10-Q 1 tv506553_10q.htm 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended September 30, 2018

 

OR

 

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

 

For the transition period from                      to

 

Commission file number 000-55773

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland   47-1796830

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

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

 

(732) 367-0129

(Registrant’s Telephone Number, Including Area Code)

 

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

Yes   þ     No   ¨

 

Indicate by check mark whether the registrant has submitted electronically 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 such files). 

Yes  þ     No  ¨

 

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

 

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

 

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

 

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

Yes  ¨  No þ

 

As of November 1, 2018, there were 8.7 million outstanding shares of common stock of Lightstone Real Estate Income Trust Inc.

 

 

 

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

INDEX

 

        Page
PART I   FINANCIAL INFORMATION    
         
Item 1.   Financial Statements (unaudited)   3
     
    Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017   3
     
    Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017   4
         
    Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2018   5
         
    Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017   6
     
    Notes to Consolidated Financial Statements   7
     
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   14
     
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   23
     
Item 4.   Controls and Procedures   23
     
PART II   OTHER INFORMATION    
     
Item 1.   Legal Proceedings   24
     
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   24
     
Item 3.   Defaults Upon Senior Securities   24
     
Item 4.   Mine Safety Disclosures   24
     
Item 5.   Other Information   24
     
Item 6.   Exhibits   24

 

 2 

 

 

PART I. FINANCIAL INFORMATION:

ITEM 1. FINANCIAL STATEMENTS:

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

  

September 30,

2018

  

December 31,

2017

 
   (Unaudited)     
Assets          
           
Investment in related party  $37,000,000   $37,000,000 
Investments in unconsolidated affiliated real estate entities   30,986,426    30,717,641 
Cash   5,945,315    14,064,001 
Due from related parties   370,000    - 
Other assets   30,613    8,878 
           
Total Assets  $74,332,354   $81,790,520 
           
Liabilities and Stockholders' Equity          
           
Accounts payable and other accrued expenses  $47,999   $56,104 
Due to related parties   53,157    54,882 
Distributions payable   570,238    606,897 
Subordinated advances - related party   13,030,661    12,890,830 
           
Total liabilities   13,702,055    13,608,713 
           
Commitments and Contingencies          
           
Stockholders' Equity:          
           
Preferred stock, $0.01 par value; 50,000,000 shares authorized, none issued and outstanding   -    - 
Common stock, $0.01 par value; 200,000,000 shares authorized, 8,692,379 and 8,952,132 shares issued and outstanding, respectively   86,924    89,521 
Additional paid-in-capital   73,159,798    75,586,926 
Accumulated deficit   (12,616,423)   (7,494,640)
Total Stockholders' Equity   60,630,299    68,181,807 
Total Liabilities and Stockholders' Equity  $74,332,354   $81,790,520 

 

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

 

 3 

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:  

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)  

 

  

For the Three Months Ended

September 30,

  

For the Nine Months Ended

September 30,

 
   2018   2017   2018   2017 
                 
Income:                    
Investment income  $1,134,667   $1,134,667   $3,367,000   $3,367,000 
Loss from investments in unconsolidated affiliated real estate entities   (933,878)   (741,002)   (2,260,413)   (2,066,879)
                     
Total income   200,789    393,665    1,106,587    1,300,121 
                     
Expenses:                    
General and administrative costs   258,220    265,960    860,956    766,996 
Interest expense   47,122    47,122    139,831    139,831 
                     
Total expenses   305,342    313,082    1,000,787    906,827 
                     
Net (loss)/income  $(104,553)  $80,583   $105,800   $393,294 
                     
Net (loss)/income per common share, basic and diluted  $(0.01)  $0.01   $0.01   $0.05 
                     
Weighted average number of common shares outstanding, basic and diluted   8,703,425    8,955,440    8,777,672    8,451,031 

 

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

 

 4 

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:    

ITEM 1. FINANCIAL STATEMENTS, CONTINUED.

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

       Additional        
   Common   Paid-In   Accumulated   Total 
   Shares   Amount   Capital   Deficit   Equity 
                     
BALANCE, December 31, 2017   8,952,132   $89,521   $75,586,926   $(7,494,640)  $68,181,807 
                          
Net income   -    -    -    105,800    105,800 
Distributions declared   -    -    -    (5,227,583)   (5,227,583)
Redemption and cancellation of shares   (259,753)   (2,597)   (2,427,128)   -    (2,429,725)
                          
BALANCE, September 30, 2018   8,692,379   $86,924   $73,159,798   $(12,616,423)  $60,630,299 

 

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

 

 5 

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

  

For the

Nine Months
Ended

September 30,

2018

  

For the

Nine Months

Ended

September 30,

2017

 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $105,800   $393,294 
Adjustments to reconcile net income to net cash provided by operating activities:          
Loss from investments in unconsolidated affiliated real estate entities   2,260,413    2,066,879 
Changes in assets and liabilities:          
(Increase)/decrease in other assets   (21,735)   106,196 
Decrease in accounts payable and other accrued expenses   (8,104)   (13,150)
Increase in accrued interest on subordinated advances - related party   139,831    139,831 
(Increase)/decrease in due from related parties   (370,000)   28,696 
(Decrease)/increase in due to related parties   (1,725)   53,609 
Net cash provided by operating activities   2,104,480    2,775,355 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Investments in unconsolidated affiliated real estate entities   (2,529,199)   (27,537,856)
Cash used in investing activities   (2,529,199)   (27,537,856)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from issuance of common stock   -    25,164,695 
Payment of commissions and offering costs   -    (2,575,121)
Redemption and cancellation of common stock   (2,429,725)   (196,419)
Distributions paid to Company's common stockholders   (5,264,242)   (4,211,194)
Net cash (used in)/provided by financing activities   (7,693,967)   18,181,961 
           
Net change in cash   (8,118,686)   (6,580,540)
Cash, beginning of year   14,064,001    21,874,240 
Cash, end of period  $5,945,315   $15,293,700 
           
Supplemental disclosure of cash flow information:          
Distributions declared, but not paid  $570,238   $587,318 
Value of shares issued from distribution reinvestment program  $-   $658,652 
Application of deposit to acquisition of investment property  $-   $5,687,250 

 

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

 

 6 

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

1. Organization

 

Lightstone Real Estate Income Trust Inc. (‘‘Lightstone Income Trust’’), incorporated on September 9, 2014, in Maryland, elected to qualify to be taxed as a real estate investment trust (‘‘REIT’’) for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2016.

 

Lightstone Income Trust sold 20,000 Common Shares to Lightstone Real Estate Income LLC, a Delaware limited liability company (the ‘‘Advisor’’), an entity majority owned by David Lichtenstein, on September 12, 2014, for $10.00 per share. Mr. Lichtenstein also is a majority owner of the equity interests of Lightstone Income Trust’s sponsor, The Lightstone Group, LLC (the ‘‘Sponsor’’). Subject to the oversight of the Company’s board of directors (the “Board of Directors”), the Advisor has primary responsibility for making investment decisions and managing the Company’s day-to-day operations. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone Income Trust.

 

Lightstone Income Trust, together with its subsidiaries is collectively referred to as the ‘‘Company’’ and the use of ‘‘we,’’ ‘‘our,’’ ‘‘us’’ or similar pronouns refers to Lightstone Income Trust or the Company as required by the context in which any such pronoun is used.

 

The Company’s registration statement on Form S-11 (the “Offering”), pursuant to which it offered to sell up to 30,000,000 shares of its common stock, par value $0.01 per share (which may be referred to herein as ‘‘shares of common stock’’ or as ‘‘Common Shares’’) for an initial offering of $10.00 per share, subject to certain volume and other discounts (the “Primary Offering”) (exclusive of 10,000,000 shares available pursuant to its distribution reinvestment program (the ‘‘DRIP’’) which were offered at a discounted price equivalent to 95% of the initial price per Common Share) was declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933 on February 26, 2015. On June 30, 2016, the Company adjusted its offering price to $9.14 per Common Share in its Primary Offering, which was equal to the Company’s estimated net asset value (“NAV”) per Common Share as of March 31, 2016, and effective July 25, 2016, the Company’s offering price was adjusted to $10.00 per Common Share in its Primary Offering, which was equal to the estimated NAV per Common Share as of June 30, 2016. Our estimated NAV per Common Share remained unchanged at $10.00 as of both September 30, 2016 and December 31, 2016.

 

The Offering, which terminated on March 31, 2017, raised aggregate gross proceeds of approximately $85.6 million from the sale of approximately 8.9 million shares of common stock (including $2.0 million in Common Shares at a purchase price of $9.00 per Common Share to an entity 100% owned by David Lichtenstein, who also owns a majority interest in the Company’s Sponsor). After including aggregate advances from our Sponsor of $12.6 million under a subordinated agreement (the “Subordinated Agreement”) (as discussed in Note 6) and allowing for the payment of approximately $7.6 million in selling commissions and dealer manager fees and $3.2 million in organization and offering expenses, the Offering generated aggregate net proceeds of approximately $87.5 million.

 

On April 21, 2017, the Board of Directors approved the termination of the DRIP effective May 15, 2017. Previously, the Company’s stockholders had an option to elect the receipt of shares of the Company’s common stock in lieu of cash distributions under the Company’s DRIP, however, all future distributions will be in the form of cash. In addition, through May 15, 2017 (the termination date of the DRIP), the Company issued approximately 0.1 million shares of common stock under its DRIP, representing approximately $1.2 million of additional proceeds under the Offering.

 

The Company has and expects it will continue to seek to originate, acquire and manage a diverse portfolio of real estate and real estate -related investments. The Company may invest in mezzanine loans, first lien mortgage loans, second lien mortgage loans, bridge loans and preferred equity interests, in each case with a focus on investments intended to finance development or redevelopment opportunities. The Company may also invest in debt and derivative securities related to real estate assets. The Company expects that a majority of its investments by value will be secured by or related to properties or entities advised by, or wholly or partially, directly or indirectly owned by, the Sponsor, by its affiliates or by real estate investment programs sponsored by it. Although the Company expects that most of its investments will be of these types, it may make other investments. In fact, it may invest in whatever types of real estate-related investments that it believes are in its best interests.

 

The Company has no employees. The Company retains the Advisor to manage its affairs on a day-to-day basis. Orchard Securities, LLC (the ‘‘Dealer Manager’’), a third party not affiliated with the Company, the Sponsor or the Advisor, served as the dealer manager of the Offering until their termination on March 31, 2017 as a result of the termination of the Offering. The Advisor is an affiliate of the Sponsor and will receive compensation and fees for services related to the investment and management of the Company’s assets.

 

 7 

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

2.Summary of Significant Accounting Policies

 

The accompanying 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 Income Trust and Subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.

 

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (‘‘GAAP’’). GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate debt investments and securities, the valuation of the investment in related party and revenue recognition. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.

 

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

 

Principles of Consolidation and Basis of Presentation

 

The consolidated financial statements include the accounts of Lightstone Income Trust and Subsidiaries (over which the Company exercises financial and operating control). All inter-company accounts and transactions have been eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary.

 

Recently Adopted Accounting Pronouncements

 

Effective January 1, 2018, the Company adopted guidance issued by the FASB that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance.  The new guidance requires companies to apply a five-step model in accounting for revenue arising from contracts with customers, as well as enhance disclosures regarding revenue recognition.  Lease contracts are excluded from this revenue recognition criteria; however, the sale of real estate is required to follow the new model. The Company has adopted this standard for the year beginning on January 1, 2018 using the modified retrospective approach.  The adoption of this pronouncement did not have a material effect on our consolidated financial statements.

 

New Accounting Pronouncements

 

 In August 2018, the Securities and Exchange Commission adopted the final rule amending certain disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded. In addition, the amendments expand the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The rule was effective on November 5, 2018 and will be effective for the quarter that begins after the effective date.  Since the Company already includes a year to date consolidated statement of stockholders’ equity in our interim financial statement filings, the adoption of this guidance will result in the inclusion of a quarter to date consolidated statement of stockholders equity in our second and third quarter interim financial statement filings and the inclusion of corresponding prior periods statement of stockholders’ equity for all periods presented.

  

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

 

3. Investments in Unconsolidated Affiliated Real Estate Entities

 

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

 

 8 

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

          As of 
Entity  Date of Ownership  Ownership %   September 30, 2018   December 31, 2017 
RP Maximus Cove, L.L.C. (the "Cove Joint Venture")  January 31, 2017   22.50%  $17,583,061   $17,805,871 
40 East End Ave. Pref Member LLC ( “40 East End Ave. Joint Venture”)  March 31, 2017   33.30%   13,403,365    12,911,770 
Total investments in unconsolidated affiliated real estate entities          $30,986,426   $30,717,641 

 

The Cove Joint Venture

 

On January 31, 2017, the Company, through its wholly owned subsidiary, REIT IV COVE LLC along with LSG Cove LLC, an affiliate of the Company’s Sponsor and a related party, REIT III COVE LLC, a subsidiary of the operating partnership of Lightstone Value Plus Real Estate Investment Trust III, Inc., a real estate investment trust also sponsored by the Company’s Sponsor and a related party and Maximus Cove Investor LLC (“Maximus”), an unrelated third party, completed the acquisition of all of RP Cove, L.L.C’s membership interest in RP Maximus Cove, L.L.C. (the “Cove Joint Venture”) for aggregate consideration of approximately $255.0 million, which consisted of $80.0 million of cash and $175.0 million of proceeds from a loan from a financial institution. The Cove Joint Venture owns and operates The Cove at Tiburon (the “Cove”), a multi-family complex consisting of 281-units, or 289,690 square feet, contained within 32 apartment buildings over 20.1 acres originally constructed in 1967, located in Tiburon, California.

 

In connection with the acquisition, the Company paid the Advisor an acquisition fee of $0.6 million, equal to 1.0% of the Company’s pro-rata share of the contractual purchase price which is reflected in the Company’s carrying value which is included in investments in unconsolidated affiliated real estate entities on the consolidated balance sheets.

 

The Company paid approximately $20.0 million for a 22.5% membership interest in the Cove Joint Venture. The Company’s ownership interest in the Cove Joint Venture is a non-managing interest. The Company has determined that the Cove Joint Venture is a variable interest entity but the Company is not the primary beneficiary. The Company accounts for its ownership interest in the Cove Joint Venture in accordance with the equity method of accounting because it exerts significant influence over but does not control the Cove Joint Venture. All capital contributions and distributions of earnings from the Cove 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 Cove Joint Venture are made to the Members pursuant to the terms of the Cove Joint Venture’s operating agreement. An affiliate of Maximus is the asset manager of the Cove and receives certain fees as defined in the Property Management Agreement for the management of the Cove. The Company commenced recording its allocated portion of profit/loss and cash distributions beginning as of January 31, 2017 with respect to its membership interest of 22.5% in the Cove Joint Venture.  During the nine months ended September 30, 2018, the Company made additional capital contributions of $1.7 million to the Cove Joint Venture.

 

In connection with the closing of the Cove Transaction, the Cove Joint Venture simultaneously entered into a $175.0 million loan (the “Loan”) initially scheduled to mature on January 31, 2020 with two, one-year extension options, subject to certain conditions. The Loan requires monthly interest payments through its maturity date.  The Loan bears interest at Libor plus 3.85% through its initial maturity and Libor plus 4.15% during each of the extension periods. The Loan is collateralized by the Cove and an affiliate of the Company’s Sponsor (the “Guarantor”) has guaranteed the Cove Joint Venture‘s obligation to pay the outstanding balance of the Loan up to approximately $43.8 million (the “Loan Guarantee”). The Members have agreed to reimburse the Guarantor for any balance that may become due under the Loan Guarantee, of which the Company’s share is up to approximately $10.9 million.

 

Starting in 2013, the Cove has been undergoing an extensive refurbishment which is substantially completed. The Members used the remaining proceeds from the Loan and have invested additional capital as necessary to complete the refurbishment. The Guarantor has provided an additional guarantee of up to approximately $13.4 million (the “Refurbishment Guarantee”) to provide any necessary funds to complete the remaining renovations as defined in the Loan. The Members have agreed to reimburse the Guarantor for any balance that may become due under the Refurbishment Guarantee, of which the Company’s share is up to approximately $3.3 million.

 

The Company has determined that the fair value of both the Loan Guarantee and the Refurbishment Guarantee are immaterial.

 

The Cove Joint Venture Condensed Financial Information

 

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

 9 

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

The following table represents the unaudited condensed income statements for the Cove Joint Venture:

 

(amounts in thousands)  For the
Three Months
Ended
September 30,
2018
   For the
Three Months
Ended
September 30,
2017
   For the
Nine Months
Ended
September 30,
2018
   For the Period
January 31,
2017
(date of investment)
through
September 30,
2017
 
Revenues  $3,672   $3,523   $10,905   $8,724 
                     
Property operating expenses   1,239    1,175    3,660    3,076 
General and administrative costs   41    54    136    196 
Depreciation and amortization   2,420    2,383    7,214    6,348 
                     
Operating loss   (28)   (89)   (105)   (896)
                     
Interest expense and other, net   (2,833)   (2,406)   (8,145)   (6,161)
Net loss  $(2,861)  $(2,495)  $(8,250)  $(7,057)
Company's share of net loss (22.50%)  $(644)  $(561)  $(1,856)  $(1,588)
Adjustment to depreciation and amortization expense (1)   (10)   (180)   (87)   (479)
Company's loss from investment  $(654)  $(741)  $(1,943)  $(2,067)

 

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

 

   As of   As of 
(amounts in thousands)  September 30,
2018
   December 31,
2017
 
         
Real estate, at cost (net)  $150,654   $149,727 
Cash and restricted cash   1,433    2,538 
Other assets   2,304    1,541 
Total assets  $154,391   $153,806 
           
Mortgage payable, net  $173,889   $173,534 
Other liabilities   3,395    2,830 
Members' deficit (1)   (22,893)   (22,558)
Total liabilities and members' deficit  $154,391   $153,806 

 

(1)The adjustment to depreciation and amortization expense relates to the difference between the Company’s basis in the Cove Joint Venture and the amount of the underlying equity in net assets of the Cove Joint Venture.

 

40 East End Ave. Joint Venture

 

On March 31, 2017, the Company entered into a joint venture agreement (the “40 East End Ave. Transaction”) with SAYT Master Holdco LLC, an entity majority-owned and controlled by David Lichtenstein, who also majority owns and controls the Company’s Sponsor, and a related party, (the “40 East End Seller”), providing for the Company to acquire 33.3% of the 40 East End Seller’s approximate 100% membership interest in 40 East End Ave. Pref Member LLC ( “40 East End Ave. Joint Venture”) for aggregate consideration of approximately $10.3 million. The Company subsequently made additional capital contributions aggregating $2.6 million to the 40 East End Ave. Joint Venture during 2017. During the nine months ended September 30, 2018, the Company made additional capital contributions of $0.8 million to the 40 East End Ave. Joint Venture.

 

The Company’s ownership interest in the 40 East End Ave. Joint Venture is a non-managing interest. Because the Company exerts significant influence over but does not control the 40 East End Ave. Joint Venture, it accounts for its ownership interest in the 40 East End Ave. Joint Venture in accordance with the equity method of accounting. All contributions to and distributions of earnings from the 40 East End Ave. 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 40 East End Ave. Joint Venture are made to the Members pursuant to the terms of its operating agreement. The Company commenced recording its allocated portion of earnings and cash distributions from the 40 East End Ave. Joint Venture beginning as of March 31, 2017 with respect to its membership interest of approximately 33.3% in the 40 East End Ave. Joint Venture. Additionally, Lightstone Value Plus Real Estate Investment Trust, Inc. (“Lightstone I”), a real estate investment trust also sponsored by the Company’s Sponsor, has made $30.0 million of preferred equity contributions to a subsidiary of the 40 East End Ave. Joint Venture, pursuant to an instrument that entitles Lightstone I to monthly preferred distributions at a rate of 12% per annum.

 10 

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

The 40 East End Ave. Joint Venture, through affiliates, has acquired a parcel of land located at the corner of 81st Street and East End Avenue in the Upper East Side neighborhood of New York City on which it is constructing a luxury residential project consisting of 29 condominium units (the “40 East End Ave. Project”). On March 21, 2017, the 40 East End Ave. Joint Venture obtained financing from a financial institution of up to $85.3 million (the “Mortgage Payable”) for the land acquisition and construction of the 40 East End Ave. Project. The Mortgage Payable initially matures on September 21, 2020 but may be further extended one additional year, subject to satisfaction of certain conditions. The Mortgage Payable bears interest at Libor plus 4.50% (subject to floor of 5.00%) and is collateralized by the 40 East End Ave. Project. During the initial term, the monthly interest due on the Mortgage Payable is funded under the remaining availability under the Mortgage Payable and thereafter, interest is payable monthly and principal payments are required to be made from condominium sales proceeds. As of September 30, 2018, the outstanding principal balance of the Mortgage Payable was approximately $47.2 million and the remaining availability was approximately $38.1 million. The Company’s Sponsor (the “40 East End Guarantor”) has provided certain guarantees with respect to the Mortgage Payable, including a completion guarantee and a carry costs guarantee for the 40 East End Ave. Project. The Members have agreed to reimburse the 40 East End Guarantor for any balance that may become due under the guarantees, of which the Company’s share is 33.3%.

 

As of September 30, 2018, the 40 East End Ave. Project was still under development but has incurred certain selling, general and administrative costs; including marketing/advertising costs and staffing, rent and other costs, and depreciation and amortization expense of furnishing and fixtures related to an off-site sales office, which opened in May 2018. To date, such costs have been funded by the Mortgage Payable.

 

The following table represents the unaudited condensed income statements for the 40 East End Ave. Joint Venture:

 

(amounts in thousands)  For the
Three Months
September 30,
2018
   For the
Three Months
September 30,
2017
   For the
Nine Months
Ended
September 30,
2018
  

For the Period
March 31,
2017
(date of investment)
trough

September 30,

2017

 
Selling, general and administrative costs  $533   $              -   $547   $    - 
Depreciation and amortization   308    -    407    - 
Net loss  $(841)  $-   $(954)  $- 
Company's share of net loss (33.3%)  $(280)  $-   $(318)  $- 

 

The following table represents the unaudited condensed balance sheets for the 40 East End Ave. Joint Venture:

 

   As of   As of 
(amounts in thousands)  September 30,
2018
   December 31,
2017
 
         
Real estate inventory  $119,817   $93,228 
Cash and restricted cash   3,214    765 
Other assets   299    227 
Total assets  $123,330   $94,220 
           
Mortgage payable, net  $44,777   $20,792 
Other liabilities   8,042    4,593 
Members' capital   70,511    68,835 
Total liabilities and members' capital  $123,330   $94,220 

 

4.Stockholders’ Equity

 

Earnings per Share

 

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

 

 11 

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

Distributions

 

Distribution Declaration

  

On October 8, 2018, the Board of Directors authorized and the Company declared a distribution for each month during the three-month period ending December 31, 2018. The distributions will be calculated based on shareholders of record at a rate of $0.002191781 per day, and will equal a daily amount that, if paid each day for a 365-day period, would equal a 8.0% annualized rate based on a share price of $10.00 payable on or about the 15th day following each month end to stockholders of record at the close of business on the last day of the prior month.

 

Distribution Payments

 

On August 15, 2018, September 14, 2018 and October 15, 2018, the Company paid distributions for the months ended July 31, 2018, August 31, 2018 and September 30, 2018, respectively, totaling $1.7 million. The distributions were paid in cash.

 

5. Selling Commissions, Dealer Manager Fees and Other Offering Costs

 

In connection with the Offering, selling commissions and dealer manager fees were paid to the Dealer Manager pursuant to various agreements that were terminated in connection with the termination of the Offering on March 31, 2017. These selling commissions and dealer manager fees and other third-party offering costs such as registration fees, due diligence fees, marketing costs, and professional fees were accounted for as a reduction against additional paid-in capital as costs were incurred. Organizational costs were expensed as general and administrative costs. During the three months ended March 31, 2017, the Company incurred approximately $2.3 million of selling commissions and deal manager fees and $0.2 million of other offering costs. The Company has not incurred any of these costs subsequent to the termination of the Offering.

 

From the Company’s inception through March 31, 2017 (the termination date of the Offering), it incurred approximately $7.6 million in selling commissions and dealer manager fees and $3.2 million of other offering costs in connection with the public offering of shares of its common stock.

 

6.Related Party Transaction and Other Arrangements

 

In addition to certain agreements with the Sponsor and Dealer Manager (see Note 5), the Company has agreements with the Advisor to pay certain fees, in exchange for services performed by the Advisor and/or its affiliated entities.

 

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

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2018   2017   2018   2017 
Acquisition fees(1)  $-   $-   $-   $573,750 
Asset management fees (general and administrative costs)   157,338    156,112    470,202    417,919 
Total  $157,338   $156,112   $470,202   $991,669 

 

(1)An acquisition fee of $573,750 paid to our Advisor in connection with the acquisition of our investment in the Cove Joint Venture during the first quarter of 2017 was capitalized and is reflected in the carrying value of the Company’s investment in the Cove Joint Venture which is included in unconsolidated affiliated real estate entities on the consolidated balance sheets.

 

 12 

 

 

LIGHTSTONE REAL ESTATE INCOME TRUST INC. AND SUBSIDIARIES

Notes To Consolidated Financial Statements

(Unaudited)

 

Investment in Related Party

 

105-109 W. 28th Street Preferred Investment

 

On November 25, 2015, the Company entered into an agreement (the “Moxy Transaction”) with various related party entities that provides for the Company to make aggregate preferred equity contributions (the “105-109 W. 28th Street Preferred Investment”) of up to $20.0 million in various affiliates of its Sponsor (the “Moxy Developer”) which owns a parcel of land located at 105-109 W. 28thStreet, New York, New York on which they are constructing a 343-room Marriott Moxy hotel, which currently is expected to open during the fourth quarter of 2018. The 105-109 W. 28th Street Preferred Investment was made pursuant to an instrument that entitles the Company to monthly preferred distributions at a rate of 12% per annum and the Company could redeem at the earlier of (i) the date that was two years from the date of the Company’s final contribution or (ii) the third anniversary of 105-109 W. 28th Street Preferred Investment. The Company could also have requested redemption or a restructuring of the agreement prior to the acceptance of any construction financing. On June 30, 2016, the Company and the Developer amended the Moxy Transaction so that the Company’s contributions would become redeemable on the fifth anniversary of the Moxy Transaction. The 105-109 W. 28th Street Preferred Investment is classified as a held-to-maturity security and recorded at cost.

 

On August 30, 2016, the Company and the Moxy Developer further amended the Moxy Transaction so that Company’s total aggregate contributions under the 105-109 W. 28th Street Preferred Investment increased by $17.0 million, to up to $37.0 million.

 

The Company made an initial contribution of $4.0 million during the fourth quarter of 2015 and additional aggregate contributions of $33.0 million during the year ended December 31, 2016. As of both September 30, 2018 and December 31, 2017, the 105-109 W. 28th Street Preferred Investment had an outstanding balance of $37.0 million, which is classified as an investment in related party on the consolidated balance sheets. The Company funded its contributions using proceeds generated from the Offering and draws under the Subordinated Agreement (see below). During both the three and nine months ended September 30, 2018 and 2017, the Company recorded $1.1 million and $3.4 million, respectively, of investment income related to the 105-109 W. 28th Street Preferred Investment. The Company’s Advisor elected to waive the acquisition fee associated with this transaction.​

 

Subordinated Advances – Related Party

 

On March 18, 2016, the Company and its Sponsor entered into the Subordinated Agreement, a subordinated unsecured loan agreement pursuant to which the Sponsor had committed to make a significant investment in the Company of up to $36.0 million, which was equivalent to 12.0% of the $300.0 million maximum offering amount of Common Shares under the Offering, which was terminated on March 31, 2017. The outstanding advances under the Subordinated Agreement (the “Subordinated Advances”) accrue interest at a rate of 1.48%, but no interest or outstanding advances are due and payable to the Sponsor until holders of the Company’s Common Shares have received liquidation distributions equal to their respective net investments (defined as $10.00 per Common Share) plus a cumulative, pre-tax, non-compounded annual return of 8.0% on their respective net investments.

 

Distributions in connection with a liquidation of the Company initially will be made to holders of its Common Shares until holders of its Common Shares have received liquidation distributions equal to their respective net investments plus a cumulative, pre-tax, non-compounded annual return of 8.0% on their respective net investments. Thereafter, only if additional liquidating distributions are available, the Company will be obligated to repay the outstanding advances under the Subordinated Agreement and accrued interest to the Sponsor, as described in the Subordinated Agreement. In the event that additional liquidation distributions are available after the Company repays its holders of common stock their respective net investments plus their 8% return on investment and then the outstanding advances under the Subordinated Agreement and accrued interest to its Sponsor, such additional distributions will be paid to holders of its Common Shares and its Sponsor: 85.0% of the aggregate amount will be payable to holders of the Company’s Common Shares and the remaining 15.0% will be payable to the Sponsor.

 

The Subordinated Advances and its related interest are subordinate to all of the Company’s obligations as well as to the holders of its Common Shares in an amount equal to the shareholder’s net investment plus a cumulative, pre-tax, non-compounded annual return of 8.0% and only potentially payable in the event of a liquidation of the Company.

 

As of both September 30, 2018 and December 31, 2017, an aggregate of approximately $12.6 million of Subordinated Advances had been funded, which along with the related accrued interest of $398,648 and $258,817, respectively, are classified as Subordinated Advances – Related Party, a liability on the consolidated balance sheets. During both the three and nine months ended September 30, 2018 and 2017, the Company accrued $47,122 and $139,831, respectively, of interest expense on the Subordinated Advances.

 

In connection with the termination of the Offering, on March 31, 2017, the Company and the Sponsor terminated the Subordinated Agreement. As a result of the termination, the Sponsor is no longer obligated to make any additional Subordinated Advances to the Company. Interest will continue to accrue on the aggregate Subordinated Advances and repayment, if any, of the Subordinated Advances and accrued interest will be made according to the terms of the Subordinated Agreement disclosed above.

 

7. Commitments and Contingencies

 

Legal Proceedings 

 

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

 13 

 

 

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 Real Estate Income Trust Inc. and Subsidiaries (‘‘Lightstone Income Trust’’), and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Lightstone Real Estate Income Trust Inc., a Maryland corporation, and its subsidiaries.

 

Forward-Looking Statements

 

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

 

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

 

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

 

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

 

Overview

 

Lightstone Income Trust, together with its subsidiaries, is collectively referred to as the ‘‘Company’’ and the use of ‘‘we,’’ ‘‘our,’’ ‘‘us’’ or similar pronouns refers to Lightstone Income Trust or the Company as required by the context in which any such pronoun is used.

 

Lightstone Income Trust has and primarily intends to continue to originate, acquire and manage a diverse portfolio of real estate-related investments. We have and may continue to invest in mezzanine loans, first lien mortgage loans, second lien mortgage loans, bridge loans and preferred equity interests, in each case with a focus on investments intended to finance development or redevelopment opportunities. We may also invest in debt and derivative securities related to real estate assets. We expect that a majority of our investments by value will be secured by or related to properties or entities advised by, or wholly or partially, directly or indirectly owned by, our sponsor, the Lightstone Group, LLC (the “Sponsor”), by its affiliates or by real estate investment programs sponsored by it. Although we expect that most of our investments will be of these types, we may make other investments. In fact, we may invest in whatever types of real estate-related investments that we believe are in our best interests.

 

 14 

 

 

We sold 20,000 Common Shares to Lightstone Real Estate Income LLC, a Delaware limited liability company (the ‘‘Advisor’’), an entity majority owned by David Lichtenstein, on September 12, 2014, for $10.00 per share. Mr. Lichtenstein also is a majority owner of the equity interests of our Sponsor.

 

Our registration statement on Form S-11, pursuant to which we offered to sell (the “Offering”) up to 30,000,000 shares of our common stock (which may be referred to herein as ‘‘shares of common stock’’ or as ‘‘Common Shares’’) for an initial price of $10.00 per share, subject to certain volume and other discounts (the “Primary Offering”) (exclusive of 10,000,000 shares available pursuant to its distribution reinvestment program (the “DRIP”) which were offered at a discounted price equivalent to 95% of the initial price of $10.00 per Common Share) was declared effective by the SEC under the Securities Act of 1933 on February 26, 2015. On June 30, 2016, we adjusted our offering price to $9.14 per Common Share in our Primary offering, which was equal to our estimated net asset value (“NAV”) per Common Share as of March 31, 2016, and effective July 25, 2016, our offering price was adjusted to $10.00 per Common Share in our Primary Offering, which was equal to the estimated NAV per Common Share as of June 30, 2016. Our estimated NAV per Common Share remained unchanged at $10.00 as of both September 30, 2016 and December 31, 2016.

 

The Offering, which terminated on March 31, 2017, raised aggregate gross proceeds of approximately $85.6 million from the sale of approximately 8.9 million shares of common stock (including $2.0 million in Common Shares at a purchase price of $9.00 per Common Share to an entity 100% owned by David Lichtenstein, who also owns a majority interest in our Sponsor). After including aggregate advances from our Sponsor of $12.6 million under the Subordinated Agreement (as discussed below) and allowing for the payment of approximately $7.6 million in selling commissions and dealer manager fees and $3.2 million in organization and offering expenses, the Offering generated aggregate net proceeds of approximately $87.5 million.

 

On April 21, 2017, our board of directors (the “Board of Directors”) approved the termination of our DRIP effective May 15, 2017. All future distributions will be in the form of cash. In addition, through May 15, 2017 (the termination date of the DRIP), we issued approximately 0.1 million shares of common stock under its DRIP, representing approximately $1.2 million of additional proceeds under the Offering.

 

Orchard Securities, LLC (the ‘‘Dealer Manager’’) served as the dealer manager of the Offering until their termination on March 31, 2017 as a result of the termination of the Offering.

 

On March 18, 2016, we and our Sponsor entered into a subordinated unsecured loan agreement (the “Subordinated Agreement”) pursuant to which the Sponsor had committed to make a significant investment in us of up to $36.0 million, which was equivalent to 12.0% of the $300.0 million maximum offering amount of Common Shares under the Offering, which was terminated on March 31, 2017. The outstanding advances under the Subordinated Agreement (the “Subordinated Advances”) accrue interest at a rate of 1.48%, but no interest or outstanding advances are due and payable to the Sponsor until holders of our Common Shares have received liquidation distributions equal to their respective net investments (defined as $10.00 per Common Share) plus a cumulative, pre-tax, non-compounded annual return of 8.0% on their respective net investments.

 

Distributions in connection with a liquidation of our company initially will be made to holders of our Common Shares until holders of our Common Shares have received liquidation distributions equal to their respective net investments plus a cumulative, pre-tax, non-compounded annual return of 8.0% on their respective net investments. Thereafter, only if additional liquidating distributions are available, we will be obligated to repay the outstanding advances under the Subordinated Agreement and accrued interest to the Sponsor, pursuant to the terms of the Subordinated Agreement. In the event that additional liquidation distributions are available after we repay our holders of common stock their respective net investments plus their 8% return on investment and then the outstanding advances under the Subordinated Agreement and accrued interest to our Sponsor: 85.0% of the aggregate amount will be payable to holders of our Common Shares and the remaining 15.0% will be payable to the Sponsor.

 

As of September 30, 2018, an aggregate of approximately $12.6 million of Subordinated Advances had been funded, which along with the related accrued interest of approximately $0.4 million, is classified as Subordinated Advances – Related Party, a liability, on the consolidated balance sheets.

 

In connection with the termination of the Offering, on March 31, 2017, we and the Sponsor terminated the Subordinated Agreement. As a result of the termination, the Sponsor is no longer obligated to make any additional Subordinated Advances to us. Interest will continue to accrue on the aggregate outstanding Subordinated Advances and repayment, if any, of the Subordinated Advances and accrued interest will be made according to the terms of the Subordinated Agreement disclosed above.

 

We do not have employees. We entered into an advisory agreement with Lightstone Real Estate Income LLC, a Delaware limited liability company, which we refer to as the “Advisor,” pursuant to which the Advisor supervises and manages our day-to-day operations and selects our real estate and real estate related investments, subject to oversight by our Board of Directors. We pay the Advisor fees for services related to the investment and management of our assets, and we will reimburse the Advisor for certain expenses incurred on our behalf.

 

 15 

 

 

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

 

Current Environment

 

Our operating results as well as our investment opportunities are impacted by the health of the North American economy.  Our business and financial performance may be adversely affected by current and future economic conditions, such as availability of credit, financial markets volatility, and recession.

 

Our business may be affected by market and economic challenges experienced by the U.S. and global economies. These conditions may materially affect the value and performance of our investments, and may affect our ability continue to pay regular monthly distributions to our shareholders, the availability or the terms of financing that we have or may anticipate utilizing, and our ability to make principal and interest payments on, or refinance, any outstanding debt when due.

We are not aware of any other material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting real estate generally, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from our real estate and real estate related investments, other than those referred to in this Form 10-Q.

 

Operating Portfolio Summary –

 

Unconsolidated Affiliated Real Estate Entitiy:                                

 

Multi - Family Residential  Location  Year
Built
   Leasable
Units
   Percentage
Occupied as of
September 30,
2018
   Annualized
Revenues based
on rents at
September 30,
2018
  Annualized
Revenues per
unit at
September 30,
2018
 
                           
The Cove  (Multi-Family Complex)  Tiburon, California   1967    283    90%   $14.2 million  $55,720 

 

Critical Accounting Policies and Estimates

 

There were no material changes during the three months ended September 30, 2018 to our critical accounting policies as reported in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

Results of Operations

 

Through September 30, 2018, we have made three real estate and real estate-related investments. During the fourth quarter of 2015 we made an initial contribution of $4.0 million in our first investment, which we refer to as the 105-109 W. 28th Street Preferred Investment, which was made pursuant to an instrument that entitles us to monthly preferred distributions at a rate of 12% per annum. We subsequently made additional contributions aggregating $33.0 million towards the 105-109 W. 28th Street Preferred Investment during the year ended December 31, 2016. As a result, the outstanding balance of our 105-109 W. 28th Street Preferred Investment, which is fully funded, was $37.0 million as of both September 30, 2018 and December 31, 2017. On January 31, 2017, we made our second investment when we acquired a 22.5% membership in the Cove Joint Venture and on March 31, 2017, we made our third investment when we acquired an approximate 33.3% interest in 40 East End Ave. Pref Member LLC (“40 East End Ave. Joint Venture”). We account for our ownership interests in the Cove Joint Venture and 40 East End Ave. Joint Venture under the equity method of accounting. Our ownership interests in the Cove Joint Venture and the 40 East End Ave. Joint Venture are classified on our consolidated balance sheets in investments in unconsolidated affiliated real estate entities.

 

The operating results of our investments are reflected in our consolidated statements of operations commencing from their respective dates of acquisition. The Cove Joint Venture owns and operates the Cove, a 281-unit, luxury waterfront multifamily rental property located in Tiburon, California. The 40 East End Ave. Joint Venture, through affiliates, owns a parcel of land located at the corner of 81st Street and East End Avenue in the Upper East Side neighborhood of New York, New York, on which it is constructing a luxury residential project consisting of 29 condominium units (the “40 East End Ave. Project”). As of and for all periods through September 30, 2018, the 40 East End Ave. Project was still under development but the 40 East End Ave. Joint Venture has incurred certain selling, general and administrative costs and depreciation and amortization expense related to an off-site sales office, which opened during May 2018.

 

See Note 3 and Note 6 of the Notes to Consolidated Financial Statements for additional information on our investments.

 

 16 

 

 

For the Three Months Ended September 30, 2018 vs. September 30, 2017

 

Investment income

 

Investment income, which is attributable to the 105-109 W. 28th Street Preferred Investment, was $1.1 million for both the three months ended September 30, 2018 and 2017.

 

Loss from investments in unconsolidated affiliated real estate entities

 

Our loss from investments in unconsolidated affiliated real estate entities during the three months ended September 30, 2018 was $0.9 million compared to $0.7 million for the same period in 2017. Our loss from investments in unconsolidated affiliated real estate entities is attributable to our ownership interests in the Cove Joint Venture and the 40 East End Ave. Joint Venture. Commencing on January 31, 2017, which was the date that we acquired our interest, we have accounted for our ownership interest in the Cove Joint Venture under the equity method of accounting. Commencing on March 31, 2017, which was the date that we acquired our interest, we have accounted for our ownership in the 40 East End Ave. Joint Venture under the equity method of accounting.

 

General and administrative expenses

 

General and administrative expense was $0.3 million during both the three months ended September 30, 2018 and 2017.

 

Interest expense

 

Interest expense, which is attributable to the Subordinated Advances – Related Party, was $47,122 for both the three months ended September 30, 2018 and 2017. See Note 6 of the Notes to Financial Statements for additional information with respect to the payment of the Subordinated Advances – Related Party and accrued interest thereon.

 

For the Nine months Ended September 30, 2018 vs. September 30, 2017

 

 Investment income

 

Investment income, which is attributable to the 105-109 W. 28th Street Preferred Investment, was $3.4 million for both the nine months ended September 30, 2018 and 2017.

 

Loss from investment in unconsolidated affiliated real estate entities

 

Our loss from investments in unconsolidated affiliated real estate entities during the three months ended September 30, 2018 was $2.3 million compared to $2.1 million for the same period in 2017. Our loss from investments in unconsolidated affiliated real estate entities is attributable to our ownership interests in the Cove Joint Venture and the 40 East End Ave. Joint Venture. Commencing on January 31, 2017, which was the date that we acquired our interest, we have accounted for our ownership interest in the Cove Joint Venture under the equity method of accounting. Commencing on March 31, 2017, which was the date that we acquired our interest, we have accounted for our ownership in the 40 East End Ave. Joint Venture under the equity method of accounting.

 

General and administrative expenses

 

General and administrative expense increased by $0.1 million to $0.9 million during the nine months ended September 30, 2018 compared to $0.8 million for the same period in 2017. The increase primarily reflects an increase in the asset management fees payable to our Advisor during the 2018 period resulting from our investment activities.

 

Interest expense

 

Interest expense, which is attributable to the Subordinated Advances – Related Party, was $139,831 for both the nine months ended September 30, 2018 and 2017. See Note 6 of the Notes to Financial Statements for additional information with respect to the payment of the Subordinated Advances – Related Party and accrued interest thereon.

 

Financial Condition, Liquidity and Capital Resources

 

For the nine months ended September 30, 2018 our primary source of funds was approximately $2.1 million of cash flows from operations.

  

 17 

 

 

Our future source of funds are expected to primarily consist of (i) cash flows from our operations; principally comprised of investment income from our 105-109 W. 28th Street Preferred Investment and any distributions from our investments in unconsolidated affiliated real estate entities as well as (ii) proceeds from the redemption of our 105-109 W. 28th Street Preferred Investment, which we expect to occur during the first half of 2019. Although there can be no assurances, we currently believe that these cash resources together with our available cash on hand will be sufficient to satisfy our cash requirements (primarily operating expenses and our distribution requirements to maintain our status as a REIT) for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.

 

We intend to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to our stockholders. Market conditions will dictate our overall leverage limit; as such our aggregate long-term permanent borrowings may be less than 75% of aggregate fair market value of all properties. We may also incur short-term indebtedness, having a maturity of two years or less.

 

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

 

Our future borrowings may consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. Such mortgages may be put in place either at the time we acquire a property or subsequent to our purchasing a property for cash. In addition, we may acquire properties that are subject to existing indebtedness where we choose to assume the existing mortgages. Generally, though not exclusively, we intend to seek to encumber our properties with 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.

 

In general the type of future financing executed by us to a large extent will be dictated by the nature of the investment and current market conditions. For long-term real estate investments, it is our intent to finance future acquisitions using long-term fixed rate debt. However there may be certain types of investments and market circumstances which may result in variable rate debt being the more appropriate choice of financing. To the extent floating rate debt is used to finance the purchase of real estate, management will evaluate a number of protections against significant increases in interest rates, including the purchase of interest rate cap instruments.

 

We may also obtain lines of credit to be used to acquire real estate and/or real estate related investments. If obtained, these lines of credit will be at prevailing market terms and will be repaid from offering proceeds, proceeds from the sale or refinancing of real estate and/or real estate related investments, 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 may draw upon lines of credit to acquire properties pending our receipt of proceeds from our public offerings. 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.

 

On January 31, 2017, the Cove Joint Venture entered into a $175.0 million loan (the “Loan”) initially scheduled to mature on January 31, 2020 with two, one-year extension options, subject to certain conditions. The Loan requires monthly interest payments through its maturity date.  The Loan bears interest at Libor plus 3.85% through its initial maturity and Libor plus 4.15% during each of the extension periods. The Loan is collateralized by the Cove and an affiliate of the Sponsor (the “Guarantor”) has guaranteed the Cove Joint Venture‘s obligation to pay the outstanding balance of the Loan up to approximately $43.8 million (the “Loan Guarantee”). The members of the Cove Joint Venture have agreed to reimburse the Guarantor for any balance that may become due under the Loan Guarantee, of which our share is up to approximately $10.9 million.

 

Starting in 2013, the Cove has been undergoing an extensive refurbishment which is substantially completed. The Members used the remaining proceeds from the Loan and invested additional capital as necessary to complete the refurbishment. The Guarantor has provided an additional guarantee of up to approximately $13.4 million (the “Refurbishment Guarantee”) to provide any necessary funds to complete the remaining renovations as defined in the Loan. The Members have agreed to reimburse the Guarantor for any balance that may become due under the Refurbishment Guarantee, of which the Company’s share is up to approximately $3.3 million.

 

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On March 21, 2017, the 40 East End Ave. Joint Venture obtained financing from a financial institution of up to $85.3 million (the “Mortgage Payable”) for the land acquisition and construction of the 40 East End Ave. Project. The Mortgage Payable initially matures on September 21, 2020 but may be further extended one additional year, subject to satisfaction of certain conditions. The Mortgage Payable bears interest at Libor plus 4.50% (subject to floor of 5.00%) and is collateralized by the 40 East End Ave. Project. During the initial term, the monthly interest due on the Mortgage Payable is funded under the remaining availability under the Mortgage Payable and thereafter, interest is payable monthly and principal payments are required to be made from condominium sales proceeds. As of September 30, 2018, the outstanding principal balance of the Mortgage Payable was approximately $47.2 million and the remaining availability was approximately $38.1 million. The Company’s Sponsor (the “40 East End Guarantor”) has provided certain guarantees with respect to the Mortgage Payable, including a completion guarantee and a carry costs guarantee for the 40 East End Ave. Project. The Members have agreed to reimburse the 40 East End Guarantor for any balance that may become due under the guarantees, of which the Company’s share is 33.3%.

 

In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make certain payments to our Advisor. During our organization and offering stage, we made payments to the Dealer Manager for selling commissions and dealer manager fees. During this stage, we also made payments to our Advisor for reimbursement of certain other organization and offering expenses.

 

In connection with our Offering, selling commissions and dealer manager fees were paid to the Dealer Manager or soliciting dealers, as applicable, pursuant to various agreements, and other third-party offering costs such as registration fees, due diligence fees, marketing costs, and professional fees were accounted for as a reduction against additional paid-in capital as costs were incurred. Any organizational costs were accounted for as general and administrative costs. During the three months ended March 31, 2017, we incurred approximately $2.3 million of selling commissions and deal manager fees and $0.2 million of other offering costs. We did not incur any of these costs subsequent to the termination of the Offering.

 

From our inception through March 31, 2017 (the termination date of the Offering), we incurred approximately $7.6 million in selling commissions and dealer manager fees and $3.2 million of other offering costs in connection with the public offering of shares of our common stock.

 

We have agreements with the Advisor to pay certain fees, in exchange for services performed by the Advisor and/or its affiliated entities.

 

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

 

   For the Three Months Ended
September 30,
   For the Nine Months Ended
September 30,
 
   2018   2017   2018   2017 
Acquisition fees(1)  $-   $-   $-   $573,750 
Asset management fees (general and administrative costs)   157,338    156,112    470,202    417,919 
Total  $157,338   $156,112   $470,202   $991,669 

 

(1)An acquisition fee of $573,750 paid to our Advisor in connection with the acquisition of our investment in the Cove Joint Venture during the first quarter of 2017 was capitalized and is reflected in the carrying value of our investment in the Cove Joint Venture which is included in unconsolidated affiliated real estate entities on the consolidated balance sheets.

 

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 our Advisor and our independent directors. During our acquisition and development stage, payments include asset acquisition fees and financing coordination fees, and the reimbursement of acquisition-related expenses to our Advisor. During our operational stage, we pay our Advisor an asset management fee or asset management participation or construction management fees. We also reimburse our Advisor and its affiliates for actual expenses it incurs for administrative and other services provided for us. Upon the liquidation of assets, we may pay our Advisor or its affiliates a real estate disposition commission.

 

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Summary of Cash Flows

 

The following summary discussion of our cash flows is based on the 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,
2018
   For the Nine
Months Ended
September 30,
2017
 
         
Cash flows provided by operating activities  $2,104,480   $2,775,355 
Cash flows used in investing activities   (2,529,199)   (27,537,856)
Cash flows (used in)/provided by financing activities   (7,693,967)   18,181,961 
Net change in cash and cash equivalents   (8,118,686)   (6,580,540)
Cash and cash equivalents, beginning of the year   14,064,001    21,874,240 
Cash and cash equivalents, end of the period  $5,945,315   $15,293,700 

 

Our principal sources of cash flow were derived from operating cash flows provided by our 105-109 W. 28th Street Preferred Investment. In the future, we expect that cash available on hand and earnings, redemptions and/or distributions from our investments will provide us with sufficient resources to fund our operating expenses, any scheduled debt service and any monthly distributions authorized by the Board of Directors.

 

Our principal demands for liquidity currently are expected to be acquisition and development activities, including contributions to our investments in unconsolidated affiliated real estate entities and distributions. The principal sources of funding for our operations are currently expected to be available cash on hand and operating cash flows.

 

Operating activities

 

The net cash provided by operating activities of $2.1 million during the 2018 period primarily related to our net income of $0.1 million adjusted by adding back our loss from investments in unconsolidated affiliated real estate entities of $2.3 million reduced by approximately $0.3 million associated with the net changes in operating assets and liabilities.

 

Investing activities

 

The cash used in investing activities of $2.5 million during the 2018 period consisted of capital contributions to our investments in unconsolidated affiliated real estate entities.

 

Financing activities

 

The net cash used by financing activities of $7.7 million during the 2018 period principally consists of distributions of $5.3 million to common stockholders and redemptions and cancellation of common stock of $2.4 million.

 

We believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.

 

DRIP and Share Repurchase Program

 

Our DRIP provided our stockholders with an opportunity to purchase additional shares of our common stock at a discount by reinvesting distributions. Our Offering provided for 10.0 million shares available for issuance under our DRIP which were offered at a discounted price equivalent to 95% of our Primary Offering price per Common Share. Through May 15, 2017 (the termination date of the DRIP), 128,554 shares of common stock had been issued under our DRIP.

 

On April 21, 2017, our Board of Directors approved the termination of our DRIP effective May 15, 2017. All future distributions are currently expected to be in the form of cash.

 

Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to us, subject to restrictions. From our date of inception through December 31, 2017, we repurchased 39,034 shares of common stock pursuant to our share repurchase program at an average price per share of $9.73 per share. For the nine months ended September 30, 2018, we repurchased 259,753 shares of common stock pursuant to our share repurchase program at an average price per share of $9.35 per share. We funded share repurchases for the periods noted above from the cumulative proceeds of the sale of our shares pursuant to our DRIP (prior to its termination) and available cash on hand.

 

The Board of Directors reserves the right to terminate our share repurchase program without cause by providing written notice of termination of the share repurchase program to all stockholders.

 

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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 define FFO, a non-GAAP measure, consistent with the standards set forth in the White Paper on FFO approved by the board of governors of NAREIT, as revised in February 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding gains or losses from sales of property and real estate related impairments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.

 

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

 

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

 

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

 

We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline") issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction-related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and 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.

 

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

 

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

 

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

 

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,
 
   2018   2017   2018   2017 
Net (loss)/income  $(104,553)  $80,583   $105,800   $393,294 
FFO adjustments:                    
Adjustments to equity earnings from unconsolidated affiliated real estate entities, net   656,981    715,911    1,845,104    1,907,349 
FFO   552,428    796,494    1,950,904    2,300,643 
MFFO adjustments:                    
                     
Other adjustments:                    
Acquisition and other transaction related costs expensed   -    -    -    - 
MFFO   552,428    796,494    1,950,904    2,300,643 
Straight-line rent(1)   -    -    -    - 
MFFO - IPA recommended format  $552,428   $796,494   $1,950,904   $2,300,643 
                     
Net (loss)/income  $(104,553)  $80,583   $105,800   $393,294 
Less: net income attributable to noncontrolling interests   -    -    -    - 
Net (loss)/income applicable to Company's common shares  $(104,553)  $80,583   $105,800   $393,294 
Net (loss)/income per common share, basic and diluted  $(0.01)   0.01   $0.01   $0.05 
                     
FFO  $552,428   $796,494   $1,950,904   $2,300,643 
Less: FFO attributable to noncontrolling interests   -    -    -    - 
FFO attributable to Company's common shares  $552,428   $796,494   $1,950,904   $2,300,643 
FFO per common share, basic and diluted  $0.06   $0.09   $0.22   $0.27 
                     
MFFO - IPA recommended format  $552,428   $796,494   $1,950,904   $2,300,643 
Less: MFFO attributable to noncontrolling interests   -    -    -    - 
MFFO attributable to Company's common shares  $552,428   $796,494   $1,950,904   $2,300,643 
                     
Weighted average number of common shares outstanding, basic and diluted   8,703,425    8,955,440    8,777,672    8,451,031 

 

(1)Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance.

 

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Distribution Payments

 

On August 15, 2018, September 14, 2018 and October 15, 2018, the Company paid distributions for the months ended July 31, 2018, August 31, 2018 and September 30, 2018, respectively, totaling $1.7 million. The distributions were paid in cash.

 

The table below presents our cumulative FFO and distributions declared:

 

   For the period
September 9, 2014
 
   (date of inception)
through
 
   September 30, 2018 
FFO  $6,420,488 
Distributions declared  $14,565,904 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or rates. Our interest rate risk management objectives with respect to our long-term debt will be to limit the impact of interest rate changes in earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars, and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes. We do not anticipate having any foreign operations and thus we do not expect to be exposed to foreign currency fluctuations.

 

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 the nine months ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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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.

 

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, we did not sell any unregistered securities.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit

Number

  Description
     
31.1*   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2*   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1*   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
32.2*   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
101*   XBRL (eXtensible Business Reporting Language).The following financial information from Lightstone Real Estate Income Trust Inc. on Form 10-Q for the quarter ended September 30, 2018, filed with the SEC on November 14, 2018, formatted in XBRL includes: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Operations, (3) Consolidated Statements of Stockholders’ Equity, (4) Consolidated Statements of Cash Flows, and (5) the Notes to the Consolidated Financial Statement.

 

 *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 REAL ESTATE INCOME TRUST INC.
   
Date: November 14, 2018 By:   /s/ David Lichtenstein
  David Lichtenstein
 

Chairman and Chief Executive Officer

(Principal Executive Officer)

 

Date: November 14, 2018 By:   /s/ Seth Molod
  Seth Molod
 

Chief Financial Officer

(Duly Authorized Officer and Principal Financial and Accounting Officer)

 

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