d) 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 III, INC. | ||
| Date: March 20, 2020 | By: | s/ David Lichtenstein |
| David Lichtenstein | ||
| Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| NAME | CAPACITY | DATE | ||
| /s/ David Lichtenstein | Chief Executive Officer and Chairman of the Board of Directors |
March 20, 2020 | ||
| David Lichtenstein | (Principal Executive Officer) | |||
| /s/ Seth Molod | Chief Financial Officer and Treasurer | March 20, 2020 | ||
| Seth Molod | (Principal Financial Officer and Principal | |||
| Accounting Officer) | ||||
| /s/ Edwin J. Glickman | Director | March 20, 2020 | ||
| Edwin J. Glickman | ||||
| /s/ George R. Whittemore | Director | March 20, 2020 | ||
| George R. Whittemore |
| 67 |
Exhibit 4.3
DESCRIPTION OF SHARES
Our charter authorizes the issuance of 200.0 million Common Shares and 50.0 million shares of preferred stock, $0.01 par value per share. In addition, our board of directors may amend our charter from time to time without stockholder approval to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue.
Common Shares
Subject to the restrictions on ownership and transfer of stock contained in our charter and except as may otherwise be specified in our charter, the holders of our Common Shares are entitled to one vote per Common Share on all matters submitted to a stockholder vote, including the election of our directors. There is no cumulative voting in the election of our directors. Therefore, the holders of a majority of our outstanding Common Shares can elect our entire board of directors. Except as our charter may provide with respect to any series of preferred stock that we may issue in the future, the holders of our Common Shares will possess exclusive voting power.
Holders of our Common Shares will be entitled to receive such distributions as authorized from time to time by our board of directors and declared by us out of legally available funds, subject to any preferential rights of any preferred stock that we issue in the future. In any liquidation, each outstanding Common Share entitles its holder to share (based on the percentage of Common Shares held) in the assets that remain after we pay our liabilities and any preferential distributions owed to preferred stockholders. Holders of Common Shares do not have preemptive rights, which means that you will not have an automatic option to purchase any new Common Shares that we issue, nor do holders of our Common Shares have any preference, conversion, exchange, sinking fund or redemption rights. Holders of Common Shares will not have appraisal rights unless our board of directors determines that appraisal rights apply, with respect to all or any classes or series of stock, to a particular transaction or all transactions occurring after the date of such determination in connection with which holders of such Common Shares would otherwise be entitled to exercise appraisal rights. Our Common Shares will be nonassessable by us upon our receipt of the consideration for which our board of directors authorized its issuance.
Our charter authorizes our board of directors to classify and reclassify any unissued Common Shares into other classes or series of stock. Prior to issuance of shares of each class or series, the board is required by Maryland law and by our charter to set, subject to our charter restrictions on ownership and transfer of our stock, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each class or series. Our board of directors has authorized the issuance of shares of our capital stock without certificates. We expect that, until our shares are listed on a national securities exchange, we will not issue Common Shares in certificated form. Information regarding restrictions on the ownership and transfer of our Common Shares that, under Maryland law, would otherwise have been required to appear on our stock certificates will instead be furnished to stockholders upon request and without charge.
We maintain a stock ledger that contains the name and address of each stockholder and the number of shares that the stockholder holds. With respect to uncertificated stock, we will continue to treat the stockholder registered on our stock ledger as the owner of the shares noted therein until the new owner delivers a properly executed form to us, which form we will provide to any registered holder upon request.
Preferred Stock
Our charter authorizes our board of directors to designate and issue one or more classes or series of preferred stock without approval of our holders of Common Shares. Prior to issuance of shares of each class or series, the board is required by Maryland law and by our charter to set, subject to our charter restrictions on ownership and transfer of our stock, the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption of each class or series of preferred stock so issued, which may be more beneficial than the rights, preferences and privileges attributable to our Common Shares. The issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control. Our board of directors has no present plans to issue preferred stock, but may do so at any time in the future without stockholder approval. However, the issuance of any additional shares of preferred stock must be approved by a majority of independent directors not otherwise interested in the transaction, who will have access at our expense to our legal counsel or to independent legal counsel.
Meetings and Special Voting Requirements
An annual meeting of our stockholders will be held each year, at least 30 days after delivery of our annual report on the date and at the time and place set by our board of directors. Special meetings of stockholders may be called upon the request of a majority of our directors, a majority of our independent directors, our chief executive officer, our chairman or our president and must be called by our secretary to act on any matter that may properly be considered at a meeting of stockholders upon the written request of stockholders entitled to cast at least 10% of the votes entitled to be cast on such matter at the special meeting. Upon receipt of a written request of stockholders entitled to cast at least 10% of the votes entitled to be cast stating the purpose of the special meeting, our secretary will provide all our holders of Common Shares written notice of the meeting and the purpose of such meeting. The written notice shall specify the time and place of the special meeting specified in the stockholders’ request; provided, however, that if none is so specified, such meeting shall be held at a time and place convenient to stockholders. The meeting must be held not less than 15 days or more than 60 days after the distribution of the notice of the meeting. The presence in person or by proxy of stockholders entitled to cast at least 50% of all the votes entitled to be cast on any matter that may properly be considered at any stockholder meeting constitutes a quorum. Unless otherwise provided by the Maryland General Corporation Law or our charter, the affirmative vote of a majority of all the votes cast is necessary to take stockholder action. With respect to the election of directors, each candidate nominated for election to the board of directors must receive the affirmative vote of a majority of the shares present, in person or by proxy, in order to be elected. Therefore, if a nominee receives fewer “for” votes than “withhold” votes in an election, then the nominee will not be elected.
Under the Maryland General Corporation Law and our charter, stockholders are generally entitled to vote at a duly held meeting at which a quorum is present on (1) amendments to our charter, (2) our liquidation or dissolution, (3) a merger, consolidation or sale or other disposition of all or substantially all of our assets, (4) a statutory share exchange and (5) election or removal of our directors. The affirmative vote of stockholders entitled to cast a majority of all the votes entitled to be cast is required to approve any such action (except that the affirmative vote of a majority of the shares represented in person or by proxy at a meeting at which a quorum is present is sufficient to elect a director). Without the approval of a majority of the stockholders entitled to vote, our board of directors may not (i) amend our charter to materially and adversely affect the rights, preferences and privileges of the stockholders; (ii) amend provisions of our charter relating to director qualifications, fiduciary duties, liability and indemnification, conflicts of interest, investment policies or investment restrictions; (iii) liquidate or dissolve our company other than before the initial investment in a property, mortgage or other investment owned by our company, directly or indirectly through one or more of our affiliates; (iv) sell all or substantially all of a property, mortgage or other investment owned by our company, directly or indirectly through one or more of our affiliates other than in the ordinary course of business or as otherwise permitted by law; or (v) cause the merger or similar reorganization of our company except as permitted by law.
Our advisory agreement with our advisor has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of our advisor and us. Our independent directors will annually review our advisory agreement with our advisor. Although the stockholders do not have the ability to vote to replace our advisor or to select a new advisor, stockholders do have the ability, by the affirmative vote of stockholders entitled to cast a majority of the votes entitled to be cast generally in the election of directors, to remove a director from our board with or without cause. With respect to shares of our stock owned by our advisor, any director or any of their affiliates, neither our advisor, nor any such director nor any of their affiliates may vote on matters submitted to the stockholders regarding the removal of our advisor, any such director or any affiliates or any transaction between us and any of the aforementioned parties.
Advance Notice for Stockholder Nominations for Directors and Proposals of New Business
In order for a stockholder to nominate a director or propose new business at the annual stockholders meeting, our bylaws generally require that the stockholder give notice of the nomination or proposal not earlier than the 150th day nor later than 5:00 p.m., Eastern Time, on the 120th day prior to the first anniversary of the date of the proxy statement for the preceding year’s annual stockholders meeting and be a stockholder of record both at the time of giving advance notice and at the time of the meeting and be entitled to vote in the election of each individual so nominated or on such other business, unless such nomination or proposal is made pursuant to the company’s notice of the meeting or by or at the direction of our board of directors. Our bylaws contain a similar notice requirement in connection with nominations for directors at a special meeting of stockholders called for the purpose of electing one or more directors. With respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of individuals for election to the board of directors at a special meeting may be made only (i) pursuant to our notice of the meeting, (ii) by or at the direction of the board of directors, or (iii) provided that the board of directors has determined that directors will be elected at the meeting, by a stockholder who is a stockholder of record both at the time of giving advance notice of such nomination and at the time of the meeting, who is entitled to vote at the meeting in the election of each individual so nominated and who has complied with the advance notice provisions of the bylaws. Failure to comply with the notice provisions will make stockholders unable to nominate directors or propose new business.
Restrictions on Ownership of Shares
Ownership Limits
To maintain our REIT qualification following the taxable year ending December 31, 2015, not more than 50% in value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals (including certain entities treated as individuals under the Code) during the last half of each taxable year. In addition, at least 100 persons who are independent of us and each other must beneficially own our outstanding shares for at least 335 days per 12-month taxable year or during a proportionate part of a shorter taxable year. Each of the requirements specified in the two preceding sentences need not be met during a corporation’s initial tax year as a REIT. We intend to elect to be taxed as a REIT commencing with our taxable year ended December 31, 2015. We may prohibit certain acquisitions and transfers of Common Shares so as to ensure our continued qualification as a REIT under the Code. However, we cannot assure you that this prohibition will be effective.
To help ensure that we meet these tests, among other purposes, our charter prohibits any person or group of persons from acquiring, directly or indirectly, beneficial ownership of more than 9.8% in value of the aggregate of our outstanding shares of stock and more than 9.8% (in value or number of shares, whichever is more restrictive), of any class or series of our shares of stock, unless exempted by our board of directors. Our board of directors may waive these ownership limits with respect to a particular person (prospectively or retroactively) if the board receives evidence that ownership in excess of the limits will not jeopardize our REIT status and certain other representations and undertakings required by our charter. For purposes of this provision, we treat corporations, partnerships and other entities as single persons. However, the board may not exempt any person whose ownership of our outstanding stock would result in our being “closely held” within the meaning of Section 856(h) of the Code or otherwise would result in our being “closely held” within the meaning of Section 856(h) of the Code or otherwise would result in our failing to qualify as a REIT. In order to be considered by the board for exemption, a person also must not own, directly or indirectly, an interest in one of our tenants (or a tenant of any entity which we own or control) that would cause us to own, directly or indirectly, more than a 9.8% interest in such tenant. The person seeking an exemption must represent to the satisfaction of the board that it will not violate these restrictions. The person also must agree that any violation or attempted violation of these restrictions will result in the automatic transfer of the shares of stock causing the violation to the charitable trust.
Any attempted transfer of our Common Shares that, if effective, would result in a violation of our ownership limits described above, our being “closely held” under Section 856(h) of the Code or otherwise failing to qualify as a REIT, or in our Common Shares being beneficially owned by fewer than 100 persons, will be null and void or will cause the number of Common Shares causing the violation to be automatically transferred to a trust for the exclusive benefit of one or more charitable beneficiaries. The prohibited transferee will not acquire any rights in the Common Shares. The automatic transfer will be deemed to be effective as of the close of business on the business day prior to the date of the attempted transfer. We will designate a trustee of the trust that will not be affiliated with us or the prohibited transferee. We also will name one or more charitable organizations as a beneficiary of the trust.
Common Shares held in trust will remain issued and outstanding Common Shares and will be entitled to the same rights and privileges as all other Common Shares. The prohibited transferee will not benefit economically from any of the Common Shares held in trust, will not have any rights to dividends or other distributions and will not have the right to vote or any other rights attributable to the Common Shares held in the trust. The trustee will receive all dividends and other distributions on the Common Shares held in trust and will hold such dividends or other distributions in trust for the benefit of the charitable beneficiary. The trustee may vote any Common Shares held in the trust. Subject to Maryland law, the trustee also will have the authority: (a) to rescind as void any vote cast by the prohibited transferee prior to our discovery that the Common Shares have been transferred to the trust and, (b) to recast the vote in accordance with the desires of the trustee acting for the benefit of the charitable beneficiary. However, if we have already taken irreversible corporate action, then the trustee will not have the authority to rescind and recast the vote.
Within 20 days of receiving notice from us that any of our Common Shares have been transferred to the trust for the charitable beneficiary, the trustee will sell those Common Shares to a person designated by the trustee whose ownership of the Common Shares will not violate the above ownership limitations. Upon the sale, the interest of the charitable beneficiary in the Common Shares sold will terminate and the trustee will distribute the net proceeds of the sale to the prohibited transferee and to the charitable beneficiary as follows. The prohibited transferee will receive an amount equal to the lesser of: (a) the price paid by the prohibited transferee for the Common Shares or, if the prohibited transferee did not give value for the Common Shares in connection with the event causing the Common Shares to be held in the trust (e.g., a gift, devise or other similar transaction), the market price (as defined in our charter) of the Common Shares on the day of the event causing the Common Shares to be held in the trust and, (b) the price received by the trustee from the sale or other disposition of the Common Shares. The trustee may reduce the amount payable to the prohibited transferee by the amount of dividends and other distributions which have been paid to the prohibited transferee and are owed by the prohibited transferee to the trustee. Any net sale proceeds in excess of the amount payable to the prohibited transferee will be paid immediately to the charitable beneficiary. If, prior to our discovery that Common Shares have been transferred to the trust, the Common Shares are sold by the prohibited transferee, then: (a) the Common Shares shall be deemed to have been sold on behalf of the trust; and (b) to the extent that the prohibited transferee received an amount for the Common Shares that exceeds the amount he was entitled to receive, the excess shall be paid to the trustee upon demand.
In addition, Common Shares held in the trust for the charitable beneficiary will be deemed to have been offered for sale to us, or our designee, at a price per Common Share equal to the lesser of: (a) the price per Common Share in the transaction that resulted in the transfer to the trust (or, in the case of a devise or gift, the market price at the time of the devise or gift); and (b) the market price on the date we, or our designee, accept the offer. We will have the right to accept the offer until the trustee has sold the Common Shares. Upon a sale to us, the interest of the charitable beneficiary in the Common Shares sold will terminate and the trustee will distribute the net proceeds of the sale to the prohibited transferee. We may reduce the amount payable to the prohibited transferee by the amount of dividends and other distributions which have been paid to the prohibited transferee and are owed by the prohibited transferee to the trustee. We may pay the amount of such reduction to the trustee for the benefit of the charitable beneficiary.
Any person who acquires Common Shares in violation of the foregoing restrictions or who would have owned the Common Shares that were transferred to any such trust must give us immediate written notice of such event, and any person who proposes or attempts to acquire or receive Common Shares in violation of the foregoing restrictions must give us at least 15 days’ written notice prior to such transaction. In both cases, such persons shall provide to us such other information as we may request in order to determine the effect, if any, of such transfer on our status as a REIT.
The foregoing restrictions will continue to apply until our board of directors determines it is no longer in our best interest to continue to qualify as a REIT or that compliance is no longer required for REIT qualification. The ownership limits do not apply to any underwriter in an offering of our shares or to a person or persons exempted from the ownership limits by our board of directors based upon appropriate assurances that our qualification as a REIT would not be jeopardized and certain other representations and undertakings required by our charter.
Within 30 days after the end of each taxable year, every owner of 5% or more of our outstanding capital stock will be asked to deliver to us a statement setting forth the number of shares owned directly or indirectly by such person and a description of how such person holds the shares. Each such owner shall also provide us with such additional information as we may request in order to determine the effect, if any, of his or her beneficial ownership on our status as a REIT and to ensure compliance with our ownership limits.
These restrictions could delay, defer or prevent a transaction or change in control of our company that might involve a premium price for our Common Shares or otherwise be in the best interests of our stockholders.
Suitability Standards and Minimum Purchase Requirements
State securities laws and our charter require that purchasers of our Common Shares meet standards regarding (a) net worth or income, and (b) minimum purchase amounts. Subsequent purchasers, i.e., potential purchasers of your Common Shares, must also meet the net worth or income standards, and unless you are transferring all of your Common Shares, you may not transfer your Common Shares in a manner that causes you or your transferee to own fewer than the number of Common Shares required to meet the minimum purchase requirements, except for the following transfers without consideration: transfers by gift; transfers by inheritance; intrafamily transfers; family dissolutions; transfers to affiliates; and transfers by operation of law. These suitability and minimum purchase requirements are applicable until our Common Shares are listed on a national securities exchange, and these requirements may make it more difficult for you to sell your Common Shares. We cannot assure you that our Common Shares will ever be listed on a national securities exchange.
Distributions
We currently pay, and intend to continue paying, regular monthly cash distributions to our stockholders. The actual amount and timing of distributions is be determined by our board of directors, in its discretion, based on its analysis of our actual and expected earnings, cash flow, capital expenditures and investments, as well as general financial conditions. The distributions that we currently pay are equal to a daily amount equal to $0.00164383 based on a purchase price of $10.00 per share. We intend to continue paying distributions for future periods in the amounts and at times as determined by our board.
Our board of directors does not intend to fund our distributions with shares of our common stock. However, our board may have to consider such distributions if there is a discrepancy between our taxable income and cash flow. It may be necessary to pay dividends in the form of stock dividends in order to comply with the annual distribution requirements relating to our qualification as a REIT. These discrepancies may arise in investments that result in taxable income without producing a corresponding amount of cash. Examples of this may include:
| • | “residual interest” in REMICs or taxable mortgage pools; |
| • | loans or mortgage-backed securities held as assets that are issued at a discount and require the accrual of taxable economic interest in advance of receipt in cash; |
| • | loans on which the borrower is permitted to defer cash payments of interest, distressed loans on which the issuer may be required to accrue taxable interest income even though the borrower is unable to make current servicing payments in cash, and debt securities purchased at a discount; and |
| • | a market downturn, such as the one that occurred in 2008–2009, where a number of publicly traded REITs paid dividends consisting primarily of stock because their boards of directors had determined, in the exercise of their fiduciary duties, that preserving cash would best serve the interests of stockholders (this is consistent with private letter rulings issued by the IRS). |
We expect to continue paying distributions monthly unless our results of operations, our general financial condition, general economic conditions or other factors make it imprudent to do so. The timing and amount of distributions will be determined by our board, in its sole discretion, may vary from time to time, and will be influenced in part by its intention to comply with REIT requirements of the Code.
Although stock dividends are permissible, distributions in kind will not be permitted, except for distributions of readily marketable securities, distributions of beneficial interests in a liquidating trust established for our dissolution and the liquidation of our assets in accordance with the terms of our charter or distributions that meet all of the following conditions: (a) our board of directors advises each stockholder of the risks associated with direct ownership of property; (b) our board of directors offers each stockholder the option of receiving such in-kind distribution; and (c) in-kind distributions are only made to those stockholders who accept such an offer.
To maintain our qualification as a REIT, we must make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. If we meet the REIT qualification requirements, we generally will not be subject to U.S. federal income tax on that portion of our taxable income or capital gain which is distributed to our stockholders. We expect that our board of directors will authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our board of directors deems relevant.
Each distribution will be accompanied by a notice which sets forth: (a) the record date; (b) the amount per Common Share that will be distributed; and (c) the equivalent annualized yield. Maryland investors also will receive notices showing (x) the amount and percentage of each distribution paid from operations, offering proceeds and other sources; and (y) the aggregate amount of such distribution.
We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders.
Inspection of Books and Records
As a part of our books and corporate records, we will maintain at our principal office an alphabetical list of the names of our holders of Common Shares, along with their addresses and telephone numbers and the number of Common Shares held by each of them. The copy of the list of holders of our Common Shares shall be printed in alphabetical order, on white paper, and in a readily readable type size (in no event smaller than 10-point type). We will update this stockholder list at least quarterly. Except as noted below, we will make the list available for inspection at our principal office by a holder of Common Shares or his or her designated agent upon request of the stockholder and also will mail this list to any holder of Common Shares within 10 days of receipt of his or her request. We may impose a reasonable charge for expenses incurred in reproducing such list. Stockholders, however, may not sell or use this list for commercial purposes. The purposes for which stockholders may request this list include matters relating to their voting rights and the exercise of stockholder rights under the federal proxy laws.
If our advisor or our board of directors neglects or refuses to exhibit, produce or mail a copy of the list of holders of Common Shares as requested, our advisor or our board of directors, as the case may be, shall be liable to the stockholder requesting the list for the costs, including attorneys’ fees, incurred by any holder of Common Shares for compelling the production of the stockholder list and any actual damages suffered by the stockholder for the neglect or refusal to produce the list. It shall be a defense that the actual purpose and reason for the requests for inspection or for a copy of the stockholder list is not for a proper purpose but is instead for the purpose of securing such list of stockholders or other information for the purpose of selling such list or copies thereof, or of using the same for a commercial purpose other than in the interest of the applicant as a stockholder relative to the affairs of our company. We may require that the stockholder requesting the stockholder list represent that the request is not for a commercial purpose unrelated to the stockholder’s interest in our company. The remedies provided by our charter to stockholders requesting copies of the stockholder list are in addition to, and do not in any way limit, other remedies available to stockholders under federal law, or the law of any state.
Business Combinations
Under the Maryland General Corporation Law, business combinations between a Maryland corporation and an interested stockholder or the interested stockholder’s affiliate are prohibited for five years after the most recent date on which the stockholder becomes an interested stockholder. For this purpose, the term “business combination” includes mergers, consolidations, share exchanges, and, in circumstances specified in the statute, asset transfers and issuances or reclassifications of equity securities. An “interested stockholder” is defined for this purpose as: (a) any person who beneficially owns, directly or indirectly, ten percent or more of the voting power of the corporation’s outstanding voting stock; or (b) an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding stock of the corporation. A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.
After the five-year prohibition, any business combination between the corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least: (a) 80% of the votes entitled to be cast by holders of outstanding voting stock of the corporation, voting together as a single voting group; and (b) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder or its affiliate with whom the business combination is to be effected, or held by an affiliate or associate of the interested stockholder, voting together as a single voting group.
These supermajority vote requirements do not apply if the holders of Common Shares receive a minimum price, as defined under the Maryland General Corporation Law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.
None of these provisions of the Maryland General Corporation Law will apply, however, to business combinations that are approved or exempted by our board of directors prior to the time that the interested stockholder becomes an interested stockholder. Our board, by resolution, has exempted any business combinations involving us and The Lightstone Group or any of its affiliates from these provisions. As a result, the five-year prohibition and the supermajority vote requirement will not apply to any business combinations between any affiliate of The Lightstone Group and us. As a result, any affiliate of The Lightstone Group may be able to enter into business combinations with us, which may or may not be in the best interests of our stockholders.
Control Share Acquisitions
The Maryland General Corporation Law provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by the affirmative vote of stockholders entitled to cast two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquirer, an officer of the corporation or an employee of the corporation who is also a director of the corporation are excluded from the vote on whether to accord voting rights to the control shares. “Control shares” are voting shares that, if aggregated with all other shares owned by the acquirer or with respect to which the acquirer has the right to vote or to direct the voting of, other than solely by virtue of revocable proxy, would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power:
| • | one-tenth or more but less than one-third; |
| • | one-third or more but less than a majority; or |
| • | a majority or more of all voting power. |
Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval or shares acquired directly from the corporation. Except as otherwise specified in the statute, a “control share acquisition” means the acquisition of issued and outstanding control shares.
Once a person who has made or proposes to make a control share acquisition has undertaken to pay expenses and has satisfied other required conditions, the person may compel the board of directors to call a special meeting of stockholders to be held within 50 days of the demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting.
If voting rights are not approved for the control shares at the meeting or if the acquiring person does not deliver an “acquiring person statement” for the control shares as required by the statute, the corporation may redeem any or all the control shares for their fair value, except for control shares for which voting rights have previously been approved. Fair value is to be determined for this purpose without regard to the absence of voting rights for the control shares, and is to be determined as of the date of the last control share acquisition or of any meeting of stockholders at which the voting rights for control shares are considered and not approved.
If voting rights for control shares are approved at a stockholders meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of these appraisal rights may not be less than the highest price per Common Share paid in the control share acquisition. Some of the limitations and restrictions otherwise applicable to the exercise of dissenters’ rights do not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or to acquisitions approved or exempted by the charter or bylaws of the corporation.
Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our stock. There can be no assurance that this provision will not be amended or eliminated at any time in the future.
Subtitle 8
Subtitle 8 of Title 3 of the Maryland General Corporation Law, or Subtitle 8, permits a Maryland corporation with a class of equity securities registered under the Exchange Act and at least three independent directors to elect to be subject, by provision in its charter or bylaws or a resolution of its board of directors and notwithstanding any contrary provision in the charter or bylaws, to any or all of five provisions:
| • | a classified board; |
| • | a two-thirds vote requirement for removing a director; |
| • | a requirement that the number of directors be fixed only by vote of the directors; |
| • | a requirement that a vacancy on the board be filled only by the remaining directors and (if the board is classified) for the remainder of the full term of the directorship in which the vacancy occurred; and |
| • | a majority requirement for the calling of a stockholder-requested special meeting of stockholders. |
Pursuant to Subtitle 8, except as may be provided by our board of directors in setting the terms of any class or series of our preferred stock, we have elected to provide that vacancies on our board of directors be filled only by the remaining directors and for the remainder of the full term of the directorship in which the vacancy occurred. Although our board has no current intention to opt in to any of the other above provisions permitted under Maryland law, our charter does not prohibit our board from doing so. Becoming governed by any of these provisions could discourage an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our securities. Note that through provisions in our charter and bylaws unrelated to Subtitle 8, we already vest in our board of directors the exclusive power to fix the number of directors, provided that the number is at least three.
Tender Offers
Our charter provides that any tender offer made by any person, including any “mini-tender” offer, must comply with certain notice and disclosure requirements. These procedural requirements with respect to tender offers apply to any widespread solicitation for shares of our stock at firm prices for a limited time period.
In order for any person to conduct a tender offer for shares of our stock, our charter requires that the person comply with all the provisions of Regulation 14D of the Exchange Act (other than filing requirements) and provide the company notice of such tender offer at least 10 business days before initiating the tender offer. Regulation 14D requires any person initiating a tender offer to provide:
| • | specific disclosure to stockholders focusing on the terms of the offer and information about the bidder; |
| • | the ability to allow stockholders to withdraw tendered shares while the offer remains open; |
| • | the right to have tendered shares accepted on a pro rata basis throughout the term of the offer if the offer is for less than all of our shares; and |
| • | for the equal treatment of all stockholders of the subject class of shares. |
In addition to the foregoing, there are certain ramifications to any person who attempts to conduct a noncompliant tender offer. A stockholder may not transfer any shares to any person who initiates a tender offer without complying with the provisions set forth above unless such stockholder first offers such shares to us at a price equal to the greater of the price in the non-complaint tender offer or the repurchase price under our share repurchase program as it is in effect at such time. The noncomplying person shall also be responsible for all our expenses in connection with that person’s noncompliance.
Registrar and Transfer Agent
We will engage a third party to serve as the registrar and transfer agent for our Common Shares. The name and address of our transfer agent is as follows:
DST Systems, Inc.
430 West 7th St.
Kansas City, Missouri 64105
Phone: (877) 304-4733
Fax: (855) 368-2326
To ensure that any account changes are made promptly and accurately, all changes (including your address, ownership type and distribution mailing address) should be directed to the transfer agent.
Restrictions on Roll-Up Transactions
A Roll-up Transaction is a transaction involving the acquisition, merger, conversion or consolidation, directly or indirectly, of us and the issuance of securities of an entity that is created or would survive after the successful completion of a Roll-up Transaction, which we refer to as a Roll-up Entity. This term does not include:
| • | a transaction involving securities of a company that have been listed on a national securities exchange for at least 12 months; or |
| • | a transaction involving our conversion to corporate, trust or association form if, as a consequence of the transaction, there will be no significant adverse change in stockholder voting rights, the term of our existence, compensation to our sponsor or advisor or our investment objectives. |
In connection with any proposed Roll-up Transaction, an appraisal of all our assets will be obtained from a competent independent appraiser. Our assets will be appraised on a consistent basis, and the appraisal will be based on an evaluation of all relevant information and will indicate the value of our assets as of a date immediately preceding the announcement of the proposed Roll-up Transaction. If the appraisal will be included in a prospectus used to offer the securities of a Roll-Up Entity, the appraisal will be filed with the SEC and, if applicable, the states in which registration of such securities is sought, as an exhibit to the registration statement for the offering. Accordingly, an issuer using the appraisal shall be subject to liability for violation of Section 11 of the Securities Act and comparable provisions under state laws for any material misrepresentations or material omissions in the appraisal. The appraisal will assume an orderly liquidation of assets over a 12-month period. The terms of the engagement of the independent appraiser will clearly state that the engagement is for our benefit and the benefit of our stockholders. A summary of the appraisal, indicating all material assumptions underlying the appraisal, will be included in a report to our stockholders in connection with any proposed Roll-up Transaction.
In connection with a proposed Roll-up Transaction, the person sponsoring the Roll-up Transaction must offer to our holders of Common Shares who vote “no” on the proposal the choice of:
| (a) | accepting the securities of the Roll-up Entity offered in the proposed Roll-up Transaction; or |
| (b) | one of the following: |
| (i) | remaining as stockholders of us and preserving their interests in us on the same terms and conditions as existed previously; or |
| (ii) | receiving cash in an amount equal to the stockholders’ pro rata share of the appraised value of our net assets. |
We are prohibited from participating in any proposed Roll-up Transaction:
| • | that would result in our holders of Common Shares having voting rights in a Roll-up Entity that are less than those provided in our charter and bylaws, including rights with respect to the election and removal of directors, annual reports, annual and special meetings of stockholders, the amendment of our charter and our dissolution; |
| • | that includes provisions that would operate to materially impede or frustrate the accumulation of shares by any purchaser of the securities of the Roll-up Entity, except to the minimum extent necessary to preserve the tax status of the Roll-up Entity, or that would limit the ability of an investor to exercise the voting rights of its securities of the Roll-up Entity on the basis of the number of shares held by that investor; |
| • | in which investors’ rights of access to the records of the Roll-up Entity would be less than those provided in our charter; or |
| • | in which any of the costs of the Roll-up Transaction would be borne by us if the Roll-up Transaction is rejected by holders of our Common Shares. |
Exhibit 21.1
Subsidiaries of Registrant
| Property Name | State Organization | |
| Lightstone Value Plus REIT III, LP | Delaware | |
| LVP CY Durham LLC | Delaware | |
| LVP CY Durham Holdings LLC | Delaware | |
| LVP CY Durham Holding Corp | Delaware | |
| LVP HMI Des Moines LLC | Delaware | |
| LVP HMI Des Moines Holdings LLC | Delaware | |
| LVP HMI Des Moines Holding Corp | Delaware | |
| LVP HMI Lansing LLC | Delaware | |
| LVP HMI Lansing Holdings LLC | Delaware | |
| LVP HMI Lansing Holding Corp | Delaware | |
| LVP CY Warwick LLC | Delaware | |
| LVP CY Warwick Holdings LLC | Delaware | |
| LVP CY Warwick Holding Corp | Delaware | |
| LVP H2S Salt Lake City LLC | Delaware | |
| LVP H2S Salt Lake City Holdings LLC | Delaware | |
| LVP H2S Salt Lake City Holding Corp | Delaware | |
| LVP H2S Seattle LLC | Delaware | |
| LVP H2S Seattle Holdings LLC | Delaware | |
| LVP H2S Seattle Holding Corp | Delaware | |
| LVP FFI Austin LLC | Delaware | |
| LVP FFI Austin Holdings LLC | Delaware | |
| LVP FFI Austin Holding Corp | Delaware | |
| LVP SBS Austin LLC | Delaware | |
| LVP SBS Austin Holdings LLC | Delaware | |
| LVP SBS Austin Holding Corp | Delaware | |
| REIT III COVE LLC | Delaware | |
| LVP LIC Hotel JV LLC | Delaware |
EXHIBIT 31.1
Certifications
I, David Lichtenstein, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Lightstone Value Plus Real Estate Investment Trust III, 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: March 20, 2020
EXHIBIT 31.2
Certifications
I, Seth Molod, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Lightstone Value Plus Real Estate Investment Trust III, 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/ Seth Molod
Seth Molod
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
Date: March 20, 2020
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 III, Inc. (the “Company”) certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) The Annual Report on Form 10-K of the Company for the year ended December 31, 2019 (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: March 20, 2020
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, Seth Molod, the Chief Financial Officer, Treasurer and Principal Accounting Officer of Lightstone Value Plus Real Estate Investment Trust III, Inc. (the “Company”) certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) The Annual Report on Form 10-K of the Company for the year ended December 31, 2019 (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/ Seth Molod
Seth Molod
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
Date: March 20, 2020