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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended March 31, 2022

 

OR

 

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

 

For the transition period from ________ to ________

 

Commission file number 000-54047

 

LIGHTSTONE VALUE PLUS REIT II, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland   83-0511223

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

1985 Cedar Bridge Avenue, Suite 1    
Lakewood, New Jersey   08701
(Address of Principal Executive Offices)   (Zip Code)

 

(732) 367-0129

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑   No ☐

 

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☑   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐   No ☑

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

As of May 5, 2022, there were approximately 17.3 million outstanding shares of common stock of Lightstone Value Plus REIT II, Inc., including shares issued pursuant to the distribution reinvestment plan.

 

 

 

 

 

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES

 

INDEX

 

      Page
PART I FINANCIAL INFORMATION    
       
Item 1. Financial Statements (unaudited)   1
       
  Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021   1
       
  Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021   2
       
  Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2022 and 2021   3
       
  Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021   4
       
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021   5
       
  Notes to Consolidated Financial Statements   6
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   20
       
Item 4. Controls and Procedures   34
       
PART II OTHER INFORMATION    
       
Item 1. Legal Proceedings   35
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   35
       
Item 3. Defaults Upon Senior Securities   35
       
Item 4. Mine Safety Disclosures   35
       
Item 5. Other Information   35
       
Item 6. Exhibits   36

 

i

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

 

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

 

           
   March 31,
2022
   December 31,
2021
 
   (unaudited)     
Assets          
Investment property:          
Land and improvements  $33,281   $36,709 
Building and improvements   182,160    203,660 
Furniture and fixtures   34,114    36,313 
Construction in progress   200    119 
Gross investment property   249,755    276,801 
Less accumulated depreciation   (59,922)   (61,626)
Net investment property   189,833    215,175 
           
Investments in unconsolidated affiliated entities   17,726    17,958 
Cash and cash equivalents   15,933    15,126 
Marketable securities, available for sale   3,439    6,777 
Restricted cash   17,872    1,833 
Accounts receivable and other assets   6,065    3,867 
Total Assets  $250,868   $260,736 
           
Liabilities and Stockholders’ Equity          
Accounts payable and other accrued expenses  $7,651   $6,525 
Margin loan   -    2,292 
Mortgages payable, net   122,894    136,167 
Notes payable   3,158    3,746 
Due to related party   536    538 
Total liabilities   134,239    149,268 
           
Commitments and contingencies          
           
Stockholders’ Equity:          
Company’s stockholders’ equity:          
Preferred shares, $0.01 par value, 10.0 million shares authorized, none issued and outstanding   -    - 
Common stock, $0.01 par value; 100.0 million shares authorized, 17.3 million shares issued and outstanding   173    173 
Additional paid-in-capital   145,811    146,308 
Accumulated deficit   (40,775)   (46,506)
Total Company stockholders’ equity   105,209    99,975 
           
Noncontrolling interests   11,420    11,493 
           
Total Stockholders’ Equity   116,629    111,468 
           
Total Liabilities and Stockholders’ Equity  $250,868   $260,736 

 

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

 

1

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

 

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(unaudited)

 

           
   For the
Three Months Ended
March 31,
 
   2022   2021 
Revenues  $13,077   $7,447 
           
Expenses:          
Property operating expenses   9,561    5,906 
Real estate taxes   636    927 
General and administrative costs   1,381    1,265 
Depreciation and amortization   2,268    2,692 
Total operating expenses   13,846    10,790 
           
Operating loss   (769)   (3,343)
           
Interest and dividend income   65    70 
Interest expense   (1,498)   (1,346)
Gain on sale of investment property   7,746    - 
Gain on forgiveness of debt   593    - 
Earnings from investments in unconsolidated affiliated entities   (89)   (83)
Other expense, net   (342)   (30)
Net income/(loss)   5,706    (4,732)
           
Less: net loss attributable to noncontrolling interests   25    88 
           
Net income/(loss) applicable to Company’s common shares  $5,731   $(4,644)
           
Net income/(loss) per Company’s common share, basic and diluted  $0.33   $(0.27)
           
Weighted average number of common shares outstanding, basic and diluted   17,286    17,430 

 

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

 

2

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

 

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(unaudited)

 

           
   For the
Three Months Ended
March 31,
 
   2022   2021 
Net income/(loss)  $5,706   $(4,732)
           
Other comprehensive loss:          
Holding loss on marketable securities, available for sale   -    (22)
Comprehensive income/(loss)   5,706    (4,754)
           
Less: Comprehensive loss attributable to noncontrolling interests   25    88 
           
Comprehensive income/(loss) attributable to the Company’s common shares  $5,731   $(4,666)

 

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

 

3

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

 

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in thousands)

(unaudited)

 

                                    
       Additional   Accumulated
Other
           Total 
   Common Stock   Paid-In   Comprehensive   Accumulated   Noncontrolling   Stockholders’ 
   Shares   Amount   Capital   Income   Deficit   Interests   Equity 
BALANCE, December 31, 2020   17,430   $174   $147,100   $82   $(41,186)  $11,599   $117,769 
                                    
Net loss   -    -    -    -    (4,644)   (88)   (4,732)
Other comprehensive loss   -    -    -    (22)   -    -    (22)
Contributions of noncontrolling interests   -    -    -    -    -    6    6 
                                    
BALANCE, March 31, 2021   17,430   $174   $147,100   $60   $(45,830)  $11,517   $113,021 

 

           Additional                   Total 
   Common Stock   Paid-In           Accumulated   Noncontrolling   Stockholders’ 
   Shares   Amount   Capital           Deficit   Interests   Equity 
BALANCE, December 31, 2021   17,331   $173   $146,308     -     $(46,506)  $11,493   $111,468 
                                       
Net income   -    -    -            5,731    (25)   5,706 
Distributions to noncontrolling interests   -    -    -     -      -    (48)   (48)
Redemption and cancellation of shares   (62)   -    (497)           -    -    (497)
                                       
BALANCE, March 31, 2022   17,269   $173   $145,811     -     $(40,775)  $11,420   $116,629 

 

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

 

4

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

 

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(unaudited)

 

           
   For the
Three Months Ended
March 31,
 
   2022   2021 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income/(loss)  $5,706   $(4,732)
Adjustments to reconcile net income/(loss) to net cash used in operating activities:          
Depreciation and amortization   2,268    2,692 
Amortization of deferred financing costs   85    103 
Gain on sale of investment property   (7,746)   - 
Gain on forgiveness of debt   (593)   - 
Earnings from investments in unconsolidated affiliated entities   89    83 
Other non-cash adjustments   387    46 
Changes in assets and liabilities:          
Increase in accounts receivable and other assets   (2,356)   (1,157)
Increase in accounts payable and other accrued expenses   1,129    794 
Decrease in due to related party   (2)   (74)
Net cash used in operating activities   (1,033)   (2,245)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of investment property   (215)   (125)
Proceeds from the sale of marketable debt securities   3,015    - 
Proceeds from sale of investment property, net of closing costs   31,192    - 
Contributions to unconsolidated affiliated entity   -    (68)
Distributions from unconsolidated affiliated entities   143    6 
Net cash provided by/(used in) investing activities   34,135    (187)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Payments on mortgages payable   (13,419)   (52)
Payment on margin loan   (2,292)   (73)
Proceeds received from notes payable   -    3,746 
Payment of loan fees and expenses   -    (336)
Redemption and cancellation of common shares   (497)   - 
Distributions to noncontrolling interests   (48)   - 
Contributions of noncontrolling interests   -    6 
Net cash (used in)/provided by financing activities   (16,256)   3,291 
           
Net change in cash, cash equivalents and restricted cash   16,846    859 
Cash, cash equivalents and restricted cash, beginning of year   16,959    18,423 
Cash, cash equivalents and restricted cash, end of period  $33,805   $19,282 
           
Supplemental cash flow information for the periods indicated is as follows:          
Cash paid for interest  $1,467   $1,108 
Holding loss on marketable securities, available for sale  $-   $22 
           
The following is a summary of the Company’s cash, cash equivalents, and restricted cash total as presented in our statements of cash flows for the periods presented:          
Cash and cash equivalents  $15,933   $14,701 
Restricted cash   17,872    4,581 
Total cash, cash equivalents and restricted cash  $33,805   $19,282 

 

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

 

5

 

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

1.Structure

 

Lightstone Value Plus REIT II, Inc. (“Lightstone REIT II”), which was formerly known as Lightstone Value Plus Real Estate Investment Trust II, Inc. before September 16, 2021, is a Maryland corporation formed on April 28, 2008, which elected to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2009.

 

Lightstone REIT II is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business will be conducted through Lightstone Value Plus REIT II LP, a Delaware limited partnership (the “Operating Partnership”). As of March 31, 2022, Lightstone REIT II held an approximately 99% general partnership interest in the Operating Partnership’s common units.

 

Lightstone REIT II and the Operating Partnership and its subsidiaries are collectively referred to as the “Company” and the use of “we,” “our,” “us” or similar pronouns refers to Lightstone REIT II, its Operating Partnership or the Company as required by the context in which such pronoun is used.

 

The Company has and will continue to seek to acquire a diverse portfolio of real estate assets and real estate-related investments, including hotels, other commercial and/or residential properties, primarily located in the United States. All such properties may be acquired and operated by the Company alone or jointly with another party. The Company may also originate or acquire mortgage loans secured by real estate. Although the Company expects that most of its investments will be of these types, it may invest in whatever types of real estate-related investments that it believes are in its best interests.

 

The Company currently has one operating segment. As of March 31, 2022, we (i) majority owned and consolidated the operating results and financial condition of 13 limited service hotels containing a total of 1,674 rooms, (ii) held an unconsolidated 48.6% membership interest in Brownmill, LLC (the “Brownmill Joint Venture”), an affiliated entity that owns two retail properties, and (iii) held an unconsolidated 50.0% membership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”), an affiliated real estate entity that owns and operates a 183-room limited service hotel located in Long Island City, New York (the “Hilton Garden Inn – Long Island City”). The Company accounts for its membership interests in the Brownmill Joint Venture and the Hilton Garden Inn Joint Venture under the equity method of accounting.

 

As of March 31, 2022, seven of the Company’s consolidated limited service hotels are held in a joint venture (the “Joint Venture”) formed between us and Lightstone Value Plus REIT, Inc. (“Lightstone REIT I”), a related party REIT also sponsored by The Lightstone Group, LLC. The Company and Lightstone I have 97.5% and 2.5% membership interests in the Joint Venture, respectively. Additionally, as of March 31, 2022, certain of the Company’s consolidated hotels also have ownership interests held by unrelated minority owners. The membership interests of Lightstone I and the unrelated minority owners are accounted for as noncontrolling interests.

 

The Company’s advisor is Lightstone Value Plus REIT II LLC (the “Advisor”), which is majority owned by David Lichtenstein. On May 20, 2008, the Advisor contributed $2 to the Operating Partnership in exchange for 200 limited partner common units in the Operating Partnership. The Advisor also owns 20,000 shares of the Company’s common stock (“Common Shares”) which were issued on May 20, 2008 for $200, or $10.00 per share. Mr. Lichtenstein also is a majority owner of the equity interests of the Lightstone Group, LLC. The Lightstone Group, LLC served as the Company’s sponsor (the “Sponsor”) during its initial public offering (the “Offering”) and follow-on offering (the “Follow-on Offering”, and collectively, “the Offerings”), which terminated on August 15, 2012 and September 27, 2014, respectively. The Advisor, pursuant to the terms of an advisory agreement, together with the Company’s board of directors (the “Board of Directors”), is primarily responsible for making investment decisions on behalf of the Company and managing its day-to-day operations. Through his ownership and control of the Lightstone Group, LLC, Mr. Lichtenstein is the indirect owner and manager of Lightstone SLP II LLC, a Delaware limited liability company (the “Associate General Partner”), which has subordinated profits interests in the Operating Partnership (“Subordinated Profits Interests”) which were acquired for aggregate consideration of $17.7 million in connection with the Company’s Offerings. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT II or the Operating Partnership.

 

The Company does not have any employees. The Advisor receives compensation and fees for services related to the investment and management of the Company’s assets.

 

6

 

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

The Company’s Advisor has certain affiliates which may manage the properties the Company acquires. However, the Company also contracts with other unaffiliated third-party property managers, principally for the management of its hospitality properties.

 

The Company’s Common Shares are not currently listed on a national securities exchange. The Company may seek to list its Common Shares for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its Common Shares until they are listed for trading. In the event the Company does not obtain listing prior to September 27, 2024, which is the tenth anniversary of the termination of its Follow-On Offering, its charter requires that the Board of Directors must either (i) seek stockholder approval of an extension or amendment of this listing deadline; or (ii) seek stockholder approval to adopt a plan of liquidation of the corporation. 

 

Noncontrolling Interests

 

Limited Partner

 

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

 

Associate General Partner

 

In connection with the Company’s Offerings, which concluded on September 27, 2014, the Associate General Partner contributed (i) cash of $12.9 million and (ii) equity interests totaling 48.6% in the Brownmill Joint Venture, which were valued at $4.8 million, to the Operating Partnership in exchange for 177.0 Subordinated Profits Interests in the Operating Partnership with an aggregate value of $17.7 million.

 

As the indirect majority owner of the Associate General Partner, Mr. Lichtenstein is the beneficial owner of a 99% interest in such Subordinated Profits Interests and thus receives an indirect benefit from any distributions made in respect thereof.

 

These Subordinated Profits Interests may entitle the Associate General Partner to a portion of any regular and liquidation distributions that the Company makes to its stockholders, but only after its stockholders have received a stated preferred return. There were no distributions declared on the Subordinated Profits Interests during the months ended March 31, 2022 and 2021. Since the Company’s inception through March 31, 2022, the cumulative distributions declared and paid on the Subordinated Profits Interests were $7.9 million. Any future distributions on the Subordinated Profits Interests will always be subordinated until stockholders receive a stated preferred return, as described above.

 

See Note 9 for additional information with respect to the Subordinated Profits Interests.

 

Other Noncontrolling Interests in Consolidated Subsidiaries

 

Other noncontrolling interests consist of the (i) membership interest in the Joint Venture held by Lightstone I and (ii) membership interests held by minority owners in certain of the Company’s hotels.

 

The Advisor and its affiliates and Associate General Partner are related parties of the Company. Certain of these entities are entitled to compensation and fees for services related to the investment, management and disposition of the Company’s assets during its acquisition, operational and liquidation stages. The compensation levels during the Company’s acquisition and operational stages are based on the cost of acquired properties/investments and the annual revenue earned from such properties/investments, and other such fees and reimbursements as outlined in each of the respective agreements. See Note 9 for additional information.

 

7

 

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

2.Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements include the accounts of Lightstone REIT II and its Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). As of March 31, 2022, Lightstone REIT II had a 99% general partnership interest in the common units of the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary.

 

The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements of the Company and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The unaudited interim consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair presentation of the results for the periods presented. The accompanying unaudited consolidated financial statements of the Lightstone Value Plus REIT II, Inc. and Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

 

GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate and investments in other real estate entities and depreciable lives of long-lived assets. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.

 

The consolidated balance sheet as of December 31, 2021 included herein has been derived from the consolidated balance sheet included in the Company’s Annual Report on Form 10-K.

 

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

 

To qualify or maintain our qualification as a REIT, we engage in certain activities through wholly-owned taxable REIT subsidiaries (“TRS”). As such, we are subject to U.S. federal and state income and franchise taxes from these activities.

 

Revenue Recognition

 

The following table represents the total revenues from hotel operations on a disaggregated basis:

 

          
   For the
Three Months ended
March 31,
 
  2022   2021 
Revenues        
Room  $12,507   $7,212 
Food, beverage and other   570    235 
Total revenues  $13,077   $7,447 

 

8

 

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

COVID-19 Pandemic Operations and Liquidity Update

 

The World Health Organization declared COVID-19 a global pandemic on March 11, 2020 and since that time many of the previously imposed restrictions and other measures which were instituted in response have been subsequently reduced or lifted. However, the COVID-19 pandemic remains highly unpredictable and dynamic and its duration and extent continue to be dependent on various developments, such as the emergence of variants to the virus that may cause additional strains of COVID-19, the administration and ultimate effectiveness of vaccines, including booster shots, and the eventual timeline to achieve a sufficient level of herd immunity among the general population. Accordingly, the COVID-19 pandemic may continue to have negative effects on the health of the U.S. economy for the foreseeable future.

 

The extent to which the Company’s business may be affected by the ongoing COVID-19 pandemic will largely depend on both current and future developments, all of which are highly uncertain and cannot be reasonably predicted.

 

Furthermore, as a result of the COVID-19 pandemic, room demand and rental rates for the Company’s consolidated and unconsolidated hotels significantly declined starting in March 2020 at the onset of the pandemic; and while these metrics have improved since then (beginning late 2020 and continuing through the first quarter of 2022); overall room demand and rental rates remain below their pre-pandemic historical levels. Accordingly, the COVID-19 pandemic has negatively impacted the Company’s operations, financial position and cash flow; and while the severity of the impact has lessened, the Company currently expects it will continue to experience a negative impact for the foreseeable future.

 

The Company cannot currently estimate if and when room demand and rental rates will return to historical pre-pandemic levels for its hotels. Additionally, the Company has an unconsolidated 48.6% membership interest in the Brownmill Joint Venture, which owns two retail properties located in New Jersey that were subject to various restrictions. If the Brownmill Joint Venture’s retail properties are negatively impacted for an extended period because its tenants are unable to pay their rent, the Company’s equity earnings and the carrying value of its investment in the Brownmill Joint Venture could be materially and adversely impacted.

 

In light of the past, present and potential future impact of the COVID-19 pandemic on the operating results of its hotels, the Company has taken various actions to preserve its liquidity, including the following: 

 

The Company has implemented cost reduction strategies for all of its hotels, leading to reductions in certain operating expenses and capital expenditures.

 

During 2020 and 2021, the Company obtained certain amendments to its revolving credit facility (the “Revolving Credit Facility”). See Note 6 for additional information.

 

In April 2020 and during the first quarter of 2021, the Company’s consolidated hotels received an aggregate of $3.3 million and $3.7 million, respectively, from loans provided under the federal Paycheck Protection Program (“PPP Loans”). See Note 6 for additional information.

 

Previously in March 2020, the Board of Directors determined to suspend regular quarterly distributions on the Company’s Common Shares and the Subordinated Profits Interests and has not declared any distributions since the suspension. Additionally, in March 2020, the Board of Directors approved the suspension of all redemptions under the Company’s shareholder repurchase program (the “SRP”). Subsequently on May 10, 2021, the Board of Directors partially reopened the SRP to allow, subject to various conditions, for redemptions submitted in connection with a stockholder’s death or hardship. See Note 8 for additional information.

 

During 2020 and 2021, the Hilton Garden Inn Joint Venture obtained various amendments to its non-recourse mortgage loan secured by the Hilton Garden Inn – Long Island City. See Note 4 for additional information.

 

9

 

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

The Company believes that these actions, along with its available on hand cash and cash equivalents, restricted cash and marketable securities, as well as its intention to seek to extend the Revolving Credit Facility to September 15, 2023 pursuant to the lender’s extension option, as discussed in Note 4, will provide it with sufficient liquidity to meet its obligations for at least 12 months from the date of issuance of these consolidated financial statements.

 

New Accounting Pronouncements

 

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

 

3.Disposition of the Courtyard – Paso Robles

 

On March 22, 2022, the Company completed the disposition of a 130-room hotel located in Paso Robles, California, which operates as a Courtyard by Marriott (the “Courtyard – Paso Robles”), to an unaffiliated third party, for a contractual sales price of $32.3 million. In connection with the transaction, the Company also defeased the Courtyard – Paso Robles Mortgage Loan with an outstanding principal balance of $13.4 million at a total cost of $14.1 million (see Note 6) and its net proceeds after closing and other costs, pro rations and working capital adjustments were $17.8 million. In connection with the disposition of the Courtyard – Paso Robles, the Company recognized a gain on the sale of investment property of $7.7 million during the three months ended March 31, 2022.

 

In connection with the sale of the Courtyard – Paso Robles, certain funds have been placed in escrow with a qualified intermediary in order to facilitate potential like-kind exchange transactions in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended. The balance of the escrow account was approximately $16.9 million as of March 31, 2022 and is included in restricted cash on the consolidated balance sheet.

 

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

 

4.Investments in Unconsolidated Affiliated Entities

 

The entities listed below are partially owned by the Company. The Company accounts for these investments under the equity method of accounting as the Company exercises significant influence, but does not exercise financial and operating control over these entities. A summary of the Company’s investments in the unconsolidated affiliated entities is as follows:

 

                   
           As of 
Entity  Date of
Ownership
   Ownership %   March 31,
2022
   December 31,
2021
 
Brownmill Joint Venture  Various    48.6%  $6,719   $6,793 
Hilton Garden Inn Joint Venture  March 27, 2018    50.0%   11,007    11,165 
Total investments in unconsolidated affiliated real estate entities           $17,726   $17,958 

 

10

 

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

Brownmill Joint Venture

 

During 2010 through 2012, the Company entered into various contribution agreements with Lightstone Holdings LLC (“LGH”), a wholly-owned subsidiary of the Sponsor, pursuant to which LGH contributed to the Company an aggregate 48.6% membership interest in the Brownmill Joint Venture in exchange for the Company issuing an aggregate of 48 units of Subordinated Profits Interests, at $100,000 per unit (at an aggregate total value of $4.8 million), to Lightstone SLP II LLC.

 

As of March 31, 2022, the Company owns a 48.6% membership interest in the Brownmill Joint Venture, which is a non-managing interest. An affiliate of the Company’s Sponsor is the majority owner and manager of the Brownmill Joint Venture. Profit and cash distributions are allocated in accordance with each investor’s ownership percentage. The Company accounts for its investment in the Brownmill Joint Venture in accordance with the equity method of accounting. During the three months ended March 31, 2021, the Company made contributions to the Brownmill Joint Venture aggregating $68. During the three months ended March 31, 2022 and 2021, the Company received distributions from the Brownmill Joint Venture aggregating $143 and $6, respectively.

 

The Brownmill Joint Venture owns two retail properties known as Browntown Shopping Center, located in Old Bridge, New Jersey, and Millburn Mall, located in Vauxhaull, New Jersey.

 

Brownmill Joint Venture Financial Information

 

The Company’s carrying value of its interest in the Brownmill Joint Venture differs from its share of member’s equity reported in the condensed balance sheet of the Brownmill Joint Venture because the basis of the Company’s investment is in excess of the historical net book value of the Brownmill Joint Venture. The Company’s additional basis, which has been allocated to depreciable assets, is being recognized on a straight-line basis over the estimated useful lives of the appropriate assets.

 

The following table represents the condensed income statements for the Brownmill Joint Venture for the periods indicated:

 

           
   For the
Three Months Ended
March 31,
 
   2022   2021 
Revenue  $1,038   $1,050 
           
Property operating expenses   449    305 
Depreciation and amortization   212    176 
           
Operating income   377    569 
           
Interest expense and other, net   (170)   (166)
Net income  $207   $403 
Company’s share of earnings  $101   $196 
Additional depreciation and amortization expense (1)   (31)   (31)
Company’s earnings from investment  $70   $165 

 

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

 

11

 

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

The following table represents the condensed balance sheets for the Brownmill Joint Venture:

 

          
   As of   As of 
   March 31,
2022
   December 31,
2021
 
Real estate, at cost (net)  $17,608   $17,830 
Cash and restricted cash   1,182    1,152 
Other assets   1,626    1,518 
Total assets  $20,416   $20,500 
           
Mortgage payable  $13,529   $13,594 
Other liabilities   734    666 
Members’ capital   6,153    6,240 
Total liabilities and members’ capital  $20,416   $20,500 

 

Hilton Garden Inn Joint Venture

 

On March 27, 2018, the Company and Lightstone Value Plus REIT III, Inc. (“Lightstone REIT III”), a related party REIT also sponsored by the Company’s Sponsor, acquired, through the Hilton Garden Inn Joint Venture, a 183-room, limited-service hotel located at 29-21 41st Avenue, Long Island City, New York (the “Hilton Garden Inn - Long Island City”) from an unrelated third party, for aggregate consideration of $60.0 million, which consisted of $25.0 million of cash and $35.0 million of proceeds from a loan from a financial institution (the “Hilton Garden Inn Mortgage”), excluding closing and other related transaction costs. The Company and Lightstone REIT III each have a 50.0% membership interest in the Hilton Garden Inn Joint Venture.

 

The Company paid $12.9 million for a 50.0% membership interest in the Hilton Garden Inn Joint Venture. The Company’s membership interest in the Hilton Garden Inn Joint Venture is a co-managing interest. The Company accounts for its membership interest in the Hilton Garden Inn Joint Venture in accordance with the equity method of accounting because it exerts significant influence over but does not control the Hilton Garden Inn Joint Venture. All capital contributions and distributions of earnings from the Hilton Garden Inn Joint Venture are made on a pro rata basis in proportion to each member’s equity interest percentage. Any distributions in excess of earnings from the Hilton Garden Inn Joint Venture are made to the members pursuant to the terms of the Hilton Garden Inn Joint Venture’s operating agreement. The Company commenced recording its allocated portion of profit/loss and cash distributions beginning as of March 27, 2018 with respect to its membership interest of 50.0% in the Hilton Garden Inn Joint Venture.

 

In light of the impact of the COVID-19 pandemic on the operating results of the Hilton Garden Inn – Long Island City, the Hilton Garden Inn Joint Venture has entered into certain amendments with respect to the Hilton Garden Inn Mortgage as discussed below.

 

On June 2, 2020, the Hilton Garden Inn Mortgage was amended to provide for (i) the deferral of the six monthly debt service payments aggregating $0.9 million for the period from April 1, 2020 through September 30, 2020 until March 27, 2023; (ii) a 100 bps reduction in the interest rate spread to LIBOR plus 2.15%, subject to a 4.03% floor, for the six-month period from September 1, 2020 through February 28, 2021; (iii) the Hilton Garden Inn Joint Venture pre-funding $1.2 million into a cash collateral reserve account to cover the six monthly debt service payments due from October 1, 2020 through March 1, 2021; and (iv) waiver of all financial covenants for quarter-end periods before June 30, 2021.

 

12

 

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

Additionally, on April 7, 2021, the Hilton Garden Inn Joint Venture and the lender further amended the terms of the Hilton Garden Inn Mortgage to provide for (i) the Hilton Garden Inn Joint Venture to make a principal paydown of $1.7 million; (ii) the Hilton Garden Inn Joint Venture to fund an additional $0.7 million into the cash collateral reserve account; (iii) a waiver of all financial covenants for quarter-end periods through September 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods beginning December 31, 2021 through December 31, 2022; (iv) an 11-month interest-only payment period from May 1, 2021 through March 31, 2022; and (v) certain restrictions on distributions to the members of the Hilton Garden Inn Joint Venture during the interest-only payment period.

 

The Hilton Garden Inn Joint Venture is currently in compliance with respect to all of its financial debt covenants. 

 

Subsequent to the Company’s acquisition of its 50.0% membership interest in the Hilton Garden Joint Venture through March 31, 2022, it has made an aggregate of $2.8 million of additional capital contributions (all of which were made prior to 2022) and received aggregate distributions of $2.0 million (all of which were received prior to 2022).

 

Hilton Garden Inn Joint Venture Financial Information

 

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

 

           
   For the
Three Months Ended
March 31,
2022
   For the
Three Months Ended
March 31,
2021
 
Revenues  $2,168   $1,419 
           
Property operating expenses   1,428    872 
General and administrative costs   10    10 
Depreciation and amortization   620    635 
Operating income/(loss)   110    (98)
Interest expense   (427)   (397)
Net loss  $(317)  $(495)
Company’s share of net loss (50.00%)  $(158)  $(248)

 

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

 

        
   As of   As of 
   March 31,
2022
   December 31,
2021
 
Investment property, net  $51,829   $52,415 
Cash   3,610    2,841 
Other assets   710    1,204 
Total assets  $56,149   $56,460 
           
Mortgage payable, net  $33,129   $33,115 
Other liabilities   1,577    1,585 
Members’ capital   21,443    21,760 
Total liabilities and members’ capital  $56,149   $56,460 

 

13

 

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

5.Marketable Securities, Fair Value Measurements and Margin Loan

 

Marketable Securities

 

The following is a summary of the Company’s available for sale securities as of the dates indicated:

 

                     
   As of March 31, 2022 
   Adjusted
Cost
   Gross Unrealized
Gains
   Gross Unrealized
Losses
   Fair
Value
 
Marketable Securities:                    
                     
Equity Securities  $3,621   $-   $(182)  $3,439 

 

   As of December 31, 2021 
   Adjusted
Cost
   Gross Unrealized
Gains
   Gross Unrealized
Losses
   Fair
Value
 
Marketable Securities:                    
                     
Equity Securities  $6,718   $59   $-   $6,777 

 

Fair Value Measurements

 

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

 

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

 

  Level 1 – Quoted prices in active markets for identical assets or liabilities.
     
  Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
     
  Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

As of March 31, 2022 and December 31, 2021, all of the Company’s marketable securities were classified as Level 2 assets and there were no transfers between the level classifications during the three months ended March 31, 2022. The fair values of the Company’s equity securities are measured using readily available quoted prices for these securities; however, the markets for these securities are not active.

 

The Company did not have any other significant financial assets or liabilities, which would require revised valuations that are recognized at fair value.

 

Margin loan

 

The Company has access to a margin loan from a financial institution that holds custody of certain of the Company’s marketable securities. The margin loan is collateralized by the marketable securities in the Company’s account. The amounts available to the Company under the margin loan are at the discretion of the financial institution and not limited to the amount of collateral in its account. The amount outstanding under this margin loan was $2.3 million as of December 31, 2021. The Company repaid the entire outstanding balance of the Margin Loan ($2.3 million) during the first quarter of 2022 with the proceeds from the sales of marketable securities. The margin loan bears interest at LIBOR plus 0.85% (1.30% as of March 31, 2022).

 

14

 

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

6.Mortgages payable, net

 

Mortgages payable, net consisted of the following:

 

                           
      Weighted Average
Interest Rate
            
Description  Interest
Rate
  as of
March 31,
2022
   Maturity
Date
  Amount
Due at
Maturity
   As of
March 31,
2022
   As of
December 31,
2021
 
Revolving Credit Facility  LIBOR plus 3.15% (floor of 4.00%)   4.00%  September 2022  $123,045   $123,045   $123,045 
                           
Courtyard – Paso Robles          Repaid in full   -    -    13,419 
                           
Total mortgages payable      4.00%     $123,045    123,045    136,464 
                           
Less: Deferred financing costs                   (151)   (297)
                           
Total mortgages payable, net                  $122,894   $136,167 

 

 

Revolving Credit Facility

 

The Company, through certain subsidiaries, has a non-recourse Revolving Credit Facility with a financial institution. The Revolving Credit Facility provides a line of credit of up to $140.0 million pursuant to which Company may designate its hotel properties as collateral that allow borrowings up to a 65.0% loan-to-value ratio subject to also meeting certain financial covenants. The Revolving Credit Facility provides for monthly interest-only payments and the entire principal balance is due upon its scheduled expiration. The Revolving Credit Facility bears interest at LIBOR plus 3.15%, subject to a 4.00% floor, and is currently scheduled to mature on September 15, 2022, subject to a one-year extension option at the sole discretion of the lender.

 

On June 2, 2020, the Revolving Credit Facility was amended to provide for (i) the deferral of the six monthly debt service payments aggregating $2.6 million (from April 1, 2020 through September 30, 2020, until November 15, 2021; (ii) a 100 bps reduction in the interest rate spread to LIBOR plus 2.15%, subject to a 3.00% floor, for the six-month period from September 1, 2020 through February 28, 2021; (iii) the Company pre-funding $2.5 million into a cash collateral reserve account to cover the six monthly debt service payments which were due from October 1, 2020 through March 1, 2021; and (iv) a waiver of all financial covenants for quarter-end periods before June 30, 2021.

 

Subsequently, on March 31, 2021, the Revolving Credit Facility was further amended providing for (i) the Company to pledge the membership interests in another hotel as additional collateral within 45 days, (ii) the Company to fund an additional $2.5 million into the cash collateral reserve account; (iii) a waiver of all financial covenants for quarter-end periods through September 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods beginning December 31, 2021 through March 31, 2023; (iv) an extension of the maturity date from May 17, 2021 to September 15, 2022 upon the pledge of the additional collateral (which was subsequently completed on May 13, 2021); (v) one additional one-year extension option at the lender’s sole discretion; and (vi) certain limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.

 

As of March 31, 2022, all of the Company’s 13 majority owned and consolidated hotel properties were pledged as collateral under the Revolving Credit Facility and the outstanding principal balance was $123.0 million. Additionally, no additional borrowings were available under the Revolving Credit Facility as of March 31, 2022. Although the Revolving Credit Facility is scheduled to mature on September 15, 2022, the Company currently intends to seek to extend the Revolving Credit Facility to September 15, 2023 pursuant to the lender’s extension option.

 

15

 

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

Courtyard – Paso Robles Mortgage Loan

 

In connection with the Company’s acquisition of the Courtyard – Paso Robles on December 14, 2017, it assumed the Courtyard – Paso Robles Mortgage Loan. The Courtyard – Paso Robles Mortgage Loan was scheduled to mature in November 2023, bore interest at a fixed rate of 5.49% and required monthly principal and interest payments of $79 with a balloon payment of $13.0 million due at maturity. On March 22, 2022, the Courtyard – Paso Robles Mortgage Loan was fully defeased in connection with the disposition of the Courtyard – Paso Robles (See Note 3) and the Company was legally released from any ongoing obligation.

 

Principal Maturities

 

The following table, based on the terms of the mortgages, sets forth their aggregate estimated contractual principal maturities, including balloon payments due at maturity, as of March 31, 2022:

 

                                    
   2022   2023   2024   2025   2026   Thereafter   Total 
Principal maturities  $123,045   $-   $-   $-   $-   $-   $123,045 
                                    
Less: deferred financing costs                                 (151)
                                    
Total principal maturities, net                                $122,894 

 

 

Pursuant to the Company’s loan agreements, escrows in the amount of $0.9 million and $1.8 million were held in restricted cash accounts as of March 31, 2022 and December 31, 2021, respectively. Such escrows will be released in accordance with the applicable loan agreements for payments of real estate taxes, debt service payments, insurance and capital improvement transactions, as required. Certain of our debt agreements also contain clauses providing for prepayment penalties.

 

7.Notes Payable

 

During the first quarter of 2021, the Company, through various subsidiaries (each such entity, a “Borrower” and collectively, the “Borrowers”), received aggregate funding of $3.7 million through PPP Loans, originated under the federal Paycheck Protection Program, which was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the SBA.

 

The PPP Loans each have a term of five years and provide for an interest rate of 1.00%. The payment of principal and interest on the PPP Loan is deferred until the day that the forgiven amount is remitted to the lender (approximately five months after the forgiveness application is submitted to the lender, unless the Borrower appeals a denial of forgiveness) or ten months after the end of the Borrower’s covered period, whichever is earlier. Pursuant to the terms of the CARES Act, the proceeds of the PPP Loans may be used for payroll costs, mortgage interest, rent or utility costs.

 

The promissory note for each of the PPP Loans contains customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note. Under the terms of the CARES Act, each Borrower can apply for and be granted forgiveness for all or a portion of the PPP Loans. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act. Although the Company intends for each Borrower to apply for loan forgiveness, no assurance can be given that each Borrower will ultimately obtain forgiveness under its PPP Loan, in whole or in part. In the event all or any portion of a PPP Loan is forgiven, the amount forgiven will be applied to outstanding principal and recorded as income. The PPP Loans are subject to audit by the SBA for up to six years after the date the loans are forgiven.

 

As of March 31, 2022, the PPP Loans had outstanding balances of $3.2 million and are classified as Notes Payable on the consolidated balance sheets. 

 

During the three months ended March 31, 2022, the Company received notice from the SBA that $0.6 million of PPP Loans and related accrued interest had been legally forgiven and therefore, the Company recognized a gain on forgiveness of debt for that amount on its consolidated statements of operations during three months ended March 31, 2022.

 

Previously, during the year ended December 31, 2021, the Company received notices from the SBA that PPP Loans received in April 2020 totaling $3.3 million and their related accrued interest aggregating $0.1 million had been legally forgiven and therefore, the Company recognized a gain on forgiveness of debt of $3.4 million in its consolidated statements of operations during the year ended December 31, 2021.

 

16

 

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

8.Equity

 

Distributions on Common Shares

 

On March 19, 2020, the Company’s Board of Directors determined to suspend regular quarterly distributions and, as a result, has not declared any distributions on the Company’s Common Shares since the suspension.

 

Future distributions declared, if any, will be at the discretion of the Board of Directors based on their analysis of the Company’s performance over the previous periods and expectations of performance for future periods. The Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, revenues and other sources of income, operating and interest expenses and the Company’s ability to refinance near-term debt as well as the IRS’s annual distribution requirement that REITs distribute no less than 90% of their taxable income. The Company cannot assure that any future distributions will be made or that it will maintain any particular level of distributions that it has previously established or may establish.

 

Share Repurchase Program

 

The Company’s SRP may provide its eligible stockholders with limited, interim liquidity by enabling them to sell their Common Shares back to the Company, subject to restrictions and applicable law.

 

On March 19, 2020, the Board of Directors amended the SRP to remove stockholder notice requirements and also approved the suspension of all redemptions effective immediately.

 

Effective May 10, 2021, the Board of Directors reopened the SRP to allow, subject to various conditions as set forth below, for redemptions submitted in connection with a stockholder’s death or hardship and set the price for all such purchases to the Company’s current estimated net asset value per share, as determined by the Board of Directors and reported by the Company from time to time.

 

Deaths that occurred subsequent to January 1, 2020 were eligible for consideration, subject to certain conditions. Beginning January 1, 2022, requests for redemptions in connection with a stockholder’s death must be submitted and received by the Company within one year of the stockholder’s date of death for consideration.

 

On the above noted date, the Board of Directors established that on an annual basis, the Company would not redeem in excess of 0.5% of the number of shares outstanding as of the end of the preceding year for either death or hardship redemptions, respectively. Additionally, redemption requests generally would be processed on a quarterly basis and would be subject to pro ration if either type of redemption requests exceeded the annual limitation.

 

For the three months ended March 31, 2022 the Company repurchased 62,043 shares of common shares, pursuant to its SRP at a price per share of $8.02 per share.

 

Earnings per Share

 

The Company had no potentially dilutive securities outstanding during the periods presented. Accordingly, earnings per share is calculated by dividing net income/loss attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the applicable period.

 

17

 

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

9.Related Party Transactions

 

The Company has various agreements, including an advisory agreement, with the Advisor to pay certain fees in exchange for services performed by the Advisor and/or its affiliated entities. Additionally, the Company’s ability to secure financing and its real estate operations are dependent upon its Advisor and its affiliates to perform such services as provided in these agreements. Amounts the Company owes to the Advisor and its affiliated entities are principally for asset management fees, and are classified as due to related parties on the consolidated balance sheets.

 

The following table represents the fees incurred associated with the payments to the Company’s Advisor for the periods indicated:

 

        
   For the
Three Months Ended
March 31,
 
   2022   2021 
Asset management fees (general and administrative costs)  $738   $737 

 

The advisory agreement has a one-year term and is renewable for an unlimited number of successive one-year periods upon the mutual consent of the Advisor and the Company’s independent directors. Payments to the Advisor or its affiliates may include asset acquisition fees and the reimbursement of acquisition-related expenses, development fees and the reimbursement of development-related costs, financing coordination fees, asset management fees or asset management participation, and construction management fees. The Company may also reimburse the Advisor and its affiliates for actual expenses it incurs for administrative and other services provided for it. Upon the liquidation of the Company’s assets, it may pay the Advisor or its affiliates a disposition commission.

 

In connection with the Company’s Offering and Follow-On Offering, Lightstone SLP II LLC, an affiliate of the Company’s Sponsor, contributed (i) cash of $12.9 million and (ii) equity interests in the Brownmill Joint Venture valued at $4.8 million to the Operating Partnership in exchange for 177.0 Subordinated Profits Interests in the Operating Partnership with an aggregate value of $17.7 million, which are included in noncontrolling interests in the consolidated balance sheets. These Subordinated Profit Interests, the purchase price of which will be repaid only after stockholders receive a stated preferred return and their net investment, entitle Lightstone SLP II, LLC to a portion of any regular distributions made by the Operating Partnership. There have been no distributions declared on the Subordinated Profits Interests for quarterly periods after March 31, 2020. Since the Company’s inception, the cumulative distributions declared and paid on the Subordinated Profits Interests were $7.9 million. Any future distributions on the Subordinated Profits Interests will always be subordinated until stockholders receive a stated preferred return, as described above.

 

18

 

 

LIGHTSTONE VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

10.Financial Instruments

 

The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and other assets, accounts payable and other accrued expenses, margin loan, notes payable, due to related party, and distributions payable approximated their fair values as of March 31, 2022 and December 31, 2021 because of the short maturity of these instruments.

 

As of March 31, 2022, the estimated fair value our mortgage payable approximated its carrying value because of the floating interest rate.

 

The carrying amount and estimated fair value of our mortgages payable as of December 31, 2021 are as follows:

 

        
   As of
December 31,
2021
 
   Carrying
Amount
   Estimated
Fair Value
 
Mortgages payable  $136,464   $136,592 

 

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

 

11.Commitments and Contingencies

 

Legal Proceedings

 

From time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes.

 

As of the date hereof, the Company is not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

 

19

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Lightstone Value Plus REIT II, Inc. and Subsidiaries and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Lightstone Value Plus REIT II, Inc., which was formerly known as Lightstone Value Plus Real Estate Investment Trust II, Inc. before September 16, 2021, a Maryland corporation, and, as required by context, Lightstone Value Plus REIT II LP and its wholly owned subsidiaries, which we collectively refer to as the “Operating Partnership”. Dollar amounts are presented in thousands, except per share data, revenue per available room (“RevPAR”), average daily rate (“ADR”), annualized revenue per square foot and where indicated in millions.

 

Forward-Looking Statements

 

Certain information included in this Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by us with the United States Securities and Exchange Commission (the “SEC”), contain or will contain, forward-looking statements. All statements, other than statements of historical facts, including, among others, statements regarding our possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives, are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of Lightstone Value Plus REIT II, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that actual results may differ materially from those contemplated by such forward-looking statements.

 

Such statements are based on assumptions and expectations which may not be realized and are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, may differ from the results discussed in the forward-looking statements.

 

Risks and other factors that might cause differences, some of which could be material, include, but are not limited to, economic and market conditions, competition, tenant or joint venture partner(s) bankruptcies, our lack of operating history, the availability of cash flows from operations to pay distributions, changes in governmental, tax, real estate and zoning laws and regulations, failure to increase tenant occupancy and operating income, rejection of leases by tenants in bankruptcy, financing and development risks, construction and lease-up delays, cost overruns, the level and volatility of interest rates, the rate of revenue increases versus expense increases, the financial stability of various tenants and industries, the our failure to make additional investments in real estate properties, the failure to upgrade our tenant mix, restrictions in current financing arrangements, the failure to fully recover tenant obligations for common area maintenance, insurance, taxes and other property expenses, the our failure to continue to qualify as a real estate investment trust (“REIT”), the failure to refinance debt at favorable terms and conditions, the effect of the phase-out of the London Interbank Offered Rate, or LIBOR, as a variable rate debt benchmark and the transition to a different benchmark interest rate, an increase in impairment charges, loss of key personnel, failure to achieve earnings/funds from operations targets or estimates, conflicts of interest with the Advisor and the Sponsor and their affiliates, failure of joint venture relationships, significant costs related to environmental issues and uncertainties regarding the impact of the current COVID-19 pandemic, and restrictions and other measures intended to prevent its spread on our business and the economy generally, as well as other risks listed from time to time in this Form 10-Q, our Form 10-K and in the Company’s other reports filed with the SEC.

 

We believe these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are qualified in their entirety by these cautionary statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time unless required by law.

 

20

 

 

Structure

 

Lightstone Value Plus REIT II, Inc. (“Lightstone REIT II”), which was formerly known as Lightstone Value Plus Real Estate Investment Trust II, Inc. before September 16, 2021, is a Maryland corporation formed on April 28, 2008, which elected to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2009.

 

Lightstone REIT II is structured as an umbrella partnership REIT (“UPREIT”), and substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT II LP (the “Operating Partnership”), a Delaware limited partnership formed on April 30, 2008. As of March 31, 2022, we held a 99% general partnership interest in our Operating Partnership’s common units.

 

Lightstone REIT II and the Operating Partnership and its subsidiaries are collectively referred to as the “Company” and the use of “we,” “our,” “us” or similar pronouns in this annual report refers to Lightstone REIT II, its Operating Partnership or the Company as required by the context in which such pronoun is used. 

 

We have and will continue to seek to acquire a diverse portfolio of real estate assets and real estate-related investments, including hotels, other commercial and/or residential properties, primarily located in the United States. All such properties may be acquired and operated by us alone or jointly with another party. We may also originate or acquire mortgage loans secured by real estate. Although we expect that most of our investments will be of these types, we may invest in whatever types of real estate-related investments that we believe are in our best interests.

 

We currently have one operating segment. As of March 31, 2022, we (i) majority owned and consolidated the operating results and financial condition of 13 limited service hotels containing a total of 1,674 rooms, (ii) held an unconsolidated 48.6% membership interest in Brownmill, LLC (the “Brownmill Joint Venture”), an affiliated entity that owns two retail properties, and (iii) held an unconsolidated 50.0% membership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”), an affiliated real estate entity that owns and operates a 183-room limited service hotel located in Long Island City, New York (the “Hilton Garden Inn – Long Island City”). We account for our membership interests in the Brownmill Joint Venture and the Hilton Garden Inn Joint Venture under the equity method of accounting.

 

As of March 31, 2022, seven of our consolidated limited service hotels are held in a joint venture (the “Joint Venture”) formed between us and Lightstone Value Plus REITI, Inc. (“Lightstone REIT I”), a related party REIT also sponsored by The Lightstone Group, LLC. We and Lightstone REIT I have 97.5% and 2.5% membership interests in the Joint Venture, respectively. Additionally, as of March 31, 2022, certain of our consolidated hotels also have ownership interests held by unrelated minority owners. The membership interests of Lightstone REIT I and the unrelated minority owners are accounted for as noncontrolling interests.

 

Our advisor is Lightstone Value Plus REIT II LLC (the “Advisor”), which is majority owned by David Lichtenstein. On May 20, 2008, the Advisor contributed $2 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. Our Advisor also owns 20,000 shares of common stock (“Common Shares”) which were issued on May 20, 2008 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 our initial public offering and follow-on offering (the “Follow-On Offering”, and collectively, the “Offerings”), which terminated on August 15, 2012 and September 27, 2014, respectively. Our Advisor, pursuant to the terms of an advisory agreement, 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 II LLC, a Delaware limited liability company (the “Associate General Partner”), which owns 177.0 subordinated profits interests (“Subordinated Profits Interests”) in the Operating Partnership which were acquired for aggregate consideration of $17.7 million in connection with our Offerings. Mr. Lichtenstein also acts as our Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT II or the Operating Partnership.

 

We do not have any employees. The Advisor receives compensation and fees for services related to the investment and management of our assets.

 

21

 

 

Our Advisor has affiliates which may manage certain of the properties we acquire. However, we also contract with other unaffiliated third-party property managers, principally for the management of our hospitality properties.

 

Our Common Shares are not currently listed on a national securities exchange. We may seek to list our Common Shares for trading on a national securities exchange only if a majority of our independent directors believe listing would be in the best interest of our stockholders. We do not intend to list our Common Shares at this time. We do not anticipate that there would be any market for our Common Shares until they are listed for trading. In the event we do not obtain listing prior to September 27, 2024, which is the tenth anniversary of the termination of our Follow-On Offering, our charter requires that our Board of Directors must either (i) seek stockholder approval of an extension or amendment of this listing deadline; or (ii) seek stockholder approval to adopt a plan of liquidation of the corporation.

 

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.

 

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.

 

COVID-19 Pandemic Operations and Liquidity Update

 

The World Health Organization declared COVID-19 a global pandemic on March 11, 2020 and since that time many of the previously imposed restrictions and other measures which were instituted in response have been subsequently reduced or lifted. However, the COVID-19 pandemic remains highly unpredictable and dynamic and its duration and extent continue to be dependent on various developments, such as the emergence of variants to the virus that may cause additional strains of COVID-19, the administration and ultimate effectiveness of vaccines, including booster shots, and the eventual timeline to achieve a sufficient level of herd immunity among the general population. Accordingly, the COVID-19 pandemic may continue to have negative effects on the health of the U.S. economy for the foreseeable future.

 

The extent to which our business may be affected by the ongoing COVID-19 pandemic will largely depend on both current and future developments, all of which are highly uncertain and cannot be reasonably predicted.

 

Furthermore, as a result of the COVID-19 pandemic, room demand and rental rates for our consolidated and unconsolidated hotels significantly declined starting in March 2020 at the onset of the pandemic; and while these metrics have improved since then (beginning late 2020 and continuing through the first quarter of 2022); overall room demand and rental rates remain below their pre-pandemic historical levels. Accordingly, the COVID-19 pandemic has negatively impacted our operations, financial position and cash flow; and while the severity of the impact has lessened, we currently expect we will continue to experience a negative impact for the foreseeable future.

 

We cannot currently estimate if and when room demand and rental rates will return to historical pre-pandemic levels for its hotels. Additionally, we have an unconsolidated 48.6% membership interest in the Brownmill Joint Venture, which owns two retail properties located in New Jersey that were subject to various restrictions. If the Brownmill Joint Venture’s retail properties are negatively impacted for an extended period because its tenants are unable to pay their rent, our equity earnings and the carrying value of our investment in the Brownmill Joint Venture could be materially and adversely impacted.

 

In light of the past, present and potential future impact of the COVID-19 pandemic on the operating results of its hotels, we have taken various actions to preserve its liquidity, including the following: 

 

We have implemented cost reduction strategies for all of our hotels, leading to reductions in certain operating expenses and capital expenditures.

 

22

 

 

During 2020 and 2021, we obtained certain amendments to its revolving credit facility (the “Revolving Credit Facility”). See Note 6 of the Notes to Consolidated Financial Statements for additional information.

 

In April 2020 and during the first quarter of 2021, our consolidated hotels received an aggregate of $3.3 million and $3.7 million, respectively, from loans provided under the federal Paycheck Protection Program (“PPP Loans”). See Note 7 of the Notes to Consolidated Financial Statements for additional information.

 

Previously in March 2020, the Board of Directors determined to suspend regular quarterly distributions on our Common Shares and the Subordinated Profits Interests and has not declared any distributions since the suspension. Additionally, in March 2020, the Board of Directors approved the suspension of all redemptions under our shareholder repurchase program (the “SRP”). Subsequently on May 10, 2021, the Board of Directors partially reopened the SRP to allow, subject to various conditions, for redemptions submitted in connection with a stockholder’s death or hardship. See Note 8 of the Notes to Consolidated Financial Statements for additional information.

 

During 2020 and 2021, the Hilton Garden Inn Joint Venture obtained various amendments to its non-recourse mortgage loan secured by the Hilton Garden Inn – Long Island City. See Note 3 of the Notes to Consolidated Financial Statements for additional information.

 

We believe that these actions, along with our available on hand cash and cash equivalents, restricted cash and marketable securities, as well as our intention to seek to extend the Revolving Credit Facility to September 15, 2023 pursuant to the lender’s option as discussed in Note 5 of the Notes to Consolidated Financial Statements, will provide us with sufficient liquidity to meet our obligations for at least 12 months from the date of issuance of these financial statements.

 

We are not currently aware of any other material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from our operations, other than those referred to above or throughout this Form 10-Q. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires our 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.

 

Portfolio Summary –

 

   Location  Year Built   Leasable Square Feet   Percentage Occupied
as of
March 31,
2022
   Annualized Revenues
based on rents
as of
March 31,
2022
   Annualized Revenues
per square foot
as of
March 31,
2022
 
Unconsolidated Affiliated Entities:                          
                           
Retail                          
Brownmill LLC (2 retail properties)  Old Bridge and Vauxhall, New Jersey  1962   155,975    90.3%  $3.4 million    $21.86 

 

            Percentage Occupied
for the
   RevPAR
for the
   ADR
for the
 
Hospitality  Location  Year Built   Year to Date
Available Rooms
   Three Months Ended
March 31,
2022
   Three Months Ended
March 31,
2022
   Three Months Ended
March 31,
2022
 
Hilton Garden Inn - Long Island City  Long Island City, New York  2014   14,470     87.9%  $124.16   $141.32 

 

23

 

 

Consolidated Properties:         
                        
            Percentage Occupied
for the
   RevPAR
for the
   ADR
for the
 
Hospitality  Location  Year Built   Year to Date
Available Rooms
   Three Months Ended
March 31,
2022
   Three Months Ended
March 31,
2022
   Three Months Ended
March 31,
2022
 
Fairfield Inn - East Rutherford  East Rutherford, New Jersey  1990    12,690    57%  $61.93   $108.11 
                            
TownePlace Suites - Little Rock  Little Rock, Arkansas  2009    8,280    67%  $53.65   $80.70 
                            
Aloft - Tucson  Tucson, Arizona  1971    13,860    72%  $128.73   $178.03 
                            
Aloft - Philadelphia  Philadelphia, Pennsylvania  2008    12,240    55%  $51.80   $94.56 
                            
Four Points by Sheraton - Philadelphia  Philadelphia, Pennsylvania  1985    15,930    55%  $47.04   $84.89 
                            
Courtyard - Willoughby  Willoughby, Ohio  1999    8,100    48%  $58.62   $121.74 
                            
Fairfield Inn - Des Moines  West Des Moines, Iowa  1997    9,180    48%  $43.09   $90.45 
                            
SpringHill Suites - Des Moines  West Des Moines, Iowa  1999    8,730    56%  $49.47   $87.91 
                            
Hampton Inn - Miami  Miami, Florida  1996    11,340    87%  $117.68   $134.60 
                            
Hampton Inn & Suites - Fort Lauderdale  Fort Lauderdale, Florida  1996    9,360    87%  $141.95   $162.76 
                            
Courtyard - Parsippany  Parsippany, New Jersey  2001    13,590    35%  $40.34   $116.41 
                            
Hyatt Place - New Orleans  New Orleans, Louisiana  1996    15,480    49%  $86.70   $176.99 
                            
Residence Inn - Needham  Needham, Massachusetts  2013    11,880    85%  $103.82   $122.54 
                            
      Hospitality Total    150,660    61%  $76.24   $124.92 

 

Annualized base rent is defined as the minimum monthly base rent due as of March 31, 2022 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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Critical Accounting Policies and Estimates

 

There were no material changes during the three months ended March 31, 2022 to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2021 except for as discussed in Note 2 to the Consolidated Financial Statements.

 

Results of Operations

 

We currently have one operating segment. As of March 31, 2022 we (i) majority owned and consolidated the operating results and financial condition of 13 limited service hotels containing a total of 1,674 rooms, (ii) held an unconsolidated 48.6% membership interest in Brownmill LLC (the “Brownmill Joint Venture”), an affiliated entity that owns two retail properties, and (iii) held an unconsolidated 50.0% membership interest in the Hilton Garden Inn Joint Venture, an affiliated entity that owns and operates the Hilton Garden Inn – Long Island City, a 183-room limited service hotel. We account for our unconsolidated membership interests in the Brownmill Joint Venture and the Hilton Garden Inn Joint Venture under the equity method of accounting.

 

As of March 31, 2022, seven of our consolidated limited service hotels are held in a joint venture (the “Joint Venture”) formed between us and Lightstone Value Plus REIT I, Inc. (“Lightstone REIT I”), a related party REIT also sponsored by our Sponsor. We and Lightstone REIT I have 97.5% and 2.5% membership interests in the Joint Venture, respectively. Additionally, as of March 31, 2022, certain of our consolidated hotels also have ownership interests held by unrelated minority owners. The membership interests of Lightstone REIT I and the unrelated minority owners are accounted for as noncontrolling interest.

 

On March 22, 2022, we completed the disposition of the Courtyard – Paso Robles. This disposition did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the operating results of the Courtyard – Paso Robles are reflected in the Company’s results from continuing operations for all periods presented through its date of disposition (March 22, 2022).

 

Comparison of the three months ended March 31, 2022 vs. March 31, 2021

 

Consolidated

 

Our consolidated revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation and amortization for the three months ended March 31, 2021 are attributable to our consolidated hospitality properties, including the Courtyard – Paso Robles through its date of disposition. 

 

As a result of the COVID-19 pandemic, room demand and rental rates for our consolidated and unconsolidated hotels significantly declined starting in March 2020 at the onset of the pandemic; and while these metrics have improved since then (beginning in late 2020 and continuing through the first quarter of 2022); overall room demand and rental rates remain below their pre-pandemic historical levels. Overall, our consolidated hospitality portfolio experienced increases in (i) the percentage of rooms occupied from 54% to 62% for the three months ended March 31, 2021 and 2022, respectively, (ii) RevPAR from $44.47 to $77.66 for the three months ended March 31, 2021 and 2022, respectively, and (iii) ADR from $81.87 to $126.20 for the three months ended March 31, 2021 and 2022, respectively.

 

Revenues

 

Revenues increased by $5.7 million to $13.1 million during the three months ended March 31, 2022 compared to $7.4 million for the same period in 2021. This increase reflects the higher occupancy, RevPAR and ADR during the 2022 period.

 

Property operating expenses

 

Property operating expenses increased by $3.7 million to $9.6 million during the three months ended March 31, 2022 compared to $5.9 million for the same period in 2021. This increase reflects the higher occupancy during the 2022 period.

 

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Real estate taxes

 

Real estate taxes decreased by $0.3 million to $0.6 million during the three months ended March 31, 2022 compared to $0.9 million for the same period in 2021.

 

General and administrative expenses

 

General and administrative expenses increased slightly by $0.1 million to $1.4 million during the three months ended March 31, 2022 compared to $1.3 million for the same period in 2021.

 

Depreciation and amortization

 

Depreciation and amortization expense decreased by $0.4 million to $2.3 million during the three months ended March 31, 2022 compared to $2.7 million for the same period in 2021. 

 

Interest expense

 

Interest expense was $1.5 million during the three months ended March 31, 2022 compared to $1.4 million for the same period in 2021. Interest expense is primarily attributable to financings associated with our hotels and reflects both changes in market interest rates on our variable rate indebtedness and the weighted average principal outstanding during the periods.

 

Gain on forgiveness of debt

 

During the three months ended March 31, 2022 notice was received from the SBA that $0.6 million of PPP Loans and related accrued interest had been legally forgiven and therefore, we recognized a gain on forgiveness of debt for that amount during the three months ended March 31, 2022.

 

Gain on sale of investment property

 

Our gain on the sale of investment property during the three months ended March 31, 2022 of $7.7 million consists of the gain recognized in connection with the sale of the Courtyard – Paso Robles on March 22, 2022.

 

Earnings from investments in unconsolidated affiliated real estate entities

 

Our loss from investments in unconsolidated affiliated real estate entities was $0.1 million during both of the three months ended March 31, 2022 and 2021. Our earnings from investments in unconsolidated affiliated real estate entities is attributable to our ownership interests in the Hilton Garden Inn Joint Venture and the Brownmill Joint Venture. We account for our membership interests in the Hilton Garden Inn Joint Venture and the Brownmill Joint Venture under the equity method of accounting commencing on the date that we acquired our interests.

 

Noncontrolling interests

 

The income or loss allocated to noncontrolling interests relates to the interest in our Operating Partnership held by our Advisor, the membership interest held by Lightstone I in the Joint Venture, and the ownership interests held by unrelated minority owners in certain of our hotels.

 

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Financial Condition, Liquidity and Capital Resources

 

Overview:

 

In light of the COVID-19 pandemic’s impact on our operating performance, we have successfully negotiated various changes to the terms of our Revolving Credit Facility, including modifications of financial covenants and an extension option. See “Contractual Mortgage Obligations” for additional information.

 

As of March 31, 2022, we had $15.9 million of cash on hand and marketable securities of $3.4 million. Additionally, in connection with the disposition of the Courtyard – Paso Robles, during the first quarter of 2022 we received net proceeds of $17.8 million, after the (i) defeasance of its mortgage indebtedness and related costs (ii) payment of closing costs and expenses and (iii) pro rations and other working capital adjustments and $16.9 million of the net proceeds have been placed in escrow with a qualified intermediary in order to facilitate potential like-kind exchange transactions in accordance with Section 1031 of the Internal Revenue Code.

 

We currently believe that these items, along with revenues from our properties, interest and dividend income on our marketable securities, proceeds from the potential sale of marketable securities, distributions received from our unconsolidated affiliated entities will be sufficient to satisfy our expected cash requirements primarily consisting of our anticipated operating expenses, scheduled debt service (excluding the Revolving Credit Facility which we intend to seek to extend to September 15, 2023 pursuant to the lender’s option), capital expenditures (excluding non-recurring capital expenditures), contributions to our unconsolidated affiliated entities, redemptions and cancellations of shares of our Common Shares, if approved, and distributions, if any, required to maintain our status as a REIT. However, we may also obtain additional funds through selective asset dispositions, joint venture arrangements, new borrowings and refinancing of existing borrowings.

 

As of March 31, 2022, we have mortgage indebtedness totaling $123.0 million and $3.2 million of PPP Loans (classified as notes payable on our consolidated balance sheet). We have and intend to continue to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of our independent directors and is disclosed to our stockholders. Market conditions will dictate the overall leverage limit; as such our aggregate long-term permanent borrowings may be less than 75% of aggregate fair market value of all properties. We may also incur short-term indebtedness, having a maturity of two years or less.

 

Our charter provides that the aggregate amount of our borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. Market conditions will dictate our overall leverage limit; as such our aggregate borrowings may be less than 300% of net assets. As of March 31, 2022, our total borrowings aggregated $126.2 million which represented 72% of our net assets.

 

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. This loan is due on demand and any outstanding balance must be paid upon the liquidation of securities.

 

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

 

We may also obtain lines of credit to be used to acquire properties. If obtained, these lines of credit will be at prevailing market terms and will be repaid from proceeds from the sale or refinancing of properties, working capital and/or permanent financing. Our Sponsor and/or its affiliates may guarantee our lines of credit although they are not obligated to do so. We expect that such properties may be purchased by our Sponsor’s affiliates on our behalf, in our name, in order to minimize the imposition of a transfer tax upon a transfer of such properties to us.

 

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We have various agreements, including an advisory agreement, with the Advisor to pay certain fees in exchange for services performed by the Advisor and/or its affiliated entities. Additionally, our ability to secure financing and our real estate operations are dependent upon our Advisor and its affiliates to perform such services as provided in these agreements.

 

In addition to meeting working capital needs and distributions, if any, made to maintain our status as a REIT, our capital resources are used to make certain payments to our Advisor, including payments related to asset acquisition fees and asset management fees, the reimbursement of acquisition-related expenses to our Advisor. We also reimburse our advisor for actual expenses it incurs for administrative and other services provided to us.

 

The advisory agreement has a one-year term and is renewable for an unlimited number of successive one-year periods upon the mutual consent of the Advisor and our independent directors.

 

The following table represents the fees incurred associated with the payments to the Company’s Advisor for the periods indicated:

 

   For the
Three Months Ended
March 31,
 
   2022   2021 
Asset management fees (general and administrative costs)  $738   $737 

 

Summary of Cash Flows

 

The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below:

 

  

For the

Three Months Ended
March 31,

 
   2022   2021 
Net cash used in operating activities  $(1,033)  $(2,245)
Net cash provided by/(used in) investing activities   34,135    (187)
Net cash (used in)/provided by financing activities   (16,256)   3,291 
Net change in cash, cash equivalents and restricted cash    16,846    859 
Cash, cash equivalents and restricted cash, beginning of year   16,959    18,423 
Cash, cash equivalents and restricted cash, end of the period  $33,805   $19,282 

 

Operating activities

 

The cash used in operating activities of $1.0 million for the three months ended March 31, 2022 consisted of our net income of $5.7 million and depreciation and amortization, loss from investments in unconsolidated affiliated entities, amortization of deferred financing costs and other non-cash items aggregating $2.9 million offset by a gain recognized in connection with the sale of the Courtyard – Paso Robles of $7.7 million, a gain on debt forgiveness of $0.6 million and net changes in operating assets and liabilities of $1.3 million.

 

Investing activities

 

The cash provided by investing activities of $34.1 million for the three months ended March 31, 2022 consists primarily of the following:

 

capital expenditures of $0.2 million;

 

$31.2 million of proceeds from the sale of the Courtyard – Paso Robles;

 

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$3.0 million of proceeds from the sale of marketable securities; and

 

$0.1 million of distributions from unconsolidated affiliated real estate entities.

 

Financing activities

 

The cash used in financing activities of $16.3 million for the three months ended March 31, 2022 consists primarily of the following:

 

debt principal payments of $13.4 million;

 

net margin loan payments of $2.3 million;

 

distributions to noncontrolling interests of $0.1 million; and

 

redemption and cancellation of common shares of $0.5 million.

 

Distributions on Common Shares

 

On March 19, 2020, the Board of Directors determined to suspend regular quarterly distributions on our Common Shares and as a result, no distributions have been declared since the suspension.

 

Future distributions declared on our Common Shares, if any, 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. The Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, revenues and sources of income, operating and interest expenses and our ability to refinance near-term debt as well as the IRS’s annual distribution requirement that REITs distribute no less than 90% of their taxable income. We cannot assure that any future distributions will be made or that we will maintain any particular level of distributions that we have previously established or may establish.

 

Contractual Mortgage Obligations

 

The following is a summary of our estimated contractual mortgage obligations outstanding over the next five years and thereafter as of March 31, 2022.

 

Contractual Mortgage Obligations  2022   2023   2024   2025   2026   Thereafter   Total 
Principal maturities  $123,045   $-   $-   $-   $-   $-   $123,045 
Interest payments(1)   2,707    -    -    -    -    -    2,707 
Total Contractual Mortgage Obligations\  $125,752   $-   $-   $-   $-   $-   $125,752 

 

Note:

(1)These amounts represent future interest payments related to mortgage payable obligations based on the 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 March 31, 2022 was used.

 

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Revolving Credit Facility

 

On June 2, 2020, our revolving credit facility (the “Revolving Credit Facility”) was amended to provide for (i) the deferral of the six monthly debt service payments aggregating $2.6 million (from April 1, 2020 through September 30, 2020, until November 15, 2021; (ii) a 100 bps reduction in the interest rate spread to LIBOR plus 2.15%, subject to a 3.00% floor, for the six-month period from September 1, 2020 through February 28, 2021; (iii) us pre-funding $2.5 million into a cash collateral reserve account to cover the six monthly debt service payments which were due from October 1, 2020 through March 1, 2021; and (iv) a waiver of all financial covenants for quarter-end periods before June 30, 2021.

 

Subsequently, on March 31, 2021, the Revolving Credit Facility was further amended providing for (i) us to pledge the membership interests in another hotel as additional collateral within 45 days, (ii) us to fund an additional $2.5 million into the cash collateral reserve account; (iii) a waiver of all financial covenants for quarter-end periods through September 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods beginning December 31, 2021 through March 31, 2023; (iv) an extension of the maturity date from May 17, 2021 to September 15, 2022 upon the pledge of the additional collateral (which was subsequently completed on May 13, 2021); (v) one additional one-year extension option at the lender’s sole discretion; and (vi) certain limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.

 

As of March 31, 2022, all 13 of our majority owned and consolidated hotel properties were pledged as collateral under the Revolving Credit Facility and the outstanding principal balance was $123.0 million. Additionally, no additional borrowings were available under the Revolving Credit Facility as of March 31, 2022. Although the Revolving Credit Facility is scheduled to mature on September 15, 2022, we currently intend to seek to extend the Revolving Credit Facility to September 15, 2023 pursuant to the lender’s extension option.

 

Courtyard – Paso Robles Mortgage Loan

 

In connection with our acquisition of the Courtyard – Paso Robles on December 14, 2017, we assumed the Courtyard - Paso Robles Mortgage Loan. On March 22, 2022, the Courtyard – Paso Robles Mortgage Loan was fully defeased in connection with the disposition of the Courtyard – Paso Robles (See Note 6 of the Notes to Consolidated Financial Statements) and we were legally released from any ongoing obligation.

 

PPP Loans

 

During the first quarter of 2021, we, through various subsidiaries (each such entity, a “Borrower” and collectively, the “Borrowers”), received aggregate funding of $3.7 million through PPP Loans originated under the federal Paycheck Protection Program, which was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the SBA.

 

The PPP Loans each have a term of five years and provide for an interest rate of 1.00%. The payment of principal and interest on the PPP loan is deferred until the day that the forgiven amount is remitted to the lender (approximately five months after the forgiveness application is submitted to the lender, unless the Borrower appeals a denial of forgiveness) or ten months after the end of the Borrower’s covered period, whichever is earlier. Pursuant to the terms of the CARES Act, the proceeds of the PPP Loans may be used for payroll costs, mortgage interest, rent or utility costs.

 

The promissory note for each of the PPP Loans contains customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note. Under the terms of the CARES Act, each Borrower can apply for and be granted forgiveness for all or a portion of the PPP Loans. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act. Although we intend for each Borrower to apply for forgiveness, no assurance may be given that each Borrower will ultimately obtain forgiveness under its PPP Loan in whole or in part. In the event all or any portion of a PPP Loan is forgiven, the amount forgiven will be applied to outstanding principal and recorded as income. The PPP Loans are subject to audit by the SBA for up to six years after the date the loans are forgiven.

 

During the three months ended March 31, 2022, we received notice from the SBA that $0.6 million of PPP Loans and related accrued interest had been legally forgiven and therefore, the Company recognized a gain on forgiveness of debt for that amount on its consolidated statements of operations during three months ended March 31, 2022.

 

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Previously, during the year ended December 31, 2021, the Company received notices from the SBA that PPP Loans received in April 2020 totaling $3.3 million and their related accrued interest aggregating $0.1 million had been legally forgiven and therefore, the Company recognized a gain on forgiveness of debt of $3.4 million in its consolidated statements of operations during the year ended December 31, 2021.

 

In addition to the mortgages payable and PPP Loans described above, a margin loan that was made available to us from a financial institution that holds custody of certain of our marketable securities. The margin loan is collateralized by the marketable securities in our account. The amounts available to us under the margin loan are at the discretion of the financial institution and not limited to the amount of collateral in our account.

 

No amounts were outstanding under this margin loan as of March 31, 2022. The margin loan bears interest at LIBOR plus 0.85% (1.30% as of March 31, 2022).

 

LIBOR

 

The Revolving Credit Facility and Margin Loan are indexed to LIBOR. In late 2021, it was announced LIBOR interest rates will cease publication altogether by June 30, 2023. We have and intend continue to incorporate relatively standardized replacement rate provisions into our LIBOR-indexed debt documents, including a spread adjustment mechanism designed to equate to the current LIBOR “all in” rate. There is significant uncertainty with respect to the implementation of the phase out and what alternative indexes will be adopted which will ultimately be determined by the market as a whole. It therefore remains uncertain how such changes will be implemented and the effects such changes would have on us and the financial markets generally.

 

Funds from Operations and Modified Funds from Operations

 

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.

 

Because of these factors, the National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has published a standardized measure of performance known as funds from operations (“FFO”), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT’s operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.

 

We calculate FFO, a non-GAAP measure, consistent with the standards established over time by the Board of Governors of NAREIT, as restated in a White Paper approved by the Board of Governors of NAREIT effective in December 2018 (the “White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Our FFO calculation complies with NAREIT’s definition.

 

We believe that the use of FFO provides a more complete understanding of our performance to investors and to management and reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.

 

Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT’s definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.

 

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Because of these factors, the Investment Program Association (the “IPA”), an industry trade group, published a standardized measure of performance known as modified funds from operations (“MFFO”), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP.

 

We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the “Practice Guideline”) issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction-related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses (which includes costs incurred in connection with strategic alternatives), amounts relating to straight-line rent receivables and amortization of market lease and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.

 

We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.

 

Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. FFO and MFFO should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.

 

Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guidelines or the SEC or another regulatory body could standardize the allowable adjustments across the publicly registered, non-listed REIT industry, and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.

 

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The below table illustrates the items deducted from or added to net income in the calculation of FFO and MFFO. Items are presented net of non-controlling interest portions where applicable.

 

   For the
Three Months Ended
March 31,
 
   2022   2021 
Net income/(loss)  $5,706   $(4,732)
FFO adjustments:          
Depreciation and amortization of real estate assets   2,268    2,692 
Gain on sale of investment property   (7,746)   - 
Adjustments to equity in earnings from unconsolidated affiliated entities   444    434 
FFO   672    (1,606)
MFFO adjustments:          
Other adjustments:          
Acquisition and other transaction related costs expensed(1)    -    - 
Adjustments to equity in earnings from unconsolidated affiliated entities   4    (10)
Amortization of above or below market leases and liabilities(2)   -    - 
Gain on forgiveness of debt(2)   (593)   - 
Mark-to-market adjustments(3)   240    22 
Non-recurring (gains)/losses from extinguishment/sale of debt, derivatives or securities holdings(4)   83    - 
MFFO   406    (1,594)
Straight-line rent(5)   -    - 
MFFO - IPA recommended format  $406   $(1,594)
           
Net income/(loss)  $5,706   $(4,732)
Less: loss attributable to noncontrolling interests   25    88 
Net income/(loss) applicable to Company’s common shares  $5,731   $(4,644)
Net income/(loss) per common share, basic and diluted  $0.33   $(0.27)