UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-55619
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 of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
| 1985 Cedar Bridge Avenue, Suite 1 | ||
| Lakewood, New Jersey | 08701 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(732) 367-0129
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer ¨ |
| Non-accelerated filer 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
As of May 15, 2020, there were approximately 13.2 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust III, Inc., including shares issued pursuant to the dividend reinvestment plan.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
INDEX
2
PART I. FINANCIAL INFORMATION:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
| March 31, 2020 | December 31, 2019 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Investment property: | ||||||||
| Land and improvements | $ | 21,657,998 | $ | 21,656,730 | ||||
| Building and improvements | 91,607,683 | 91,585,498 | ||||||
| Furniture and fixtures | 16,124,890 | 15,946,892 | ||||||
| Construction in progress | 5,650 | 160,000 | ||||||
| Gross investment property | 129,396,221 | 129,349,120 | ||||||
| Less accumulated depreciation | (18,807,407 | ) | (17,551,394 | ) | ||||
| Net investment property | 110,588,814 | 111,797,726 | ||||||
| Investments in unconsolidated affiliated real estate entities | 11,279,988 | 25,929,408 | ||||||
| Cash and cash equivalents | 25,759,893 | 6,102,573 | ||||||
| Marketable securities, available for sale | 2,746,467 | 3,228,759 | ||||||
| Restricted cash | 7,697,310 | 7,440,620 | ||||||
| Accounts receivable and other assets | 1,753,126 | 1,585,759 | ||||||
| Total Assets | $ | 159,825,598 | $ | 156,084,845 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Accounts payable and other accrued expenses | $ | 2,577,096 | $ | 2,826,937 | ||||
| Mortgages payable, net | 65,565,421 | 65,641,277 | ||||||
| Due to related parties | 379,259 | 451,337 | ||||||
| Total liabilities | 68,521,776 | 68,919,551 | ||||||
| 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, 13.2 million and 13.3 million shares issued and outstanding, respectively | 132,298 | 133,102 | ||||||
| Additional paid-in-capital | 113,205,240 | 114,002,133 | ||||||
| Accumulated other comprehensive loss | (583,555 | ) | (78,676 | ) | ||||
| Accumulated deficit | (33,542,347 | ) | (38,983,377 | ) | ||||
| Total Company stockholders' equity | 79,211,636 | 75,073,182 | ||||||
| Noncontrolling interests | 12,092,186 | 12,092,112 | ||||||
| Total Stockholders' Equity | 91,303,822 | 87,165,294 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 159,825,598 | $ | 156,084,845 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Revenues | $ | 5,276,400 | $ | 7,171,663 | ||||
| Expenses: | ||||||||
| Property operating expenses | 4,009,180 | 4,876,679 | ||||||
| Real estate taxes | 376,117 | 406,308 | ||||||
| General and administrative costs | 698,698 | 753,181 | ||||||
| Depreciation and amortization | 1,272,082 | 1,429,794 | ||||||
| Total operating expenses | 6,356,077 | 7,465,962 | ||||||
| Operating loss | (1,079,677 | ) | (294,299 | ) | ||||
| Interest expense | (839,827 | ) | (1,183,261 | ) | ||||
| Loss from investments in unconsolidated affiliated real estate entities | (612,813 | ) | (1,088,750 | ) | ||||
| Gain on disposition of investment in unconsolidated affiliated real estate entity | 7,876,639 | - | ||||||
| Other income, net | 96,790 | 23,305 | ||||||
| Net income/(loss) | 5,441,112 | (2,543,005 | ) | |||||
| Less: net (income)/loss attributable to noncontrolling interests | (82 | ) | 35 | |||||
| Net income/(loss) applicable to Company's common shares | $ | 5,441,030 | $ | (2,542,970 | ) | |||
| Net income/(loss) per Company's common shares, basic and diluted | $ | 0.41 | $ | (0.19 | ) | |||
| Weighted average number of common shares outstanding, basic and diluted | 13,244,817 | 13,396,734 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Net income/(loss) | $ | 5,441,112 | $ | (2,543,005 | ) | |||
| Other comprehensive (loss)/income: | ||||||||
| Holding (loss)/gain on marketable securities, available for sale | (504,887 | ) | 231,480 | |||||
| Reclassification adjustment for loss included in net income | - | 38,359 | ||||||
| Other comprehensive (loss)/income | (504,887 | ) | 269,839 | |||||
| Comprehensive income/(loss) | 4,936,225 | (2,273,166 | ) | |||||
| Less: Comprehensive (income)/loss attributable to noncontrolling interests | (74 | ) | 32 | |||||
| Comprehensive income/(loss) attributable to the Company's common shares | $ | 4,936,151 | $ | (2,273,134 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
5
PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 1. FINANCIAL STATEMENTS, CONTINUED.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| Common Shares | ||||||||||||||||||||||||||||
Common Shares | Amount | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Noncontrolling Interests | Total Equity | ||||||||||||||||||||||
| 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 | - | - | - | - | (2,542,970 | ) | (35 | ) | (2,543,005 | ) | ||||||||||||||||||
| Other comprehensive income | - | - | - | 269,836 | - | 3 | 269,839 | |||||||||||||||||||||
| Distributions declared (a) | - | - | - | - | (1,980,093 | ) | - | (1,980,093 | ) | |||||||||||||||||||
| Distributions paid to noncontrolling interests | - | - | - | - | - | (29 | ) | (29 | ) | |||||||||||||||||||
| Redemption and cancellation of shares | (67,434 | ) | (674 | ) | (655,686 | ) | - | - | - | (656,360 | ) | |||||||||||||||||
| BALANCE, March 31, 2019 | 13,383,997 | $ | 133,841 | $ | 114,724,495 | $ | (180,449 | ) | $ | (35,460,942 | ) | $ | 12,092,163 | $ | 91,309,108 | |||||||||||||
(a) Distributions per share were $0.15.
| Common Shares | ||||||||||||||||||||||||||||
Common Shares | Amount | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Noncontrolling Interests | Total Equity | ||||||||||||||||||||||
| BALANCE, December 31, 2019 | 13,310,227 | $ | 133,102 | $ | 114,002,133 | $ | (78,676 | ) | $ | (38,983,377 | ) | $ | 12,092,112 | $ | 87,165,294 | |||||||||||||
| Net income | - | - | - | - | 5,441,030 | 82 | 5,441,112 | |||||||||||||||||||||
| Other comprehensive loss | - | - | - | (504,879 | ) | - | (8 | ) | (504,887 | ) | ||||||||||||||||||
| Redemption and cancellation of shares | (80,436 | ) | (804 | ) | (796,893 | ) | - | - | - | (797,697 | ) | |||||||||||||||||
| BALANCE, March 31, 2020 | 13,229,791 | $ | 132,298 | $ | 113,205,240 | $ | (583,555 | ) | $ | (33,542,347 | ) | $ | 12,092,186 | $ | 91,303,822 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income/(loss) | $ | 5,441,112 | $ | (2,543,005 | ) | |||
| Adjustments to reconcile net income/(loss) to net cash | ||||||||
| used in operating activities: | ||||||||
| Loss from investments in unconsolidated affiliated real estate entities | 612,813 | 1,088,750 | ||||||
| Depreciation and amortization | 1,272,082 | 1,429,794 | ||||||
| Amortization of deferred financing costs | 45,232 | 103,069 | ||||||
| Gain on disposition of investment in unconsolidated affiliated entity | (7,876,639 | ) | - | |||||
| Other non-cash adjustments | 19,529 | 38,494 | ||||||
| Changes in assets and liabilities: | ||||||||
| Increase in accounts receivable and other assets | (196,874 | ) | (456,166 | ) | ||||
| (Decrease)/increase in accounts payable and other accrued expenses | (157,311 | ) | 131,369 | |||||
| (Decrease)/increase in due to related parties | (72,078 | ) | 150,955 | |||||
| Net cash used in operating activities | (912,134 | ) | (56,740 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of investment property | (139,630 | ) | (1,067,711 | ) | ||||
| Purchase of marketable securities | (28,686 | ) | (35,808 | ) | ||||
| Proceeds from sale of marketable securities | - | 1,018,865 | ||||||
| Investment in unconsolidated affiliated real estate entities | - | (193,921 | ) | |||||
| Distribution from unconsolidated affiliated real estate entity | 44,000 | - | ||||||
| Proceeds from disposition of unconsolidated affiliated real estate entity | 21,869,246 | - | ||||||
| Net cash provided by/(used in) investing activities | 21,744,930 | (278,575 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payments on mortgages payable | (121,089 | ) | (119,083 | ) | ||||
| Distributions to noncontrolling interests | - | (29 | ) | |||||
| Distributions to common stockholders | - | (1,983,510 | ) | |||||
| Redemption and cancellation of common shares | (797,697 | ) | (656,360 | ) | ||||
| Net cash used in financing activities | (918,786 | ) | (2,758,982 | ) | ||||
| Net change in cash, cash equivalents and restricted cash | 19,914,010 | (3,094,297 | ) | |||||
| Cash, cash equivalents and restricted cash, beginning of year | 13,543,193 | 11,638,681 | ||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 33,457,203 | $ | 8,544,384 | ||||
| Supplemental cash flow information for the periods indicated is as follows: | ||||||||
| Cash paid for interest | $ | 803,508 | $ | 1,100,539 | ||||
| Distributions declared, but not paid | $ | - | $ | 682,032 | ||||
| Investment property acquired but not paid | $ | 5,650 | $ | 180,456 | ||||
| Holding loss/gain on marketable securities, available for sale | $ | 504,887 | $ | 269,839 | ||||
| The following is a summary of the Company’s cash, cash equivalents and restricted cash total as presented in our statements of cash flows for the periods presented: | ||||||||
| Cash and cash equivalents | $ | 25,759,893 | $ | 6,564,842 | ||||
| Restricted cash | 7,697,310 | 1,979,542 | ||||||
| Total cash, cash equivalents and restricted cash | $ | 33,457,203 | $ | 8,544,384 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
7
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
| 1. | Business and Organization |
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 March 31, 2020, 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 March 31, 2020, the Company majority owned and consolidated the operating results and financial condition of eight limited service hotels containing a total of 872 rooms and 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 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.
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.
8
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 |
The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of the Company and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. The accompanying unaudited consolidated financial statements of the Lightstone Value Plus Real Estate Investment Trust III, Inc. and its Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.
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.
The consolidated balance sheet as of December 31, 2019 included herein has been derived from the consolidated balance sheet included in the Company's Annual Report on Form 10-K.
The unaudited consolidated statements of operations for interim periods are not necessarily indicative of results for the full year or any other period.
To qualify or maintain our qualification as a REIT, we engage in certain activities through wholly-owned taxable REIT subsidiaries (“TRS”). As such, we are subject to U.S. federal and state income and franchise taxes from these activities.
9
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Revenue
The following table represents the total revenues from hotel operations on a disaggregated basis:
| For the Three Months Ended March 31, | ||||||||
| Revenues | 2020 | 2019 | ||||||
| Room | $ | 5,046,817 | $ | 6,879,092 | ||||
| Food, beverage and other | 229,583 | 292,571 | ||||||
| Total revenues | $ | 5,276,400 | $ | 7,171,663 | ||||
Restricted cash
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 the Company’s 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 March 31, 2020 and December 31, 2019, restricted cash also included approximately $5.2 million of the net proceeds from the October 2019 sale of the Company’s SpringHill Suites by Marriott hotel, located in Green Bay, Wisconsin. These funds were temporarily placed in escrow with a qualified intermediary to potentially facilitate a like-kind exchange transaction in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended. However, the Company decided not to pursue a like-kind exchange transaction and the funds were subsequently released in May 2020.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Lightstone REIT III and the Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). As of March 31, 2020, Lightstone REIT III had an approximate 99% general partnership interest in the common units of the Operating Partnership. All inter-company accounts and transactions have been eliminated in consolidation.
COVID-19 Pandemic
The global impact of the COVID-19 pandemic has been rapidly evolving and, as cases of the illness caused by the virus have continued to be identified in additional countries, many countries, including the United States, have reacted by instituting quarantines and restrictions on travel. In addition, all the states where the Company operates properties have reacted to the COVID-19 pandemic by instituting quarantines, restrictions on travel, “shelter in place” rules and restrictions on types of business that may continue to operate. Many states have recently announced guidelines to reduce certain of these restrictions.
Commencing in March 2020, room demand for the Company’s consolidated and unconsolidated hotels has significantly declined due to the COVID-19 pandemic resulting in lower occupancy and rental revenues during the first quarter of 2020 compared to first quarter of 2019. These trends have continued into the second quarter of 2020 and if demand for the Company’s hotel rooms continues to be 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.
In light of the impact of the COVID-19 pandemic on the operating results of its hotels, the Company has taken certain actions to preserve its liquidity, including the following:
| · | The Company has implemented various cost reduction strategies for its hotels, including the deferral of all non-critical capital expenditures. However, there can be no assurance that these cost reductions will fully mitigate the adverse impact of any lost revenue and income. |
| · | The Company has been proactively working with its lenders to obtain or seek to obtain modification of key terms to its indebtedness, including interest rate reductions, forbearance of scheduled debt service and waivers of financial covenants. While the Company has historically been successful in obtaining modifications of key terms for certain of its indebtedness, discussions with lenders are ongoing and there can be no assurance the Company will be successful in its endeavors. See Note 5 for additional information. |
| · | On March 19, 2020, the Company’s board of directors approved the suspension of all redemptions under the Company’s shareholder redemption program. See Note 10 for additional information. |
| · | In May 2020, the Company had approximately $5.2 million of funds released to it from an escrow account. |
10
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
New Accounting Pronouncements
The Company has reviewed and determined that other recently issued accounting pronouncements will not have a material impact on its financial position, results of operations and cash flows, or do not apply to its current operations.
| 3. | Investments in Unconsolidated Affiliated Real Estate Entities |
The entities listed below are or were 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 % | March 31, 2020 | December 31, 2019 | ||||||||||
| RP Maximus Cove, L.L.C. (the "Cove Joint Venture") | January 31, 2017 | 22.50 | % | $ | - | $ | 14,150,280 | |||||||
| LVP LIC Hotel JV LLC (the "Hilton Garden Inn Joint Venture") | March 27, 2018 | 50.00 | % | 11,279,988 | 11,779,128 | |||||||||
| Total investments in unconsolidated affiliated real estate entities | $ | 11,279,988 | $ | 25,929,408 | ||||||||||
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.
Subsequent to the Company’s acquisition of its 22.5% membership interest in the Cove Joint Venture, it made an aggregate of $2.6 million of additional capital contributions and received aggregate distributions of $0.9 million. All of these additional capital contributions were made and distributions received in periods prior to 2020.
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 which resulted in a gain on the disposition of investment in unconsolidated affiliated real estate entity of approximately $7.9 million, which is included on the consolidated statements of operations for the three months ended March 31, 2020. As a result of the redemption of its 22.5% membership interest in the Cove Joint Venture, the Company no longer has an ownership interest in the Cove Joint Venture.
11
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 because the Company’s basis of its investment was in excess of the historical net book value of the Cove Joint Venture. The Company’s additional basis was allocated to depreciable assets was recognized on a straight-line basis over the lives of the appropriate assets.
The following table represents the unaudited condensed income statements for the Cove Joint Venture:
| (amounts in thousands) | For the Period January 1 through February 12, 2020 | For the Three Months Ended March 31, 2019 | ||||||
| Revenue | $ | 1,375 | $ | 3,693 | ||||
| Property operating expenses | 430 | 1,240 | ||||||
| General and administrative costs | 13 | 42 | ||||||
| Depreciation and amortization | 960 | 2,837 | ||||||
| Operating loss | (28 | ) | (426 | ) | ||||
| Interest expense and other, net | (652 | ) | (2,934 | ) | ||||
| Net loss | $ | (680 | ) | $ | (3,360 | ) | ||
| Company's share of net loss (22.50%) | $ | (153 | ) | $ | (756 | ) | ||
| Additional depreciation and amortization expense (1) | (5 | ) | (10 | ) | ||||
| Company's loss from investment | $ | (158 | ) | $ | (766 | ) | ||
The following table represents the unaudited condensed balance sheet for the Cove Joint Venture:
| As of | ||||
| (amounts in thousands) | December 31, 2019 | |||
| Real estate, at cost (net) | $ | 138,045 | ||
| Cash and restricted cash | 1,491 | |||
| Other assets | 1,141 | |||
| Total assets | $ | 140,677 | ||
| Mortgage payable, net | $ | 178,353 | ||
| Other liabilities | 1,339 | |||
| Members' deficit (1) | (39,015 | ) | ||
| Total liabilities and members' deficit | $ | 140,677 | ||
| 1) | The adjustment to depreciation and amortization expense relates 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. |
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 mortgage 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.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 March 31, 2020, it has made an aggregate of $0.7 million of additional capital contributions and received aggregate distributions of $1.5 million (of which $44,000 was received in 2020).
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 Three Months Ended March 31, 2020 | For the Three Months Ended March 31, 2019 | ||||||
| Revenues | $ | 1,540 | $ | 2,008 | ||||
| Property operating expenses | 1,344 | 1,505 | ||||||
| General and administrative costs | 18 | - | ||||||
| Depreciation and amortization | 630 | 642 | ||||||
| Operating loss | (452 | ) | (139 | ) | ||||
| Interest expense | (457 | ) | (506 | ) | ||||
| Net loss | $ | (909 | ) | $ | (645 | ) | ||
| Company's share of net loss (50.00%) | $ | (455 | ) | $ | (323 | ) | ||
The following table represents the condensed balance sheet for the Hilton Garden Inn Joint Venture:
| As of | As of | |||||||
| March 31, 2020 | December 31, 2019 | |||||||
| (amounts in thousands) | ||||||||
| Investment property, net | $ | 56,558 | $ | 56,775 | ||||
| Cash | 507 | 904 | ||||||
| Other assets | 753 | 894 | ||||||
| Total assets | $ | 57,818 | $ | 58,573 | ||||
| Mortgage payable, net | $ | 34,835 | $ | 34,821 | ||||
| Other liabilities | 1,023 | 794 | ||||||
| Members' capital | 21,960 | 22,958 | ||||||
| Total liabilities and members' capital | $ | 57,818 | $ | 58,573 | ||||
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
| 4. | Marketable Securities and Fair Value Measurements |
Marketable Securities
The following is a summary of the Company’s available for sale securities as of the dates indicated:
| As of March 31, 2020 | ||||||||||||||||
| Adjusted Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| Marketable Securities: | ||||||||||||||||
| Equity securities: | ||||||||||||||||
| Mutual funds | $ | 416,216 | $ | - | $ | (6,092 | ) | $ | 410,124 | |||||||
| Debt securities: | ||||||||||||||||
| Corporate Bonds | 2,919,095 | - | (582,752 | ) | 2,336,343 | |||||||||||
| Total | $ | 3,335,311 | $ | - | $ | (588,844 | ) | $ | 2,746,467 | |||||||
| 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 | |||||||
Financial markets have experienced significant volatility in response to the current COVID-19 pandemic, including significant reductions in market interest rates and market prices of certain debt securities during the three months ended March 31, 2020. During the three months ended March 31, 2020, the Company’s experienced a holding loss of approximately $0.6 million on its available for sale marketable debt securities, which is included in its consolidated statements of comprehensive income.
The Company considers the declines in market value of its investments in debt securities to be temporary in nature as the unrealized losses were caused primarily by financial market volatility associated with the current COVID-19 pandemic resulting in significant reductions in market interest rates and market prices of certain debt securities. When evaluating its investments in debt securities for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the debt security before recovery of its amortized cost basis. During the three months ended March 31, 2020 and 2019, the Company did not recognize any impairment charges on its investments in debt securities. As of March 31, 2020, the Company does not consider any of its investments in debt securities to be other-than-temporarily impaired.
The Company may sell certain of its investments in marketable debt securities prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
14
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 March 31, 2020 and 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 during the three months ended March 31, 2020.
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 marketable debt securities with stated contractual maturity dates, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities:
| As of March 31, 2020 | ||||
| Due in 1 year | $ | - | ||
| Due in 1 year through 5 years | 2,036,343 | |||
| Due in 5 year through 10 years | - | |||
| Due after 10 years | 300,000 | |||
| Total | $ | 2,336,343 | ||
The Company did not have any other significant financial assets or liabilities, which would require revised valuations that are recognized at fair value.
| 5. | Mortgages payable, net |
Mortgages payable, net consists of the following:
| Weighted Average Interest Rate | As of | |||||||||||||||||||
| Description | Interest Rate | as
of March 31, 2020 | Maturity Date | Amount
Due at Maturity | As
of March 31, 2020 | December 31, 2019 | ||||||||||||||
| Revolving Credit Facility | LIBOR + 3.50% | 4.80 | % | July 2022 | $ | 38,988,014 | $ | 38,988,014 | $ | 38,988,014 | ||||||||||
| Promissory Note, secured by two properties | 4.73% | 4.73 | % | October 2021 | 26,127,572 | 26,874,616 | 26,995,705 | |||||||||||||
| Total mortgages payable | 4.77 | % | $ | 65,115,586 | 65,862,630 | 65,983,719 | ||||||||||||||
| Less: Deferred financing costs | (297,209 | ) | (342,442 | ) | ||||||||||||||||
| Total mortgage payable, net | $ | 65,565,421 | $ | 65,641,277 | ||||||||||||||||
Revolving Credit Facility
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.
15
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 was required to make principal paydowns of approximately $0.6 million on both August 22, 2019 and December 31, 2019, respectively, and in certain circumstances would be required to make an additional principal paydown of approximately $0.6 million on April 1, 2020.
As of March 31, 2020, six of the Company’s hotel properties were pledged as collateral under the Revolving Credit Facility.
Because of the impact of the COVID-19 pandemic on the operating performance of the six hotels pledged as collateral under the Revolving Credit Facility, the Company and the lender have agreed to certain changes to terms of the Revolving Credit Facility. The key changes are as follows:
| · | The Company will receive a deferral of monthly debt service for the payments due on April 1, 2020 through September 1, 2020, with the deferred payments added to the principal balance due at maturity; |
| · | Subject to certain conditions, including maintenance of a minimum aggregate of $25.0 million of deposits with the lender by the Company, The Lightstone Group, LLC and/or other affiliated entities, the interest rate spread will be reduced by 100 bps to Libor plus 2.15% for the six-month period beginning September 1, 2020 through February 28, 2021; |
| · | The Company will deposit $0.9 million into a cash collateral account to be applied against the monthly debt service payments due on October 1, 2020 through March 1, 2021; and |
| · | The additional principal paydown of approximately $0.6 million, which was due on April 1, 2020, will be bifurcated into two separate principal paydowns, each one approximately $0.3 million, with the first paydown due by June 30, 2020 and the second paydown due by September 30, 2020; |
| · | Waiver of all financial covenants until June 30, 2021. |
Home2 Suites Promissory Note
On October 5, 2016, the Company entered into a non-recourse promissory note (the “Home2 Suites 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 Home2 Suites Promissory Note is cross-collateralized by two of the Company’s hotel properties (Home2 Suites – Tukwila and Home2 Suites – Salt Lake City).
Despite the impact of the COVID-19 pandemic on the operating performance of the two hotels cross-collateralizing the Home2 Suites Promissory Note, the Company has continued to make scheduled monthly debt service payments. However, the Company is currently engaged in discussions with the servicer of the Home2 Suites Promissory Note and is seeking forbearance of certain future scheduled monthly debt service. There can be no assurance that the Company will be successful in its endeavors.
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 March 31, 2020:
| 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | ||||||||||||||||||||||
| Principal maturities | $ | 938,203 | $ | 26,509,613 | $ | 38,414,814 | $ | - | $ | - | $ | - | $ | 65,862,630 | ||||||||||||||
| Less: Deferred financing costs | (297,209 | ) | ||||||||||||||||||||||||||
| Total principal maturiteis, net | $ | 65,565,421 | ||||||||||||||||||||||||||
Pursuant to the Company’s debt agreements, approximately $2.5 million and $2.3 million of funds were held in restricted escrow accounts as of March 31, 2020 and December 31, 2019, 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 contain clauses providing for prepayment penalties.
16
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
| 6. | Earnings per Share |
The Company had no potentially dilutive securities outstanding during the periods presented. Accordingly, basic and diluted earnings per share is calculated by dividing earnings attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the applicable period.
| 7. | Related Party Transactions |
Due to related parties and other transactions
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.
The following table represents the fees incurred associated with the payments to the Company’s Advisor for the periods indicated:
| For the Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Asset management fees (general and administrative costs) | $ | 355,818 | $ | 453,569 | ||||
| 8. | Financial Instruments |
The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable and other assets, accounts payable and other accrued expenses and due to/from related parties approximated their fair values because of the short maturity of these instruments.
The estimated fair value of our mortgages payable is as follows:
| As of March 31, 2020 | As of December 31, 2019 | |||||||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
| Mortgages payable | $ | 65,862,630 | $ | 66,574,623 | $ | 65,983,719 | $ | 65,974,411 | ||||||||
The fair value of our mortgages payable was determined by discounting the future contractual interest and principal payments by market interest rates.
| 9. | Commitments and Contingencies |
Legal Proceedings
From time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes. As of the date hereof, we are not a party to any material pending legal proceedings.
10. Share Repurchase Program
The Company’s share repurchase program may provide its stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to the Company, subject to certain restrictions. From the Company’s date of inception through December 31, 2019 we repurchased 397,370 shares of common stock, pursuant to our share repurchase program. We repurchased the shares at an average price per share of $9.72 per share. For the three months ended March 31, 2020, 80,436 shares of common stock were repurchased under our share repurchase program at an average price per share of $9.92 per share.
On March 19, 2020, the Board of Directors amended the share repurchase program to remove stockholder notice requirements and also approved the suspension of all redemptions effective immediately.
17
PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Lightstone Value Plus Real Estate Investment Trust III, Inc. and Subsidiaries and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Lightstone Value Plus Real Estate Investment Trust III, Inc., a Maryland corporation, and, as required by context, Lightstone Value Plus REIT III, L.P., which we collectively refer to as the “Operating Partnership”.
Forward-Looking Statements
Certain information included in this Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by us with the United States Securities and Exchange Commission (the “SEC”), contain or will contain, forward-looking statements. All statements, other than statements of historical facts, including, among others, statements regarding our possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives, are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of Lightstone Value Plus Real Estate Investment Trust III, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that actual results may differ materially from those contemplated by such forward-looking statements.
Such statements are based on assumptions and expectations which may not be realized and are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, may differ from the results discussed in the forward-looking statements.
Risks and other factors that might cause differences, some of which could be material, include, but are not limited to, economic and market conditions, competition, tenant or joint venture partner(s) bankruptcies, our lack of operating history, the availability of cash flows from operations to pay distributions, changes in governmental, tax, real estate and zoning laws and regulations, failure to increase tenant occupancy and operating income, rejection of leases by tenants in bankruptcy, financing and development risks, construction and lease-up delays, cost overruns, the level and volatility of interest rates, the rate of revenue increases versus expense increases, the financial stability of various tenants and industries, the failure of the Company to make additional investments in real estate properties, the failure to upgrade our tenant mix, restrictions in current financing arrangements, the failure to fully recover tenant obligations for common area maintenance, insurance, taxes and other property expenses, the failure of the Company to continue to qualify as a real estate investment trust (“REIT”), the failure to refinance debt at favorable terms and conditions, an increase in impairment charges, loss of key personnel, failure to achieve earnings/funds from operations targets or estimates, conflicts of interest with the Advisor and the Sponsor and their affiliates, failure of joint venture relationships, significant costs related to environmental issues and uncertainties regarding the impact of the current COVID-19 pandemic, and restrictions intended to prevent its spread on our business and the economy generally, as well as other risks listed from time to time in this Form 10-Q, our Form 10-K and in the Company’s other reports filed with the SEC.
We believe these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are qualified in their entirety by these cautionary statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time unless required by law.
Overview
Lightstone Value Plus Real Estate Investment Trust 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 March 31, 2020, Lightstone REIT III held an approximately 99% general partnership interest in the Operating Partnership’s common units.
18
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 March 31, 2020, we majority owned and consolidated the operating results and financial condition of eight limited service hotels containing a total of 872 rooms and held 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 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.
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.
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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.
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.
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.
COVID-19 Pandemic
The global impact of the COVID-19 pandemic has been rapidly evolving and, as cases of the illness caused by the virus have continued to be identified in additional countries, many countries, including the United States, have reacted by instituting quarantines and restrictions on travel. In addition, all the states where we operate properties and have development projects have reacted to the COVID-19 pandemic by instituting quarantines, restrictions on travel, “shelter in place” rules and restrictions on types of business that may continue to operate. Many states have recently announced guidelines to reduce certain of these restrictions.
Commencing in March 2020, room demand for our consolidated and unconsolidated hotels has significantly declined due to the COVID-19 pandemic resulting in lower occupancy and rental revenues during the first quarter of 2020 compared to first quarter of 2019. These trends have continued into the second quarter of 2020 and if demand for our hotel rooms continues to be 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.
In light of the impact of the COVID-19 pandemic on the operating results of our hotels, we have taken certain actions to preserve our liquidity, including the following:
| · | We have implemented various cost reduction strategies for our hotels, including the deferral of all non-critical capital expenditures. However, there can be no assurance that these cost reductions will fully mitigate the adverse impact of any lost revenue and income. |
| · | We have been proactively working with our lenders to obtain or seek to obtain modification of key terms to our indebtedness, including interest rate reductions, forbearance of scheduled debt service and waivers of financial covenants. While we have historically been successful in obtaining modifications of key terms for certain of our indebtedness, discussions with lenders are ongoing and there can be no assurance we will be successful in our endeavors. See Note 5 of the Notes to Consolidated Financial Statements for additional information. |
| · | On March 19, 2020, our board of directors approved the suspension of all redemptions under our shareholder redemption program. See Note 10 of the Notes to Consolidated Financial Statements for additional information. |
| · | In May 2020, we had approximately $5.2 million of funds released to us from an escrow account. See Note 2 of the Notes to Consolidated Financial Statements for additional information. |
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The COVID-19 pandemic 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-Q.
Portfolio Summary –
| Date | Year to Date Available | Percentage Occupied for the Three Months Ended | Revenue per Available Room for the Three Months | Average Daily Rate For the Three Months Ended | ||||||||||||||||||
| Location | Year Built | Acquired | Rooms | March 31, 2020 | Ended March 31, 2020 | March 31, 2020 | ||||||||||||||||
| Wholly-Owned and Consolidated Hospitality Properties: | ||||||||||||||||||||||
| Hampton Inn – Des Moines | Des Moines, Iowa | 1987 | 2/4/2015 | 10,920 | 58.9 | % | $ | 58.66 | $ | 99.67 | ||||||||||||
| Courtyard - Durham | Durham, North Carolina | 1996 | 5/15/2015 | 13,286 | 67.6 | % | 65.17 | 96.44 | ||||||||||||||
| Hampton Inn – Lansing | Lansing, Michigan | 2013 | 3/10/2016 | 7,826 | 64.1 | % | 63.93 | 99.67 | ||||||||||||||
| Courtyard - Warwick | Warwick, Rhode Island | 2003 | 3/23/2016 | 8,372 | 50.0 | % | 56.47 | 113.03 | ||||||||||||||
| Home2 Suites – Salt Lake | Salt Lake City, Utah | 2013 | 8/2/2016 | 11,375 | 54.8 | % | 56.79 | 103.63 | ||||||||||||||
| Home2 Suites – Tukwila | Tukwila, Washington | 2015 | 8/2/2016 | 12,649 | 66.0 | % | 84.36 | 127.88 | ||||||||||||||
| Fairfield Inn – Austin (1) | Austin, Texas | 2014 | 9/13/2016 | 7,644 | 54.9 | % | 53.08 | 96.75 | ||||||||||||||
| Staybridge Suites – Austin (1) | Austin, Texas | 2009 | 10/7/2016 | 7,360 | 61.5 | % | 60.94 | 99.14 | ||||||||||||||
| Total | 79,432 | 60.3 | % | $ | 63.54 | $ | 105.35 | |||||||||||||||
Unconsolidated Affiliated Real Estate Entity:
| Hospitality | Date | Year to Date Available | Percentage Occupied for the Three Months Ended | Revenue per Available Room for the Three Months | Average Daily Rate For the Three Months Ended | |||||||||||||||||
| Location | Year Built | Acquired | Rooms | March 31, 2020 | Ended March 31, 2020 | March 31, 2020 | ||||||||||||||||
| Hilton Garden Inn - Long Island City | Long Island City, New York | 2014 | 3/27/2018 | 16,653 | 71.3 | % | $ | 84.83 | $ | 119.01 | ||||||||||||
Critical Accounting Policies and Estimates
There were no material changes during the three months ended March 31, 2020 to our critical accounting policies as reported in our Annual Report on Form 10-K, for the year ended December 31, 2019.
Results of Operations
Disposition of an unconsolidated 22.5% membership interest in the Cove Joint Venture
On February 12, 2020, we completed the disposition of an unconsolidated 22.5% membership interest in the Cove Joint Venture which resulted in the recognition of a gain on the disposition of unconsolidated affiliated real estate entity of $7.9 million during the first quarter of 2020.
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 during the third quarter of 2019.
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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.
We currently have one operating segment. As of March 31, 2020, we majority owned and consolidated the operating results and financial condition of 8 limited service hotels containing a total of 872 rooms and an unconsolidated 50.0% membership interest in the Hilton Garden Inn Joint Venture, which we account for under the equity method of accounting.
Comparison of the three months ended March 31, 2020 vs. March 31, 2019
Consolidated
Our consolidated revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation and amortization for the three months ended March 31, 2020 and 2019 are attributable to our consolidated hospitality properties, including the SpringHill Suites – Green Bay through its date of disposition. Hospitality properties which were owned by us during the entire periods presented are referred to as our “Same Store Hotels”. Overall, our hospitality portfolio experienced decreases in the percentage of rooms occupied from 67.5% to 60.3% for the first quarters of 2019 and 2020, respectively, revenue per available room (“RevPAR”) from $76.51 to $63.54 for the first quarters of 2019 and 2020, respectively, and the average daily rate per room (“ADR”) from $113.30 to $105.35 for the first quarters of 2019 and 2020, respectively.
Revenues
Revenues decreased by $1.9 million to $5.3 million during the three months ended March 31, 2020 compared to $7.2 million for the same period in 2019. Excluding the effect of the disposition of the SpringHill Suites – Green Bay, revenues for our Same Store Hotels decreased by $1.2 million. This decrease reflects lower occupancy, RevPAR and ADR during the 2020 quarterly period compared to the same period in 2019, all of which were primarily attributable to reduced room demand during the 2020 period resulting from the COVID-19 pandemic, as evidenced by a $1.3 million decline in March 2020 monthly revenues compared to March 2019 monthly revenues.
Property operating expenses
Property operating expenses decreased by $0.9 million to $4.0 million three months ended March 31, 2020 compared to $4.9 million for the same period in 2019. Excluding the effect of the disposition of the SpringHill Suites – Green Bay, property operating expenses for our Same Store Hotels decreased by $0.4 million. This decrease reflects the lower occupancy during the 2020 period resulting from the COVID-19 pandemic.
Real estate taxes
Real estate taxes were relatively unchanged at approximately $0.4 million during both the three months ended March 31, 2020 and 2019.
General and administrative expense
General and administrative expenses decreased slightly by less than $0.1 million to $0.7 million three months ended March 31, 2020 compared to $0.8 million for the same period in 2019.
Depreciation and amortization
Depreciation and amortization expense decreased slightly by $0.1 million to $1.3 million during the three months ended March 31, 2020 compared to $1.4 million for the same period in 2019.
Interest expense
Interest expense decreased by $0.4 million to $0.8 million during the three months ended March 31, 2020 compared to $1.2 million for the same period in 2019. 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.
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Gain on disposition of unconsolidated affiliated real estate entity
On February 12, 2020, we completed the disposition of an unconsolidated 22.5% membership interest in the Cove Joint Venture which resulted in the recognition of a gain on the disposition of unconsolidated affiliated real estate entity of $7.9 million during the first quarter of 2020.
Earnings from investments in unconsolidated affiliated real estate entities
Our loss from investments in unconsolidated affiliated real estate entities was $0.6 million during the three months ended March 31, 2020 compared to $1.1 million for the same period in 2019. 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 and our unconsolidated 22.5% membership interest in the Cove Joint Venture (through the date of the redemption of our membership interest on February 12, 2020). 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.
Financial Condition, Liquidity and Capital Resources
Overview:
Revenues, interest and dividend income, proceeds from the sale of marketable securities, distributions from unconsolidated affiliated investments and borrowings are our principal sources of funds to pay operating expenses, scheduled debt service, capital expenditures (excluding non-recurring capital expenditures) and distributions, if any, required to maintain our status as a REIT. Other than our available cash on hand, our primary sources of funds was approximately $21.9 million of proceeds generated from the disposition of our membership interest in the Cove Joint Venture during the three months ended March 31, 2020.
We currently believe that these cash resources along with our available cash on hand of $25.8 million and marketable securities, available for sale, of $2.7 million, both as of March 31, 2020, as well as the subsequent release of $5.2 million of previously escrowed funds in May 2020, along with any proceeds generated from the selective disposition of certain assets 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 March 31, 2020, we have $65.9 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 March 31, 2020, our total borrowings were $65.9 million which represented 60% 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.
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.
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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 Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Asset management fees (general and administrative costs) | $ | 355,818 | $ | 453,569 | ||||
Summary of Cash Flows
The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below:
| For the Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Net cash used in operating activities | $ | (912,134 | ) | $ | (56,740 | ) | ||
| Net cash provided by/(used in) investing activities | 21,744,930 | (278,575 | ) | |||||
| Net cash used in financing activities | (918,786 | ) | (2,758,982 | ) | ||||
| Net change in cash, cash equivalents and restricted cash | 19,914,010 | (3,094,297 | ) | |||||
| Cash, cash equivalents and restricted cash, beginning of year | 13,543,193 | 11,638,681 | ||||||
| Cash, cash equivalents and restricted cash, end of the period | $ | 33,457,203 | $ | 8,544,384 | ||||
Our principal source of cash flow during the three months ended March 31, 2020 has been derived from the disposition of our membership interest in the Cove Joint Venture. We believe our cash available on hand and any 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, expected debt service, capital contributions 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.
Because of the impact of the COVID-19 pandemic on our operating performance, we have recently negotiated, or are in the process of negotiating certain amendments with respect to our outstanding indebtedness, including forbearance of scheduled debt service, reductions in interest rates and waivers of financial covenants. See “Contractual Obligations” for additional information.
Operating activities
The net cash used in operating activities of $0.9 million during the three months ended March 31, 2020 consisted of our net income of $5.4 million and depreciation and amortization, amortization of deferred financing costs and other non-cash items aggregating $1.9 million offset by a gain of $7.9 million on the disposition of our membership interest in the Cove Joint Venture and net changes in operating assets and liabilities of $0.4 million. The net use of cash in operating activities of $0.9 million during the three months ended March 31, 2020 was principally attributable to the effect of the COVID-19 pandemic on our operating performance as well as seasonality associated with our portfolio of hotels.
Investing activities
The net cash provided by investing activities of $21.7 million during the three months ended March 31, 2020 primarily consisted of proceeds received in connection with the redemption of our membership interest in the Cove Joint Venture of $21.9 million offset slightly by capital expenditures.
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Financing activities
The cash used in financing activities of $0.9 million during the three months ended March 31, 2020 consisted of the redemptions and cancellation of common stock of $0.8 million and $0.1 million in payments on our mortgages payable.
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 will be at the discretion of the Board of Directors based on their analysis of our performance over the previous periods and expectations of performance for future periods and may differ from the amount of the distribution determined for this period. The Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, current revenues, operating and interest expenses and our ability to refinance near-term debt. In addition, the Company currently intends to continue to comply with the REIT distribution requirement that it annually distribute no less than 90% of its taxable income. The Company cannot assure that regular distributions will continue to be made or that it will maintain any particular level of distributions that it has established or may establish.
Share Repurchase Program
Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to us, subject to certain restrictions. From our date of inception through December 31, 2019 we repurchased 397,370 shares of common stock, pursuant to our share repurchase program. We repurchased the shares at an average price per share of $9.72 per share. For the three months ended March 31, 2020, 80,436 shares of common stock were repurchased under our share repurchase program at an average price per share of $9.92 per share.
On March 19, 2020, the Board of Directors amended the share repurchase program to remove stockholder notice requirements and also approved the suspension of all redemptions effective immediately.
Contractual Obligations
The following is a summary of the estimated contractual obligations related to our mortgage payable over the next five years and thereafter as of March 31, 2020.
| Contractual Obligations | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | |||||||||||||||||||||
| Principal maturities | $ | 938,203 | $ | 26,509,613 | $ | 38,414,814 | $ | - | $ | - | $ | - | $ | 65,862,630 | ||||||||||||||
| Interest payments | 2,239,054 | 2,743,583 | 1,039,492 | - | - | - | 6,022,129 | |||||||||||||||||||||
| Total | $ | 3,177,257 | $ | 29,253,196 | $ | 39,454,306 | $ | - | $ | - | $ | - | $ | 71,884,759 | ||||||||||||||
Revolving Credit Facility
We, through certain subsidiaries, have a 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, we 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, we 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, we were required to make principal paydowns of approximately $0.6 million on both August 22, 2019 and December 31, 2019, respectively, and in certain circumstances would be required to make an additional principal paydown of approximately $0.6 million on April 1, 2020.
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As of March 31, 2020, the Revolving Credit Facility had an outstanding principal balance of approximately $40.0 million and six of our hotel properties were pledged as collateral.
Because of the impact of the COVID-19 pandemic on the operating performance of the six hotels pledged as collateral under the Revolving Credit Facility, we and the lender have agreed to certain changes to terms of the Revolving Credit Facility. The key changes are as follows:
| · | We will receive a deferral of monthly debt service for the payments due on April 1, 2020 through September 1, 2020, with the deferred payments added to the principal balance due at maturity; |
| · | Subject to certain conditions, including maintenance of a minimum aggregate of $25.0 million of deposits with the lender by us, The Lightstone Group, LLC and/or other affiliated entities, the interest rate spread will be reduced by 100 bps to Libor plus 2.15% for the six-month period beginning September 1, 2020 through February 28, 2021; |
| · | We will deposit $0.9 million into a cash collateral account to be applied against the monthly debt service payments due on October 1, 2020 through March 1, 2021; and |
| · | The additional principal paydown of approximately $0.6 million, which was due on April 1, 2020, will be bifurcated into two separate principal paydowns, each one approximately $0.3 million, with the first paydown due by June 30, 2020 and the second paydown due by September 30, 2020; |
| · | Waiver of all financial covenants until June 30, 2021. |
Home2 Suites Promissory Note
On October 5, 2016, we entered into a non-recourse promissory note (the “Home2 Suites 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 Home2 Suites Promissory Note is cross-collateralized by two of our hotel properties (Home2 Suites – Tukwila and Home2 Suites – Salt Lake City). As of March 31, 2020, the Home2 Suites Promissory Note had an outstanding balance of approximately $26.9 million.
Despite the impact of the COVID-19 pandemic on the operating performance of the two hotels cross-collateralizing the Home2 Suites Promissory Note, we have continued to make scheduled monthly debt service payments. However, we are currently engaged in discussions with the servicer of the Home2 Suites Promissory Note and are seeking forbearance of certain future scheduled monthly debt service. There can be no assurance that we will be successful in our endeavors.
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.
Because of these factors, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has published a standardized measure of performance known as funds from operations ("FFO"), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT's operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.
We calculate FFO, a non-GAAP measure, consistent with the standards established over time by the Board of Governors of NAREIT, as restated in a White Paper approved by the Board of Governors of NAREIT effective in December 2018 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Our FFO calculation complies with NAREIT's definition.
We believe that the use of FFO provides a more complete understanding of our performance to investors and to management, and reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.
Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT's definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.
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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.
27
The below table illustrates the items deducted in the calculation of FFO and MFFO. Items are presented net of non-controlling interest portions where applicable.
| For the Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Net income/(loss) | $ | 5,441,112 | $ | (2,543,005 | ) | |||
| FFO adjustments: | ||||||||
| Depreciation and amortization of real estate assets | 1,272,082 | 1,429,794 | ||||||
| Gain on disposition of unconsolidated affiliated real estate entity | (7,876,639 | ) | - | |||||
| Adjustments to equity earnings from unconsolidated affiliated real estate entities | 535,451 | 969,540 | ||||||
| FFO | (627,994 | ) | (143,671 | ) | ||||
| MFFO adjustments: | ||||||||
| Loss on sale of marketable securities (1) | - | 38,359 | ||||||
| MFFO | (627,994 | ) | (105,312 | ) | ||||
| Straight-line rent(2) | - | - | ||||||
| MFFO - IPA recommended format | $ | (627,994 | ) | $ | (105,312 | ) | ||
| Net income/(loss) | $ | 5,441,112 | $ | (2,543,005 | ) | |||
| Less: net loss attributable to noncontrolling interests | (82 | ) | 35 | |||||
| Net loss applicable to Company's common shares | $ | 5,441,030 | $ | (2,542,970 | ) | |||
| Net income/(loss) per common share, basic and diluted | $ | 0.41 | $ | (0.19 | ) | |||
| FFO | $ | (627,994 | ) | $ | (143,671 | ) | ||
| Less: FFO attributable to noncontrolling interests | 6 | (1 | ) | |||||
| FFO attributable to Company's common shares | $ | (627,988 | ) | $ | (143,672 | ) | ||
| FFO per common share, basic and diluted | $ | (0.05 | ) | $ | (0.01 | ) | ||
| MFFO - IPA recommended format | $ | (627,994 | ) | $ | (105,312 | ) | ||
| Less: MFFO attributable to noncontrolling interests | 6 | (2 | ) | |||||
| MFFO attributable to Company's common shares | $ | (627,988 | ) | $ | (105,314 | ) | ||
| Weighted average number of common shares | ||||||||
| outstanding, basic and diluted | 13,244,817 | 13,396,734 | ||||||
| (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 FFO attributable to the Company's common shares:
| For the period October 5, 2012 | ||||
| (date of inception) through | ||||
| March 31, 2020 | ||||
| FFO attributable to Company's common shares | $ | 15,288,417 | ||
| Distributions Paid | $ | 25,876,082 | ||
New Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been issued or adopted during 2020, if any, and certain accounting standards that we have not yet been required to implement and may be applicable to our future operations.
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, management, including our chief executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of the evaluation, our chief executive officer and principal financial officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.
28
There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There were no significant deficiencies or material weaknesses identified in the evaluation, and therefore, no corrective actions were taken.
From time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes.
As of the date hereof, the Company is not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
During the period covered by this Form 10-Q, the Company did not sell any unregistered securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
None.
*Filed herewith
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST III, INC. | ||
| Date: May 15, 2020 | By: | /s/ David Lichtenstein |
| David Lichtenstein | ||
|
Chairman and Chief Executive Officer (Principal Executive Officer) | ||
| Date: May 15, 2020 | By: | /s/ Seth Molod |
| Seth Molod | ||
|
Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) |
30
EXHIBIT 31.1
Certifications
I, David Lichtenstein, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Lightstone Value Plus Real Estate Investment Trust 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: May 15, 2020
EXHIBIT 31.2
Certifications
I, Seth Molod, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q 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: May 15, 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 Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2020 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C 78m); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ David Lichtenstein
David Lichtenstein
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 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 Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2020 (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: May 15, 2020
Mortgages payable, net (Tables) |
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| Mortgages payable, net | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of mortgages Payable, Net | Mortgages payable, net consists of the following:
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| Schedule of 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 March 31, 2020:
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Summary of Significant Accounting Policies - Summary of total revenues from hotel operations on a disaggregated basis (Details) - USD ($) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2020 |
Mar. 31, 2019 |
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| Total revenues | $ 5,276,400 | $ 7,171,663 |
| Room [Member] | ||
| Total revenues | 5,046,817 | 6,879,092 |
| Food, beverage and other [Member] | ||
| Total revenues | $ 229,583 | $ 292,571 |
Investments in Unconsolidated Affiliated Real Estate Entities |
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| Investments in Unconsolidated Affiliated Real Estate Entities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investments in Unconsolidated Affiliated Real Estate Entities | 3. Investments in Unconsolidated Affiliated Real Estate Entities
The entities listed below are or were 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:
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.
Subsequent to the Company’s acquisition of its 22.5% membership interest in the Cove Joint Venture, it made an aggregate of $2.6 million of additional capital contributions and received aggregate distributions of $0.9 million. All of these additional capital contributions were made and distributions received in periods prior to 2020.
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 which resulted in a gain on the disposition of investment in unconsolidated affiliated real estate entity of approximately $7.9 million, which is included on the consolidated statements of operations for the three months ended March 31, 2020. As a result of the redemption of its 22.5% membership interest in the Cove Joint Venture, the Company no longer has an ownership interest in the Cove Joint Venture.
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 because the Company’s basis of its investment was in excess of the historical net book value of the Cove Joint Venture. The Company’s additional basis was allocated to depreciable assets was recognized on a straight-line basis over the lives of the appropriate assets.
The following table represents the unaudited condensed income statements for the Cove Joint Venture:
The following table represents the unaudited condensed balance sheet for the Cove Joint Venture:
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 mortgage 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 March 31, 2020, it has made an aggregate of $0.7 million of additional capital contributions and received aggregate distributions of $1.5 million (of which $44,000 was received in 2020).
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:
The following table represents the condensed balance sheet for the Hilton Garden Inn Joint Venture:
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Parenthetical) |
3 Months Ended |
|---|---|
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Mar. 31, 2019
$ / shares
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| CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | |
| Annual distribution (in dollars per share) | $ 0.15 |
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares |
Mar. 31, 2020 |
Dec. 31, 2019 |
|---|---|---|
| CONSOLIDATED BALANCE SHEETS | ||
| Preferred Stock, par value per share | $ 0.01 | $ 0.01 |
| Preferred Stock, shares authorized | 50,000,000 | 50,000,000 |
| Preferred Stock, shares issued | 0 | 0 |
| Preferred Stock, shares outstanding | 0 | 0 |
| Common Stock, par value per share | $ 0.01 | $ 0.01 |
| Common Stock, shares authorized | 200,000,000 | 200,000,000 |
| Common Stock, shares issued | 13,200,000 | 13,300,000 |
| Common Stock, shares outstanding | 13,200,000 | 13,300,000 |
Related Party Transactions |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||
| Related Party Transactions | |||||||||||||||||||||||||||||||||||||||||||
| Related Party Transactions | 7. Related Party Transactions
Due to related parties and other transactions
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.
The following table represents the fees incurred associated with the payments to the Company’s Advisor for the periods indicated:
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