UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For The Fiscal Year Ended December 31, 2019
or
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission file number 333-117367
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Maryland | 20-1237795 |
| (State or other jurisdiction | (I.R.S. Employer Identification No.) |
| of incorporation or organization) |
| 1985 Cedar Bridge Avenue, Suite 1, Lakewood, NJ | 08701 |
| (Address of principal executive offices) | (Zip code) |
Registrant's telephone number, including area code: 732-367-0129
Securities registered under Section 12(b) of the Exchange Act:
| Title of Each Class | Name of Each Exchange on Which Registered |
| None | None |
Securities registered under Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer ¨ |
| Non-accelerated filer x | Smaller reporting company x |
Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There is no established market for the Registrant’s common shares. As of June 30, 2019, the last business day of the most recently completed second quarter, there were 23.1 million shares of the registrant’s common stock held by non-affiliates of the registrant. On December 10, 2019 the board of directors of the Registrant approved an estimated value per share of the Registrant’s common stock of $11.82 per share (after allocations to the holder of subordinated profits interests in our operating partnership) derived from the estimated value of the Registrant’s assets less the estimated value of the Registrant’s liabilities, divided by the number of shares outstanding, all as of September 30, 2019. For a full description of the methodologies used to value the Registrant's assets and liabilities in connection with the calculation of the estimated value per share, see Part II, Item 5, “Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information.” As of March 15, 2020, there were 22.3 million shares of common stock held by non-affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
None.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
Table of Contents
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Special Note Regarding Forward-Looking Statements
This annual report on Form 10-K, together with other statements and information publicly disseminated by Lightstone Value Plus Real Estate Investment Trust, Inc. (the “Lightstone REIT”) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Lightstone REIT intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Lightstone REIT ’s future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond the Lightstone REIT’s control and which could materially affect actual results, performances or achievements. Factors which may cause actual results to differ materially from current expectations include, but are not limited to, (i) general economic and local real estate conditions, (ii) the inability of major tenants to continue paying their rent obligations due to bankruptcy, insolvency or general downturn in their business, (iii) financing risks, such as the inability to obtain equity, debt, or other sources of financing on favorable terms, (iv) changes in governmental laws and regulations, (v) the level and volatility of interest rates and foreign currency exchange rates, (vi) the availability of suitable acquisition opportunities and (vii) increases in operating costs. Accordingly, there is no assurance that the Lightstone REIT’s expectations will be realized.
General Description of Business
Structure
The Lightstone REIT is a Maryland corporation, formed on June 8, 2004, which has elected to be taxed, and qualify as a real estate investment trust for U.S. federal income tax purposes (“REIT”). The Lightstone REIT was formed primarily for the purpose of engaging in the business of investing in and owning commercial and residential real estate properties and making other real estate-related investments located throughout the United States.
The Lightstone REIT is structured as an umbrella partnership real estate investment trust, (“UPREIT”), and substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT, L.P. (the “Operating Partnership”), a Delaware limited partnership formed on July 12, 2004. As of December 31, 2019, we held a 98% general partnership interest in our Operating Partnership’s common units.
The Lightstone REIT 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, its Operating Partnership or the Company as required by the context in which such pronoun is used.
Through our Operating Partnership, we own, operate and develop commercial, residential, and hospitality properties and make real estate-related investments, principally in the United States. Our real estate investments are held by us alone or jointly with other parties. We also originate or acquire mortgage loans secured by real estate. Although most of our investments are of these types, we may invest in whatever types of real estate or real estate-related investments that we believe are in our best interests.
Since our inception, we have owned and managed various commercial and residential properties located throughout the United States. We historically operated within four business segments consisting of: (i) retail properties, (ii) multi-family residential properties, (iii) industrial properties and (iv) hospitality properties. Prior to 2018 we disposed of substantially all of the ownership interests in our hospitality properties. Additionally, during the first quarter of 2019, we disposed of all of our remaining industrial properties and during the third quarter of 2019 we disposed of DePaul Plaza, a retail property. Because of the changes in the composition of our real estate and real estate investments, we now evaluate all of our real estate investments as one operating segment.
As of December 31, 2019, we have ownership interests in (i) two consolidated operating properties, (ii) three consolidated development properties and (iii) seven unconsolidated operating properties. With respect to our consolidated operating properties, we wholly own the St. Augustine Outlet Center, a retail property containing approximately 0.3 million square feet of gross leasable area, and have a majority ownership interest of approximately 59.2% in Gantry Park Landing, a multi-family residential property containing 199 apartment units. With respect to our consolidated development properties, we wholly own three projects consisting of the Lower East Side Moxy Hotel, the Exterior Street Project and the Santa Clara Data Center. We also hold a 2.5% ownership interest in seven hotel properties (our seven unconsolidated operating properties) through a joint venture (the “Joint Venture”) which we account for our under the cost method of accounting. The Joint Venture is between us and the operating partnership of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a real estate investment trust also sponsored by our Sponsor, which has a 97.5% ownership interest in the Joint Venture. Furthermore, we have other real estate-related investments, including preferred investments in related parties and nonrecourse loans made to unaffiliated third-party borrowers.
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Our advisor is Lightstone Value Plus REIT, LLC (the “Advisor”), which is majority owned by David Lichtenstein. On July 6, 2004, the Advisor contributed $2,000 to the Operating Partnership in exchange for 200 limited partner common units (“Common Units”) in the Operating Partnership. Our Advisor also owns 20,000 shares of our common stock (“Common Shares”) which were issued on July 6, 2004 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 the sponsor (the ‘‘Sponsor’’) during our initial public offering (the “Offering”), which terminated on October 10, 2008. Our Advisor, together with our board of directors (the “Board of Directors”), is primarily responsible 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, LLC, a Delaware limited liability company, which owns an aggregate of $30.0 million of special general partner interests (“SLP Units”) in the Operating Partnership which were purchased, at a cost of $100,000 per unit, 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 the Lightstone REIT or the Operating Partnership.
We do not have any employees. The Advisor receives compensation and fees for services related to the investment and management of our assets.
Our Advisor has affiliates which may manage and develop certain of our properties. However, we also contract with other unaffiliated third-party property managers.
Our Common Shares are not currently listed on a national securities exchange. We may seek to list our stock for trading on a national securities exchange only if a majority of our independent directors believe listing would be in the best interest of our stockholders. We do not intend to list our shares at this time. We do not anticipate that there would be any market for our shares of common stock until they are listed for trading.
Noncontrolling Interests
Partners of Operating Partnership
On July 6, 2004, the Advisor contributed $2,000 to the Operating Partnership in exchange for 200 Common Units. The Advisor has the right to convert the Common Units into cash or, at the option of the Company, an equal number of Common Shares.
In connection with the Offering, Lightstone SLP, LLC, an affiliate of the Advisor, purchased an aggregate of $30.0 million of SLP Units in the Operating Partnership at a cost of $100,000 per unit. As the majority owner of the SLP Units, Mr. Lichtenstein is the beneficial owner of a 99% interest in such SLP Units and thus receives an indirect benefit from any distributions made in respect thereof. These SLP Units may be entitled 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.
In addition, an aggregate of 497,209 Common Units were issued to other unrelated parties during the years ended December 31, 2008 and 2009 and remain outstanding as of December 31, 2019.
Other Noncontrolling Interests in Consolidated Subsidiaries
As of December 31, 2019, the other noncontrolling interests in consolidated subsidiaries include ownership interests in (i) Pro-DFJV Holdings LLC (“PRO”) held by the Company’s Sponsor, (ii) 50-01 2nd St. Associates LLC (the “2nd Street Joint Venture”), held by the Company’s Sponsor and other affiliates and (iii) various joint ventures held by affiliates of our Sponsor that have originated promissory notes to unaffiliated third parties. PRO’s holdings principally consist of Marco OP Units and Marco II OP Units. The 2nd Street Joint Venture owns Gantry Park Landing, a multi-family apartment building located in Queens, New York.
Related Party
Our Advisor and its affiliates, and Lightstone SLP, LLC 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. The compensation levels 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.
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Primary Investment Objectives
Our primary objective is to achieve capital appreciation with a secondary objective of income without subjecting principal to undue risk.
Acquisition and Investment Policies
We have, to date, acquired and/or developed residential, commercial and hospitality properties principally, all of which are located in the United States and also made other real estate-related investments. Our acquisitions have included both portfolios and individual properties. Our current operating properties consist of one retail property (the St. Augustine Outlet Center) and one multi-family residential property (Gantry Park Landing). We have also acquired various parcels of land and air rights related to the development and construction of real estate properties. Additionally, we have made preferred investments in related parties and originated nonrecourse loans to unaffiliated third-party borrowers.
We may acquire the following types of real estate interests:
| · | Fee interests in market-rate, middle market multifamily properties at a discount to replacement cost located either in emerging markets or near major metropolitan areas. We will attempt to identify those sub-markets with job growth opportunities and demand demographics which support potential long-term value appreciation for multifamily properties. |
| · | Fee interests in well-located, multi-tenant, community, power and lifestyle shopping centers and malls located in highly trafficked retail corridors, in selected high-barrier to entry markets and submarkets. We will attempt to identify those sub-markets with constraints on the amount of additional property supply will make future competition less likely. |
| · | Fee interests in improved, multi-tenant, industrial properties located near major transportation arteries and distribution corridors with limited management responsibilities. |
| · | Fee interests in improved, multi-tenant, office properties located near major transportation arteries in urban and suburban areas. |
| · | Fee interests in lodging properties located near major transportation arteries in urban and suburban areas. |
All of the properties are owned by subsidiary limited partnerships or limited liability companies. These subsidiaries are single-purpose entities that we created to own a single property, and each have no assets other than the property it owns. These entities represent a useful means of shielding our Operating Partnership from liability under state laws and will make the underlying properties easier to transfer. However, tax law disregards single-member LLCs and so it will be as if the Operating Partnership owns the underlying properties for tax purposes. Use of single-purpose entities in this manner is customary for REITs. Our independent directors are not required to approve all transactions involving the creation of subsidiary limited liability companies and limited partnerships that we use for investment in properties on our behalf. These subsidiary arrangements are intended to ensure that no environmental or other liabilities associated with any particular property can be attributed against other properties that the Operating Partnership or we will own. The limited liability aspect of a subsidiary’s form will shield parent and affiliated (but not subsidiary) companies, including the Operating Partnership and us, from liability assessed against it. No additional fees are imposed upon the REIT by the subsidiary companies’ managers and these subsidiaries are not affected our stockholders’ voting rights.
We have not and do not intend to make significant investments in single family residential properties; leisure home sites; farms; ranches; timberlands; unimproved properties not intended to be developed; or mining properties.
Not more than 10% of our total assets may be invested in unimproved real property. For purposes of this paragraph, “unimproved real properties” does not include properties acquired for the purpose of producing rental or other operating income, properties under construction and properties for which development or construction is planned within one year. Additionally, we do not invest in contracts for the sale of real estate unless in recordable form and appropriately recorded.
Although we are not limited as to the geographic area where we may conduct our operations, we have invested and may continue to invest in properties located near the existing operations of our Sponsor, in order to achieve economies of scale where possible.
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Financing Strategy and Policies
We utilize leverage when acquiring and developing our properties. The number of different properties we acquire are affected by numerous factors, including, the amount of funds available to us. When interest rates on loans are high or financing is otherwise unavailable on terms that are satisfactory to us, we may purchase certain properties for cash with the intention of obtaining a loan for a portion of the purchase price or development costs at a later time. However, 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.
Our charter provides that the aggregate amount of borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. As of December 31, 2019, our total borrowings represented 49% of net assets.
We have financed our property acquisitions and development activities through a variety of means, including but not limited to individual non-recourse mortgages and through the exchange of an interest in the property for limited partnership units of the Operating Partnership. Generally, though not exclusively, we intend to seek to finance our investments with debt which will be on a non-recourse basis. However, we may, secure recourse financing or provide a guarantee to lenders, if we believe this may result in more favorable terms.
Tax Status
We elected to be taxed as a a REIT, commencing with the taxable year ended December 31, 2005. If we remain qualified 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, or 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 generally accepted accounting principles in the United States of America, or GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If we fail to remain qualified for taxation as a REIT in any subsequent year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify as a REIT. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. Additionally, even if we qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income.
To maintain our qualification as a REIT, we engage in certain activities such as providing real estate-related services through wholly-owned taxable REIT subsidiaries (“TRSs”). As such, we are subject to U.S. federal and state income and franchise taxes from these activities.
As of December 31, 2019 and 2018, we had no material uncertain income tax positions. Additionally, even if we continue to qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income, if any.
Competition
The commercial, multifamily residential and hospitality real estate markets are highly competitive. We compete in markets with other owners and operators of such properties. The development of new properties intensifies the competition among owners and operators of these types of real estate in many market areas in which we either operate or intend to operate. We compete based on a number of factors that include location, rental rates, security, suitability of the property’s design to prospective tenants’ needs and the manner in which the property is operated and marketed. The number of competing properties in a particular market could have a material effect on our occupancy levels, rental rates and on the operating expenses of certain of our properties.
In addition, we compete with other entities engaged in real estate investment activities to locate suitable properties to acquire and/or develop and also to locate tenants and purchasers for our properties. These competitors include other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, governmental bodies and other entities. There also may be other REITs with asset acquisition objectives similar to ours that may be organized in the future. Some of these competitors, including larger REITs, have substantially greater marketing and financial resources than we have and generally may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of tenants. In addition, these same entities seek financing through similar channels to those sought by us. Therefore, we compete for institutional investors in a market where funds for real estate investment may decrease.
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Competition from these and other third party real estate investors may limit the number of suitable investment opportunities available to us. It may also result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms.
We believe that our Sponsor’s experience, coupled with our financing, professionalism, diversity of investments and reputation in the industry enable us to compete with the other real estate investment companies.
Because we are organized as an UPREIT, we believe we are well positioned within the industries in which we operate to offer existing property owners the potential opportunity to contribute their properties to us in tax-deferred transactions using our operating partnership units as transactional currency. As a result, we may have a competitive advantage over certain of our competitors that are structured as traditional REITs and non-REITs in pursuing acquisitions with tax-sensitive sellers.
Environmental
As an owner of real estate, we are subject to various environmental laws of federal, state and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired or developed in the future.
Employees
We do not have employees. We entered into an advisory agreement with our Advisor on April 22, 2005, pursuant to which our Advisor supervises and manages our day-to-day operations and selects our real estate and real estate related investments, subject to oversight by our Board of Directors. We pay our Advisor fees for services related to the investment and management of our assets, and we reimburse our Advisor for certain expenses incurred on our behalf.
Available Information
We electronically file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and proxy statements, with the United States Securities and Exchange Commission (the “SEC”). Stockholders may obtain copies of our filings with the SEC, free of charge, from the website maintained by the SEC at http://www.sec.gov, or at the SEC's Public Reference Room at 100 F. Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our office is located at 1985 Cedar Bridge Avenue, Lakewood, NJ 08701. Our telephone number is (732) 367-0129. Our website is www.lightstonecapitalmarkets.com.
ITEM 1B. UNRESOLVED STAFF COMMENTS:
None applicable.
Operating Properties
| Location | Year Built (Range of years built) | Date Acquired | Gross Leasable Area ("GLA") in Square Feet/Leaseable Units | Percentage Occupied as of December 31, 2019 | Annualized
Revenues based on rents at December 31, 2019 |
Annualized Revenues per square foot/unit at December 31, 2019 | ||||
| St. Augustine Outlet Center (Retail Outlet Mall) | St. Augustine, Florida | 1998 | March 2006 | 328,120 | GLA | 74.5% | $2.4 million | $9.79 | sqft | |
| Gantry Park Landing (Multi-Family Apartment Building) | Queens, New York | 2013 | August 2013 | 199 | units | 95.0% | $8.7 million | $45,809 | unit |
Annualized revenue is defined as the minimum monthly payments due as of December 31, 2019 annualized, excluding periodic contractual fixed increases and rents calculated based on a percentage of tenants' sales. The annualized base rent disclosed in the table above includes all concessions, abatements and reimbursements of rent to tenants.
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Development Properties
Lower East Side Moxy Hotel
On December 3, 2018, we acquired three adjacent parcels of land located at 147-151 Bowery, New York, New York on which we intend to develop and construct a 296-room Marriott Moxy hotel (the “Lower East Side Moxy Hotel”).
As of December 31, 2019, we incurred and capitalized to construction in progress an aggregate of $73.8 million consisting of acquisition and other development costs attributable to the Lower East Side Moxy Hotel.
Exterior Street Project
On February 27, 2019, we, acquired two adjacent parcels of land located at 355 and 399 Exterior Street, New York, New York, on which we intend to develop and construct a multi-family residential property (the “Exterior Street Project”).
As of December 31, 2019, we incurred and capitalized to construction in progress an aggregate of $66.1 million consisting of acquisition and other development costs attributable to the Exterior Street Project.
Santa Clara Data Center
On January 10, 2019, we acquired a parcel of land located at 2175 Martin Avenue, Santa Clara, CA, on which we intend to develop and construct a data center (the “Santa Clara Data Center”).
As of December 31, 2019, we have incurred and capitalized to construction in progress an aggregate of $13.0 million consisting of acquisition and other development costs attributable to the Santa Clara Data Center.
From time to time in the ordinary course of business, we may become subject to legal proceedings, claims or disputes.
As of the date hereof, we are not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES:
Shareholder Information
As of March 15, 2020, we had approximately 22.3 million common shares outstanding, held by a total of 5,987 stockholders. The number of stockholders is based on the records of DST Systems Inc., which serves as our registrar and transfer agent.
Market Information
The Company’s common stock is not currently listed on a national securities exchange. The Company may seek to list its common stock for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its shares of common stock until they are listed for trading.
Estimated Net Asset Value (“NAV”) and NAV per Share of Common Stock (“NAV per Share”)
On December 10, 2019, our board of directors determined and approved our estimated NAV of approximately $275.4 million and resulting estimated NAV per Share of $11.82, after allocations of value to special general partner interests, or SLP Units, in our Operating Partnership, held by Lightstone SLP, LLC, an affiliate of our Advisor, assuming a liquidation event, both as of September 30, 2019. From our inception through the termination of our initial public offering on October 10, 2008, Lightstone SLP, LLC, an affiliate of our Advisor, contributed cash of $30.0 million in exchange for 300 SLP Units, at a cost of $100,000 per unit.
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The estimated value of our shares was calculated as of a particular point in time. The value of our shares will fluctuate over time in response to developments related to individual assets in the portfolio and the management of those assets and in response to the real estate and finance markets. There is no assurance of the extent to which the current estimated valuation should be relied upon for any purpose after its effective date regardless that it may be published on any statement issued by us or otherwise.
Process and Methodology
Our Advisor, along with any necessary material assistance or confirmation of a third-party valuation expert or service, is responsible for calculating our estimated NAV and resulting NAV per Share, which we currently expect will be done on an annual basis unless our Common Shares are approved for listing on a national securities exchange. Our board of directors will review and approve each estimate of NAV and resulting NAV per Share.
Our estimated NAV and resulting NAV per Share as of September 30, 2019 were calculated with the assistance of both our Advisor and Robert A. Stanger & Co, Inc. (“Stanger”), an independent third-party valuation firm engaged by us to assist with the valuation of our assets, liabilities and any allocations of value to SLP Units. Our Advisor recommended and our board of directors established the estimated NAV per Share as of September 30, 2019 based upon the analysis and reports provided by our Advisor and Stanger. The process for estimating the value of our assets, liabilities and allocations of value to SLP Units, is performed in accordance with the provisions of the Investment Program Association Practice Guideline 2013-01, “Valuations of Publicly Registered Non-Listed REITs.” We believe that our valuations were developed in a manner reasonably designed to ensure their reliability.
The engagement of Stanger with respect to our estimated NAV and resulting NAV per Share as of September 30, 2019 was approved by our board of directors, including all of our independent directors. Stanger has extensive experience in conducting asset valuations, including valuations of commercial real estate, debt, properties and real estate-related investments.
With respect to our estimated NAV and resulting NAV per Share as of September 30, 2019, Stanger prepared appraisal reports (the “Stanger Appraisal Reports”), summarizing key inputs and assumptions, on eight of the nine operating properties and all three of the development properties (collectively, the “Stanger Appraised Properties”) in which we held ownership interests as of September 30, 2019. The Stanger Appraised Properties consist of the St. Augustine Outlet Center, a wholly owned and consolidated operating retail property; (ii) three wholly owned and consolidated development properties (the “Lower East Side Moxy Hotel”, the “Exterior Street Project” and the “Santa Clara Data Center”); and (iii) seven hospitality properties in which we hold a 2.5% ownership interest through an unconsolidated joint venture (the “Joint Venture”) and account for under the cost method of accounting. The Joint Venture is between us and the operating partnership of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a real estate investment trust also sponsored by our Sponsor, which has a 97.5% ownership interest in the Joint Venture.
Stanger also prepared a NAV report (the “September 2019 NAV Report”) which estimates our NAV per Share as of September 30, 2019. The September 2019 NAV Report relied upon (i) the Stanger Appraisal Reports for the Stanger Appraised Properties, (ii) an appraisal report prepared by another independent third-party valuation firm for Gantry Park Landing, our majority-owned and consolidated operating multi-family residential property, (iii) Stanger’s estimated value of our outstanding indebtedness, (iv) Stanger’s value opinion with respect to our 2.5% ownership interest in the Joint Venture, assuming a liquidation pursuant to the terms of the Joint Venture’s operating agreement, and our other investments in related parties, (vi) Stanger’s estimate of the allocation of value to the SLP Units, and (vii) our Advisor’s estimate of the value of our cash and cash equivalents, marketable securities, restricted escrows, other assets, other liabilities and other non-controlling interests, to calculate estimated NAV per Share, all as of September 30, 2019.
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The table below sets forth the calculation of our estimated NAV and resulting NAV per Share as of September 30, 2019, as well as the comparable calculations as of September 30, 2018. Certain amounts are reflected net of noncontrolling interests, as applicable. Dollar and share amounts are presented in thousands, except per share data.
| As of September 30, 2019 | As of September 30, 2018 | |||||||||||||||
| Value | Per Share | Value | Per Share | |||||||||||||
| Net Assets: | ||||||||||||||||
| Real Estate Properties | $ | 256,288 | $ | 11.00 | $ | 167,688 | $ | 6.84 | ||||||||
| Non-Real Estate Assets: | ||||||||||||||||
| Cash and cash equivalents | 22,249 | 61,185 | ||||||||||||||
| Investments in related parties | 77,038 | 114,806 | ||||||||||||||
| Marketable securities, available for sale | 54,161 | 118,575 | ||||||||||||||
| Restricted escrows | 1,472 | 9,025 | ||||||||||||||
| Notes receivable, net | 33,251 | - | ||||||||||||||
| Other assets | 1,038 | 1,883 | ||||||||||||||
| Total non-real estate assets | 189,209 | 8.12 | 305,474 | 12.46 | ||||||||||||
| Total Assets | 445,497 | 19.12 | 473,162 | 19.30 | ||||||||||||
| Liabilities: | ||||||||||||||||
| Mortgage notes payable | (113,120 | ) | (87,536 | ) | ||||||||||||
| Notes payable | - | (18,625 | ) | |||||||||||||
| Other liabilities | (8,166 | ) | (27,473 | ) | ||||||||||||
| Total liabilities | (121,286 | ) | (5.21 | ) | (133,634 | ) | (5.45 | ) | ||||||||
| Other noncontrolling interests | (617 | ) | (0.02 | ) | (617 | ) | (0.02 | ) | ||||||||
| Net Asset Value before Allocations to SLP Units | 323,594 | 13.89 | 338,911 | 13.83 | ||||||||||||
| Allocations to SLP Units | (48,209 | ) | (2.07 | ) | (49,147 | ) | (2.01 | ) | ||||||||
| Net Asset Value | $ | 275,385 | $ | 11.82 | $ | 289,764 | $ | 11.82 | ||||||||
| Shares of Common Stock Outstanding(1) | 23,290 | 24,509 | ||||||||||||||
Note:
| (1) | Includes approximately 0.5 million shares of our common stock assuming the conversion of an equal number of common units of limited partnership interest in our Operating Partnership (“common units”). |
Use of Independent Valuation Firm:
As discussed above, our Advisor is responsible for calculating our NAV. In connection with determining our NAV, our Advisor may rely on the material assistance or confirmation of a third-party valuation expert or service. In this regard, Stanger was selected by our board of directors to assist our Advisor in the calculation of our estimated NAV and resulting NAV per Share as of September 30, 2019. Stanger’s service included appraising the Stanger Appraised Properties and preparing the September 2019 NAV Report. Stanger is engaged in the business of appraising commercial real estate properties and is not affiliated with us or our Advisor. The compensation we paid to Stanger was based on the scope of work and not on the appraised values of our real estate properties. The appraisals were performed in accordance with the Code of Ethics and the Uniform Standards of Professional Appraisal Practice, or USPAP, the real estate appraisal industry standards created by The Appraisal Foundation. The Stanger Appraisal Reports were reviewed, approved, and signed by an individual with the professional designation of MAI licensed in the state where each real property is located. The use of the reports is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. In preparing its reports, Stanger did not, and was not requested to; solicit third-party indications of interest for our common stock in connection with possible purchases thereof or the acquisition of all or any part of us.
Stanger collected reasonably available material information that it deemed relevant in appraising our real estate properties. Stanger relied in part on property-level information provided by our Advisor, including (i) property historical and projected operating revenues and expenses; (ii) property lease agreements and/or lease abstracts; and (iii) information regarding recent or planned capital expenditures.
In conducting their investigation and analyses, Stanger took into account customary and accepted financial and commercial procedures and considerations as they deemed relevant. Although Stanger reviewed information supplied or otherwise made available by us or the Advisor for reasonableness, they assumed and relied upon the accuracy and completeness of all such information and of all information supplied or otherwise made available to them by any other party and did not independently verify any such information. Stanger has assumed that any operating or financial forecasts and other information and data provided to or otherwise reviewed by or discussed with Stanger were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of our management, our board of directors, and/or our Advisor. Stanger relied on us to advise them promptly if any information previously provided became inaccurate or was required to be updated during the period of their review.
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In performing its analyses, Stanger made numerous other assumptions as of various points in time with respect to industry performance, general business, economic, and regulatory conditions, and other matters, many of which are beyond their control and our control. Stanger also made assumptions with respect to certain factual matters. For example, unless specifically informed to the contrary, Stanger assumed that we have clear and marketable title to each real estate property appraised, that no title defects exist, that any improvements were made in accordance with law, that no hazardous materials are present or were present previously, that no significant deed restrictions exist, and that no changes to zoning ordinances or regulations governing use, density, or shape are pending or being considered. Furthermore, Stanger’s analyses, opinions, and conclusions were necessarily based upon market, economic, financial, and other circumstances and conditions existing as of or prior to the date of the Stanger Appraisal Reports, and any material change in such circumstances and conditions may affect Stanger’s analyses and conclusions. The Stanger Appraisal Reports contain other assumptions, qualifications, and limitations that qualify the analyses, opinions, and conclusions set forth therein. Furthermore, the prices at which our real estate properties may actually be sold could differ from Stanger’s analyses.
Stanger is actively engaged in the business of appraising commercial real estate properties similar to those owned by us in connection with public security offerings, private placements, business combinations, and similar transactions. We do not believe that there are any material conflicts of interest between Stanger, on the one hand, and us, our Sponsor, our Advisor, and our affiliates, on the other hand. Our Advisor engaged Stanger on behalf of our board of directors to deliver their reports to assist in the NAV calculation as of September 30, 2019 and Stanger received compensation for those efforts. In addition, we agreed to indemnify Stanger against certain liabilities arising out of this engagement. In the two years prior to the date of this filing, Stanger was previously engaged by us for appraisal and valuation services in connection with our financial reporting requirements. Stanger has received usual and customary fees in connection with those services. Stanger may from time to time in the future perform other services for us and our Sponsor or other affiliates of the Sponsor, so long as such other services do not adversely affect the independence of Stanger as certified in the applicable Appraisal Reports. During the past two years Stanger has also been engaged to provide appraisal services to another non-traded REIT sponsored by our Sponsor for which it was paid usual and customary fees.
Although Stanger considered any comments received from us and our Advisor relating to their reports, the final appraised values of the Stanger Appraised Properties were determined by Stanger. The reports are addressed to our board of directors to assist our board of directors in calculating our estimated NAV per Share as of September 30, 2019. The reports are not addressed to the public, may not be relied upon by any other person to establish our estimated NAV per Share, and do not constitute a recommendation to any person to purchase or sell any shares of our common stock.
Our goal in calculating our estimated NAV is to arrive at values that are reasonable and supportable using what we deem to be appropriate valuation methodologies and assumptions. The reports, including the analysis, opinions, and conclusions set forth in such reports, are qualified by the assumptions, qualifications, and limitations set forth in the respective reports. The following is a summary of our valuation methodologies used to value our assets and liabilities by key component:
Real estate properties:
As of September 30, 2019, we have ownership interests in (i) two consolidated operating properties and three development properties (collectively, the “Real Estate Properties”) and (ii) seven unconsolidated operating properties. With respect to our consolidated operating properties, we wholly own the St. Augustine Outlet Center, a retail property containing approximately 0.3 million square feet of gross leasable area, and have a majority ownership interest of approximately 59.2% in Gantry Park Landing, a multi-family residential property containing 199 apartment units. With respect to our consolidated development properties, we wholly own three development projects consisting of the Lower East Side Moxy Hotel, the Exterior Street Project and the Santa Clara Data Center.
Additionally, as of September 30, 2019, we have a 2.5% ownership interest in the Joint Venture, which owns seven hospitality properties. We do not consolidate our ownership interest in the Joint Venture but rather account for it under the cost method of accounting. The value of our ownership interest in the Joint Venture is not included in our Real Estate Properties, but rather it is included in our “Investments in Related Parties” below.
As described above, we engaged Stanger to provide an appraisal of the Stanger Appraised Properties consisting of 11 of the 12 properties in which we held ownership interests as of September 30, 2019. The Stanger Appraised Properties consist of (i) the St. Augustine Outlet Center; (ii) our three development properties; and (ii) the seven hospitality properties (all select services hotels) owned by the Joint Venture. We also engaged another independent third-party valuation firm to provide an appraisal report for Gantry Park Landing, a multi-family apartment building which we majority own and consolidate. In preparing their appraisal reports, Stanger and the other independent third-party valuation firm, among other things:
| • | Performed a site visit of each property in connection with this assignment or other assignments; | |
| • | Interviewed our officers or our Advisor’s personnel to obtain information relating to the physical condition of each appraised property, including known environmental conditions, status of ongoing or planned property additions and reconfigurations, and other factors for such leased properties; |
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| • | Reviewed lease agreements for those properties subject to a long-term lease and discussed with us or the Advisor certain lease provisions and factors on each property; and | |
| • | Reviewed the acquisition criteria and parameters used by real estate investors for properties similar to the subject properties, including a search of real estate data sources and publications concerning real estate buyer’s criteria, discussions with sources deemed appropriate, and a review of transaction data for similar properties. |
Stanger and the other independent third-party valuation firm employed the income approach and/or the sales comparison approach to estimate the value of the appraised properties. The income approach involves an economic analysis of the property based on its potential to provide future net annual income. As part of the valuation, a discounted cash flow analysis (“DCF Analysis”) and/or direct capitalization analysis was used in the income approach to determine the value of our interest in the portfolio. The indicated value by the income approach represents the amount an investor may pay for the expectation of receiving the net cash flow from the property.
The direct capitalization analysis is based upon the net operating income of the property capitalized at an appropriate capitalization rate for the property based upon property characteristics and competitive position and market conditions at the date of the appraisal.
In applying the DCF Analysis, pro forma statements of operations for the property including revenues and expenses are analyzed and projected over a multi-year period. The property is assumed to be sold at the end of the multi-year holding period. The reversion value of the property which can be realized upon sale at the end of the holding period is calculated based on the capitalization of the estimated net operating income of the property in the year of sale, utilizing a capitalization rate deemed appropriate in light of the age, anticipated functional and economic obsolescence and competitive position of the property at the time of sale. Net proceeds to owners are determined by deducting appropriate costs of sale. The discount rate selected for the DCF Analysis is based upon estimated target rates of return for buyers of similar properties.
The sales comparison approach utilizes indices of value derived from actual or proposed sales of comparable properties to estimate the value of the subject property. The appraiser analyzed such comparable sale data as was available to develop a market value conclusion for the subject property.
Stanger prepared the Stanger Appraisal Reports and the other independent third-party valuation firm prepared an appraisal report for Gantry Park Landing, summarizing key inputs and assumptions, for each of the appraised properties using financial information provided by us and our Advisor. From such review, Stanger and the other independent third-party valuation firm selected the appropriate cash flow discount rate, residual discount rate, and terminal capitalization rate in the DCF Analysis, if applicable, the appropriate capitalization rate in the direct capitalization analysis and the appropriate price per unit in the sales comparison analysis. As for those properties consolidated on our financials, and for which we do not own 100% of the ownership interest, the property value was adjusted to reflect our ownership interest in such property after consideration of the distribution priorities associated with such property.
The estimated values for our investments in real estate may or may not represent current market values and do not equal the book values of our real estate investments in accordance with U.S. GAAP. Our consolidated investments in real estate are currently carried in our consolidated financial statements at their amortized cost basis, adjusted for any loss impairments and bargain purchase gains recognized to date. Our unconsolidated investments in real estate are currently accounted for under the cost method of accounting in our consolidated financial statements.
Operating Properties
As of September 30, 2019, our ownership interests in our two consolidated operating properties were valued at an aggregate of $100.4 million. The following summarizes the key assumptions that were used in the discounted cash flow models to estimate the value of (i) the St. Augustine Outlet Center, our operating retail property, and (ii) Gantry Park Landing, our operating multi-family residential property, which are included in our Real Estate Properties as of September 30, 2019:
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| Gantry | ||||||||
| St. Augustine | Park Landing | |||||||
| Outlet Center | (multi-family | |||||||
| (retail) | residential) | |||||||
| Weighted-average: | ||||||||
| Exit capitalization rate | 10.00 | % | 4.25 | % | ||||
| Discount rate | 11.00 | % | 5.25 | % | ||||
| Annual market rent growth rate | 3.18 | % | 2.80 | % | ||||
| Annual net operating income growth rate | 13.73 | % | 2.47 | % | ||||
| Holding period (in years) | 12.0 | 11.0 | ||||||
While we believe that the assumptions made by Stanger and the other independent third party appraisal firm are reasonable, a change in these assumptions would impact the calculations of the estimated value of these two operating properties included in our Real Estate Properties. The table below represents the estimated increase or decrease to our estimated NAV per Share resulting from a 25 basis point increase and decrease in the capitalization rates and discount rates for the two consolidated operating properties we own. The table is presented to provide a hypothetical illustration of the possible results if only one change in assumptions was made, with all other factors remaining constant. Further, each of these assumptions could change by more or less than 25 basis points or not at all.
| Change in NAV per Share | ||||||||
| Increase of | Decrease of | |||||||
| 25 basis points | 25 basis points | |||||||
| Exit capitalization rate | $ | (0.16 | ) | $ | 0.18 | |||
| Discount rate | $ | (0.06 | ) | $ | 0.06 | |||
Development Properties
As of September 30, 2019, we wholly own and consolidate three development properties as follows:
Lower East Side Moxy Hotel
In December 2018, we acquired three adjacent parcels of land located at 147-151 Bowery, New York, New York (collectively, the “Bowery Land”) on which we intend to develop and construct the Lower East Side Moxy Hotel, a 296-room Marriott-branded hotel. Additionally, in December 2018, we acquired certain air rights located at 329 Broome Street, New York, New York (the “Air Rights”) that we intend to use in connection with the development and construction of the Lower East Side Moxy Hotel. The Lower East Side Moxy Hotel was under development as of September 30, 2019. Accordingly, Stanger deemed it appropriate to determine its fair value of approximately $73.3 million as of September 30, 2019 based on the aggregate estimated fair value of the land parcels of $58.7 million (using a sales comparison approach) plus other development costs incurred of $14.6 million.
Exterior Street Project
In February 2019, we acquired two adjacent parcels of land located at 355 and 399 Exterior Street, New York, New York (collectively, the “Exterior Street Land”) on which we intend to develop and construct the Exterior Street Project, a multi-family residential property. The Exterior Street Project was under development as of September 30, 2019. Accordingly, Stanger deemed it appropriate to determine its fair value of approximately $69.5 million as of September 30, 2019 based on the aggregate estimated fair value of the land parcels of $64.2 million (using a sales comparison approach) plus other development costs incurred of $5.3 million.
Santa Clara Data Center
In January 2019, we acquired a parcel of land located at 2175 Martin Avenue, Santa Clara, CA (the “Martin Avenue Land”) on which we intend to develop and construct the Santa Clara Data Center. The Santa Clara Data Center was under development as of September 30, 2019. Accordingly, Stanger deemed it appropriate to determine its fair value of approximately $13.1 million as of September 30, 2019 based on the estimated fair value of the land parcel of $10.9 million (using a sales comparison approach) plus other development costs incurred of $2.2 million.
The aggregate fair value of our Real Estate Properties of $256.3 million compared to their aggregate cost of $254.1 million, both as of September 30, 2019, equates to an increase in value of 1.2%.
Cash and cash equivalents: The estimated values of our cash and cash equivalents approximate their carrying values due to their short maturities.
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Investments in related parties: As of September 30, 2019, we had various investments in related parties, which were classified as investments in related parties in our consolidated balance sheets, as follows:
| · | We hold a 2.5% non-managing ownership interest in the Joint Venture, which we do not consolidate but rather account for under the cost method of accounting. As of September 30, 2019, the Joint Venture estimated fair value of our ownership interest in the Joint Venture was approximately $1.0 million based on a hypothetical liquidation of the estimated value of the Joint Venture’s net assets. | |
| · | We have entered into agreements with various related party entities pursuant to which we have made aggregate outstanding contributions of $76.0 million to affiliates of our Sponsor which have either developed or are developing various residential and hospitality projects located in the New York City and Miami metropolitan areas. These contributions were made pursuant to instruments (the “Preferred Investments”) that entitle us to monthly preferred distributions at 12% per annum and are classified as held-to-maturity securities and are recorded at cost. As of September 30, 2019, the aggregate estimated value of our Preferred Investments of $76.0 million approximated their carrying values based on market rates for similar instruments. |
Marketable securities, available for sale: The estimated values of our marketable securities, available for sale, are based on Level 1 and Level 2 inputs. Level 1 inputs are inputs that are observable, either directly or indirectly, such as quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. All of our marketable securities measured using Level 2 inputs were valued based on a market approach using readily available quoted market prices for similar assets.
Restricted escrows: The estimated values of our restricted escrows approximate their carrying values due to their short maturities.
Notes receivable, net: The estimated values of our notes receivable generally approximate their carrying values as of September 30, 2019 based on current market rates for similar instruments.
Other assets: Our other assets consist of tenant accounts receivable and prepaid expenses and other assets. The estimated values of these items approximate their carrying values due to their short maturities. Certain other items, primarily straight-line rent receivable, intangibles and deferred costs, have been eliminated for the purpose of the valuation because those items are already considered in our valuation of the respective investments in real estate properties or financial instruments.
Mortgage notes payable: The values for our mortgage loans were estimated using a discounted cash flow analysis, which used inputs based on the remaining loan terms and estimated current market interest rates for mortgage loans with similar characteristics, including remaining loan term and loan-to-value ratios. The current market interest rate was generally determined based on market rates for available comparable debt. The estimated current market interest rates for mortgage loans ranged from 4.05% to 6.36%.
Other liabilities: Our other liabilities consist of our accounts payable and accrued expenses, amounts due to our Sponsor, tenant allowances and deposits payable, distributions payable and deferred rental income. The carrying values of these items were considered to equal their fair value due to their short maturities. Certain other items, primarily intangibles, have been eliminated for the purpose of the valuation because those items are already considered in our valuation of the respective Real Estate Properties or financial instruments.
Other noncontrolling interests: Our other noncontrolling interests consist of accrued distributions on common units and SLP Units.
Allocations of value to SLP units: The carrying value of the SLP Units held by Lightstone SLP, LLC, an affiliate of our Advisor, are classified in noncontrolling interests on our consolidated balance sheet. The IPA’s Practice Guideline 2013—01 provides for adjustments to the NAV for preferred securities, special interests and incentive fees based on the aggregate NAV of the company and payable to the sponsor in a hypothetical liquidation of the company as of the valuation date in accordance with the provisions of the partnership or advisory agreements and the terms of the preferred securities. Because certain distributions related to our SLP Units are only payable to their holder in a liquidation event, we believe they should be valued for our NAV in accordance with these provisions.
Our operating agreement provides for distributions to be made during our liquidating stage to our stockholders and the holder of the SLP Units at certain prescribed thresholds. In connection with our initial public offering of common stock, Lightstone SLP, LLC purchased an aggregate of $30.0 million of SLP Units. In the calculation of our estimated NAV, an approximately $48.2 million allocation of value was made to the SLP Units representing the amount of estimated distributions which would have been payable to the holder of the SLP Units, assuming a liquidation event as of September 30, 2019.
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Limitations and Risks
As with any valuation methodology, the methodology used to determine our estimated NAV and resulting estimated NAV per Share is based upon a number of estimates and assumptions that may prove later not to be accurate or complete. Further, different participants with different property-specific and general real estate and capital market assumptions, estimates, judgments and standards could derive a different estimated NAV per Share, which could be significantly different from the estimated NAV per Share approved by our board of directors. The estimated NAV per Share approved by our board of directors does not represent the fair value of our assets and liabilities in accordance with GAAP, and such estimated NAV per Share is not a representation, warranty or guarantee that:
| · | A stockholder would be able to resell his or her shares at the estimated NAV per Share; |
| · | A stockholder would ultimately realize distributions per share of common stock equal to the estimated NAV per Share upon liquidation of our assets and settlement of our liabilities or a sale of the Company; |
| · | Our shares of common stock would trade at the estimated NAV per Share on a national securities exchange; |
| · | An independent third-party appraiser or other third-party valuation firm would agree with the estimated NAV per Share; or |
| · | The methodology used to estimate our NAV per Share would be acceptable to FINRA or under the Employee Retirement Income Security Act with respect to their respective requirements. |
The Internal Revenue Service and the Department of Labor do not provide any guidance on the methodology an issuer must use to determine its estimated NAV per share. FINRA guidance provides that NAV valuations be derived from a methodology that conforms to standard industry practice.
As with any valuation methodology, our methodology is based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive different estimated NAVs and resulting NAVs per share, and these differences could be significant. The estimated NAV per Share is not audited and does not represent the fair value of our assets less our liabilities in accordance GAAP, nor do they represent an actual liquidation value of our assets and liabilities or the amount shares of our common stock would trade at on a national securities exchange. As of the date of this filing, although we have not sought stockholder approval to adopt a plan of liquidation of the Company, certain distributions may be payable to Lightstone SLP, LLC for its SLP Units in connection with a liquidation event. Accordingly, our estimated NAV reflects any allocations of value to the SLP Units representing the amount that would be payable to Lightstone SLP, LLC in connection with a liquidation event pursuant to the guidelines for estimating NAV contained in IPA Practice Guideline 2013-01, ‘‘Valuation of Publicly Registered Non-Listed REITs.’’ Our estimated NAV per Share is based on the estimated value of our assets less the estimated value of our liabilities and other non-controlling interests less any allocations to the SLP Units divided by the number of our diluted shares of common stock outstanding, all as of the date indicated. Our estimated NAV per Share does not reflect a discount for the fact we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. Our estimated NAV per Share does not take into account estimated disposition costs or fees or penalties, if any, that may apply upon the prepayment of certain of our debt obligations or the impact of restrictions on the assumption of certain debt. Our estimated NAV per Share will fluctuate over time as a result of, among other things, future acquisitions or dispositions of assets, developments related to individual assets and the management of those assets and changes in the real estate and capital markets. Different parties using different assumptions and estimates could derive different NAVs and resulting estimated NAVs per share, and these differences could be significant. Markets for real estate and real estate-related investments can fluctuate and values are expected to change in the future. We currently expect that our Advisor will estimate our NAV on at least an annual basis. Our board of directors will review and approve each estimate of NAV and resulting estimated NAV per Share.
The following factors may cause a stockholder not to ultimately realize distributions per share of common stock equal to the estimated NAV per Share upon liquidation:
| · | The methodology used to determine estimated NAV per Share includes a number of estimates and assumptions that may not prove to be accurate or complete as compared to the actual amounts received in the liquidation; |
| · | In a liquidation, certain assets may not be liquidated at their estimated values because of transfer fees and disposition fees, which are not reflected in the estimated NAV calculation; |
| · | In a liquidation, debt obligations may have to be prepaid and the costs of any prepayment penalties may reduce the liquidation amounts. Prepayment penalties are not included in determining the estimated value of liabilities in determining estimated NAV; |
| · | In a liquidation, the real estate assets may derive a portfolio premium which premium is not considered in determining estimated NAV; |
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| · | In a liquidation, the potential buyers of the assets may use different estimates and assumptions than those used in determining estimated NAV; |
| · | If the liquidation occurs through a listing of the common stock on a national securities exchange, the capital markets may value the Company’s net assets at a different amount than the estimated NAV. Such valuation would likely be based upon customary REIT valuation methodology including funds from operation (‘‘FFO’’) multiples of other comparable REITs, FFO coverage of dividends and adjusted FFO payout of the Company’s anticipated dividend; and |
| · | If the liquidation occurs through a merger of the Company with another REIT, the amount realized for the common stock may not equal the estimated NAV per Share because of many factors including the aggregate consideration received, the make-up of the consideration (e.g., cash, stock or both), the performance of any stock received as part of the consideration during the merger process and thereafter, the reception of the merger in the market and whether the market believes the pricing of the merger was fair to both parties. |
Dividend Reinvestment Program
Our distribution reinvestment program (“DRIP”) provides our shareholders with an opportunity to purchase additional shares of our common stock at a discount by reinvesting distributions. Under our distribution reinvestment program, a shareholder may acquire, from time to time, additional shares of our common stock by reinvesting cash distributions payable by us to such shareholder, without incurring any brokerage commission, fees or service charges.
The DRIP had been suspended since 2015 until our DRIP Registration Statement on Form S-3D was filed and became effective as amended and restated, under the Securities Act of 1933 on October 25, 2018.
Pursuant to the DRIP following its reactivation, our stockholders who elect to participate may invest all or a portion of the cash distributions that we pay them on shares of our common stock in additional shares of our common stock without paying any fees or commissions. The purchase price for shares under the DRIP will be equal to 95% of our current NAV per Share, as determined by the Company’s board of directors and reported by the Company from time to time. On December 10, 2019, our Board of Directors determined our NAV per Share of $11.82 as of September 30, 2019, which resulted in a purchase price for shares under the DRIP of $11.23 per share. As of December 31, 2019, we had 10.0 million shares available for issuance under our DRIP.
However, our Board of Directors reserves the right to terminate the program for any reason without cause by providing written notice of termination of the distribution reinvestment program to all participants or written notice of termination of the share repurchase program to all shareholders.
Share Repurchase Program
Our share repurchase program may provide eligible stockholders with limited, interim liquidity by enabling them to sell shares back to us, subject to restrictions and applicable law. A selling stockholder must be unaffiliated with us, and must have beneficially held the shares for at least one year prior to offering the shares for sale to us through the share repurchase program. Subject to the limitations described in the Registration Statement, we will also redeem shares upon the request of the estate, heir or beneficiary of a deceased stockholder.
Originally, the prices at which stockholders who held shares for the required one-year period could sell shares back to us was the lesser of (i) the share price as determined by our Board of Directors or (ii) the purchase price per share if purchased at a reduced price.
On May 10, 2018, the Board of Directors amended the share repurchase program to (i) change to the price for all purchases under our share repurchase program from $10.00 per share to 92% of the NAV per Share (previously the purchase price was $10.00 per share) and (ii) increase the number of shares repurchased during any calendar year from two (2.0%) of the weighted average number of shares outstanding during the prior calendar year to five (5.0%) of the weighted average number of shares outstanding during the previous twelve months.
A stockholder must have beneficially held the shares for at least one year prior to offering them for sale to us through the share repurchase program, although if a stockholder redeems all of its shares our Board of Directors has the discretion to exempt shares purchased pursuant to the distribution reinvestment plan from this one year requirement. Other affiliates will not be eligible to participate in share repurchase program.
Pursuant to the terms of the share repurchase program, we will make repurchases, if requested, at least once quarterly. Subject to funds being available, we will limit the number of shares repurchased during any calendar year to two (2.0%) of the weighted average number of shares outstanding during the prior calendar year. Funding for the share repurchase program will come exclusively from proceeds we receive from the sale of shares under our distribution reinvestment plan and other operating funds, if any, as the Board of Directors, at its sole discretion, may reserve for this purpose.
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We repurchased 1.1 million shares of common stock each of the years ended December 31, 2019 and 2018, at an average price per share of $10.65 and $9.98 per share, respectively.
Our Board of Directors, at its sole discretion, has the power to terminate the share repurchase program, change the price per share under the share repurchase program or reduce the number of shares purchased under the program, if it determines that the funds allocated to the share repurchase program are needed for other purposes, such as the acquisition, maintenance or repair of properties, or for use in making a declared distribution. A determination by our Board of Directors to eliminate or reduce the share repurchase program requires the unanimous affirmative vote of the independent directors.
On March 25, 2020, the Board of Directors amended the share repurchase program to remove stockholder notice requirements and also approved the suspension of all redemptions effective immediately.
Distributions
Distribution Objectives
We made an election to qualify as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2005. U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with GAAP) determined without regard to the deduction for distributions paid and excluding any net capital gains. In order to continue to qualify for REIT status, we may be required to make distributions in excess of cash available.
Distributions are authorized at the discretion of our Board of Directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. Such analyses may include actual and anticipated operating cash flow, capital expenditure needs, general financial and market conditions, proceeds from asset sales and other factors that our board of directors deem relevant. Our Board of Directors’ decisions will be substantially influenced by their obligation to ensure that we maintain our federal tax status as a REIT. We commenced quarterly distributions beginning February 1, 2006. We may fund future distributions from borrowings if we have not generated sufficient cash flow from our operations to fund such distributions. Our ability to continue to pay regular distributions and the size of these distributions will depend upon a variety of factors. For example, our borrowing policy permits us to incur short-term indebtedness, having a maturity of two years or less, and we may have to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. We cannot assure that regular distributions will continue to be made or that we will maintain any particular level of distribution that we have previously established or may establish.
We are an accrual basis taxpayer, and
as such our REIT taxable income could be higher than the cash available to us. We may therefore borrow to make distributions,
which could reduce the cash available to us, in order to distribute 90% of REIT taxable income as a condition to our election
to be taxed as a REIT. These distributions made with borrowed funds may constitute a return of capital to stockholders. “Return
of capital” refers to distributions to investors in excess of net income. To the extent that distributions to stockholders
exceed earnings and profits, such amounts constitute a return of capital for U.S. federal income tax purposes, although such distributions
might not reduce stockholders’ aggregate invested capital. Because our earnings and profits are reduced for deprecation
and other non-cash items, it is likely that a portion of each distribution will constitute a tax deferred return of capital for
U.S. federal income tax purposes.
Distributions on Common Shares
Our Board of Directors commenced declaring and we began paying regular quarterly distributions on our Common Shares at the pro rata equivalent of an annual distribution of $0.70 per share, or an annualized rate of 7.0% assuming a purchase price of $10.00 per share, beginning February 1, 2006. Subsequently, our Board of Directors has declared regular quarterly distributions at the annualized rate of 7.0% assuming a purchase price of $10.00 per share, with the exception of the three-month period ended June 30, 2010. The distributions for the three-month period ended June 30, 2010 were at an aggregate annualized rate of 8% based on the share price of $10.00. Through December 31, 2019, we have paid aggregate distribution in the amount of $232.0 million, which includes cash distributions paid to stockholders and common stock issued under our DRIP.
Total distributions declared during the years ended December 31, 2019 and 2018 were $16.1 million and $16.9 million, respectively.
On March 25, 2020, our Board of Directors authorized and declared a Common Share distribution of $0.175 per share for the quarterly period ending March 31, 2020. The quarterly distribution is the pro rata equivalent of an annual distribution of $0.70 per share, or an annualized rate of 7.0% assuming a purchase price of $10.00 per share. The distribution will be paid on or about the 15th day of the month following the quarter-end to stockholders of record at the close of business on the last day of the quarter-end. The stockholders have an option to elect the receipt of shares under the Company’s DRIP.
Distributions on SLP Units
From our inception through March 31, 2010, cumulative distributions declared to Lightstone SLP, LLC were $4.9 million, all of which had been paid as of April 2010. For the three months ended June 30, 2010, the Operating Partnership did not declare a distribution related to the SLP Units as the distribution to the stockholders was less than 7% for this period. On August 30, 2010, the Company declared additional distributions to the stockholders to bring the annualized distribution to at least 7%. As such, the Company as of August 30, 2010 recommenced declaring distributions to Lightstone SLP, LLC at the 7% annualized rate, except for the three months ended June 30, 2010 which was at an 8% annualized rate which represents the same rate paid to the stockholders.
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During each of the years ended December 31, 2019 and 2018, distributions of $2.1 million were declared and distributions of $2.1 million were paid related to the SLP Units and are part of noncontrolling interests. Since inception through December 31, 2019, cumulative distributions declared were $25.5 million, of which $25.0 million have been paid. Such distributions, paid currently at a 7% annualized rate of return to Lightstone SLP, LLC through December 31, 2019, with the exception of the distribution related to the three months ended June 30, 2010, which was paid at an 8% annualized rate will always be subordinated until stockholders receive a stated preferred return, as described below.
Additionally, on March 25, 2020, our Board of Directors declared a quarterly distribution for the quarterly period ending March 31, 2020 on the SLP Units at an annualized rate of 7.0%. Any future distributions on the SLP Units will always be subordinated until stockholders receive a stated preferred return.
Recent Sales of Unregistered Securities
During the period covered by this Form 10-K, we did not sell any equity securities that were not registered under the Securities Act of 1933.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: |
You should read the following discussion and analysis together with our consolidated financial statements and notes thereto included in this Annual Report on Form 10-K. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see “Special Note Regarding Forward-Looking Statements” above for a description of these risks and uncertainties. Dollar amounts are presented in thousands, except per share data and where indicated in millions.
Overview
Lightstone Value Plus Real Estate Investment Trust, Inc. (the “Lightstone REIT”), (together with the Operating Partnership (as defined below), the “Company”, also referred to as “we”, “our” or “us” herein) has and expects to continue to acquire and operate or develop in the future, commercial, residential and hospitality properties and/or make real estate-related investments, principally in the United States. Our acquisitions and investments are, principally conducted through the Operating Partnership, and may include both portfolios and individual properties.
As of December 31, 2019, we have ownership interests in (i) two consolidated operating properties, (ii) three consolidated development properties and (iii) seven unconsolidated operating properties. With respect to our consolidated operating properties, we wholly own the St. Augustine Outlet Center, a retail property containing approximately 0.3 million square feet of gross leasable area, and have a majority ownership interest of approximately 59.2% in Gantry Park Landing, a multi-family residential property containing 199 apartment units. With respect to our consolidated development properties, we wholly own three projects consisting of the Lower East Side Moxy Hotel, the Exterior Street Project and the Santa Clara Data Center. We also hold a 2.5% ownership interest in seven hotel properties through a joint venture (the “Joint Venture”) which we account for our under the cost method of accounting. The Joint Venture is between us and the operating partnership of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a real estate investment trust also sponsored by our Sponsor, which has a 97.5% ownership interest in the Joint Venture. Furthermore, we have other real estate-related investments, including preferred investments in related parties and nonrecourse promissory notes made to unaffiliated third-parties. our real estate investments have been and are expected to continue to be held by the Company alone or jointly with other parties.
We do not have employees. We entered into an advisory agreement pursuant to which the Advisor supervises and manages our day-to-day operations and selects our real estate and real estate related investments, subject to oversight by our Board of Directors. We pay the Advisor fees for services related to the investment and management of our assets, and we will reimburse the Advisor for certain expenses incurred on our behalf.
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To maintain our qualification as a REIT, we engage in certain activities such as providing real estate-related services through taxable REIT subsidiaries (“TRSs”). As such, we may still be subject to U.S. federal and state income and franchise taxes from these activities.
Acquisitions and Investment Strategy
We have, to date, acquired and/or developed residential, commercial and hospitality properties principally, all of which are located in the United States and also made other real estate-related investments. Our acquisitions have included both portfolios and individual properties. Our current operating properties consist of one retail property (the St. Augustine Outlet Center) and one multi-family residential property (Gantry Park Landing). We have also acquired various parcels of land and air rights related to the development and construction of real estate properties. Additionally, we have made preferred investments in related parties and originated nonrecourse loans to unaffiliated third-party borrowers.
Investments in real estate are generally made through the purchase of all or part of a fee simple ownership, or all or part of a leasehold interest. We may also purchase limited partnership interests, limited liability company interests and other equity securities. We may also enter into joint ventures with related parties for the acquisition, development or improvement of properties as well as general partnerships, co-tenancies and other participations with real estate developers, owners and others for the purpose of developing, owning and operating real properties. We will not enter into a joint venture to make an investment that we would not be permitted to make on our own. Not more than 10% of our total assets will be invested in unimproved real property. For purposes of this paragraph, “unimproved real properties” does not include properties acquired for the purpose of producing rental or other operating income, properties under construction and properties for which development or construction is planned within one year.
Current Environment
Our operating results are substantially impacted by the overall health of local, U.S. national and global economies and may be influenced by market and other challenges. Additionally, our business and financial performance may be adversely affected by current and future economic and other conditions; including, but not limited to, availability or terms of financings, financial markets volatility, political upheaval or uncertainty, natural and man-made disasters, terrorism and acts of war, unfavorable changes in laws and regulations, outbreaks of contagious diseases, cybercrime, loss of key relationships, and recession.
With respect to contagious diseases, the extent to which our business may be affected by the current outbreak of the Coronavirus will largely depend on both current and future developments, including its duration, spread and treatment, and related travel advisories and restrictions, all of which are highly uncertain and cannot be reasonably predicted.
If our properties and real estate-related investments are negatively impacted for an extended period because (i) tenants are unable to pay their rent, (ii) borrowers are unable to pay scheduled debt service on our notes receivable and/or (iii) various related party entities are unable to pay monthly preferred distributions on our Preferred Investments, our business and financial results could be materially and adversely impacted. While we believe there are certain cost reduction strategies we can implement, there can be no assurance that they would fully mitigate the adverse impact of any lost revenue and income.
These and other market and economic challenges could materially affect (i) the value and performance of our investments, (ii) our ability to pay future distributions, if any, (iii) the availability or terms of financings, (iv) our ability to make scheduled principal and interest payments, and (v) our ability to refinance any outstanding debt when contractually due.
We are not currently aware of any other material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from our operations, other than those referred to above or throughout this Form 10-K. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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.
Critical Accounting Estimates and Policies
General
Our consolidated financial statements, included in this annual report, include our accounts, the Operating Partnership and its subsidiaries (over which we exercise financial and operating control). All inter-company balances and transactions have been eliminated in consolidation.
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and judgments about the effects of matters or future events that are inherently uncertain. These estimates and judgments may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
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On an ongoing basis, we evaluate our estimates, including contingencies and litigation. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
To assist in understanding our results of operations and financial position, we have identified our critical accounting policies and discussed them below. These accounting policies are most important to the portrayal of our results and financial position, either because of the significance of the financial statement items to which they relate or because they require our management's most difficult, subjective or complex judgments.
Revenue Recognition
Our revenue, which is comprised largely of rental income, includes rents that tenants pay in accordance with the terms of their respective leases reported on a straight-line basis over the initial term of the lease. Since our leases may provide for rental increases at specified intervals, straight-line basis accounting requires us to record as an asset, and include in revenue, unbilled rent that we only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease.
In addition, we will defer the recognition of contingent rental income, such as percentage rents, until the specific target which triggers the contingent rental income is achieved. Cost recoveries from tenants will be included in tenant recovery income in the period the related costs are incurred.
Investments in Real Estate
We generally record investments in real estate at cost and capitalize improvements and replacements when they extend the useful life or improve the efficiency of the asset. We expense costs of ordinary repairs and maintenance as incurred. We compute depreciation using the straight-line method over the estimated useful lives of the applicable real estate asset. We generally use estimated useful lives of up to thirty-nine years for buildings and improvements, five to ten years for furniture and fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
We make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because, if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
We record assets and groups of assets and liabilities which comprise disposal groups as “held for sale” when all of the following criteria are met: a decision has been made to sell, the assets are available for sale immediately, the assets are being actively marketed at a reasonable price in relation to the current fair value, a sale has been or is expected to be concluded within twelve months of the balance sheet date, and significant changes to the plan to sell are not expected. The assets and disposal groups held for sale are valued at the lower of book value or fair value less disposal costs. For sales of real estate or assets classified as held for sale, we evaluate whether a disposal transaction meets the criteria of a strategic shift and will have a major effect on our operations and financial results to determine if the results of operations and gains on sale of real estate will be presented as part of our continuing operations or as discontinued operations in our consolidated statements of operations. If the disposal represents a strategic shift, it will be classified as discontinued operations for all periods presented; if not, it will be presented in continuing operations.
When circumstances such as adverse market conditions indicate a possible impairment of the value of a property, we will review the recoverability of the property’s carrying value. The review of recoverability is based on our estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. Our forecast of these cash flows considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, we record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the property.
We make subjective assessments as to whether there are impairments in the values of our investments in real estate. We evaluate our ability to collect both interest and principal related to any real estate related investments in which we may invest. If circumstances indicate that such investment is impaired, we reduce the carrying value of the investment to its net realizable value. Such reduction in value will be reflected as a charge to operations in the period in which the determination is made.
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Accounting for Asset Acquisitions
The cost of the acquisition in an asset acquisition is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, and certain liabilities such as assumed debt and contingent liabilities on the basis of their relative fair values. Fees incurred related to asset acquisitions are capitalized as part of the cost of the investment.
Accounting for Business Combinations
Upon acquisition of real estate operating properties that meet the definition of a business, we estimate the fair value of acquired tangible assets and identified intangible assets and liabilities and assumed debt and contingent liabilities at the date of acquisition, based upon an evaluation of information and estimates available at that date. Based on these estimates, we evaluate the existence of goodwill or a gain from a bargain purchase and allocate the initial purchase price to the applicable assets, liabilities and noncontrolling interest, if any. As final information regarding fair value of the assets acquired and liabilities assumed and noncontrolling interest is received and estimates are refined, appropriate adjustments are made to the purchase price allocation. The allocations are finalized as soon as all the information necessary is available.
Real Estate-Related Debt Investments
We intend to hold our real estate-related debt investments until maturity and accordingly, they are carried at cost, net of any unamortized loan fees, origination fees, discounts, premiums and unfunded commitments. Real estate-related debt investments that are deemed impaired will be carried at amortized cost less a reserve, if deemed appropriate, which approximates fair value.
Investment income will be recognized on an accrual basis and any related premium, discount, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to investment income in the Company’s statements of operations. The amortization of any premium or accretion of any discount is discontinued if such debt investment is reclassified to held for sale.
Credit Losses and Impairment on Investments
Real Estate-Related Debt Investments
Real estate-related debt investments are considered impaired when, based on current information and events, it is probable that we will not be able to collect principal and interest amounts due according to the contractual terms. We assess the credit quality of our real estate-related debt investments and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment of management is required in this analysis. We consider the estimated net recoverable value of the debt investment 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 quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value of the underlying collateral is less than the net carrying value of the debt investment, a loan loss reserve is recorded with a corresponding charge to provision for loan losses. The loan loss reserve for each debt investment is maintained at a level that is determined to be adequate by management to absorb probable losses.
Income recognition is suspended for a debt investment at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired debt investment is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired debt investment is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method, until an accrual is resumed when the debt investment becomes contractually current and performance is demonstrated to be resumed. A debt investment is written off when it is no longer realizable or is legally discharged.
Investments in Unconsolidated Entities
We evaluate our investments in other entities for consolidation. We consider our percentage interest in the joint venture, evaluation of control and whether a variable interest entity exists when determining if the investment qualifies for consolidation or if it should be accounted for as an unconsolidated investment under the equity or cost method of accounting.
If an investment qualifies for the equity method of accounting, our investment is recorded initially at cost, and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. The net income or loss of an unconsolidated investment is allocated to its investors in accordance with the provisions of the operating agreement of the entity. The allocation provisions in these agreements may differ from the ownership interest held by each investor. Differences, if any, between the carrying amount of our investment in the respective joint venture and our share of the underlying equity of such unconsolidated entity are amortized over the respective lives of the underlying assets as applicable. These items are reported as a single line item in the consolidated statements of operations as income or loss from investments in unconsolidated affiliated entities. If an investment qualifies for the cost method of accounting, our investment is recorded initially at cost, and subsequently adjusted for cash contributions and distributions resulting from any capital events. Distributions received from the underlying entity are recorded as interest income.
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We review investments for impairment in value whenever events or changes in circumstances indicate that the carrying amount of such investment may not be recoverable. An investment is impaired only if management’s estimate of the fair value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary. The ultimate realization of our investment in partially owned entities is dependent on a number of factors including the performance of that entity and market conditions. If we determine that a decline in the value of a partially owned entity is other than temporary, we will record an impairment charge.
Inflation
We will be exposed to inflation risk as income from long-term leases is expected to be the primary source of our cash flows from operations. Our long-term leases are expected to contain provisions to mitigate the adverse impact of inflation on our operating results. Such provisions will include clauses entitling us to receive scheduled base rent increases and base rent increases based upon the consumer price index. In addition, our leases are expected to require tenants to pay a negotiated share of operating expenses, including maintenance, real estate taxes, insurance and utilities, thereby reducing our exposure to increases in cost and operating expenses resulting from inflation.
Treatment of Management Compensation, Expense Reimbursements and Operating Partnership Participation Interest
Management of our operations is outsourced to our Advisor and certain other affiliates of our Sponsor. Fees related to each of these services are accounted for based on the nature of such service and the relevant accounting literature. Such fees include acquisition fees associated with the purchase of interests in affiliated real estate entities; asset management fees paid to our Advisor and property management fees paid to our Property Manager, which manage certain of the properties we acquire, or to other unaffiliated third-party property managers, principally for the management of our hospitality properties. These fees are expensed or capitalized to the basis of acquired assets, as appropriate.
Our Property Manager may also perform fee-based construction management services for both our re-development activities and tenant construction projects. These fees are considered incremental to the construction effort and will be capitalized to the associated real estate project as incurred. Costs incurred for tenant construction will be depreciated over the shorter of their useful life or the term of the related lease. Costs related to redevelopment activities will be depreciated over the estimated useful life of the associated project.
Leasing activity at certain of our properties has also been outsourced to our Property Manager. Any corresponding leasing fees we pay are capitalized and amortized over the life of the related lease.
Expense reimbursements made to both our Advisor and Property Manager will be expensed or capitalized to the basis of acquired assets, as appropriate.
Through March 31, 2009, Lightstone SLP, LLC, an affiliate of the Advisor, purchased an aggregate of $30.0 million of SLP Units in the Operating Partnership at a cost of $100,000 per unit and none thereafter.
Income Taxes
We elected to be taxed as a REIT commencing with the taxable year ended December 31, 2005. If we remain qualified 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, or 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 generally accepted accounting principles in the United States of America, or GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If we fail to remain qualified for taxation as a REIT in any subsequent year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify as a REIT. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders.
To maintain our qualification as a REIT, we engage in certain activities through taxable REIT subsidiaries (“TRSs”). As such, we may still be subject to U.S. federal and state income and franchise taxes from these activities.
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As of December 31, 2019 and 2018, we had no material uncertain income tax positions. Additionally, even if we continue to qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income.
Results of Operations
The following summarizes our investment activities during the years ended December 31, 2019 and 2018.
Development Projects
Lower East Side Moxy Hotel
On December 3, 2018, we, through a subsidiary of the Operating Partnership, acquired three adjacent parcels of land located at 147-151 Bowery, New York, New York (collectively, the “Bowery Land”) from 151 Emmut Properties LLC and 145-149 Bowery LLC, both unaffiliated third parties, for aggregate consideration of approximately $56.5 million, excluding closing and other acquisition related costs, on which we intend to develop and construct a 296-room Marriott Moxy hotel (the “Lower East Side Moxy Hotel”). Additionally, on December 6, 2018, we, though a subsidiary of the Operating Partnership, acquired certain air rights located at 329 Broome Street, New York, New York (the “Air Rights”) from B.R.P. Realty Corp., an unaffiliated third party, for approximately $2.4 million, excluding closing and other acquisition related costs. We intend to use the Air Rights in connection with the development and construction of the Lower East Side Moxy Hotel.
As of December 31, 2019 and December 31, 2018, we incurred and capitalized to construction in progress an aggregate of $73.8 million and $63.3 million, respectively, consisting of acquisition and other development costs attributable to the Lower East Side Moxy Hotel.
Exterior Street Project
On February 27, 2019, we, through subsidiaries of the Operating Partnership, acquired two adjacent parcels of land located at 355 and 399 Exterior Street, New York, New York (collectively, the “Exterior Street Land”), from Borden Realty Corp and 399 Exterior Street Associates LLC, unaffiliated third parties, for an aggregate purchase price of approximately $59.0 million, excluding closing and other acquisition related costs, on which it intends to develop and construct a multi-family residential property (the “Exterior Street Project”).
As of December 31, 2019, we incurred and capitalized to construction in progress an aggregate of $66.1 million consisting of acquisition and other development costs attributable to the Exterior Street Project.
Santa Clara Data Center
On January 10, 2019, we, through subsidiaries of the Operating Partnership, acquired a parcel of land located at 2175 Martin Avenue, Santa Clara, CA (the “Martin Avenue Land”) from The Chioini Living Trust, an unaffiliated third party, for approximately $10.6 million, excluding closing and other acquisition related costs, on which we intend to develop and construct a data center (the “Santa Clara Data Center”).
As of December 31, 2019, we have incurred and capitalized to construction in progress an aggregate of $13.0 million consisting of acquisition of the Martin Avenue Land and other development costs attributable to the Santa Clara Data Center.
Notes Receivable
Beginning in 2019, we formed certain joint ventures (collectively, the “NR Joint Ventures”) between wholly-owned subsidiaries of the Operating Partnership (collectively, the “NR Subsidiaries”) and affiliates of the Sponsor (the “NR Affiliates”), pursuant to which the NR Joint Ventures have originated nonrecourse loans (collectively, the “Joint Venture Promissory Notes”) to unaffiliated third-party borrowers (collectively, the “Joint Venture Borrowers”).
We determined that the NR Joint Ventures are VIEs and the NR Subsidiaries are the primary beneficiaries. Since the NR Subsidiaries are the primary beneficiaries, beginning on the applicable date of formation, we consolidated the operating results of the NR Joint Ventures and accounted for the respective ownership interests of the NR Affiliates as noncontrolling interests.
The Joint Venture Promissory Notes generally have an initial term of one year and may provide for an additional one-year extension option subject to satisfaction of certain prescribed conditions, including the funding of an additional reserve for interest and payment of an extension fee. The Joint Venture Promissory Notes are collateralized by either the membership interests of the Joint Venture Borrowers in the borrowing entity or the underlying real property being developed by the Joint Venture Borrower.
During the year ended December 31, 2019, the NR Subsidiaries and the NR Affiliates made aggregate contributions to the NR Joint Ventures of approximately $32.1 million and $33.1 million, respectively, principally to fund their respective shares of the Joint Venture Promissory Notes that were originated. Additionally, during the year ended December 31, 2019, the NR Joint Ventures made aggregate distributions of approximately $18.4 million to both the NR Subsidiaries and NR Affiliates, based on their respective membership interests. The NR Joint Ventures’ distributions were made from payments received from the NR Borrowers and proceeds from a financing transaction completed by LSC 1543 7th LLC and LSC 1650 Lincoln LLC.
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The Joint Venture Promissory Notes are recorded in notes receivable, net on the consolidated balance sheets. The origination fees received are presented in the consolidated balance sheets as a direct deduction from the carrying value of the Joint Venture Promissory Notes and are amortized into interest income, using a straight-line method that approximates the effective interest method, over the initial term of the Joint Venture Promissory Notes. The Loan Reserves are presented in the consolidated balance sheets as a direct deduction from the carrying value of the Joint Venture Promissory Notes and are applied against the monthly interest due over the initial term.
The Notes Receivable (dollar amounts in thousands) are summarized as follows:
| Company's | Original | Initial | Contractual | As of December 31, 2019 | ||||||||||||||||||||||||||||||
| Ownership | Loan | Origination | Origination | Maturity | Interest | Outstanding | Unamortized | Carrying | ||||||||||||||||||||||||||
| Joint Venture/Lender | Percentage | Amount | Fee | Date | Date | Rate | Principal | Reserves | Origination Fee | Value | ||||||||||||||||||||||||
| LSC 162nd Capital I LLC | 45.45 | % | $ | 4,234 | 1.50 | % | February 5, 2019 | March 1,2020 | Libor plus 7.50% (Floor of 10%) | $ | 4,234 | $ | (82 | ) | $ | (6 | ) | $ | 4,146 | |||||||||||||||
| LSC 162nd Capital II LLC | 45.45 | % | $ | 9,166 | 1.50 | % | February 5, 2019 | March 1,2020 | Libor plus 7.50% (Floor of 10%) | 9,166 | (178 | ) | (14 | ) | 8,974 | |||||||||||||||||||
| LSC 47-16 Greenpoint LLC (1) | 50 | % | $ | 13,000 | 1.00 | % | April 5, 2019 | April 4, 2020 | Libor plus 5.75% (Floor of 8.25%) | - | - | - | - | |||||||||||||||||||||
| LSC 1543 7th LLC | 50 | % | $ | 20,000 | 1.00 | % | August 27, 2019 | August 26, 2020 | Libor plus 5.15% (Floor of 7.65%) | 20,000 | (504 | ) | (131 | ) | 19,365 | |||||||||||||||||||
| LSC 1650 Lincoln LLC | 50 | % | $ | 24,000 | 1.00 | % | August 27, 2019 | August 26, 2020 | Libor plus 5.15% (Floor of 7.65%) | 24,000 | (605 | ) | (157 | ) | 23,238 | |||||||||||||||||||
| Total | $ | 57,400 | $ | (1,369 | ) | $ | (308 | ) | $ | 55,723 | ||||||||||||||||||||||||
| (1) | Repaid in full during 2019 |
During the year ended December 31, 2019, the Company recognized interest income (included in interest and dividend income on the consolidated statements of operations) of $3.7 million for the Joint Venture Promissory Notes.
Preferred Investments
We have entered into several agreements with various related party entities that provide for us to make preferred contributions pursuant to certain instruments (the “Preferred Investments”) that entitle us to monthly preferred distributions. The Preferred Investments had an aggregate balance of $34.5 million and $100.7 million as of December 31, 2019 and 2018, respectively, and are classified as held-to-maturity securities, recorded at cost and included in investments in related parties on the consolidated balance sheets. The fair value of these investments approximated their carrying values based on market rates for similar instruments.
During the year ended December 31, 2019, we (i) partially redeemed an aggregate of $13.0 million of the 40 East End Avenue Preferred Investment, redeemed the entire 30-02 39th Street Preferred Investment of $10.0 million, partially redeemed an aggregate of $34.5 million of the East 11th Street Preferred Investment and partially redeemed $11.0 million of the Miami Moxy Preferred Investment and (ii) made aggregate contributions of $2.3 million for the Miami Moxy Preferred Investment and as of December 31, 2019, there were no unfunded contributions. Additionally, during the years ended December 31, 2019 and 2018, we recognized investment income of $9.4 million and $14.3 million, respectively, on the Preferred Investments which is included in interest and dividend income on the consolidated statements of operations.
The Preferred Investments (dollar amounts in thousands) are summarized as follows:
| Preferred Investment Balance | Investment Income | ||||||||||||||||||
| As of | As of | For the Year Ended December 31, | |||||||||||||||||
| Preferred Investments | Dividend Rate | December 31, 2019 | December 31, 2018 | 2019 | 2018 | ||||||||||||||
| 40 East End Avenue | 8% to 12% | $ | 17,000 | $ | 30,000 | $ | 3,609 | $ | 3,650 | ||||||||||
| 30-02 39th Avenue | 12% | - | 10,000 | 140 | 1,217 | ||||||||||||||
| 485 7th Avenue | 12% | - | - | - | 1,095 | ||||||||||||||
| East 11th Street | 12% | 8,500 | 43,000 | 3,433 | 6,561 | ||||||||||||||
| Miami Moxy | 12% | 9,000 | 17,733 | 2,263 | 1,744 | ||||||||||||||
| Total Preferred Investments | $ | 34,500 | $ | 100,733 | $ | 9,445 | $ | 14,267 | |||||||||||
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Dispositions
Dispositions - Continuing Operations
The following disposition did not represent a strategic shift that had a major effect on our operations and financial results and therefore did not qualify to be reported as discontinued operations and its operating results are reflected in tour results from continuing operations in the consolidated statements of operations for all periods presented through the date of disposition:
DePaul Plaza
On September 20, 2019, we disposed of a retail center located in Bridgeton, Missouri (“DePaul Plaza”), to an unrelated third party for aggregate consideration of approximately $19.8 million, excluding closing and other related costs. In connection with the disposition, we recorded a gain on the disposition of real estate of approximately $1.0 million during the third quarter of 2019.
Dispositions - Discontinued Operations
The following dispositions qualified to be reported as discontinued operations and their operating results are classified as discontinued operations in the consolidated statements of operations for all periods presented through their respective dates of disposition:
Disposition Transactions related to Gulf Coast Industrial Portfolio
We had an outstanding non-recourse mortgage loan (the “Gulf Coast Industrial Portfolio Mortgage Loan”) which was originated in February 2007 and subsequently transferred during the third quarter of 2012 to a special servicer that discontinued scheduled debt service payments and notified us that the loan was in default and due on demand. The Gulf Coast Industrial Portfolio Mortgage Loan was initially cross-collateralized by a portfolio of 14 industrial properties (collectively, the “Gulf Coast Industrial Portfolio”) including ten properties located in Louisiana (seven properties located in New Orleans and three properties located in Baton Rouge, and collectively, the “Louisiana Properties”) and four properties located in San Antonio, Texas (the “San Antonio Properties”).
Foreclosure of San Antonio Assets
On June 5, 2018, the special servicer completed a partial foreclosure of the Gulf Coast Industrial Portfolio pursuant to which it foreclosed on the San Antonio Assets. The San Antonio Assets were sold in a foreclosure sale by the special servicer for an aggregate amount of approximately $20.7 million.
Upon consummation of the foreclosure sale, the buyers assumed the significant risks and rewards of ownership and took legal title and physical possession of the San Antonio Assets for the agreed upon aggregate sales price of $20.7 million. We simultaneously received an aggregate credit of approximately $20.7 million which we applied against the total outstanding indebtedness (approximately $19.6 million and $1.1 million of principal and accrued interest payable, respectively) of the Gulf Coast Industrial Portfolio Mortgage.
The aggregate carrying value of the assets transferred and the liabilities extinguished in connection with the foreclosure of the San Antonio Assets were approximately $13.6 million and $20.7 million, respectively.
Since our performance obligations were met at the closing of the foreclosure sales and we had no continuing involvement with the San Antonio Assets an aggregate gain on disposition of real estate of approximately $7.1 million was recognized during the second quarter of 2018.
During 2018, the disposition of the San Antonio Assets did not initially qualify to be reported as discontinued operations since their disposition did not represent a strategic shift that had a major effect on our operations and financial results.
Assignment of Ownership in Louisiana Assets to Lender
On February 12, 2019, we and the lender of the Gulf Coast Industrial Portfolio Mortgage entered into an assignment agreement (the “Assignment Agreement”) pursuant to which we assigned our membership interests in the Louisiana Assets to the lender with an effective date of February 7, 2019. Under the terms of the Assignment Agreement, the lender assumed the significant risks and rewards of ownership and took legal title and physical possession of the Louisiana Assets and assumed all the other assets and related liabilities, including the Gulf Coast Industrial Mortgage and its accrued and unpaid interest, and released us of any claims against the liabilities assumed.
As a result of the Assignment Agreement, we have fully satisfied all of our obligations with respect to the Gulf Coast Industrial Portfolio Mortgage and all amounts accrued but not paid for interest (including default interest) and no amounts are due to the lender. Additionally, we have no continuing involvement with the Louisiana Assets.
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The aggregate carrying value of the assets transferred and the liabilities extinguished in connection with our assignment of our ownership interests in the Louisiana Assets to the lender was approximately $37.0 million and $49.6 million, respectively.
Since our performance obligations were met upon the assignment of our ownership interests in the Louisiana Assets to the lender and we have no continuing involvement with the Louisiana Assets, an aggregate gain on debt extinguishment of approximately $13.6 million was recognized during the first quarter of 2019.
The disposition of the Louisiana Assets, which comprised all of our remaining industrial properties, represented a strategic shift that had a major effect on our operations and financial results.
As a result of the disposition transactions related to both the San Antonio Assets and the Louisiana Assets, we no longer have any industrial properties. Because the Gulf Coast Industrial Portfolio Mortgage was cross-collateralized by the Gulf Coast Industrial Portfolio, comprised of both the San Antonio Assets and Louisiana Assets, the operating results of the entire Gulf Coast Industrial Portfolio have been classified as discontinued operations in our consolidated statements of operations for all periods presented.
For the Year Ended December 31, 2019 vs. December 31, 2018
Consolidated – Continuing Operations
Revenues
Our revenues are comprised of rental income and tenant recovery income. Total revenues decreased by approximately $1.1 million to $15.2 million for the year ended December 31, 2019 compared to $16.3 million for the same period in 2018. Excluding the effect of the disposition of DePaul Plaza, revenues were relatively flat.
Property operating expenses
Property operating expenses decreased by approximately $0.3 million to $4.7 million for the year ended December 31, 2019 compared to $5.0 million for the same period in 2018.
Real estate taxes
Real estate taxes decreased slightly by approximately $0.1 million to $1.1 million for the year ended December 31, 2019 compared to $1.2 million for the same period in 2018.
General and administrative expenses
General and administrative expenses decreased by approximately $1.7 million to $2.6 million for the year ended December 31, 2019 compared to $4.3 million for the same period in 2018 principally due to a decrease in professional fees and lower asset management fees as a result of the disposition transactions related to the Gulf Coast Industrial Portfolio and DePaul Plaza.
Depreciation and amortization
Depreciation and amortization decreased by approximately $0.5 million to $4.8 million for the year ended December 31, 2019 compared to $5.3 million for the same period in 2018.
Gain on disposition of real estate
During the year ended December 31, 2019, we recognized a gain on disposition of real estate of approximately $1.0 million related to the disposition of DePaul Plaza.
Interest and dividend income
Interest and dividend income decreased by approximately $2.1 million to $16.8 million for the year ended December 31, 2019 compared to $18.9 million for the same period in 2018. The decrease primarily reflects lower investment income of $4.9 million from our Preferred Investments and a decrease in dividend income from our investments in marketable securities of $1.4 million partially offset by interest income on our notes receivable of $3.7 million and an increase in interest earned on available cash of $0.4 million. We did not have any notes receivable during the year ended December 31, 2018.
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Interest expense
Interest expense, including amortization of deferred financing costs, decreased by approximately $3.9 million to $1.7 million for the year ended December 31, 2019 compared to $5.6 million for the same period in 2018. This decrease primarily reflects lower interest expense resulting from the capitalization of interest in connection with our development activities and the repayment in full of a mortgage that was collateralized by the St. Augustine Outlet Center in May 2018.
Unrealized loss on marketable equity securities
During the year ended December 31, 2019, we recorded an unrealized loss on marketable equity securities of $3.8 million and during the year ended December 31, 2018, we recorded an unrealized gain on marketable equity securities of $0.8 million which represents the change in the fair value of our marketable equity securities during the year ended December 31, 2019 and 2018, respectively.
Noncontrolling interests
The net earnings allocated to noncontrolling interests relates to (i) parties of the Company that hold units in the Operating Partnership, (ii) the interest in PRO-DFJV Holdings LLC (“PRO”) held by our Sponsor, (iii) the ownership interests in 50-01 2nd St. Associates LLC (the “2nd Street Joint Venture”) held by our Sponsor and other affiliates and (iv) the ownership interest in various joint ventures held by affiliates of our Sponsor that have originated nonrecourse loans to unaffiliated third-party borrowers.
Financial Condition, Liquidity and Capital Resources
Overview:
Rental income, interest and dividend income and borrowings are our principal source of funds to pay operating expenses, scheduled debt service, capital expenditures and distributions, excluding non-recurring capital expenditures.
We expect to meet our short-term liquidity requirements, including the costs of our expected non-recurring capital expenditures, including development activities, generally through working capital, redemptions of our Preferred Investments, repayments of our outstanding notes receivable, the remaining availability on the Bowery Mortgage ($0.8 million as of December 31, 2019) and new borrowings. As of December 31, 2019, we had approximately $77.6 million of cash and cash equivalents on hand and $54.7 million of marketable securities, available for sale. We believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.
Our borrowings consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. We typically have obtained level payment financing, meaning that the amount of debt service payable would be substantially the same each year. As such, most of the mortgages on our properties provide for a so-called “balloon” payment and are at a fixed interest rate.
Additionally, in order to leverage our investments in marketable securities and seek a higher rate of return, we have access to borrowings under a margin loan and line of credit collateralized by the securities held with the financial institution that provided the margin loan and line of credit as well as a portion of our Marco OP Units. These loans are due on demand and any outstanding balance must be paid upon the liquidation of securities.
Our charter provides that the aggregate amount of borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. As of December 31, 2019, our total borrowings of $167.0 million represented 49% of net assets.
Any future properties that we may acquire or investments we may make may be funded through a combination of borrowings, proceeds generated from the sale and redemption of our marketable securities, available for sale, proceeds received from the selective disposition of our properties and proceeds received from the redemption of our preferred investments in related parties. These borrowings may consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. Such mortgages may be put in place either at the time we acquire a property or subsequent to our purchasing a property for cash. In addition, we may acquire properties that are subject to existing indebtedness where we choose to assume the existing mortgages. Generally, though not exclusively, we intend to seek to encumber our properties with debt, which will be on a non-recourse basis. This means that a lender’s rights on default will generally be limited to foreclosing on the property. However, we may, at our discretion, secure recourse financing or provide a guarantee to lenders if we believe this may result in more favorable terms. When we give a guaranty for a property owning entity, we will be responsible to the lender for the satisfaction of the indebtedness if it is not paid by the property owning entity.
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We may also obtain lines of credit to be used to acquire properties or real estate-related assets. These lines of credit will be at prevailing market terms and will be repaid from proceeds from the sale or refinancing of properties, working capital or permanent financing. Our Sponsor or its affiliates may guarantee the lines of credit although they will not be obligated to do so.
In addition to meeting working capital needs and distributions, if any, to our stockholders, our capital resources are used to make certain payments to our Advisor and our Property Manager, including payments related to asset acquisition fees, development fees and leasing commissions, asset management fees, the reimbursement of acquisition related expenses to our Advisor and property management fees. We also reimburse our Advisor and its affiliates 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, LLC, an affiliate of the Advisor.
The following table represents the fees incurred associated with the payments to our Advisor and our Property Manager:
| For the Year Ended | ||||||||
| December
31, 2019 | December
31, 2018 | |||||||
| Acquisition fees (capitalized and are reflected in the carrying value of the investment) | $ | 1,823 | $ | 1,618 | ||||
| Asset management fees (general and administrative costs) | 1,237 | 1,680 | ||||||
| Property management fees (property operating expenses) | 264 | 548 | ||||||
| Development fees and leasing commissions* | 167 | 309 | ||||||
| Total | $ | 3,491 | $ | 4,155 | ||||
* Generally, capitalized and amortized over the estimated useful life of the associated asset.
Our charter states that our operating expenses, excluding offering costs, property operating expenses and real estate taxes, as well as acquisition fees and non cash related items (“Qualified Operating Expenses”) are to be less than the greater of 2% of our average invested net assets or 25% of net income. For the year ended December 31, 2019, our Qualified Operating Expenses were less than the greater of 2% of our average invested net assets or 25% of net income.
In addition, our charter states that our acquisition fees and expenses shall not exceed 6% of the contractual purchase price or in the case of a mortgage, 6% of funds advanced unless approved by a majority of the independent directors. For the year ended December 31, 2019, the acquisition fees and acquisition expenses were less than 6% of each of the contract prices.
Summary of Cash Flows.
The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below:
| Year
Ended December 31, 2019 | Year
Ended December 31, 2018 | |||||||
| Cash flows provided by operating activities | $ | 19,199 | $ | 20,621 | ||||
| Cash flows (used in)/provided by investing activities | (6,956 | ) | (62,681 | ) | ||||
| Cash flows used in financing activities | 27,701 | (40,577 | ) | |||||
| Net change in cash, cash equivalents and restricted cash | 39,944 | (82,637 | ) | |||||
| Cash , cash equivalents and restricted cash, beginning of year | 39,856 | 119,219 | ||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 79,800 | $ | 36,582 | ||||
Our principal sources of cash flow are derived from the operation of our rental properties, interest and dividend income on our marketable securities and real estate-related investments, as well as loan proceeds and proceeds from redemptions of preferred investments in related parties. We intend that our properties and real estate-related investments will provide a relatively consistent stream of cash flow that provides us with resources to fund operating expenses, debt service and quarterly distributions if authorized by our board of directors.
Our principal demands for liquidity are (i) our property operating expenses, (ii) real estate taxes, (iii) insurance costs, (iv) leasing costs and related tenant improvements, (v) capital expenditures, (vi) acquisition and development activities, including our investments in related parties (vii) scheduled debt service and (viii) distributions to our stockholders and noncontrolling interests. The principal sources of funding for our operations are operating cash flows and proceeds from (i) the sale and redemption of marketable securities, (ii) the selective disposition of properties or interests in properties, (iii) redemptions of our preferred investments in related parties, (iv) the issuance of equity and debt securities and (v) the placement of mortgage loans or other indebtedness.
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Operating activities
Net cash flows provided by operating activities of $19.2 million for the year ended December 31, 2019 consists of the following:
| · | cash inflows of approximately $19.5 million from our net income after adjustment for non-cash items; and |
| · | cash outflows of approximately $0.3 million associated with the net changes in operating assets and liabilities and net cash used in discontinued operations. |
Investing activities
The net cash used in investing activities of $7.0 million for the year ended December 31, 2019 consists primarily of the following:
| · | net purchases of investment property of approximately $87.1 million; |
| · | net funding of notes receivable of $52.4 million; |
| · | net proceeds from the sale of DePaul Plaza of $19.5 million; |
| · | net proceeds from preferred investments in related parties of $66.2 million; |
| · | net proceeds from the sale and purchase of marketable securities of $50.4 million; and |
| · | net cash used in discontinued operation of $3.5 million. |
Financing activities
The net cash provided by financing activities of approximately $27.7 million for the year ended December 31, 2019 is primarily related to the following:
| · | proceeds from mortgage financing, net of fees and expenses of $59.5 million; |
| · | debt principal payments $15.3 million; |
| · | contributions received from noncontrolling interests of $33.1 million; |
| · | redemptions and cancellation of common stock of $12.0 million; |
| · | aggregate distributions to our noncontrolling interests of $21.7 million; and |
| · | distributions to our common shareholders of $16.0 million. |
Development Properties
Lower East Side Moxy Hotel
On December 3, 2018, we, through a subsidiary of the Operating Partnership, acquired three adjacent parcels of land located at 147-151 Bowery, New York, New York (collectively, the “Bowery Land”) from 151 Emmut Properties LLC and 145-149 Bowery LLC, both unaffiliated third parties, for aggregate consideration of approximately $56.5 million, excluding closing and other acquisition related costs, on which we intend to develop and construct a 296-room Marriott Moxy hotel (the “Lower East Side Moxy Hotel”). Additionally, on December 6, 2018, we, though a subsidiary of the Operating Partnership, acquired certain air rights located at 329 Broome Street, New York, New York (the “Air Rights”) from B.R.P. Realty Corp., an unaffiliated third party, for approximately $2.4 million, excluding closing and other acquisition related costs. We intend to use the Air Rights in connection with the development and construction of the Lower East Side Moxy Hotel.
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On December 3, 2018, we entered into a mortgage loan collateralized by the Bowery Land and the Air Rights (the “Bowery Mortgage”) for approximately $35.6 million. The Bowery Mortgage has a term of two years, bears interest at LIBOR+4.25% and requires monthly interest-only payments through its stated maturity with the entire unpaid balance due upon maturity. Through December 31, 2019, we received aggregate proceeds of $34.8 million under the Bowery Mortgage. As a result, the Bowery Mortgage had an outstanding balance and remaining availability of $34.8 million and $0.8 million, respectively, as of December 31, 2019.
As of December 31, 2019 and December 31, 2018, we incurred and capitalized to construction in progress an aggregate of $73.8 million and $63.3 million, respectively, consisting of acquisition and other development costs attributable to the Lower East Side Moxy Hotel.
Exterior Street Project
On February 27, 2019, we, through subsidiaries of the Operating Partnership, acquired two adjacent parcels of land located at 355 and 399 Exterior Street, New York, New York (collectively, the “Exterior Street Land”), from Borden Realty Corp and 399 Exterior Street Associates LLC, unaffiliated third parties, for an aggregate purchase price of approximately $59.0 million, excluding closing and other acquisition related costs, on which we intends\ to develop and construct a multi-family residential property (the “Exterior Street Project”).
On March 29, 2019, we entered into a $35.0 million loan (the “Exterior Street Loan”) which bears interest and 4.50% and is scheduled to initially mature on April 9, 2020, but may be further extended through the exercise of two, six-month extension options, which we can exercise by providing the lender with notice of our intent to extend. The Exterior Street Loan requires monthly interest payments through its maturity date and is collateralized by the Exterior Street Land.
As of December 31, 2019, we incurred and capitalized to construction in progress an aggregate of $66.1 million consisting of acquisition and other development costs attributable to the Exterior Street Project.
Santa Clara Data Center
On January 10, 2019, we, through subsidiaries of the Operating Partnership, acquired a parcel of land located at 2175 Martin Avenue, Santa Clara, CA (the “Martin Avenue Land”) from The Chioini Living Trust, an unaffiliated third party, for approximately $10.6 million, excluding closing and other acquisition related costs, on which we intend to develop and construct a data center (the “Santa Clara Data Center”).
As of December 31, 2019, we have incurred and capitalized to construction in progress an aggregate of $13.0 million consisting of acquisition of the Martin Avenue Land and other development costs attributable to the Santa Clara Data Center.
We believe our capital resources are sufficient to fund our expected development activities related to the Lower East Side Moxy Hotel, the Exterior Land and the Santa Clara Data Center for the next 12 months. However, we ultimately expect to finance a substantial portion of our development costs through construction loans. There can be no assurance we will be successful in obtaining construction financing at favorable terms, if at all.
Share Repurchase Program
Our share repurchase program may provide eligible stockholders with limited, interim liquidity by enabling them to sell shares back to us, subject to restrictions and applicable law. A selling stockholder must be unaffiliated with us, and must have beneficially held the shares for at least one year prior to offering the shares for sale to us through the share repurchase program. Subject to the limitations described in the Registration Statement, we will also redeem shares upon the request of the estate, heir or beneficiary of a deceased stockholder.
Originally, the prices at which stockholders who held shares for the required one-year period could sell shares back to us was the lesser of (i) the share price as determined by our Board of Directors or (ii) the purchase price per share if purchased at a reduced price.
On May 10, 2018, the Board of Directors amended the share repurchase program to (i) change to the price for all purchases under our share repurchase program from $10.00 per share to 92% of the NAV per Share (previously the purchase price was $10.00 per share) and (ii) increase the number of shares repurchased during any calendar year from two (2.0%) of the weighted average number of shares outstanding during the prior calendar year to five (5.0%) of the weighted average number of shares outstanding during the previous twelve months.
A stockholder must have beneficially held the shares for at least one year prior to offering them for sale to us through the share repurchase program, although if a stockholder redeems all of its shares our Board of Directors has the discretion to exempt shares purchased pursuant to the distribution reinvestment plan from this one year requirement. Other affiliates will not be eligible to participate in share repurchase program.
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Pursuant to the terms of the share repurchase program, we will make repurchases, if requested, at least once quarterly. Subject to funds being available, we will limit the number of shares repurchased during any calendar year to two (2.0%) of the weighted average number of shares outstanding during the prior calendar year. Funding for the share repurchase program will come exclusively from proceeds we receive from the sale of shares under our distribution reinvestment plan and other operating funds, if any, as the Board of Directors, at its sole discretion, may reserve for this purpose.
We repurchased 1.1 million shares of common stock each of the years ended December 31, 2019 and 2018, at an average price per share of $10.65 and $9.98 per share, respectively.
Our Board of Directors, at its sole discretion, has the power to terminate the share repurchase program, change the price per share under the share repurchase program or reduce the number of shares purchased under the program, if it determines that the funds allocated to the share repurchase program are needed for other purposes, such as the acquisition, maintenance or repair of properties, or for use in making a declared distribution. A determination by our Board of Directors to eliminate or reduce the share repurchase program requires the unanimous affirmative vote of the independent directors.
On March 25, 2020, the Board of Directors amended the share repurchase program to remove stockholder notice requirements and also approved the suspension of all redemptions effective immediately.
Distributions Declared by our Board of Directors
Common Shares
During the years ended December 31, 2019 and 2018, distributions on our Common Shares were declared quarterly, for each calendar quarter end, at the pro rata equivalent of an annual distribution of $0.70 per share, or an annualized rate of 7.0% assuming a purchase price of $10.00 per share, to stockholders of record at the close of business on the last day of the quarter-end. All distributions were paid on or about the 15th day of the month following the quarter-end.
Total distributions declared during the years ended December 31, 2019 and 2018 were $16.1 million and $16.9 million, respectively.
On March 25, 2020, our Board of Directors authorized and declared a Common Share distribution of $0.175 per share for the quarterly period ending March 31, 2020. The quarterly distribution is the pro rata equivalent of an annual distribution of $0.70 per share, or an annualized rate of 7.0% assuming a purchase price of $10.00 per share. The distribution will be paid on or about the 15th day of the month following the quarter-end to stockholders of record at the close of business on the last day of the quarter-end. The stockholders have an option to elect the receipt of shares under the Company’s DRIP.
SLP Units
For the years ended December 31, 2019 and 2018, total distributions declared and paid on the SLP Units were both $2.1 million. Additionally, on March 25, 2020, our Board of Directors declared a quarterly distribution for the quarterly period ending March 31, 2020 on the SLP Units at an annualized rate of 7.0%. Any future distributions on the SLP Units will always be subordinated until stockholders receive a stated preferred return.
Contractual Obligations
The following is a summary of our contractual obligations outstanding over the next five years and thereafter as of December 31, 2019.
| Contractual Obligations | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | |||||||||||||||||||||
| Mortgage Payable | $ | 96,089 | $ | 1,328 | $ | 1,389 | $ | 1,454 | $ | 66,696 | $ | - | $ | 166,956 | ||||||||||||||
| Interest Payments 1,2 | 6,973 | 3,191 | 3,130 | 3,065 | 2,917 | - | 19,276 | |||||||||||||||||||||
| Total Contractual Obligations | $ | 103,062 | $ | 4,519 | $ | 4,519 | $ | 4,519 | $ | 69,613 | $ | - | $ | 186,232 | ||||||||||||||
| 1) | These amounts represent future interest payments related to mortgage payable obligations based on the fixed and variable interest rates specified in the associated debt agreement. All variable rate debt agreements are based on the one month LIBOR rate. For purposes of calculating future interest amounts on variable interest rate debt the one month LIBOR rate as of December 31, 2019 was used. |
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Notes Payable
Margin Loan
We have access to a margin loan (the “Margin Loan”) from a financial institution that holds custody of certain of our marketable securities. The Margin Loan, which is due on demand, bears interest at Libor plus 0.85% (2.61% as of December 31, 2019) and is collateralized by the marketable securities in our account. The amounts available to us under the Margin Loan are at the discretion of the financial institution and not limited to the amount of collateral in our account. There were no amounts outstanding under the Margin Loan as of December 31, 2019 and 2018.
Line of Credit
We have a non-revolving credit facility (the “Line of Credit”) with a financial institution which permits borrowings up to $20.0 million. The Line of Credit expires on June 19, 2021 and bears interest at Libor plus 1.35% (3.11% as of December 31, 2019). The Line of Credit is collateralized by approximately 209,000 Marco OP Units and PRO has guaranteed the Line of Credit. No amounts were outstanding under the Line of Credit as of December 31, 2019 and 2018.
Debt Maturities
The Exterior Street Loan (outstanding principal balance of $35.0 million as of December 31, 2019) initially matures on April 9, 2020 but has two, six-month extension options, which we can exercise by providing the lender with notice of our intent to extend. We currently intend to seek to exercise the extension options or refinance the Exterior Street Loan on or before the applicable stated maturity date.
The Santa Monica Loan (outstanding principal balance of $25.0 million as of December 31, 2019) initially matures on August 12, 2020 but has two, six-month extension options, which we can exercise by providing the lender with notice of our intent to extend. We currently intend to seek to exercise the extension options or refinance the Santa Monica Loan on or before its applicable stated maturity date.
The Bowery Mortgage (outstanding principal balance of $34.8 million as of December 31, 2019) matures on December 3, 2020. We currently intend to seek to refinance the Bowery Mortgage on or before its maturity date.
However, if we are unable to extend or refinance our maturing indebtedness at favorable terms, we will look to repay the then outstanding balance with available cash and/or proceeds from selective asset sales. We have no additional significant maturities of mortgage debt over the next 12 months.
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.
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We believe that the use of FFO provides a more complete understanding of our performance to investors and to management, and reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.
Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT's definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.
Because of these factors, the Investment Program Association (the "IPA"), an industry trade group, published a standardized measure of performance known as modified funds from operations ("MFFO"), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP.
We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline") issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction-related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses (which includes costs incurred in connection with strategic alternatives), amounts relating to 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.
| 32 |
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 Years Ended | ||||||||
| December 31, 2019 | December 31, 2018 | |||||||
| Net income | $ | 27,160 | $ | 17,072 | ||||
| FFO adjustments: | ||||||||
| Depreciation and amortization | 4,849 | 5,288 | ||||||
| Adjustments to equity in earnings from unconsolidated entities, net | ||||||||
| Gain on disposal of investment property | (987 | ) | - | |||||
| Gain on satisfaction of mortgage receivable | (70 | ) | (7,137 | ) | ||||
| Depreciation and amortization | 121 | 1,584 | ||||||
| FFO | 31,073 | 16,807 | ||||||
| MFFO adjustments: | ||||||||
| Other adjustments: | ||||||||
| Acquisition and other transaction related costs expensed(1) | (22 | ) | 22 | |||||
| Noncash adjustments: | ||||||||
| Amortization of above or below market leases and liabilities(2) | (105 | ) | (141 | ) | ||||
| Mark to market adjustments (3) | 4,011 | 752 | ||||||
| Non-recurring (gain)/loss from extinguishment/sale of debt, derivatives or securities holdings(4) | (13,615 | ) | 117 | |||||
| Loss on sale of marketable securities | 724 | 476 | ||||||
| MFFO | 22,066 | 18,033 | ||||||
| Straight-line rent (5) | 39 | 116 | ||||||
| MFFO - IPA recommended format (6) | $ | 22,105 | $ | 18,149 | ||||
| Net income | $ | 27,160 | $ | 17,072 | ||||
| Less: income attributable to noncontrolling interests | (2,910 | ) | (1,178 | ) | ||||
| Net income applicable to Company's common shares | $ | 24,250 | $ | 15,894 | ||||
| Net income per common share, basic and diluted | $ | 1.05 | $ | 0.65 | ||||
| FFO | $ | 31,073 | $ | 16,807 | ||||
| Less: FFO attributable to noncontrolling interests | (3,094 | ) | (1,771 | ) | ||||
| FFO attributable to Company's common shares | $ | 27,979 | $ | 15,036 | ||||
| FFO per common share, basic and diluted | $ | 1.21 | $ | 0.62 | ||||
| MFFO - IPA recommended format | $ | 22,105 | $ | 18,149 | ||||
| Less: MFFO attributable to noncontrolling interests | (3,638 | ) | (1,782 | ) | ||||
| MFFO attributable to Company's common shares | $ | 18,467 | $ | 16,367 | ||||
| Weighted average number of common shares outstanding, basic and diluted | 23,039 | 24,371 | ||||||
Notes:
| (1) | The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to investors. In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for non-listed REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition costs, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our advisor or third parties. Acquisition fees and expenses under GAAP are considered operating expenses and as expenses included in the determination of net income and income from continuing operations, both of which are performance measures under GAAP. Such fees and expenses are paid in cash, and therefore such funds will not be available to distribute to investors. Such fees and expenses negatively impact our operating performance during the period in which properties are being acquired. Therefore, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property. Acquisition fees and expenses will not be paid or reimbursed, as applicable, to our advisor even if there are no further proceeds from the sale of shares in our offering, and therefore such fees and expenses would need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties or from ancillary cash flows. |
| 33 |
| (2) | Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate. |
| (3) | Management believes that adjusting for mark-to-market adjustments is appropriate because they are nonrecurring items that may not be reflective of ongoing operations and reflects unrealized impacts on value based only on then current market conditions, although they may be based upon current operational issues related to an individual property or industry or general market conditions. The need to reflect mark-to-market adjustments is a continuous process and is analyzed on a quarterly and/or annual basis in accordance with GAAP. |
| (4) | Management believes that adjusting for gains or losses related to extinguishment/sale of debt, derivatives or securities holdings is appropriate because they are items that may not be reflective of ongoing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods. |
| (5) | Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance. |
The table below presents our cumulative distributions paid and cumulative FFO:
| From inception through | ||||
| December 31, 2019 | ||||
| FFO | $ | 236,041 | ||
| Distributions Paid | $ | 235,973 | ||
For the year ended December 31, 2019, we paid cash distributions of $16.0 million. FFO attributable to Company's common shares for the year ended December 31, 2019 was $28.0 million and cash flow from operations was $19.2 million. For the year ended December 31, 2018, we paid cash distributions of $17.2 million. FFO attributable to Company's common shares for the year ended December 31, 2018 was $15.0 million and cash flow from operations was $20.6 million.
New Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been adopted during 2019 and certain accounting standards that we have not yet been required to adopt and may be applicable to our future operations.
| 34 |
| ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
| Lightstone Value Plus Real Estate Investment Trust, Inc. and Subsidiaries |
| (a Maryland corporation) |
| Index |
| 35 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Lightstone Value Plus Real Estate Investment Trust, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lightstone Value Plus Real Estate Investment Trust, Inc. and Subsidiaries (the “Company") as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2019 and 2018, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the United States Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ EisnerAmper LLP
We have served as the Company’s auditor since 2010.
EISNERAMPER LLP
New York, New York
March 30, 2020
| 36 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
| As
of December 31, 2019 | As
of December 31, 2018 | |||||||
| Assets | ||||||||
| Net investment property | 258,106 | 190,394 | ||||||
| Investments in related parties | 35,738 | 102,008 | ||||||
| Cash and cash equivalents | 77,569 | 35,565 | ||||||
| Marketable securities and other investments | 54,738 | 106,949 | ||||||
| Restricted cash | 2,231 | 1,017 | ||||||
| Notes receivable, net | 55,723 | - | ||||||
| Prepaid expenses and other assets | 2,075 | 3,050 | ||||||
| Assets held for disposition | - | 37,226 | ||||||
| Total Assets | $ | 486,180 | $ | 476,209 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Mortgages payable, net | $ | 164,705 | $ | 118,401 | ||||
| Accounts payable, accrued expenses and other liabilities | 4,380 | 3,024 | ||||||
| Due to related parties | 244 | 432 | ||||||
| Tenant allowances and deposits payable | 594 | 611 | ||||||
| Distributions payable | 3,960 | 4,134 | ||||||
| Deferred rental income | 524 | 662 | ||||||
| Liabilities held for disposition | - | 50,704 | ||||||
| Total Liabilities | 174,407 | 177,968 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity: | ||||||||
| Company's Stockholders Equity: | ||||||||
| Preferred shares, $0.01 par value, 10.0 million shares authorized, none issued and outstanding | - | - | ||||||
| Common stock, $0.01 par value; 60.0 million shares authorized, 22.6 million and 23.7 million shares issued and outstanding, respectively | 226 | 237 | ||||||
| Additional paid-in-capital | 172,749 | 184,469 | ||||||
| Accumulated other comprehensive income/(loss) | 408 | (2,251 | ) | |||||
| Accumulated surplus | 109,559 | 101,382 | ||||||
| Total Company's stockholders' equity | 282,942 | 283,837 | ||||||
| - | - | |||||||
| Noncontrolling interests | 28,831 | 14,404 | ||||||
| Total Stockholders' Equity | 311,773 | 298,241 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 486,180 | $ | 476,209 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 37 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
| For the Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Revenues: | ||||||||
| Rental income | $ | 14,137 | $ | 14,617 | ||||
| Tenant recovery income | 1,028 | 1,651 | ||||||
| Total revenues | 15,165 | 16,268 | ||||||
| Expenses: | ||||||||
| Property operating expenses | 4,652 | 5,009 | ||||||
| Real estate taxes | 1,065 | 1,174 | ||||||
| General and administrative costs | 2,598 | 4,327 | ||||||
| Depreciation and amortization | 4,849 | 5,287 | ||||||
| Total operating expenses | 13,164 | 15,797 | ||||||
| Operating income | 2,001 | 471 | ||||||
| Interest and dividend income | 16,828 | 18,916 | ||||||
| Interest expense | (1,674 | ) | (5,560 | ) | ||||
| Gain on disposition of real estate, net | 987 | - | ||||||
| Loss on sale and redemption of marketable securities | (724 | ) | (476 | ) | ||||
| Unrealized loss on marketable equity securities | (3,849 | ) | (835 | ) | ||||
| Other income, net | 110 | 225 | ||||||
| Net income from continuing operations | 13,679 | 12,741 | ||||||
| Net income from discontinued operations | 13,481 | 4,331 | ||||||
| Net income | 27,160 | 17,072 | ||||||
| Less: net income attributable to noncontrolling interests | (2,910 | ) | (1,178 | ) | ||||
| Net income attributable to Company's common shares | $ | 24,250 | $ | 15,894 | ||||
| Basic and diluted net income per Company's common share: | ||||||||
| Continuing operations | $ | 0.46 | $ | 0.47 | ||||
| Discontinued operations | 0.59 | 0.18 | ||||||
| Net income per Company's common shares, basic and diluted | $ | 1.05 | $ | 0.65 | ||||
| Weighted average number of common shares outstanding, basic and diluted | 23,039 | 24,371 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 38 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
| For the Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Net income | $ | 27,160 | $ | 17,072 | ||||
| Other comprehensive income/(loss): | ||||||||
| Holding gain/(loss) on available for sale debt securities | 1,992 | (2,764 | ) | |||||
| Reclassification adjustment for loss included in net income | 724 | 476 | ||||||
| Other comprehensive income/(loss) | 2,716 | (2,288 | ) | |||||
| Comprehensive income | 29,876 | 14,784 | ||||||
| Less: Comprehensive income attributable to noncontrolling interests | (2,967 | ) | (1,132 | ) | ||||
| Comprehensive income attributable to the Company's common shares | $ | 26,909 | $ | 13,652 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| 39 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in thousands)
| Common | ||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | Accumulated Other Comprehensive (Loss)/Income | Accumulated Surplus | Total Noncontrolling Interests | Total Equity | ||||||||||||||||||||||
| BALANCE, December 31, 2017 | 24,847 | $ | 248 | $ | 194,497 | $ | 15,467 | $ | 86,956 | $ | 18,202 | $ | 315,370 | |||||||||||||||
| Reclassification of accumulated other comprehensive income to accumulated surplus | - | - | - | (15,476 | ) | 15,476 | - | - | ||||||||||||||||||||
| Net income | - | - | - | - | 15,894 | 1,178 | 17,072 | |||||||||||||||||||||
| Transfer of membership interests (See Note 13) | - | - | 1,500 | - | - | (1,500 | ) | - | ||||||||||||||||||||
| Other comprehensive loss | - | - | - | (2,242 | ) | - | (46 | ) | (2,288 | ) | ||||||||||||||||||
| Distributions declared (a) | - | - | - | - | (16,944 | ) | - | (16,944 | ) | |||||||||||||||||||
| Distributions paid to noncontrolling interests | - | - | - | - | - | (3,441 | ) | (3,441 | ) | |||||||||||||||||||
| Contributions received from noncontrolling interests | - | - | - | - | - | 11 | 11 | |||||||||||||||||||||
| Offering costs associated with dividend reinvestment program | - | - | (178 | ) | - | - | - | (178 | ) | |||||||||||||||||||
| Redemption and cancellation of shares | (1,139 | ) | (11 | ) | (11,350 | ) | - | - | - | (11,361 | ) | |||||||||||||||||
| BALANCE, December 31, 2018 | 23,708 | 237 | 184,469 | (2,251 | ) | 101,382 | 14,404 | 298,241 | ||||||||||||||||||||
| Net income | - | - | - | - | 24,250 | 2,910 | 27,160 | |||||||||||||||||||||
| Other comprehensive income | - | - | - | 2,659 | - | 57 | 2,716 | |||||||||||||||||||||
| Distributions declared (a) | - | - | - | - | (16,073 | ) | - | (16,073 | ) | |||||||||||||||||||
| Distributions paid to noncontrolling interests | - | - | - | - | - | (21,662 | ) | (21,662 | ) | |||||||||||||||||||
| Contributions received from noncontrolling interests | - | - | - | - | - | 33,122 | 33,122 | |||||||||||||||||||||
| Shares issued from distribution reinvestment program | 25 | - | 278 | - | - | - | 278 | |||||||||||||||||||||
| Redemption, cancellation and tender of shares | (1,125 | ) | (11 | ) | (11,998 | ) | - | - | - | (12,009 | ) | |||||||||||||||||
| BALANCE, December 31, 2019 | 22,608 | $ | 226 | $ | 172,749 | $ | 408 | $ | 109,559 | $ | 28,831 | $ | 311,773 | |||||||||||||||
| (a) | Distributions per share were $0.70. |
The accompanying notes are an integral part of these consolidated financial statements.
| 40 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
| For the Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | 27,160 | $ | 17,072 | ||||
| Less net income – discontinued operations | 13,481 | 4,331 | ||||||
| Net income – continuing operations | 13,679 | 12,741 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 4,849 | 5,287 | ||||||
| Loss on sale and redemption of marketable securities | 724 | 476 | ||||||
| Non-cash interest income | (3,284 | ) | - | |||||
| Gain on disposition of real estate | (987 | ) | - | |||||
| Unrealized loss on marketable equity securities | 3,849 | 835 | ||||||
| Other non-cash adjustments | 626 | 390 | ||||||
| Changes in assets and liabilities: | ||||||||
| Increase in prepaid expenses and other assets | (650 | ) | (305 | ) | ||||
| Increase/(decrease) in tenant allowances and deposits payable | 217 | (282 | ) | |||||
| Increase/(decrease) in accounts payable, accrued expenses and other liabilities | 557 | (1,663 | ) | |||||
| Decrease in due to related parties | (188 | ) | (64 | ) | ||||
| Increase/(decrease) in deferred rental income | (138 | ) | 197 | |||||
| Net cash provided by operating activities – continuing operations | 19,254 | 17,612 | ||||||
| Net cash (used in)/provided by operating activities – discontinued operations | (55 | ) | 3,009 | |||||
| Net cash provided by operating activities | 19,199 | 20,621 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of investment property | (87,104 | ) | (63,865 | ) | ||||
| Purchase of marketable securities | (14,096 | ) | (80,157 | ) | ||||
| Proceeds from sale of marketable securities | 59,437 | 32,565 | ||||||
| Proceeds from sale of investment property | 19,477 | - | ||||||
| Proceeds from/(purchase of) short-term investment | 5,012 | (5,012 | ) | |||||
| Investment in related party joint venture | (115 | ) | (735 | ) | ||||
| Proceeds from related party joint venture | 151 | 939 | ||||||
| Contributions for preferred investments in related parties | (2,267 | ) | (16,920 | ) | ||||
| Proceeds from preferred investments in related parties | 68,501 | 74,500 | ||||||
| Proceeds from repayment of notes receivable | 13,000 | - | ||||||
| Funding of notes receivable | (65,439 | ) | - | |||||
| Net cash used in investing activities – continuing operations | (3,443 | ) | (58,685 | ) | ||||
| Net cash used in investing activities – discontinued operations | (3,513 | ) | (722 | ) | ||||
| Net cash used in investing activities | (6,956 | ) | (59,407 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from mortgage financing | 62,262 | 32,567 | ||||||
| Mortgage principal payments | (15,285 | ) | (21,967 | ) | ||||
| Payment of loan fees and expenses | (2,756 | ) | (386 | ) | ||||
| Payment of offering costs associated with dividend reinvestment program | - | (178 | ) | |||||
| Payment of notes payable | - | (18,625 | ) | |||||
| Redemption, cancellation and tender of shares | (12,009 | ) | (11,361 | ) | ||||
| Contributions received from noncontrolling interests | 33,122 | 11 | ||||||
| Distributions paid to noncontrolling interests | (21,662 | ) | (3,441 | ) | ||||
| Distributions paid to Company's stockholders | (15,971 | ) | (17,197 | ) | ||||
| Net cash used in financing activities | 27,701 | (40,577 | ) | |||||
| Net change in cash, cash equivalents and restricted cash | 39,944 | (79,363 | ) | |||||
| Cash , cash equivalents and restricted cash, beginning of year | 39,856 | 119,219 | ||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 79,800 | $ | 39,856 | ||||
| See Note 2 for supplemental cash flow information. |
The accompanying notes are an integral part of these consolidated financial statement
| 41 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
1. Structure
Lightstone Value Plus Real Estate Investment Trust, Inc., a Maryland corporation (“Lightstone REIT”), formed on June 8, 2004, which has elected to be taxed and qualify as a real estate investment trust for U.S. federal income tax purposes (“REIT”). The Lightstone REIT was formed primarily for the purpose of engaging in the business of investing in and owning commercial and residential real estate properties located throughout the United States.
The Lightstone REIT is structured as an umbrella partnership real estate investment trust, or UPREIT, and substantially all of the Company’s current and future business is and will be conducted through Lightstone Value Plus REIT, L.P. (the “Operating Partnership”), a Delaware limited partnership formed on July 12, 2004. As of December 31, 2019, the Company held a 98% general partnership interest in the Company’s Operating Partnership’s common units (“Common Units”).
The Lightstone REIT and the Operating Partnership and its subsidiaries are collectively referred to as the ‘‘Company’’ and the use of ‘‘we,’’ ‘‘our,’’ ‘‘us’’ or similar pronouns refers to the Lightstone REIT, its Operating Partnership or the Company as required by the context in which such pronoun is used.
Through its Operating Partnership, the Company owns, operates and develops commercial, residential, and hospitality properties and make real estate-related investments, principally in the United States. The Company’s real estate investments are held alone or jointly with other parties. The Company also originates or acquires mortgage loans secured by real estate. Although most of its investments are of these types, the Company may invest in whatever types of real estate or real estate-related investments that it believes is in its best interests.
Since its inception, the Company has owned and managed various commercial and residential properties located throughout the United States. The Company historically operated within four business segments consisting of: (i) retail properties, (ii) multi-family residential properties, (iii) industrial properties and (iv) hospitality properties. Prior to 2018 the Company disposed of substantially all of the ownership interests in its hospitality properties. Additionally, during the first quarter of 2019, the Company disposed of all of its remaining industrial properties and during the third quarter of 2019 the Company disposed of DePaul Plaza, a retail property. Because of the changes in the composition of the Company’s real estate and real estate investments, the Company now evaluates all of its real estate investments as one operating segment.
As of December 31, 2019, the Company has ownership interests in (i) two consolidated operating properties, (ii) three consolidated development properties and (iii) seven unconsolidated operating properties. With respect to its consolidated operating properties, the Company wholly owns the St. Augustine Outlet Center, a retail property containing approximately 0.3 million square feet of gross leasable area, and has a majority ownership interest of approximately 59.2% in Gantry Park Landing, a multi-family residential property containing 199 apartment units. With respect to its consolidated development properties, the Company wholly owns three projects consisting of the Lower East Side Moxy Hotel, the Exterior Street Project and the Santa Clara Data Center. The Company also holds a 2.5% ownership interest in seven hotel properties through a joint venture (the “Joint Venture”) which it accounts for under the cost method of accounting. The Joint Venture is between the Company and the operating partnership of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a real estate investment trust also sponsored by the Company’s Sponsor, which has a 97.5% ownership interest in the Joint Venture. Furthermore, the Company has other real estate-related investments, including preferred investments in related parties and nonrecourse loans made to unaffiliated third-party borrowers.
The Company’s advisor is Lightstone Value Plus REIT, LLC (the “Advisor”), which is majority owned by David Lichtenstein. On July 6, 2004, the Advisor contributed $2 to the Operating Partnership in exchange for 200 Common Units. The Company’s Advisor also owns 20,000 shares of the Company’s common stock (“Common Shares”) which were issued on July 6, 2004 for $200, 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 the sponsor (the ‘‘Sponsor’’) during the Company’s initial public offering (the “Offering”), which terminated on October 10, 2008. The Company’s Advisor, together with its board of directors (the “Board of Directors”), is primarily responsible for making investment decisions on the Company’s behalf 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, LLC, a Delaware limited liability company, which owns an aggregate of $30.0 million of special general partner interests (“SLP Units”) in the Operating Partnership which were purchased, at a cost of $100,000 per unit, in connection with the Company’s 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 the Lightstone REIT or the Operating Partnership.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
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 affiliates which may manage and develop certain of its properties. However, the Company also contracts with other unaffiliated third-party property managers.
The Company’s Common Shares are not currently listed on a national securities exchange. The Company may seek to list its stock for trading on a national securities exchange only if a majority of independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its shares of common stock until they are listed for trading.
Related Parties:
The Advisor and its affiliates, and Lightstone SLP, LLC are related parties of the Company. Certain of these entities are entitled to compensation for services related to the investment, management and disposition of the Company’s assets. The compensation is 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 14 for additional information.
Discontinued Operations
During the first quarter of 2019, a portfolio comprised of the Company’s industrial properties (the “Gulf Coast Industrial Portfolio”) met the criteria to be classified as discontinued operations in the consolidated statements of operations for all periods presented. Additionally, the associated assets and liabilities of ten of the properties within the Gulf Coast Industrial Portfolio which are located in Louisiana (the “Louisiana Properties”) have been reclassified as held for disposition in the consolidated balance sheet as of December 31, 2018. The disposition of the Louisiana Properties, which represented all of the Company’s remaining industrial properties, represented a strategic shift that had a major effect on the Company’s operations and financial results and therefore, upon their disposition, the operating results of the entire Gulf Coast Industrial Portfolio were classified as discontinued operations in the Company’s consolidated statements of operations for all periods presented (See Note 10).
Noncontrolling Interests
Partners of Operating Partnership
On July 6, 2004, the Advisor contributed $2 to the Operating Partnership in exchange for 200 Common Units in the Operating Partnership. The Advisor has the right to convert the Common Units into cash or, at the option of the Company, an equal number of shares of Common Shares.
In connection with the Offering, Lightstone SLP, LLC, an affiliate of the Advisor, purchased an aggregate of $30.0 million of SLP Units. As the majority owner of the SLP Units, Mr. Lichtenstein is the beneficial owner of a 99% interest in such SLP Units and thus receives an indirect benefit from any distributions made in respect thereof. These SLP Units may be entitled to a portion of any regular and liquidation distributions that the Company makes to its stockholders, but only after the Company’s stockholders have received a stated preferred return.
In addition, an aggregate 497,209 Common Units were issued to other unrelated parties during the years ended December 31, 2008 and 2009 and remain outstanding as of December 31, 2019.
Other Noncontrolling Interests in Consolidated Subsidiaries
Other noncontrolling interests in consolidated subsidiaries include ownership interests in (i) Pro-DFJV Holdings LLC (“PRO”) held by the Company’s Sponsor (see Note 13), (ii) 50-01 2nd St. Associates LLC (the “2nd Street Joint Venture”), held by the Company’s Sponsor and other affiliates (see Note 13) and (iii) various joint ventures held by affiliates of the Sponsor that have originated promissory notes to unaffiliated third parties (see Note 5). PRO’s holdings principally consist of Marco OP Units and Marco II OP Units (see Note 7). The 2nd Street Joint Venture owns Gantry Park Landing, a multi-family apartment building located in Queens, New York.
See Note 13 for further discussion of noncontrolling interests.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Lightstone REIT and the Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). As of December 31, 2019, Lightstone REIT had a 98% general partnership interest in the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate and real estate-related investments, depreciable lives, and revenue recognition. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.
Investments in entities where the Company has the ability to exercise significant influence, but does not exercise financial and operating control, and is not considered to be the primary beneficiary of a variable interest entity will be accounted for using the equity method. Investments in entities where the Company has virtually no influence will be accounted for using the cost method.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less when made to be cash equivalents.
As required by the Company’s lenders, restricted cash is held in escrow accounts for anticipated capital expenditures, real estate taxes, and other reserves for certain of its consolidated properties. Capital reserves are typically utilized for non-operating expenses such as tenant improvements, leasing commissions, and major capital expenditures. Alternatively, a lender may require its own formula for an escrow of capital reserves. Restricted cash may also include certain funds temporarily placed in escrow with qualified intermediaries to facilitate potential like-kind exchange transactions in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended.
The following is a summary of the Company’s cash, cash equivalents, and restricted cash total as presented in the statements of cash flows for the periods presented:
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash and cash equivalents | $ | 77,569 | $ | 35,565 | ||||
| Restricted cash | $ | 2,231 | $ | 1,017 | ||||
| Restricted cash included in assets held for disposition | - | 3,274 | ||||||
| Total cash, cash equivalents and restricted cash | $ | 79,800 | $ | 39,856 | ||||
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Supplemental cash flow information for the periods indicated is as follows:
| For the Years Ended | ||||||||
| December
31, 2019 | December
31, 2018 | |||||||
| Cash paid for interest | $ | 7,492 | $ | 5,092 | ||||
| Distributions declared but not paid | $ | 3,960 | $ | 4,134 | ||||
| Investment property acquired but not paid | $ | 1,082 | $ | 255 | ||||
| Assets transferred due to foreclosure | $ | 34,025 | $ | 13,521 | ||||
| Liabilities credited in foreclosure | $ | 50,914 | $ | 20,658 | ||||
| Amortization of deferred financing costs included in construction in progress | $ | 2,084 | $ | - | ||||
| Reclassification of accumulated other comprehensive income and noncontrolling interests to accumulated surplus | $ | - | $ | 15,476 | ||||
| Transfer of membership interests from noncontrolling interests to additional paid-in-capital | $ | - | $ | 1,500 | ||||
| Holding gain/loss on marketable securities | $ | 2,716 | $ | 2,288 | ||||
| Value of shares issued from distribution reinvestment program | $ | 278 | $ | - | ||||
Marketable Securities
Marketable securities consist of equity and debt securities that are designated as available-for-sale. Marketable debt securities are recorded at fair value and unrealized holding gains or losses are reported as a component of accumulated other comprehensive income. The Company’s marketable equity securities are recorded at fair value and unrealized holding gains and losses are recognized on the consolidated statements of operations.
Realized gains or losses resulting from the sale of these securities are determined based on the specific identification of the securities sold. An impairment charge is recognized when the decline in the fair value of a security below the amortized cost basis is determined to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the duration and severity of any decline in fair value below our amortized cost basis, any adverse changes in the financial condition of the issuers and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. The Board of Directors has authorized the Company from time to time to invest the Company’s available cash in marketable securities of real estate related companies. The Board of Directors has approved investments of marketable securities of real estate companies up to 30% of the Company’s total assets to be made at the Company’s discretion, subject to compliance with any REIT or other restrictions.
Revenue Recognition
Minimum rents are recognized on a straight-line accrual basis, over the terms of the related leases. The capitalized above-market lease values and the capitalized below-market lease values are amortized as an adjustment to rental income over the initial lease term, including any below-market renewal periods taken into account. Percentage rents, which are based on commercial tenants’ sales, are recognized once the sales reported by such tenants exceed any applicable breakpoints as specified in the tenants’ leases. Recoveries from commercial tenants for real estate taxes, insurance and other operating expenses, and from residential tenants for utility costs, are recognized as revenues in the period that the applicable costs are incurred.
Consolidated VIEs
The Company consolidates certain joint ventures which have originated nonrecourse loans to unaffiliated third-party borrowers (see Note 5) which are variable interest entities, or VIEs, for which the Company is the primary beneficiary. Generally, a VIE is a legal entity in which the equity investors do not have the characteristics of a controlling financial interest or the equity investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. A limited partnership, or legal entities such as an LLC, are considered a VIE when the majority of the limited partners unrelated to the general partner possess neither the right to remove the general partner without cause, nor certain rights to participate in the decisions that most significantly affect the financial results of the partnership. In determining whether the Company is the primary beneficiary of a VIE, the Company considers qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; and the similarity with and significance to our business activities and the business activities of the other investors. Significant judgments related to these determinations include estimates about the current and future fair values and performance of real estate held by these VIEs and general market conditions.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Investments in Real Estate
Accounting for Asset Acquisitions
The cost of the real estate assets acquired in an asset acquisition is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based in each case on their relative fair values. Fees incurred related to asset acquisitions are capitalized as part of the cost of the investment.
Accounting for Business Combinations
Upon the acquisition of real estate operating properties that meet the definition of a business, the Company estimates the fair value of acquired tangible assets and identified intangible assets and liabilities and assumed debt at the date of acquisition, based on evaluation of information and estimates available at that date. Based on these estimates, the Company evaluates the existence of goodwill or a gain from a bargain purchase and allocates the initial purchase price to the applicable assets, liabilities and noncontrolling interests, if any. As final information regarding fair value of the assets acquired, liabilities assumed and noncontrolling interests is received and estimates are refined, appropriate adjustments are made to the purchase price allocation. The allocations are finalized as soon as all the information necessary is available.
Impairment Evaluation
Management evaluates the recoverability of its investments in real estate assets at the lowest identifiable level, the individual property level. Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value.
The Company evaluates the long-lived assets for potential impairment whenever events or changes in circumstances indicate that the undiscounted projected cash flows are less than the carrying amount for a particular property. The estimated cash flows used for the impairment analysis and the determination of estimated fair value are based on the Company’s plans for the respective assets and the Company’s views of market and economic conditions. The estimates consider matters such as current and historical rental rates, occupancies for the respective properties and comparable properties, and recent sales data for comparable properties. Changes in estimated future cash flows due to changes in the Company’s plans or views of market and economic conditions could result in recognition of impairment losses, which, under the applicable accounting guidance, could be substantial.
Real Estate-Related Debt Investments
The Company intends to hold its real estate-related debt investments until maturity and accordingly, they are carried at cost, net of any unamortized loan fees, origination fees, discounts, premiums and unfunded commitments. Real estate-related debt investments that are deemed impaired will be carried at amortized cost less a reserve, if deemed appropriate, which approximates fair value.
Investment income and any related premium, discount, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to investment income in the Company’s statements of operations. The amortization of any premium or accretion of any discount is discontinued if such debt investment is reclassified to held for sale.
Impairment on Real Estate-Related Debt Investments
Real estate-related debt investments are considered impaired when, based on current information and events, it is probable that the Company will not be able to collect principal and interest amounts due according to the contractual terms. The Company assesses the credit quality of its real estate-related debt investments and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment of management is required in this analysis. The Company considers the estimated net recoverable value of the debt investment 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 quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value of the underlying collateral is less than the net carrying value of the debt investment, a loan loss reserve is recorded with a corresponding charge to provision for loan losses. The loan loss reserve for each debt investment is maintained at a level that is determined to be adequate by management to absorb probable losses.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Income recognition is suspended for a debt investment at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired debt investment is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired debt investment is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method, until an accrual is resumed when the debt investment becomes contractually current and performance is demonstrated to be resumed. A debt investment is written off when it is no longer realizable or is legally discharged.
Depreciation and Amortization
Depreciation expense is computed based on the straight-line method over the estimated useful life of the applicable real estate asset. The Company generally uses estimated useful lives of up to thirty-nine years for buildings and improvements and five to ten years for furniture and fixtures. Expenditures for tenant improvements and construction allowances paid to commercial tenants are capitalized and amortized over the initial term of each lease or the useful life if shorter. Expenditures for ordinary maintenance and repairs are charged to expense as incurred.
Deferred Costs
The Company capitalizes initial direct costs associated with financing activities. The costs are capitalized upon the execution of the loan, presented in the consolidated balance sheets as a direct deduction from the carrying value of the corresponding loan and amortized over the initial term of the corresponding loan. Amortization of deferred loan costs begin in the period during which the loan is originated using the effective interest method over the term of the loan. The Company capitalizes initial direct costs associated with leasing activities. The costs are capitalized upon the execution of the lease and amortized over the initial term of the corresponding lease.
Income Taxes
The Company has elected to be taxed as a REIT commencing with the taxable year ended December 31, 2005. If the Company qualifies as a REIT, it generally will not be subject to U.S. federal income tax on its taxable income or capital gain that it distributes to its stockholders. To maintain its REIT qualification, the Company must meet a number of organizational and operational requirements, including a requirement that it annually distribute to its stockholders at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If the Company fails to remain qualified for taxation as a REIT in any subsequent year and does not qualify for certain statutory relief provisions, its income for that year will be taxed at the regular corporate rate, and it may be precluded from qualifying for treatment as a REIT for the four-year period following its failure to qualify as a REIT. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to stockholders.
To maintain its qualification as a REIT, the Company engages in certain activities such as providing real estate-related services through wholly-owned taxable REIT subsidiaries (“TRSs”). As such, the Company is subject to U.S. federal and state income and franchise taxes from these activities.
As of December 31, 2019 and 2018, the Company had no material uncertain income tax positions. Additionally, even if the Company continues to qualify as a REIT, it may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on its undistributed income.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted escrows, tenants’ accounts receivable, notes receivable and accounts payable and accrued expenses approximate their fair values because of the short maturity of these instruments. The carrying amount of the note receivable approximates fair value because the interest rate is variable and reflective of the market rate.
The estimated fair value (in millions) of the Company’s mortgage debt is summarized as follows:
| As of December 31, 2019 | As of December 31, 2018 | |||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
| Mortgages payable | $ | 167.0 | $ | 167.9 | $ | 120.0 | $ | 119.8 | ||||||||
The fair value of the mortgages payable was determined by discounting the future contractual interest and principal payments by estimated current market interest rates.
Accounting for Derivative Financial Investments and Hedging Activities.
The Company may enter into derivative financial instrument transactions in order to mitigate interest rate risk on a related financial instrument. The Company may designate these derivative financial instruments as hedges and apply hedge accounting. The Company records all derivative instruments at fair value on the consolidated balance sheets and changes in the fair value of the instruments are recorded in the consolidated statements of operations.
Stock-Based Compensation
The Company had a stock-based incentive award plan for the independent directors of its Board. This plan expired in April 2015. Awards were granted at fair market value on the date of the grant with fair value estimated using the Black-Scholes-Merton option valuation model, which incorporates assumptions surrounding the volatility, dividend yield, the risk-free interest rate, expected life, and the exercise price as compared to the underlying stock price on the grant date. The tax benefits, if any, associated with these share-based payments are classified as financing activities in the consolidated statement of cash flows. For the years ended December 31, 2019 and 2018, the Company had no material compensation costs related to the incentive award plan.
Concentration of Risk
The Company maintains its cash and cash equivalents in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on its cash and cash equivalents.
Net Earnings per Share
Basic net earnings per share is calculated by dividing net income attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the applicable period. Dilutive income per share includes the potentially dilutive effect, if any, which would occur if our outstanding options to purchase our common stock were exercised. For all periods presented dilutive net income per share is equivalent to basic net income per share.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued an accounting standards update (“ASU”) that amends the existing lease accounting guidance and requires lessees to recognize a lease liability and a right-of-use asset for all leases on their balance sheets. Lessees of operating leases will continue to recognize lease expense in a manner similar to current accounting. For lessors, accounting for leases under the new guidance is substantially the same as in prior periods, but eliminates current real estate- specific provisions and changes the treatment of initial direct costs. The standard became effective for the Company on January 1, 2019.
The Company elected the following package of practical expedients provided by the standard: (i) an entity need not reassess whether any expired or existing contract is a lease or contains a lease, (ii) an entity need not reassess the lease classification of any expired or existing leases, and (iii) an entity need not reassess initial direct costs for any existing leases. The Company also elected the short-term lease exception provided for in the standard and therefore will only recognize right-of-use assets and lease liabilities for leases with a term greater than one year.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
The Company did not recognize any right-of-use assets or lease liabilities upon adoption of the standard. The Company does not have any material leases such as ground leases or building leases or any material leases for leases with a term greater than one year. From time to time the Company will enter into immaterial leases for office equipment such as copiers. The resulting right-of-use assets or lease liabilities would be immaterial in the aggregate and are recognized in the period they are incurred as lease expense.
The ASU provides a practical expedient which allows lessors to not separate lease and non-lease components in a contract and allocate the consideration in the contract to the separate components if both: (i) the timing and pattern of revenue recognition for the non-lease component and the related lease component are the same and (ii) the combined single lease component would be classified as an operating lease. The Company elected the practical expedient to account for lease and non-lease components as a single component in lease contracts where it is the lessor. The ASU also provides a transition option that permits entities to not recast the comparative periods presented when transitioning to the standard, which the Company also elected.
The adoption of this standard did not have a material effect on our consolidated financial position or our results of operations.
New Accounting Pronouncements
In June 2016, the FASB issued an accounting standards update which replaces the incurred loss impairment methodology currently in use with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently in the process of evaluating the impact the adoption of this standard will have on the Company’s consolidated financial statements.
The Company has reviewed and determined that other recently issued accounting pronouncements will not have a material impact on its financial position, results of operations and cash flows, or do not apply to its current operations.
Reclassifications
Certain prior period amounts may have been reclassified to conform to the current year presentation.
| 3. | Development Projects |
Lower East Side Moxy Hotel
On December 3, 2018, the Company, through a subsidiary of the Operating Partnership, acquired adjacent three parcels of land located at 147-151 Bowery, New York, New York (collectively, the “Bowery Land”) from 151 Emmut Properties LLC and 145-149 Bowery LLC, both unaffiliated third parties, for aggregate consideration of approximately $56.5 million, excluding closing and other acquisition related costs, on which it intends to develop and construct a 296-room Marriott Moxy hotel (the “Lower East Side Moxy Hotel”). Additionally, on December 6, 2018, the Company, though a subsidiary of the Operating Partnership, acquired certain air rights located at 329 Broome Street, New York, New York (the “Air Rights”) from B.R.P. Realty Corp., an unaffiliated third party, for approximately $2.4 million, excluding closing and other acquisition related costs. The Company intends to use the Air Rights in connection with the development and construction of the Lower East Side Moxy Hotel. In connection with the acquisition of the Bowery Land and the Air Rights, the Advisor earned an acquisition fee equal to 2.75% of the gross contractual purchase price, which was approximately $1.6 million.
As of December 31, 2019 and 2018, the Company incurred and capitalized to construction in progress an aggregate of $73.8 million (including the acquisition fee of $1.6 million and capitalized interest of $4.4 million) and $63.3 million (including the acquisition fee of $1.6 million and capitalized interest of $0.2 million), respectively, consisting of acquisition and other development costs attributable to the Lower East Side Moxy Hotel. During the years ended December 31, 2019 and 2018, the Company capitalized interest of approximately $4.2 million and $0.2 million, respectively in connection with the development of the Lower East Side Moxy Hotel.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Exterior Street Project
On February 27, 2019, the Company, through subsidiaries of the Operating Partnership, acquired two adjacent parcels of land located at 355 and 399 Exterior Street, New York, New York (collectively, the “Exterior Street Land”), from Borden Realty Corp and 399 Exterior Street Associates LLC, unaffiliated third parties, for an aggregate purchase price of approximately $59.0 million, excluding closing and other acquisition related costs, on which it intends to develop and construct a multi-family residential property (the “Exterior Street Project”).
On March 30, 2019, the Company entered into a $35.0 million loan (the “Exterior Street Loan”) which bears interest at 4.50% and is scheduled to initially mature on April 9, 2020, but may be further extended through the exercise of two, six-month extension options, which the Company can exercise by providing the lender with notice of its intent to extend. The Exterior Street Loan requires monthly interest payments through its maturity date and is collateralized by the Exterior Street Land. In connection with the acquisition of the Exterior Street Land, the Advisor earned an acquisition fee equal to 2.75% of the gross aggregate contractual purchase price, which was approximately $1.6 million.
As of December 31, 2019, the Company incurred and capitalized to construction in progress an aggregate of $66.1 million (including the acquisition fee of $1.6 million and $2.2 million of capitalized interest) consisting of acquisition and other development costs attributable to the Exterior Street Project. During the year ended December 31, 2019, the Company capitalized interest of approximately $2.2 million in connection with the development of the Exterior Street Project.
Santa Clara Data Center
On January 10, 2019, the Company, through subsidiaries of the Operating Partnership, acquired a parcel of land located at 2175 Martin Avenue, Santa Clara, CA (the “Martin Avenue Land”) from The Chioini Living Trust, an unaffiliated third party, for approximately $10.6 million, excluding closing and other acquisition related costs, on which the Company intends to develop and construct a data center (the “Santa Clara Data Center”). In connection with the acquisition of the Martin Avenue Land, the Advisor earned an acquisition fee equal to 2.75% of the gross contractual purchase price, which was approximately $0.2 million.
As of December 31, 2019, the Company has incurred and capitalized to construction in progress an aggregate of $13.0 million (including the acquisition fee of $0.2 million and $0.4 million of capitalized interest) consisting of acquisition and other development costs attributable to the Santa Clara Data Center. During the year ended December 31, 2019, the Company capitalized interest of approximately $0.4 million in connection with the development of the Santa Clara Data Center.
| 4. | Investments in Related Parties |
Preferred Investments
The Company has entered into agreements with various related party entities that provide for it to make preferred contributions pursuant to certain instruments (the “Preferred Investments”) that entitle it to certain prescribed monthly preferred distributions (see below for additional information). The Preferred Investments had an aggregate balance of $34.5 million and $100.7 million as of December 31, 2019 and 2018, respectively, and are classified as held-to-maturity securities, recorded at cost and included in investments in related parties on the consolidated balance sheets. The fair value of these investments approximated their carrying values based on market rates for similar instruments. Additionally, during the years ended December 31, 2019 and 2018, the Company recognized investment income of $9.4 million and $14.3 million, respectively, which is included in interest and dividend income on the consolidated statements of operations.
The Preferred Investments (dollar amounts in thousands) are summarized as follows:
| Preferred Investment Balance | Investment Income | |||||||||||||||||
| As of | As of | For the Year Ended December 31, | ||||||||||||||||
| Preferred Investments | Dividend Rate | December
31, 2019 | December
31, 2018 | 2019 | 2018 | |||||||||||||
| 40 East End Avenue | 8% to 12% | $ | 17,000 | $ | 30,000 | $ | 3,609 | $ | 3,650 | |||||||||
| 30-02 39th Avenue | 12% | - | 10,000 | 140 | 1,217 | |||||||||||||
| 485 7th Avenue | 12% | - | - | - | 1,095 | |||||||||||||
| East 11th Street | 12% | 8,500 | 43,000 | 3,433 | 6,561 | |||||||||||||
| Miami Moxy | 12% | 9,000 | 17,733 | 2,263 | 1,744 | |||||||||||||
| Total Preferred Investments | $ | 34,500 | $ | 100,733 | $ | 9,445 | $ | 14,267 | ||||||||||
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
40 East End Avenue Preferred Investment
In May 2015, the Company entered into an agreement with various related party entities that provided for it to make contributions of up to $30.0 million in a related party entity, which is now a joint venture between an affiliate of our Sponsor and Lightstone Real Estate Income Trust Inc. (“Lightstone IV”), a related-party REIT also sponsored by the Company’s Sponsor, which owns a parcel of land located at the corner of 81st Street and East End Avenue in the Upper East Side of New York City on which it is constructing a luxury residential project consisting of 29 condominiums. Contributions were made pursuant to an instrument, the “40 East End Avenue Preferred Investment,” that is entitled to monthly preferred distributions initially at a rate of 8% per annum which increased to 12% per annum upon procurement of construction financing in March 2017, and is redeemable by us beginning on April 27, 2022 or upon the occurrence of certain capital transactions. During the fourth quarter of 2019, the Company redeemed $13.0 million of the 40 East End Avenue Preferred Investment. In February 2020, the Company redeemed an additional $11.0 million of the 40 East End Avenue Preferred Investment which reduced the remaining outstanding balance to $6.0 million.
30-02 39th Avenue Preferred Investment
In August 2015, the Company entered into certain agreements that provided for it to make aggregate contributions of up to $50.0 million in various affiliates of its Sponsor which own a parcel of land located at 30-02 39th Avenue in Long Island City, Queens, New York on which they are constructing a residential apartment project. On March 31, 2017, the 30-02 39th Preferred Investment was amended so that our total aggregate required contributions would decrease by $40.0 million to $10.0 million. Contributions were made pursuant to instruments, the “30-02 39th Avenue Preferred Investment,” that were entitled to monthly preferred distributions between 9% and 12% per annum and is redeemable by the Company upon the occurrence of certain capital transactions. As of December 31, 2019, there were no remaining unfunded contributions. On February 11, 2019, the Company redeemed the entire 30-02 39th Street Preferred Investment of $ 10.0 million.
485 7th Avenue Preferred Investment
In December 2015, the Company entered into an agreement with various related party entities that provided for it to make contributions of up to $60.0 million in an affiliate of its Sponsor which owns a parcel of land located at 485 7th Avenue, New York, New York on which they constructed a 612-room Marriott Moxy hotel, which opened during the third quarter of 2017. Contributions were made pursuant to an instrument, the “485 7th Avenue Preferred Investment,” that were entitled to monthly preferred distributions at a rate of 12% per annum and was redeemable by the Company upon the occurrence of certain capital transactions. In January 2018, the Company redeemed $37.5 million of the 485 7th Avenue Preferred Investment. In April 2018, the Company redeemed the remaining $22.5 million of the 485 7th Avenue Preferred Investment.
East 11th Street Preferred Investment
On April 21, 2016, the Company entered into an agreement, as amended, with various related party entities that provided for it to make contributions of up to $57.5 million in an affiliate of its Sponsor (the “East 11th Street Developer”) which owned two residential buildings located at 112-120 East 11th Street and 85 East 10th Street in New York, New York. The East 11th Street Developer is developing a hotel at 112-120 East 11th Street (the “East 11th Street Project”). Contributions were made pursuant to an instrument, the “East 11th Street Preferred Investment,” that entitled us to monthly preferred distributions at a rate of 12% per annum. Upon the consummation of certain capital transactions, the Company may redeem its investment in the East 11th Street Preferred Investment. Additionally, the East 11th Street Developer may redeem the Company’s investment at any time or upon the consummation of any capital transaction. Any redemption by the Company or the East 11th Street Developer under the East 11th Street Preferred Investment will be made at an amount equal to the amount invested by the Company plus a 12.0% annual cumulative, pre-tax, non-compounded return on the aggregate amount invested by the Company. During 2019 and 2018, the Company redeemed $34.5 million and $14.5 million, respectively of the East 11th Street Preferred Investment.
Miami Moxy Preferred Investment
On September 30, 2016, the Company entered into an agreement with various related party entities that provides for it to make contributions of up to $20.0 million in an affiliate of its Sponsor (the “Miami Moxy Developer”) which owns parcels of land located at 915 through 955 Washington Avenue in Miami Beach, Florida, on which the Miami Moxy Developer is developing a 205-room Marriott Moxy hotel (the “Miami Moxy”). Contributions are made pursuant to an instrument, the “Miami Moxy Preferred Investment,” that entitles the Company to monthly preferred distributions at a rate of 12% per annum. Upon the consummation of certain capital transactions, the Company may redeem its investment in the Miami Moxy Preferred Investment. Additionally, the Miami Moxy Developer may redeem the Company’s investment at any time or upon the consummation of any capital transaction. Any redemption by the Company or the Miami Moxy Developer under the Miami Moxy Preferred Investment will be made at an amount equal to the amount invested by the Company plus a 12.0% annual cumulative, pre-tax, non-compounded return on the aggregate amount invested by the Company. During the second quarter of 2019, the Company made its final contributions of $2.3 million for the Miami Moxy Preferred Investment. During the fourth quarter of 2019, the Company redeemed $11.0 million of the Miami Moxy Preferred Investment.
| 51 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
The Joint Venture
During 2015, the Company formed the Joint Venture with Lightstone II. The Company has a 2.5% membership interest in the Joint Venture and Lightstone II holds the remaining 97.5% membership interest. The Joint Venture previously acquired our membership interests in a portfolio of 11 hotels in a series of transactions completed during 2015. As of January 1, 2018 the Joint Venture held ownership interests in eight hotels. During the second quarter of 2019, the Joint Venture sold its ownership interests in one of the hotels to an unrelated third party. As a result, the Joint Venture now holds ownership interests in seven hotels as of December 31, 2019.
The Company accounts for its 2.5% membership interest in the Joint Venture under the cost method and as of December 31, 2019 and 2018, the carrying value of our investment was $1.2 million and $1.3 million, respectively, which is included in investments in related parties on the consolidated balance sheets.
| 5. | Notes Receivable |
Beginning in 2019, the Company has formed certain joint ventures (collectively, the “NR Joint Ventures”) between wholly-owned subsidiaries of the Operating Partnership (collectively, the “NR Subsidiaries”) and affiliates of the Sponsor (the “NR Affiliates”) which have originated nonrecourse loans (collectively, the “Joint Venture Promissory Notes”) to unaffiliated third-party borrowers (collectively, the “Joint Venture Borrowers”).
The NR Subsidiaries and NR Affiliates have varying ownership interests in the NR Joint Ventures and certain other wholly-owned subsidiaries of the Operating Partnership serve as the manager and are the sole decision-maker for each of the NR Joint Ventures.
The Company has determined that the NR Joint Ventures are VIEs and the NR Subsidiaries are the primary beneficiaries. Since the NR Subsidiaries are the primary beneficiaries, beginning on the applicable date of formation, the Company has consolidated the operating results and financial condition of the NR Joint Ventures and accounted for the respective ownership interests of the NR Affiliates as noncontrolling interests.
The Joint Venture Promissory Notes provide for monthly interest at a prescribed variable rate, subject to a floor. In connection with funding of the Joint Venture Promissory Notes, the NR Joint Ventures have received origination fees (1.00% -1.50%) based on the principal amount of the loan and retained a portion of the loan proceeds to establish a reserve for interest and other items (the “Loan Reserves”). The Joint Venture Promissory Notes are recorded in notes receivable, net on the consolidated balance sheets.
The Joint Venture Promissory Notes generally have an initial term of one year and may provide for an additional one-year extension option subject to satisfaction of certain prescribed conditions, including the funding of an additional reserve for interest and payment of an extension fee. The Joint Venture Promissory Notes are collateralized by either the membership interests of the Joint Venture Borrowers in the borrowing entity or the underlying real property being developed by the Joint Venture Borrower.
The origination fees received are presented in the consolidated balance sheets as a direct deduction from the carrying value of the Joint Venture Promissory Notes and are amortized into interest income, using a straight-line method that approximates the effective interest method, over the initial term of the Joint Venture Promissory Notes. The Loan Reserves are presented in the consolidated balance sheets as a direct deduction from the carrying value of the Joint Venture Promissory Notes and are applied against the monthly interest due over the initial term.
During the year ended December 31, 2019, the NR Subsidiaries and the NR Affiliates made aggregate contributions to the NR Joint Ventures of approximately $32.1 million and $33.1 million, respectively, principally to fund their respective shares of the Joint Venture Promissory Notes that were originated. Additionally, during the year ended December 31, 2019, the NR Joint Ventures made aggregate distributions of approximately $18.4 million to both the NR Subsidiaries and NR Affiliates, based on their respective membership interests. The NR Joint Ventures’ distributions were made from payments received from the NR Borrowers and proceeds from a financing transaction completed by LSC 1543 7th LLC and LSC 1650 Lincoln LLC (collectively, the “Santa Monica Joint Ventures”). See Note 8 for additional information.
| 52 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
The Notes Receivable are summarized as follows:
| Company's | Original | Initial | Contractual | As of December 31, 2019 | |||||||||||||||||||||||
| Ownership | Loan | Origination | Origination | Maturity | Interest | Outstanding | Unamortized | Carrying | |||||||||||||||||||
| Joint Venture/Lender | Percentage | Amount | Fee | Date | Date | Rate | Principal | Reserves | Origination Fee | Value | |||||||||||||||||
| LSC 162nd Capital I LLC | 45.45% | $ | 4,234 | 1.50% | February 5, 2019 | March 1,2020 | Libor plus 7.50% (Floor of 10%) | $ | 4,234 | $ | (82 | ) | $ | (6 | ) | $ | 4,146 | ||||||||||
| LSC 162nd Capital II LLC | 45.45% | $ | 9,166 | 1.50% | February 5, 2019 | March 1,2020 | Libor plus 7.50% (Floor of 10%) | 9,166 | (178 | ) | (14 | ) | 8,974 | ||||||||||||||
| LSC 47-16 Greenpoint LLC (1) | 50% | $ | 13,000 | 1.00% | April 5, 2019 | April 4, 2020 | Libor plus 5.75% (Floor of 8.25%) | - | - | - | - | ||||||||||||||||
| LSC 1543 7th LLC | 50% | $ | 20,000 | 1.00% | August 27, 2019 | August 26, 2020 | Libor plus 5.15% (Floor of 7.65%) | 20,000 | (504 | ) | (131 | ) | 19,365 | ||||||||||||||
| LSC 1650 Lincoln LLC | 50% | $ | 24,000 | 1.00% | August 27, 2019 | August 26, 2020 | Libor plus 5.15% (Floor of 7.65%) | 24,000 | (605 | ) | (157 | ) | 23,238 | ||||||||||||||
| Total | $ | 57,400 | $ | (1,369 | ) | $ | (308 | ) | $ | 55,723 | |||||||||||||||||
(1) Repaid in full during 2019
The following summarizes the interest earned (included in interest and dividend income on the consolidated statements of operations) for each of the Joint Venture Promissory Notes during the periods indicated:
| Joint Venture/Lender | For the Year Ended December 31, 2019 | |||
| LSC 162nd Capital I LLC | $ | 445 | ||
| LSC 162nd Capital II LLC | 964 | |||
| LSC 47-16 Greenpoint LLC | 965 | |||
| LSC 1543 7th LLC | 609 | |||
| LSC 1650 Lincoln LLC | 731 | |||
| $ | 3,714 | |||
| 53 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
6. Supplementary Financial Information
Investment property consists of the following:
| As of | As of | |||||||
| December 31, 2019 | December 31, 2018 | |||||||
| Investment property: | ||||||||
| Land and improvements | $ | 30,664 | $ | 36,786 | ||||
| Building and improvements | 101,827 | 117,852 | ||||||
| Furniture and fixtures | 2,404 | 2,265 | ||||||
| Construction in progress | 152,896 | 63,519 | ||||||
| Gross investment property | 287,791 | 220,422 | ||||||
| Less accumulated depreciation | (29,685 | ) | (30,028 | ) | ||||
| Net investment property | $ | 258,106 | $ | 190,394 | ||||
As of December 31, 2019 and 2018, construction in progress includes approximately $152.9 million and $63.3 million of costs related to the Company’s development projects (see Note 3).
7. Marketable Securities and Other Investments, Fair Value Measurements and Notes Payable
Marketable Securities and Other Investments:
The following is a summary of the Company’s available for sale securities and other investments as of the dates indicated:
| As of December 31, 2019 | ||||||||||||||||
| Adjusted
Cost | Gross
Unrealized Gains | Gross
Unrealized Losses | Fair
Value | |||||||||||||
| Marketable Securities: | ||||||||||||||||
| Equity securities: | ||||||||||||||||
| Equity Securities, primarily REITs | $ | 6,799 | $ | 375 | $ | (17 | ) | $ | 7,157 | |||||||
| Marco OP Units and Marco II OP Units | 19,227 | 11,942 | - | 31,169 | ||||||||||||
| 26,026 | 12,317 | (17 | ) | 38,326 | ||||||||||||
| Debt securities: | ||||||||||||||||
| Corporate Bonds | 15,993 | 442 | (23 | ) | 16,412 | |||||||||||
| Total | $ | 42,019 | $ | 12,759 | $ | (40 | ) | $ | 54,738 | |||||||
| 54 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
| As of December 31, 2018 | ||||||||||||||||
| Adjusted
Cost | Gross
Unrealized Gains | Gross
Unrealized Losses | Fair
Value | |||||||||||||
| Marketable Securities: | ||||||||||||||||
| Equity securities: | ||||||||||||||||
| Equity Securities, primarily REITs | $ | 1,439 | $ | 230 | $ | (18 | ) | $ | 1,651 | |||||||
| Marco OP Units and Marco II OP Units | 19,227 | 15,924 | - | 35,151 | ||||||||||||
| 20,666 | 16,154 | (18 | ) | 36,802 | ||||||||||||
| Debt securities: | ||||||||||||||||
| Corporate Bonds | 65,817 | 124 | (2,120 | ) | 63,821 | |||||||||||
| Mortgage Backed Securities ("MBS") | 1,615 | - | (301 | ) | 1,314 | |||||||||||
| 67,432 | 124 | (2,421 | ) | 65,135 | ||||||||||||
| Other Investments: | ||||||||||||||||
| Certificate of Deposit | 5,012 | - | - | 5,012 | ||||||||||||
| 5,012 | - | - | 5,012 | |||||||||||||
| Total | $ | 93,110 | $ | 16,278 | $ | (2,439 | ) | $ | 106,949 | |||||||
As of both December 31, 2019 and 2018, the Company held an aggregate of 209,243 Marco OP Units and Marco II OP Units, of which 89,695 were owned by PRO. The Marco OP Units and the Marco II OP Units are both exchangeable for a similar number of common operating partnership units (“Simon OP Units”) of Simon Property Group, L.P., (“Simon OP”), the operating partnership of Simon Property Group, Inc. (“Simon Inc.”). Subject to the various conditions, the Company may elect to exchange the Marco OP Units and/or the Marco II OP Units to Simon OP Units which must be immediately delivered to Simon Inc. in exchange for cash or similar number of shares of Simon Inc.’s common stock (“Simon Stock”).
The Company considers the declines in market value of certain investments in its investment portfolio to be temporary in nature. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. During the years ended December 31, 2019 and 2018, the Company did not recognize any impairment charges. As of December 31, 2019 and 2018, the Company does not consider any of its investments to be other-than-temporarily impaired.
The Company may sell certain of its investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:
| • | Level 1 – Quoted prices in active markets for identical assets or liabilities. | ||
| • | Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | ||
| • | Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
| 55 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Marketable securities, available for sale, measured at fair value on a recurring basis as of the dates indicated are as follows:
| Fair Value Measurement Using | ||||||||||||||||
| As of December 31, 2019 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Marketable Securities: | ||||||||||||||||
| Equity Securities, primarily REITs | $ | 7,157 | $ | - | $ | - | $ | 7,157 | ||||||||
| Marco OP and OP II Units | - | 31,169 | - | 31,169 | ||||||||||||
| Corporate Bonds | - | 16,412 | - | 16,412 | ||||||||||||
| Total | $ | 7,157 | $ | 47,581 | $ | - | $ | 54,738 | ||||||||
| Fair Value Measurement Using | ||||||||||||||||
| As of December 31, 2018 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Marketable Securities: | ||||||||||||||||
| Equity Securities, primarily REITs | $ | 1,651 | $ | - | $ | - | $ | 1,651 | ||||||||
| Marco OP and OP II Units | - | 35,151 | - | 35,151 | ||||||||||||
| Corporate Bonds | - | 63,821 | - | 63,821 | ||||||||||||
| MBS | - | 1,314 | - | 1,314 | ||||||||||||
| Certificate of Deposit | - | 5,012 | - | 5,012 | ||||||||||||
| Total | $ | 1,651 | $ | 105,298 | $ | - | $ | 106,949 | ||||||||
The fair values of the Company’s investments in Corporate Bonds and Preferred Securities, MBS and Certificate of Deposit are measured using readily available quoted prices for these investments; however, the markets for these assets are not active. Additionally, as noted and disclosed above, the Company’s Marco OP and OP II units are both ultimately exchangeable for cash or similar number of shares of Simon Stock, therefore the Company uses the quoted market price of Simon Stock to measure the fair value of the Company’s Marco OP and OP II units.
The Company did not have any other significant financial assets or liabilities, which would require revised valuations that are recognized at fair value.
Notes Payable
Margin Loan
The Company has access to a margin loan (the “Margin Loan”) from a financial institution that holds custody of certain of the Company’s marketable securities. The Margin Loan, which is due on demand, bears interest at LIBOR plus 0.85% (2.61% as of December 31, 2019) and is collateralized by the marketable securities in the Company’s account. The amounts available to the Company under the Margin Loan are at the discretion of the financial institution and not limited to the amount of collateral in its account. There were no amounts outstanding under this Margin Loan as of December 31, 2019 and 2018.
Line of Credit
The Company had a non-revolving credit facility (the “Line of Credit”) with a financial institution which previously permitted borrowings up to $25.0 million and was scheduled to expire on June 19, 2019. Effective June 19, 2019, the Line of Credit was extended until June 19, 2021 and the amount available for borrowings was reduced to $20.0 million. The Line of Credit bears interest at Libor plus 1.35% (3.11% as of December 31, 2019). The Line of Credit is collateralized by approximately 209,000 Marco OP Units and PRO has guaranteed the Line of Credit. No amounts were outstanding under the Line of Credit as of December 31, 2019 and 2018.
| 56 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
8. Mortgages Payable
Mortgages payable, net consists of the following:
| Property/Investment | Interest Rate | Weighted Average Interest Rate as of December 31, 2019 | Maturity Date | Amount Due at Maturity | As of December 31, 2019 | As of December 31, 2018 | ||||||||||||
| Gantry Park | 4.48% | 4.48% | November 2024 | $ | 65,317 | $ | 72,128 | $ | 73,341 | |||||||||
| DePaul Plaza | (Repaid in full on September 20, 2019) | - | - | 14,072 | ||||||||||||||
| Bowery Land and Air Rights | LIBOR + 4.25% | 6.69% | December 2020 | 34,828 | 34,828 | 32,567 | ||||||||||||
| Exterior Street Land | 4.50% | 4.50% | April 2020 | 35,000 | 35,000 | - | ||||||||||||
| Santa Monica Note Receivable | LIBOR + 3.75% | 4.51% | August 2020 | 25,000 | 25,000 | - | ||||||||||||
| Total mortgages payable | 4.95% | $ | 160,145 | 166,956 | 119,980 | |||||||||||||
| Less: Deferred financing costs | (2,251 | ) | (1,579 | ) | ||||||||||||||
| Total mortgages payable, net | $ | 164,705 | $ | 118,401 | ||||||||||||||
LIBOR as of December 31, 2019 and 2018 was 1.76% and 2.52%, respectively. Our loans are secured by the indicated real estate and are non-recourse to the Company.
The following table shows our contractually scheduled principal maturities during the next five years and thereafter:
| 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | |||||||||||||||
| Principal maturities | $ | 96,089 | $ | 1,328 | $ | 1,389 | $ | 1,454 | $ | 66,696 | $ | - | $ | 166,956 | |||||||
| Less: Deferred financing costs | (2,251 | ) | |||||||||||||||||||
| Total principal maturities, net | $ | 164,705 | |||||||||||||||||||
On November 12, 2019, the Company, through the Santa Monica Joint Ventures, entered into a $25.0 million loan (the” Santa Monica Loan”) which bears interest at LIBOR+3.75% and is scheduled to initially mature on August 12, 2020 but may be further extended through the exercise of two, six-month extension options, which the Santa Monica Joint Ventures may exercise by providing the lender with advance written notice. The Santa Monica Loan requires monthly interest payments through its maturity date and is cross-collateralized by two nonrecourse loans originated by the Santa Monica Joint Ventures. The net proceeds from the Santa Monica Loan of approximately $23.6 million were distributed to the members of the Santa Monica Joint Ventures based on their respective ownership interests. See Note 5 for additional information.
On September 20, 2019, approximately $13.8 million of the proceeds from the disposition of DePaul Plaza were used to repay in full the existing non-recourse mortgage loan collateralized by the DePaul Plaza (see Note 10).
On March 29, 2019, the Company entered into the $35.0 million Exterior Street Loan which bears interest at 4.50% and is scheduled to initially mature on April 9, 2020 but may be further extended through the exercise of two, six-month extension options, which the Company can exercise by providing the lender with notice of its intent to extend. The Exterior Street Loan requires monthly interest payments through its maturity date and is collateralized by the Exterior Street Land.
On December 3, 2018, the Company entered into a mortgage loan collateralized by the Bowery Land and the Air Rights (the “Bowery Mortgage) for up to $35.6 million. The Bowery Mortgage has a term of two years, bears interest at LIBOR+4.25% and requires monthly interest-only payments through its stated maturity with the entire unpaid balance due upon maturity. Through December 31, 2019, the Company received aggregate proceeds of $34.8 million under the Bowery Mortgage. As a result, the Bowery Mortgage had an outstanding balance and remaining availability of $34.8 million and $0.8 million, respectively, as of December 31, 2019.
On November 19, 2014, the 2nd Street Joint Venture entered into a $74.5 million non-recourse mortgage loan (the “Gantry Park Mortgage Loan”) with CIBC. The Gantry Park Mortgage Loan has a term of ten years with a maturity date of November 19, 2024, bears interest at 4.48%, and requires monthly interest-only payments for the first three years and monthly principal and interest payments pursuant to a 30-year amortization schedule thereafter. The Gantry Park Mortgage Loan is collateralized by Gantry Park.
| 57 |
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Certain of the Company’s debt agreements require the maintenance of certain ratios, including debt service coverage. As of December 31, 2019, the Company was in compliance with all of its financial debt covenants. Additionally, certain of our mortgages payable also contain clauses providing for prepayment penalties.
Debt Maturities
The Exterior Street Loan (outstanding principal balance of $25.0 million as of December 31, 2019) initially matures on April 9, 2020 but has two, six-month extension options, which the Company can exercise by providing the lender with notice of its intent to extend. The Company intends to seek to exercise the extension options or refinance the Exterior Street Loan on or before its applicable stated maturity date.
The Santa Monica Loan (outstanding principal balance of $25.0 million as of December 31, 2019) initially matures on August 12, 2020 but has two, six-month extension options, which the Company can exercise by providing the lender with notice of its intent to extend. The Company intends to seek to exercise the extension options or refinance the Santa Monica Loan on or before its applicable stated maturity date.
The Bowery Mortgage (outstanding principal balance of $34.8 million as of December 31, 2019) matures on December 3, 2020. The Company currently intends to seek to refinance the Bowery Mortgage on or before its maturity date.
However, if the Company is unable to extend or refinance its maturing indebtedness at favorable terms, it will look to repay the then outstanding balance with available cash and/or proceeds from selective asset sales. The Company has no additional significant maturities of mortgage debt over the next 12 months.
| 9. | Leases |
The Company’s retail property and multi-family residential property are both leased to tenants under operating leases. Substantially all of our multi-family residential property leases have initial terms of 12 months or less. Our retail space leases expire between 2020 and 2026.
We, as a lessor, retain substantially all of the risks and benefits of ownership of the investment properties and continue to account for our leases as operating leases. The Company accrues fixed lease income on a straight-line basis over the terms of the leases. Some of our tenants are also required to pay overage rents based on sales over a stated base amount during the lease year. The Company recognizes this variable lease consideration only when each tenant’s sales exceed the applicable sales threshold. The Company amortizes any tenant inducements as a reduction of revenue utilizing the straight-line method over the term of the related lease.
The Company structures its leases to allow us to recover a portion of our property operating expenses from our tenants. A portion of our leases require the tenant to reimburse us for a portion of our operating expenses, including common area maintenance (“CAM”), real estate taxes and insurance. Such property operating expenses typically include utility, insurance and other administrative expenses. For some of the Company’s leases it receives a fixed payment from the tenant for the CAM component which is recognized as revenue on a straight-line basis over the term of the lease. When not reimbursed by the fixed CAM component, CAM expense reimbursements are based on the tenant’s proportionate share of the allocable operating expenses for the property. The Company accrues reimbursements from tenants for recoverable portions of all of these expenses as variable lease consideration in the period the applicable expenditures are incurred. The Company recognizes differences between estimated recoveries and the final billed amounts in the subsequent year. These differences were not material in any period presented.
As of December 31, 2019, the approximate fixed future minimum rent payments, excluding variable lease consideration, from the Company’s retail property, due to us under non-cancelable leases are as follows:
| 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | ||||||||||||||
| $ | 1,862 | $ | 1,428 | $ | 1,184 | $ | 1,114 | $ | 457 | $ | 230 | $ | 6,275 | |||||||
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
As of December 31, 2018, the approximate fixed future minimum rental payments, excluding variable lease consideration, from the Company’s retail properties, due to us under non-cancelable leases are as follows:
| 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | Total | ||||||||||||||
| $ | 4,309 | $ | 3,264 | $ | 2,733 | $ | 2,223 | $ | 2,126 | $ | 7,429 | $ | 22,084 | |||||||
Pursuant to the lease agreements, tenants of the property may be required to reimburse the Company for some or the entire portion of the particular tenant's pro rata share of the real estate taxes and operating expenses of the property. Such amounts are not included in the future minimum lease payments above, but are included in tenant recovery income on the accompanying consolidated statements of operations. Lease income of approximately $1.0 million and $2.5 million for the years ended December 31, 2019 and 2018, respectively, related to variable lease payments was included in tenant recovery income on the accompanying consolidated statements of operations.
The Company has excluded our multi-family residential property leases from this table as substantially all of its multi-family residential property leases have initial terms of 12 months of less.
10. Dispositions
Dispositions - Continuing Operations
The following disposition did not represent a strategic shift that had a major effect on the Company’s operations and financial results and therefore did not qualify to be reported as discontinued operations and its operating results are reflected in the Company’s results from continuing operations in the consolidated statements of operations for all periods presented through the date of disposition:
DePaul Plaza
On September 20, 2019, the Company disposed of a retail center located in Bridgeton, Missouri (“DePaul Plaza”), to an unrelated third party for aggregate consideration of approximately $19.8 million, excluding closing and other related costs. In connection with the disposition, the Company recorded a gain on the disposition of real estate of approximately $1.0 million during the year ended December 31, 2019.
Dispositions - Discontinued Operations
The following dispositions qualified to be reported as discontinued operations and their operating results are classified as discontinued operations in the consolidated statements of operations for all periods presented through their respective dates of disposition:
Disposition Transactions related to Gulf Coast Industrial Portfolio
The Company had an outstanding non-recourse mortgage loan (the “Gulf Coast Industrial Portfolio Mortgage Loan”) which was originated in February 2007 and subsequently transferred during the third quarter of 2012 to a special servicer that discontinued scheduled debt service payments and notified the Company that the loan was in default and due on demand. The Gulf Coast Industrial Portfolio Mortgage Loan was initially cross-collateralized by a portfolio of 14 industrial properties (collectively, the “Gulf Coast Industrial Portfolio”) including ten properties located in Louisiana (seven properties located in New Orleans and three properties located in Baton Rouge, and collectively, the “Louisiana Properties”) and four properties located in San Antonio, Texas (the “San Antonio Properties”).
Foreclosure of San Antonio Assets
On June 5, 2018, the special servicer completed a partial foreclosure of the Gulf Coast Industrial Portfolio pursuant to which it foreclosed on the San Antonio Assets. The San Antonio Assets were sold in a foreclosure sale by the special servicer for an aggregate amount of approximately $20.7 million.
Upon consummation of the foreclosure sale, the buyers assumed the significant risks and rewards of ownership and took legal title and physical possession of the San Antonio Assets for the agreed upon aggregate sales price of $20.7 million. The Company simultaneously received an aggregate credit of approximately $20.7 million which it applied against the total outstanding indebtedness (approximately $19.6 million and $1.1 million of principal and accrued interest payable, respectively) of the Gulf Coast Industrial Portfolio Mortgage.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
The aggregate carrying value of the assets transferred and the liabilities extinguished in connection with the foreclosure of the San Antonio Assets were approximately $13.6 million and $20.7 million, respectively.
Since the Company’s performance obligations were met at the closing of the foreclosure sales and the Company had no continuing involvement with the San Antonio Assets an aggregate gain on disposition of real estate of approximately $7.1 million was recognized during the second quarter of 2018.
During 2018, the disposition of the San Antonio Assets did not initially qualify to be reported as discontinued operations since their disposition did not represent a strategic shift that had a major effect on the Company’s operations and financial results.
Assignment of Ownership in Louisiana Assets to Lender
On February 12, 2019, the Company and the lender of the Gulf Coast Industrial Portfolio Mortgage entered into an assignment agreement (the “Assignment Agreement”) pursuant to which the Company assigned its membership interests in the Louisiana Assets to the lender with an effective date of February 7, 2019. Under the terms of the Assignment Agreement, the lender assumed the significant risks and rewards of ownership and took legal title and physical possession of the Louisiana Assets and assumed all the other assets and related liabilities, including the Gulf Coast Industrial Mortgage and its accrued and unpaid interest, and released the Company of any claims against the liabilities assumed.
As a result of the Assignment Agreement, the Company has fully satisfied all of its obligations with respect to the Gulf Coast Industrial Portfolio Mortgage and all amounts accrued but not paid for interest (including default interest) and no amounts are due to the lender. Additionally, the Company has no continuing involvement with the Louisiana Assets.
The aggregate carrying value of the assets transferred and the liabilities extinguished in connection with the Company’s assignment of its ownership interests in the Louisiana Assets to the lender was approximately $37.0 million and $49.6 million, respectively.
Since the Company’s performance obligations were met upon the assignment of its ownership interests in the Louisiana Assets to the lender and the Company has no continuing involvement with the Louisiana Assets, an aggregate gain on debt extinguishment of approximately $13.6 million was recognized during the first quarter of 2019.
The disposition of the Louisiana Assets, which comprised all of the Company’s remaining industrial properties, represented a strategic shift that had a major effect on the Company’s operations and financial results.
As a result of the disposition transactions related to both the San Antonio Assets and the Louisiana Assets, the Company no longer has any industrial properties. Because the Gulf Coast Industrial Portfolio Mortgage was cross-collateralized by the Gulf Coast Industrial Portfolio, comprised of both the San Antonio Assets and Louisiana Assets, the operating results of the entire Gulf Coast Industrial Portfolio have been classified as discontinued operations in the Company’s consolidated statements of operations for all periods presented.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
The following summary presents the operating results of the Gulf Coast Industrial Portfolio included in discontinued operations in the Consolidated Statements of Operations for the periods indicated.
| For
the Years Ended December 31, | ||||||
| 2019 | 2018 | |||||
| Revenues | $ | 409 | $ | 4,979 | ||
| Operating expenses | 317 | 3,900 | ||||
| Operating income | 92 | 1,079 | ||||
| Interest expense and other, net | (226 | ) | (3,885 | ) | ||
| - | - | |||||
| Gain on disposition of real estate | - | 7,137 | ||||
| Gain on debt extinguishment | 13,615 | - | ||||
| Net income from discontinued operations | $ | 13,481 | $ | 4,331 | ||
Cash flows generated from discontinued operations are presented separately on the Company’s consolidated statements of cash flows.
The following summary presents the major components of assets and liabilities held for disposition, of as the date indicated.
| As of | |||
| December 31, 2018 | |||
| Net investment property | $ | 32,778 | |
| Restricted escrows | 3,274 | ||
| Other assets | 1,174 | ||
| Total assets held for disposition | $ | 37,226 | |
| Mortgages payable | $ | 30,642 | |
| Accounts payable and accrued expenses | 19,069 | ||
| Other liabilities | 993 | ||
| Total liabilities held for disposition | $ | 50,704 | |
11. Distributions Payable
On November 11, 2019 and November 14, 2018, the Company’s Board of Directors authorized and the Company declared distributions of $0.175 per share for the quarterly periods ending December 31, 2019 and 2018. The quarterly distributions are the pro rata equivalent of annual distributions of $0.70 per share, or an annualized rate of 7.0% assuming a purchase price of $10.00 per share. The distributions will be paid on or about the 15th day of the month following the quarter-end to stockholders of record at the close of business on the last day of the quarter-end. The stockholders have an option to elect the receipt of shares under the Company’s DRIP. The distributions payable as of December 31, 2019 and 2018, were paid on January 15, 2020 and January 15, 2019, respectively.
Future distributions declared will be at the discretion of the Board of Directors based on their analysis of our performance over the previous periods and expectations of performance for future periods and may differ from the amount of the distribution determined for this period. The Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, current rental revenues, operating and interest expenses and our ability to refinance near-term debt. In addition, the Company currently intends to continue to comply with the REIT distribution requirement that it annually distribute no less than 90% of its taxable income. The Company cannot assure that regular distributions will continue to be made or that it will maintain any particular level of distributions that it has previously established or may establish.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
12. Company’s Stockholder’s Equity
Preferred Shares
Shares of preferred stock may be issued in the future in one or more series as authorized by the Company’s Board. Prior to the issuance of shares of any series, the Board of Directors is required by the Company’s charter to fix the number of shares to be included in each series and the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each series. Because the Company’s Board of Directors has the power to establish the preferences, powers and rights of each series of preferred stock, it may provide the holders of any series of preferred stock with preferences, powers and rights, voting or otherwise, senior to the rights of holders of our common stock. The issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of the Company’s common stock. As of December 31, 2019 and 2018, the Company had no outstanding preferred shares.
Common Shares
All of the common stock offered by the Company will be duly authorized, fully paid and nonassessable. Subject to the preferential rights of any other class or series of stock and to the provisions of its charter regarding the restriction on the ownership and transfer of shares of our stock, holders of the Company’s common stock will be entitled to receive distributions if authorized by the Board of Directors and to share ratably in the Company’s assets available for distribution to the stockholders in the event of a liquidation, dissolution or winding-up.
Each outstanding share of the Company’s common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors. There is no cumulative voting in the election of directors, which means that the holders of a majority of the outstanding common stock can elect all of the directors then standing for election, and the holders of the remaining common stock will not be able to elect any directors.
Holders of the Company’s common stock have no conversion, sinking fund, redemption or exchange rights, and have no preemptive rights to subscribe for any of its securities. Maryland law provides that a stockholder has appraisal rights in connection with some transactions. However, the Company’ charter provides that the holders of its stock do not have appraisal rights unless a majority of the Board of Directors determines that such rights shall apply. Shares of the Company’s common stock have equal dividend, distribution, liquidation and other rights.
Under its charter, the Company cannot make some material changes to its business form or operations without the approval of stockholders holding at least a majority of the shares of our stock entitled to vote on the matter. These include (1) amendment of its charter, (2) its liquidation or dissolution, (3) its reorganization, and (4) its merger, consolidation or the sale or other disposition of its assets. Share exchanges in which the Company is the acquirer, however, do not require stockholder approval.
Distributions, Share Repurchase Program and Tender Offer
The Company’s Board of Directors commenced declaring and the Company began paying regular quarterly distributions on its Common Shares at the pro rata equivalent of an annual distribution of $0.70 per share, or an annualized rate of 7.0% assuming a purchase price of $10.00 per share, beginning February 1, 2006. Subsequently, the Company’s Board of Directors has declared regular quarterly distributions at the annualized rate of rate of 7.0% assuming a purchase price of $10.00 per share, with the exception of the three-month period ended June 30, 2010. The distributions for the three-month period ended June 30, 2010 were at an aggregate annualized rate of 8% based on the share price of $10.00.
On March 25, 2020, the Company’s Board of Directors authorized and the Company declared a distribution of $0.175 per share for the quarterly period ending December 31, 2019. The quarterly distribution is the pro rata equivalent of an annual distribution of $0.70 per share, or an annualized rate of 7.0% assuming a purchase price of $10.00 per share. The distribution will be paid on or about the 15th day of the month following the quarter-end to stockholders of record at the close of business on the last day of the quarter-end. The stockholders have an option to elect the receipt of shares under the Company’s distribution reinvestment program (the “DRIP”).
The Company’s stockholders have the option to elect the receipt of shares in lieu of cash under the Company’s DRIP. The Company’s DRIP Registration Statement on Form S-3D was filed and became effective under the Securities Act of 1933 on October 25, 2018. As of December 31, 2019, approximately 10.0 million shares remain available for issuance under our DRIP.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
The amount of distributions distributed to our stockholders in the future will be determined by the Company’s Board of Directors and is dependent on a number of factors, including funds available for payment of distributions, the Company’s financial condition, capital expenditure requirements and annual distribution requirements needed to maintain the Company’s status as a REIT under the Internal Revenue Code.
Our share repurchase program provided our stockholders with limited, interim liquidity by enabling them to sell their shares back to us, subject to restrictions. The Company repurchased 1.1 million shares of common stock each of the years ended December 31, 2019 and 2018, at an average price per share of $10.65 and $9.98 per share, respectively.
On May 10, 2018, the Board of Directors amended the share repurchase program to (i) change to the price for all purchases under our share repurchase program from $10.00 per share to 92% of the estimated net asset value per share of the Company’s common stock (previously the purchase price was $10.00 per share) and (ii) increase the number of shares repurchased during any calendar year from two (2.0%) of the weighted average number of shares outstanding during the prior calendar year to five (5.0%) of the weighted average number of shares outstanding during the previous twelve months.
Our Board of Directors, at its sole discretion, has the power to terminate the share repurchase program, change the price per share under the share repurchase program or reduce the number of shares purchased under the program, if it determines that the funds allocated to the share repurchase program are needed for other purposes, such as the acquisition, maintenance or repair of properties, or for use in making a declared distribution. A determination by the Company’s Board of Directors to eliminate or reduce the share repurchase program requires the unanimous affirmative vote of the independent directors.
On March 25, 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.
Tender Offer
The Company commenced a tender offer on April 19, 2019, pursuant to which it is offered to acquire up to 0.5 million shares of its common stock at a purchase price of $7.00 per share, or $3.5 million in the aggregate (the “Tender Offer”). Pursuant to the terms of the Tender Offer, which expired on June 14, 2019, the Company repurchased approximately 63,532 of its shares of common stock at $7.00 per share, or an aggregate of approximately $0.4 million.
Stock-Based Compensation
The Company previously adopted a stock option plan under which its independent directors were eligible to receive annual nondiscretionary awards of nonqualified stock options. This plan expired in April 2015.
The Company authorized and reserved 75,000 shares of its common stock for issuance under its stock option plan. The Board of Directors could make appropriate adjustments to the number of shares available for awards and the terms of outstanding awards under the Company’s stock option plan to reflect any change in its capital structure or business, stock dividend, stock split, recapitalization, reorganization, merger, consolidation or sale of all or substantially all of our assets.
The Company’s stock option plan provided for the automatic grant of a nonqualified stock option through April 2015 to each of its independent directors, without any further action by the Board of Directors or the stockholders, to purchase 3,000 shares of the Company’s common stock on the date of each annual stockholder’s meeting. During both of the years ended December 31, 2019 and 2018, options to purchase 3,000 shares of stock expired unexercised and there were no forfeitures related to stock options previously granted. As of December 31, 2019, options to purchase 15,000 shares of stock were outstanding and fully vested. The options have exercise prices between $9.80 per share and $11.80 per share with a weighted average exercise price of $10.81 per share.
The exercise price for all stock options granted under the stock option plan were initially fixed at $10 per share until the termination of the Offering which occurred in October 2008, and thereafter the exercise price for stock options granted to the independent directors was equal to the fair market value of a share on the last business day preceding the annual meeting of stockholders. The term of each such option will be 10 years from the date of grant. Options granted to non-employee directors vested and became exercisable on the second anniversary of the date of grant, provided that the independent director was a director on the Board of Directors on that date. Notwithstanding any other provisions of the Company’s stock option plan to the contrary, no stock option issued pursuant thereto may be exercised if such exercise would jeopardize the Company’s status as a REIT under the Internal Revenue Code.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
13. Noncontrolling Interests
The Company’s noncontrolling interests consist of (i) parties of the Company that hold units in the Operating Partnership, and (ii) certain interests in consolidated subsidiaries. The units held by noncontrolling interests in the Operating Partnership include SLP Units and Common Units. The noncontrolling interests in consolidated subsidiaries include ownership interests in (i) PRO held by the Company’s Sponsor and (ii) 50-01 2nd St Associates LLC (the “2nd Street Joint Venture”) held by the Company’s Sponsor and other affiliates and (iii) various joint ventures held by affiliates of our Sponsor that have originated promissory notes to unaffiliated third parties (see Note 5). PRO’s holdings principally consist of Marco OP Units and Marco II OP Units (see Note 7). The 2nd Street Joint Venture owns Gantry Park Landing, a multi-family apartment building located in Queens, New York. See below for additional information.
Share Description
See Note 14 for discussion of rights related to SLP Units. The Common Units of the Operating Partnership have similar rights as those of the Company’s stockholders including distribution rights.
Distributions
During the years ended December 31, 2019 and 2018, the Company paid distributions to noncontrolling interests of $21.7 million and $3.4 million, respectively. The 2019 distributions to noncontrolling interests include aggregate distributions of approximately $18.4 million made by the NR Joint Ventures to the NR Affiliates (see Note 5 and Note 8). As of December 31, 2019 and 2018, the total distributions declared and not paid to noncontrolling interests was $0.6 million (paid on January 15, 2020) and $0.6 million (paid on January 15, 2019), respectively.
Noncontrolling Interest of Subsidiary within the Operating Partnership
During 2009, the Operating Partnership acquired certain membership interests in Prime Outlets Acquisition Company (“POAC”) and Mill Run, LLC (“Mill Run”), which were subsequently contributed to PRO in exchange for a 99.99% managing membership interest in PRO. In addition, the Company contributed $2,900 for a 0.01% non-managing membership interest in PRO. Because the Operating Partnership is the managing member with control, PRO is consolidated into the results and financial position of the Company. In connection with the acquisitions of the memberships interests in POAC and Mill Run, the Advisor accepted a 19.17% profit membership interest in PRO in lieu of an acquisition fee and assigned its rights to receive distributions to the Sponsor, who assigned the same to David Lichtenstein. Distributions are split between the three members in proportion to their respective profit interests. PRO disposed of its membership interests in POAC and Mill Run in August 2010 and as a result, its current holdings primarily consist of Marco OP Units and Marco II OP Units (see Note 7).
On September 19, 2018, the Company’s Sponsor transferred approximately 9.14% of its profit membership interest in PRO, valued at the estimated fair value of $1.5 million, to the Operating Partnership. The transfer was accounted for as an increase in equity of the Company and decrease in noncontrolling interest. As of both December 31, 2019 and 2018, the Sponsor had a 10.03% profit membership interest in PRO, which is accounted for as a noncontrolling interest.
Consolidated Joint Venture
In August 2011, the Operating Partnership and its Sponsor formed the 2nd Street Joint Venture, which owns Gantry Park, a multi-family apartment building located in Queens, New York. The Operating Partnership has a 59.2% membership interest in the 2nd Street Joint Venture (the “2nd Street JV Interest”). The 2nd Street JV Interest is a managing membership interest. The Sponsor and other related parties have an aggregate 40.8% non-managing membership interest with certain consent rights with respect to major decisions. Contributions are allocated in accordance with each investor’s ownership percentage. Profit and cash distributions are allocated in accordance with each investor’s ownership percentage. As the Operating Partnership through the 2nd Street Joint Venture Interest has the power to direct the activities of the 2nd Street Joint Venture that most significantly impact the performance, the Company consolidates the operating results and financial condition of the 2nd Street Joint Venture and has accounts for the ownership interests of the Sponsor and other related parties as noncontrolling interests.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
14. Related Party Transactions
The Company has agreements with the Advisor and its affiliates to pay certain fees, as follows, in exchange for services performed by these entities and other related parties. The Company’s ability to secure financing and subsequent real estate operations are dependent upon its Advisor and their affiliates to perform such services as provided in these agreements.
| Fees | Amount | |
| Acquisition Fee | The Advisor is paid an acquisition fee equal to 2.75% of the gross contractual purchase price (including any mortgage assumed) of each property purchased. The Advisor is also reimbursed for expenses that it incurs in connection with the purchase of a property. The acquisition fee and acquisition-related expenses for any particular property, including amounts payable to related parties, will not exceed, in the aggregate 5% of the gross contractual purchase price (including mortgage assumed) of the property. | |
Property Management - Residential/Retail
|
The property managers are paid a monthly management fee of up to 5% of the gross revenues from residential and retail properties. The Company pays the property managers a separate fee for (i) the development of, (ii) the one-time initial rent-up or (iii) the leasing-up of newly constructed properties in an amount not to exceed the fee customarily charged in arm’s length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area. | |
| Property Management - Office/Industrial | The property managers are paid monthly property management and leasing fees of up to 4.5% of gross revenues from office and industrial properties. In addition, the Lightstone REIT pays the property managers a separate fee for the one-time initial rent-up or leasing-up of newly constructed properties in an amount not to exceed the fee customarily charged in arm’s length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area. | |
| Asset Management Fee | The Advisor or its affiliates is paid an asset management fee of 0.55% of the Company’s average invested assets, as defined, payable quarterly in an amount equal to 0.1375 of 1% of average invested assets as of the last day of the immediately preceding quarter. | |
Reimbursement of Other expenses |
For any year in which the Company qualifies as a REIT, the Advisor must reimburse the Company for the amounts, if any, by which the total operating expenses, the sum of the advisor asset management fee plus other operating expenses paid during the previous fiscal year exceed the greater of 2% of average invested assets, as defined, for that fiscal year, or, 25% of net income for that fiscal year. Items such as property operating expenses, depreciation and amortization expenses, interest payments, taxes, non-cash expenditures, the special liquidation distribution, the special termination distribution, organization and offering expenses, and acquisition fees and expenses are excluded from the definition of total operating expenses, which otherwise includes the aggregate expense of any kind paid or incurred by the Company. | |
| The Advisor or its affiliates are reimbursed for expenses that may include costs of goods and services, administrative services and non-supervisory services performed directly for the Company by independent parties. |
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Lightstone SLP, LLC, an affiliate of the Company’s Sponsor, has purchased SLP Units in the Operating Partnership. These SLP Units, the purchase price of which will be repaid only after stockholders receive a stated preferred return and their net investment, entitle Lightstone SLP, LLC to a portion of any regular distributions made by the Operating Partnership. From our inception through March 31, 2010, cumulative distributions declared to Lightstone SLP, LLC were $4.9 million, all of which had been paid as of April 2010. For the three months ended June 30, 2010, the Operating Partnership did not declare a distribution related to the SLP Units as the distribution to the stockholders was less than 7% for this period. On August 30, 2010, the Company declared additional distributions to the stockholders to bring the annualized distribution to at least 7%. As such, the Company as of August 30, 2010 recommenced declaring distributions to Lightstone SLP, LLC at the 7% annualized rate, except for the three months ended June 30, 2010 which was at an 8% annualized rate which represents the same rate paid to the stockholders.
During each of the years ended December 31, 2019 and 2018, distributions of $2.1 million were declared and distributions of $2.1 million were paid related to the SLP Units and are part of noncontrolling interests. Since inception through December 31, 2019, cumulative distributions declared were $25.5 million, of which $25.0 million have been paid. Such distributions, paid currently at a 7% annualized rate of return to Lightstone SLP, LLC through December 31, 2019, with the exception of the distribution related to the three months ended June 30, 2010, which was paid at an 8% annualized rate will always be subordinated until stockholders receive a stated preferred return, as described below.
Additionally, on March 25, 2020, the Board of Directors declared a quarterly distribution for the quarterly period ending March 31, 2020 on the SLP Units at an annualized rate of 7.0%. Any future distributions on the SLP Units will always be subordinated until stockholders receive a stated preferred return.
The SLP Units also entitle Lightstone SLP, LLC to a portion of any liquidating distributions made by the Operating Partnership. The value of such distributions will depend upon the net sale proceeds upon the liquidation of the Lightstone REIT and, therefore, cannot be determined at the present time. Liquidating distributions to Lightstone SLP, LLC will always be subordinated until stockholders receive a distribution equal to their initial investment plus a stated preferred return, as described below:
Operating Stage |
||
| Distributions | Amount of Distribution | |
7% Stockholder Return Threshold |
Once a cumulative non-compounded return of 7% per year on their net investment is realized by stockholders, Lightstone SLP, LLC is eligible to receive available distributions from the Operating Partnership until it has received an amount equal to a cumulative non-compounded return of 7% per year on the purchase price of the special general partner interests. “Net investment” refers to $10 per share, less a pro rata share of any proceeds received from the sale or refinancing of the Lightstone REIT’s assets. | |
12% Stockholder Return Threshold |
Once a cumulative non-compounded return of 12% per year is realized by stockholders on their net investment (including amounts equaling a 7% return on their net investment as described above), 70% of the aggregate amount of any additional distributions from the Operating Partnership will be payable to the stockholders, and 30% of such amount will be payable to Lightstone SLP, LLC. | |
Returns in Excess of 12% |
After the 12% return threshold is realized by stockholders and Lightstone SLP, LLC, 60% of any remaining distributions from the Operating Partnership will be distributable to stockholders, and 40% of such amount will be payable to Lightstone SLP, LLC. | |
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Liquidating Stage Distributions |
Amount of Distribution | |
| 7% Stockholder Return Threshold | Once stockholders have received liquidation distributions, and a cumulative non-compounded 7% return per year on their initial net investment, Lightstone SLP, LLC will receive available distributions until it has received an amount equal to its initial purchase price of the special general partner interests plus a cumulative non-compounded return of 7% per year. | |
| 12% Stockholder Return Threshold | Once stockholders have received liquidation distributions [in an amount equal to their net investment] plus a cumulative non-compounded return of 12% per year on their initial net investment (including amounts equaling a 7% return on their net investment as described above), 70% of the aggregate amount of any additional distributions from the Operating Partnership will be payable to the stockholders, and 30% of such amount will be payable to Lightstone SLP, LLC. | |
| Returns in Excess of 12% | After stockholders and Lightstone LP, LLC have received liquidation distributions [in an amount equal to their net investment] plus a cumulative non-compounded return of 12% per year on their initial net investment, 60% of any remaining distributions from the Operating Partnership will be distributable to stockholders, and 40% of such amount will be payable to Lightstone SLP, LLC. |
The Company, pursuant to the related party arrangements described above, has recorded the following amounts for the years indicated:
| For the Year Ended | ||||||
| December
31, 2019 | December
31, 2018 | |||||
| Acquisition fees (capitalized and are reflected in the carrying value of the investment) | $ | 1,823 | $ | 1,618 | ||
| Asset management fees (general and administrative costs) | 1,237 | 1,680 | ||||
| Property management fees (property operating expenses) | 264 | 548 | ||||
| Development fees and leasing commissions* | 167 | 309 | ||||
| Total | $ | 3,491 | $ | 4,155 | ||
* Generally, capitalized and amortized over the estimated useful life of the associated asset.
See Notes 4 and 5 for other related party transactions.
15. Commitments and Contingencies
Legal Proceedings
From time to time in the ordinary course of business, the Lightstone REIT may become subject to legal proceedings, claims or disputes.
As of the date hereof, the Company is not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.
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LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2019 and 2018
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Tax Protection Agreements
On December 8, 2009, the Company, the Operating Partnership and PRO, (collectively, the LVP Parties”) entered into a definitive agreement (the “Contribution Agreement”) with Simon Inc. and certain of its affiliates (collectively, “Simon”) providing for the disposition of a substantial portion of the Company’s portfolio of retail properties at that time to Simon, including (i) the St. Augustine Center, which is wholly owned, (ii) a 40.0% aggregate interest in its investment in POAC, which included POAC’s properties (the “POAC Properties”), Grand Prairie Holdings LLC (“GPH”) and Livermore Holdings LLC (“LVH”) and (iii) a 36.8% aggregate interest in Mill Run, which included Mill Run’s properties (the “Mill Run Properties”). On June 28, 2010, the Contribution Agreement was amended to remove the previously contemplated dispositions of the St. Augustine Outlet Center, GPH and LVH. The transactions contemplated by the Contribution Agreement are referred to herein as the “POAC/Mill Run Transaction.” On August 30, 2010, the LVP Parties completed POAC/Mill Run Transaction and contemporaneously entered into a tax matters agreement with Simon. Additionally, the Company was advised by an independent law firm that it was “more likely than not” that the POAC/Mill Run Transaction did not give rise to current taxable income or loss. Pursuant to the terms of the tax matters agreement, Simon generally could not have engaged in a transaction that would have resulted in the recognition of the “built-in gain” with respect to POAC and Mill Run at the time of the closing for specified periods of up to eight years following the closing date. Simon has a number of obligations with respect to the allocation of partnership liabilities to the LVP Parties. For example, Simon agreed to maintain certain of the outstanding mortgage loans that were secured by POAC Properties and Mill Run Properties until their respective maturities, and the LVP Parties provided and had the opportunity to continue to provide guaranties of collection with respect to a revolving credit facility (or indebtedness incurred to refinance the revolving credit facility) for at least four years following the closing of the POAC/Mill Run Transaction. The LVP Parties were also given the opportunity to enter into agreements to make specified capital contributions to Simon OP in the event that it defaults on certain of its indebtedness. If Simon breached its obligations under the tax matters agreement, Simon was required to indemnify the LVP Parties for certain taxes that they were deemed to incur, including taxes relating to the recognition of “built-in gains” with respect to POAC Properties and Mill Run Properties, and gains recognized as a result of a reduction in the allocation of partnership liabilities. These indemnification payments would have been “grossed up” such that the amount of the payments would have equaled, on an after-tax basis, to the tax liability deemed incurred because of the breach.
On December 9, 2011 and December 4, 2012, GPH, LVH and certain of their subsidiaries (collectively, the “Holding Entities”) completed the disposition of their ownership interests in two outlet centers and a parcel of land (collectively, the “Outlet Centers Transactions”) to Simon. In connection with the closing of the Outlet Centers Transactions, the Holdings Entities, the Company, the Operating Partnership, PRO and certain affiliates of the Sponsor (collectively, the “Outlet Centers Parties”) entered into a tax matters agreement with Simon pursuant to which Simon generally may not engage in a transaction that could result in the recognition of the “built-in gain” with respect to the two outlets centers at the time of the closing for specified periods of up to eight years following the closing date. Simon had a number of obligations with respect to the allocation of partnership liabilities to the Outlet Centers Parties. For example, Simon agreed to maintain a debt level of no less than the cash portion of the proceeds from the Outlet Centers Transaction until at least the fourth anniversary of the closing, and the Outlet Centers Parties provided and had the opportunity to continue to provide guaranties of collection with respect to a revolving credit facility (or indebtedness incurred to refinance the revolving credit facility) for at least four years following the closing of the Outlet Centers Transactions. The Outlet Centers Parties were also given the opportunity to enter into agreements to make specified capital contributions to Simon OP in the event that it defaults on certain of its indebtedness. If Simon breaches its obligations under the tax matters agreement, Simon will be required to indemnify the Outlet Centers Parties for certain taxes that they are deemed to incur, including taxes relating to the recognition of “built-in gains” with respect to the two outlet centers, and gains recognized as a result of a reduction in the allocation of partnership liabilities. These indemnification payments will be “grossed up” such that the amount of the payments will equal, on an after-tax basis, the tax liability deemed incurred because of the breach.
16. Subsequent Event
The extent to which the Company’s business may be affected by the current outbreak of the Coronavirus will largely depend on both current and future developments, including its duration, spread and treatment, and related travel advisories and restrictions, all of which are highly uncertain and cannot be reasonably predicted.
If the Company’s properties and real estate-related investments are negatively impacted for an extended period because (i) tenants are unable to pay their rent, (ii) borrowers are unable to pay scheduled debt service on notes receivable and/or (iii) various related party entities are unable to pay monthly preferred distributions on the Company’s Preferred Investments, the Company’s business and financial results could be materially and adversely impacted. While the Company believes there are certain cost reduction strategies it can implement, there can be no assurance that they would fully mitigate the adverse impact of any lost revenue and income.
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PART II. CONTINUED:
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:
None
| Item 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures. As of December 31, 2019, we conducted an evaluation under the supervision and with the participation of the Advisor’s management, including our Chairman and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chairman and Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2019 that our disclosure controls and procedures were adequate and effective.
Management’s Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system is a process designed by, or under the supervision of, our Chairman and Chief Executive Officer and Chief Financial Officer and effected by our Board, management and other personnel to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes policies and procedures that:
| • | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and disposition of assets; |
| • | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with the authorization of our management and directors; and |
| • | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. |
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment, they used the control criteria framework of the Committee of Sponsoring Organizations, or COSO, of the Treadway Commission published in its report entitled Internal Control—Integrated Framework (2013). Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2019.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The following table presents certain information
as of March 15, 2020 concerning each of our directors serving in such capacity:
| Principal Occupation and | Year Term of | Served as a | ||||||
| Name | Age | Positions Held | Office Will Expire | Director Since | ||||
| David Lichtenstein | 59 | Chief Executive Officer, President and Chairman of the Board of Directors | 2020 | 2004 | ||||
| George R. Whittemore | 70 | Director | 2020 | 2006 | ||||
| Alan Retkinski | 48 | Director | 2020 | 2019 | ||||
| Yehuda “Judah” L. Angster | 37 | Director | 2020 | 2015 |
David Lichtenstein is the Chairman of our Board of Directors and our Chief Executive Officer, and is the Chief Executive Officer of our Advisor. Mr. Lichtenstein founded both American Shelter Corporation and The Lightstone Group. From 1988 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of The Lightstone Group, directing all aspects of the acquisition, financing and management of a diverse portfolio of multi-family, lodging, retail and industrial properties located in 20 states, and Puerto Rico. From April 2008 to present, Mr. Lichtenstein has served as the Chairman of the board of directors and Chief Executive Officer of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”) and Lightstone Value Plus REIT II LLC, its advisor. From October 2012 to the present, Mr. Lichtenstein has served as the Chairman of the board of directors of Lightstone Value Plus Real Estate Investment Trust III, Inc. (“Lightstone III”) and from April 2013 to the present, as the Chief Executive Officer of Lightstone III and of Lightstone Value Plus REIT III LLC. From September 2014 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone Real Estate Income Trust Inc., (“Lightstone IV”), and as Chief Executive Officer of Lightstone Real Estate Income LLC, its advisor. From October 2014 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone Enterprises Limited (“Lightstone Enterprises”). Mr. Lichtenstein was appointed Chairman of the Board of Directors of Lightstone Value Plus Real Estate Investment Trust V, Inc. (“Lightstone V”), formerly known as Behringer Harvard Opportunity REIT II, Inc., effective as of September 28, 2017 and is Chairman and Chief Executive Officer of the its advisor. Mr. Lichtenstein was the president and/or director of certain subsidiaries of Extended Stay Hotels, Inc. (“Extended Stay”) that filed for Chapter 11 protection with Extended Stay. Extended Stay and its subsidiaries filed for bankruptcy protection on June 15, 2009 so they could reorganize their debts in the face of looming amortization payments. Extended Stay emerged from bankruptcy on October 8, 2010. Mr. Lichtenstein is no longer affiliated with Extended Stay. From July 2015 to the present, Mr. Lichtenstein has served as a member of the Board of Directors of the New York City Economic Development Corporation. Mr. Lichtenstein is a member of the International Council of Shopping Centers and the National Association of Real Estate Investment Trusts, Inc., and industry trade group, as well as, a member of the Board of Directors of Touro College and New York Medical College. Mr. Lichtenstein has been selected to serve as a director due to his extensive experience and networking relationships in the real estate industry, along with his experience in acquiring and financing real estate properties.
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George R. Whittemore is one of our independent directors. From April 2008 to the present, Mr. Whittemore has served as a member of the board of directors of Lightstone II and from December 2013 to present, has served as a member of the board of directors of Lightstone III. Mr. Whittemore also presently serves as a Director and Chairman of the Audit Committee of Village Bank Financial Corporation in Richmond, Virginia, a publicly traded company. Mr, Whittemore previously served as a Director of Condor Hospitality, Inc. in Norfolk, Nebraska, a publicly traded company, from November 1994 to March 2016. Mr. Whittemore previously served as a Director and Chairman of the Audit Committee of Prime Group Realty Trust from July 2005 until December 2012. Mr. Whittemore previously served as President and Chief Executive Officer of Condor Hospitality Trust, Inc. from November 2001 until August 2004 and as Senior Vice President and Director of both Anderson & Strudwick, Incorporated, a brokerage firm based in Richmond, Virginia, and Anderson & Strudwick Investment Corporation, from October 1996 until October 2001. Mr. Whittemore has also served as a Director, President and Managing Officer of Pioneer Federal Savings Bank and its parent, Pioneer Financial Corporation, from September 1982 until August 1994, and as President of Mills Value Adviser, Inc., a registered investment advisor. Mr. Whittemore is a graduate of the University of Richmond. Mr. Whittemore has been selected to serve as an independent director due to his extensive experience in accounting, banking, finance and real estate.
Alan Retkinski is one of our independent directors. Since 2004, Mr. Retkinski has been the president of Lexington Realty International, a national multi-faceted real estate brokerage firm specializing in investment sales, retail leasing, lease preparation/negotiating and management. Mr. Retkinski has been selected to serve as an independent director due to his extensive experience in real estate transactions.
Yehuda “Judah” L. Angster is our is one of our independent directors. Mr. Angster is currently the Chief Executive Officer of CastleRock Equity Group in Florham Park, NJ. Before joining CastleRock Equity Group in June of 2015, Mr. Angster was the Vice President of Global Development for PCS Wireless, LLC in Florham Park NJ beginning in September 2012. Mr. Angster was the Internal Counsel for Empire Bank from June 2009 to September 2012. Mr. Angster earned his J.D. from the Pace University School of Law in May 2009. Mr. Angster earned a Bachelor of Talmudic Law from Tanenbaum Educational Center, Rockland, NY. Mr. Angster is licensed to practice law in New Jersey and New York. Mr. Angster has been selected to serve as an independent director due to his extensive experience in global business development and real estate transactions.
Executive Officers:
The following table presents certain information as of March 15, 2020 concerning each of our executive officers serving in such capacities:
| Name | Age | Principal Occupation and Positions Held | ||
| David Lichtenstein | 59 | Chief Executive Officer and Chairman of the Board of Directors | ||
| Mitchell Hochberg | 67 | President | ||
| Joseph Teichman | 46 | General Counsel | ||
| Seth Molod | 56 | Chief Financial Officer and Treasurer |
David Lichtenstein for biographical information about Mr. Lichtenstein, see ‘‘Management — Directors.”
Mitchell Hochberg is our President and Chief Operating Officer and has also served as President and Chief Operating Officer of Lightstone II since December 2013. Mr. Hochberg also serves as the President and Chief Operating Officer of our sponsor. From April 2013 to the present, Mr. Hochberg has served as President and Chief Operating Officer of Lightstone III and its advisor. From September 2014 to the present, Mr. Hochberg has served as President and Chief Operating Officer of Lightstone IV and its advisor. From October 2014 to the present, Mr. Hochberg has served as President of Lightstone Enterprises. Mr. Hochberg was appointed Chief Executive Officer of Behringer Harvard Opportunity REIT I, Inc. (“BH OPP I”) and Lightstone V effective as of September 28, 2017. Prior to joining The Lightstone Group in August 2012, Mr. Hochberg served as principal of Madden Real Estate Ventures, a real estate investment, development and advisory firm specializing in hospitality and residential projects from 2007 to August 2012 when it combined with our sponsor. Mr. Hochberg held the position of President and Chief Operating Officer of Ian Schrager Company, a developer and manager of innovative luxury hotels and residential projects in the United States from early 2006 to early 2007 and prior to that Mr. Hochberg founded Spectrum Communities, a developer of luxury residential neighborhoods in the Northeast in 1985 where for 20 years he served as its President and Chief Executive Officer. Additionally, Mr. Hochberg serves on the board of directors of Belmond Ltd and through October 2014 served on the board of directors and as Chairman of the board of directors of Orleans Homebuilders, Inc. Mr. Hochberg received his law degree from Columbia University School of Law where he was a Harlan Fiske Stone Scholar and graduated magna cum laude from New York University College of Business and Public Administration with a Bachelor of Science degree in accounting and finance.
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Joseph E. Teichman is our General Counsel and also serves as General Counsel of Lightstone II, Lightstone III and Lightstone IV and their respective advisors. Mr. Teichman also serves as Executive Vice President and General Counsel of our Advisor and Sponsor. From October 2014 to the present, Mr. Teichman has served as Secretary and a Director of Lightstone Enterprises. Prior to joining us in January 2007, Mr. Teichman practiced law at the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP in New York, NY from September 2001 to January 2007. Mr. Teichman earned his J.D. from the University of Pennsylvania Law School in May 2001. Mr. Teichman earned a B.A. from Beth Medrash Govoha, Lakewood, NJ. Mr. Teichman is licensed to practice law in New York and New Jersey. Mr. Teichman was also a director and officer of certain subsidiaries of Extended Stay that filed for Chapter 11 protection with Extended Stay. Extended Stay and its subsidiaries filed for bankruptcy protection on June 15, 2009 so they could reorganize their debts in the face of looming amortization payments. Extended Stay emerged from bankruptcy on October 8, 2010. Mr. Teichman is no longer affiliated with Extended Stay. Mr. Teichman is also a member of the Board of Directors of Yeshiva Orchos Chaim, Lakewood, NJ and was appointed to the Ocean County College Board of Trustees in February 2016.
Seth Molod is our Chief Financial Officer and Treasurer and also serves as Chief Financial Officer and Treasurer of Lightstone II, Lightstone III, Lightstone IV and Lightstone V. Mr. Molod also serves as the Executive Vice President and Chief Financial Officer of our Sponsor and as the Chief Financial Officer of our Advisor and the advisors of Lightstone II, Lightstone III, Lightstone IV and Lightstone V. Prior to joining the Lightstone Group in August of 2018, Mr. Molod served as an Audit Partner, Chair of Real Estate Services and on the Executive Committee of Berdon LLP, a full service accounting, tax, financial and management advisory firm (“Berdon”). Mr. Molod joined Berdon in 1989. He has extensive experience advising some of the nation’s most prominent real estate owners, developers, managers, and investors in both commercial and residential projects. Mr. Molod has worked with many privately held real estate companies as well as institutional investors, REITs, and other public companies. Mr. Molod is a licensed certified public accountant in New Jersey and New York and a member of the American Institute of Certified Public Accountants. Mr. Molod holds a Bachelor of Business Administration degree in Accounting from Muhlenberg College.
Section 16 (a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires each director, officer and individual beneficially owning more than 10% of our common stock to file initial statements of beneficial ownership (Form 3) and statements of changes in beneficial ownership (Forms 4 and 5) of our common stock with the Securities Exchange Commission ("SEC"). Officers, directors and greater than 10% beneficial owners are required by SEC rules to furnish us with copies of all such forms they file. Based solely on a review of the copies of such forms furnished to us during and with respect to the fiscal year ended December 31, 2019, or written representations that no additional forms were required, we believe that all of our officers and directors and persons that beneficially own more than 10% of the outstanding shares of our common stock complied with these filing requirements in 2019.
Information Regarding Audit Committee
Our board of directors (the “Board”) established an audit committee in April 2005. The charter of audit committee is available at www.lightstonecapitalmarkets.com/sec-filings or in print to any shareholder who requests it c/o Lightstone Value Plus REIT, 1985 Cedar Bridge Avenue, Lakewood, NJ 08701. Our audit committee consists of George R. Whittemore and Yehuda “Judah” L. Angster, each of whom is “independent” within the meaning of the NYSE listing standards. The Board determined that Mr. Whittemore is qualified as an audit committee financial expert as defined in Item 401 (h) of Regulation S-K. For more information regarding the relevant professional experience of Mr. Whittemore, Mr. Retkinski and Mr. Angster, see “Directors”.
Code of Conduct and Ethics
We have adopted a Code of Conduct and Ethics that applies to all of our executive officers and directors, including but not limited to, our principal executive officer and principal financial officer. Our Code of Conduct and Ethics can be found at www.lightstonecapitalmarkets.com/sec-filings.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Executive Officers
We currently have no employees. Our Advisor performs our day-to-day management functions. Our executive officers are all employees of the Advisor. We do not pay any of these individuals for serving in their respective positions.
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Compensation of Board
We pay each of our independent directors an annual fee of $40,000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Executive Officers:
The following table presents certain information as of March 15, 2020 concerning each of our directors and executive officers serving in such capacities:
| Name and Business Address (where required) of Beneficial Owner | Number of Shares of Common Stock of the Company Beneficially Owned | Percent of All Common Shares of the Company | ||||||
| David Lichtenstein | 20,000 | 0.09 | % | |||||
| George R. Whittemore | - | - | ||||||
| Yehuda “Judah” L. Angster | - | - | ||||||
| Alan Retkinski | - | - | ||||||
| Mitchell Hotchberg | - | - | ||||||
| Joseph Teichman | - | - | ||||||
| Seth Molod | - | - | ||||||
| Our directors and executive officers as a group (7 persons) | 20,000 | 0.09 | % | |||||
EQUITY COMPENSATION PLAN INFORMATION
We previously adopted a stock option plan under which our independent directors were eligible to receive annual nondiscretionary awards of nonqualified stock options. This plan expired in April 2015. Our stock option plan was designed to enhance our profitability and value for the benefit of our stockholders by enabling us to offer independent directors stock-based incentives, thereby creating a means to raise the level of equity ownership by such individuals in order to attract, retain and reward such individuals and strengthen the mutuality of interests between such individuals and our stockholders.
We authorized and reserved 75,000 shares of our Common Stock for issuance under our stock option plan. The Board could make appropriate adjustments to the number of shares available for awards and the terms of outstanding awards under our stock option plan to reflect any change in our capital structure or business, stock dividend, stock split, recapitalization, reorganization, merger, consolidation or sale of all or substantially all of our assets.
Our stock option plan provided for the automatic grant of a nonqualified stock option through April 2015 to each of our independent directors, without any further action by our Board or the stockholders, to purchase 3,000 shares of our Common Stock on the date of each annual stockholders meeting. The exercise price for all stock options granted under our stock option plan was equal to the fair market value of a share on the last business day preceding the annual meeting of stockholders. The term of each such option was 10 years. Options granted to non-employee directors vested and became exercisable on the second anniversary of the date of grant, provided that the independent director was a director on the Board on that date. At each of our annual stockholder meetings, beginning in July 2007, options were granted to each of our independent directors. During the year ended December 31, 2019, options to purchase 3,000 shares of stock expired unexercised. As of December 31, 2019, options to purchase 15,000 shares of stock were outstanding at a weighted average exercise price of $10.81 per share and 15,000 were fully vested at exercise prices between $9.80 per share and $11.80 per share.
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Notwithstanding any other provisions of our stock option plan to the contrary, no stock option issued pursuant thereto may be exercised if such exercise would jeopardize our status as a REIT under the Internal Revenue Code.
The following table sets forth information regarding securities authorized for issuance under our Employee and Director Incentive Share Plan as of December 31, 2019:
| Number of Securities | ||||||||||||
| Number of | Remaining Available | |||||||||||
| Securities to be | For Future Issuance | |||||||||||
| Issued Upon | Weighted-Average | Under Equity | ||||||||||
| Exercise of | Exercise Price of | Compensation Plans | ||||||||||
| Outstanding | Outstanding | (Excluding | ||||||||||
| Options, Warrants | Options, Warrants | Securities Reflected | ||||||||||
| Plan Category | and Rights | and Rights | in Column (a)) | |||||||||
| (a) | (b) | (c) | ||||||||||
| Equity Compensation Plans approved by security holders | 15,000 | $ | 10.81 | 0 | ||||||||
| Equity Compensation Plans not approved by security holders | N/A | N/A | N/A | |||||||||
| Total | 15,000 | $ | 10.81 | 0 | ||||||||
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our advisor is Lightstone Value Plus REIT, LLC (the “Advisor”), which is majority owned by David Lichtenstein. On July 6, 2004, the Advisor contributed $2,000 to the Operating Partnership in exchange for 200 limited partner common units (“Common Units”) in the Operating Partnership. Our Advisor also owns 20,000 shares of our common stock (“Common Shares”) which were issued on July 6, 2004 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 the sponsor (the ‘‘Sponsor’’) during our initial public offering (the “Offering”), which terminated on October 10, 2008. Our Advisor, together with our board of directors (the “Board of Directors”), is primarily responsible 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, LLC, a Delaware limited liability company, which owns an aggregate of $30.0 million of special general partner interests (“SLP Units”) in the Operating Partnership which were purchased, at a cost of $100,000 per unit, 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 the Lightstone REIT or the Operating Partnership.
On April 22, 2005, we entered into agreements with our Advisor and its affiliates to pay certain fees, as described below, in exchange for services performed by these and other affiliated entities. As the indirect owner of those entities, Mr. Lichtenstein benefits from fees and other compensation that they receive pursuant to these agreements.
Property Managers
Our property managers manage certain of the properties we have acquired and may manage additional properties we acquire. We also use other unaffiliated third-party property managers, principally for the management of our hospitality properties.
We have agreed to pay our property managers a monthly management fee of up to 5% of the gross revenues from our residential and retail properties. In addition, for the management and leasing of our office and industrial properties, we pay to our property managers, property management and leasing fees of up to 4.5% of gross revenues from our office and industrial properties. We may pay our property managers a separate fee for (i) the development of, (ii) the one-time initial rent-up or (iii) leasing-up of newly constructed properties in an amount not to exceed the fee customarily charged in arm's length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area. Our Property Manager will also be paid a monthly fee for any extra services equal to no more than that which would be payable to an unrelated party providing the services. We have recorded the following amounts related to the property managers for the years indicated:
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| (in thousands) | 2019 | 2018 | ||||||
| Property management fees | $ | 264 | $ | 548 | ||||
| Development fees and leasing commissions | 167 | 309 | ||||||
| Total | $ | 431 | $ | 857 | ||||
Advisor
We have agreed to pay our Advisor an acquisition fee equal to 2.75% of the gross contractual purchase price (including any mortgage indebtedness assumed) of each property we purchase and reimburse our Advisor for expenses that it incurs in connection with the purchase of a property. We anticipate that acquisition expenses will typically be between 1% and 1.5% of a property's purchase price, and acquisition fees and expenses are capped at 5% of the gross contract purchase price of a property. The Advisor is also paid an advisor asset management fee of 0.55% of our average invested assets and we reimburse some expenses of the Advisor. We have recorded the following amounts related to the Advisor for the years indicated:
| (in thousands) | 2019 | 2018 | ||||||
| Acquisition fees | $ | 1,823 | $ | 1,618 | ||||
| Asset management fees | 1,237 | 1,680 | ||||||
| Total | $ | 3,060 | $ | 3,298 | ||||
Sponsor
On April 22, 2005, the Operating Partnership entered into an agreement with Lightstone SLP, LLC pursuant to which the Operating Partnership has issued special general partner interests to Lightstone SLP, LLC in an amount equal to all expenses, dealer manager fees and selling commissions that we incurred in connection with our organization and the Offering. Through December 31, 2019, Lightstone SLP, LLC had contributed $30.0 million to the Operating Partnership in exchange for special general partner interests. As the sole member of our Sponsor, which wholly owns Lightstone SLP, LLC, Mr. Lichtenstein is the indirect, beneficial owner of such special general partner interests and will thus receive an indirect benefit from any distributions made in respect thereof.
These special general partner interests entitle Lightstone SLP, LLC to a portion of any regular and liquidation distributions that we make to stockholders, but only after stockholders have received a stated preferred return. Although the actual amounts are dependent upon results of operations and, therefore, cannot be determined at the present time, distributions to Lightstone SLP, LLC, as holder of the special general partner interests, could be substantial.
Acquisitions and Investments in Entities Affiliated with Sponsor
Preferred Investments
We have entered into several agreements with various related party entities that provide for us to make preferred contributions pursuant to certain instruments (the “Preferred Investments”) that entitle us to certain prescribed monthly preferred distributions. The Preferred Investments had an aggregate balance of $34.5 million and $100.7 million as of December 31, 2019 and 2018, respectively, and are classified as held-to-maturity securities, recorded at cost and included in investments in related parties on the consolidated balance sheets. The fair value of these investments approximated their carrying values based on market rates for similar instruments. Additionally, during the years ended December 31, 2019 and 2018, the Company recognized investment income of $9.4 million and $14.3 million, respectively, which is included in interest and dividend income on the consolidated statements of operations.
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The Preferred Investments (dollar amounts in thousands) are summarized as follows:
| Preferred Investment Balance | Investment Income | |||||||||||||||||
| As of | As of | For the Year Ended December 31, | ||||||||||||||||
| Preferred Investments | Dividend Rate | December
31, 2019 | December
31, 2018 | 2019 | 2018 | |||||||||||||
| 40 East End Avenue | 8% to 12% | $ | 17,000 | $ | 30,000 | $ | 3,609 | $ | 3,650 | |||||||||
| 30-02 39th Avenue | 12% | - | 10,000 | 140 | 1,217 | |||||||||||||
| 485 7th Avenue | 12% | - | - | - | 1,095 | |||||||||||||
| East 11th Street | 12% | 8,500 | 43,000 | 3,433 | 6,561 | |||||||||||||
| Miami Moxy | 12% | 9,000 | 17,733 | 2,263 | 1,744 | |||||||||||||
| Total Preferred Investments | $ | 34,500 | $ | 100,733 | $ | 9,445 | $ | 14,267 | ||||||||||
40 East End Avenue Preferred Investment
In May 2015, we entered into an agreement with various related party entities that provided for us to make contributions of up to $30.0 million in a related party entity, which is now a joint venture between an affiliate of our Sponsor and Lightstone Real Estate Income Trust Inc. (“Lightstone IV”), a related party REIT also sponsored by our Sponsor, which owns a parcel of land located at the corner of 81st Street and East End Avenue in the Upper East Side of New York City on which it is constructing a luxury residential project consisting of 29 condominiums. Contributions were made pursuant to an instrument, the “40 East Side Avenue Preferred Investment,” that is entitled to monthly preferred distributions, initially at a rate of 8% per annum which increased to 12% per annum upon procurement of construction financing in March 2017, and is redeemable by us beginning on April 27, 2022 or upon the occurrence of certain capital transactions. During the fourth quarter of 2019, we redeemed $13.0 million of the 40 East End Avenue Preferred Investment. In February 2020, we redeemed an additional $11.0 million of the 40 East End Avenue Preferred Investment which reduced the remaining outstanding balance to $6.0 million.
30-02 39th Avenue Preferred Investment
In August 2015, we entered into certain agreements that provided for us to make aggregate contributions of up to $50.0 million in various affiliates of our Sponsor which own a parcel of land located at 30-02 39th Avenue in Long Island City, Queens, New York on which they are constructing a residential apartment project. On March 31, 2017, the 30-02 39th Preferred Investment was amended so that our total aggregate required contributions would decrease by $40.0 million to $10.0 million. Contributions were made pursuant to instruments, the “30-02 39th Avenue Preferred Investment,” that were entitled to monthly preferred distributions between 9% and 12% per annum and is redeemable by us upon the occurrence of certain capital transactions. As of December 31, 2019, there were no remaining unfunded contributions and the outstanding 30-02 39th Preferred Investment is entitled to monthly preferred distributions at a rate of 12% per annum. On February 11, 2019, we redeemed the entire 30-02 39th Street Preferred Investment of $ 10.0 million.
485 7th Avenue Preferred Investment
In December 2015, we entered into an agreement with various related party entities that provided for us to make contributions of up to $60.0 million in an affiliate of our Sponsor which owns a parcel of land located at 485 7th Avenue, New York, New York on which they constructed a 612-room Marriott Moxy hotel, which opened during the third quarter of 2017. Contributions were made pursuant to an instrument, the “485 7th Avenue Preferred Investment,” that were entitled to monthly preferred distributions at a rate of 12% per annum and was redeemable by us upon the occurrence of certain capital transactions. In January 2018, the Company redeemed $37.5 million of the 485 7th Avenue Preferred Investment. In April 2018, we redeemed the remaining $22.5 million of the 485 7th Avenue Preferred Investment.
East 11th Street Preferred Investment
On April 21, 2016, we entered into an agreement, as amended, with various related party entities that provided for us to make contributions of up to $57.5 million in an affiliate of our Sponsor (the “East 11th Street Developer”) which owned two residential buildings located at 112-120 East 11th Street and 85 East 10th Street in New York, New York. The East 11th Street Developer is developing a hotel at 112-120 East 11th Street (the “East 11th Street Project”). Contributions were made pursuant to an instrument, the “East 11th Street Preferred Investment,” that entitled us to monthly preferred distributions at a rate of 12% per annum. We may redeem our investment in the East 11th Street Preferred Investment upon the consummation of certain capital transactions. Additionally, the East 11th Street Developer may redeem our investment at any time or upon the consummation of any capital transaction. Any redemption by us or the East 11th Street Developer under the East 11th Street Preferred Investment will be made at an amount equal to the amount we have invested plus a 12.0% annual cumulative, pre-tax, non-compounded return on the aggregate amount we have invested. During 2019 and 2018, we redeemed $34.5 million and $14.5 million, respectively of the East 11th Street Preferred Investment.
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Miami Moxy Preferred Investment
On September 30, 2016, we entered into an agreement with various related party entities that provides for us to make contributions of up to $20.0 million in an affiliate of our Sponsor (the “Miami Moxy Developer”) which owns parcels of land located at 915 through 955 Washington Avenue in Miami Beach, Florida, on which the Miami Moxy Developer is developing a 205-room Marriott Moxy hotel (the “Miami Moxy”). Contributions are made pursuant to an instrument, the “Miami Moxy Preferred Investment,” that entitles us to monthly preferred distributions at a rate of 12% per annum. We may redeem our investment in the Miami Moxy Preferred Investment upon the consummation of certain capital transactions. Additionally, the Miami Moxy Developer may redeem our investment at any time or upon the consummation of any capital transaction. Any redemption by us or the Miami Moxy Developer under the Miami Moxy Preferred Investment will be made at an amount equal to the amount we have invested plus a 12.0% annual cumulative, pre-tax, non-compounded return on the aggregate amount we have invested. During the second quarter of 2019, the Company made contributions of $2.3 million for the Miami Moxy Preferred Investment. During the fourth quarter of 2019, the Company redeemed $11.0 million of the Miami Moxy Preferred Investment.
Consolidated Joint Venture
In August 2011, the Operating Partnership and its Sponsor formed the 2nd Street Joint Venture, which owns Gantry Park, a multi-family apartment building located in Queens, New York. The Operating Partnership has a 59.2% membership interest in the 2nd Street Joint Venture (the “2nd Street JV Interest”). The 2nd Street JV Interest is a managing membership interest. The Sponsor and other related parties have an aggregate 40.8% non-managing membership interest with certain consent rights with respect to major decisions. Contributions are allocated in accordance with each investor’s ownership percentage. Profit and cash distributions are allocated in accordance with each investor’s ownership percentage. As the Operating Partnership through the 2nd Street Joint Venture Interest has the power to direct the activities of the 2nd Street Joint Venture that most significantly impact the performance, we consolidate the operating results and financial condition of the 2nd Street Joint Venture and has accounts for the ownership interests of the Sponsor and other related parties as noncontrolling interests.
The Joint Venture
During 2015, the Company formed a joint venture (the “Joint Venture”) with Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a related party real estate investment trust also sponsored by the Company’s Sponsor. We have a 2.5% membership interest in the Joint Venture and Lightstone II holds the remaining 97.5% membership interest. The Joint Venture previously acquired our membership interests in a portfolio of 11 hotels in a series of transactions completed during 2015. As of January 1, 2018 the Joint Venture held ownership interests in eight hotels. During the second quarter of 2019, the Joint Venture sold its ownership interests in one of the hotels to an unrelated third party. As a result, the Joint Venture now holds ownership interests in seven hotels as of December 31, 2019.
We account for our 2.5% membership interest in the Joint Venture under the cost method and as of December 31, 2019 and 2018, the carrying value of our investment was $1.3 million and $1.5 million, respectively, which is included in investments in related parties on the consolidated balance sheets.
Notes Receivable
Beginning in 2019, we formed certain joint ventures (collectively, the “NR Joint Ventures”) between wholly-owned subsidiaries of the Operating Partnership (collectively, the “NR Subsidiaries”) and affiliates of the Sponsor (the “NR Affiliates”) which have originated nonrecourse loans (collectively, the “Joint Venture Promissory Notes”) to unaffiliated third-party borrowers (collectively, the “Joint Venture Borrowers”).
The NR Subsidiaries and NR Affiliates have varying ownership interests in the NR Joint Ventures and certain other wholly-owned subsidiaries of the Operating Partnership serve as the manager and are the sole decision-maker for each of the NR Joint Ventures.
We determined that the NR Joint Ventures are VIEs and the NR Subsidiaries are the primary beneficiaries. Since the NR Subsidiaries are the primary beneficiaries, beginning on the applicable date of formation, we have consolidated the operating results and financial condition of the NR Joint Ventures and accounted for the respective ownership interests of the NR Affiliates as noncontrolling interests.
The Joint Venture Promissory Notes provide for monthly interest at a prescribed variable rate, subject to a floor. In connection with funding of the Joint Venture Promissory Notes, the NR Joint Ventures have received origination fees (1.00% -1.50%) based on the principal amount of the loan and retained a portion of the loan proceeds to establish a reserve for interest and other items (the “Loan Reserves”). The Joint Venture Promissory Notes are recorded in notes receivable, net on the consolidated balance sheets.
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The Joint Venture Promissory Notes generally have an initial term of one year and may provide for an additional one-year extension option subject to satisfaction of certain prescribed conditions, including the funding of an additional reserve for interest and payment of an extension fee. The Joint Venture Promissory Notes are collateralized by either the membership interests of the Joint Venture Borrowers in the borrowing entity or the underlying real property being developed by the Joint Venture Borrower.
The origination fees received are presented in the consolidated balance sheets as a direct deduction from the carrying value of the Joint Venture Promissory Notes and are amortized into interest income, using a straight-line method that approximates the effective interest method, over the initial term of the Joint Venture Promissory Notes. The Loan Reserves are presented in the consolidated balance sheets as a direct deduction from the carrying value of the Joint Venture Promissory Notes and are applied against the monthly interest due over the initial term.
During the year ended December 31, 2019, the NR Subsidiaries and the NR Affiliates made aggregate contributions to the NR Joint Ventures of approximately $32.1 million and $33.1 million, respectively, principally to fund their respective shares of the Joint Venture Promissory Notes that were originated. Additionally, during the year ended December 31, 2019, the NR Joint Ventures made aggregate distributions of approximately $18.4 million to both the NR Subsidiaries and NR Affiliates, based on their respective membership interests. The NR Joint Ventures’ distributions were made from payments received from the NR Borrowers and proceeds from a financing transaction completed by LSC 1543 7th LLC and LSC 1650 Lincoln LLC.
The Notes Receivable are summarized as follows:
| Company's | Original | Initial | Contractual | As of December 31, 2019 | ||||||||||||||||||||||||||||||
| Ownership | Loan | Origination | Origination | Maturity | Interest | Outstanding | Unamortized | Carrying | ||||||||||||||||||||||||||
| Joint Venture/Lender | Percentage | Amount | Fee | Date | Date | Rate | Principal | Reserves | Origination Fee | Value | ||||||||||||||||||||||||
| LSC 162nd Capital I LLC | 45.45 | % | $ | 4,234 | 1.50 | % | February 5, 2019 | March 1,2020 | Libor plus 7.50% (Floor of 10%) | $ | 4,234 | $ | (82 | ) | $ | (6 | ) | $ | 4,146 | |||||||||||||||
| LSC 162nd Capital II LLC | 45.45 | % | $ | 9,166 | 1.50 | % | February 5, 2019 | March 1,2020 | Libor plus 7.50% (Floor of 10%) | 9,166 | (178 | ) | (14 | ) | 8,974 | |||||||||||||||||||
| LSC 47-16 Greenpoint LLC (1) | 50 | % | $ | 13,000 | 1.00 | % | April 5, 2019 | April 4, 2020 | Libor plus 5.75% (Floor of 8.25%) | - | - | - | - | |||||||||||||||||||||
| LSC 1543 7th LLC | 50 | % | $ | 20,000 | 1.00 | % | August 27, 2019 | August 26, 2020 | Libor plus 5.15% (Floor of 7.65%) | 20,000 | (504 | ) | (131 | ) | 19,365 | |||||||||||||||||||
| LSC 1650 Lincoln LLC | 50 | % | $ | 24,000 | 1.00 | % | August 27, 2019 | August 26, 2020 | Libor plus 5.15% (Floor of 7.65%) | 24,000 | (605 | ) | (157 | ) | 23,238 | |||||||||||||||||||
| Total | $ | 57,400 | $ | (1,369 | ) | $ | (308 | ) | $ | 55,723 | ||||||||||||||||||||||||
(1) Repaid in full during 2019
The following summarizes the interest earned (included in interest and dividend income on the consolidated statements of operations) for each of the Joint Venture Promissory Notes during the periods indicated:
| Joint Venture/Lender | For the Year Ended December 31, 2019 | For the Year Ended December 31, 2018 | ||||||
| LSC 162nd Capital I LLC | $ | 445 | $ | - | ||||
| LSC 162nd Capital II LLC | 964 | - | ||||||
| LSC 47-16 Greenpoint LLC | 965 | - | ||||||
| LSC 1543 7th LLC | 609 | - | ||||||
| LSC 1650 Lincoln LLC | 731 | - | ||||||
| Total | $ | 3,714 | $ | - | ||||
The Santa Monica Loan
On November 12, 2019, the Company, through the Santa Monica Joint Ventures, entered into a $25.0 million loan (the” Santa Monica Loan”) which bears interest at LIBOR+3.75% and is scheduled to initially mature on August 12, 2020 but may be further extended through the exercise of two, six-month extension options, which the Santa Monica Joint Ventures may exercise by providing the lender with advance written notice. The Santa Monica Loan requires monthly interest payments through its maturity date and is cross-collateralized by two nonrecourse loans originated by the Santa Monica Joint Ventures. The net proceeds from the Santa Monica Loan of approximately $23.6 million were distributed to the members of the Santa Monica Joint Ventures based on their respective ownership interests.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accounting Firm Fees
The following table presents the aggregate fees billed to the Company for the years indicated by the Company’s principal accounting firms:
| (in thousands) | 2019 | 2018 | ||||||
| Audit Fees (a) | $ | 286 | $ | 299 | ||||
| Audit-Related Fees (b) | - | 5 | ||||||
| Tax Fees (c) | 141 | 189 | ||||||
| Total Fees | $ | 427 | $ | 493 | ||||
| a) | Fees for audit services consisted of the audit of the Company’s annual consolidated financial statements, interim reviews of the Company’s quarterly consolidated financial statements and services normally provided in connection with statutory and regulatory filings including registration statement consents. |
| b) | Fees for audit related services related to audits of entities or subsidiaries that the Company already owns, has acquired or proposed to acquire. |
| c) | Fees for tax services. |
In considering the nature of the services provided by the independent auditor, the audit committee determined that such services are compatible with the provision of independent audit services. The audit committee discussed these services with the independent auditor and the Company’s management to determine that they are permitted under the rules and regulations concerning auditor independence promulgated by the SEC to implement the related requirements of the Sarbanes-Oxley Act of 2002, as well as the American Institute of Certified Public Accountants.
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AUDIT COMMITTEE REPORT
To the Directors of Lightstone Value Plus Real Estate Investment Trust, Inc.:
We have reviewed and discussed with management Lightstone Value Plus Real Estate Investment Trust, Inc.’s audited consolidated financial statements as of and for the year ended December 31, 2019.
We have discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standard No. 16, “Communication with Audit Committees,” as amended, as adopted by the Public Company Accounting Oversight Board.
We have received and reviewed the written disclosures and the letter from the independent auditors required by the Public Company Accounting Oversight Board Rule 3526, Communication with Audit Committees Concerning Independence and have discussed with the auditors the auditors’ independence.
Based on the reviews and discussions referred to above, we recommend to the Board that the consolidated financial statements referred to above be included in Lightstone Value Plus Real Estate Investment Trust, Inc.’s Annual Report on consolidated Form 10-K for the year ended December 31, 2019.
Audit Committee
George R. Whittemore
Yehuda “Judah” L. Angster
Alan Retkinski
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INDEPENDENT DIRECTORS’ REPORT
To the Stockholders of Lightstone Value Plus Real Estate Investment Trust, Inc.:
We have reviewed the Company’s policies and determined that they are in the best interest of the Company’s stockholders. Set forth below is a discussion of the basis for that determination.
General
The Company’s primary objective is to achieve capital appreciation with a secondary objective of income without subjecting principal to undue risk. The Company intends to achieve this goal primarily through acquisitions and development of real estate properties and other real estate-related investments.
The Company, to date, has acquired and developed residential and commercial properties principally, all of which are located in the United States and made real estate-related investments. The Company’s acquisitions have included both portfolios and individual properties. The Company current commercial holdings consist of retail (primarily multi-tenanted shopping centers) and industrial properties. The Company also has acquired various parcels of land and air rights related to the development and construction of real estate properties. Additionally, the Company has made certain preferred equity investments in related parties.
The following is descriptive of the Company’s:
Acquisition and investment policies:
| • | Reflecting a flexible operating style, the Company’s portfolio is likely to be diverse and include properties of different types (such as retail, lodging, office, industrial and residential properties); both passive and active investments; real estate-related investments (such as preferred equity investments) and joint venture transactions. The portfolio is likely to be determined largely by the purchase opportunities that the market offers, whether on an upward or downward trend. This is in contrast to those funds that are more likely to hold investments of a single type, usually as outlined in their charters. |
| • | The Company may invest in properties that are not sold through conventional marketing and auction processes. The Company’s investments may be at a dollar cost level lower than levels that attract those funds that hold investments of a single type. |
| • | The Company may be more likely to make investments that are in need of rehabilitation, redirection, remarketing and/or additional capital investment. |
| • | The Company may place major emphasis on a bargain element in its purchases, and often on the individual circumstances and motivations of the sellers. The Company will search for bargains that become available due to circumstances that occur when real estate cannot support the mortgages securing the property. |
| • | The Company intends to pursue returns in excess of the returns targeted by real estate investors who target a single type of property investment. |
Financing Policies
The Company utilizes leverage to acquire and develop properties. The number of different properties the Company acquires and develops is affected by numerous factors, including, the amount of funds available to us. When interest rates on loans are high or financing is otherwise unavailable on terms that are satisfactory to the Company, the Company may purchase or develop certain properties for cash with the intention of obtaining a loan for a portion of the purchase price or development costs at a later time. There is no limitation on the amount the Company may invest in any single property or on the amount the Company can borrow for any property.
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The Company currently intends to limit its aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to the Company’s stockholders. The Company may also incur short-term indebtedness, having a maturity of two years or less. By operating on a leveraged basis, the Company may have more funds available for investment in properties. This may allow the Company to make more investments than would otherwise be possible, resulting in a more diversified portfolio. Although the Company’s liability for the repayment of indebtedness is expected to be limited to the value of the property securing the liability and the rents or profits derived therefrom, the Company’s use of leveraging increases the risk of default on the mortgage payments and a resulting foreclosure of a particular property. To the extent that the Company does not obtain loans on the Company’s properties, the Company’s ability to acquire or develop additional properties may be restricted. The Company will endeavor to obtain financing on the most favorable terms available.
Policy on Sale or Disposition of Properties
The Company’s Board will determine whether a particular property should be sold or otherwise disposed of after considering the relevant factors, including performance or projected performance of the property and market conditions, with a view toward achieving its principal investment objectives.
The Company may, sell properties at any time and if so, may invest the proceeds from any sale, financing, refinancing or other disposition of its properties into acquiring or developing additional properties. Alternatively, the Company may use these proceeds to fund maintenance or repair of existing properties or to increase reserves for such purposes. The Company may choose to reinvest the proceeds from the sale, financing and refinancing of its properties to increase its real estate assets and its net income. Notwithstanding this policy, the Board, in its discretion, may distribute all or part of the proceeds from the sale, financing, refinancing or other disposition of all or any of the Company’s properties to the Company’s stockholders. In determining whether to distribute these proceeds to stockholders, the Board will consider, among other factors, the desirability of properties available for purchase, real estate market conditions and compliance with the applicable requirements under federal income tax laws.
When the Company sells a property, it intends to obtain an all-cash sale price. However, the Company may take a purchase money obligation secured by a mortgage on the property as partial payment, and there are no limitations or restrictions on the Company’s ability to take such purchase money obligations. The terms of payment to the Company will be affected by custom in the area in which the property being sold is located and the then prevailing economic conditions. If the Company receives notes and other property instead of cash from sales, these proceeds, other than any interest payable on these proceeds, will not be available for distributions until and to the extent the notes or other property are actually paid, sold, refinanced or otherwise disposed. Therefore, the distribution of the proceeds of a sale to the stockholders may be delayed until that time. In these cases, the Company will receive payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years.
Independent Directors
George R. Whittemore
Yehuda “Judah” L. Angster
Alan Retkinski
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
Annual Report on Form 10-K
For the fiscal year ended December 31, 2019
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report on Form 10-K or incorporated by reference herein:
| * | Filed herewith. |
| (1) | Incorporated by reference from Lightstone Value Plus Real Estate Investment Trust, Inc.’s Amended Registration Statement on Form S-11/A (File No. 333-166930), filed with the Securities and Exchange Commission on October 19, 2010. |
| (2) | Incorporated by reference from Lightstone Value Plus Real Estate Investment Trust, Inc.’s Registration Statement on Form S-11 (File No. 333-166930), filed with the Securities and Exchange Commission on May 18, 2010. |
| (3) | Incorporated by reference from Lightstone Value Plus Real Estate Investment Trust, Inc.’s Post-Effective Amendment No. 1 to its Registration Statement on Form S-11 (File No. 333-117367), filed with the Securities and Exchange Commission on May 23, 2005. |
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| Item 16. | Form 10-K Summary |
None.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. | ||
|
|
|
| Date: March 30, 2020 | By: | s/ David Lichtenstein David Lichtenstein |
Chief Executive Officer and Chairman of the Board (Principal Executive Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| NAME | CAPACITY | DATE |
/s/ David Lichtenstein David Lichtenstein
|
Chief Executive Officer and Chairman of the Board (Principal Executive Officer) |
March 30, 2020
|
/s/ Seth Molod Seth Molod
|
Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer)
|
March 30, 2020
|
/s/ George R. Whittemore George R. Whittemore
|
Director | March 30, 2020 |
/s/ Yehuda L. Angster Yehuda L. Angster
|
Director | March 30, 2020 |
/s/ Alan Retkinski Alan Retkinski |
Director | March 30, 2020 |
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EXHIBIT 4.2
DESCRIPTION OF SHARES
We were incorporated under the laws of the State of Maryland. Your rights are governed by Maryland law, our charter and our bylaws. The following summary of the terms of our stock is only a summary and you should refer to our charter and bylaws for a full description.
Authorized Stock
Our charter provides that we may issue up to 60,000,000 shares of common stock and 10,000,000 shares of preferred stock.
Our charter contains a provision permitting our Board of Directors, without any action by the stockholders, to amend the charter to increase or decrease the aggregate number of shares of common stock or preferred stock that we are authorized to issue and to change the aggregate number of shares, change the number of shares of any class or series of stock we have the authority to issue, and classify or reclassify any unissued common stock or preferred stock into one or more classes or series by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such stock.
We believe that the power of the Board of Directors to issue additional authorized but unissued shares of common stock or preferred stock and to classify or reclassify unissued shares of common stock or preferred stock and thereafter to cause us to issue such classified or reclassified shares of stock will provide us with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs which might arise. The additional common stock or preferred stock will generally be available for issuance without further action by our stockholders.
Common Stock
All of our common stock will be duly authorized, fully paid and nonassessable. Subject to the preferential rights of any other class or series of stock and to the provisions of our charter regarding the restriction on the ownership and transfer of shares of our stock, holders of our common stock will be entitled to receive distributions if authorized by our Board of Directors and to share ratably in our assets available for distribution to the stockholders in the event of a liquidation, dissolution or winding-up.
Each outstanding share of our common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors. There is no cumulative voting in the election of directors, which means that the holders of a majority of the outstanding common stock can elect all of the directors then standing for election, and the holders of the remaining common stock will not be able to elect any directors.
Holders of our common stock have no conversion, sinking fund, redemption or exchange rights, and have no preemptive rights to subscribe for any of our securities. Maryland law provides that a stockholder has appraisal rights in connection with some transactions. However, our charter provides that the holders of our stock do not have appraisal rights unless a majority of the Board of Directors determines that such rights shall apply. Shares of our common stock have equal dividend, distribution, liquidation and other rights.
Under our charter, we cannot make some material changes to our business form or operations without the approval of stockholders holding at least a majority of the shares of our stock entitled to vote on the matter. These include (1) amendment of our charter, (2) our liquidation or dissolution, (3) our reorganization, and (4) our merger, consolidation or the sale or other disposition of all or substantially all of our assets. Share exchanges in which we are the acquirer, however, do not require stockholder approval.
Our bylaws provide that the election of directors requires a majority of all the votes cast at a meeting of our stockholders at which a quorum is present. Our charter provides that the affirmative vote of the holders of a majority of our outstanding stock entitled to vote generally in the election of directors may remove any director with or without cause.
Our registrar and transfer agent is DST Systems, Inc.
Preferred Stock
Shares of preferred stock may be issued in the future in one or more series as authorized by our Board of Directors. Prior to the issuance of shares of any series, the Board of Directors is required by our charter to fix the number of shares to be included in each series and the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each series. Because our Board of Directors has the power to establish the preferences, powers and rights of each series of preferred stock, it may provide the holders of any series of preferred stock with preferences, powers and rights, voting or otherwise, senior to the rights of holders of our common stock. The issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.
Issuance of Additional Securities and Debt Instruments
Our directors are authorized to issue additional stock or other convertible securities for cash, property or other consideration on such terms as they may deem advisable. Subject to restrictions in our charter, our directors may cause us to issue debt obligations on such terms and conditions as they may determine, including debt with the right to convert into stock. Subject to certain restrictions, our directors may also cause us to issue, options and rights to buy our common stock on such terms as they deem advisable to our stockholders, as part of a financing arrangement, or pursuant to stock option plans. Our directors may cause us to issue warrants, options and rights to buy our common stock even though their exercise could result in dilution in the value of our outstanding common stock.
Restrictions on Issuance of Securities
Our charter provides that we will not issue:
| • | equity securities which are redeemable solely at the option of the holder; |
| • | debt securities unless the historical debt service coverage in the most recently completed fiscal year is sufficient to properly service the higher level of debt; |
| • | options or warrants to purchase stock to our advisor, Sponsor, director(s) or any affiliates of our advisor, Sponsor or directors except on the same terms as sold to the general public and in an amount not to exceed 10% of our outstanding common or preferred stock on the date of grant of any options or warrants; or |
| • | equity securities on a deferred payment basis or similar arrangement. |
Restrictions on Ownership and Transfer
The resale of our shares may be restricted by limitations on transferability of shares imposed by state suitability standards or blue sky laws. Specifically, the REIT Sponsors must establish minimum income and net worth standards for purchasers of shares in REITs such as us, for which there is not likely to be a substantial and active secondary market, such as us. The NASAA REIT Guidelines require a Sponsor to propose minimum income and net worth standards that are reasonable given the type of REIT and risk associated with the purchase of shares. REITS with greater investor risk must have minimum standards with a substantial net worth requirement. Generally, unless a particular state regulator decides otherwise, stockholders must have a minimum annual gross income of $70,000 and a minimum net worth of $70,000, or a minimum net worth of $250,000. For specific states with increased minimum income and net worth requirements.
In order to qualify as a REIT under the Code, among other purposes, our charter provides that, subject to exceptions described below, no person may beneficially or constructively own, or be deemed to beneficially or constructively own by virtue of the attribution provisions of the Code, (i) more than 9.8% in value of our aggregate outstanding shares of capital stock or (ii) our capital stock to the extent that such ownership would result in us being “closely held” within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year), or otherwise failing to qualify as a REIT (including, but not limited to, ownership that would result in us owning (actually or constructively) an interest in a tenant that is described in Section 856(d)(2)(B) of the Code if the income derived by the Company from such tenant would cause us to fail to satisfy any of the gross income requirements of Section 856(c) of the Code). Our charter further provides that any transfer of our common stock or preferred stock that would result in our common stock and preferred stock being beneficially owned by fewer than 100 persons shall be null and void, and the intended transferee will not acquire any rights in the common stock or preferred stock intended to be transferred.
Subject to the exceptions described below, to the extent that any person beneficially or constructively owns our common or preferred stock in excess of the 9.8% ownership limit or that would cause us to be “closely held” within the meaning of the Code or would otherwise cause us to fail to qualify as a REIT, such shares will be transferred automatically by operation of law, to a trust, the beneficiary of which will be a qualified charitable organization selected by us. The trustee will be a person unaffiliated with us who is designated by us. The automatic transfer will be effective as of the close of business on the business day prior to the date of the transfer. Within 20 days of receiving notice from us of the transfer of shares to the trust, the trustee of the trust shall sell the shares held in the trust to a person or entity who could own such shares without violating the ownership limits. Upon such sale, the trustee will distribute to the prohibited transferee an amount equal to the lesser of the price paid by the prohibited transferee for the shares held in the trust or the sales proceeds received by the trust for such shares.
In the case of any shares held in the trust resulting from any event other than a transfer or from a transfer for no consideration, such as a gift, the trustee will be required to sell the shares held in the trust to a qualified person or entity and distribute to the prohibited owner an amount equal to the lesser of the market price of the shares held in the trust as of the date of the event causing the shares to be held in the trust or the sales proceeds received by the trust for the shares held in the trust. In either case, any proceeds in excess of the amount distributable to the prohibited transferee or prohibited owner, as applicable, will be distributed to the charitable beneficiary. Prior to a sale of any of the shares by the trust, the trustee will be entitled to receive, in trust for the charitable beneficiary, all dividends and other distributions paid by us with respect to the shares, and also will be entitled to exercise all voting rights with respect to the shares. Subject to the MGCL, effective as of the date that such shares have been transferred to the trust, the trustee shall have the authority, in its sole discretion to:
| • | rescind as void any vote cast by a prohibited transferee or prohibited owner, as applicable, prior to the discovery by us that such shares have been transferred to the trust; and |
| • | recast such vote in accordance with the desires of the trustee acting for the benefit of the charitable beneficiary. |
However, if we have already taken irreversible corporate action, then the trustee shall not have the authority to rescind and recast such vote. Any dividend or other distribution paid to the prohibited transferee or prohibited owner prior to the discovery by us that such shares had been automatically transferred to a trust as described above, will be required to be repaid to the trustee upon demand for distribution to the charitable beneficiary. In the event that the transfer to the trust as described above is not automatically effective for any reason to prevent violation of the ownership limits or such other limit as provided in the charter or as otherwise permitted by the Board of Directors, our charter provides that the transfer of the shares will be null and void.
In addition, our shares which are held in trust shall be deemed to have been offered for sale to us, or our designee, at a price per share equal to the lesser of:
| • | the price per share on the transaction that resulted in such transfer to the trust, or, in the case of a gift, the market price at the time of the gift; and |
| • | the market price on the date we accept such offer. |
We shall have the right to accept such offer until the trustee has sold the shares of stock held in the trust. Upon such a sale to us, the interest of the charitable beneficiary in the shares sold shall terminate and the trustee shall distribute the net proceeds of the sale to the prohibited transferee or prohibited owner.
Our charter requires all persons who directly or indirectly beneficially own more than 5%, or any lower percentage as required pursuant to regulations under the Internal Revenue Code, of our outstanding shares of common and preferred stock, within 30 days after December 31 of each year, to provide to us a written statement stating their name and address, the number of shares of common and preferred stock they beneficially own directly or indirectly, and a description of how the shares are held. In addition, each beneficial owner must provide to us any additional information as we may request in order to determine the effect, if any, of their beneficial ownership on our status as a REIT and to ensure compliance with the 9.8% ownership limit.
Our Board of Directors may exempt prospectively or retroactively a person from the 9.8% ownership limit upon certain conditions. However, our Board of Directors may not grant an exemption from the 9.8% ownership limit to any proposed transferee whose beneficial ownership of our common and preferred stock in excess of the ownership limit would result in the termination of our status as a REIT.
Prior to the listing of our shares on a national stock exchange or the trading of our shares in the over-the-counter market, we will not issue stock certificates except to stockholders who make a written request to us therefor. Until such time, ownership of our shares will be recorded by us in book-entry form. Once issued, all certificates representing any shares of our common or preferred stock will bear a legend referring to the restrictions described above.
Provisions of Maryland Law and Our Charter and Bylaws
The following paragraphs summarize material provisions of Maryland law and of our charter and bylaws. The following summary does not purport to be complete, and you should review our charter and bylaws.
Business Combinations. Under Maryland law, some business combinations (including a merger, consolidation, share exchange or, under some circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and any person who beneficially owns ten percent or more of the voting power of the corporation’s outstanding voting stock or an affiliate or associate of the corporation who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of ten percent or more of the voting power of the then-outstanding stock of the corporation (an interested stockholder) or an affiliate of such an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. A person is not an interested stockholder under the statute if, the Board of Directors of the corporation approved in advance the transaction which otherwise would have resulted in the person becoming an interested stockholder. The Board of Directors may provide that its approval is subject to compliance with any terms and conditions determined by the Board of Directors. Thereafter, any such business combination generally must be recommended by the Board of Directors of such corporation and approved by the affirmative vote of at least:
| • | 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and |
| • | two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom (or with whose affiliate) the business combination is to be effected or held by an affiliate or associate of the interested stockholder. These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price (as defined in the Maryland business combination statute) for their shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its shares. |
These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by our Board of Directors prior to the time that the interested stockholder becomes an interested stockholder. Our board, by resolution, has exempted any business combinations involving us and The Lightstone Group or any of its affiliates from these provisions. As a result, the five-year prohibition and the super-majority vote requirements will not apply to any business combinations between any affiliate of The Lightstone Group and us. As a result, any affiliate of The Lightstone Group may be able to enter into business combinations with us, which may or may not be in the best interests of our stockholders.
Control Share Acquisition. With some exceptions, Maryland law provides that holders of control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares (1) owned by the acquiring person, (2) owned by officers, and (3) owned by employees who are also directors. Control shares mean voting shares of stock which, if aggregated with all other shares of stock owned by an acquiring person or in respect of which the acquiring person can exercise or direct the exercise of voting power, would entitle the acquiring person to exercise voting power in electing directors within one of the following ranges of voting power:
| • | one-tenth or more but less than one-third; |
| • | one-third or more but less than a majority; or |
| • | a majority or more of all voting power. |
Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A control share acquisition occurs when, subject to some exceptions, a person directly or indirectly acquires ownership or the power to direct the exercise of voting power (except solely by virtue of a revocable proxy) of issued and outstanding control shares. A person who has made or proposes to make a control share acquisition, upon satisfaction of some specific conditions, including an undertaking to pay expenses, may compel our Board of Directors to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the control shares. If no request for a meeting is made, we may present the question at any stockholders’ meeting.
If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then, subject to some conditions and limitations, the corporation may redeem any or all of the control shares (except those for which voting rights have previously been approved) for fair value determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquirer or of any meeting of stockholders at which the voting rights of such shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquirer in the control share acquisition.
The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or to acquisitions approved or exempted by the charter or bylaws of the corporation.
Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions of our shares of stock. We cannot assure that such provision will not be amended or eliminated at any time in the future.
Tender Offers
At our stockholders’ annual meeting held on September 16, 2010, an amendment to our charter to add a new section regarding tender offers was approved by our stockholders. Under our amended charter, any tender offer made by any person, including any “mini-tender” offer, must comply with most of the provisions of Regulation 14D of the Exchange Act, including the notice and disclosure requirements. Among other things, the offeror must provide notice of such tender offer at least ten business days before initiating the tender offer. If the offeror does not comply with the provisions set forth above, we will have the right to redeem that offeror’s shares of stock, including shares acquired in the tender offer. Additionally, the non-complying offeror would be responsible for our related expenses.
EXHIBIT 21.1
Subsidiaries of Registrant
| Property Name | State Organization | |
| Lightstone Value Plus REIT, LP | Delaware | |
| LVP St. Augustine Outlets LLC | Delaware | |
| PRO DFJV Holdings, LLC | Delaware | |
| 50-01 2nd Street Associates LLC | Delaware | |
| 50-01 2nd Street Associates Holdings LLC | Delaware | |
| 50-01 2nd Street Development LLC | Delaware | |
| LVP OP Hold Co LLC | Delaware | |
| LVP OP Hold Co II LLC | Delaware | |
| LVP OP Hold Co III LLC | Delaware | |
| LVP OP Holdings Corp. | Delaware | |
| Bowery Street Associates LLC | Delaware |
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement of Lightstone Value Plus Real Estate Investment Trust, Inc. on Form S-3D (File No. 333-227864) of our report dated March 30, 2020, on our audits of the consolidated financial statements as of December 31, 2019 and 2018 and for each of the years then ended, which report is included in this Annual Report on Form 10-K to be filed on or about March 30, 2020.
/s/ EisnerAmper LLP
EISNERAMPER LLP
New York, NY
March 30, 2020
EXHIBIT 31.1
Certifications
I, David Lichtenstein, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Lightstone Value Plus Real Estate Investment Trust, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
/s/ David Lichtenstein
David Lichtenstein
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: March 30, 2020
EXHIBIT 31.2
Certifications
I, Seth Molod, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Lightstone Value Plus Real Estate Investment Trust, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
/s/ Seth Molod
Seth Molod
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
Date: March 30, 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, Inc. (the “Company”) certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) The Annual Report on Form 10-K of the Company for the year ended December 31, 2019 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C 78m); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ David Lichtenstein
David Lichtenstein
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: March 30, 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, Inc. (the “Company”) certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) The Annual Report on Form 10-K of the Company for the year ended December 31, 2019 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C 78m); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Seth Molod
Seth Molod
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
Date: March 30, 2020
EXHIBIT 99.1
CONSENT OF INDEPENDENT VALUER
We hereby consent to the reference of our name and description of our role in the valuation process of the estimated net asset values per common share of Lightstone Value Plus Real Estate Investment Trust, Inc. and its subsidiaries being included or incorporated by reference in the Registration Statement on Form S-3D (File No. 333-227864) of Lightstone Value Plus Real Estate Investment Trust, Inc., which reference and description are included in this Annual Report on Form 10-K of Lightstone Value Plus Real Estate Investment Trust, Inc. filed March 30, 2020.
In giving such consent, we do not thereby admit that we are in the category of person whose consent is required under Section 7 of the Securities Act of 1933.
/s/ Robert A. Stanger & Co., Inc.
Robert A. Stanger & Co., Inc.
March 30, 2020
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