UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from __________ to __________
Commission file number
(Exact Name of Registrant as Specified in Its Charter)
|
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
| (Address of Principal Executive Offices) | (Zip Code) |
(
(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.
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).
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 | ☐ |
| ☑ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐
As of November 7, 2023, there were approximately million outstanding shares of common stock of Lightstone Value Plus REIT III, Inc., including shares issued pursuant to the dividend reinvestment plan.
LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
INDEX
i
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS:
LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
| September 30, 2023 |
December 31, 2022 |
|||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Investment property: | ||||||||
| Land and improvements | $ | $ | ||||||
| Building and improvements | ||||||||
| Furniture and fixtures | ||||||||
| Construction in progress | ||||||||
| Gross investment property | ||||||||
| Less: accumulated depreciation | ( |
) | ( |
) | ||||
| Net investment property | ||||||||
| Investments in unconsolidated affiliated real estate entities | ||||||||
| Cash and cash equivalents | ||||||||
| Marketable securities, available for sale | ||||||||
| Accounts receivable and other assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Accounts payable and other accrued expenses | $ | $ | ||||||
| Mortgages payable, net | ||||||||
| Distributions payable | ||||||||
| Due to related parties | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity: | ||||||||
| Company’s stockholders’ equity: | ||||||||
| Preferred stock, $ par value; million shares authorized, issued and outstanding | ||||||||
| Common stock, $ par value; million shares authorized, million and million shares issued and outstanding, respectively | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated other comprehensive loss | ( |
) | ( |
) | ||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Total Company stockholders’ equity | ||||||||
| Noncontrolling interests | ||||||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
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 III, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Expenses: | ||||||||||||||||
| Property operating expenses | ||||||||||||||||
| Real estate taxes | ||||||||||||||||
| General and administrative costs | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total expenses | ||||||||||||||||
| Interest expense | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Gain on forgiveness of debt | ||||||||||||||||
| Earnings from investments in unconsolidated affiliated real estate entities | ( |
) | ( |
) | ||||||||||||
| Other income/(expense), net | ( |
) | ||||||||||||||
| Net (loss)/income | ( |
) | ( |
) | ||||||||||||
| Less: net loss/(income) attributable to noncontrolling interests | ||||||||||||||||
| Net (loss)/income applicable to Company’s common shares | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Net (loss)/income per Company’s common share, basic and diluted | $ | ) | $ | $ | ) | $ | ||||||||||
| Weighted average number of common shares outstanding, basic and diluted | ||||||||||||||||
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 III, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net (loss)/income | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Other comprehensive income/(loss): | ||||||||||||||||
| Holding gain/(loss) on marketable securities, available for sale | ( |
) | ( |
) | ||||||||||||
| Comprehensive (loss)/income | ( |
) | ( |
) | ||||||||||||
| Less: Comprehensive loss/(income) attributable to noncontrolling interests | ||||||||||||||||
| Comprehensive (loss)/income attributable to the Company’s common shares | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||
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 III, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in thousands)
(Unaudited)
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||
| Common | Paid-In | Comprehensive | Accumulated | Noncontrolling | Total | |||||||||||||||||||||||
| Shares | Amount | Capital | Loss | Deficit | Interests | Equity | ||||||||||||||||||||||
| BALANCE, June 30, 2022 | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||
| Other comprehensive loss | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Redemption and cancellation of shares | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
| BALANCE, September 30, 2022 | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||
| Common | Paid-In | Comprehensive | Accumulated | Noncontrolling | Total | |||||||||||||||||||||||
| Shares | Amount | Capital | Loss | Deficit | Interests | Equity | ||||||||||||||||||||||
| BALANCE, December 31, 2021 | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||
| Other comprehensive loss | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Redemption and cancellation of shares | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
| BALANCE, September 30, 2022 | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||
| Common | Paid-In | Comprehensive | Accumulated | Noncontrolling | Total | |||||||||||||||||||||||
| Shares | Amount | Capital | Loss | Deficit | Interests | Equity | ||||||||||||||||||||||
| BALANCE, June 30, 2023 | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Other comprehensive income | - | |||||||||||||||||||||||||||
| Distributions declared (a) | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Redemption and cancellation of shares | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
| BALANCE, September 30, 2023 | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||
| (a) |
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||
| Common | Paid-In | Comprehensive | Accumulated | Noncontrolling | Total | |||||||||||||||||||||||
| Shares | Amount | Capital | Loss | Deficit | Interests | Equity | ||||||||||||||||||||||
| BALANCE, December 31, 2022 | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Other comprehensive income | - | |||||||||||||||||||||||||||
| Distributions declared (a) | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Redemption and cancellation of shares | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
| BALANCE, September 30, 2023 | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||
| (a) |
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 III, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
| For the Nine Months Ended September 30, |
||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (loss)/income | $ | ( |
) | $ | ||||
| Adjustments to reconcile net (loss)/income to net cash provided by operating activities: | ||||||||
| Earnings from investments in unconsolidated affiliated real estate entities | ( |
) | ||||||
| Depreciation and amortization | ||||||||
| Amortization of deferred financing costs | ||||||||
| Gain on forgiveness of debt | ( |
) | ||||||
| Other non-cash adjustments | ||||||||
| Changes in assets and liabilities: | ||||||||
| Increase in accounts receivable and other assets | ( |
) | ( |
) | ||||
| Increase in accounts payable and other accrued expenses | ||||||||
| Increase in due to related parties | ||||||||
| Net cash provided by operating activities | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of investment property | ( |
) | ( |
) | ||||
| Purchase of marketable securities | ( |
) | ( |
) | ||||
| Proceeds from sale of marketable securities | ||||||||
| Distributions from unconsolidated affiliated real estate entity | ||||||||
| Investments in unconsolidated affiliated real estate entities | ( |
) | ( |
) | ||||
| Net cash (used in)/provided by investing activities | ( |
) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payments on mortgages payable | ( |
) | ||||||
| Payment of loan fees and expenses | ( |
) | ( |
) | ||||
| Redemption and cancellation of common shares | ( |
) | ( |
) | ||||
| Distributions paid to Company’s common stockholders | ( |
) | ||||||
| Net cash used in financing activities | ( |
) | ( |
) | ||||
| Change in cash, cash equivalents and restricted cash | ( |
) | ||||||
| Cash, cash equivalents and restricted cash, beginning of year | ||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | ||||||
| Supplemental cash flow information for the periods indicated is as follows: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Distributions declared, but not paid | $ | $ | ||||||
| Holding gain/loss on marketable securities, available for sale | $ | $ | ||||||
| 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 | $ | $ | ||||||
| Restricted cash (included in accounts receivable and other assets) | ||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
| 1. | Business and Structure |
Lightstone Value Plus REIT III, Inc. (“Lightstone REIT III”), before September 16, 2021, is a Maryland corporation, formed on October 5, 2012, which elected to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2015.
Lightstone REIT III is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business will be conducted through Lightstone Value Plus REIT III LP, a Delaware limited partnership (the “Operating Partnership”). As of September 30, 2023, Lightstone REIT III had a
Lightstone REIT III and the Operating Partnership and its subsidiaries are collectively referred to as the “Company” and the use of “we,” “our,” “us” or similar pronouns in these consolidated financial statements refers to Lightstone REIT III, its Operating Partnership or the Company as required by the context in which such pronoun is used.
Through the Operating Partnership, the Company owns, operates and develops commercial properties and makes real estate-related investments. Since its inception, the Company has primarily acquired and operated commercial hospitality properties, principally consisting of limited-service-hotels all located in the United States. However, its commercial holdings may also consist of full-service hotels, and to a lesser extent, retail (primarily multi-tenanted shopping centers), industrial and office properties. The Company’s real estate investments are held by it alone or jointly with other parties. In addition, the Company may invest up to 20% of its net assets in collateralized debt obligations, commercial mortgage-backed securities (“CMBS”) and mortgage and mezzanine loans secured, directly or indirectly, by the same types of properties which it may acquire directly. Although most of its investments are these types, the Company may invest in whatever types of real estate or real estate-related investments that it believes are in its best interests. The Company evaluates all of its real estate investments as one operating segment. The Company currently intends to hold its investments until such time as it determines that a sale or other disposition appears to be advantageous to achieve its investment objectives or until it appears that the objectives will not be met.
As of September 30, 2023, the Company (i) majority owned and consolidated the operating results and financial condition of eight limited-service hotels containing a total of 872 rooms, (ii) held an unconsolidated 50.0% membership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”) and (iii) held an unconsolidated 25.0% membership interest in Bedford Avenue Holdings LLC (the “Williamsburg Moxy Hotel Joint Venture”). The Company accounts for its unconsolidated membership interests in the Hilton Garden Inn Joint Venture and the Williamsburg Moxy Hotel Joint Venture under the equity method of accounting.
The Hilton Garden Inn Joint Venture owns a 183-room, limited-service hotel (the “Hilton Garden Inn – Long Island City) located in the Long Island City neighborhood in the Queens borough of New York City. The Williamsburg Moxy Hotel Joint Venture developed, constructed and owns a 216-room branded hotel (the “Williamsburg Moxy Hotel”) located in the Williamsburg neighborhood in the Brooklyn borough of New York City, which opened on March 7, 2023. Both the Hilton Garden Inn Joint Venture and the Williamsburg Moxy Hotel Joint Venture are between the Company and related parties.
The Company’s advisor is Lightstone Value Plus REIT III LLC (the “Advisor”), which is majority owned by David Lichtenstein. On July 16, 2014, the Advisor contributed $
6
LIGHTSTONE VALUE PLUS REIT III, 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 has no employees. The Company’s Advisor and its affiliates perform a full range of real estate services for it, including asset management, accounting, legal, and property management, as well as investor relations services.
The Company is dependent on the Advisor and its affiliates for services that are essential to it, including asset management and acquisition, disposition and financing activities, and other general administrative responsibilities. If the Advisor and its affiliates are unable to provide these services to the Company, it would be required to provide the services itself or obtain the services from other parties.
The Company also uses other unaffiliated third-party property managers, principally for the management of its hospitality properties.
The Company’s Common Shares are not currently listed on a national securities exchange. The Company may seek to list its Common Shares for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its Common Shares at this time. The Company does not anticipate that there would be any market for its Common Shares until they are listed for trading.
On January 17, 2023, the Company’s stockholders approved an amendment and restatement to the Company’s charter pursuant to which the Company is no longer required to either (a) amend its charter to extend the deadline to begin the process of achieving a liquidity event, or (b) hold a stockholders meeting to vote on a proposal for an orderly liquidation of its portfolio.
Noncontrolling Interests – Partners of the Operating Partnership
Limited Partner
On July 16, 2014, the Advisor contributed $2 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The Advisor has the right to convert limited partner units into cash or, at the Company’s option, an equal number of its Common Shares.
Special Limited Partner
In connection with the Company’s Offering, the Special Limited Partner purchased from the Operating Partnership an aggregate of 242 Subordinated Participation Interests for consideration of $12.1 million. The Subordinated Participation Interests were each purchased for $50 in consideration and may be entitled to receive liquidation distributions upon the liquidation of Lightstone REIT III.
As the majority owner of the Special Limited Partner, Mr. Lichtenstein is the beneficial owner of a 99% interest in such Subordinated Participation Interests and will thus receive an indirect benefit from any distributions made in respect thereof.
These Subordinated Participation Interests entitle the Special Limited Partner to a portion of any regular and liquidation distributions that the Company makes to its stockholders, but only after its stockholders have received a stated preferred return. From the Company’s inception through September 30, 2023, no distributions have been declared or paid on the Subordinated Participation Interests.
Related Parties
The Company’s Sponsor, Advisor and its affiliates, including the Special Limited Partner, are related parties of the Company as well as the other public REITs also sponsored and/or advised by these entities. Certain of these entities are entitled to compensation and reimbursement for services and costs incurred related to the investment, management and disposition of our assets during the Company’s acquisition, operational and liquidation stages. The compensation levels during the acquisition and operational stages are based on the cost of acquired properties/investments and the annual revenue earned from such properties/investments, and other such fees and expense reimbursements as outlined in each of the respective agreements. See Note 7 – Related Party Transactions for additional information.
7
LIGHTSTONE VALUE PLUS REIT III, 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 |
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Lightstone REIT III and the Operating Partnership and its subsidiaries (over which Lightstone REIT III exercises financial and operating control). As of September 30, 2023, Lightstone REIT III had a
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, 2022. 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 III, Inc. and its Subsidiaries have been prepared in accordance with 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 depreciable lives. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.
The consolidated balance sheet as of December 31, 2022 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.
Income Taxes
The Company has elected to be taxed as a REIT commencing with the taxable year ended December 31, 2009. If the Company qualifies as a REIT, it generally will not be subject to U.S. federal income tax on its taxable income or capital gain that it distributes to its stockholders. To maintain its REIT qualification, the Company must meet a number of organizational and operational requirements, including a requirement that it annually distribute to its stockholders at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If the Company fails to remain qualified for taxation as a REIT in any subsequent year and does not qualify for certain statutory relief provisions, its income for that year will be taxed at the regular corporate rate, and it may be precluded from qualifying for treatment as a REIT for the four-year period following its failure to qualify as a REIT. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to stockholders.
To maintain its qualification as a REIT, the Company may engage in certain activities through taxable REIT subsidiaries (“TRSs”). As such, it may be subject to U.S. federal and state income and franchise taxes from these activities.
As of September 30, 2023 and December 31, 2022, the Company had
8
LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
Revenues
The following table represents the total revenues from hotel operations on a disaggregated basis:
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| Revenues | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Room | $ | $ | $ | $ | ||||||||||||
| Food, beverage and other | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
Gain on Forgiveness of Debt
During the three and nine months ended September 30, 2022, notice was received from the U.S. Small Business Administration that $0.8 million and $1.9 million, respectively, of the Company’s Paycheck Protection loans and related accrued interest had been legally forgiven and therefore, it recognized a gain on forgiveness of debt for those amounts during the periods.
Recently Adopted Accounting Standards
In June 2016, the Financial Accounting Standards Board issued an accounting standards update, “Financial Instruments-Credit Losses-Measurement of Credit Losses on Financial Instruments,” which changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The updated standard replaces the current “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For trade receivables and held to maturity debt securities, entities are required to use a new forward looking expected loss model that generally will result in the earlier recognition of allowances for losses. The Company has adopted this standard effective January 1, 2023, noting that it did not have a material impact on the Company’s financial statements or related disclosures.
Concentration of Risk
As of September 30, 2023 and December 31, 2022, the Company had cash deposited in certain financial institutions in excess of federally insured levels. The Company regularly monitors the financial stability of these financial institutions and believes that it is not exposed to any significant credit risk in cash and cash equivalents.
Current Environment
The Company’s operating results and financial condition 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, its 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 and uncertainty as a result of recent banking failures, 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, inflation and recession.
The Company’s overall performance depends in part on worldwide economic and geopolitical conditions and their impacts on consumer behavior. Worsening economic conditions, increases in costs due to inflation, higher interest rates, certain labor and supply chain challenges and other changes in economic conditions may adversely affect the Company’s results of operations and financial performance.
9
LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
| 3. | Investments in Unconsolidated Affiliated Real Estate Entities |
The entities 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 unconsolidated affiliated real estate entities is as follows:
| As of | ||||||||||||||
| Entity | Date of Ownership |
Ownership % |
September 30, 2023 |
December 31, 2022 |
||||||||||
| LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”) | $ | $ | ||||||||||||
| Bedford Avenue Holdings LLC (the “Williamsburg Moxy Hotel Joint Venture”) | ||||||||||||||
| Total investments in unconsolidated affiliated real estate entities | $ | $ | ||||||||||||
Hilton Garden Inn Joint Venture
On March 27, 2018, the Company and Lightstone Value Plus REIT II, Inc. (“Lightstone REIT II”), a REIT also sponsored by the Company’s Sponsor and a related party, acquired, through the newly formed Hilton Garden Inn Joint Venture, the Hilton Garden Inn – Long Island City from an unrelated third party, for aggregate consideration of $
Except as discussed below, the Hilton Garden Inn Mortgage bore interest at
On June 2, 2020, the Hilton Garden Inn Mortgage was amended to provide for the deferral of the six monthly debt service payments aggregating $
On March 27, 2023, the Hilton Garden Inn Joint Venture and the lender amended the Hilton Garden Inn Mortgage to extend the maturity date for 90 days, through June 25, 2023, to provide additional time to finalize the terms of a long-term extension. Subsequently, on May 31, 2023, the Hilton Garden Inn Mortgage was further amended to provide for (i) an extension of the maturity date for an additional five years, (ii) the interest rate to be adjusted to SOFR plus 3.25%, subject to a 6.41% floor, interest-only payments for the first two years of its extended term with principal and interest payments pursuant to a 300-month amortization schedule thereafter and the remaining unpaid balance due in full at its maturity date of May 31, 2028, (iii) the ability to draw up to an additional $3.0 million of principal, subject to the satisfaction of certain conditions, and (iv) certain changes to its financial covenants. Additionally, the Hilton Garden Inn Joint Venture will fund $1.3 million, through monthly payments of $37 from May 31, 2023 through June 1, 2026, into a cash collateral reserve account which may be drawn upon for specified capital expenditures.
The Company and Lightstone REIT II each have a
The Hilton Garden Inn Joint Venture is currently in compliance with respect to all of its financial debt covenants.
During the nine months ended September 30, 2023, the Company made capital contributions to the Hilton Garden Inn Joint Venture of $
10
LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
Hilton Garden Inn Joint Venture Financial Information
The following table represents the condensed statements of operations for the Hilton Garden Inn Joint Venture for the periods indicated:
| For the Three Months Ended September 30, 2023 |
For the Three Months Ended September 30, 2022 |
For the Nine Months Ended September 30, 2023 |
For the Nine Months Ended September 30, 2022 |
|||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Property operating expenses | ||||||||||||||||
| General and administrative costs | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Operating income | ||||||||||||||||
| Gain on forgiveness of debt | ||||||||||||||||
| Interest expense | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net income/(loss) | $ | $ | $ | ( |
) | $ | ||||||||||
| Company’s share of earnings from investment (50.0%) | $ | $ | $ | ( |
) | $ | ||||||||||
The following table represents the condensed balance sheets for the Hilton Garden Inn Joint Venture as of the dates indicated:
| As of | As of | |||||||
| September 30, 2023 |
December 31, 2022 |
|||||||
| Investment property, net | $ | $ | ||||||
| Cash | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Mortgage payable, net | $ | $ | ||||||
| Other liabilities | ||||||||
| Members’ capital | ||||||||
| Total liabilities and members’ capital | $ | $ | ||||||
11
LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
Williamsburg Moxy Hotel Joint Venture
On August 5, 2021, the Company formed a joint venture with Lightstone Value Plus REIT IV, Inc. (“Lightstone REIT IV”), a REIT also sponsored by the Company’s Sponsor and a related party, pursuant to which the Company acquired 25% of Lightstone REIT IV’s membership interest in Bedford Avenue Holdings LLC, which effective on that date became the Williamsburg Moxy Hotel Joint Venture, for aggregate consideration of $
As a result, the Company and Lightstone REIT IV have 25% and 75% membership interests, respectively, in the Williamsburg Moxy Hotel Joint Venture. The Company has determined that the Williamsburg Moxy Hotel Joint Venture is a variable interest entity and the Company is not the primary beneficiary, as it was determined that REIT IV is the primary beneficiary. Therefore, the Company accounts for its membership interest in the Williamsburg Moxy Hotel Joint Venture in accordance with the equity method because it exerts significant influence over but does not control the Williamsburg Moxy Hotel Joint Venture. All capital contributions and distributions of earnings from the Williamsburg Moxy Hotel 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 Williamsburg Moxy Hotel Joint Venture are made to the members pursuant to the terms of the Williamsburg Moxy Hotel Joint Venture’s operating agreement.
The Williamsburg Moxy Hotel was substantially completed and opened for business on March 7, 2023. In connection with the opening of the hotel, including its food and beverage venues, the Williamsburg Moxy Hotel Joint Venture incurred pre-opening costs of $
An adjacent land owner previously filed a claim questioning the Williamsburg Moxy Hotel Joint Venture’s right to develop and construct the Williamsburg Moxy Hotel without his consent. On November 3, 2023, the Williamsburg Moxy Hotel Joint Venture acquired additional building rights at a contractual purchase price of $
During the nine months ended September 30, 2023 and 2022, the Company made capital contributions to the Williamsburg Moxy Joint Venture of $
12
LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
Moxy Construction Loan
On August 5, 2021, the Williamsburg Moxy Hotel Joint Venture entered into a recourse construction loan facility for up to $
As of September 30, 2023 and December 31, 2022, the outstanding principal balance of the Moxy Construction Loan was $
In connection with the Moxy Construction Loan, the Williamsburg Moxy Hotel Joint Venture has provided certain completion and carry cost guarantees. Furthermore, in connection with the Moxy Construction Loan, the Williamsburg Moxy Hotel Joint Venture paid $
The Williamsburg Moxy Hotel Joint Venture currently expects to refinance the Moxy Construction Loan (outstanding principal balance of $82.3 million as of September 30, 2023) on or before its initial maturity date of February 5, 2024; however, there can be no assurances that it will be successful in such endeavors. If the Williamsburg Moxy Hotel Joint Venture is unable to refinance the Moxy Construction Loan on or before its initial maturity date, it will then seek to exercise the first of its two six-month extension options.
13
LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
Williamsburg Moxy Hotel Joint Venture Financial Information
The following table represents the condensed statements of operations for the Williamsburg Moxy Joint Venture for the periods indicated:
| For the Three Months Ended September 30, 2023 |
For the Three Months Ended September 30, 2022 |
For the Nine Months Ended September 30, 2023 |
For the 2022 |
|||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Property operating expenses | ||||||||||||||||
| Pre-opening costs | ||||||||||||||||
| General and administrative costs | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Operating income/(loss) | ( |
) | ( |
) | ( |
) | ||||||||||
| Interest expense | ( |
) | ( |
) | ||||||||||||
| Net loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Company’s share of net loss (25.00%) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
The following table represents the condensed balance sheets for the Williamsburg Moxy Hotel Joint Venture as of the dates indicated:
| As of | As of | |||||||
| September 30, 2023 |
December 31, 2022 |
|||||||
| Investment property, net | $ | $ | ||||||
| Cash | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Mortgage payable, net | $ | $ | ||||||
| Other liabilities | ||||||||
| Members’ capital | ||||||||
| Total liabilities and members’ capital | $ | $ | ||||||
14
LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
| 4. | Marketable Securities and Fair Value Measurements |
Marketable Securities
The following is a summary of the Company’s available for sale securities as of the dates indicated:
| As of September 30, 2023 | ||||||||||||||||
| Adjusted Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
| Marketable Securities: | ||||||||||||||||
| Equity securities: | ||||||||||||||||
| Preferred Equity Securities | $ | $ | $ | ( |
) | $ | ||||||||||
| Mutual Funds | ||||||||||||||||
| ( |
) | |||||||||||||||
| Debt securities: | ||||||||||||||||
| Corporate Bonds | ( |
) | ||||||||||||||
| Total | $ | $ | $ | ( |
) | $ | ||||||||||
| As of December 31, 2022 | ||||||||||||||||
| Adjusted Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
| Marketable Securities: | ||||||||||||||||
| Equity securities: | ||||||||||||||||
| Preferred Equity Securities | $ | $ | $ | ( |
) | $ | ||||||||||
| Mutual Funds | ( |
) | ||||||||||||||
| ( |
) | |||||||||||||||
| Debt securities: | ||||||||||||||||
| Corporate Bonds | ( |
) | ||||||||||||||
| United States Treasury Bills | ||||||||||||||||
| ( |
) | |||||||||||||||
| Total | $ | $ | $ | ( |
) | $ | ||||||||||
The Company may be exposed to credit losses through its available-for-sale debt securities. Unrealized losses or impairments resulting from the amortized cost basis of any available-for-sale debt security exceeding its fair value are evaluated for identification of credit and non-credit related factors. Any difference between the fair value of the debt security and the amortized cost basis not attributable to credit related factors are reported in other comprehensive income. A credit-related impairment is recognized as an allowance on the balance sheet with a corresponding adjustment to earnings. When evaluating the investments for impairment at each reporting period, the Company reviews factors such as the extent of the unrealized loss, current and future economic market conditions and the economic and financial condition of the issuer and any changes thereto. As of September 30, 2023, the Company has not recognized an allowance for expected credit losses related to available-for-sale debt securities as the Company has not identified any unrealized losses for these investments attributable to credit factors. The Company’s unrealized loss on investments in corporate bonds was primarily caused by recent rising interest rates. The Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis.
The Company may sell certain of its investments in marketable debt securities prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management.
15
LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
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 September 30, 2023 and December 31, 2022, the Company’s mutual funds and United States Treasury Bills were classified as Level 1 assets and the Company’s preferred equity securities and corporate bonds were classified as Level 2 assets. There were no transfers between the level classifications during the nine months ended September 30, 2023 and 2022.
The fair values of the Company’s investments in mutual funds and United States Treasury Bills are measured using quoted prices in active markets for identical assets and its preferred equity securities and corporate bonds are measured using readily available quoted prices for these securities; however, the markets for these securities are not active.
The following table summarizes the estimated fair value of our investments in marketable debt securities with stated contractual maturity dates, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities:
| As of September 30, 2023 |
||||
| Due in 1 year | $ | |||
| Due in 1 year through 5 years | ||||
| Due in 5 year through 10 years | ||||
| Due after 10 years | ||||
| Total | $ | |||
The Company did not have any other significant financial assets or liabilities, which would require revised valuations that are recognized at fair value.
16
LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
| 5. | Mortgages payable, net |
Mortgages payable, net consists of the following:
| Weighted Average Interest Rate |
||||||||||||||||||||
| Description | Interest Rate |
for the Nine Months Ended September 30, 2023 |
Maturity Date |
Amount Due at Maturity |
As of September 30, 2023 |
As of December 31, 2022 |
||||||||||||||
| Revolving Credit Facility | $ | $ | $ | |||||||||||||||||
| Home2 Suites Tukwila Loan | (floor of 3.75%) |
|||||||||||||||||||
| Home2 Suites Salt Lake City Loan | ||||||||||||||||||||
| Total mortgages payable | $ | |||||||||||||||||||
| Less: Deferred financing costs | ( |
) | ( |
) | ||||||||||||||||
| Total mortgage payable, net | $ | $ | ||||||||||||||||||
AMERIBOR as of September 30, 2023 and December 31, 2022 was
17
LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
Revolving Credit Facility
The Company, through certain subsidiaries, has a non-recourse revolving credit facility (the “Revolving Credit Facility”) with a financial institution. The Revolving Credit Facility provides the Company with a line of credit of up to $
On March 31, 2021, the Revolving Credit Facility was amended providing for (i) the Company to make a principal paydown of $
Except as discussed above, the Revolving Credit Facility, which was scheduled to mature on July 13, 2022, bore interest at LIBOR plus
Additionally, in connection with the extension of the Revolving Credit facility on July 13, 2023, the Company was required to deposit $
As of September 30, 2023, the Company also did not meet two of its financial debt covenants with respect to the Revolving Credit Facility; however, in November 2023 the financial institution agreed to (i) waive one of the financial debt covenants for all remaining quarterly periods through the maturity date and (ii) modify the other financial debt covenant through the remaining term. Additionally, the Company is making a principal paydown of $1.4 million to reduce the outstanding principal balance of the Revolving Credit Facility to $30.9 million and entering into an at the money interest rate cap.
As of September 30,
2023 and December 31, 2022, the Revolving Credit Facility had an outstanding principal balance of $32.3
million and $
18
LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
Home2 Suites Financings
On December 6, 2021, the Company entered into a non-recourse loan facility providing for up to $
On December 6, 2021, the Company entered into a non-recourse loan facility providing for up to $
Principal Maturities
The following table sets forth the estimated contractual principal maturities of the Company’s mortgages payable, including balloon payments due at maturity, as of September 30, 2023:
| 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | ||||||||||||||||||||||
| Principal maturities | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Less: Deferred financing costs | ( |
) | ||||||||||||||||||||||||||
| Total principal maturities, net | $ | |||||||||||||||||||||||||||
Certain of the Company’s debt agreements also contain clauses providing for prepayment penalties. As of September 30, 2023, the Company was in compliance with or had obtained a waiver for (See “Revolving Credit Facility” discussed above of its financial debt covenants.
19
LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
| 6. | Company’s Stockholder’s Equity |
Distributions on Common Shares
On August 14, 2023, the Board of Directors authorized and the Company declared a Common Share distribution of $ per share for the quarterly period ending September 30, 2023. The distribution is the pro rata equivalent of an annual distribution of $ per share, or an annualized rate of
On November 13, 2023, the Board of Directors authorized and the Company declared a Common Share distribution of $ per share for the quarterly period ending December 31, 2023. The distribution is the pro rata equivalent of an annual distribution of $ per share, or an annualized rate of
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.
SRP
The Company’s share repurchase program (the “SRP”) may provide 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 May 10, 2021, the Board of Directors partially reopened the SRP to allow, subject to various conditions as set forth below, for redemptions submitted in connection with a stockholder’s death and hardship, respectively, and set the price for all such purchases to the Company’s current estimated net asset value per share of common stock, 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 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 proration if either type of redemption requests exceeded the annual limitation.
For the nine months ended September 30, 2023, the Company repurchased Common Shares at a weighted average price per share of $. For the nine months ended September 30, 2022, the Company repurchased Common Shares at a weighted average price per share of $.
Earnings per Share
The Company had no potentially dilutive securities outstanding during the periods presented. Accordingly, basic and diluted earnings per share is calculated by dividing net income/(loss) by the weighted-average number of shares of common stock outstanding during the applicable period.
20
LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
| 7. | Related Party Transactions |
The Company’s Sponsor, Advisor and their affiliates, including the Special Limited Partner, are related parties of the Company as well as other public REITs also sponsored and/or advised by these entities. Pursuant to the terms of various agreements, certain of these entities are entitled to compensation and reimbursement of costs incurred for services related to the investment, development, management and disposition of the Company’s assets. The compensation is generally based on the cost of acquired properties/investments and the annual revenue earned from such properties/investments, and other such fees and expense reimbursements as outlined in each of the respective agreements. 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 September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Asset management fees (general and administrative costs) | $ | $ | $ | $ | ||||||||||||
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.
| 8. | Financial Instruments |
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable and other assets, accounts payable and other accrued expenses, distributions payable and due to related parties approximate their fair values because of the short maturity of these instruments.
The carrying amount of the mortgages payable approximate fair value because the interest rates are variable and reflective of market rates.
| 9. | Commitments and Contingencies |
Management Agreements
The Company’s hotels operate pursuant to management agreements (the “Management Agreements”) with various third-party management companies. The management companies perform management functions including, but not limited to, hiring and supervising employees, establishing room prices, establishing administrative policies and procedures, managing expenditures and arranging and supervising public relations and advertising. The Management Agreements are for initial terms ranging from one year to
The Management Agreements provide for the payment of a base management fee equal to
21
LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)
Franchise Agreements
As of September 30, 2023, the Company’s hotels operated pursuant to various franchise agreements. Under the franchise agreements, the Company generally pays a fee equal to
The franchise agreements are generally for initial terms ranging from
Legal Proceedings
From time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes. See Note 3 for additional information.
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.
22
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 III, Inc. and Subsidiaries and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Lightstone Value Plus REIT III, Inc., a Maryland corporation, and, as required by context, Lightstone Value Plus REIT III, L.P., which we collectively refer to as the “Operating Partnership”. 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 statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include discussion and analysis of the financial condition of Lightstone Value Plus REIT III, Inc. and our subsidiaries (which may be referred to herein as the “Company,” “we,” “us” or “our”), including our ability to make accretive real estate or real estate-related investments, to rent space on favorable terms, to address our debt maturities and to fund our liquidity requirements, to sell our assets when we believe advantageous to achieve our investment objectives, to fund our anticipated capital expenditures, to meet the amount and timing of anticipated future cash distributions to our stockholders, to grow the estimated net asset value per share of our common stock (“NAV per Share”), and other matters. Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements.
These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors described below:
| ● | market and economic challenges experienced by the U.S. and global economies or real estate industry as a whole and the local economic conditions in the markets in which our investments are located. Additionally, our business and financial performance may be adversely affected by current and future economic and other conditions; such as inflation, recession, political upheaval or uncertainty, terrorism and acts of war, natural and man-made disasters, cybercrime, and outbreaks of contagious diseases; | |
| ● | the availability of cash flow from operating activities for distributions, if required to maintain our status as a real estate investment trust, or REIT; | |
| ● | conflicts of interest arising out of our relationships with our advisor and its affiliates; | |
| ● | our ability to retain our executive officers and other key individuals who provide advisory and property management services to us; | |
| ● | our level of debt and the terms and limitations imposed on us by our debt agreements; | |
| ● | the availability of credit generally, and any failure to obtain debt financing at favorable terms or a failure to satisfy the conditions and requirements of that debt; | |
| ● | our ability to make accretive investments; |
| ● | our ability to diversify our portfolio of assets; |
23
| ● | changes in market factors that could impact our rental rates and operating costs; | |
| ● | our ability to secure leases at favorable rental rates; | |
| ● | our ability to sell our assets at a price and on a timeline consistent with our investment objectives; | |
| ● | impairment charges; | |
| ● | unfavorable changes in laws or regulations impacting our business, our assets or our key relationships; and | |
| ● | factors that could affect our ability to qualify as a real estate investment trust. |
Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Report, and may ultimately prove to be incorrect. 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, except as required by applicable law. We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.
Cautionary Note
The representations, warranties, and covenants made by us in any agreement filed as an exhibit to this Quarterly Report on Form 10-Q are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the parties to the agreement, and should not be deemed to be representations, warranties, or covenants to or with any other parties. Moreover, these representations, warranties, or covenants should not be relied upon as accurately describing or reflecting the current state of our affairs.
Business and Structure
Lightstone Value Plus REIT III, Inc. (“Lightstone REIT III”), is a Maryland corporation formed on October 5, 2012, which elected to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2015.
Lightstone REIT III is structured as an umbrella partnership REIT (“UPREIT”), and substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT III LP, a Delaware limited partnership (the “Operating Partnership”). As of September 30, 2023, Lightstone REIT III had a 99% general partnership interest in the Operating Partnership’s common units.
Lightstone REIT III and the Operating Partnership and its subsidiaries are collectively referred to as the “Company” and the use of “we,” “our,” “us” or similar pronouns in this annual report refers to Lightstone REIT III, its Operating Partnership or the Company as required by the context in which such pronoun is used.
Through our Operating Partnership, we own, operate and develop commercial properties and make real estate-related investments. Since our inception, we have primarily acquired and operated commercial hospitality properties, principally consisting of limited-service-hotels all located in the United States. However, our commercial holdings may also consist of full-service hotels, and to a lesser extent, retail (primarily multi-tenanted shopping centers), industrial and office properties. Our real estate investments are held by us alone or jointly with other parties. In addition, we may invest up to 20% of our net assets in collateralized debt obligations, commercial mortgage-backed securities (“CMBS”) and mortgage and mezzanine loans secured, directly or indirectly, by the same types of properties which we may acquire directly. Although most of our investments are these types, we may invest in whatever types of real estate or real estate-related investments that we believe are in our best interests. We evaluate all of our real estate investments as one operating segment. We currently intend to hold our investments until such time as we determine that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that the objectives will not be met.
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As of September 30, 2023, we (i) majority owned and consolidated the operating results and financial condition of eight limited-service hotels containing a total of 872 rooms, (ii) held an unconsolidated 50.0% membership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”) and (iii) held an unconsolidated 25.0% membership interest in Bedford Avenue Holdings LLC (the “Williamsburg Moxy Hotel Joint Venture”). We account for our unconsolidated membership interests in the Hilton Garden Inn Joint Venture and the Williamsburg Moxy Hotel Joint Venture under the equity method of accounting.
The Hilton Garden Inn Joint Venture owns a 183-room, limited-service hotel (the “Hilton Garden Inn – Long Island City) located in the Long Island City neighborhood in the Queens borough of New York City. The Williamsburg Moxy Hotel Joint Venture developed, constructed and owns a 216-room branded hotel (the “Williamsburg Moxy Hotel”) located in the Williamsburg neighborhood in the Brooklyn borough of New York City, which opened on March 7, 2023. Both the Hilton Garden Inn Joint Venture and the Williamsburg Moxy Hotel Joint Venture are between us and related parties.
Our advisor is Lightstone Value Plus REIT III LLC (the “Advisor”), which is majority owned by David Lichtenstein. On July 16, 2014, the Advisor contributed $2 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. Our Advisor also owns 20,000 shares of our common stock (“Common Shares”) which were issued on December 24, 2012 for $200, or $10.00 per share. Mr. Lichtenstein also is the majority owner of the equity interests of the Lightstone Group, LLC. The Lightstone Group, LLC served as our sponsor (the “Sponsor”) during our initial public offering (the “Offering”) which terminated on March 31, 2017. Mr. Lichtenstein owns 222,222 Common Shares which were issued on December 11, 2014 for $2.0 million, or $9.00 per share. Pursuant to the terms of an advisory agreement and subject to the oversight of our board of directors (the “Board of Directors”), the Advisor has primary responsibility for making investment decisions on our behalf and managing our day-to-day operations. Through his ownership and control of The Lightstone Group, LLC, Mr. Lichtenstein is the indirect owner and manager of Lightstone SLP III LLC, a Delaware limited liability company (the “Special Limited Partner”), which owns 242 subordinated participation interests (“Subordinated Participation Interests”) in the Operating Partnership which were acquired for $12.1 million in connection with our Offering. Mr. Lichtenstein also acts as our Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT III or the Operating Partnership.
We have no employees. Our Advisor and its affiliates perform a full range of real estate services for us, including asset management, accounting, legal, and property management, as well as investor relations services.
We are dependent on the Advisor and its affiliates for services that are essential to us, including asset management and acquisition, disposition and financing activities, and other general administrative responsibilities. If the Advisor and its affiliates are unable to provide these services to us, we would be required to provide the services ourselves or obtain the services from other parties.
We also use other unaffiliated third-party property managers, principally for the management of our hospitality properties.
Our Common Shares are not currently listed on a national securities exchange. We may seek to list our Common Shares for trading on a national securities exchange only if a majority of our independent directors believe listing would be in the best interest of our stockholders. We do not intend to list our Common Shares at this time. We do not anticipate that there would be any active market for our Common Shares until they are listed for trading.
On January 17, 2023 our stockholders approved an amendment and restatement to our charter pursuant to which we are no longer required to either (a) amend our charter to extend the deadline to begin the process of achieving a liquidity event, or (b) hold a stockholders meeting to vote on a proposal for an orderly liquidation of our portfolio.
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Noncontrolling Interests – Partners of the Operating Partnership
Limited Partner
On July 16, 2014, the Advisor contributed $2 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The Advisor has the right to convert the limited partner units into cash or, at our option, an equal number of our Common Shares.
Special Limited Partner
In connection with our Offering, the Special Limited Partner purchased from the Operating Partnership an aggregate of 242 Subordinated Participation Interests for consideration of $12.1 million. The Subordinated Participation Interests were each purchased for $50 in consideration and may be entitled to receive liquidation distributions upon the liquidation of Lightstone REIT III.
As the majority owner of the Special Limited Partner, Mr. Lichtenstein is the beneficial owner of a 99% interest in such Subordinated Participation Interests and will thus receive an indirect benefit from any distributions made in respect thereof.
These Subordinated Participation Interests entitle the Special Limited Partner to a portion of any regular and liquidation distributions that we make to our stockholders, but only after our stockholders have received a stated preferred return. From our inception through September 30, 2023, no distributions have been declared or paid on the Subordinated Participation Interests.
Concentration of Credit Risk
As of September 30, 2023 and December 31, 2022, we had cash deposited in certain financial institutions in excess of federally insured levels. We regularly monitor the financial stability of these financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents or restricted cash.
Current Environment
Our operating results and financial condition 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 and uncertainty as a result of recent banking failures, 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, inflation and recession.
Our overall performance depends in part on worldwide economic and geopolitical conditions and their impacts on consumer behavior. Worsening economic conditions, increases in costs due to inflation, higher interest rates, certain labor and supply chain challenges and other changes in economic conditions may adversely affect our results of operations and financial performance.
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.
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Portfolio Summary –
| Location | Year Built | Date Acquired |
Year to Date Available Rooms |
Percentage Occupied |
RevPAR for the Nine Months Ended September 30, 2023 |
ADR 2023 |
||||||||||||||||
| Wholly-Owned and Consolidated Hospitality Properties: | ||||||||||||||||||||||
| Hampton Inn – Des Moines | Des Moines, Iowa | 1987 | 2/4/2015 | 32,760 | 63 | % | $ | 81.02 | $ | 121.83 | ||||||||||||
| Courtyard – Durham | Durham, North Carolina | 1996 | 5/15/2015 | 39,858 | 60 | % | $ | 69.76 | $ | 115.72 | ||||||||||||
| Hampton Inn – Lansing | Lansing, Michigan | 2013 | 3/10/2016 | 23,478 | 67 | % | $ | 83.36 | $ | 123.96 | ||||||||||||
| Courtyard – Warwick | Warwick, Rhode Island | 2003 | 3/23/2016 | 25,116 | 73 | % | $ | 100.25 | $ | 137.83 | ||||||||||||
| Home2 Suites – Salt Lake | Salt Lake City, Utah | 2013 | 8/2/2016 | 34,125 | 72 | % | $ | 85.69 | $ | 119.81 | ||||||||||||
| Home2 Suites – Tukwila | Tukwila, Washington | 2015 | 8/2/2016 | 37,947 | 88 | % | $ | 150.49 | $ | 170.30 | ||||||||||||
| Fairfield Inn – Austin | Austin, Texas | 2014 | 9/13/2016 | 22,932 | 66 | % | $ | 71.26 | $ | 107.19 | ||||||||||||
| Staybridge Suites – Austin | Austin, Texas | 2009 | 10/7/2016 | 21,840 | 76 | % | $ | 81.10 | $ | 106.88 | ||||||||||||
| Total | 238,056 | 71 | % | $ | 92.20 | $ | 129.40 | |||||||||||||||
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Unconsolidated Affiliated Real Estate Entities:
| Hospitality | Location | Year Built | Date Acquired/Opened | Year to Date Available Rooms |
Percentage Occupied for the Nine Months Ended September 30, 2023 |
RevPAR for the Nine Months Ended September 30, 2023 |
ADR For the Nine Months Ended September 30, 2023 |
|||||||||||||||
| Hilton Garden Inn - Long Island City | Long Island City, New York | 2014 | 3/27/2018 | 49,959 | 87 | % | $ | 162.02 | $ | 186.25 | ||||||||||||
| Williamsburg Moxy Hotel | Williamsburg, New York | 2023 | 3/7/2023 | 44,928 | 82 | % | $ | 221.98 | $ | 269.92 | ||||||||||||
The following information generally applies to our investments in our real estate properties:
| ● | we believe our real estate properties are adequately covered by insurance and suitable for their intended purpose; | |
| ● | our real estate properties are located in markets where we are subject to competition; and | |
| ● | depreciation is provided on a straight-line basis over the estimated useful life of the applicable improvements. |
Critical Accounting Policies and Estimates
There were no material changes during the nine months ended September 30, 2023 to our critical accounting policies as reported in our Annual Report on Form 10-K, for the year ended December 31, 2022.
Results of Operations
Comparison of the three months ended September 30, 2023 vs. September 30, 2022
Consolidated
Our consolidated revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation and amortization for the three months ended September 30, 2023 and 2022 are attributable to our consolidated hospitality properties, all of which were owned by us during the entire periods presented.
During the three months ended September 30, 2023 compared to same period in 2022, our consolidated hospitality portfolio experienced slight increases in the percentage of rooms occupied to 75% from 74%, RevPAR to $100.90 from $99.53 and ADR to $135.09 from $135.00.
Revenues
Revenues increased slightly by $0.1 million to $8.3 million during the three months ended September 30, 2023 compared to $8.2 million for the same period in 2022. The slight increase in revenue during the 2023 period is attributable to the favorable impact of slightly higher occupancy, RevPAR and ADR.
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Property operating expenses
Property operating expenses increased by $0.4 million to $5.5 million during the three months ended September 30, 2023 compared to $5.1 million for the same period in 2022. This increase is attributable to primarily to higher labor costs resulting from wage inflation.
Real estate taxes
Real estate taxes increased slightly by $0.1 million to $0.3 million during the three months ended September 30, 2023 compared to $0.2 million for the same period in 2022.
General and administrative expense
General and administrative expenses increased slightly by $0.1 million to $0.7 million during the three months ended September 30, 2023 compared to $0.6 million for the same period in 2022.
Depreciation and amortization
Depreciation and amortization expense decreased by $0.2 million to $1.0 million during the three months ended September 30, 2023 compared to $1.2 million for the same period in 2022.
Interest expense
Interest expense increased by $0.5 million to $1.4 million during the three months ended September 30, 2023 compared to $0.9 million for the same period in 2022. Interest expense is attributable to the mortgage financings associated with our hotels, all of which bear interest at variable rates, and reflects higher market interest rates during the 2023 period as well as the changes in the weighted average outstanding principal during the periods.
Gain on forgiveness of debt
During the three months ended September 30, 2022 notice was received from the U.S. Small Business Administration that $0.8 million of Paycheck Protection 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 September 30, 2022.
Earnings from investments in unconsolidated affiliated real estate entities
Our loss from investments in unconsolidated affiliated real estate entities was $0.6 million during the three months ended September 30, 2023 compared to income of $0.3 million for the same period in 2022. Our earnings from investments in unconsolidated affiliated real estate entities are attributable to our unconsolidated 50.0% membership interest in the Hilton Garden Inn Joint Venture and our unconsolidated 25.0% membership interest in the Williamsburg Moxy Hotel Joint Venture.
Comparison of the nine months ended September 30, 2023 vs. September 30, 2022
Consolidated
Our consolidated revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation and amortization for the nine months ended September 30, 2023 and 2022 are attributable to our consolidated hospitality properties, all of which were owned by us during the entire periods presented.
During the nine months ended September 30, 2023 compared to same period in 2022, our consolidated hospitality portfolio experienced increases in RevPAR to $92.20 from $89.78 and ADR to $129.40 from $123.11 and a decrease in the percentage of rooms occupied to 71% from 73%.
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Revenues
Revenues increased by $0.7 million to $22.6 million during the nine months ended September 30, 2023 compared to $21.9 million for the same period in 2022. The increase in revenues during the 2023 period is attributable to the favorable impact of higher RevPAR and ADR, which reflect the effect of inflation on our room rental rates, offset by the negative impact of lower occupancy.
Property operating expenses
Property operating expenses increased by $1.6 million to $15.2 million during the nine months ended September 30, 2023 compared to $13.6 million for the same period in 2022. The increase in property operating expenses during the 2023 period is attributable to higher labor costs resulting from wage inflation plus increases in property management fees and franchise fees, both which are generally based on a percentage of revenues.
Real estate taxes
Real estate taxes were unchanged at $0.9 million during the nine months ended September 30, 2023 and 2022.
General and administrative expense
General and administrative expenses increased slightly by $0.1 million to $2.0 million during the nine months ended September 30, 2023 compared to $1.9 million for the same period in 2022.
Depreciation and amortization
Depreciation and amortization expense decreased by $0.4 million to $3.3 million during the nine months ended September 30, 2023 compared to $3.7 million for the same period in 2022.
Interest expense
Interest expense increased by $1.7 million to $4.0 million during the nine months ended September 30, 2023 compared to $2.3 million for the same period in 2022. Interest expense is attributable to the mortgage financings associated with our hotels, all of which bear interest at variable rates, and reflects higher market interest rates during the 2023 period as well as changes in the weighted average principal outstanding during the periods.
Gain on forgiveness of debt
During the nine months ended September 30, 2022 notice was received from the U.S. Small Business Administration that $1.9 million of Paycheck Protection loans and related accrued interest had been legally forgiven and therefore, we recognized a gain on forgiveness of debt for that amount during the nine months ended September 30, 2022.
Earnings from investments in unconsolidated affiliated real estate entities
Our loss from investments in unconsolidated affiliated real estate entities was $2.8 million during the nine months ended September 30, 2023 compared to income of $0.2 million for the same period in 2022. Our earnings from investments in unconsolidated affiliated real estate entities are attributable to our unconsolidated 50.0% membership interest in the Hilton Garden Inn Joint Venture and our unconsolidated 25.0% membership interest Williamsburg Moxy Hotel Joint Venture.
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Financial Condition, Liquidity and Capital Resources
Overview:
As of September 30, 2023, we had $8.2 million of cash on hand and $7.1 million of marketable securities. We currently believe that these items along with revenues from our hospitality properties, interest and dividend income earned on our marketable securities, distributions received from our unconsolidated affiliated real estate entities and proceeds received from the sale of marketable securities will be sufficient to satisfy our expected cash requirements for at least twelve months from the date of filing this report, which primarily consist of our anticipated operating expenses, scheduled debt service (excluding balloon payments due at maturity), capital expenditures (excluding non-recurring capital expenditures), capital contributions to our unconsolidated affiliated real estate entities, redemptions and cancellations of shares of our common stock and distributions to our shareholders, if any, required to maintain our status as a REIT for the foreseeable future. However, to the extent that our cash flow from operations and available cash on hand and marketable securities are not sufficient to cover our cash needs, we may use proceeds from additional borrowings and/or selective asset sales to fund such needs.
As of September 30, 2023, we have $59.1 million of outstanding mortgage debt. We have and intend to continue to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to our stockholders. Market conditions will dictate our overall leverage limit; as such our aggregate long-term permanent borrowings may be less than 75% of aggregate fair market value of all properties. We may also incur short-term indebtedness, having a maturity of two years or less.
Our charter provides that the aggregate amount of our borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a justification 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 September 30, 2023, our total borrowings were $59.1 million which represented 56% of our net assets.
Our borrowings currently consist of mortgages cross-collateralized by a pool of properties. Our mortgages typically provide for either interest-only payments (generally for variable-rate indebtedness) or level payments (generally for fixed-rate indebtedness) with “balloon” payments due at maturity.
Any future properties that we may acquire or develop may be funded through a combination of borrowings and the proceeds received from the disposition of certain of our assets. These borrowing may consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. Such mortgages may be put in place either at the time we acquire a property or subsequent to our purchasing a property for cash. In addition, we may acquire properties that are subject to existing indebtedness where we choose to assume the existing mortgages. Generally, though not exclusively, we intend to seek to encumber our properties with non-recourse debt. This means that a lender’s rights on default will generally be limited to foreclosing on the property. However, we may, at our discretion, secure recourse financing or provide a guarantee to lenders if we believe this may result in more favorable terms. When we give a guaranty for a property owning entity, we will be responsible to the lender for the satisfaction of the indebtedness if it is not paid by the property owning entity.
We may also obtain lines of credit to be used to acquire properties. If obtained, these lines of credit will be at prevailing market terms and will be repaid from proceeds from the sale or refinancing of properties, working capital and/or permanent financing. Our Sponsor and/or its affiliates may guarantee our lines of credit although they are not obligated to do so. We expect that such properties may be purchased by our Sponsor’s affiliates on our behalf, in our name, in order to minimize the imposition of a transfer tax upon a transfer of such properties to us.
In addition to meeting our working capital needs and making distributions, if any, to our stockholders, our capital resources are used to make certain payments to our Advisor and its affiliates, such as payments related to asset acquisition fees, development fees and leasing commissions, asset management fees, the reimbursement of acquisition related expenses to our Advisor and property management fees. We also reimburse our Advisor and its affiliates for actual expenses it incurs for administrative and other services provided to us. Additionally, in the event of a liquidation of our assets, we may pay our Advisor or its affiliates a real estate disposition fee. Furthermore, the Operating Partnership may be required to make distributions to Lightstone SLP III, LLC, an affiliate of the Advisor.
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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 Advisor for the periods indicated:
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Asset management fees (general and administrative costs) | $ | 361 | $ | 302 | $ | 1,038 | $ | 905 | ||||||||
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 Nine Months Ended September 30, |
||||||||
| 2023 | 2022 | |||||||
| Cash provided by operating activities | $ | 733 | $ | 2,730 | ||||
| Cash (used in)/provided by investing activities | (5,401 | ) | 1,080 | |||||
| Cash used in financing activities | (5,479 | ) | (954 | ) | ||||
| Change in cash, cash equivalents and restricted cash | (10,147 | ) | 2,856 | |||||
| Cash, cash equivalents and restricted cash, beginning of year | 18,391 | 16,639 | ||||||
| Cash, cash equivalents and restricted cash, end of the period | $ | 8,244 | $ | 19,495 | ||||
Operating activities
The net cash provided by operating activities of $733 during the nine months ended September 30, 2023 consisted of our net loss of $5.0 million and the net changes in operating assets and liabilities of $0.8 million; which were offset by depreciation and amortization, loss from investments in unconsolidated affiliated real estate entities and other non-cash items aggregating $6.5 million.
Investing activities
The net cash used in investing activities of $5.4 million during the nine months ended September 30, 2023 consisted of capital expenditures of $0.5 million, net purchases of marketable securities of $3.7 million, capital contributions of $1.3 million made to the Hilton Garden Inn Joint Venture and Williamsburg Moxy Hotel Joint Venture; offset by distributions from the Hilton Garden Inn Joint Venture of $0.1 million.
Financing activities
The cash used in financing activities of $5.5 million during the nine months ended September 30, 2023 consisted of distributions to common stockholders of $1.9 million, debt principal payments of $2.3 million, payment of loan fees and expenses of $0.2 million and redemptions and cancellations of common shares of $1.1 million.
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Distributions on Common Shares
On August 14, 2023, the Board of Directors authorized and we declared a Common Share distribution of $0.075 per share for the quarterly period ending September 30, 2023. The distribution is the pro rata equivalent of an annual distribution of $0.30 per share, or an annualized rate of 3% based on a share price of $10.00. On or about October 15, 2023, the distribution for the three-month period ending September 30, 2023 of $1.0 million was paid in cash.
On November 13, 2023, the Board of Directors authorized and we declared a Common Share distribution of $0.075 per share for the quarterly period ending December 31, 2023. The distribution is the pro rata equivalent of an annual distribution of $0.30 per share, or an annualized rate of 3% based on a share price of $10.00. The distribution will be paid on or about the 15th day of the month following the quarter-end to stockholders of record at the close of business on the last day of the quarter end.
Future distributions declared, 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 other 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.
Subordinated Participation Interests
In connection with our initial public offering (the “Offering”), which terminated on March 31, 2017, Lightstone SLP III LLC, a Delaware limited liability company (the “Special Limited Partner”), purchased from Lightstone Value Plus REIT III LP, a Delaware limited partnership (the “Operating Partnership”) an aggregate of 242 Subordinated Participation Interests for consideration of $12.1 million. The Subordinated Participation Interests were each purchased for $50 in consideration and may be entitled to receive liquidation distributions upon the liquidation of Lightstone REIT III.
These Subordinated Participation Interests entitle the Special Limited Partner to a portion of any regular and liquidation distributions that we make to stockholders, but only after stockholders have received a stated preferred return. From our inception through September 30, 2023, no distributions have been declared or paid on the Subordinated Participation Interests.
SRP
Our share repurchase program (the “SRP”) may provide eligible stockholders with limited, interim liquidity by enabling them to sell Common Shares back to us, 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 May 10, 2021, the Board of Directors partially reopened the SRP to allow, subject to various conditions as set forth below, for redemptions submitted in connection with a stockholder’s death and hardship, respectively, and set the price for all such purchases to our current estimated net asset value per share of common stock, as determined by our board of directors and reported by us 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 us 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, we 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 proration if either type of redemption requests exceeded the annual limitation.
For the nine months ended September 30, 2023, we repurchased 107,371 Common Shares at a weighted average price per share of $10.08. For the nine months ended September 30, 2022, we repurchased 95,309 Common Shares at a weighted average price per share of $9.00.
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Contractual Mortgage Obligations
The following is a summary of the estimated contractual obligations related to our mortgage payable over the next five years and thereafter as of September 30, 2023.
| Contractual Mortgage Obligations | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | |||||||||||||||||||||
| Principal maturities | $ | - | $ | 32,956 | $ | 684 | $ | 25,410 | $ | - | $ | - | $ | 59,050 | ||||||||||||||
| Interest payments(1) | 1,244 | 3,751 | 2,323 | 2,297 | - | - | 9,615 | |||||||||||||||||||||
| Total Contractual Mortgage Obligations | $ | 1,244 | $ | 36,707 | $ | 3,007 | $ | 27,707 | $ | - | $ | - | $ | 68,665 | ||||||||||||||
| (1) | These amounts represent future interest payments related to mortgage payable obligations based on the interest rate specified in the associated debt agreement. All of our mortgage debt outstanding as of September 30, 2023 bears interest based on one-month AMERIBOR plus a specified spread, subject to a floor. For purposes of calculating future interest amounts on our variable interest rate debt, the one-month AMERIBOR rate as of September 30, 2023 was used. |
Revolving Credit Facility
We, through certain subsidiaries, have a non-recourse revolving credit facility (the “Revolving Credit Facility”) with a financial institution. The Revolving Credit Facility provides us with a line of credit of up to $60.0 million pursuant to which we may designate properties as collateral that allow borrowings up to a 65.0% loan-to-value ratio subject to also meeting certain financial covenants. The Revolving Credit Facility provides for monthly interest-only payments and the entire principal balance is due upon its expiration.
On March 31, 2021, our Revolving Credit Facility was amended providing for (i) us to make a principal paydown of $3.8 million, (ii) us to fund $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 March 31, 2023; (iv) two one-year extension options, subject to certain conditions, including the lender’s approval (including the first extension option which was exercised on July 13, 2022); and (v) certain limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.
Except as discussed above, the Revolving Credit Facility, which was scheduled to mature on July 13, 2022, bore interest at LIBOR plus 3.15%, subject to a 4.00% floor. However, on both July 13, 2022 and July 13, 2023, the maturity dates of the Revolving Credit Facility were further extended to July 13, 2023 and July 13, 2024, respectively, subject to the conditions of the two one-year extension options. In connection with the extension of the Revolving Credit Facility on July 13, 2022, the interest rate was prospectively changed to AMERIBOR plus 3.15%, subject to a 4.00% floor.
Additionally, in connection with the extension of the Revolving Credit facility on July 13, 2023, we were required to deposit $1.4 million into a cash collateral reserve account with the financial institution. Subsequently, we were not in compliance with certain financial debt covenants under the Revolving Credit Facility as of June 30, 2023 and were required to make a principal paydown of $2.3 million during August 2023 reducing its outstanding principal balance to $32.3 million. The principal paydown consisted of the financial institution applying the $1.4 million of funds previously deposited into the cash collateral reserve account against principal and us making an additional payment of $0.9 million.
As of September 30, 2023, we also did not meet two of our financial debt covenants with respect to the Revolving Credit Facility; however, in November 2023 the financial institution agreed to (i) waive one of the financial debt covenants for all remaining quarterly periods through the maturity date and (ii) modify the other financial debt covenant through the remaining term. Additionally, we are making a principal paydown of $1.4 million to reduce the outstanding principal balance of the Revolving Credit Facility to $30.9 million and entering into an at the money interest rate cap.
As of September 30, 2023 and December 31, 2022, the Revolving Credit Facility had an outstanding principal balance of $32.3 million and $34.6 million, respectively, and six of our hotel properties were pledged as collateral. Additionally, no additional borrowings were available under the Revolving Credit Facility as of September 30, 2023. We currently intend to seek to further extend the maturity or refinance the Revolving Credit Facility on or before its maturity date of July 13, 2024, however, there can be no assurances that we will be successful in such endeavors.
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Home2 Suites Financings
On December 6, 2021,we entered into a non-recourse loan facility providing for up to $19.1 million (the “Home2 Suites – Tukwila Loan”). At closing, we initially received $16.2 million and the remaining $2.9 million is available, subject to satisfaction of certain conditions. The Home2 Suites – Tukwila Loan is scheduled to mature on December 6, 2026, and requires monthly interest-only payments through December 2023 and subsequently, monthly payments of interest and principal of $0.1 million through its maturity date. The Home2 Suites – Tukwila Loan provided for a replacement benchmark rate in connection with the phase-out of LIBOR and effective on June 30, 2023, the Home2 Suites – Tukwila Loan’s interest rate converted from LIBOR plus 3.50%, with a floor of 3.75%, to AMERIBOR plus 3.50%, with a floor of 3.75%. The Home2 Suites Tukwila Loan is cross-collateralized by the Home2 Suites – Tukwila and the Home2 Suites – Salt Lake City.
On December 6, 2021, we entered into a non-recourse loan facility providing for up to $12.5 million (the “Home2 Suites – Salt Lake City Loan”). At closing we initially received $10.5 million, and the remaining $2.0 million is available, subject to satisfaction of certain conditions. The Home2 Suites – Salt Lake City Loan is scheduled to mature on December 6, 2026, and requires monthly interest-only payments through December 2023 and subsequently, monthly payments of interest and principal of $0.1 million through its maturity date. The Home2 Suites – Salt Lake City Loan provided for a replacement benchmark rate in connection with the phase-out of LIBOR and effective on June 30, 2023, the Home2 Suites – Salt Lake City Loan’s interest rate converted from LIBOR plus 3.50%, with a floor of 3.75%, to AMERIBOR plus 3.50%, with a floor of 3.75%.The Home2 Suites Salt Lake City Loan is cross-collateralized by the Home2 Suites – Salt Lake City and the Home2 Suites – Tukwila.
Certain of our debt agreements also contain clauses providing for prepayment penalties. As of September 30, 2023, we were in compliance with or had obtained a waiver for (see “Revolving Credit Facility” discussed above) all of our financial debt covenants.
Investments in Unconsolidated Affiliated Entities
Hilton Garden Inn Joint Venture
On March 27, 2018, we and Lightstone Value Plus REIT II, Inc. (“Lightstone REIT II”), a REIT also sponsored by our Sponsor and a related party, acquired, through the newly formed Hilton Garden Inn Joint Venture 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 hand $35.0 million of proceeds from a five-year term, non-recourse mortgage loan from a financial institution (the “Hilton Garden Inn Mortgage”), excluding closing and other related transaction costs. We paid $12.9 million for a 50.0% membership interest in the Hilton Garden Inn Joint Venture.
Except as discussed below, the Hilton Garden Inn Mortgage bore interest at LIBOR plus 3.15%, subject to a 5.03% floor, initially provided for monthly interest-only payments for the first 30 months of its term with principal and interest payments pursuant to a 25-year amortization schedule thereafter, and the remaining unpaid balance due in full at its maturity on March 27, 2023.
On June 2, 2020, the Hilton Garden Inn Mortgage was amended to provide for 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.
On March 27, 2023, the Hilton Garden Inn Joint Venture and the lender amended the Hilton Garden Inn Mortgage to extend the maturity date for 90 days, through June 25, 2023, to provide additional time to finalize the terms of a long-term extension. Subsequently, on May 31, 2023, the Hilton Garden Inn Mortgage was further amended to provide for (i) an extension of the maturity date for an additional five years, (ii) the interest rate to be adjusted to SOFR plus 3.25%, subject to a 6.41% floor, interest-only payment for the first two years of its extended term with principal and interest payments pursuant to a 300-month amortization schedule thereafter and the remaining unpaid balance due in full at its maturity date of May 31, 2028, (iii) the ability to draw up to an additional $3.0 million of principal, subject to the satisfaction of certain conditions, and (iv) certain changes to its financial covenants. Additionally, the Hilton Garden Inn Joint Venture will fund $1.3 million, through monthly payments of $37 from May 31, 2023 through June 1, 2026, into a cash collateral reserve account which may be drawn upon for specified capital expenditures.
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We and Lightstone II each have a 50.0% co-managing membership interest in the Hilton Garden Inn Joint Venture. We account for our membership interest in the Hilton Garden Inn Joint Venture in accordance with the equity method of accounting because we exert significant influence over but do 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. We commenced recording our allocated portion of profit/loss and cash distributions beginning as of March 27, 2018 with respect to our membership interest of 50.0% in the Hilton Garden Inn Joint Venture.
The Hilton Garden Inn Joint Venture is currently in compliance with respect to all of its financial debt covenants.
During the nine months ended September 30, 2023, we made capital contributions to the Hilton Garden Inn Joint Venture of $0.4 million. During the nine months ended September 30, 2023 and 2022, we received distributions from the Hilton Garden Inn Joint Venture of $0.1 million and $1.5 million, respectively.
Williamsburg Moxy Hotel Joint Venture
On August 5, 2021, we formed a joint venture with Lightstone Value Plus REIT IV, Inc. (“Lightstone REIT IV”), a REIT also sponsored by the Sponsor and a related party, pursuant to which we acquired 25% of Lightstone REIT IV’s membership interest in the Bedford Avenue Holdings LLC, which effective on that date became the Williamsburg Moxy Hotel Joint Venture, for aggregate consideration of $7.9 million.
In July 2019, Lightstone REIT IV, through its then wholly owned subsidiary, Bedford Avenue Holdings LLC, previously acquired four adjacent parcels of land located at 353-361 Bedford Avenue in the Williamsburg neighborhood in the Brooklyn borough of New York City, from unrelated third parties, for the development of the Williamsburg Moxy Hotel.
As a result, we and Lightstone REIT IV have 25% and 75% membership interests, respectively, in the Williamsburg Moxy Hotel Joint Venture. We have determined that the Williamsburg Moxy Hotel Joint Venture is a variable interest entity and we are not the primary beneficiary, as it was determined that REIT IV is the primary beneficiary. Therefore, we account for our membership interest in the Williamsburg Moxy Hotel Joint Venture in accordance with the equity method because we exert significant influence over but do not control the Williamsburg Moxy Hotel Joint Venture. All capital contributions and distributions of earnings from the Williamsburg Moxy Hotel 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 Williamsburg Moxy Hotel Joint Venture are made to the members pursuant to the terms of the Williamsburg Moxy Hotel Joint Venture’s operating agreement.
On August 5, 2021, the Williamsburg Moxy Hotel Joint Venture entered into a development agreement (the “Development Agreement”) with an affiliate of the Advisor (the “Williamsburg Moxy Developer”) pursuant to which the Williamsburg Moxy Developer is being paid a development fee equal to 3% of hard and soft costs, as defined in the Development Agreement, incurred in connection with the development and construction of the Williamsburg Moxy Hotel. Additionally on August 5, 2021, the Williamsburg Moxy Hotel Joint Venture obtained construction financing for the Williamsburg Moxy Hotel as discussed below. Additionally, the Advisor and its affiliates are reimbursed for certain development and development-related costs attributable to the Williamsburg Moxy Hotel.
The Williamsburg Moxy Hotel was substantially completed and opened for business on March 7, 2023. In connection with the opening of the hotel, including its food and beverage venues, the Williamsburg Moxy Hotel Joint Venture incurred pre-opening costs of $0.1 million and $2.3 million during the three and nine months ended September 30, 2023, respectively and $0.3 million and $0.7 million during the three and nine months ended September 30, 2022, respectively. Pre-opening costs generally consist of non-recurring personnel, marketing and other costs.
An adjacent land owner previously filed a claim questioning the Williamsburg Moxy Hotel Joint Venture’s right to develop and construct the Williamsburg Moxy Hotel without his consent. On November 3, 2023, the Williamsburg Moxy Hotel Joint Venture acquired additional building rights at a contractual purchase price of $3.1 million and the adjacent land owner subsequently rescinded and withdrew his claim.
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Moxy Construction Loan
On August 5, 2021, the Williamsburg Moxy Hotel Joint Venture entered into a recourse construction loan facility for up to $77.0 million (the “Moxy Construction Loan”) to fund the development, construction and certain pre-opening costs associated with the Williamsburg Moxy Hotel. The Moxy Construction Loan is scheduled to initially mature on February 5, 2024, with two, six-month extension options, subject to the satisfaction of certain conditions. The Moxy Construction Loan is collateralized by the Williamsburg Moxy Hotel. The Moxy Construction Loan provided for a replacement benchmark rate in connection with the phase-out of LIBOR and effective after June 30, 2023, the Moxy Construction Loan’s interest rate converted from LIBOR plus 9.00%, with a floor of 9.50%, to SOFR plus 9.11%, with a floor of 9.61%. The Moxy Construction Loan requires monthly interest-only payments based on a rate of 7.50% and the excess added to the outstanding loan balance due at maturity. SOFR as of September 30, 2023 was 5.32%. LIBOR as of December 31, 2022 was 4.39%.
As of September 30, 2023 and December 31, 2022, the outstanding principal balance of the Moxy Construction Loan was $82.3 million (including $5.4 million of interest capitalized to principal) which is presented, net of deferred financing fees of $0.6 million and $65.6 million (including $1.7 million of interest capitalized to principal) which is presented, net of deferred financing fees of $2.0 million, respectively, on the condensed consolidated balance sheets and is classified as mortgage payable, net. As of September 30, 2023, the Williamsburg Moxy Construction Loan’s interest rate was 14.43%. Additionally, the Williamsburg Moxy Hotel Joint Venture was required by the lender to deposit $3.0 million of key money (the “Key Money”) received from Marriott International, Inc. (“Marriott”) during the first quarter of 2023 into an escrow account all of which was subsequently used to fund remaining construction costs for the project during the second quarter of 2023.
In connection with the Moxy Construction Loan, the Williamsburg Moxy Hotel Joint Venture has provided certain completion and carry cost guarantees. Furthermore, in connection with the Moxy Construction Loan, the Williamsburg Moxy Hotel Joint Venture paid $3.7 million of loan fees and expenses and accrued $0.8 million of loan exit fees which are due at the initial maturity date and are included in other liabilities on the balance sheets as of both and September 30, 2023 and December 31, 2022.
The Williamsburg Moxy Hotel Joint Venture currently expects to refinance the Moxy Construction Loan (outstanding principal balance of $82.3 million as of September 30, 2023) on or before its initial maturity date of February 5, 2024; however, there can be no assurances that it will be successful in such endeavors. If the Williamsburg Moxy Hotel Joint Venture is unable to refinance the Moxy Construction Loan on or before its initial maturity date, it will then seek to exercise the first of its two six-month extension options.
See Note 3 of the Notes to Consolidated Financial Statements for additional information.
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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.
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, 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.
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We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the “Practice Guideline”) issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction-related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses (which includes costs incurred in connection with strategic alternatives), amounts relating to deferred rent receivables and amortization of market lease and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Certain of the above adjustments are also made to reconcile net income (loss) to net cash provided by (used in) operating activities, such as for the amortization of a premium and accretion of a discount on debt and securities investments, amortization of fees, any unrealized gains (losses) on derivatives, securities or other investments, as well as other adjustments.
MFFO excludes non-recurring impairment of real estate-related investments. We assess the credit quality of our investments and adequacy of reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. We consider the estimated net recoverable value of a loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive situation of the region where the borrower does business.
We believe that, because MFFO excludes costs that we consider more reflective of 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 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 in the calculation of FFO and MFFO. Items are presented net of non-controlling interest portions where applicable.
| For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net (loss)/income | $ | (970 | ) | $ | 1,339 | $ | (4,960 | ) | $ | 1,649 | ||||||
| FFO adjustments: | ||||||||||||||||
| Depreciation and amortization of real estate assets | 972 | 1,191 | 3,266 | 3,673 | ||||||||||||
| Adjustments to equity earnings from unconsolidated affiliated real estate entities | 521 | 305 | 1,408 | 917 | ||||||||||||
| FFO | 523 | 2,835 | (286 | ) | 6,239 | |||||||||||
| MFFO adjustments: | ||||||||||||||||
| Loss on sale of marketable securities(1) | - | - | 4 | - | ||||||||||||
| Gain on forgiveness of debt(1) | - | (762 | ) | - | (1,893 | ) | ||||||||||
| Adjustments to equity earnings from unconsolidated affiliated real estate entities | - | (258 | ) | - | (258 | ) | ||||||||||
| Unrealized (gain)/loss on sale of marketable equity securities(2) | 36 | (7 | ) | 32 | 43 | |||||||||||
| MFFO - IPA recommended format | $ | 559 | $ | 1,808 | $ | (250 | ) | $ | 4,131 | |||||||
| Net (loss)/income | $ | (970 | ) | $ | 1,339 | $ | (4,960 | ) | $ | 1,649 | ||||||
| Less: net (income)/loss attributable to noncontrolling interests | - | - | - | - | ||||||||||||
| Net (loss)/income applicable to Company’s common shares | $ | (970 | ) | $ | 1,339 | $ | (4,960 | ) | $ | 1,649 | ||||||
| Net (loss)/income per common share, basic and diluted | $ | (0.07 | ) | $ | 0.10 | $ | (0.38 | ) | $ | 0.13 | ||||||
| FFO | $ | 523 | $ | 2,835 | $ | (286 | ) | $ | 6,239 | |||||||
| Less: FFO attributable to noncontrolling interests | - | - | - | - | ||||||||||||
| FFO attributable to Company’s common shares | $ | 523 | $ | 2,835 | $ | (286 | ) | $ | 6,239 | |||||||
| FFO per common share, basic and diluted | $ | 0.04 | $ | 0.22 | $ | (0.02 | ) | $ | 0.48 | |||||||
| MFFO - IPA recommended format | $ | 559 | $ | 1,808 | $ | (250 | ) | $ | 4,131 | |||||||
| Less: MFFO attributable to noncontrolling interests | - | - | - | - | ||||||||||||
| MFFO attributable to Company’s common shares | $ | 559 | $ | 1,808 | $ | (250 | ) | $ | 4,131 | |||||||
| Weighted average number of common shares outstanding, basic and diluted | 12,941 | 13,060 | 12,979 | 13,091 | ||||||||||||
| (1) | Management believes that adjusting for gains or losses related to extinguishment/sale of debt, derivatives or securities holdings is appropriate because they are items that may not be reflective of ongoing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods. |
| (2) | Management believes that adjusting for mark-to-market adjustments is appropriate because they are nonrecurring items that may not be reflective of ongoing operations and reflects unrealized impacts on value based only on then current market conditions, although they may be based upon current operational issues related to an individual property or industry or general market conditions. Mark-to-market adjustments are made for items such as ineffective derivative instruments, certain marketable securities and any other items that GAAP requires we make a mark-to-market adjustment for. The need to reflect mark-to-market adjustments is a continuous process and is analyzed on a quarterly and/or annual basis in accordance with GAAP. |
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The table below presents our cumulative distributions paid and FFO attributable to our common shares:
| For the period October 5, 2012 (date of inception) through September 30, 2023 |
||||
| FFO attributable to Company’s common shares | $ | 20,832 | ||
| Distributions paid | $ | 27,821 | ||
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, management, including our chief executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of the evaluation, our chief executive officer and principal financial officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.
There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There were no significant deficiencies or material weaknesses identified in the evaluation, and therefore, no corrective actions were taken.
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PART II. OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS.
From time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes. See Note 9 of the Notes to Consolidated Financial Statements for additional information.
As of the date hereof, the Company is not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
During the period covered by this Form 10-Q, the Company did not sell any unregistered securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
| * | Filed herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
LIGHTSTONE VALUE PLUS REIT III, INC. | ||
| Date: November 14, 2023 | By: | /s/ David Lichtenstein |
| David Lichtenstein | ||
|
Chairman and Chief Executive Officer (Principal Executive Officer) | ||
| Date: November 14, 2023 | By: | /s/ Seth Molod |
| Seth Molod | ||
|
Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer) |
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