ITEM 1. BUSINESS:
General Description of Business
Structure
The Lightstone REIT is a Maryland corporation, formed on June 8, 2004 and subsequently qualified as a real estate investment trust (“REIT”) during year ending December 31, 2006. The Lightstone REIT was formed primarily for the purpose of engaging in the business of investing in and owning commercial and residential real estate properties located throughout the United States.
The Lightstone REIT is structured as an umbrella partnership real estate investment trust, (“UPREIT”), and substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT, L.P. (the “Operating Partnership”), a Delaware limited partnership formed on July 12, 2004. The Lightstone REIT as the general partner, held a 98% interest in the Operating Partnership as of December 31, 2018 (See Noncontrolling Interests below for discussion of other owners of the Operating Partnership).
The Lightstone REIT and the Operating Partnership and its subsidiaries are collectively referred to as the “Company” and the use of “we,” “our,” “us” or similar pronouns in this annual report refers to the Lightstone REIT, its Operating Partnership or the Company as required by the context in which such pronoun is used.
The Lightstone REIT is managed by Lightstone Value Plus REIT, LLC (the “Advisor”), an affiliate of The Lightstone Group, LLC (the “Sponsor”), under the terms and conditions of an advisory agreement. The Sponsor and Advisor are majority owned and controlled by David Lichtenstein, the Chairman of our Board of Directors and its Chief Executive Officer.
We own and manage a portfolio of commercial and residential properties located throughout the United States. We historically have operated within four operating segments, which are our Retail Segment, Multi-Family Residential Segment, Industrial Segment and Hospitality Segment. However, during 2017 we sold our only remaining consolidated hospitality property and therefore, no longer have a Hospitality Segment as of December 31, 2018. The Unallocated amounts include our investments in real estate companies which are unconsolidated, our other real estate related-investments, and our corporate operations. As of December 31, 2018, on a collective basis, we (i) wholly or majority owned and consolidated the operating results and financial condition of two retail properties containing a total of approximately 0.5 million square feet of gross leasable area (“GLA”), 10 industrial properties containing a total of approximately .5 million square feet of GLA (on February 12, 2019, we disposed of the 10 industrial properties) and one multi-family residential property containing a total of 199 units. All of our properties are located within the United States. As of December 31, 2018, the retail properties, the industrial properties and the multi-family residential property were 83%, 72% and 94% occupied based on a weighted-average basis, respectively.
Acquisition and Dispositions Activity
The following summarizes our acquisition and disposition activities during the years ended December 31, 2018 and 2017:
Acquisition
Lower East Side Moxy Hotel
On December 3, 2018, we, through a subsidiary of the Operating Partnership, acquired three parcels of land located at 147-151 Bowery, New York, New York (collectively, the “Bowery Land”) for aggregate consideration of approximately $56.5 million, excluding closing and other acquisition related costs, on which we intend to develop and construct a 296-room Marriott Moxy hotel (the “Lower East Side Moxy Hotel”). Additionally, on December 6, 2018, we acquired certain air rights located at 329 Broome Street, New York, New York (the “Air Rights”) for approximately $2.4 million, excluding closing and other acquisition related costs. The Company intends to use the Air Rights in connection with the development and construction of the Lower East Side Moxy Hotel. In connection with the acquisition of the Bowery Land and the Air Rights, the Advisor earned an acquisition fee equal to 2.75% of the gross contractual purchase price, which was approximately $1.6 million.
On December 3, 2018, we entered into a mortgage loan collateralized by the Bowery Land and the Air Rights (the “Bowery Mortgage”) for approximately $35.6 million. The Bowery Mortgage has a term of two years, bears interest at LIBOR+4.25% and requires monthly interest-only payments through its stated maturity with the entire unpaid balance due upon maturity. In connection with the acquisition of the Bowery Land and the Air Rights, we received aggregate proceeds of $32.6 million under the Bowery Mortgage and paid approximately $26.3 million of cash. As a result, the Bowery Mortgage had an outstanding balance and remaining availability of $32.6 million and $3.0 million, respectively, as of December 31, 2018.
As of December 31, 2018, the Company has incurred and capitalized to construction in progress an aggregate of $63.3 million related to the acquisition of the Bowery Land and Air Rights and other development costs attributable to the Lower East Side Moxy Hotel.
Dispositions
Gulf Coast Industrial Portfolio
The Company had an outstanding non-recourse mortgage loan (the “Gulf Coast Industrial Portfolio Mortgage”) which was in default and due on demand. The Gulf Coast Industrial Portfolio Mortgage was initially cross-collateralized by a portfolio of 14 industrial properties (collectively, the “Gulf Coast Industrial Portfolio”) located in New Orleans, Louisiana (seven properties), Baton Rouge, Louisiana (three properties) and San Antonio, Texas (four properties).
We did not meet certain debt service coverage ratios on the Gulf Coast Industrial Portfolio Mortgage, and as a result, the lender elected to retain the excess cash flow from these properties beginning in July 2011. During the third quarter of 2012, the Gulf Coast Industrial Portfolio Mortgage was transferred to a special servicer, who discontinued scheduled debt service payments and notified us that the Gulf Coast Industrial Portfolio Mortgage was in default and although originally due in February 2017 became due on demand.
On June 5, 2018, the special servicer for the Gulf Coast Industrial Portfolio Mortgage completed a partial foreclosure of the Gulf Coast Industrial Portfolio pursuant to which it foreclosed on the four properties located in San Antonio, Texas (the “San Antonio Assets”). The San Antonio Assets were sold in a foreclosure sale by the special servicer for an aggregate amount of approximately $20.7 million.
Upon consummation of the foreclosure sale, the buyers assumed the significant risks and rewards of ownership and took legal title and physical possession of the San Antonio Assets for the agreed upon sales price of $20.7 million (the “San Antonio Assets Disposition”). We simultaneously received an aggregate credit of approximately $20.7 million which we applied against the total outstanding indebtedness (approximately $19.6 million and $1.1 million of principal and accrued interest payable, respectively) of the Gulf Coast Industrial Portfolio Mortgage.
The aggregate carrying value of the assets transferred and the liabilities extinguished in connection with the foreclosure of the San Antonio Assets were approximately $13.6 million and $20.7 million, respectively.
Since our performance obligations were met at the closing of the foreclosure sales and we have no continuing involvement with the San Antonio Assets, an aggregate gain on disposition of real estate of approximately $7.1 million was recognized during the second quarter of 2018.
The disposition of the San Antonio Assets did not qualify to be reported as discontinued operations since their disposition did not represent a strategic shift that had a major effect on our operations and financial results. Accordingly, the operating results of the San Antonio Assets were reflected in our results from continuing operations.
On February 12, 2019, we and the current holder (the “Lender”) of the Gulf Coast Industrial Portfolio Mortgage entered into an assignment agreement (the “Assignment Agreement”) pursuant to which we assigned our membership interests in the remaining 10 industrial properties of the Gulf Coast Industrial Portfolio located in New Orleans, Louisiana and Baton Rouge, Louisiana (collectively, the “Louisiana Assets”) to the Lender with an effective date of February 7, 2019. Under the terms of the Assignment Agreement, the Lender assumed the significant risks and rewards of ownership and took legal title and physical possession of the Louisiana Assets and assumed all related liabilities, including the Gulf Coast Industrial Portfolio Mortgage and its accrued and unpaid interest, and released us of any claims against the liabilities assumed.
The aggregate carrying value of the assets and liabilities transferred in connection with our assignment of our ownership interests in the Louisiana Assets to the Lender was approximately $37.0 million and $49.6 million, respectively (as of December 31, 2018).
As a result, as of February 7, 2019, we have fully satisfied all of our obligations with respect to the Gulf Coast Industrial Portfolio Mortgage and all amounts accrued but not yet paid for interest (including default interest) and no amounts are due to the Lender. Additionally, we have no continuing involvement with the assets of Gulf Coast Industrial Portfolio.
DoubleTree - Danvers
On September 7, 2017, we disposed of a hotel and water park (the “DoubleTree - Danvers”) located in Danvers, Massachusetts to an unrelated third party for aggregate consideration of approximately $31.5 million. In connection with the disposition, we recorded a gain on the disposition of real estate of approximately $10.5 million during the third quarter of 2017. The disposition of the DoubleTree - Danvers did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift that had a major effect our operations and financial results. Accordingly, the operating results of the DoubleTree - Danvers are reflected in our results from continuing operations for all periods presented through its date of disposition.
Oakview Plaza
The mortgage indebtedness (the “Oakview Plaza Mortgage”) secured by Oakview Plaza matured in January 2017 and was not repaid which constituted a maturity default. The Oakview Plaza Mortgage was subsequently transferred to a special servicer and on September 15, 2017, ownership of Oakview Plaza was transferred to the lender via foreclosure (the “Oakview Plaza Foreclosure”). The carrying value of the assets transferred and the liabilities extinguished in connection with the Oakview Plaza Foreclosure both approximated $27.0 million. The balance of the Oakview Plaza Mortgage as of the date of foreclosure was $25.6 million and the associated accrued default interest was $1.0 million. The disposition of Oakview Plaza did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift that had a major effect on our operations and financial results. Accordingly, the operating results of the Oakview Plaza are reflected in our results from continuing operations for all periods presented through its date of disposition.
Joint Venture 2017 & 2018 Activity
During 2015, the Company formed a joint venture (the “Joint Venture”) with Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a related party real estate investment trust also sponsored by the Company’s Sponsor. We have a 2.5% membership interest in the Joint Venture and Lightstone II holds the remaining 97.5% membership interest. The Joint Venture previously acquired our membership interests in a portfolio of 11 hotels in a series of transactions completed during 2015. During the third quarter of 2017, the Joint Venture sold its ownership interests in four of the hotels to an unrelated third party and as a result, holds ownership interests in the seven remaining hotels as well as an additional hotel it acquired on November 6, 2017 from an unrelated third party.
We account for our 2.5% membership interest in the Joint Venture under the cost method and as of December 31, 2018 and 2017, the carrying value of its investment was $1.3 million and $1.5 million, respectively, which is included in investment in related parties on the consolidated balance sheets.
Noncontrolling Interest - Partners of Operating Partnership
On July 6, 2004, the Advisor contributed $2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The limited partner has the right to convert operating partnership units into cash or, at our option, an equal number of our common shares, as allowed by the limited partnership agreement.
In connection with the Company’s initial public offering, Lightstone SLP, LLC, an affiliate of the Advisor, purchased an aggregate of $30.0 million of special general partner interests (“SLP Units”) in the Operating Partnership at a cost of $100,000 per unit.
In addition, 497,209 units of common limited partnership interest in the Operating Partnership (“Common Units”) were issued during the years ended December 31, 2008 and 2009 and remain outstanding.
Other Noncontrolling Interests in Consolidated Subsidiaries
Other noncontrolling interests in consolidated subsidiaries include ownership interests in Pro-DFJV Holdings LLC (“PRO”) held by the Company’s Sponsor and 50-01 2nd St. Associates LLC (the “2nd Street Joint Venture”) held by the Company’s Sponsor and other affiliates. PRO’s holdings principally consist of Marco OP Units and Marco II OP Units. The 2nd Street Joint Venture owns Gantry Park, a multi-family apartment building located in Queens, New York.
Operating Partnership Activity
Through our Operating Partnership, we have and will continue to acquire and operate or develop commercial, residential, and hospitality properties and make real estate-related investments, principally in the United States. Our commercial holdings currently consist of retail (primarily multi-tenant shopping centers) and industrial properties. The Company’s real estate investments have been and are expected to continue to be held by us alone or jointly with other parties. Since inception, we have completed the following significant property and investments transactions:
Property and Investments Transactions
·St. Augustine Outlet Center: In March 2006, we completed the acquisition of an outlet center located in St. Augustine, Florida (the “St. Augustine Outlet Center”). In 2007, we purchased an adjacent 8.5-acre parcel of undeveloped land, including certain development rights, and used a portion of it to expand the St. Augustine Center, which was completed during 2008.
·Southeastern Michigan Multi-Family Properties: In June 2006 we completed the acquisition of the Southeastern Michigan Multi-Family Properties. We subsequently sold three and the remaining one multi-family apartment communities contained in the Southeastern Michigan Multi-Family Properties in May 2016 and July 2016, respectively.
·Oakview Plaza: In December 2006, we completed the acquisition of a retail power center located in Omaha, Nebraska ( “Oakview Plaza”). Ownership of Oakview Plaza was subsequently transferred to the lender via foreclosure in September 2017.
·1407 Broadway: In January 2007, we acquired a 49.0% ownership investment in 1407 Broadway Mezz II, LLC (“1407 Broadway”), which had a sub-leasehold interest (the “Sub-Leasehold Interest”) in a ground lease to an office building located at 1407 Broadway Street in New York, New York. 1407 Broadway subsequently sold the Sub-Leasehold Interest in April 2015.
·Gulf Coast Industrial Portfolio: In February 2007, we purchased a portfolio of industrial properties (collectively, the” Gulf Coast Industrial Portfolio”) located in New Orleans, Louisiana (seven properties), Baton Rouge, Louisiana (three properties) and San Antonio, Texas (four properties). The four industrial properties in Texas were subsequently sold in a foreclosure sale in the second quarter of 2018 and the Company assigned its membership interests in the remaining 10 industrial properties located in Louisiana to the holder of the non-recourse mortgage indebtedness secured by the properties with an effective date of February 7, 2019.
·Brazos Crossing: In June 2007, we purchased a land parcel in Lake Jackson, Texas, on which we subsequently completed the development of Brazos Crossing during the first quarter of 2008. We subsequently sold Brazos Crossing in July 2012.
·Camden Multi-Family Properties: In November 2007, we purchased the Camden Multi-Family Properties initially consisting of five apartment communities located in Tampa, Florida (one property), Charlotte, North Carolina (two properties) and Greensboro, North Carolina (two properties). In 2010, we subsequently disposed of three of the apartment communities (one located in Tampa, Florida, one located in Charlotte, North Carolina and one located in Greensboro, North Carolina) through foreclosure transactions. In September 2014 we sold the remaining two apartment communities.
·Houston Extended Stay Hotels: In October 2007, we purchased two Extended Stay Hotels located in Houston, Texas (the “Houston Extended Stay Hotels”), which we subsequently sold in December 2013.
·Sarasota: In November 2007, we purchased Sarasota, which we subsequently sold in July 2014.
·Park Avenue: In April 2008, we made a contribution in exchange for membership interests in a wholly owned subsidiary of Park Avenue Funding, LLC, an affiliated real estate lending company (“Park Avenue”). During 2010, we received our final redemption payments from Park Avenue and no longer have any investment in Park Avenue.
·Mill Run: In March 2008, we acquired a 22.54% ownership interest in Mill Run, LLC (“Mill Run”), which owned two retail properties located in Orlando, Florida, and in August 2009, we acquired an additional 14.26% ownership interest in Mill Run. We disposed of all of our ownership interests in Mill Run in August 2010.
·POAC: In March 2009, we acquired a 25.0% ownership interest in Prime Outlets Acquisition Company (“POAC”), which owned a portfolio of 18 retail outlet malls located throughout the Unites States, Grand Prairie Holdings LLC (“GPH”) and Livermore Holdings LLC (“LVH”). In August 2009, we acquired an additional 15.0% ownership interest in POAC. We disposed of all of our ownership interests in POAC, excluding GPH and LVH, in August 2010. We subsequently disposed of 50.0% of our ownership interests in both GPH and LVH in December 2011 and our remaining 50.0% ownership interests in both GPH and LVH in December 2012.
·Everson Pointe: In December 2010, we acquired a retail shopping center located in Snellville, Georgia (“Everson Pointe”), which we subsequently sold in December 2013.
·DoubleTree - Danvers: In March 2011, we acquired an 80.0% ownership interest in a hotel and water park (the “CP Boston Property”) located in Danvers, Massachusetts, and in February 2012, we acquired the remaining 20.0% ownership interest. During 2012, the CP Boston Property was rebranded to a DoubleTree Suites by Hilton and thereafter referred to as the “DoubleTree - Danvers.” We subsequently sold the DoubleTree - Danvers in September 2017.
·Rego Park Joint Venture: In April 2011, we acquired, through a joint venture partnership (the “Rego Park Joint Venture”), a 90.0% ownership interest in a second mortgage loan secured by a residential apartment complex located in Queens, New York. In June 2013, all amounts due under the mortgage loan owned by the Rego Park Joint Venture were paid in full and subsequently distributed to its members.
·Mortgage Loan Receivable: In June 2011, we acquired a mortgage loan secured by a Holiday Inn Express hotel located in East Brunswick, New Jersey. In June 2017, the mortgage loan was paid in full.
·Gantry Park: In August 2011, we acquired, through the 2nd Street Joint Venture, an initial 75.0% ownership interest in a fee interest in land located at 50-01 2nd Street in Long Island City, Queens, New York. During the third quarter of 2012, we put approximately 15.8% of our membership interest in the 2nd Street Joint Venture back to our Sponsor and other related parties and as a result, now have an approximately 59.2% membership interest in the 2nd Street Joint Venture. During the third quarter of 2013, the Second Street Joint Venture completed the development of a multi-family residential project containing 199 units ( “Gantry Park”).
·Crowe’s Crossing: In October 2011, we acquired Crowe’s Crossing, which we subsequently sold in January 2014.
·Courtyard - Parsippany: In October 2011, we acquired a mortgage loan secured by a Courtyard by Marriott hotel located in Parsippany, New Jersey (the “Courtyard - Parsippany”). We subsequently took title to the Courtyard - Parsippany through a restructuring of the mortgage loan in July 2012. We contributed our interest in the Courtyard - Parsippany to the Joint Venture in February 2015.
·DePaul Plaza: In November 2011, we acquired a retail center located in Bridgeton, Missouri (“DePaul Plaza”)
·The Hotel Portfolio: In December 2012, we acquired a portfolio comprised of three hotels, consisting of two hotels located in West Des Moines, Iowa (the “Fairfield Inn - Des Moines” and the “SpringHill Suites - Des Moines”) and one hotel located in Willoughby, Ohio (the “Courtyard - Willoughby” and collectively, the “Hotel Portfolio”). We subsequently contributed our interests in the Hotel Portfolio to the Joint Venture in January 2015.
·Holiday Inn Express - Auburn: In January 2013, we acquired a Holiday Inn Express Hotel & Suites (the “Holiday Inn Express - Auburn”) located in Auburn, Alabama. We subsequently contributed our interest in Holiday Inn Express - Auburn to the Joint Venture in June 2015.
·Baton Rouge Hotel Portfolio: In May 2013, we acquired a portfolio comprised of two hotels located in Baton Rouge, Louisiana (the “Courtyard - Baton Rouge” and the “Residence Inn - Baton Rouge”, collectively the “Baton Rouge Hotel Portfolio”). We subsequently contributed our interests in the Courtyard - Baton Rouge and the Residence Inn - Baton Rouge to the Joint Venture in February 2015 and June 2015, respectively. The Joint Venture subsequently sold its interests in the Baton Rouge Portfolio in July 2017.
·Arkansas Hotel Portfolio: In June 2013, we acquired a portfolio comprised of two hotels located in Jonesboro, Arkansas (the Fairfield Inn - Jonesboro) and Rogers, Arkansas (the “Aloft - Rogers”, collectively, the “Arkansas Hotel Portfolio”). We subsequently contributed our interests in the Arkansas Hotel Portfolio to the Joint Venture in June 2015. The Joint Venture subsequently sold its interests in the Arkansas Hotel Portfolio in July 2017.
·Florida Hotel Portfolio: In August 2013, we acquired a portfolio comprised of two hotels located in Miami, Florida (the “Hampton Inn - Miami”) and Fort Lauderdale, Florida (the “Hampton Inn & Suites - Fort Lauderdale”, collectively the “Florida Hotel Portfolio”). We subsequently contributed our interests in the Florida Hotel Portfolio to the Joint Venture in January 2015.
·Lower East Side Moxy Hotel: In December 2018, we acquired three parcels of land located at 147-151 Bowery, New York, New York and certain air rights located at located at 329 Broome Street, New York, New York. The land and air rights were acquired for the development and construction of a 296-room Marriott Moxy hotel.
·Investments in Related parties: We have entered into several agreements with various related party entities that provide for us to make preferred contributions pursuant to certain instruments (the “Preferred Investments”) that entitle us to certain prescribed monthly preferred distributions. The Preferred Investments are classified as held-to-maturity securities, recorded at cost and included in investments in related parties on the consolidated balance sheets.
The Preferred Investments (dollars in thousands) are summarized as follows:
·365 Bond Street Preferred Investment
In March 2014, we entered into an agreement with various related party entities that provided for us to make contributions of up to $35.0 million, with an additional contribution of up to $10.0 million subject to the satisfaction of certain conditions, which were subsequently met during October 2014, in an affiliate of our Sponsor which owns a parcel of land located at 365 Bond Street in Brooklyn, New York on which it constructed a residential apartment project. Contributions were made pursuant to an instrument, the “365 Bond Street Preferred Investment,” that was entitled to monthly preferred distributions at a rate of 12% per annum and was redeemable by us upon the occurrence of certain events. During the year ended December 31, 2016, we redeemed the entire 365 Bond Street Preferred Investment of $42.2 million.
·40 East End Avenue Preferred Investment
In May 2015, we entered into an agreement with various related party entities that provided for us to make contributions of up to $30.0 million in a related party entity, which is now a joint venture between an affiliate of our Sponsor and Lightstone Real Estate Income Trust Inc., (“Lightstone IV”), a related party REIT also sponsored by our Sponsor, which owns a parcel of land located at the corner of 81st Street and East End Avenue in the Upper East Side of New York City on which it is constructing a luxury residential project consisting of 29 condominiums. Contributions were made pursuant to an instrument, the “40 East End Avenue Preferred Investment,” that is entitled to monthly preferred distributions, initially at a rate of 8% per annum which increased to 12% per annum upon procurement of construction financing in March 2017, and is redeemable by us beginning on April 27, 2022.
·30-02 39th Avenue Preferred Investment
In August 2015, we entered into certain agreements that provided for us to make aggregate contributions of up to $50.0 million in various affiliates of our Sponsor which own a parcel of land located at 30-02 39th Avenue in Long Island City, Queens, New York on which they are constructing a residential apartment project. On March 31, 2017, the 30-02 39th Preferred Investment was amended so that our total aggregate required contributions would decrease by $40.0 million to $10.0 million. Contributions were made pursuant to instruments, the “30-02 39th Street Preferred Investment,” that were entitled to monthly preferred distributions between 9% and 12% per annum and is redeemable by us upon the occurrence of certain capital transactions. As of December 31, 2018, there were no remaining unfunded contributions and the outstanding 30-02 39th Preferred Investment is entitled to monthly preferred distributions at a rate of 12% per annum. On February 11, 2019, we redeemed the entire 30-02 39th Street Preferred Investment of $ 10.0 million.
·485 7th Avenue Preferred Investment
In December 2015, we entered into an agreement with various related party entities that provided for us to make contributions of up to $60.0 million in an affiliate of our Sponsor which owns a parcel of land located at 485 7th Avenue, New York, New York on which they constructed a 612-room Marriott Moxy hotel, which opened during the third quarter of 2017. Contributions were made pursuant to an instrument, the “485 7th Avenue Preferred Investment,” that were entitled to monthly preferred distributions at a rate of 12% per annum and was redeemable by us upon the occurrence of certain capital transactions. In January 2018, the Company redeemed $37.5 million of the 485 7th Avenue Preferred Investment. In April 2018, the Company redeemed the remaining $22.5 million of the 485 7th Avenue Preferred Investment.
·East 11th Street Preferred Investment
On April 21, 2016, we entered into an agreement, as amended, with various related party entities that provided for us to make contributions of up to $57.5 million in an affiliate of our Sponsor (the “East 11th Street Developer”) which owned two residential buildings located at 112-120 East 11th Street and 85 East 10th Street in New York, New York. The East 11th Street Developer is developing a hotel at 112-120 East 11th Street (the “East 11th Street Project”). Contributions were made pursuant to an instrument, the “East 11th Street Preferred Investment,” that entitles us to monthly preferred distributions at a rate of 12% per annum. We may redeem our investment in the East 11th Street Preferred Investment upon the consummation of certain capital transactions. Additionally, the East 11th Street Developer may redeem our investment at any time or upon the consummation of any capital transaction. Any redemption by us or the East 11th Street Developer under the East 11th Street Preferred Investment will be made at an amount equal to the amount we have invested plus a 12.0% annual cumulative, pre-tax, non-compounded return on the aggregate amount we have invested. During 2018, the Company redeemed $14.5 million of the East 11th Street Preferred Investment.
·Miami Moxy Preferred Investment
On September 30, 2016, we entered into an agreement with various related party entities that provides for us to make contributions of up to $20.0 million in an affiliate of our Sponsor (the “Miami Moxy Developer”) which owns parcels of land located at 915 through 955 Washington Avenue in Miami Beach, Florida, on which the Miami Moxy Developer is developing a 205-room Marriott Moxy hotel (the “Miami Moxy”) whose construction is projected to be completed during the last quarter of 2021. Contributions are made pursuant to an instrument, the “Miami Moxy Preferred Investment,” that entitles us to monthly preferred distributions at a rate of 12% per annum. We may redeem our investment in the Miami Moxy Preferred Investment upon the consummation of certain capital transactions. Additionally, the Miami Moxy Developer may redeem our investment at any time or upon the consummation of any capital transaction. Any redemption by us or the Miami Moxy Developer under the Miami Moxy Preferred Investment will be made at an amount equal to the amount we have invested plus a 12.0% annual cumulative, pre-tax, non-compounded return on the aggregate amount we have invested.
The Joint Venture
During 2015, the Company formed the Joint Venture with Lightstone II. We have a 2.5% membership interest in the Joint Venture and Lightstone II holds the remaining 97.5% membership interest. The Joint Venture previously acquired our membership interests in a portfolio of 11 hotels in a series of transactions completed during 2015. During the third quarter of 2017, the Joint Venture sold its ownership interests in four of the hotels to an unrelated third party and as a result, holds ownership interests in the seven remaining hotels as well as an additional hotel it acquired on November 6, 2017 from an unrelated third party.
Related Party
Our business is managed by the Advisor, an affiliate of our Sponsor, under the terms and conditions of an advisory agreement. Our Sponsor and Advisor are owned and controlled by David Lichtenstein, the Chairman of our Board of Directors. Our Sponsor is also the Sponsor of (i) Lightstone II, (iii) Lightstone Value Plus Real Estate Investment Trust III, Inc. and (iv) Lightstone Real Estate Income Trust Inc., additionally, on February 10, 2017, an affiliate of our Sponsor became the advisor of (v) Behringer Harvard Opportunity REIT I, Inc (which was subsequently liquidated in August 2018). and (vi) Lightstone Value Plus Real Estate Investment Trust V, Inc. (formerly Behringer Harvard Opportunity REIT II, Inc.), collectively, “Sponsor’s Other Public Programs”, all programs with similar investment objectives as ours.
Acquired properties and development activities may be managed by affiliates of Lightstone Value Plus REIT Management LLC (the “Property Manager”).
Our Advisor and its affiliates, the Property Manager and Lightstone SLP, LLC are each related parties of the Company. Certain of these entities have received and will continue to receive compensation and fees for services for the investment and management of our assets. These entities received fees during our offering (which was completed on October 10, 2008), and have and will continue to receive fees during its acquisition, operational and liquidation stages. The compensation level during offering stage was based on a percentage of the offering proceeds raised and the compensation levels during the acquisition and operational stages are based on the contractual purchase price of the acquired properties and the annual revenue earned from such properties, and other such fees as outlined in each of the respective agreements.
Primary Investment Objectives
Our primary investment objectives are:
·Capital appreciation; and
·Income without subjecting principal to undue risk.
Acquisition and Investment Policies
We have, to date, acquired and/or developed residential, commercial and lodging properties principally, all of which are located in the continental United States and made other real estate-related investments. Our acquisitions have included both portfolios and individual properties. Our current commercial holdings consist of retail (primarily multi-tenant shopping centers) and industrial properties and our residential property, a multi-family residential complex. We have also acquired various parcels of land and air rights related to the development and construction of real estate properties. Additionally, we have made certain preferred investments in related parties.
We may acquire the following types of real estate interests:
·Fee interests in market-rate, middle market multifamily properties at a discount to replacement cost located either in emerging markets or near major metropolitan areas. We will attempt to identify those sub-markets with job growth opportunities and demand demographics which support potential long-term value appreciation for multifamily properties.
·Fee interests in well-located, multi-tenant, community, power and lifestyle shopping centers and malls located in highly trafficked retail corridors, in selected high-barrier to entry markets and submarkets. We will attempt to identify those sub-markets with constraints on the amount of additional property supply will make future competition less likely.
·Fee interests in improved, multi-tenant, industrial properties located near major transportation arteries and distribution corridors with limited management responsibilities.
·Fee interests in improved, multi-tenant, office properties located near major transportation arteries in urban and suburban areas.
·Fee interests in lodging properties located near major transportation arteries in urban and suburban areas.
All of the properties are owned by subsidiary limited partnerships or limited liability companies. These subsidiaries are single-purpose entities that we created to own a single property, and each have no assets other than the property it owns. These entities represent a useful means of shielding our Operating Partnership from liability under state laws and will make the underlying properties easier to transfer. However, tax law disregards single-member LLCs and so it will be as if the Operating Partnership owns the underlying properties for tax purposes. Use of single-purpose entities in this manner is customary for REITs. Our independent directors are not required to approve all transactions involving the creation of subsidiary limited liability companies and limited partnerships that we use for investment in properties on our behalf. These subsidiary arrangements are intended to ensure that no environmental or other liabilities associated with any particular property can be attributed against other properties that the Operating Partnership or we will own. The limited liability aspect of a subsidiary’s form will shield parent and affiliated (but not subsidiary) companies, including the Operating Partnership and us, from liability assessed against it. No additional fees are imposed upon the REIT by the subsidiary companies’ managers and these subsidiaries are not affected our stockholders’ voting rights.
We have not and do not intend to make significant investments in single family residential properties; leisure home sites; farms; ranches; timberlands; unimproved properties not intended to be developed; or mining properties.
Not more than 10% of our total assets may be invested in unimproved real property. For purposes of this paragraph, “unimproved real properties” does not include properties acquired for the purpose of producing rental or other operating income, properties under construction and properties for which development or construction is planned within one year. Additionally, we do not invest in contracts for the sale of real estate unless in recordable form and appropriately recorded.
Although we are not limited as to the geographic area where we may conduct our operations, we have invested and may continue to invest in properties located near the existing operations of our Sponsor, in order to achieve economies of scale where possible.
Financing Strategy and Policies
We utilize leverage when acquiring and developing our properties. The number of different properties we acquire are affected by numerous factors, including, the amount of funds available to us. When interest rates on loans are high or financing is otherwise unavailable on terms that are satisfactory to us, we may purchase certain properties for cash with the intention of obtaining a loan for a portion of the purchase price or development costs at a later time. However, we have and intend to continue to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to our stockholders.
Our charter provides that the aggregate amount of borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. As of December 31, 2018, our total borrowings represented 44% of net assets.
We have financed our property acquisitions and development activities through a variety of means, including but not limited to individual non-recourse mortgages and through the exchange of an interest in the property for limited partnership units of the Operating Partnership. Generally, though not exclusively, we intend to seek to finance our investments with debt which will be on a non-recourse basis. However, we may, secure recourse financing or provide a guarantee to lenders, if we believe this may result in more favorable terms. We had $150.6 million in outstanding debt obligations as of December 31, 2018.
Distribution Objectives
U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles in the United States, or GAAP) determined without regard to the deduction for dividends paid and excluding any net capital gain. In order to continue to qualify for REIT status, we may be required to make distributions in excess of cash available.
Distributions are authorized at the discretion of our Board of Directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. Such analyses may include actual and anticipated operating cash flow, capital expenditure needs, general financial and market conditions, proceeds from asset sales and other factors that our board of directors deem relevant. Our Board of Directors’ decisions will be substantially influenced by their obligation to ensure that we maintain our federal tax status as a REIT. We commenced quarterly distributions beginning February 1, 2006. We may fund future distributions from borrowings if we have not generated sufficient cash flow from our operations to fund such distributions. Our ability to continue to pay regular distributions and the size of these distributions will depend upon a variety of factors. For example, our borrowing policy permits us to incur short-term indebtedness, having a maturity of two years or less, and we may have to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. We cannot assure that regular distributions will continue to be made or that we will maintain any particular level of distribution that we have established or may establish.
We are an accrual basis taxpayer, and as such our REIT taxable income could be higher than the cash available to us. We may therefore borrow to make distributions, which could reduce the cash available to us, in order to distribute 90% of REIT taxable income as a condition to our election to be taxed as a REIT. These distributions made with borrowed funds may constitute a return of capital to stockholders. “Return of capital” refers to distributions to investors in excess of net income. To the extent that distributions to stockholders exceed earnings and profits, such amounts constitute a return of capital for U.S. federal income tax purposes, although such distributions might not reduce stockholders’ aggregate invested capital. Because our earnings and profits are reduced for deprecation and other non-cash items, it is likely that a portion of each distribution will constitute a tax deferred return of capital for U.S. federal income tax purposes.
Beginning February 1, 2006, our Board of Directors declared quarterly distributions in the amount of $0.0019178 per share per day payable to stockholders of record at the close of business each day during the applicable period. The annualized rate declared was equal to 7%, which represents the annualized rate of return on an investment of $10.00 per share attributable to these daily amounts, if paid for each day for a 365 day period (the “Annualized Rate”). Subsequently, our Board of Directors has declared regular quarterly distributions at the Annualized Rate, with the exception of the three-month period ended June 30, 2010. The distributions for the three-month period ended June 30, 2010 were at an aggregate annualized rate of 8% based upon a share price of $10.00. Through December 31, 2018, we have paid aggregate distributions in the amount of $215.8 million, which includes cash distributions paid to stockholders and common stock issued under our distribution reinvestment program (the “DRIP”).
Total distributions declared during the years ended December 31, 2018 and 2017 were $16.9 million and $17.5 million, respectively.
On March 14, 2019, our we declared the quarterly distribution for the three-month period ended March 31, 2019 in the amount of $0.0019178 per share per day payable to stockholders of record on the close of business on the last day of the quarter, which is payable on or about April 15, 2019.
DRIP
Our DRIP provides our stockholders with an opportunity to purchase additional shares of our common stock at a discount by reinvesting distributions. The DRIP, which had been suspended since 2015, was reactivated as amended and restated effective on October 25, 2018.
Pursuant to the DRIP following its reactivation, our stockholders who elect to participate may invest all or a portion of the cash distributions that we pay them on shares of our common stock in additional shares of our common stock without paying any fees or commissions. The purchase price for shares under the DRIP will be equal to 95% of our current estimated net asset value per share of common stock (“NAV per Share”), as determined by our board of directors and reported by us from time to time. On December 13, 2018, our Board of Directors determined our NAV per Share of $11.82 as of September 30, 2018, which resulted in a purchase price for shares under the DRIP of $11.23 per share. As of December 31, 2018, we had 10.0 million shares available for issuance under our DRIP.
Our Board of Directors reserves the right to terminate the DRIP for any reason without cause by providing written notice of termination of the DRIP to all participants.
Share Repurchase Program
Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares back to us, subject to restrictions. From our inception through December 31, 2017 we redeemed approximately 3.9 million common shares at an average price per share of $9.41 per share. During 2018, we redeemed approximately 1.1 million common shares or 66% of redemption requests received during the period, at an average price per share of $9.98 per share.
On May 10, 2018, the Board of Directors amended the share repurchase program to (i) change to the price for all purchases under our share repurchase program from $10.00 per share to 92% of the estimated net asset value per share of the Company’s common stock (previously the purchase price was $10.00 per share) and (ii) increase the number of shares repurchased during any calendar year from two (2.0%) of the weighted average number of shares outstanding during the prior calendar year to five (5.0%) of the weighted average number of shares outstanding during the previous twelve months.
Our Board of Directors, at its sole discretion, has the power to terminate the share repurchase program after the end of the offering period, change the price per share under the share repurchase program or reduce the number of shares purchased under the program, if it determines that the funds allocated to the share repurchase program are needed for other purposes, such as the acquisition, maintenance or repair of properties, or for use in making a declared distribution. A determination by our Board of Directors to eliminate or reduce the share repurchase program requires the unanimous affirmative vote of the independent directors.
Tax Status
We elected to be taxed as a real estate investment trust (a “REIT”), commencing with the taxable year ended December 31, 2005. If we remain qualified as a REIT, we generally will not be subject to U.S. federal income tax on our net taxable income that we distribute currently to our stockholders. To maintain our REIT qualification under the Internal Revenue Code of 1986, as amended, or the Code, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles in the United States of America, or GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If we fail to remain qualified for taxation as a REIT in any subsequent year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify as a REIT. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. As of December 31, 2018 and 2017, we had no material uncertain income tax positions and our net operating loss carry forward was $11.5 million, for which we have recorded a full valuation allowance. Additionally, even if we qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income.
To maintain our qualification as a REIT, we engage in certain activities such as providing real estate-related services through wholly-owned taxable REIT subsidiaries (“TRSs”). As such, we are subject to U.S. federal and state income and franchise taxes from these activities.
Competition
The retail, lodging, office, industrial and residential real estate markets are highly competitive. We compete in markets with other owners and operators of retail, lodging, office, industrial and residential real estate. The continued development of new retail, lodging, office, industrial and residential properties has intensified the competition among owners and operators of these types of real estate in many market areas in which we operate or intend to operate. We compete based on a number of factors that include location, rental rates, security, suitability of the property’s design to prospective tenants’ needs and the manner in which the property is operated and marketed. The number of competing properties in a particular market could have a material effect on our occupancy levels, rental rates and on the operating expenses of certain of our properties.
In addition, we compete with other entities engaged in real estate investment activities to locate suitable properties to acquire and/or develop and also to locate tenants and purchasers for our properties. These competitors include other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, governmental bodies and other entities. There also may be other REITs with asset acquisition objectives similar to ours that may be organized in the future. Some of these competitors, including larger REITs, have substantially greater marketing and financial resources than we have and generally may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of tenants. In addition, these same entities seek financing through similar channels to those sought by us. Therefore, we compete for institutional investors in a market where funds for real estate investment may decrease.
Competition from these and other third party real estate investors may limit the number of suitable investment opportunities available to us. It may also result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms.
We believe that our Sponsor’s experience, coupled with our financing, professionalism, diversity of properties and reputation in the industry enable us to compete with the other real estate investment companies.
Because we are organized as an UPREIT, we believe we are well positioned within the industries in which we operate to offer existing property owners the potential opportunity to contribute their properties to us in tax-deferred transactions using our operating partnership units as transactional currency. As a result, we may have a competitive advantage over certain of our competitors that are structured as traditional REITs and non-REITs in pursuing acquisitions with tax-sensitive sellers.
Environmental
As an owner of real estate, we are subject to various environmental laws of federal, state and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired or developed in the future.
Employees
We do not have employees. We entered into an advisory agreement with our Advisor on April 22, 2005, pursuant to which our Advisor supervises and manages our day-to-day operations and selects our real estate and real estate related investments, subject to oversight by our Board of Directors. We pay our Advisor fees for services related to the investment and management of our assets, and we reimburse our Advisor for certain expenses incurred on our behalf.
Available Information
We electronically file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and proxy statements, with the United States Securities and Exchange Commission (the “SEC”). Stockholders may obtain copies of our filings with the SEC, free of charge, from the website maintained by the SEC at http://www.sec.gov, or at the SEC's Public Reference Room at 100 F. Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our office is located at 1985 Cedar Bridge Avenue, Lakewood, NJ 08701. Our telephone number is (732) 367-0129. Our website is www.lightstonecapitalmarkets.com.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS:
None applicable.
ITEM 2.
ITEM 2. PROPERTIES:
Annualized revenue is defined as the minimum monthly payments due as of December 31, 2018 annualized, excluding periodic contractual fixed increases and rents calculated based on a percentage of tenants' sales. The annualized base rent disclosed in the table above includes all concessions, abatements and reimbursements of rent to tenants.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS:
From time to time in the ordinary course of business, we may become subject to legal proceedings, claims or disputes.
As of the date hereof, we are not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss.
ITEM 4.
ITEM 4. Mine Safety Disclosures
Not applicable.
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES:
Shareholder Information
As of March 15, 2019, we had approximately 23.4 million common shares outstanding, held by a total of 6,468 stockholders. The number of stockholders is based on the records of DST Systems Inc., which serves as our registrar and transfer agent.
Market Information
The Company’s stock is not currently listed on a national securities exchange. The Company may seek to list its stock for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its shares of common stock until they are listed for trading.
On October 20, 2017, the Company filed a definitive proxy statement with the SEC pursuant to which it sought stockholder approval to amend its charter to remove the requirement that the Company must either list its stock on a national securities exchange or seek stockholder approval to adopt a plan of liquidation of the corporation on or before October 10, 2018 (the “Charter Amendment”). On December 11, 2017, the stockholders approved the Charter Amendment.
Estimated Net Asset Value (“NAV”) and NAV per Share of Common Stock (“NAV per Share”)
On December 13, 2018, our board of directors determined and approved our estimated NAV of approximately $289.8 million and resulting estimated NAV per Share of $11.82, after allocations of value to special general partner interests, or SLP Units, in our Operating Partnership, held by Lightstone SLP, LLC, an affiliate of our Advisor, assuming a liquidation event, both as of September 30, 2018. From our inception through the termination of our initial public offering on October 10, 2008, Lightstone SLP, LLC, an affiliate of our Advisor, contributed cash of $30.0 million in exchange for 300 SLP Units, at a cost of $100,000 per unit.
We believe there have been no material changes between September 30, 2018 and the date of this filing to the net values of our assets and liabilities that existed as of September 30, 2018.
Process and Methodology
Our Advisor along with any necessary material assistance or confirmation of a third-party valuation expert or service, is responsible for calculating our estimated NAV and resulting NAV per Share, which we currently expect will be done on an annual basis unless and until our Common Shares are approved for listing on a national securities exchange. Our board of directors will review and approve each estimate of NAV and resulting NAV per Share.
Our estimated NAV and resulting NAV per Share as of September 30, 2018 were calculated with the assistance of both our Advisor and Robert A. Stanger & Co, Inc. (“Stanger”), an independent third-party valuation firm engaged by us to assist with the valuation of our assets, liabilities and any allocations of value to SLP Units,. Our Advisor recommended and our board of directors established the estimated NAV per Share as of September 30, 2018 based upon the analysis and reports provided by our Advisor and Stanger. The process for estimating the value of our assets, liabilities and allocations of value to SLP Units, is performed in accordance with the provisions of the Investment Program Association Practice Guideline 2013-01, “Valuations of Publicly Registered Non-Listed REITs.” We believe that our valuations were developed in a manner reasonably designed to ensure their reliability.
The engagement of Stanger with respect to our estimated NAV and resulting NAV per Share as of September 30, 2018 was approved by our board of directors, including all of our independent directors. Stanger has extensive experience in conducting asset valuations, including valuations of commercial real estate, debt, properties and real estate-related investments.
With respect to our estimated NAV and resulting NAV per Share as of September 30, 2018, Stanger prepared appraisal reports (the “Stanger Appraisal Reports”), summarizing key inputs and assumptions, on 10 of the 21 properties (collectively, the “Stanger Appraised Properties”) in which we held ownership interests as of September 30, 2018. The Stanger Appraised Properties consist of (i) the two properties in our Retail Segment - the St. Augustine Outlet Center and DePaul Plaza; and (ii) eight hospitality properties in which we hold an ownership interest through an unconsolidated joint venture (the “Joint Venture”). The Joint Venture was formed between us and the operating partnership of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a real estate investment trust also sponsored by our Sponsor, in which we and Lightstone II have 2.5% and 97.5% ownership interests. Stanger also prepared a NAV report (the “September 2018 NAV Report”) which estimates our NAV per Share as of September 30, 2018. The September 2018 NAV Report relied upon the Stanger Appraisal Reports for the Stanger Appraised Properties, an appraisal report prepared by another independent third-party valuation firm for Gantry Park ,which represents our Multi-Family Residential Segment, the outstanding principal balance of the non-recourse mortgage indebtedness on the Gulf Coast Industrial Portfolio (10 industrial properties), Stanger’s estimated value of our mortgage notes payable and other debt payable, Stanger’s value opinion with respect to our ownership interest in the Joint Venture and our other investments in related parties, Stanger’s estimate of the allocation of value to the SLP Units, and our Advisor’s estimate of the value of our cash and cash equivalents, marketable securities, restricted escrows, other assets, other liabilities and other non-controlling interests, to calculate estimated NAV per Share, all as of September 30, 2018.
The table below sets forth the calculation of our estimated NAV and resulting NAV per Share as of September 30, 2018, as well as the comparable calculations as of September 30, 2017 and 2016, respectively. Certain amounts are reflected net of noncontrolling interests, as applicable. Dollar and share amounts are presented in thousands, except per share data.
Note:
(1)Includes approximately 0.5 million shares of our common stock assuming the conversion of an equal number of common units of limited partnership interest in our Operating Partnership (“common units”).
Use of Independent Valuation Firm:
As discussed above, our Advisor is responsible for calculating our NAV. In connection with determining our NAV, our Advisor may rely on the material assistance or confirmation of a third-party valuation expert or service. In this regard, Stanger was selected by our board of directors to assist our Advisor in the calculation of our estimated NAV and resulting NAV per Share as of September 30, 2018. Stanger’s service included appraising the Stanger Appraised Properties and preparing the September 2018 NAV Report. Stanger is engaged in the business of appraising commercial real estate properties and is not affiliated with us or our Advisor. The compensation we paid to Stanger was based on the scope of work and not on the appraised values of our real estate properties. The appraisals were performed in accordance with the Code of Ethics and the Uniform Standards of Professional Appraisal Practice, or USPAP, the real estate appraisal industry standards created by The Appraisal Foundation. The Stanger Appraisal Reports were reviewed, approved, and signed by an individual with the professional designation of MAI licensed in the state where each real property is located. The use of the reports is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. In preparing its reports, Stanger did not, and was not requested to; solicit third-party indications of interest for our common stock in connection with possible purchases thereof or the acquisition of all or any part of us.
Stanger collected reasonably available material information that it deemed relevant in appraising our real estate properties. Stanger relied in part on property-level information provided by our Advisor, including (i) property historical and projected operating revenues and expenses; (ii) property lease agreements and/or lease abstracts; and (iii) information regarding recent or planned capital expenditures.
In conducting their investigation and analyses, Stanger took into account customary and accepted financial and commercial procedures and considerations as they deemed relevant. Although Stanger reviewed information supplied or otherwise made available by us or the Advisor for reasonableness, they assumed and relied upon the accuracy and completeness of all such information and of all information supplied or otherwise made available to them by any other party and did not independently verify any such information. Stanger has assumed that any operating or financial forecasts and other information and data provided to or otherwise reviewed by or discussed with Stanger were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of our management, our board of directors, and/or our Advisor. Stanger relied on us to advise them promptly if any information previously provided became inaccurate or was required to be updated during the period of their review.
In performing its analyses, Stanger made numerous other assumptions as of various points in time with respect to industry performance, general business, economic, and regulatory conditions, and other matters, many of which are beyond their control and our control. Stanger also made assumptions with respect to certain factual matters. For example, unless specifically informed to the contrary, Stanger assumed that we have clear and marketable title to each real estate property appraised, that no title defects exist, that any improvements were made in accordance with law, that no hazardous materials are present or were present previously, that no significant deed restrictions exist, and that no changes to zoning ordinances or regulations governing use, density, or shape are pending or being considered. Furthermore, Stanger’s analyses, opinions, and conclusions were necessarily based upon market, economic, financial, and other circumstances and conditions existing as of or prior to the date of the Stanger Appraisal Reports, and any material change in such circumstances and conditions may affect Stanger’s analyses and conclusions. The Stanger Appraisal Reports contain other assumptions, qualifications, and limitations that qualify the analyses, opinions, and conclusions set forth therein. Furthermore, the prices at which our real estate properties may actually be sold could differ from Stanger’s analyses.
Stanger is actively engaged in the business of appraising commercial real estate properties similar to those owned by us in connection with public security offerings, private placements, business combinations, and similar transactions. We do not believe that there are any material conflicts of interest between Stanger, on the one hand, and us, our Sponsor, our Advisor, and our affiliates, on the other hand. Our Advisor engaged Stanger on behalf of our board of directors to deliver their reports to assist in the NAV calculation as of September 30, 2018 and Stanger received compensation for those efforts. In addition, we agreed to indemnify Stanger against certain liabilities arising out of this engagement. In the two years prior to the date of this filing, Stanger was previously engaged by us for appraisal and valuation services in connection with our financial reporting requirements. Stanger has received usual and customary fees in connection with those services. Stanger may from time to time in the future perform other services for us and our Sponsor or other affiliates of the Sponsor, so long as such other services do not adversely affect the independence of Stanger as certified in the applicable Appraisal Reports. During the past two years Stanger has also been engaged to provide appraisal services to another non-traded REIT sponsored by our Sponsor for which it was paid usual and customary fees.
Although Stanger considered any comments received from us and our Advisor relating to their reports, the final appraised values of the Stanger Appraised Properties were determined by Stanger. The reports are addressed to our board of directors to assist our board of directors in calculating our estimated NAV per Share as of September 30, 2018. The reports are not addressed to the public, may not be relied upon by any other person to establish our estimated NAV per Share, and do not constitute a recommendation to any person to purchase or sell any shares of our common stock.
Our goal in calculating our estimated NAV is to arrive at values that are reasonable and supportable using what we deem to be appropriate valuation methodologies and assumptions. The reports, including the analysis, opinions, and conclusions set forth in such reports, are qualified by the assumptions, qualifications, and limitations set forth in the respective reports. The following is a summary of our valuation methodologies used to value our assets and liabilities by key component:
Real Estate Properties: We have ownership interests in both consolidated and unconsolidated investments in real estate properties (the “Real Estate Properties”). As of September 30, 2018, on a collective basis, we wholly or majority-owned and consolidated the operating results and financial condition of two retail properties containing a total of approximately 0.5 million square feet of retail space (the “Retail Segment”), 10 industrial properties containing a total of approximately 0.5 million square feet of industrial space (the “Industrial Segment”) and one multi-family residential property containing a total of 199 units (the “Multi-family Residential Segment”). As of September 30, 2018, we have a 2.5% ownership interest in the Joint Venture, which we do not consolidate but rather account for under the cost method of accounting, which is included in our “Investments in Related Parties” below.
As described above, we engaged Stanger to provide an appraisal of the Stanger Appraised Properties consisting of 10 of the 21 properties in which we held ownership interests as of September 30, 2018. The Stanger Appraised Properties consist of (i) two properties in our Retail Segment - the St. Augustine Outlet Center and DePaul Plaza; and (ii) eight hospitality properties - consisting of our ownership interests in select services hotels, or hospitality properties, owned by the Joint Venture (see “Investments in Related Parties” below). We also engaged another independent third-party valuation firm to provide an appraisal report for Gantry Park, a multi-family apartment building which we majority own and consolidate (our Multi-Family Residential Segment). In preparing their appraisal reports, Stanger and the other independent third-party valuation firm, among other things:
·Performed a site visit of each property in connection with this assignment or other assignments;
·Interviewed our officers or our Advisor’s personnel to obtain information relating to the physical condition of each appraised property, including known environmental conditions, status of ongoing or planned property additions and reconfigurations, and other factors for such leased properties;
·Reviewed lease agreements for those properties subject to a long-term lease and discussed with us or the Advisor certain lease provisions and factors on each property; and
·Reviewed the acquisition criteria and parameters used by real estate investors for properties similar to the subject properties, including a search of real estate data sources and publications concerning real estate buyer’s criteria, discussions with sources deemed appropriate, and a review of transaction data for similar properties.
Stanger and the other independent third-party valuation firm employed the income approach and the sales comparison approach to estimate the value of the appraised properties. The income approach involves an economic analysis of the property based on its potential to provide future net annual income. As part of the valuation, a discounted cash flow analysis (“DCF Analysis”) and/or direct capitalization analysis was used in the income approach to determine the value of our interest in the portfolio. The indicated value by the income approach represents the amount an investor may pay for the expectation of receiving the net cash flow from the property.
The direct capitalization analysis is based upon the net operating income of the property capitalized at an appropriate capitalization rate for the property based upon property characteristics and competitive position and market conditions at the date of the appraisal.
In applying the DCF Analysis, pro forma statements of operations for the property including revenues and expenses are analyzed and projected over a multi-year period. The property is assumed to be sold at the end of the multi-year holding period. The reversion value of the property which can be realized upon sale at the end of the holding period is calculated based on the capitalization of the estimated net operating income of the property in the year of sale, utilizing a capitalization rate deemed appropriate in light of the age, anticipated functional and economic obsolescence and competitive position of the property at the time of sale. Net proceeds to owners are determined by deducting appropriate costs of sale. The discount rate selected for the DCF Analysis is based upon estimated target rates of return for buyers of similar properties.
The sales comparison approach utilizes indices of value derived from actual or proposed sales of comparable properties to estimate the value of the subject property. The appraiser analyzed such comparable sale data as was available to develop a market value conclusion for the subject property.
Stanger prepared the Stanger Appraisal Reports and the other independent third-party valuation firm prepared an appraisal report for Gantry Park, summarizing key inputs and assumptions, for each of the appraised properties using financial information provided by us and our Advisor. From such review, Stanger and the other independent third-party valuation firm selected the appropriate cash flow discount rate, residual discount rate, and terminal capitalization rate in the DCF Analysis, if applicable, the appropriate capitalization rate in the direct capitalization analysis and the appropriate price per unit in the sales comparison analysis. As for those properties consolidated on our financials, and for which we do not own 100% of the ownership interest, the property value was adjusted to reflect our ownership interest in such property after consideration of the distribution priorities associated with such property.
The estimated values for our investments in real estate may or may not represent current market values and do not equal the book values of our real estate investments in accordance with U.S. GAAP. Our consolidated investments in real estate are currently carried in our consolidated financial statements at their amortized cost basis, adjusted for any loss impairments and bargain purchase gains recognized to date. Our unconsolidated investments in real estate are accounted for under the equity method of accounting in our consolidated financial statements.
As of September 30, 2018, our ownership interests in our Real Estate Properties, excluding our ownership interest in the Joint Venture (see “Investments in Related Parties” below) were valued at $167.7 million, including the Gulf Coast Industrial Portfolio, currently comprised of 10 industrial properties located in New Orleans and Baton Rouge, Louisiana, which was valued at $41.2 million, as discussed below.
The following relates to specifically to our valuation of the Gulf Coast Industrial Portfolio for purposes of estimating our NAV and resulting NAV per Share as of September 30, 2018. As a result of not meeting certain debt service coverage ratios on our non-recourse mortgage indebtedness secured by the Gulf Coast Industrial Portfolio, the lender elected to retain the excess cash flow from these properties beginning in July 2011. During the fourth quarter of 2012, the non-recourse mortgage loan was transferred to a special servicer, who discontinued scheduled debt service payments and notified the Company that the non-recourse mortgage loan was in default and although originally due in February 2017 became due on demand.
In addition to the 10 industrial properties located in Louisiana, the Gulf Coast Industrial Portfolio previously included four industrial properties located in San Antonio, Texas (the “San Antonio Assets”). On June 5, 2018, the special servicer completed a partial foreclosure transaction pursuant to which it foreclosed on the “San Antonio Assets. The San Antonio Assets were sold via a foreclosure sale for an aggregate amount of approximately $20.7 million for which the Company received a corresponding credit against the then total outstanding indebtedness, of which $19.6 million and $1.1 million were applied by the Company against the outstanding principal and outstanding accrued interest payable, respectively.
As a result, the remaining outstanding principal of the non-recourse mortgage indebtedness was $30.6 million as of September 30, 2018. The Company accrues default interest expense on the non-recourse mortgage indebtedness pursuant to the terms of its loan agreement.
We believe the total of the outstanding principal balance of the non-recourse mortgage loan, related accrued default interest and other liabilities, all of which we do not fully expect to pay, exceeds the estimated fair value of the remaining underlying collateral plus other assets as of September 30, 2018 and therefore, for valuation purposes, the estimated NAV of the Gulf Coast Industrial Portfolio was deemed to be zero which was accomplished by establishing that the estimated fair value of this portfolio of properties was $41.2 million which equals the total of the outstanding principal balance of its associated mortgage debt of $30.6 million plus the related accrued default interest of $12.5 million less other assets, net of $1.9 million. This mortgage loan is nonrecourse to us and we are not required to fund any operating shortfalls and/or refinancing shortfalls.
Excluding (i) the Gulf Coast Industrial Portfolio and (iii) our ownership interest in the Joint Venture (see “Investments in Related Parties” below), the following summarizes the key assumptions that were used in the discounted cash flow models to estimate the value of our two retail properties and one our one multi-family residential property, included in our Real Estate Properties as of September 30, 2018:
While we believe that the assumptions made by Stanger and the other independent third party appraisal firm are reasonable, a change in these assumptions would impact the calculations of the estimated value of these two properties included in our Real Estate Properties. Assuming all other factors remain unchanged, the following table summarizes the estimated change in the values (dollars in thousands) of our two retail properties and our one multi-family property (based on our approximately 59.2% ownership interest) included in our Real Estate Properties which would result from a 25 basis point increase or decrease in exit capitalization rates and discount rates:
As of September 30, 2018, the aggregate estimated value of our interests in the Real Estate Properties, excluding our ownership interest in the Joint Venture (see “Investments in Related Parties” below), was approximately $167.7 million and the aggregate cost of our Real Estate Properties was approximately $157.7 million, including $10.0 million of capital and tenant improvements invested subsequent to acquisition. The estimated value of our Real Estate Properties, excluding our ownership interest in the Joint Venture (see “Investments in Related Parties” below) compared to the original acquisition price plus subsequent capital improvements through September 30, 2018, results in an estimated overall increase in the real estate value of 6.3%.
Cash and Cash Equivalents: The estimated values of our cash and cash equivalents approximate their carrying values due to their short maturities.
Investments in Related Parties: As of September 30, 2018, we had various investments in related parties, which were classified as investments in related parties in our consolidated balance sheets, as follows:
·We hold a 2.5% non-managing ownership interest in the Joint Venture, which we do not consolidate but rather account for under the cost method of accounting. As of September 30, 2018, the Joint Venture estimated fair value of our ownership interest in the Joint Venture was approximately $1.4 million which approximated our carrying value, based on a hypothetical liquidation of the estimated value of the Joint Venture’s net assets.
·We have entered into agreements with various related party entities pursuant to which we have made aggregate contributions of $113.4 million to affiliates of our Sponsor which are developing certain residential and hospitality projects located in the New York City and Miami metropolitan areas. These contributions are made pursuant to instruments (the “Preferred Investments”) that entitle us to monthly preferred distributions at rates ranging from 8% to 12% per annum and are classified as held-to-maturity securities and are recorded at cost. As of September 30, 2018, the aggregate estimated value of our Preferred Investments of $113.4 million approximated their carrying values based on market rates for similar instruments.
Marketable Securities: The estimated values of our marketable securities are based on Level 1 and Level 2 inputs. Level 1 inputs are inputs that are observable, either directly or indirectly, such as quoted prices in active markets for identical assets or liabilities. Level 2 inputs are inputs that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. All of our marketable securities measured using Level 2 inputs were valued based on a market approach using readily available quoted market prices for similar assets.
Restricted Escrows: The estimated values of our restricted escrows approximate their carrying values due to their short maturities.
Other Assets: Our other assets consist of tenant accounts receivable and prepaid expenses and other assets. The estimated values of these items approximate their carrying values due to their short maturities. Certain other items, primarily straight-line rent receivable, intangibles and deferred costs, have been eliminated for the purpose of the valuation because those items are already considered in our valuation of the respective investments in real estate properties or financial instruments.
Mortgage Notes Payable: The values for our mortgage loans were estimated using a discounted cash flow analysis, which used inputs based on the remaining loan terms and estimated current market interest rates for mortgage loans with similar characteristics, including remaining loan term and loan-to-value ratios. The current market interest rate was generally determined based on market rates for available comparable debt. The estimated current market interest rates for mortgage loans ranged from 4.18% to 9.97%.
Notes Payable: The estimated value of our notes payable, which consist of our margin loan (no outstanding balance as of September 30, 2018) and revolving line of credit (approximately $18.6 million outstanding as of September 30, 2018), approximates their carrying values because of their short maturities.
Other Liabilities: Our other liabilities consist of our accounts payable and accrued expenses, amounts due to our Sponsor, tenant allowances and deposits payable, distributions payable and deferred rental income. The carrying values of these items were considered to equal their fair value due to their short maturities. Certain other items, primarily intangibles, have been eliminated for the purpose of the valuation because those items are already considered in our valuation of the respective Real Estate Properties or financial instruments.
Other Noncontrolling Interests: Our other noncontrolling interests consist of accrued distributions on common units and SLP Units.
Allocations of Value to SLP Units: The carrying value of the SLP Units held by Lightstone SLP, LLC, an affiliate of our Advisor, are classified in noncontrolling interests on our consolidated balance sheet. The IPA’s Practice Guideline 2013-01 provides for adjustments to the NAV for preferred securities, special interests and incentive fees based on the aggregate NAV of the company and payable to the sponsor in a hypothetical liquidation of the company as of the valuation date in accordance with the provisions of the partnership or advisory agreements and the terms of the preferred securities. Because certain distributions related to our SLP Units are only payable to their holder in a liquidation event, we believe they should be valued for our NAV in accordance with these provisions.
Our operating agreement provides for distributions to be made during our liquidating stage to our stockholders and the holder of the SLP Units at certain prescribed thresholds. In connection with our initial public offering of common stock, Lightstone SLP, LLC purchased an aggregate of $30.0 million of SLP Units. In the calculation of our estimated NAV, an approximately $49.1 million allocation of value was made to the SLP Units representing the amount of estimated distributions which would have been payable to the holder of the SLP Units, assuming a liquidation event as of September 30, 2018.
Limitations and Risks
As with any valuation methodology, the methodology used to determine our estimated NAV and resulting estimated NAV per Share is based upon a number of estimates and assumptions that may prove later not to be accurate or complete. Further, different participants with different property-specific and general real estate and capital market assumptions, estimates, judgments and standards could derive a different estimated NAV per Share, which could be significantly different from the estimated NAV per Share approved by our board of directors. The estimated NAV per Share approved by our board of directors does not represent the fair value of our assets and liabilities in accordance with GAAP, and such estimated NAV per Share is not a representation, warranty or guarantee that:
·A stockholder would be able to resell his or her shares at the estimated NAV per Share;
·A stockholder would ultimately realize distributions per share of common stock equal to the estimated NAV per Share upon liquidation of our assets and settlement of our liabilities or a sale of the Company;
·Our shares of common stock would trade at the estimated NAV per Share on a national securities exchange;
·An independent third-party appraiser or other third-party valuation firm would agree with the estimated NAV per Share; or
·The methodology used to estimate our NAV per Share would be acceptable to FINRA or under the Employee Retirement Income Security Act with respect to their respective requirements.
The Internal Revenue Service and the Department of Labor do not provide any guidance on the methodology an issuer must use to determine its estimated NAV per share. FINRA guidance provides that NAV valuations be derived from a methodology that conforms to standard industry practice.
As with any valuation methodology, our methodology is based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive different estimated NAVs and resulting NAVs per share, and these differences could be significant. The estimated NAV per Share is not audited and does not represent the fair value of our assets less our liabilities in accordance GAAP, nor do they represent an actual liquidation value of our assets and liabilities or the amount shares of our common stock would trade at on a national securities exchange. As of the date of this filing, although we have not sought stockholder approval to adopt a plan of liquidation of the Company, certain distributions may be payable to Lightstone SLP, LLC for its SLP Units in connection with a liquidation event. Accordingly, our estimated NAV reflects any allocations of value to the SLP Units representing the amount that would be payable to Lightstone SLP, LLC in connection with a liquidation event pursuant to the guidelines for estimating NAV contained in IPA Practice Guideline 2013-01, ‘‘Valuation of Publicly Registered Non-Listed REITs.’’ Our estimated NAV per Share is based on the estimated value of our assets less the estimated value of our liabilities and other non-controlling interests less any allocations to the SLP Units divided by the number of our diluted shares of common stock outstanding, all as of the date indicated. Our estimated NAV per Share does not reflect a discount for the fact we are externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. Our estimated NAV per Share does not take into account estimated disposition costs or fees or penalties, if any, that may apply upon the prepayment of certain of our debt obligations or the impact of restrictions on the assumption of certain debt. Our estimated NAV per Share will fluctuate over time as a result of, among other things, future acquisitions or dispositions of assets, developments related to individual assets and the management of those assets and changes in the real estate and capital markets. Different parties using different assumptions and estimates could derive different NAVs and resulting estimated NAVs per share, and these differences could be significant. Markets for real estate and real estate-related investments can fluctuate and values are expected to change in the future. We currently expect that our Advisor will estimate our NAV on at least an annual basis. Our board of directors will review and approve each estimate of NAV and resulting estimated NAV per Share.
The following factors may cause a stockholder not to ultimately realize distributions per share of common stock equal to the estimated NAV per Share upon liquidation:
·The methodology used to determine estimated NAV per Share includes a number of estimates and assumptions that may not prove to be accurate or complete as compared to the actual amounts received in the liquidation;
·In a liquidation, certain assets may not be liquidated at their estimated values because of transfer fees and disposition fees, which are not reflected in the estimated NAV calculation;
·In a liquidation, debt obligations may have to be prepaid and the costs of any prepayment penalties may reduce the liquidation amounts. Prepayment penalties are not included in determining the estimated value of liabilities in determining estimated NAV;
·In a liquidation, the real estate assets may derive a portfolio premium which premium is not considered in determining estimated NAV;
·In a liquidation, the potential buyers of the assets may use different estimates and assumptions than those used in determining estimated NAV;
·If the liquidation occurs through a listing of the common stock on a national securities exchange, the capital markets may value the Company’s net assets at a different amount than the estimated NAV. Such valuation would likely be based upon customary REIT valuation methodology including funds from operation (‘‘FFO’’) multiples of other comparable REITs, FFO coverage of dividends and adjusted FFO payout of the Company’s anticipated dividend; and
·If the liquidation occurs through a merger of the Company with another REIT, the amount realized for the common stock may not equal the estimated NAV per Share because of many factors including the aggregate consideration received, the make-up of the consideration (e.g., cash, stock or both), the performance of any stock received as part of the consideration during the merger process and thereafter, the reception of the merger in the market and whether the market believes the pricing of the merger was fair to both parties.
Dividend Reinvestment Program
Our distribution reinvestment program (“DRIP”) provides our shareholders with an opportunity to purchase additional shares of our common stock at a discount by reinvesting distributions. Our share repurchase program may provide our shareholders with limited, interim liquidity by enabling them to sell their shares back to us, subject to restrictions. Under our distribution reinvestment program, a shareholder may acquire, from time to time, additional shares of our common stock by reinvesting cash distributions payable by us to such shareholder, without incurring any brokerage commission, fees or service charges.
The DRIP had been suspended since 2015 until our DRIP Registration Statement on Form S-3D was filed and became effective as amended and restated, under the Securities Act of 1933 on October 25, 2018. As of December 31, 2018, 10.0 million shares remain available for issuance under our DRIP.
Pursuant to the DRIP following its reactivation, our stockholders who elect to participate may invest all or a portion of the cash distributions that we pay them on shares of our common stock in additional shares of our common stock without paying any fees or commissions. The purchase price for shares under the DRIP will be equal to 95% of our current NAV per Share, as determined by the Company’s board of directors and reported by the Company from time to time. On December 13, 2018, our Board of Directors determined our NAV per Share of $11.82 as of September 30, 2018, which resulted in a purchase price for shares under the DRIP of $11.23 per share. As of December 31, 2018, we had 10.0 million shares available for issuance under our DRIP.
However, our Board of Directors reserves the right to terminate the program for any reason without cause by providing written notice of termination of the distribution reinvestment program to all participants or written notice of termination of the share repurchase program to all shareholders.
Share Repurchase Program
Our share repurchase program may provide eligible stockholders with limited, interim liquidity by enabling them to sell shares back to us, subject to restrictions and applicable law. A selling stockholder must be unaffiliated with us, and must have beneficially held the shares for at least one year prior to offering the shares for sale to us through the share repurchase program. Subject to the limitations described in the Registration Statement, we will also redeem shares upon the request of the estate, heir or beneficiary of a deceased stockholder.
Originally, the prices at which stockholders who held shares for the required one-year period could sell shares back to us was the lesser of (i) the share price as determined by our Board of Directors or (ii) the purchase price per share if purchased at a reduced price.
On May 10, 2018, the Board of Directors amended the share repurchase program to (i) change to the price for all purchases under our share repurchase program from $10.00 per share to 92% of the NAV per Share (previously the purchase price was $10.00 per share) and (ii) increase the number of shares repurchased during any calendar year from two (2.0%) of the weighted average number of shares outstanding during the prior calendar year to five (5.0%) of the weighted average number of shares outstanding during the previous twelve months.
A stockholder must have beneficially held the shares for at least one year prior to offering them for sale to us through the share repurchase program, although if a stockholder redeems all of its shares our Board of Directors has the discretion to exempt shares purchased pursuant to the distribution reinvestment plan from this one year requirement. Other affiliates will not be eligible to participate in share repurchase program.
Pursuant to the terms of the share repurchase program, we will make repurchases, if requested, at least once quarterly. Subject to funds being available, we will limit the number of shares repurchased during any calendar year to two (2.0%) of the weighted average number of shares outstanding during the prior calendar year. Funding for the share repurchase program will come exclusively from proceeds we receive from the sale of shares under our distribution reinvestment plan and other operating funds, if any, as the Board of Directors, at its sole discretion, may reserve for this purpose.
From our inception through December 31, 2017 we redeemed approximately 3.9 million common shares at an average price per share of $9.41 per share. During 2018, we redeemed approximately 1.1 million common shares or 66% of redemption requests received during the period, at an average price per share of $9.98 per share.
Our Board of Directors, at its sole discretion, has the power to terminate the share repurchase program after the end of the offering period, change the price per share under the share repurchase program or reduce the number of shares purchased under the program, if it determines that the funds allocated to the share repurchase program are needed for other purposes, such as the acquisition, maintenance or repair of properties, or for use in making a declared distribution. A determination by our Board of Directors to eliminate or reduce the share repurchase program requires the unanimous affirmative vote of the independent directors.
Distributions
U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with GAAP) determined without regard to the deduction for distributions paid and excluding any net capital gains. In order to continue to qualify for REIT status, we may be required to make distributions in excess of cash available.
Distributions are authorized at the discretion of our Board of Directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. Such analyses may include actual and anticipated operating cash flow, capital expenditure needs, general financial and market conditions, proceeds from asset sales and other factors that our board of directors deem relevant. Our Board of Directors’ decisions will be substantially influenced by their obligation to ensure that we maintain our federal tax status as a REIT. We commenced quarterly distributions beginning February 1, 2006. We may fund future distributions from borrowings if we have not generated sufficient cash flow from our operations to fund such distributions. Our ability to continue to pay regular distributions and the size of these distributions will depend upon a variety of factors. For example, our borrowing policy permits us to incur short-term indebtedness, having a maturity of two years or less, and we may have to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT. We cannot assure that regular distributions will continue to be made or that we will maintain any particular level of distribution that we have established or may establish.
We are an accrual basis taxpayer, and as such our REIT taxable income could be higher than the cash available to us. We may therefore borrow to make distributions, which could reduce the cash available to us, in order to distribute 90% of REIT taxable income as a condition to our election to be taxed as a REIT. These distributions made with borrowed funds may constitute a return of capital to stockholders. “Return of capital” refers to distributions to investors in excess of net income. To the extent that distributions to stockholders exceed earnings and profits, such amounts constitute a return of capital for U.S. federal income tax purposes, although such distributions might not reduce stockholders’ aggregate invested capital. Because our earnings and profits are reduced for deprecation and other non-cash items, it is likely that a portion of each distribution will constitute a tax deferred return of capital for U.S. federal income tax purposes.
Distributions Declared by our Board of Directors and Source of Distributions
Beginning February 1, 2006, our Board of Directors declared quarterly distributions in the amount of $0.0019178 per share per day payable to stockholders of record at the close of business each day during the applicable period. The annualized rate declared was equal to 7%, which represents the annualized rate of return on an investment of $10.00 per share attributable to these daily amounts, if paid for each day for a 365 day period (the “Annualized Rate”). Subsequently, our Board of Directors has declared regular quarterly distributions at the Annualized Rate, with the exception of the three-month period ended June 30, 2010. The distributions for the three-month period ended June 30, 2010 were at an aggregate annualized rate of 8% based on the share price of $10.00. Through December 31, 2018, we have paid aggregate distribution in the amount of $215.8 million, which includes cash distributions paid to stockholders and common stock issued under our DRIP.
Total dividends declared during the years ended December 31, 2018 and 2017 were $16.9 million and $17.5 million, respectively.
On March 14, 2019, we declared the quarterly distribution for the three-month period ended March 31, 2019 in the amount of $0.0019178 per share per day payable to stockholders of record on the close of business on the last day of the quarter, which is payable on or about April 15, 2019.
Recent Sales of Unregistered Securities
During the period covered by this Form 10-K, we did not sell any equity securities that were not registered under the Securities Act of 1933.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
You should read the following discussion and analysis together with our consolidated financial statements and notes thereto included in this Annual Report on Form 10-K. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see “Special Note Regarding Forward-Looking Statements” above for a description of these risks and uncertainties. Dollar amounts are presented in thousands, except per share data and where indicated in millions.
Overview
The Lightstone REIT, (together with the Operating Partnership (as defined below), the “Company”, also referred to as “we”, “our” or “us” herein) has and expects to continue to acquire and operate or develop in the future, commercial, residential and hospitality properties and/or make real estate-related investments, principally in the United States. Our acquisitions and investments are, principally conducted through the Operating Partnership, and may include both portfolios and individual properties. As of December 31, 2018, our commercial holdings consisted of retail (two multi-tenant shopping centers), our residential property, which is a ‘‘Class A’’ multi-family complex and, as disclosed in further detail below in “Acquisitions and Dispositions Activity,” our 10 industrial properties which were disposed of on February 7, 2019. The Company’s real estate investments have been and are expected to continue to be held by the Company alone or jointly with other parties.
We do not have employees. We entered into an advisory agreement dated April 22, 2005 with Lightstone Value Plus REIT 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 reimburse the Advisor for certain expenses incurred on our behalf.
We elected to be taxed as a real estate investment trust (a “REIT”), commencing with the taxable year ended December 31, 2005. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our ordinary taxable income to stockholders. As a REIT, we generally will not be subject to U.S. federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, it will then be subject to federal income taxes on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. As of December 31, 2018, we continue to comply with the requirements for maintaining our REIT status.
To maintain our qualification as a REIT, we engage in certain activities such as providing real estate-related services through taxable REIT subsidiaries (“TRSs”). As such, we may still be subject to U.S. federal and state income and franchise taxes from these activities.
Acquisitions and Investment Strategy
We have and may continue to acquire fee interests in multi-tenant, community, power and lifestyle shopping centers, and in malls located in highly trafficked retail corridors, high-barrier to entry markets, and sub- markets with constraints on the amount of additional property supply. We have also acquired and may continue to acquire mid-scale, limited services lodging properties and multi-tenant industrial properties located near major transportation arteries and distribution corridors; multi-tenant office properties located near major transportation arteries; and market-rate, middle market multi-family properties at a discount to replacement cost. Additionally, we have and may continue to make real estate-related investments including certain preferred equity investments in related parties. We have and do not intend to invest in single family residential properties; leisure home sites; farms; ranches; timberlands; unimproved properties not intended to be developed; or mining properties.
Investments in real estate are generally made through the purchase of all or part of a fee simple ownership, or all or part of a leasehold interest. We may also purchase limited partnership interests, limited liability company interests and other equity securities. We may also enter into joint ventures with related parties for the acquisition, development or improvement of properties as well as general partnerships, co-tenancies and other participations with real estate developers, owners and others for the purpose of developing, owning and operating real properties. We will not enter into a joint venture to make an investment that we would not be permitted to make on our own. Not more than 10% of our total assets will be invested in unimproved real property. For purposes of this paragraph, “unimproved real properties” does not include properties acquired for the purpose of producing rental or other operating income, properties under construction and properties for which development or construction is planned within one year.
Acquisition and Dispositions Activity
The following summarizes our acquisition and disposition activities during the years ended December 31, 2018 and 2017:
Acquisition
Lower East Side Moxy Hotel
On December 3, 2018, we, through a subsidiary of the Operating Partnership, acquired three parcels of land located at 147-151 Bowery, New York, New York (, the “Bowery Land”) for aggregate consideration of approximately $56.5 million, excluding closing and other acquisition related costs, on which we intend to develop and construct a 296-room Marriott Moxy hotel (the “Lower East Side Moxy Hotel”). Additionally, on December 6, 2018, we, though a subsidiary of the Operating Partnership, acquired certain air rights located at 329 Broome Street, New York, New York (the “Air Rights”) for approximately $2.4 million, excluding closing and other acquisition related costs. We intend to use the Air Rights in connection with the development and construction of the Lower East Side Moxy Hotel. In connection with the acquisition of the Bowery Land and the Air Rights, the Advisor earned an acquisition fee equal to 2.75% of the gross contractual purchase price, which was approximately $1.6 million.
On December 3, 2018, we entered into a mortgage loan collateralized by the Bowery Land and the Air Rights (the “Bowery Mortgage”) for approximately $35.6 million. The Bowery Mortgage has a term of two years, bears interest at LIBOR+4.25% and requires monthly interest-only payments through its stated maturity with the entire unpaid balance due upon maturity. In connection with the acquisition of the Bowery Land and the Air Rights, we received aggregate proceeds of $32.6 million under the Bowery Mortgage and paid approximately $26.3 million of cash. As a result, the Bowery Mortgage had an outstanding balance and remaining availability of $32.6 million and $3.0 million, respectively, as of December 31, 2018.
As of December 31, 2018, we have incurred and capitalized to construction in progress an aggregate of $63.3 million related to the acquisition of the Bowery Land and Air Rights and other development costs attributable to the Lower East Side Moxy Hotel.
Gulf Coast Industrial Portfolio
We did not meet certain debt service coverage ratios on the non-recourse mortgage indebtedness (the “Gulf Coast Industrial Portfolio Mortgage”), secured by a portfolio of industrial properties (collectively, the “Gulf Coast Industrial Portfolio”) located in New Orleans, Louisiana (seven properties), Baton Rouge, Louisiana (three properties) and San Antonio, Texas (four properties), and as a result, the lender elected to retain the excess cash flow from these properties beginning in July 2011. During the third quarter of 2012, the Gulf Coast Industrial Portfolio Mortgage was transferred to a special servicer, who discontinued scheduled debt service payments and notified us that the Gulf Coast Industrial Portfolio Mortgage was in default and although originally due in February 2017 became due on demand.
On June 5, 2018, the special servicer for the Gulf Coast Industrial Portfolio Mortgage completed a partial foreclosure of the Gulf Coast Industrial Portfolio pursuant to which it foreclosed on the four properties located in San Antonio, Texas (the “San Antonio Assets”). The San Antonio Assets were sold in a foreclosure sale by the special servicer for an aggregate amount of approximately $20.7 million.
Upon consummation of the foreclosure sale, the buyers assumed the significant risks and rewards of ownership and took legal title and physical possession of the San Antonio Assets for the agreed upon sales price of $20.7 million (the “San Antonio Assets Disposition”). We simultaneously received an aggregate credit of approximately $20.7 million which it applied against the total outstanding indebtedness (approximately $19.6 million and $1.1 million of principal and accrued interest payable, respectively) of the Gulf Coast Industrial Portfolio Mortgage.
The aggregate carrying value of the assets transferred and the liabilities extinguished in connection with the foreclosure of the San Antonio Assets were approximately $13.6 million and $20.7 million, respectively.
Since our performance obligations were met at the closing of the foreclosure sales and we have no continuing involvement with the San Antonio Assets an aggregate gain on disposition of real estate of approximately $7.1 million was recognized during the second quarter of 2018.
The disposition of San Antonio Assets did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift that had a major effect on our operations and financial results. Accordingly, the operating results of the San Antonio Assets are reflected in our results from continuing operations for all periods presented through their respective date of disposition.
On February 12, 2019, we and the current holder (the “Lender) of the Gulf Coast Industrial Portfolio Mortgage entered into an assignment agreement (the “Assignment Agreement”) pursuant to which we assigned our membership interests in the remaining 10 industrial properties of the Gulf Coast Industrial Portfolio located in New Orleans, Louisiana and Baton Rouge, Louisiana (collectively, the “Louisiana Assets”) to the Lender with an effective date of February 7, 2019. Under the terms of the Assignment Agreement, the Lender assumed the significant risks and rewards of ownership and took legal title and physical possession of the Louisiana Assets and assumed all related liabilities, including the Gulf Coast Industrial Portfolio Mortgage and its accrued and unpaid interest, and released us of any claims against the liabilities assumed.
The aggregate carrying value of the assets and liabilities transferred in connection with our assignment of our ownership interests in the Louisiana Assets to the Lender was approximately $37.0 million and $49.6 million, respectively (as of December 31, 2018).
As a result, we have fully satisfied all of our obligations with respect to the Gulf Coast Industrial Portfolio Mortgage and all amounts accrued but not yet paid for interest (including default interest) and no amounts are due to the Lender. Additionally, we have no continuing involvement with the assets of Gulf Coast Industrial Portfolio.
DoubleTree - Danvers
On September 7, 2017, we disposed of a hotel and water park (the “DoubleTree - Danvers”) located in Danvers, Massachusetts to an unrelated third party for aggregate consideration of approximately $31.5 million. In connection with the disposition, we recorded a gain on the disposition of real estate of approximately $10.5 million during the third quarter of 2017. The disposition of the DoubleTree - Danvers did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift that had a major effect our operations and financial results. Accordingly, the operating results of the DoubleTree - Danvers are reflected in our results from continuing operations for all periods presented through its date of disposition.
Oakview Plaza
The mortgage indebtedness (the “Oakview Plaza Mortgage”) secured by a retail power center (“Oakview Plaza” located in Omaha, Nebraska matured in January 2017 and was not repaid which constituted a maturity default. The Oakview Plaza Mortgage was subsequently transferred to a special servicer and on September 15, 2017, ownership of Oakview Plaza was transferred to the lender via foreclosure (the “Oakview Plaza Foreclosure”). The carrying value of the assets transferred and the liabilities extinguished in connection with the Oakview Plaza Foreclosure both approximated $27.0 million. The balance of the Oakview Plaza Mortgage as of the date of foreclosure was $25.6 million and the associated accrued default interest was $1.0 million. The disposition of Oakview Plaza did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift that had a major effect on our operations and financial results. Accordingly, the operating results of the Oakview Plaza are reflected in our results from continuing operations for all periods presented through its date of disposition.
Joint Venture 2017 & 2018 activity
We have a 2.5% membership interest in a joint venture (the “Joint Venture”) with Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a related party REIT also sponsored by our Sponsor. The Joint Venture previously acquired our membership interests in a portfolio of 11 hotels in a series of transactions completed during 2015. During the third quarter of 2017, the Joint Venture sold its ownership interests in four of the hotels to an unrelated third party and as a result, holds ownership interests in the seven remaining hotels as well as an additional hotel it acquired on November 6, 2017 from an unrelated third party.
We account for our 2.5% membership interest in the Joint Venture under the cost method and as of December 31, 2018 and 2017, the carrying value of our investment was $1.3 million and $1.5 million, respectively, which is included in investment in related parties on the consolidated balance sheets.
Operating Partnership Activity
Through our Operating Partnership, we have and will continue to acquire and operate or develop commercial, residential, and hospitality properties and make real estate-related investments, principally in the United States. Our commercial holdings currently consist of retail (primarily multi-tenant shopping centers) and industrial properties. Our real estate investments have been and are expected to continue to be held by us alone or jointly with other parties. Since inception, we have completed the following significant property and investments transactions:
Property and Investments Transactions
·St. Augustine Outlet Center: In March 2006, we completed the acquisition of an outlet center located in St. Augustine, Florida (the “St. Augustine Outlet Center”). In 2007, we purchased an adjacent 8.5-acre parcel of undeveloped land, including certain development rights, and used a portion of it to expand the St. Augustine Center, which was completed during 2008.
·Southeastern Michigan Multi-Family Properties: In June 2006 we completed the acquisition of the four apartment communities located in Southeast Michigan (the “Southeastern Michigan Multi-Family Properties”). We subsequently sold three and the remaining one multi-family apartment communities contained in the Southeastern Michigan Multi-Family Properties in May 2016 and July 2016, respectively.
·Oakview Plaza: In December 2006, we completed the acquisition of Oakview Plaza. Ownership of Oakview Plaza was subsequently transferred to the lender via foreclosure in September 2017.
·1407 Broadway: In January 2007, we acquired a 49.0% ownership investment in 1407 Broadway Mezz II, LLC (“1407 Broadway”), which had a sub-leasehold interest (the “Sub-Leasehold Interest”) in a ground lease to an office building located at 1407 Broadway Street in New York, New York. 1407 Broadway subsequently sold the Sub-Leasehold Interest in April 2015.
·Gulf Coast Industrial Portfolio: In February 2007, we purchased a portfolio of industrial properties (collectively, the” Gulf Coast Industrial Portfolio”) located in New Orleans, Louisiana (seven properties), Baton Rouge, Louisiana (three properties) and San Antonio, Texas (four properties). The four industrial properties in Texas were subsequently sold in a foreclosure sale in the second quarter of 2018 and we assigned our membership interests in the remaining 10 industrial properties located in Louisiana to the current holder of the non-recourse mortgage indebtedness secured by the properties with an effective date of February 7, 2019.
·Brazos Crossing: In June 2007, we purchased a land parcel in Lake Jackson, Texas, on which we subsequently completed the development of Brazos Crossing during the first quarter of 2008. We subsequently sold Brazos Crossing in July 2012.
·Camden Multi-Family Properties: In November 2007, we purchased the Camden Multi-Family Properties initially consisting of five apartment communities located in Tampa, Florida (one property), Charlotte, North Carolina (two properties) and Greensboro, North Carolina (two properties). In 2010, we subsequently disposed of three of the apartment communities (one located in Tampa, Florida, one located in Charlotte, North Carolina and one located in Greensboro, North Carolina) through foreclosure transactions. In September 2014 we sold the remaining two apartment communities.
·Houston Extended Stay Hotels: In October 2007, we purchased two Extended Stay Hotels located in Houston, Texas (the “Houston Extended Stay Hotels”), which we subsequently sold in December 2013.
·Sarasota: In November 2007, we purchased Sarasota, which we subsequently sold in July 2014.
·Park Avenue: In April 2008, we made a contribution in exchange for membership interests in a wholly owned subsidiary of Park Avenue Funding, LLC, an affiliated real estate lending company (“Park Avenue”). During 2010, we received our final redemption payments from Park Avenue and no longer have any investment in Park Avenue.
·Mill Run: In March 2008, we acquired a 22.54% ownership interest in Mill Run, LLC (“Mill Run”), which owned two retail properties located in Orlando, Florida, and in August 2009, we acquired an additional 14.26% ownership interest in Mill Run. We disposed of all of our ownership interests in Mill Run in August 2010.
·POAC: In March 2009, we acquired a 25.0% ownership interest in Prime Outlets Acquisition Company (“POAC”), which owned a portfolio of 18 retail outlet malls located throughout the Unites States, Grand Prairie Holdings LLC (“GPH”) and Livermore Holdings LLC (“LVH”). In August 2009, we acquired an additional 15.0% ownership interest in POAC. We disposed of all of our ownership interests in POAC, excluding GPH and LVH, in August 2010. We subsequently disposed of 50.0% of our ownership interests in both GPH and LVH in December 2011 and our remaining 50.0% ownership interests in both GPH and LVH in December 2012.
·Everson Pointe: In December 2010, we acquired a retail shopping center located in Snellville, Georgia (“Everson Pointe”), which we subsequently sold in December 2013.
·DoubleTree - Danvers: In March 2011, we acquired an 80.0% ownership interest in a hotel and water park (the “CP Boston Property”) located in Danvers, Massachusetts, and in February 2012, we acquired the remaining 20.0% ownership interest. During 2012, the CP Boston Property was rebranded to a DoubleTree Suites by Hilton and thereafter referred to as the “DoubleTree - Danvers.” We subsequently sold the DoubleTree - Danvers in September 2017.
·Rego Park Joint Venture: In April 2011, we acquired, through a joint venture partnership (the “Rego Park Joint Venture”), a 90.0% ownership interest in a second mortgage loan secured by a residential apartment complex located in Queens, New York. In June 2013, all amounts due under the mortgage loan owned by the Rego Park Joint Venture were paid in full and subsequently distributed to its members.
·Mortgage Loan Receivable: In June 2011, we acquired a mortgage loan secured by a Holiday Inn Express hotel located in East Brunswick, New Jersey. In June 2017, the mortgage loan was paid in full.
·Gantry Park: In August 2011, we acquired, through a joint venture partnership (the “2nd Street Joint Venture”), an initial 75.0% ownership interest in a fee interest in land located at 50-01 2nd Street in Long Island City, Queens, New York. During the third quarter of 2012, we put approximately 15.8% of our membership interest in the 2nd Street Joint Venture back to our Sponsor and other related parties and as a result, now have an approximately 59.2% membership interest in the 2nd Street Joint Venture. During the third quarter of 2013, the Second Street Joint Venture completed the development of a multi-family residential project containing 199 units ( “Gantry Park”).
·Crowe’s Crossing: In October 2011, we acquired Crowe’s Crossing, which we subsequently sold in January 2014.
·Courtyard - Parsippany: In October 2011, we acquired a mortgage loan secured by a Courtyard by Marriott hotel located in Parsippany, New Jersey (the “Courtyard - Parsippany”). We subsequently took title to the Courtyard - Parsippany through a restructuring of the mortgage loan in July 2012. We contributed our interest in the Courtyard - Parsippany to a joint venture between us and Lightstone II (the “Joint Venture”) in February 2015.
·DePaul Plaza: In November 2011, we acquired a retail center located in Bridgeton, Missouri (“DePaul Plaza”)
·The Hotel Portfolio: In December 2012, we acquired a portfolio comprised of three hotels, consisting of two hotels located in West Des Moines, Iowa (the “Fairfield Inn - Des Moines” and the “SpringHill Suites - Des Moines”) and one hotel located in Willoughby, Ohio (the “Courtyard - Willoughby” and collectively, the “Hotel Portfolio”). We subsequently contributed our interests in the Hotel Portfolio to the Joint Venture in January 2015.
·Holiday Inn Express - Auburn: In January 2013, we acquired a Holiday Inn Express Hotel & Suites (the “Holiday Inn Express - Auburn”) located in Auburn, Alabama. We subsequently contributed our interest in Holiday Inn Express - Auburn to the Joint Venture in June 2015.
·Baton Rouge Hotel Portfolio: In May 2013, we acquired a portfolio comprised of two hotels located in Baton Rouge, Louisiana (the “Courtyard - Baton Rouge” and the “Residence Inn - Baton Rouge”, collectively the “Baton Rouge Hotel Portfolio”). We subsequently contributed our interests in the Courtyard - Baton Rouge and the Residence Inn - Baton Rouge to the Joint Venture in February 2015 and June 2015, respectively. The Joint Venture subsequently sold its interests in the Baton Rouge Portfolio in July 2017.
·Arkansas Hotel Portfolio: In June 2013, we acquired a portfolio comprised of two hotels located in Jonesboro, Arkansas (the Fairfield Inn - Jonesboro) and Rogers, Arkansas (the “Aloft - Rogers”, collectively, the “Arkansas Hotel Portfolio”). We subsequently contributed our interests in the Arkansas Hotel Portfolio to the Joint Venture in June 2015. The Joint Venture subsequently sold its interests in the Arkansas Hotel Portfolio in July 2017.
·Florida Hotel Portfolio: In August 2013, we acquired a portfolio comprised of two hotels located in Miami, Florida (the “Hampton Inn - Miami”) and Fort Lauderdale, Florida (the “Hampton Inn & Suites - Fort Lauderdale”, collectively the “Florida Hotel Portfolio”). We subsequently contributed our interests in the Florida Hotel Portfolio to the Joint Venture in January 2015.
·Lower East Side Moxy Hotel: In December 2018, we acquired three parcels of land located at 147-151 Bowery, New York, New York and certain air rights located at located at 329 Broome Street, New York, New York. The land and air rights were acquired for the development and construction of a 296-room Marriott Moxy hotel.
·Investments in Related parties: We have entered into several agreements with various related party entities that provide for us to make preferred contributions pursuant to certain instruments (the “Preferred Investments”) that entitle us to certain prescribed monthly preferred distributions.
The Preferred Investments are classified as held-to-maturity securities, recorded at cost and included in investments in related parties on the consolidated balance sheets.
The Preferred Investments (dollars in thousands) are summarized as follows:
·365 Bond Street Preferred Investment
In March 2014, we entered into an agreement with various related party entities that provided for us to make contributions of up to $35.0 million, with an additional contribution of up to $10.0 million subject to the satisfaction of certain conditions, which were subsequently met during October 2014, in an affiliate of our Sponsor which owns a parcel of land located at 365 Bond Street in Brooklyn, New York on which it constructed a residential apartment project. Contributions were made pursuant to an instrument, the “365 Bond Street Preferred Investment,” that was entitled to monthly preferred distributions at a rate of 12% per annum and was redeemable by us upon the occurrence of certain events. During the year ended December 31, 2016, we redeemed the entire 365 Bond Street Preferred Investment of $42.2 million.
·40 East End Avenue Preferred Investment
In May 2015, we entered into an agreement with various related party entities that provided for us to make contributions of up to $30.0 million in a related party entity, which is now a joint venture between and affiliate of our Sponsor and Lightstone Real Estate Income Trust Inc. (“Lightstone IV”), a related party REIT also sponsored by our Sponsor, which owns a parcel of land located at the corner of 81st Street and East End Avenue in the Upper East Side of New York City on which it is constructing a luxury residential project consisting of 29 condominiums. Contributions were made pursuant to an instrument, the “40 East End Avenue Preferred Investment,” that is entitled to monthly preferred distributions, initially at a rate of 8% per annum which increased to 12% per annum upon procurement of construction financing in March 2017, and is redeemable by us beginning on April 27, 2022.
·30-02 39th Avenue Preferred Investment
In August 2015, we entered into certain agreements that provided for us to make aggregate contributions of up to $50.0 million in various affiliates of our Sponsor which own a parcel of land located at 30-02 39th Avenue in Long Island City, Queens, New York on which they are constructing a residential apartment project. On March 31, 2017, the 30-02 39th Preferred Investment was amended so that our total aggregate required contributions would decrease by $40.0 million to $10.0 million. Contributions were made pursuant to instruments, the “30-02 39th Street Preferred Investment,” that were entitled to monthly preferred distributions between 9% and 12% per annum and is redeemable by us upon the occurrence of certain capital transactions. As of December 31, 2018, there were no remaining unfunded contributions and the outstanding 30-02 39th Street Preferred Investment is entitled to monthly preferred distributions at a rate of 12% per annum. On February 11, 2019, we redeemed the entire 30-02 39th Street Preferred Investment of $ 10.0 million.
·485 7th Avenue Preferred Investment
In December 2015, we entered into an agreement with various related party entities that provided for us to make contributions of up to $60.0 million in an affiliate of our Sponsor which owns a parcel of land located at 485 7th Avenue, New York, New York on which they constructed a 612-room Marriott Moxy hotel, which opened during the third quarter of 2017. Contributions were made pursuant to an instrument, the “485 7th Avenue Preferred Investment,” that were entitled to monthly preferred distributions at a rate of 12% per annum and was redeemable upon the occurrence of certain capital transactions. In January 2018, the Company redeemed $37.5 million of the 485 7th Avenue Preferred Investment. In April 2018, the Company redeemed the remaining $22.5 million of the 485 7th Avenue Preferred Investment.
·East 11th Street Preferred Investment
On April 21, 2016, we entered into an agreement, as amended, with various related party entities that provided for us to make contributions of up to $40.0 million in an affiliate of our Sponsor (the “East 11th Street Developer”) which owned two residential buildings located at 112-120 East 11th Street and 85 East 10th Street in New York, New York. The East 11th Street Developer is developing a hotel at 112-120 East 11th Street (the “East 11th Street Project”). Contributions were made pursuant to an instrument, the “East 11th Street Preferred Investment,” that entitles us to monthly preferred distributions at a rate of 12% per annum. We may redeem our investment in the East 11th Street Preferred Investment upon the consummation of certain capital transactions. Additionally, the East 11th Street Developer may redeem our investment at any time or upon the consummation of any capital transaction. Any redemption by us or the East 11th Street Developer under the East 11th Street Preferred Investment will be made at an amount equal to the amount we have invested plus a 12.0% annual cumulative, pre-tax, non-compounded return on the aggregate amount we have invested. During 2018, the Company redeemed $14.5 million of the East 11th Street Preferred Investment.
·Miami Moxy Preferred Investment
On September 30, 2016, we entered into an agreement with various related party entities that provides for us to make contributions of up to $20.0 million in an affiliate of our Sponsor (the “Miami Moxy Developer”) which owns parcels of landlocated at 915 through 955 Washington Avenue in Miami Beach, Florida, on which the Miami Moxy Developer is developing a 205-room Marriott Moxy hotel (the “Miami Moxy”). Contributions are made pursuant to an instrument, the “Miami Moxy Preferred Investment,” that entitles us to monthly preferred distributions at a rate of 12% per annum. We may redeem our investment in the Miami Moxy Preferred Investment upon the consummation of certain capital transactions. Additionally, the Miami Moxy Developer may redeem our investment at any time or upon the consummation of any capital transaction. Any redemption by us or the Miami Moxy Developer under the Miami Moxy Preferred Investment will be made at an amount equal to the amount we have invested plus a 12.0% annual cumulative, pre-tax, non-compounded return on the aggregate amount we have invested.
The Joint Venture
During 2015, the Company formed the Joint Venture with Lightstone II. We have a 2.5% membership interest in the Joint Venture and Lightstone II holds the remaining 97.5% membership interest. The Joint Venture previously acquired our membership interests in a portfolio of 11 hotels in a series of transactions completed during 2015. During the third quarter of 2017, the Joint Venture sold its ownership interests in four of the hotels to an unrelated third party and as a result, holds ownership interests in the seven remaining hotels as well as an additional hotel it acquired on November 6, 2017 from an unrelated third party.
Current Environment
Our operating results are impacted by the health of the North American economies. Our business and financial performance, including collection of our accounts receivable, recoverability of assets including investments, may be adversely affected by current and future economic conditions, such as a reduction in the availability of credit, financial markets volatility, and recession.
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 the acquisition and operation of real estate and real estate related investments, other than those referred to in this Form 10-K.
Critical Accounting Estimates and Policies
General
Our consolidated financial statements, included in this annual report, include our accounts, the Operating Partnership and its subsidiaries (over which we exercise financial and operating control). All inter-company balances and transactions have been eliminated in consolidation.
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of our financial statements requires us to make estimates and judgments about the effects of matters or future events that are inherently uncertain. These estimates and judgments may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
On an ongoing basis, we evaluate our estimates, including contingencies and litigation. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
To assist in understanding our results of operations and financial position, we have identified our critical accounting policies and discussed them below. These accounting policies are most important to the portrayal of our results and financial position, either because of the significance of the financial statement items to which they relate or because they require our management's most difficult, subjective or complex judgments.
Revenue Recognition and Valuation of Related Receivables
Our revenue, which is comprised largely of rental income, includes rents that tenants pay in accordance with the terms of their respective leases reported on a straight-line basis over the initial term of the lease. Since our leases may provide for rental increases at specified intervals, straight-line basis accounting requires us to record as an asset, and include in revenue, unbilled rent that we only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. Accordingly, we determine, in our judgment, to what extent the unbilled rent receivable applicable to each specific tenant is collectible. We review unbilled rent receivables on a quarterly basis and take into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collection of unbilled rent with respect to any given tenant is in doubt, we record an increase in our allowance for doubtful accounts or record a direct write-off of the specific rent receivable, which has an adverse effect on our net income for the year in which the allowance is increased or the direct write-off is recorded and decreases our total assets and stockholders’ equity. Revenues from the operations of the hotel are recognized when the services are provided.
In addition, we will defer the recognition of contingent rental income, such as percentage rents, until the specific target which triggers the contingent rental income is achieved. Cost recoveries from tenants will be included in tenant reimbursement income in the period the related costs are incurred.
Investments in Real Estate
We generally record investments in real estate at cost and capitalize improvements and replacements when they extend the useful life or improve the efficiency of the asset. We expense costs of ordinary repairs and maintenance as incurred. We compute depreciation using the straight-line method over the estimated useful lives of the applicable real estate asset. We generally use estimated useful lives of up to thirty-nine years for buildings and improvements, five to ten years for furniture and fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
We make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because, if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
We record assets and groups of assets and liabilities which comprise disposal groups as “held for sale” when all of the following criteria are met: a decision has been made to sell, the assets are available for sale immediately, the assets are being actively marketed at a reasonable price in relation to the current fair value, a sale has been or is expected to be concluded within twelve months of the balance sheet date, and significant changes to the plan to sell are not expected. The assets and disposal groups held for sale are valued at the lower of book value or fair value less disposal costs. For sales of real estate or assets classified as held for sale, we evaluate whether a disposal transaction meets the criteria of a strategic shift and will have a major effect on our operations and financial results to determine if the results of operations and gains on sale of real estate will be presented as part of our continuing operations or as discontinued operations in our consolidated statements of operations. If the disposal represents a strategic shift, it will be classified as discontinued operations for all periods presented; if not, it will be presented in continuing operations.
When circumstances such as adverse market conditions indicate a possible impairment of the value of a property, we will review the recoverability of the property’s carrying value. The review of recoverability is based on our estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. Our forecast of these cash flows considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, we record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the property.
We make subjective assessments as to whether there are impairments in the values of our investments in real estate. We evaluate our ability to collect both interest and principal related to any real estate related investments in which we may invest. If circumstances indicate that such investment is impaired, we reduce the carrying value of the investment to its net realizable value. Such reduction in value will be reflected as a charge to operations in the period in which the determination is made.
Accounting for Acquisitions of Investment Property
The cost of the acquisition in an asset acquisition is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, and certain liabilities such as assumed debt and contingent liabilities on the basis of their relative fair values. Fees incurred related to asset acquisitions are capitalized as part of the cost of the investment.
Upon acquisition of real estate operating properties that meet the definition of a business, we estimate the fair value of acquired tangible assets and identified intangible assets and liabilities and assumed debt and contingent liabilities at the date of acquisition, based upon an evaluation of information and estimates available at that date. Based on these estimates, we evaluate the existence of goodwill or a gain from a bargain purchase and allocate the initial purchase price to the applicable assets, liabilities and noncontrolling interest, if any. As final information regarding fair value of the assets acquired and liabilities assumed and noncontrolling interest is received and estimates are refined, appropriate adjustments are made to the purchase price allocation. The allocations are finalized as soon as all the information necessary is available and in no case later than within twelve months from the acquisition date. 	
Real Estate-Related Debt Investments
We intend to hold our real estate-related debt investments until maturity and accordingly, they are carried at cost, net of any unamortized loan fees, origination fees, discounts, premiums and unfunded commitments. Real estate-related debt investments that are deemed impaired will be carried at amortized cost less a reserve, if deemed appropriate, which approximates fair value.
Investment income will be recognized on an accrual basis and any related premium, discount, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to investment income in the Company’s statements of operations. The amortization of any premium or accretion of any discount is discontinued if such debt investment is reclassified to held for sale.
Impairment on Real Estate-Related Debt Investments
Real estate-related debt investments are considered impaired when, based on current information and events, it is probable that we will not be able to collect principal and interest amounts due according to the contractual terms. We assess the credit quality of our real estate-related debt investments and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment of management is required in this analysis. We consider the estimated net recoverable value of the debt investment as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value of the underlying collateral is less than the net carrying value of the debt investment, a loan loss reserve is recorded with a corresponding charge to provision for loan losses. The loan loss reserve for each debt investment is maintained at a level that is determined to be adequate by management to absorb probable losses.
Income recognition is suspended for a debt investment at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired debt investment is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired debt investment is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method, until an accrual is resumed when the debt investment becomes contractually current and performance is demonstrated to be resumed. A debt investment is written off when it is no longer realizable or is legally discharged.
Inflation
We will be exposed to inflation risk as income from long-term leases is expected to be the primary source of our cash flows from operations. Our long-term leases are expected to contain provisions to mitigate the adverse impact of inflation on our operating results. Such provisions will include clauses entitling us to receive scheduled base rent increases and base rent increases based upon the consumer price index. In addition, our leases are expected to require tenants to pay a negotiated share of operating expenses, including maintenance, real estate taxes, insurance and utilities, thereby reducing our exposure to increases in cost and operating expenses resulting from inflation.
Treatment of Management Compensation, Expense Reimbursements and Operating Partnership Participation Interest
Management of our operations is outsourced to our Advisor and certain other affiliates of our Sponsor. Fees related to each of these services are accounted for based on the nature of such service and the relevant accounting literature. Such fees include acquisition fees associated with the purchase of interests in affiliated real estate entities; asset management fees paid to our Advisor and property management fees paid to our Property Manager, which manage certain of the properties we acquire, or to other unaffiliated third-party property managers, principally for the management of our hospitality properties. These fees are expensed or capitalized to the basis of acquired assets, as appropriate.
Our Property Manager may also perform fee-based construction management services for both our re-development activities and tenant construction projects. These fees are considered incremental to the construction effort and will be capitalized to the associated real estate project as incurred. Costs incurred for tenant construction will be depreciated over the shorter of their useful life or the term of the related lease. Costs related to redevelopment activities will be depreciated over the estimated useful life of the associated project.
Leasing activity at certain of our properties has also been outsourced to our Property Manager. Any corresponding leasing fees we pay are capitalized and amortized over the life of the related lease.
Expense reimbursements made to both our Advisor and Property Manager will be expensed or capitalized to the basis of acquired assets, as appropriate.
Through March 31, 2009, Lightstone SLP, LLC, an affiliate of the Advisor, purchased an aggregate of $30.0 million of special general partner interests (“SLP Units”) in the Operating Partnership at a cost of $100,000 per unit and none thereafter.
Income Taxes
We elected to be taxed as a REIT commencing with the taxable year ended December 31, 2005. If we remain qualified as a REIT, we generally will not be subject to U.S. federal income tax on our net taxable income that we distribute currently to our stockholders. To maintain our REIT qualification under the Internal Revenue Code of 1986, as amended, or the Code, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with generally accepted accounting principles in the United States of America, or GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If we fail to remain qualified for taxation as a REIT in any subsequent year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify as a REIT. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. As of December 31, 2018 and 2017, we had no material uncertain income tax positions and our net operating loss carry forward was $11.5 million. Additionally, even if we qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income.
To maintain our qualification as a REIT, we engage in certain activities through taxable REIT subsidiaries (“TRSs”). As such, we may still be subject to U.S. federal and state income and franchise taxes from these activities.
Results of Operations
Our primary financial measure for evaluating each of our properties is net operating income (“NOI”). NOI represents rental income less property operating expenses, real estate taxes and general and administrative expenses. We believe that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate company because it is a direct measure of the actual operating results of our properties.
The dispositions of the San Antonio Assets (previously included in our Gulf Coast Industrial Portfolio), the DoubleTree - Danvers, and Oakview Plaza did not qualify to be reported as discontinued operations since none of the dispositions represented a strategic shift that had a major effect on our operations and financial results. Accordingly, the operating results of the San Antonio Assets, the DoubleTree - Danvers, and Oakview Plaza are reflected in our results from continuing operations for all periods presented through their respective dates of disposition. The operating results of the industrial buildings contained in the Gulf Coast Industrial Portfolio - San Antonio Assets were included in our Industrial Segment, the DoubleTree - Danvers in our Hospitality Segment and Oakview in our Retail Segment, through their respective dates of disposition.
For the Year Ended December 31, 2018 vs. December 31, 2017
Consolidated
Revenues
Our revenues are comprised of rental income, tenant recovery income and other service income. Total revenues decreased by approximately $19.9 million to $21.2 million for the year ended December 31, 2018 compared to $41.1 million for the same period in 2017. See “Segment Results of Operations for the Year ended December 31, 2018 compared to December 31, 2017” for additional information on revenues by segment.
Property operating expenses
Property operating expenses decreased by approximately $13.6 million to $6.8 million for the year ended December 31, 2018 compared to $20.4 million for the same period in 2017. This decrease is primarily attributable to lower expenses in our Hospitality Segment as a result of the disposition of the DoubleTree - Danvers and to a lesser extent the San Antonio Assets and Oakview Plaza.
Real estate taxes
Real estate taxes expense decreased by approximately $0.7 million to $1.8 million for the year ended December 31, 2018 compared to $2.5 million for the same period in 2017. This decrease is primarily attributable to lower expenses resulting from the dispositions of the DoubleTree - Danvers, the San Antonio Assets and Oakview Plaza.
General and administrative expenses
General and administrative expenses decreased by approximately $3.5 million to $4.3 million for the year ended December 31, 2018 compared to $7.8 million for the same period in 2017 principally due to a decrease in professional fees and to a lesser extent lower asset management fees as a result of the dispositions of the DoubleTree - Danvers, the San Antonio Assets and Oakview Plaza.
Depreciation and amortization
Depreciation and amortization expense decreased by approximately $3.1 million to $6.9 million for the year ended December 31, 2018 compared to $10.0 million for the same period in 2017. This decrease is primarily attributable to lower expense resulting from the dispositions of the DoubleTree - Danvers, Oakview Plaza and the San Antonio Assets.
Gain on disposition of real estate
During the year ended December 31, 2018 we recognized a second quarter gain on disposition of real estate of approximately $7.1 million related to the foreclosure sale of the San Antonio Assets. During the year ended December 31, 2017 we recognized a third quarter gain on disposition of real estate of approximately $10.5 million related to the sale of the DoubleTree - Danvers.
Interest and dividend income
Interest and dividend income decreased by approximately $2.0 million to $18.9 million for the year ended December 31, 2018 compared to $20.9 million for the same period in 2017. The decrease reflects lower investment income of $3.4 million primarily as a result of the redemption of certain Preferred Investments partially offset by higher interest and dividend income from our investments in marketable securities of $1.4 million.
Interest expense
Interest expense, including amortization of deferred financing costs, decreased by approximately $4.1 million to $9.5 million for the year ended December 31, 2018 compared to $13.6 million for the same period in 2017. This decrease primarily reflects lower interest expense resulting from reductions in mortgage indebtedness in connection with the dispositions of the San Antonio Assets and Oakview Plaza and the repayment in full of the mortgage loan collateralized by the St. Augustine Outlet Center.
Unrealized loss on marketable equity securities
During the year ended December 31, 2018, we recorded an unrealized loss on marketable equity securities of $0.8 million which represents the change in the fair value of our marketable equity securities during the year ended December 31, 2018. No unrealized loss on marketable equity securities was recorded for the 2017 period as these amounts were previously recorded as a component of other comprehensive income prior to our adoption, on January 1, 2018, of guidance issued by the Financial Accounting Standards Board that requires companies to measure investments in equity securities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income.
Gain on satisfaction of mortgage receivable
During the second quarter of 2017 we recognized a gain on satisfaction of mortgage receivable of approximately $3.2 million related to the repayment in full of our mortgage receivable collateralized by a Holiday Inn Express located in East Brunswick, New Jersey which we acquired at a discount in 2011.
Noncontrolling interests
The net earnings allocated to noncontrolling interests relates to (i) parties of the Company that hold units in the Operating Partnership, (ii) the interest in PRO-DFJV Holdings LLC (“PRO”) held by our Sponsor and (iii) the ownership interests in the 2nd Street Joint Venture held by our Sponsor and other affiliates.
Segment Results of Operations for the Year Ended December 31, 2018 compared to December 31, 2017
Retail Segment - Our Retail Segment includes the operating results of the St. Augustine Outlet Center and DePaul Plaza during the 2018 and 2017 periods and Oakview Plaza during the 2017 period through September 2017. Ownership of Oakview Plaza was transferred to the lender via foreclosure in September 2017.
The following table represents lease expirations for our Retail Segment as of December 31, 2018:
As of December 31, 2018, we had three tenants, Kohl’s Inc., Saks & Company and H& M Hennes & Mauritz L.P., each with one store, representing approximately 19.9%, 5.4% and 5.1%, respectively, of the total GLA in our Retail Segment. Additionally, as of that date, we did not have any other tenants whose GLA was 5% or more of the total GLA in our Retail Segment.
Revenues and NOI decreased by approximately $1.9 million and $1.2 million, respectively, for the year ended December 31, 2018 compared to the same period in 2017 as a result of the disposition of Oakview Plaza. Revenues and NOI decreased by approximately $0.6 million and $0.3 million, respectively, for the year ended December 31, 2018 compared to the same period in 2017 for our remaining retail properties primarily as a result of the lower average occupancy rate during the 2018 period.
Multi-Family Residential Segment - Our Multi-Family Residential Segment includes the operating results of Gantry Park during the 2018 and 2017 periods.
Revenues and NOI increased for the year ended December 31, 2018 compared to the same period in 2017 primarily as a result of higher average annual revenue per unit during 2018 for Gantry Park, our only multi-family residential property.
Industrial Segment - Our Industrial Segment includes the operating results of the Gulf Coast Industrial Portfolio during the 2018 and 2017 periods. Our San Antonio Assets, four of the 14 industrial properties included in the Gulf Coast Industrial Portfolio, were sold at foreclosure sale on June 5, 2018. We transferred ownership of our Louisiana Assets, the remaining 10 industrial properties included in the Gulf Coast Industrial Portfolio, to the lender effective February 7, 2019.
The following table represents lease expirations for our Industrial Segment as of December 31, 2018:
As of December 31, 2018, we had two tenants, Carrier Enterprise, LLC and PSS World Medical, Inc., representing approximately 17.0% and 7.8%, respectively, of the total GLA in our Industrial Segment. Additionally, as of that date, we did not have any other tenants whose GLA was 5% or more of the total GLA in our Industrial Segment.
Revenues and NOI decreased by approximately $1.6 million and $0.9 million, respectively, for the year ended December 31, 2018 compared to the same period in 2017 as a result of the disposition of the San Antonio Assets on June 5, 2018. Revenues and NOI increased by approximately $0.1 million and $0.2 million, respectively, for the year ended December 31, 2018 compared to the same period in 2017 for our Louisiana Assets.
Hospitality Segment - Our Hospitality Segment includes the operating results of the DoubleTree - Danvers during the 2017 period through September 2017. The DoubleTree - Danvers was sold in September 2017.
On September 7, 2017, the Company disposed of the DoubleTree - Danvers, which was its only remaining consolidated hospitality property and therefore, no longer has a Hospitality Segment.
Financial Condition, Liquidity and Capital Resources
Overview:
Rental revenue, interest and dividend income and borrowings are our principal sources of funds to pay operating expenses, scheduled debt service, routine capital expenditures and distributions, if any, necessary to maintain our status as a REIT.
We expect to meet our other short-term liquidity requirements, including the costs of our expected non-recurring capital expenditures, including development activities, and the funding of the remaining contributions for our investments in related parties (Preferred Investments) of up to $2.3 million as of December 31, 2018, generally through a combination of working capital, redemptions of our Preferred Investments (including the February 11, 2019, redemption in full of our entire 30-02 39th Street Preferred Investment of $ 10.0 million), the remaining availability on the Bowery Mortgage ($3.0 million as of December 31, 2018) and new borrowings. As of December 31, 2018, we had approximately $35.6 million of cash and cash equivalents and $106.9 million of marketable securities and other investments. We believe that these 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.
As of December 31, 2018, we have $150.6 million of outstanding mortgage debt. Our outstanding mortgage debt includes non-recourse mortgage indebtedness (the “Gulf Coast Industrial Portfolio Mortgage”), secured by the Gulf Coast Industrial Portfolio, of $30.6 million that was in default and due on demand (see “Contractual Obligations” for additional information). On February 12, 2019, we and the current holder (the “Lender) of the Gulf Coast Industrial Portfolio Mortgage entered into an assignment agreement (the “Assignment Agreement”) pursuant to which we assigned our membership interests in the remaining 10 industrial properties of the Gulf Coast Industrial Portfolio located in New Orleans, Louisiana and Baton Rouge, Louisiana (collectively, the “Louisiana Assets”) to the Lender with an effective date of February 7, 2019. Under the terms of the Assignment Agreement, the Lender assumed the significant risks and rewards of ownership and took legal title and physical possession of the Louisiana Assets and assumed all related liabilities, including the Gulf Coast Industrial Portfolio Mortgage and its accrued and unpaid interest, and released us of any claims against the liabilities assumed.
We have and intend to continue to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to our stockholders. We may also incur short-term indebtedness, having a maturity of two years or less.
Our charter provides that the aggregate amount of borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. As of December 31, 2018, our total borrowings represented 44% of net assets.
Our borrowings consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. We typically have obtained level payment financing, meaning that the amount of debt service payable would be substantially the same each year. As such, most of the mortgages on our properties provide for a so-called “balloon” payment at maturity and are at a fixed interest rate.
Additionally, in order to leverage our investments in marketable securities and seek a higher rate of return, we have access to borrowings under a margin loan and line of credit collateralized by the securities held with the financial institution that provided the margin loan and line of credit as well as a portion of our Marco OP Units. These loans are due on demand and any outstanding balance must be paid upon the liquidation of securities.
Any future properties that we may acquire or develop may be funded through a combination of borrowings and the proceeds received from the disposition of certain of our commercial assets. These borrowings may consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. Such mortgages may be put in place either at the time we acquire a property or subsequent to our purchasing a property for cash. In addition, we may acquire properties that are subject to existing indebtedness where we choose to assume the existing mortgages. Generally, though not exclusively, we intend to seek to encumber our properties with debt, which will be on a non-recourse basis. This means that a lender’s rights on default will generally be limited to foreclosing on the property. However, we may, at our discretion, secure recourse financing or provide a guarantee to lenders if we believe this may result in more favorable terms. When we give a guaranty for a property owning entity, we will be responsible to the lender for the satisfaction of the indebtedness if it is not paid by the property owning entity.
We may also obtain lines of credit to be used to acquire properties. These lines of credit will be at prevailing market terms and will be repaid from proceeds from the sale or refinancing of properties, working capital or permanent financing. Our Sponsor or its affiliates may guarantee the lines of credit although they will not be obligated to do so.
In addition to meeting working capital needs and distributions, if any, made to our stockholders in order to maintain our status as a REIT, our capital resources are used to make certain payments to our Advisor and our Property Manager, including payments related to asset acquisition fees and asset management fees, the reimbursement of acquisition related expenses to our Advisor and property management fees. We also reimburse our Advisor and its affiliates for actual expenses it incurs for administrative and other services provided to us. Additionally, the Operating Partnership may be required to make distributions to Lightstone SLP, LLC, an affiliate of the Advisor.
The following table represents the fees incurred associated with the payments to our Advisor and our Property Manager:
*Generally, capitalized and amortized over the estimated useful life of the associated asset.
Our charter states that our operating expenses, excluding offering costs, property operating expenses and real estate taxes, as well as acquisition fees and non cash related items (“Qualified Operating Expenses”) are to be less than the greater of 2% of our average invested net assets or 25% of net income. For the year ended December 31, 2018, our Qualified Operating Expenses were less than the greater of 2% of our average invested net assets or 25% of net income.
In addition, our charter states that our acquisition fees and expenses shall not exceed 6% of the contractual purchase price or in the case of a mortgage, 6% of funds advanced unless approved by a majority of the independent directors. For the year ended December 31, 2018, the acquisition fees and acquisition expenses were less than 6% of each of the contract prices.
Summary of Cash Flows.
The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below:
Our principal sources of cash flow are derived from the operation of our rental properties, interest and dividend income on our marketable securities and real estate-related investments, as well as distributions received from related parties. We intend that our properties and real estate-related investments will provide a relatively consistent stream of cash flow that provides us with resources to fund operating expenses, debt service and distributions, if approved by our Board of Directors.
Our principal demands for liquidity are (i) our property operating expenses, (ii) real estate taxes, (iii) insurance costs, (iv) leasing costs and related tenant improvements, (v) capital expenditures, (vi) acquisition and development activities, including our investments in related parties, (vii) debt service and (viii) distributions, if any, to our stockholders and noncontrolling interests. The principal sources of funding for our operations are operating cash flows and proceeds from (i) the sale of marketable securities, (ii) the selective disposition of properties or interests in properties, (iii) the issuance of equity and/or debt securities and (iv) the placement of mortgage and other loans.
Operating activities
Net cash flows provided by operating activities of $20.6 million for the year ended December 31, 2018 consists of the following:
·cash inflows of approximately $18.5 million from our net income from continuing operations after adjustment for non-cash items; and
·cash inflows of approximately $2.1 million associated with the net changes in operating assets and liabilities.
Investing activities
The net cash used in investing activities of $59.4 million for the year ended December 31, 2018 consists primarily of the following:
·purchases of investment property of approximately $64.6 million;
·net proceeds from preferred investments in related parties of $57.6 million; and
·net purchases of marketable securities and short term investments of $52.6 million
Financing activities
The net cash used by financing activities of approximately $40.6 million for the year ended December 31, 2018 is primarily related to the following:
·distributions to our common shareholders of $17.2 million;
·redemptions and cancellation of common stock of $11.4 million;
·aggregate distributions to our noncontrolling interests of $3.4 million; and
·net payments on debt of $8.4 million.
Development Activities
Lower East Side Moxy Hotel
On December 3, 2018, we, through a subsidiary of the Operating Partnership, acquired three parcels of land located at 147-151 Bowery, New York, New York (collectively, the “Bowery Land”) for aggregate consideration of approximately $56.5 million, excluding closing and other acquisition related costs, on which we intend to develop and construct a 296-room Marriott Moxy hotel (the “Lower East Side Moxy Hotel”). Additionally, on December 6, 2018, we acquired certain air rights located at 329 Broome Street, New York, New York (the “Air Rights”) for approximately $2.4 million, excluding closing and other acquisition related costs. We intend to use the Air Rights in connection with the development and construction of the Lower East Side Moxy Hotel. In connection with the acquisition of the Bowery Land and the Air Rights, the Advisor earned an acquisition fee equal to 2.75% of the gross contractual purchase price, which was approximately $1.6 million.
On December 3, 2018, we entered into a mortgage loan collateralized by the Bowery Land and the Air Rights (the “Bowery Mortgage”) for approximately $35.6 million. The Bowery Mortgage has a term of two years, bears interest at LIBOR+4.25% and requires monthly interest-only payments through its stated maturity with the entire unpaid balance due upon maturity. In connection with the acquisition of the Bowery Land and the Air Rights, we received aggregate proceeds of $32.6 million under the Bowery Mortgage and paid approximately $26.3 million of cash. As a result, the Bowery Mortgage had an outstanding balance and remaining availability of $32.6 million and $3.0 million, respectively, as of December 31, 2018.
As of December 31, 2018, we incurred and capitalized to construction in progress an aggregate of $63.3 million related to the acquisition of the Bowery Land and Air Rights and other development costs attributable to the Lower East Side Moxy Hotel.
Exterior Street Land
On February 27, 2019, we acquired two adjacent parcels of land located at 355 and 399 Exterior Street, New York, New York (collectively, the “Exterior Street Land”) for an aggregate purchase price of approximately $59.0 million, excluding closing and other acquisition related costs. We currently expect to develop and construct a multi-family residential property on the Exterior Street Land.
On March 29, 2019, we entered into a $35.0 million loan (the “Exterior Street Loan”) scheduled to mature on April 9, 2020, with two, six-month extension options, subject to certain conditions. The Exterior Street Loan requires monthly interest payments through its maturity date and bears interest at 4.50% through its maturity. The Exterior Street Mortgage is collateralized by the Exterior Street Land.
We believe our capital resources are sufficient to fund our expected development activities related to the Lower East Side Moxy Hotel and the Exterior Land for the next twelve months. However, we ultimately expect to finance a substantial portion of our development costs through construction loans. There can be no assurance we will be successful in obtaining construction financing at favorable terms, if at all.
Contractual Obligations
The following is a summary of our contractual obligations outstanding over the next five years and thereafter as of December 31, 2018.
1)These amounts represent future interest payments related to mortgage payable obligations based on the fixed and variable interest rates specified in the associated debt agreement. All variable rate debt agreements are based on the one month LIBOR rate. For purposes of calculating future interest amounts on variable interest rate debt the one month LIBOR rate as of December 31, 2018 was used.
2)The non-recourse Gulf Coast Industrial Portfolio Mortgage (outstanding principal balance of $30.6 million as of December 31, 2018) was in default and due on demand and therefore no future interest payments on this debt are included in these amounts (See below).
We have access to a margin loan and line of credit from a financial institution that holds custody of certain of the Company’s marketable securities. The margin loan and line of credit had no amounts outstanding as of December 31, 2018.
Certain of our debt agreements require the maintenance of certain ratios, including debt service coverage.
We are currently in compliance with all of our financial debt covenants except as discussed below.
We did not meet certain debt service coverage ratios on the non-recourse mortgage indebtedness (the “Gulf Coast Industrial Portfolio Mortgage”), secured by a portfolio of industrial properties (collectively, the “Gulf Coast Industrial Portfolio”) located in New Orleans, Louisiana (seven properties), Baton Rouge, Louisiana (three properties) and San Antonio, Texas (four properties), and as a result, the lender elected to retain the excess cash flow from these properties beginning in July 2011. During the third quarter of 2012, the Gulf Coast Industrial Portfolio Mortgage was transferred to a special servicer, who discontinued scheduled debt service payments and notified us that the Gulf Coast Industrial Portfolio Mortgage was in default and although originally due in February 2017 became due on demand.
On June 5, 2018, the special servicer for the Gulf Coast Industrial Portfolio Mortgage completed a partial foreclosure of the Gulf Coast Industrial Portfolio pursuant to which it foreclosed on the four properties located in San Antonio, Texas (the “San Antonio Assets”). The San Antonio Assets were sold in a foreclosure sale by the special servicer for an aggregate amount of approximately $20.7 million.
Upon consummation of the foreclosure sale, the buyers assumed the significant risks and rewards of ownership and took legal title and physical possession of the San Antonio Assets for the agreed upon sales price of $20.7 million (the “San Antonio Assets Disposition”). We simultaneously received an aggregate credit of approximately $20.7 million which we applied against the total outstanding indebtedness (approximately $19.6 million and $1.1 million of principal and accrued interest payable, respectively) of the Gulf Coast Industrial Portfolio Mortgage.
The aggregate carrying value of the assets transferred and the liabilities extinguished in connection with the foreclosure of the San Antonio Assets were approximately $13.6 million and $20.7 million, respectively.
Since our performance obligations were met at the closing of the foreclosure sales and we have no continuing involvement with the San Antonio Assets, an aggregate gain on disposition of real estate of approximately $7.1 million was recognized during the second quarter of 2018.
The San Antonio Assets did not qualify to be reported as discontinued operations since their disposition did not represent a strategic shift that had a major effect on our operations and financial results. Accordingly, the operating results of the San Antonio Assets were reflected in our results from continuing operations.
On February 12, 2019, we and the current holder (the “Lender”) of the Gulf Coast Industrial Portfolio Mortgage entered into an assignment agreement (the “Assignment Agreement”) pursuant to which we assigned our membership interests in the Louisiana Assets to the Lender with an effective date of February 7, 2019. Under the terms of the Assignment Agreement, the Lender assumed the significant risks and rewards of ownership and took legal title and physical possession of the Louisiana Assets and assumed all related liabilities, including the Gulf Coast Industrial Portfolio Mortgage and its accrued and unpaid interest, and released us of any claims against the liabilities assumed.
The aggregate carrying value of the assets and liabilities transferred in connection with our assignment of our ownership interests in the Louisiana Assets to the Lender was approximately $37.0 million and $49.6 million, respectively (as of December 31, 2018).
As a result, as of February 7, 2019, we have fully satisfied all of our obligations with respect to the Gulf Coast Industrial Portfolio Mortgage and all amounts accrued but not yet paid for interest (including default interest) and no amounts are due to the Lender. Additionally, we have no continuing involvement with the assets of Gulf Coast Industrial Portfolio.
Additionally, the Company previously accrued default interest expense on a non-recourse mortgage loan (the “Oakview Plaza Mortgage”), pursuant to the terms of its loan agreement during the period from January 2017 through September 2017. The Oakview Plaza Mortgage was secured by a retail shopping center located in Omaha, Nebraska (“Oakview Plaza”). The lender foreclosed on Oakview Plaza in September 2017.
Default interest expense related to the Gulf Coast Industrial Portfolio Mortgage of $1.6 million was accrued during year ended December 31, 2018 and default interest expense related to both the Gulf Coast Industrial Portfolio Mortgage and the Oakview Plaza Mortgage of $3.0 million was accrued during the year ended December 31, 2017. Cumulative accrued default interest expense (solely related the Gulf Coast Industrial Portfolio Mortgage) of $12.8 million and $11.2 million is included in accounts payable, accrued expenses and other liabilities on our consolidated balance sheets as of December 31, 2018 and 2017, respectively.
The Company has no additional significant maturities of mortgage debt over the next 12 months.
Funds from Operations and Modified Funds from Operations
	The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.
Because of these factors, the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has published a standardized measure of performance known as funds from operations ("FFO"), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT's operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.
We 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 exclude acquisition and transaction-related fees and expenses (which includes costs incurred in connection with strategic alternatives), amounts relating to deferred rent receivables and amortization of market lease and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.
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.
Notes:
(1)The purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of our business plan to generate operational income and cash flows in order to make distributions to investors. In evaluating investments in real estate, management differentiates the costs to acquire the investment from the operations derived from the investment. Such information would be comparable only for non-listed REITs that have completed their acquisition activity and have other similar operating characteristics. By excluding expensed acquisition costs, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our advisor or third parties. Acquisition fees and expenses under GAAP are considered operating expenses and as expenses included in the determination of net income and income from continuing operations, both of which are performance measures under GAAP. Such fees and expenses are paid in cash, and therefore such funds will not be available to distribute to investors. Such fees and expenses negatively impact our operating performance during the period in which properties are being acquired. Therefore, MFFO may not be an accurate indicator of our operating performance, especially during periods in which properties are being acquired. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property. Acquisition fees and expenses will not be paid or reimbursed, as applicable, to our advisor even if there are no further proceeds from the sale of shares in our offering, and therefore such fees and expenses would need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties or from ancillary cash flows.
(2)Under GAAP, certain intangibles are accounted for at cost and reviewed at least annually for impairment, and certain intangibles are assumed to diminish predictably in value over time and amortized, similar to depreciation and amortization of other real estate related assets that are excluded from FFO. However, because real estate values and market lease rates historically rise or fall with market conditions, management believes that by excluding charges relating to amortization of these intangibles, MFFO provides useful supplemental information on the performance of the real estate.
(3)Management believes that adjusting for mark-to-market adjustments is appropriate because they are nonrecurring items that may not be reflective of ongoing operations and reflects unrealized impacts on value based only on then current market conditions, although they may be based upon current operational issues related to an individual property or industry or general market conditions. The need to reflect mark-to-market adjustments is a continuous process and is analyzed on a quarterly and/or annual basis in accordance with GAAP.
(4)Management believes that adjusting for gains or losses related to extinguishment/sale of debt, derivatives or securities holdings is appropriate because they are items that may not be reflective of ongoing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods.
(5)Under GAAP, rental receipts are allocated to periods using various methodologies. This may result in income recognition that is significantly different than underlying contract terms. By adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments, providing insight on the contractual cash flows of such lease terms and debt investments, and aligns results with management’s analysis of operating performance.
(6)Our MFFO results include certain unusual items as set forth in the table below. We believe it is helpful to our investors in understanding our operating results to both highlight them and present adjusted MFFO excluding their impact (as shown below).
(a)Represents default interest expense on our non-recourse mortgage loan collateralized by our Gulf Coast Industrial Portfolio. Although the lender is currently not charging us or being paid interest at the stated default rate, we have accrued interest at the default rate pursuant to the terms of the loan agreement. Additionally, we are engaged in discussions with the lender to restructure the non-recourse mortgage loan and do not expect to pay the default interest.
(b)Represents the accrual of default interest expense on our non-recourse mortgage loan secured by Oakview Plaza. The Oakview Plaza Mortgage Loan matured in January 2017 and was not repaid which constituted a maturity default. In connection with the Oakview Plaza Foreclosure which occurred on September 15, 2017, approximately $1.0 million of accrued default interest was extinguished.
Excluding the impact of these unusual items from our MFFO, after taking into consideration allocations to noncontrolling interests, our adjusted MFFO would have been $16.6 million and $18.9 million for the years ended December 31, 2018 and 2017, respectively.
The table below presents our cumulative distributions paid and cumulative FFO:
For the year ended December 31, 2018, we paid cash distributions of $17.2 million. FFO attributable to Company's common shares for the year ended December 31, 2018 was $15.0 million and cash flow from operations was $20.6 million. For the year ended December 31, 2017, we paid cash distributions of $17.5 million. FFO attributable to Company's common shares for the year ended December 31, 2017 was $15.9 million and cash flow from operations was $20.8 million.
Lightstone SLP, LLC and SLP Units
	Lightstone SLP, LLC, an affiliate of our Sponsor, has purchased SLP units in the Operating Partnership. These SLP units, the purchase price of which will be repaid only after stockholders receive a stated preferred return and their net investment, will entitle Lightstone SLP, LLC to a portion of any regular distributions made by the Operating Partnership.
Since inception through December 31, 2018, cumulative SLP Unit distributions declared were $23.4 million, of which $22.9 million have been paid. Such distributions, paid current at a 7% annualized rate of return to Lightstone SLP, LLC through December 31, 2018, with the exception of the distribution related to the three months ended June 30, 2010, which was paid at an 8% annualized rate will always be subordinated until stockholders receive a stated preferred return. (See Note 12 of the notes to consolidated financial statements for further information related to the SLP Units)
The initial and subsequent stockholder return thresholds are measured purely based on distributions. The initial and subsequent return thresholds are not based on any measure of the Company’s performance or changes in NAV. Subsequent distributions to the SLP units are not limited to any specific measure of available cash; however, SLP units will receive no distributions until after stockholders receive a 7% cumulative return calculated purely based on distributions. The source of the distributions to the SLP units has been from operating cash flow, issuance of shares under our DRIP and excess cash other than operating cash flow.
New Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been adopted during 2018 and certain accounting standards that we have not yet been required to implement and may be applicable to our future operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Lightstone Value Plus Real Estate Investment Trust, Inc. and Subsidiaries
(a Maryland corporation)
Index
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Lightstone Value Plus Real Estate Investment Trust, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lightstone Value Plus Real Estate Investment Trust, Inc. and Subsidiaries (the “Company") as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2018 and 2017, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for marketable equity securities in 2018 due to the adoption of Accounting Standards Update 2016-01.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the United States Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ EisnerAmper LLP
We have served as the Company’s auditor since 2010.
EISNERAMPER LLP
Iselin, New Jersey
April 1, 2019
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
See Note 2 for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated financial statements
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
1. Organization
Lightstone Value Plus Real Estate Investment Trust, Inc., a Maryland corporation (“Lightstone REIT”) was formed on June 8, 2004 (date of inception) and subsequently qualified as a real estate investment trust (“REIT”) during the year ending December 31, 2006. Lightstone REIT was formed primarily for the purpose of engaging in the business of investing in and owning commercial and residential real estate properties located throughout the United States.
Lightstone REIT is structured as an umbrella partnership real estate investment trust, or UPREIT, and substantially all of the Company’s current and future business is and will be conducted through Lightstone Value Plus REIT, L.P., a Delaware limited partnership formed on July 12, 2004 (the “Operating Partnership”), in which Lightstone REIT, as the general partner, held a 98% interest as of December 31, 2018 (See Noncontrolling Interests below for discussion of other owners of the Operating Partnership).
The Lightstone REIT and the Operating Partnership and its subsidiaries are collectively referred to as the ‘‘Company’’ and the use of ‘‘we,’’ ‘‘our,’’ ‘‘us’’ or similar pronouns refers to the Lightstone REIT, its Operating Partnership or the Company as required by the context in which such pronoun is used.
The Company is managed by Lightstone Value Plus REIT, LLC (the “Advisor”), an affiliate of the Lightstone Group, LLC, under the terms and conditions of an advisory agreement. The Lightstone Group, LLC previously served as the Company’s sponsor (the “Sponsor”) during its initial public offering, which closed on October 10, 2008. 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. Through his ownership and control of The Lightstone Group, LLC, David Lichtenstein is the indirect owner of the Advisor and the indirect owner and manager of Lightstone SLP, LLC, which has subordinated profits interests (“SLP units”) in the Operating Partnership. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT or the Operating Partnership.
The Company’s stock is not currently listed on a national securities exchange. The Company may seek to list its stock for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time.
On October 20, 2017, the Company filed a definitive proxy statement with the U.S. Securities and Exchange Commission (the “SEC”) pursuant to which it sought stockholder approval to amend its charter to remove the requirement that the Company must either list its stock on a national securities exchange or seek stockholder approval to adopt a plan of liquidation of the corporation on or before October 10, 2018 (the “Charter Amendment”). On December 11, 2017, the stockholders approved the Charter Amendment.
As of December 31, 2018, on a collective basis, the Company wholly or majority owned and consolidated the operating results and financial condition of two retail properties containing a total of approximately 0.5 million square feet of gross leasable area (“GLA”), 10 industrial properties containing a total of approximately 0.5 million square feet of GLA (on February 12, 2019, the Company disposed of the 10 industrial properties) and one multi-family residential property containing a total of 199 units. All of the Company’s properties are located within the United States. As of December 31, 2018, the retail properties, the industrial properties and the multi-family residential property were 83%, 72%, and 94% occupied based on a weighted-average basis, respectively.
Noncontrolling Interests -
Partners of Operating Partnership
On July 6, 2004, the Advisor contributed $2 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The limited partner has the right to convert operating partnership units into cash or, at the option of the Company, an equal number of shares of common stock of the Company, as allowed by the limited partnership agreement.
In connection with the Company’s initial public offering, Lightstone SLP, LLC, an affiliate of the Advisor, purchased an aggregate of $30.0 million of special general partner interests (“SLP Units”) in the Operating Partnership at a cost of $100,000 per unit.
In addition, 497,209 units of common limited partnership interest in the Operating Partnership (“Common Units”) were issued during the years ended December 31, 2008 and 2009 and remain outstanding as of December 31, 2018.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Other Noncontrolling Interests in Consolidated Subsidiaries
Other noncontrolling interests in consolidated subsidiaries include ownership interests in Pro-DFJV Holdings LLC (“PRO”) held by the Company’s Sponsor and 50-01 2nd St. Associates LLC (the “2nd Street Joint Venture”) held by the Company’s Sponsor and other affiliates. PRO’s holdings principally consist of Marco OP Units and Marco II OP Units (see Note 6). The 2nd Street Joint Venture owns Gantry Park, a multi-family apartment building located in Queens, New York.
See Note 11 for further discussion of noncontrolling interests.
Operating Partnership Activity
Acquisitions and Investments:
Through its Operating Partnership, the Company has and will continue to seek to acquire and operate or develop commercial, residential, and hospitality properties and make real estate-related investments, principally in the United States. The Company’s commercial holdings currently consist of retail (two multi-tenanted shopping centers) and industrial properties (on February 12, 2019, the Company disposed of its industrial properties). The Company’s real estate investments have been and are expected to continue to be held by the Company alone or jointly with other parties.
Related Parties:
Properties acquired and development activities have been and may continue to be managed by affiliates of Lightstone Value Plus REIT Management LLC (collectively, the “Property Managers”).
The Company’s Advisor and its affiliates, the Property Managers and Lightstone SLP, LLC are related parties of the Company. Certain of these entities have received or will receive compensation and fees for services provided for the investment and management of the Company’s assets. These entities received fees during the Company’s offering stage (which was completed on October 10, 2008), and have and will continue to receive fees during its acquisition, operational and liquidation stages. The compensation level during the offering stage was based on a percentage of the offering proceeds raised and the compensation levels during the acquisition and operational stages are based on percentages of the contractual purchase price of the acquired properties and the annual revenue earned from such properties, and other such fees as outlined in each of the respective agreements. See Note 12 for additional information.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Lightstone REIT and the Operating Partnership and its subsidiaries (over which the Company exercises financial and operating control). As of December 31, 2018, Lightstone REIT had a 98% general partnership interest in the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The most significant assumptions and estimates relate to the valuation of real estate and real estate-related investments, depreciable lives, and revenue recognition. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.
Investments in entities where the Company has the ability to exercise significant influence, but does not exercise financial and operating control, and is not considered to be the primary beneficiary of a variable interest entity will be accounted for using the equity method. Investments in entities where the Company has virtually no influence will be accounted for using the cost method.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when made to be cash equivalents.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Supplemental cash flow information for the periods indicated is as follows:
Marketable Securities
Marketable securities consist of equity and debt securities that are designated as available-for-sale. Marketable debt securities are recorded at fair value and unrealized holding gains or losses are reported as a component of accumulated other comprehensive income (“AOCI”).
On January 1, 2018, the Company adopted guidance issued by the Financial Accounting Standards Board (“FASB”) that required it to change the way it previously accounted for marketable equity securities. The Company’s marketable equity securities are measured at fair value and starting on January 1, 2018, all unrealized holding gains and losses are recognized on the consolidated statements of operations. Prior to January 1, 2018, all unrealized holding gains or losses were reported as a component of AOCI. In connection with its adoption of this guidance, the Company reclassified $15.5 million of aggregate net unrealized gains from AOCI to the opening accumulated surplus balance as of January 1, 2018, both which are components of stockholders’ equity in the consolidated balance sheets.
Realized gains or losses resulting from the sale or redemptions of these debt and equity securities are determined based on the specific identification of the securities sold. An impairment charge is recognized when the decline in the fair value of a security below the amortized cost basis is determined to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the duration and severity of any decline in fair value below our amortized cost basis, any adverse changes in the financial condition of the issuers’ and its intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. The Board of Directors has authorized the Company from time to time to invest the Company’s available cash in marketable securities of real estate related companies. The Board of Directors has approved investments of marketable securities of real estate companies up to 30% of the Company’s total assets to be made at the Company’s discretion, subject to compliance with any REIT or other restrictions.
Revenue Recognition
Minimum rents are recognized on a straight-line accrual basis, over the terms of the related leases. The capitalized above-market lease values and the capitalized below-market lease values are amortized as an adjustment to rental income over the initial lease term, including any below-market renewal periods taken into account. Percentage rents, which are based on commercial tenants’ sales, are recognized once the sales reported by such tenants exceed any applicable breakpoints as specified in the tenants’ leases. Recoveries from commercial tenants for real estate taxes, insurance and other operating expenses, and from residential tenants for utility costs, are recognized as revenues in the period that the applicable costs are incurred. Room revenue for the hotel properties are recognized as stays occur. Amounts paid in advance are deferred until stays occur. Other service income consisted of revenues from food and beverage services, water park admissions and arcade income from our DoubleTree - Danvers property, which was disposed of in September 2017 (See Note 8), and which was recognized when consumed.
Tenant and Other Accounts Receivable
The Company makes estimates of the uncollectability of its tenant and other accounts receivable related to base rents, expense reimbursements and other revenues. The Company analyzes tenant and other accounts receivable and historical bad debt levels, customer credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, tenants in bankruptcy are analyzed and estimates are made in connection with the expected recovery of pre-petition and post-petition claims. The Company’s reported net income or loss is directly affected by management’s estimate of the collectability of tenant and other accounts receivable.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Investments in Real Estate
Accounting for Acquisitions of Investment Property
The cost of the real estate assets acquired in an asset acquisition is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, based in each case on their relative fair values. Fees incurred related to asset acquisitions are capitalized as part of the cost of the investment.
Upon the acquisition of real estate operating properties that meet the definition of a business, the Company estimates the fair value of acquired tangible assets and identified intangible assets and liabilities and assumed debt at the date of acquisition, based on evaluation of information and estimates available at that date. Based on these estimates, the Company evaluates the existence of goodwill or a gain from a bargain purchase and allocates the initial purchase price to the applicable assets, liabilities and noncontrolling interests, if any. As final information regarding fair value of the assets acquired, liabilities assumed and noncontrolling interests is received and estimates are refined, appropriate adjustments are made to the purchase price allocation. The allocations are finalized as soon as all the information necessary is available and in no case later than within twelve months from the acquisition date.
Impairment Evaluation
Management evaluates the recoverability of its investments in real estate assets and real estate-related investments at the lowest identifiable level, the individual property level. Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value.
The Company evaluates the long-lived assets on a quarterly basis and will record an impairment charge when there is an indicator of impairment and the undiscounted projected cash flows are less than the carrying amount for a particular property. The estimated cash flows used for the impairment analysis and the determination of estimated fair value are based on the Company’s plans for the respective assets and the Company’s views of market and economic conditions. The estimates consider matters such as current and historical rental rates, occupancies for the respective properties and comparable properties, and recent sales data for comparable properties. Changes in estimated future cash flows due to changes in the Company’s plans or views of market and economic conditions could result in recognition of impairment losses, which, under the applicable accounting guidance, could be substantial.
Real Estate-Related Debt Investments
The Company intends to hold its real estate-related debt investments until maturity and accordingly, they are carried at cost, net of any unamortized loan fees, origination fees, discounts, premiums and unfunded commitments. Real estate-related debt investments that are deemed impaired will be carried at amortized cost less a reserve, if deemed appropriate, which approximates fair value.
Investment income and any related premium, discount, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to investment income in the Company’s statements of operations. The amortization of any premium or accretion of any discount is discontinued if such debt investment is reclassified to held for sale.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Impairment on Real Estate-Related Debt Investments
Real estate-related debt investments are considered impaired when, based on current information and events, it is probable that the Company will not be able to collect principal and interest amounts due according to the contractual terms. The Company assesses the credit quality of its real estate-related debt investments and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment of management is required in this analysis. The Company considers the estimated net recoverable value of the debt investment as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value of the underlying collateral is less than the net carrying value of the debt investment, a loan loss reserve is recorded with a corresponding charge to provision for loan losses. The loan loss reserve for each debt investment is maintained at a level that is determined to be adequate by management to absorb probable losses.
Income recognition is suspended for a debt investment at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired debt investment is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired debt investment is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method, until an accrual is resumed when the debt investment becomes contractually current and performance is demonstrated to be resumed. A debt investment is written off when it is no longer realizable or is legally discharged.
Depreciation and Amortization
Depreciation expense is computed based on the straight-line method over the estimated useful life of the applicable real estate asset. We generally use estimated useful lives of up to thirty-nine years for buildings and improvements and five to ten years for furniture and fixtures. Expenditures for tenant improvements and construction allowances paid to commercial tenants are capitalized and amortized over the initial term of each lease or the useful life if shorter. Expenditures for ordinary maintenance and repairs are charged to expense as incurred.
Deferred Costs
The Company capitalizes initial direct costs associated with financing activities. The costs are capitalized upon the execution of the loan, presented in the consolidated balance sheets as a direct deduction from the carrying value of the corresponding loan and amortized over the initial term of the corresponding loan. Amortization of deferred loan costs begin in the period during which the loan is originated using the effective interest method over the term of the loan. The Company capitalizes initial direct costs associated with leasing activities. The costs are capitalized upon the execution of the lease and amortized over the initial term of the corresponding lease.
Income Taxes
The Company elected to be taxed as a REIT commencing with the taxable year ended December 31, 2005. If the Company qualifies as a REIT, it generally will not be subject to U.S. federal income tax on its taxable income or capital gain that it distributes to its stockholders. To maintain its REIT qualification, the Company must meet a number of organizational and operational requirements, including a requirement that it annually distribute to its stockholders at least 90% of its REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If the Company fails to remain qualified for taxation as a REIT in any subsequent year and does not qualify for certain statutory relief provisions, its income for that year will be taxed at the regular corporate rate, and it may be precluded from qualifying for treatment as a REIT for the four-year period following its failure to qualify as a REIT. Such an event could materially adversely affect the Company’s net income and net cash available for distribution to stockholders.
The Company has net operating loss carryforwards of $11.5 million for U.S. federal income tax purposes as of December 31, 2018. The availability of such loss carryforwards will begin to expire in 2026. As the Company does not consider it likely that it will realize any future benefit from its loss carry-forward, any deferred asset resulting from the final determination of its tax loss carryforwards will be fully offset by a valuation allowance of the same amount.
The Company engages in certain activities through taxable REIT subsidiaries (“TRSs”). As such, the Company may be subject to U.S. federal and state income taxes and franchise taxes from these activities.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
As of December 31, 2018 and 2017, the Company had no material uncertain income tax positions. Additionally, even if the Company continues to qualify as a REIT, it may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on its undistributed income.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, restricted escrows, tenants’ accounts receivable, and accounts payable and accrued expenses approximate their fair values because of the short maturity of these instruments. The estimated fair value of the outstanding notes payable (line of credit) approximated its carrying value ($18.6 million as of December 31, 2017) because of its floating interest rate.
The estimated fair value (in millions) of the Company’s debt is summarized as follows:
The fair value of the mortgages payable was determined by discounting the future contractual interest and principal payments by estimated current market interest rates.
Accounting for Derivative Financial Investments and Hedging Activities.
The Company may enter into derivative financial instrument transactions in order to mitigate interest rate risk on a related financial instrument. The Company may designate these derivative financial instruments as hedges and apply hedge accounting. The Company records all derivative instruments at fair value on the consolidated balance sheets and changes in the fair value of the instruments are recorded in the consolidated statements of operations.
Stock-Based Compensation
The Company had a stock-based incentive award plan for the independent directors of its Board. This plan expired in April 2015. Awards were granted at fair market value on the date of the grant with fair value estimated using the Black-Scholes-Merton option valuation model, which incorporates assumptions surrounding the volatility, dividend yield, the risk-free interest rate, expected life, and the exercise price as compared to the underlying stock price on the grant date. The tax benefits, if any, associated with these share-based payments are classified as financing activities in the consolidated statement of cash flows. For the years ended December 31, 2018 and 2017, the Company had no material compensation costs related to the incentive award plan.
Concentration of Risk
The Company maintains its cash and cash equivalents in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on its cash and cash equivalents.
Net Earnings per Share
Basic net earnings per share is calculated by dividing net income attributable to common shareholders by the weighted-average number of shares of common stock outstanding during the applicable period. Dilutive income per share includes the potentially dilutive effect, if any, which would occur if our outstanding options to purchase our common stock were exercised. For all periods presented dilutive net income per share is equivalent to basic net income per share.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Recently Adopted Accounting Pronouncements
Effective January 1, 2018, the Company adopted guidance issued by FASB that requires amounts that are generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this standard using the retrospective transition method, which resulted in an increase of $1.4 million in net cash provided by operating activities and a decrease of $1.3 million in net cash used in investing activities for the year ended December 31, 2017.
As required by the Company’s lenders, restricted cash is held in escrow accounts for anticipated capital expenditures, real estate taxes, and other reserves for certain of our consolidated properties. Capital reserves are typically utilized for non-operating expenses such as tenant improvements, leasing commissions, and major capital expenditures. Alternatively, a lender may require its own formula for an escrow of capital reserves. Restricted cash may also include certain funds temporarily placed in escrow with qualified intermediaries to facilitate potential like-kind exchange transactions in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended.
The following is a summary of the Company’s cash, cash equivalents, and restricted cash total as presented in our statements of cash flows for the periods presented:
Effective January 1, 2018, the Company adopted guidance issued by the FASB that that requires companies to measure investments in equity securities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income, using a modified-retrospective approach. This resulted in a $15.5 million reclassification of aggregate net unrealized gains from AOCI to the opening accumulated surplus balance as of January 1, 2018, both of which are components of stockholders’ equity in the consolidated balance sheet (see Note 6).
Effective January 1, 2018, the Company adopted guidance issued by the FASB that clarifies the definition of a business and assists in the evaluation of whether a transaction will be accounted for as an acquisition of an asset or as a business combination. The guidance provides a test to determine when a set of assets and activities acquired is not a business. When substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. Additionally, assets acquired, liabilities assumed, and any noncontrolling interest will be measured at their relative fair values. The Company anticipates future acquisitions of real estate assets, if any, will likely qualify as an asset acquisition. Therefore, starting on January 1, 2018 all transaction costs associated with asset acquisitions are capitalized and accounted for in accordance with this guidance.
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 adopted this standard for the year beginning on January 1, 2018 using the modified retrospective approach. The adoption of this pronouncement had no effect on our consolidated financial statements since, with the disposal of the DoubleTree - Danvers in September 2017, substantially all revenues now consist of rental income from leasing arrangements, which is specifically excluded from the standard.
New Accounting Pronouncements
In August 2018, the SEC adopted the final rule amending certain disclosure requirements which will 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 its 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 its second and third quarter interim financial statement filings and the inclusion of corresponding prior period statement of stockholders’ equity for all periods presented.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
In June 2016, the FASB issued an accounting standards update which replaces the incurred loss impairment methodology currently in use with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This guidance will not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued an accounting standards update which supersedes the existing lease accounting model, and modifies both lessee and lessor accounting. The new guidance will require lessees to recognize a liability to make lease payments and a right-of-use asset, initially measured at the present value of lease payments, for both operating and financing leases, with classification affecting the pattern of expense recognition in the statement of earnings. For leases with a term of 12 months or less, lessees will be permitted to make an accounting policy election by class of underlying asset to not recognize lease liabilities and lease assets. The standard offers several practical expedients for transition and certain expedients specific to lessees or lessors. Both lessees and lessors are permitted to make an election to apply a package of practical expedients available for implementation under the standard. The Company intends to apply the package of practical expedients and certain other transition expedients. For transition, the Company intends to recognize all effects of transition in the beginning of the adoption reporting period on January 1, 2019. We expect that the adoption of this standard will result in the recognition of right-of-use assets and related lease liability accounts on the consolidated balance sheet but will not have a material effect on our consolidated financial position or our results of operations.
The Company has reviewed and determined that other recently issued accounting pronouncements will not have a material impact on its financial position, results of operations and cash flows, or do not apply to its current operations.
Reclassifications
Certain prior period amounts may have been reclassified to conform to the current year presentation.
3. Lower East Side Moxy Hotel
On December 3, 2018, the Company, through a subsidiary of the Operating Partnership, acquired three parcels of land located at 147-151 Bowery, New York, New York (collectively, the “Bowery Land”) from 151 Emmut Properties LLC and 145-149 Bowery LLC, both unaffiliated third parties, for aggregate consideration of approximately $56.5 million, excluding closing and other acquisition related costs, on which it intends to develop and construct a 296-room Marriott Moxy hotel (the “Lower East Side Moxy Hotel”). Additionally, on December 6, 2018, the Company, though a subsidiary of the Operating Partnership, acquired certain air rights located at 329 Broome Street, New York, New York (the “Air Rights”) from B.R.P. Realty Corp., an unaffiliated third party, for approximately $2.4 million, excluding closing and other acquisition related costs. The Company intends to use the Air Rights in connection with the development and construction of the Lower East Side Moxy Hotel. In connection with the acquisition of the Bowery Land and the Air Rights, the Advisor earned an acquisition fee equal to 2.75% of the gross contractual purchase price, which was approximately $1.6 million.
On December 3, 2018, the Company entered into a mortgage loan collateralized by the Bowery Land and the Air Rights (the “Bowery Mortgage”) for approximately $35.6 million. The Bowery Mortgage has a term of two years, bears interest at LIBOR+4.25% and requires monthly interest-only payments through its stated maturity with the entire unpaid balance due upon maturity. In connection with the acquisition of the Bowery Land and the Air Rights, the Company received aggregate proceeds of $32.6 million under the Bowery Mortgage and paid approximately $26.3 million of cash. As a result, the Bowery Mortgage had an outstanding balance and remaining availability of $32.6 million and $3.0 million, respectively, as of December 31, 2018.
As of December 31, 2018, the Company has incurred and capitalized to construction in progress (see Note 7) an aggregate of $63.3 million (including the acquisition fee of $1.6 million and $0.2 million of interest) related to the acquisition of the Bowery Land and Air Rights and other development costs attributable to the Lower East Side Moxy Hotel.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
4. Investments in Related Parties
Preferred Investments
The Company has entered into agreements with various related party entities that provide for it to make preferred contributions pursuant to certain instruments (the “Preferred Investments”) that entitle it to certain prescribed monthly preferred distributions (see below for additional information). The Preferred Investments had an aggregate balance of $100.7 million and $158.3 million as of December 31, 2018 and 2017, respectively, and are classified as held-to-maturity securities, recorded at cost and included in investments in related parties on the consolidated balance sheets. The fair value of these investments approximated their carrying values based on market rates for similar instruments. As of December 31, 2018, remaining contributions of up to $2.3 million were unfunded. Additionally, during the years ended December 31, 2018 and 2017, the Company recognized investment income of $14.3 million and $17.6 million, respectively, which is included in interest and dividend income on the consolidated statements of operations.
The Preferred Investments (dollar amounts in thousands) are summarized as follows:
40 East End Avenue Preferred Investment
In May 2015, the Company entered into an agreement with various related party entities that provided for it to make contributions of up to $30.0 million in a related party entity, which is now a joint venture between an affiliate of our Sponsor and Lightstone Real Estate Income Trust Inc. (“Lightstone IV”), a related-party REIT also sponsored by the Company’s Sponsor, which owns a parcel of land located at the corner of 81st Street and East End Avenue in the Upper East Side of New York City on which it is constructing a luxury residential project consisting of 29 condominiums. Contributions were made pursuant to an instrument, the “40 East End Avenue Preferred Investment,” that is entitled to monthly preferred distributions initially at a rate of 8% per annum which increased to 12% per annum upon procurement of construction financing in March 2017, and is redeemable by us beginning on April 27, 2022.
30-02 39th Avenue Preferred Investment
In August 2015, the Company entered into certain agreements that provided for it to make aggregate contributions of up to $50.0 million in various affiliates of its Sponsor which own a parcel of land located at 30-02 39th Avenue in Long Island City, Queens, New York on which they are constructing a residential apartment project. On March 31, 2017, the 30-02 39th Preferred Investment was amended so that our total aggregate required contributions would decrease by $40.0 million to $10.0 million. Contributions were made pursuant to instruments, the “30-02 39th Avenue Preferred Investment,” that were entitled to monthly preferred distributions between 9% and 12% per annum and is redeemable by the Company upon the occurrence of certain capital transactions. As of December 31, 2018, there were no remaining unfunded contributions and the outstanding 30-02 39th Avenue Preferred Investment is entitled to monthly preferred distributions a rate of 12% per annum. On February 11, 2019, we redeemed the entire 30-02 39th Street Preferred Investment of $ 10.0 million.
485 7th Avenue Preferred Investment
In December 2015, the Company entered into an agreement with various related party entities that provided for it to make contributions of up to $60.0 million in an affiliate of its Sponsor which owns a parcel of land located at 485 7th Avenue, New York, New York on which they constructed a 612-room Marriott Moxy hotel, which opened during the third quarter of 2017. Contributions were made pursuant to an instrument, the “485 7th Avenue Preferred Investment,” that were entitled to monthly preferred distributions at a rate of 12% per annum and was redeemable by the Company upon the occurrence of certain capital transactions. In January 2018, the Company redeemed $37.5 million of the 485 7th Avenue Preferred Investment. In April 2018, the Company redeemed the remaining $22.5 million of the 485 7th Avenue Preferred Investment.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
East 11th Street Preferred Investment
On April 21, 2016, the Company entered into an agreement, as amended, with various related party entities that provided for it to make contributions of up to $57.5 million in an affiliate of its Sponsor (the “East 11th Street Developer”) which owned two residential buildings located at 112-120 East 11th Street and 85 East 10th Street in New York, New York. The East 11th Street Developer is developing a hotel at 112-120 East 11th Street (the “East 11th Street Project”). Contributions were made pursuant to an instrument, the “East 11th Street Preferred Investment,” that entitles us to monthly preferred distributions at a rate of 12% per annum. Upon the consummation of certain capital transactions, the Company may redeem its investment in the East 11th Street Preferred Investment. Additionally, the East 11th Street Developer may redeem the Company’s investment at any time or upon the consummation of any capital transaction. Any redemption by the Company or the East 11th Street Developer under the East 11th Street Preferred Investment will be made at an amount equal to the amount invested by the Company plus a 12.0% annual cumulative, pre-tax, non-compounded return on the aggregate amount invested by the Company. During 2018, the Company redeemed $14.5 million of the East 11th Street Preferred Investment.
Miami Moxy Preferred Investment
On September 30, 2016, the Company entered into an agreement with various related party entities that provides for it to make contributions of up to $20.0 million in an affiliate of its Sponsor (the “Miami Moxy Developer”) which owns parcels of land located at 915 through 955 Washington Avenue in Miami Beach, Florida, on which the Miami Moxy Developer is developing a 205-room Marriott Moxy hotel (the “Miami Moxy”). Contributions are made pursuant to an instrument, the “Miami Moxy Preferred Investment,” that entitles the Company to monthly preferred distributions at a rate of 12% per annum. Upon the consummation of certain capital transactions, the Company may redeem its investment in the Miami Moxy Preferred Investment. Additionally, the Miami Moxy Developer may redeem the Company’s investment at any time or upon the consummation of any capital transaction. Any redemption by the Company or the Miami Moxy Developer under the Miami Moxy Preferred Investment will be made at an amount equal to the amount invested by the Company plus a 12.0% annual cumulative, pre-tax, non-compounded return on the aggregate amount invested by the Company.
The Joint Venture
During 2015, the Company formed a joint venture (the “Joint Venture”) with Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a related party real estate investment trust also sponsored by the Company’s Sponsor. We have a 2.5% membership interest in the Joint Venture and Lightstone II holds the remaining 97.5% membership interest. The Joint Venture previously acquired our membership interests in a portfolio of 11 hotels in a series of transactions completed during 2015. During the third quarter of 2017, the Joint Venture sold its ownership interests in four of the hotels to an unrelated third party. As a result, the Joint Venture now holds ownership interests in eight hotels, including an additional hotel it acquired on November 6, 2017 from an unrelated third party.
We account for our 2.5% membership interest in the Joint Venture under the cost method and as of December 31, 2018 and 2017, the carrying value of our investment was $1.3 million and $1.5 million, respectively, which is included in investments in related parties on the consolidated balance sheets.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
5. Supplementary Financial Information
Investment property consists of the following:
As of December 31, 2018, construction in progress includes approximately $63.3 million of costs related to the Company’s development of the Lower East Side Moxy Hotel (see Note 3).
Accounts payable, accrued expenses and other liabilities consist of the following:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
6. Marketable Securities and Other Investments, Fair Value Measurements and Notes Payable
Marketable Securities and Other Investments:
The following is a summary of the Company’s available for sale securities and other investments as of the dates indicated:
As of both December 31, 2018 and 2017, the Company held an aggregate of 209,243 Marco OP Units and Marco II OP Units, of which 89,695 were owned by PRO. The Marco OP Units and the Marco II OP Units are both exchangeable for a similar number of common operating partnership units (“Simon OP Units”) of Simon Property Group, L.P., (“Simon OP”), the operating partnership of Simon Property Group, Inc. (“Simon Inc.”). Subject to the various conditions, the Company may elect to exchange the Marco OP Units and/or the Marco II OP Units to Simon OP Units which must be immediately delivered to Simon Inc. in exchange for cash or similar number of shares of Simon Inc.’s common stock (“Simon Stock”).
Prior to January 1, 2018, the Company accounted for marketable equity securities at fair value with all unrealized gains and losses recognized in AOCI on the consolidated balance sheet. Realized gains and losses on marketable equity securities sold or impaired were recognized on the consolidated statements of operations.
On January 1, 2018, the Company adopted guidance issued by the FASB that required it to change the way it previously accounted for marketable equity securities. The Company’s marketable equity securities are measured at fair value and starting January 1, 2018 all unrealized gains and losses are recognized on the consolidated statements of operations. In connection with its adoption of the new guidance, the Company reclassified $15.5 million of aggregate net unrealized gains from AOCI to the opening accumulated surplus balance as of January 1, 2018, both which are components of stockholders’ equity in the consolidated balance sheets.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
The Company considers the declines in market value of certain investments in its investment portfolio to be temporary in nature. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. During the years ended December 31, 2018 and 2017, the Company did not recognize any impairment charges. As of December 31, 2018 and 2017, the Company does not consider any of its investments to be other-than-temporarily impaired.
The Company may sell certain of its investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration, or for duration management. At their respective dates of acquisition, the maturities of the Company’s Certificate of Deposit was 1 year and MBS generally ranged from 27 year to 30 years.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:
•Level 1 - Quoted prices in active markets for identical assets or liabilities.
•Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Marketable securities, available for sale, measured at fair value on a recurring basis as of the dates indicated are as follows:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
The fair values of the Company’s investments in Corporate Bonds and Preferred Securities, MBS and Certificate of Deposit are measured using readily available quoted prices for these investments; however, the markets for these assets are not active. Additionally, as noted and disclosed above, the Company’s Marco OP and OP II units are both ultimately exchangeable for cash or similar number of shares of Simon Stock, therefore the Company uses the quoted market price of Simon Stock to measure the fair value of the Company’s Marco OP and OP II units.
The Company did not have any other significant financial assets or liabilities, which would require revised valuations that are recognized at fair value.
Notes Payable
Margin Loan
The Company has access to a margin loan (the “Margin Loan”) from a financial institution that holds custody of certain of the Company’s marketable securities. The Margin Loan, which is due on demand, bears interest at LIBOR plus 0.85% (3.37% as of December 31, 2018) and is collateralized by the marketable securities in the Company’s account. The amounts available to the Company under the Margin Loan are at the discretion of the financial institution and not limited to the amount of collateral in its account. There were no amounts outstanding under this Margin Loan as of December 31, 2018 and 2017.
Line of Credit
The Company has a credit facility (the “Line of Credit”) with a financial institution which permits borrowings up to $25.0 million. The Line of Credit expires on June 19, 2019 and bears interest at LIBOR plus 1.35% (3.87% as of December 31, 2018). The Line of Credit is collateralized by approximately 209,000 Marco OP Units and PRO has guaranteed the Line of Credit. The amount outstanding under the Line of Credit was $18.6 million as of December 31, 2017 and is included in Notes Payable on the consolidated balance sheets. During 2018 the Company paid down the Line of Credit in full and no amount was outstanding as of December 31, 2018.
7. Mortgages Payable
Mortgages payable, net consists of the following:
LIBOR as of December 31, 2018 and 2017 was 2.52% and 1.57%, respectively. Our loans are secured by the indicated real estate and are non-recourse to the Company.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
The following table shows our contractually scheduled principal maturities during the next five years and thereafter as of December 31, 2018:
Pursuant to the Company’s loan agreements, escrows in the amount of approximately $3.4 million and $2.6 million were held in restricted escrow accounts as of December 31, 2018 and 2017, respectively. Escrows held in restricted escrow accounts are included in restricted escrows on the consolidated balance sheets. Such escrows will be released in accordance with the applicable loan agreements for payments of real estate taxes, insurance and capital improvement transactions, as required. Certain of our mortgages payable also contain clauses providing for prepayment penalties.
On December 3, 2018, the Company entered into the Bowery Mortgage collateralized by the Bowery Land and the Air Rights for approximately $35.6 million. The Bowery Mortgage has a term of two years, bears interest at LIBOR+4.25% and requires monthly interest-only payments through its stated maturity with the entire unpaid balance due upon maturity. Through December 31, 2018, the Company received aggregate proceeds of $32.6 million under the Bowery Mortgage. As a result, the Bowery Mortgage had an outstanding balance and remaining availability of $32.6 million and $3.0 million, respectively, as of December 31, 2018.
On July 28, 2016, the Company, entered into a mortgage loan collateralized by the St. Augustine Outlet Center (the “St. Augustine Mortgage”) for approximately $20.4 million. The St. Augustine Mortgage had a term of two years, bore interest at LIBOR+4.50% and required monthly interest-only payments through its stated maturity with the entire unpaid balance due upon maturity. On May 29, 2018, the Company repaid the St. Augustine Mortgage in full.
Certain of the Company’s debt agreements require the maintenance of certain ratios, including debt service coverage. As of December 31, 2018, the Company was in compliance with all of its financial debt covenants except as discussed below. Additionally, certain of our mortgages payable also contain clauses providing for prepayment penalties.
The Company has an outstanding non-recourse mortgage loan (the “Gulf Coast Industrial Portfolio Mortgage”) which is in default and due on demand. The Gulf Coast Industrial Portfolio Mortgage was initially cross-collateralized by a portfolio of 14 industrial properties (collectively, the “Gulf Coast Industrial Portfolio”) located in New Orleans, Louisiana (seven properties), Baton Rouge, Louisiana (three properties) and San Antonio, Texas (four properties).
As a result of not meeting certain debt service coverage ratios on the Gulf Coast Industrial Portfolio Mortgage, the lender elected to retain the excess cash flow from these properties beginning in July 2011. During the third quarter of 2012, the Gulf Coast Industrial Portfolio Mortgage was transferred to a special servicer, who discontinued scheduled debt service payments and notified the Company that the Gulf Coast Industrial Portfolio Mortgage was in default and although originally due in February 2017 became due on demand.
On June 5, 2018, the special servicer completed a partial foreclosure of the Gulf Coast Industrial Portfolio pursuant to which it foreclosed on the four properties located in San Antonio, Texas (the “San Antonio Assets”). The San Antonio Assets were sold in a foreclosure sale by the special servicer for an aggregate amount of approximately $20.7 million. (See Note 8)
Upon consummation of the foreclosure sale, the buyers assumed the significant risks and rewards of ownership and took legal title and physical possession of the San Antonio Assets for the aggregate sales price of $20.7 million. The Company simultaneously received an aggregate credit of approximately $20.7 million against the total outstanding indebtedness of the Gulf Coast Industrial Portfolio Mortgage, of which $19.6 million and $1.1 million were applied by the Company against the outstanding principal and outstanding accrued interest payable, respectively, under the Gulf Coast Industrial Portfolio Mortgage.
As a result, the remaining outstanding principal of the Gulf Coast Industrial Portfolio Mortgage was approximately $30.6 million as of December 31, 2018. The Company accrues default interest expense on the Gulf Coast Industrial Portfolio Mortgage pursuant to the terms of its loan agreement.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
On February 12, 2019, the Company and the current holder (the “Lender) of the Gulf Coast Industrial Portfolio Mortgage entered into an assignment agreement (the “Assignment Agreement”) pursuant to which the Company assigned its membership interests in the remaining 10 industrial properties of the Gulf Coast Industrial Portfolio located in New Orleans, Louisiana and Baton Rouge, Louisiana (collectively, the “Louisiana Assets”) to the Lender with an effective date of February 7, 2019. Under the terms of the Assignment Agreement, the Lender assumed the significant risks and rewards of ownership and took legal title and physical possession of the Louisiana Assets and assumed all related liabilities, including the Gulf Coast Industrial Portfolio Mortgage and its accrued and unpaid interest, and released us of any claims against the liabilities assumed. (See Note 8)
As a result, as of February 12, 2019, the Company has fully satisfied all of its obligations with respect to the Gulf Coast Industrial Portfolio Mortgage and all amounts accrued but not yet paid for interest (including default interest) and no amounts are due to the Lender.
Additionally, the Company previously accrued default interest expense on a non-recourse mortgage loan (the “Oakview Plaza Mortgage”), pursuant to the terms of its loan agreement during the period from January 2017 through September 2017. The Oakview Plaza Mortgage was secured by a retail shopping center located in Omaha, Nebraska (“Oakview Plaza”). The lender foreclosed on Oakview Plaza in September 2017.
Default interest expense related to the Gulf Coast Industrial Portfolio Mortgage of $1.6 million was accrued during year ended December 31, 2018 and default interest expense related to both the Gulf Coast Industrial Portfolio Mortgage and the Oakview Plaza Mortgage of $3.0 million was accrued during the year ended December 31, 2017. Cumulative accrued default interest expense (solely related the Gulf Coast Industrial Portfolio Mortgage) of $12.8 million and $11.2 million is included in accounts payable, accrued expenses and other liabilities on the Company’s consolidated balance sheets as of December 31, 2018 and 2017, respectively.
The Company has no additional significant maturities of mortgage debt over the next 12 months.
8. Dispositions
Dispositions - Continuing Operations
The following dispositions did not represent a strategic shift that had a major effect on the Company’s operations and financial results and therefore did not qualify to be reported as discontinued operations and their operating results are reflected in the Company’s results from continuing operations in the consolidated statements of operations for all periods presented through their respective dates of disposition:
Gulf Coast Industrial Portfolio
As discussed in detail in Note 7, on June 5, 2018, the special servicer for the Gulf Coast Industrial Portfolio Mortgage completed a partial foreclosure of the Gulf Coast Industrial Portfolio pursuant to which it foreclosed on the San Antonio Assets. The San Antonio Assets were sold in a foreclosure sale by the special servicer for an aggregate amount of approximately $20.7 million.
Upon consummation of the foreclosure sale, the buyers assumed the significant risks and rewards of ownership and took legal title and physical possession of the San Antonio Assets for the agreed upon sales price of $20.7 million. The Company simultaneously received an aggregate credit of approximately $20.7 million which it applied against the total outstanding indebtedness (approximately $19.6 million and $1.1 million of principal and accrued interest payable, respectively) of the Gulf Coast Industrial Portfolio Mortgage.
The aggregate carrying value of the assets transferred and the liabilities extinguished in connection with the foreclosure of the San Antonio Assets were approximately $13.6 million and $20.7 million, respectively.
Since the Company’s performance obligations were met at the closing of the foreclosure sales and the Company has no continuing involvement with the San Antonio Assets an aggregate gain on disposition of real estate of approximately $7.1 million was recognized during 2018.
The disposition of the San Antonio Assets did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the operating results of the San Antonio Assets are reflected in the Company’s results from continuing operations for all periods presented through their respective date of disposition.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
On February 12, 2019, the Company and the Lender of the Gulf Coast Industrial Portfolio Mortgage entered into the Assignment Agreement pursuant to which the Company assigned its membership interests in the Louisiana Assets to the Lender with an effective date of February 7, 2019. Under the terms of the Assignment Agreement, the Lender assumed the significant risks and rewards of ownership and took legal title and physical possession of the Louisiana Assets and assumed all related liabilities, including the Gulf Coast Industrial Portfolio Mortgage and its accrued and unpaid interest, and released the Company of any claims against the liabilities assumed.
The aggregate carrying value of the assets and liabilities transferred in connection with the Company’s assignment of its ownership interests in the Louisiana Assets to the Lender was approximately $37.0 million and $49.6 million, respectively (as of December 31, 2018).
As a result, the Company has fully satisfied all of its obligations with respect to the Gulf Coast Industrial Portfolio Mortgage and all amounts accrued but not yet paid for interest (including default interest) and no amounts are due to the Lender. Additionally, the Company has no continuing involvement with the assets of Gulf Coast Industrial Portfolio.
DoubleTree - Danvers
On September 7, 2017, the Company disposed of a hotel and water park (the “DoubleTree - Danvers”) located in Danvers, Massachusetts, to an unrelated third party for aggregate consideration of approximately $31.5 million. In connection with the disposition, the Company recorded a gain on the disposition of real estate of approximately $10.5 million during the third quarter of 2017.
Oakview Plaza
The non-recourse mortgage loan (the “Oakview Plaza Mortgage”) secured by a retail power center located in Omaha, Nebraska (“Oakview Plaza”) matured in January 2017 and was not repaid which constituted a maturity default. The Oakview Plaza Mortgage was transferred to a special servicer and on September 15, 2017, ownership of Oakview Plaza was transferred to the lender via foreclosure (the “Oakview Plaza Foreclosure”). The carrying value of the assets transferred and the liabilities extinguished in connection with the Oakview Plaza Foreclosure both approximated $27.0 million. The outstanding balance of the Oakview Plaza Mortgage as of the date of foreclosure was $25.6 million and the associated accrued default interest was $1.0 million.
9. Distributions Payable
On November 14, 2018, the Board declared a distribution for the three-month period ending December 31, 2018. The distribution was calculated based on shareholders of record each day during this three-month period at a rate of $0.0019178 per day, and will equal a daily amount that, if paid each day for a 365-day period, would equal a 7.0% annualized rate based on a share price of $10.00. The December 31, 2018 distribution was paid in cash on January 15, 2019.
On November 14, 2017, the Board declared a distribution for the three-month period ending December 31, 2017. The distribution was calculated based on shareholders of record each day during this three-month period at a rate of $0.0019178 per day, and will equal a daily amount that, if paid each day for a 365-day period, would equal a 7.0% annualized rate based on a share price of $10.00. The December 31, 2017 distribution was paid in cash on January 15, 2018.
10. Company’s Stockholder’s Equity
Preferred Shares
Shares of preferred stock may be issued in the future in one or more series as authorized by the Company’s Board. Prior to the issuance of shares of any series, the Board is required by the Company’s charter to fix the number of shares to be included in each series and the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each series. Because the Company’s Board has the power to establish the preferences, powers and rights of each series of preferred stock, it may provide the holders of any series of preferred stock with preferences, powers and rights, voting or otherwise, senior to the rights of holders of our common stock. The issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of the Company, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of the Company’s common stock. As of December 31, 2018 and 2017, the Company had no outstanding preferred shares.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Common Shares
All of the common stock offered by the Company will be duly authorized, fully paid and nonassessable. Subject to the preferential rights of any other class or series of stock and to the provisions of its charter regarding the restriction on the ownership and transfer of shares of our stock, holders of the Company’s common stock will be entitled to receive distributions if authorized by the Board and to share ratably in the Company’s assets available for distribution to the stockholders in the event of a liquidation, dissolution or winding-up.
Each outstanding share of the Company’s common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors. There is no cumulative voting in the election of directors, which means that the holders of a majority of the outstanding common stock can elect all of the directors then standing for election, and the holders of the remaining common stock will not be able to elect any directors.
Holders of the Company’s common stock have no conversion, sinking fund, redemption or exchange rights, and have no preemptive rights to subscribe for any of its securities. Maryland law provides that a stockholder has appraisal rights in connection with some transactions. However, the Company’ charter provides that the holders of its stock do not have appraisal rights unless a majority of the Board determines that such rights shall apply. Shares of the Company’s common stock have equal dividend, distribution, liquidation and other rights.
Under its charter, the Company cannot make some material changes to its business form or operations without the approval of stockholders holding at least a majority of the shares of our stock entitled to vote on the matter. These include (1) amendment of its charter, (2) its liquidation or dissolution, (3) its reorganization, and (4) its merger, consolidation or the sale or other disposition of its assets. Share exchanges in which the Company is the acquirer, however, do not require stockholder approval.
Distributions, Share Repurchase Program and Tender Offers
Beginning February 1, 2006, the Company’s Board declared quarterly distributions in the amount of $0.0019178 per share per day payable to stockholders of record at the close of business each day during the applicable period. The annualized rate declared was equal to 7%, which represents the annualized rate of return on an investment of $10.00 per share attributable to these daily amounts, if paid for each day for a 365 day period (the “Annualized Rate”). Subsequently, the Company’s Board has declared regular quarterly distributions at the Annualized Rate, with the exception of the three-month period ended June 30, 2010. The distributions for the three-month period ended June 30, 2010 were at an aggregate annualized rate of 8% based on the share price of $10.00.
The Company’s stockholders have the option to elect the receipt of shares in lieu of cash under the Company’s distribution reinvestment program (“DRIP”). Our DRIP Registration Statement on Form S-3D was filed and became effective under the Securities Act of 1933 on October 25, 2018. As of December 31, 2018, 10.0 million shares remain available for issuance under our DRIP.
The amount of distributions distributed to our stockholders in the future will be determined by our Board and is dependent on a number of factors, including funds available for payment of distributions, the Company’s financial condition, capital expenditure requirements and annual distribution requirements needed to maintain the Company’s status as a REIT under the Internal Revenue Code.
Our share repurchase program may provide our stockholders with limited, interim liquidity by enabling them to sell their shares back to us, subject to restrictions. From our inception through December 31, 2017 we redeemed approximately 3.9 million common shares at an average price per share of $9.41 per share. During 2018, we redeemed approximately 1.1 million common shares or 66% of redemption requests received during the period, at an average price per share of $9.98 per share.
On May 10, 2018, the Board of Directors amended the share repurchase program to (i) change to the price for all purchases under our share repurchase program from $10.00 per share to 92% of the estimated net asset value per share of the Company’s common stock (previously the purchase price was $10.00 per share) and (ii) increase the number of shares repurchased during any calendar year from two (2.0%) of the weighted average number of shares outstanding during the prior calendar year to five (5.0%) of the weighted average number of shares outstanding during the previous twelve months.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Our Board of Directors, at its sole discretion, has the power to terminate the share repurchase program after the end of the offering period, change the price per share under the share repurchase program or reduce the number of shares purchased under the program, if it determines that the funds allocated to the share repurchase program are needed for other purposes, such as the acquisition, maintenance or repair of properties, or for use in making a declared distribution. A determination by our Board of Directors to eliminate or reduce the share repurchase program requires the unanimous affirmative vote of the independent directors.
Stock-Based Compensation
The Company previously adopted a stock option plan under which its independent directors were eligible to receive annual nondiscretionary awards of nonqualified stock options. This plan expired in April 2015.
The Company authorized and reserved 75,000 shares of its common stock for issuance under its stock option plan. The Board could make appropriate adjustments to the number of shares available for awards and the terms of outstanding awards under the Company’s stock option plan to reflect any change in its capital structure or business, stock dividend, stock split, recapitalization, reorganization, merger, consolidation or sale of all or substantially all of our assets.
The Company’s stock option plan provided for the automatic grant of a nonqualified stock option through April 2015 to each of its independent directors, without any further action by the Board of Directors or the stockholders, to purchase 3,000 shares of the Company’s common stock on the date of each annual stockholder’s meeting. During both of the years ended December 31, 2018 and 2017, options to purchase 3,000 shares of stock expired unexercised and there were no forfeitures related to stock options previously granted. As of December 31, 2018, options to purchase 18,000 shares of stock were outstanding and fully vested. The options have exercise prices between $9.80 per share and $11.80 per share with a weighted average exercise price of $10.68 per share. Compensation expense associated with our stock option plan was not material for the years ended December 31, 2018 and 2017.
The exercise price for all stock options granted under the stock option plan were initially fixed at $10 per share until the termination of the Company’s initial public offering which occurred in October 2008, and thereafter the exercise price for stock options granted to the independent directors was equal to the fair market value of a share on the last business day preceding the annual meeting of stockholders. The term of each such option will be 10 years from the date of grant. Options granted to non-employee directors vested and become exercisable on the second anniversary of the date of grant, provided that the independent director was a director on the Board on that date. Notwithstanding any other provisions of the Company’s stock option plan to the contrary, no stock option issued pursuant thereto may be exercised if such exercise would jeopardize the Company’s status as a REIT under the Internal Revenue Code.
11. Noncontrolling Interests
The Company’s noncontrolling interests consist of (i) parties of the Company that hold units in the Operating Partnership, and (ii) certain interests in consolidated subsidiaries. The units held by noncontrolling interests in the Operating Partnership include SLP Units, limited partner units and Common Units. The noncontrolling interests in consolidated subsidiaries include ownership interests in (i) PRO held by the Company’s Sponsor and (ii) 50-01 2nd St Associates LLC (the “2nd Street Joint Venture”) held by the Company’s Sponsor and other affiliates. See below for additional information.
Share Description
See Note 12 for discussion of rights related to SLP Units. The limited partner and Common Units of the Operating Partnership have similar rights as those of the Company’s stockholders including distribution rights.
Distributions
During the years ended December 31, 2018 and 2017, the Company paid distributions to noncontrolling interests of $3.4 million and $3.9 million, respectively. As of December 31, 2018 and 2017, the total distributions declared and not paid to noncontrolling interests was $0.6 million (paid on January 15, 2019) and $0.6 million (paid on January 15, 2018), respectively.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Noncontrolling Interest of Subsidiary within the Operating Partnership
During 2009, the Operating Partnership acquired certain membership interests in Prime Outlets Acquisition Company (“POAC”) and Mill Run, LLC (“Mill Run”), which were subsequently contributed to PRO in exchange for a 99.99% managing membership interest in PRO. In addition, the Company contributed $2,900 (in whole dollars) for a 0.01% non-managing membership interest in PRO. Because the Operating Partnership is the managing member with control, PRO is consolidated into the results and financial position of the Company. In connection with the acquisitions of the memberships interests in POAC and Mill Run, the Advisor accepted a 19.17% profit membership interest in PRO in lieu of an acquisition fee and assigned its rights to receive distributions to the Sponsor, who assigned the same to David Lichtenstein. Distributions are split between the three members in proportion to their respective profit interests. PRO’s disposed of its membership interests in POAC and Mill Run in August 2010 and its holding primarily consist of Marco OP Units and Marco II OP Units (see Note 6).
On September 19, 2018, the Company’s Sponsor transferred approximately 9.14% of its profit membership interest in PRO, valued at the estimated fair value of $1.5 million to the Operating Partnership, accounted for as an increase in equity of the Company and decrease in noncontrolling interest. As of December 31, 2018 and 2017, the Sponsor, had a 10.03% and a 19.17% profit membership interest in PRO, respectively, which is accounted for as a noncontrolling interest.
Consolidated Joint Venture
In August 2011, the Operating Partnership and its Sponsor formed the 2nd Street Joint Venture, which owns Gantry Park, a multi-family apartment building located in Queens, New York. The Operating Partnership has a 59.2% membership interest in the 2nd Street Joint Venture (the “2nd Street JV Interest”). The 2nd Street JV Interest is a managing membership interest. The Sponsor and other related parties have an aggregate 40.8% non-managing membership interest with certain consent rights with respect to major decisions. Contributions are allocated in accordance with each investor’s ownership percentage. Profit and cash distributions are allocated in accordance with each investor’s ownership percentage. As the Operating Partnership through the 2nd Street Joint Venture Interest has the power to direct the activities of the 2nd Street Joint Venture that most significantly impact the performance, the Company consolidates the operating results and financial condition of the 2nd Street Joint Venture and has accounts for the ownership interests of the Sponsor and other related parties as noncontrolling interests.
12. Related Party Transactions
The Company has agreements with the Advisor and its Property Managers to pay certain fees, as follows, in exchange for services performed by these entities and other related parties. The Company’s ability to secure financing and subsequent real estate operations are dependent upon its Advisor, Property Managers, and their affiliates to perform such services as provided in these agreements.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Fees
Amount
Acquisition Fee
The Advisor is paid an acquisition fee equal to 2.75% of the gross contractual purchase price (including any mortgage assumed) of each property purchased. The Advisor is also reimbursed for expenses that it incurs in connection with the purchase of a property. The acquisition fee and acquisition-related expenses for any particular property, including amounts payable to related parties, will not exceed, in the aggregate 5% of the gross contractual purchase price (including mortgage assumed) of the property.
Property Management - Residential/Retail
The Property Managers are paid a monthly management fee of up to 5% of the gross revenues from residential and retail properties. The Company pays the Property Managers a separate fee for (i) the development of, (ii) the one-time initial rent-up or (iii) the leasing-up of newly constructed properties in an amount not to exceed the fee customarily charged in arm’s length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area.
Property Management - Office/Industrial
The Property Managers are paid monthly property management and leasing fees of up to 4.5% of gross revenues from office and industrial properties. In addition, the Lightstone REIT pays the Property Managers a separate fee for the one-time initial rent-up or leasing-up of newly constructed properties in an amount not to exceed the fee customarily charged in arm’s length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area.
Asset Management Fee
The Advisor or its affiliates is paid an asset management fee of 0.55% of the Company’s average invested assets, as defined, payable quarterly in an amount equal to 0.1375 of 1% of average invested assets as of the last day of the immediately preceding quarter.
Reimbursement of Other expenses
For any year in which the Company qualifies as a REIT, the Advisor must reimburse the Company for the amounts, if any, by which the total operating expenses, the sum of the advisor asset management fee plus other operating expenses paid during the previous fiscal year exceed the greater of 2% of average invested assets, as defined, for that fiscal year, or, 25% of net income for that fiscal year. Items such as property operating expenses, depreciation and amortization expenses, interest payments, taxes, non-cash expenditures, the special liquidation distribution, the special termination distribution, organization and offering expenses, and acquisition fees and expenses are excluded from the definition of total operating expenses, which otherwise includes the aggregate expense of any kind paid or incurred by the Company.
The Advisor or its affiliates are reimbursed for expenses that may include costs of goods and services, administrative services and non-supervisory services performed directly for the Company by independent parties.
Lightstone SLP, LLC, an affiliate of the Company’s Sponsor, has purchased SLP Units in the Operating Partnership. These SLP Units, the purchase price of which will be repaid only after stockholders receive a stated preferred return and their net investment, entitle Lightstone SLP, LLC to a portion of any regular distributions made by the Operating Partnership. From our inception through March 31, 2010, cumulative distributions declared to Lightstone SLP, LLC were $4.9 million, all of which had been paid as of April 2010. For the three months ended June 30, 2010, the Operating Partnership did not declare a distribution related to the SLP Units as the distribution to the stockholders was less than 7% for this period. On August 30, 2010, the Company declared additional distributions to the stockholders to bring the annualized distribution to at least 7%. As such, the Company as of August 30, 2010 recommenced declaring distributions to Lightstone SLP, LLC at the 7% annualized rate, except for the three months ended June 30, 2010 which was at an 8% annualized rate which represents the same rate paid to the stockholders.
During each of the years ended December 31, 2018 and 2017, distributions of $2.1 million were declared and distributions of $2.1 million were paid related to the SLP Units and are part of noncontrolling interests. Since inception through December 31, 2018, cumulative distributions declared were $23.4 million, of which $22.9 million have been paid. Such distributions, paid currently at a 7% annualized rate of return to Lightstone SLP, LLC through December 31, 2018, with the exception of the distribution related to the three months ended June 30, 2010, which was paid at an 8% annualized rate will always be subordinated until stockholders receive a stated preferred return, as described below.
The SLP Units also entitle Lightstone SLP, LLC to a portion of any liquidating distributions made by the Operating Partnership. The value of such distributions will depend upon the net sale proceeds upon the liquidation of the Lightstone REIT and, therefore, cannot be determined at the present time. Liquidating distributions to Lightstone SLP, LLC will always be subordinated until stockholders receive a distribution equal to their initial investment plus a stated preferred return, as described below:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Operating Stage
Distributions
Amount of Distribution
7% Stockholder Return Threshold
Once a cumulative non-compounded return of 7% per year on their net investment is realized by stockholders, Lightstone SLP, LLC is eligible to receive available distributions from the Operating Partnership until it has received an amount equal to a cumulative non-compounded return of 7% per year on the purchase price of the special general partner interests. “Net investment” refers to $10 per share, less a pro rata share of any proceeds received from the sale or refinancing of the Lightstone REIT’s assets.
12% Stockholder Return Threshold
Once a cumulative non-compounded return of 12% per year is realized by stockholders on their net investment (including amounts equaling a 7% return on their net investment as described above), 70% of the aggregate amount of any additional distributions from the Operating Partnership will be payable to the stockholders, and 30% of such amount will be payable to Lightstone SLP, LLC.
Returns in Excess of 12%
After the 12% return threshold is realized by stockholders and Lightstone SLP, LLC, 60% of any remaining distributions from the Operating Partnership will be distributable to stockholders, and 40% of such amount will be payable to Lightstone SLP, LLC.
Liquidating Stage
Distributions
Amount of Distribution
7% Stockholder Return Threshold
Once stockholders have received liquidation distributions, and a cumulative non-compounded 7% return per year on their initial net investment, Lightstone SLP, LLC will receive available distributions until it has received an amount equal to its initial purchase price of the special general partner interests plus a cumulative non-compounded return of 7% per year.
12% Stockholder Return Threshold
Once stockholders have received liquidation distributions [in an amount equal to their net investment] plus a cumulative non-compounded return of 12% per year on their initial net investment (including amounts equaling a 7% return on their net investment as described above), 70% of the aggregate amount of any additional distributions from the Operating Partnership will be payable to the stockholders, and 30% of such amount will be payable to Lightstone SLP, LLC.
Returns in Excess of 12%
After stockholders and Lightstone LP, LLC have received liquidation distributions [in an amount equal to their net investment] plus a cumulative non-compounded return of 12% per year on their initial net investment, 60% of any remaining distributions from the Operating Partnership will be distributable to stockholders, and 40% of such amount will be payable to Lightstone SLP, LLC.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
The Company, pursuant to the related party arrangements described above, has recorded the following amounts for the years indicated:
*Generally, capitalized and amortized over the estimated useful life of the associated asset.
See Notes 4 and 11 for other related party transactions.
13. Future Minimum Rentals
As of December 31, 2018, the approximate fixed future minimum rental from the Company’s commercial real estate properties
(including approximately $10.0 million attributable to the Company’s Louisiana Assets which were transferred to the Lender on February 12, 2019) are as follows:
Pursuant to the lease agreements, tenants of the property may be required to reimburse the Company for some or the entire portion of the particular tenant's pro rata share of the real estate taxes and operating expenses of the property. Such amounts are not included in the future minimum lease payments above, but are included in tenant recovery income on the accompanying consolidated statements of operations.
14. Segment Information
The Company historically operated within four business segments which are: (i) retail real estate (the “Retail Segment”), (ii) multi-family residential real estate (the “Multi-Family Residential Segment”), (iii) industrial real estate (the “Industrial Segment”) and (iv) hospitality (the “Hospitality Segment”). However, during 2017, the Company sold its only remaining consolidated hospitality property and therefore, no longer has a Hospitality Segment as of December 31, 2018. The Company’s Advisor and its affiliates and third-party management companies provide leasing, property and facilities management, acquisition, development, construction and tenant-related services for its portfolio. The Company’s revenues for the years ended December 31, 2018 and 2017 were exclusively derived from activities in the United States. No revenues from foreign countries were received or reported. The Company had no long-lived assets in foreign locations as of December 31, 2018 and 2017. The accounting policies of the segments are the same as those described in Note 2, excluding depreciation and amortization. Unallocated assets, revenues and expenses relate to corporate related accounts.
The Company evaluates performance based upon net operating income/(loss) from the combined properties in each real estate segment.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Selected results of operations regarding the Company’s operating segments are as follows:
15. Commitments and Contingencies
Legal Proceedings
From time to time in the ordinary course of business, the Lightstone REIT may become subject to legal proceedings, claims or disputes.
As of the date hereof, the Company is not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended December 31, 2018 and 2017
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
Tax Protection Agreements
On December 8, 2009, the Company, the Operating Partnership and PRO, (collectively, the LVP Parties”) entered into a definitive agreement (the “Contribution Agreement”) with Simon Inc. and certain of its affiliates (collectively, “Simon”) providing for the disposition of a substantial portion of the Company’s portfolio of retail properties at that time to Simon, including (i) the St. Augustine Center, which is wholly owned, (ii) a 40.0% aggregate interest in its investment in POAC, which included POAC’s properties (the “POAC Properties”), Grand Prairie Holdings LLC (“GPH”) and Livermore Holdings LLC (“LVH”) and (iii) a 36.8% aggregate interest in Mill Run, which included Mill Run’s properties (the “Mill Run Properties”). On June 28, 2010, the Contribution Agreement was amended to remove the previously contemplated dispositions of the St. Augustine Outlet Center, GPH and LVH. The transactions contemplated by the Contribution Agreement are referred to herein as the “POAC/Mill Run Transaction.” On August 30, 2010, the LVP Parties completed POAC/Mill Run Transaction and contemporaneously entered into a tax matters agreement with Simon. Additionally, the Company was advised by an independent law firm that it was “more likely than not” that the POAC/Mill Run Transaction did not give rise to current taxable income or loss. Pursuant to the terms of the tax matters agreement, Simon generally could not have engaged in a transaction that would have resulted in the recognition of the “built-in gain” with respect to POAC and Mill Run at the time of the closing for specified periods of up to eight years following the closing date. Simon has a number of obligations with respect to the allocation of partnership liabilities to the LVP Parties. For example, Simon agreed to maintain certain of the outstanding mortgage loans that were secured by POAC Properties and Mill Run Properties until their respective maturities, and the LVP Parties provided and had the opportunity to continue to provide guaranties of collection with respect to a revolving credit facility (or indebtedness incurred to refinance the revolving credit facility) for at least four years following the closing of the POAC/Mill Run Transaction. The LVP Parties were also given the opportunity to enter into agreements to make specified capital contributions to Simon OP in the event that it defaults on certain of its indebtedness. If Simon breached its obligations under the tax matters agreement, Simon was required to indemnify the LVP Parties for certain taxes that they were deemed to incur, including taxes relating to the recognition of “built-in gains” with respect to POAC Properties and Mill Run Properties, and gains recognized as a result of a reduction in the allocation of partnership liabilities. These indemnification payments would have been “grossed up” such that the amount of the payments would have equaled, on an after-tax basis, to the tax liability deemed incurred because of the breach.
On December 9, 2011 and December 4, 2012, GPH, LVH and certain of their subsidiaries (collectively, the “Holding Entities”) completed the disposition of their ownership interests in two outlet centers and a parcel of land (collectively, the “Outlet Centers Transactions”) to Simon. In connection with the closing of the Outlet Centers Transactions, the Holdings Entities, the Company, the Operating Partnership, PRO and certain affiliates of the Sponsor (collectively, the “Outlet Centers Parties”) entered into a tax matters agreement with Simon pursuant to which Simon generally may not engage in a transaction that could result in the recognition of the “built-in gain” with respect to the two outlets centers at the time of the closing for specified periods of up to eight years following the closing date. Simon had a number of obligations with respect to the allocation of partnership liabilities to the Outlet Centers Parties. For example, Simon agreed to maintain a debt level of no less than the cash portion of the proceeds from the Outlet Centers Transaction until at least the fourth anniversary of the closing, and the Outlet Centers Parties provided and had the opportunity to continue to provide guaranties of collection with respect to a revolving credit facility (or indebtedness incurred to refinance the revolving credit facility) for at least four years following the closing of the Outlet Centers Transactions. The Outlet Centers Parties were also given the opportunity to enter into agreements to make specified capital contributions to Simon OP in the event that it defaults on certain of its indebtedness. If Simon breaches its obligations under the tax matters agreement, Simon will be required to indemnify the Outlet Centers Parties for certain taxes that they are deemed to incur, including taxes relating to the recognition of “built-in gains” with respect to the two outlet centers, and gains recognized as a result of a reduction in the allocation of partnership liabilities. These indemnification payments will be “grossed up” such that the amount of the payments will equal, on an after-tax basis, the tax liability deemed incurred because of the breach.
16. Subsequent Events
Acquisition of Land for Development
Exterior Street Land
On February 27, 2019, the Company, through subsidiaries of the Operating Partnership, acquired two adjacent parcels of land located at 355 and 399 Exterior Street, New York, New York (collectively, the “Exterior Street Land”), from Borden Realty Corp and 399 Exterior Street Associates LLC, unaffiliated third parties, for an aggregate purchase price of approximately $59.0 million, excluding closing and other acquisition related costs. The acquisition was funded with cash on hand and proceeds from the Company’s Margin Loan. The Company currently expects to develop and construct a multi-family residential property on the Exterior Street Land.
On March 29, 2019, the Company entered into a $35.0 million loan (the “Exterior Street Loan”) scheduled to mature on scheduled to mature on April 9, 2020, with two, six-month extension options, subject to certain conditions. The Exterior Street Loan requires monthly interest payments through its maturity date and bears interest at 4.50% through its maturity. The Exterior Street Mortgage is collateralized by the Exterior Street Land.
In connection with the acquisition of the Exterior Land, the Advisor earned an acquisition fee equal to 2.75% of the gross aggregate contractual purchase price, which was approximately $1.6 million.
Distribution Declaration
On March 14, 2019, the Company declared a distribution for the three-month period ending March 31, 2019. The distribution will be calculated based on shareholders of record each day during this three-month period at a rate of $0.0019178 per day, and will equal a daily amount that, if paid each day for a 365-day period, would equal a 7.0% annualized rate based on a share price of $10.00. The distribution will be paid on or about April 15, 2019 to shareholders of record as of March 31, 2019.
PART II. CONTINUED:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:
None
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. As of December 31, 2018, we conducted an evaluation under the supervision and with the participation of the Advisor’s management, including our Chairman and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chairman and Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2018 that our disclosure controls and procedures were adequate and effective.
Management’s Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system is a process designed by, or under the supervision of, our Chairman and Chief Executive Officer and Chief Financial Officer and effected by our Board, management and other personnel to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and disposition of assets;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with the authorization of our management and directors; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this assessment, they used the control criteria framework of the Committee of Sponsoring Organizations, or COSO, of the Treadway Commission published in its report entitled Internal Control-Integrated Framework (2013). Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2018.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION:
None.
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The following table presents certain information as of March 15, 2019 concerning each of our directors serving in such capacity:
Principal Occupation and
Year Term of
Served as a
Name
Age
Positions Held
Office Will Expire
Director Since
David Lichtenstein
Chief Executive Officer, President and Chairman of the Board of Directors
George R. Whittemore
Director
Alan Retkinsky
Director
Yehuda “Judah” L. Angster
Director
David Lichtenstein is the Chairman of our Board of Directors and our Chief Executive Officer, and is the Chief Executive Officer of our Advisor. Mr. Lichtenstein founded both American Shelter Corporation and The Lightstone Group. From 1988 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of The Lightstone Group, directing all aspects of the acquisition, financing and management of a diverse portfolio of multi-family, lodging, retail and industrial properties located in 20 states, and Puerto Rico. From April 2008 to present, Mr. Lichtenstein has served as the Chairman of the board of directors and Chief Executive Officer of Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”) and Lightstone Value Plus REIT II LLC, its advisor. From October 2012 to the present, Mr. Lichtenstein has served as the Chairman of the board of directors of Lightstone Value Plus Real Estate Investment Trust III, Inc. (“Lightstone III”) and from April 2013 to the present, as the Chief Executive Officer of Lightstone III and of Lightstone Value Plus REIT III LLC. From September 2014 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone Real Estate Income Trust Inc., (“Lightstone IV”), and as Chief Executive Officer of Lightstone Real Estate Income LLC, its advisor. From October 2014 to the present, Mr. Lichtenstein has served as Chairman of the Board of Directors and Chief Executive Officer of Lightstone Enterprises Limited (“Lightstone Enterprises”). Mr. Lichtenstein was appointed Chairman of the Board of Directors of Lightstone Value Plus Real Estate Investment Trust V, Inc. (“Lightstone V”), formerly known as Behringer Harvard Opportunity REIT II, Inc., effective as of September 28, 2017 and is Chairman and Chief Executive Officer of the its advisor. Mr. Lichtenstein was the president and/or director of certain subsidiaries of Extended Stay Hotels, Inc. (“Extended Stay”) that filed for Chapter 11 protection with Extended Stay. Extended Stay and its subsidiaries filed for bankruptcy protection on June 15, 2009 so they could reorganize their debts in the face of looming amortization payments. Extended Stay emerged from bankruptcy on October 8, 2010. Mr. Lichtenstein is no longer affiliated with Extended Stay. From July 2015 to the present, Mr. Lichtenstein has served as a member of the Board of Directors of the New York City Economic Development Corporation. Mr. Lichtenstein is a member of the International Council of Shopping Centers and the National Association of Real Estate Investment Trusts, Inc., and industry trade group, as well as, a member of the Board of Directors of Touro College and New York Medical College. Mr. Lichtenstein has been selected to serve as a director due to his extensive experience and networking relationships in the real estate industry, along with his experience in acquiring and financing real estate properties.
George R. Whittemore is one of our independent directors. From April 2008 to the present, Mr. Whittemore has served as a member of the board of directors of Lightstone II and from December 2013 to present, has served as a member of the board of directors of Lightstone III. Mr. Whittemore also presently serves as a Director and Chairman of the Audit Committee of Village Bank Financial Corporation in Richmond, Virginia, a publicly traded company. Mr, Whittemore previously served as a Director of Condor Hospitality, Inc. in Norfolk, Nebraska, a publicly traded company, from November 1994 to March 2016. Mr. Whittemore previously served as a Director and Chairman of the Audit Committee of Prime Group Realty Trust from July 2005 until December 2012. Mr. Whittemore previously served as President and Chief Executive Officer of Condor Hospitality Trust, Inc. from November 2001 until August 2004 and as Senior Vice President and Director of both Anderson & Strudwick, Incorporated, a brokerage firm based in Richmond, Virginia, and Anderson & Strudwick Investment Corporation, from October 1996 until October 2001. Mr. Whittemore has also served as a Director, President and Managing Officer of Pioneer Federal Savings Bank and its parent, Pioneer Financial Corporation, from September 1982 until August 1994, and as President of Mills Value Adviser, Inc., a registered investment advisor. Mr. Whittemore is a graduate of the University of Richmond. Mr. Whittemore has been selected to serve as an independent director due to his extensive experience in accounting, banking, finance and real estate.
Alan Retkinsky is one of our independent directors. Since 2004, Mr. Retkinsky has been the president of Lexington Realty International, a national multi-faceted real estate brokerage firm specializing in investment sales, retail leasing, lease preparation/negotiating and management. Mr. Retkinsky has been selected to serve as an independent director due to his extensive experience in real estate transactions.
Yehuda “Judah” L. Angster is our is one of our independent directors. Mr. Angster is currently the Chief Executive Officer of CastleRock Equity Group in Florham Park, NJ. Before joining CastleRock Equity Group in June of 2015, Mr. Angster was the Vice President of Global Development for PCS Wireless, LLC in Florham Park NJ beginning in September 2012. Mr. Angster was the Internal Counsel for Empire Bank from June 2009 to September 2012. Mr. Angster earned his J.D. from the Pace University School of Law in May 2009. Mr. Angster earned a Bachelor of Talmudic Law from Tanenbaum Educational Center, Rockland, NY. Mr. Angster is licensed to practice law in New Jersey and New York. Mr. Angster has been selected to serve as an independent director due to his extensive experience in global business development and real estate transactions.
Executive Officers:
The following table presents certain information as of March 15, 2019 concerning each of our executive officers serving in such capacities:
Name
Age
Principal Occupation and Positions Held
David Lichtenstein
Chief Executive Officer and Chairman of the Board of Directors
Mitchell Hochberg
President
Joseph Teichman
General Counsel
Seth Molod
Chief Financial Officer and Treasurer
David Lichtenstein for biographical information about Mr. Lichtenstein, see ‘‘Management - Directors.”
Mitchell Hochberg is our President and Chief Operating Officer and has also served as President and Chief Operating Officer of Lightstone II since December 2013. Mr. Hochberg also serves as the President and Chief Operating Officer of our sponsor. From April 2013 to the present, Mr. Hochberg has served as President and Chief Operating Officer of Lightstone III and its advisor. From September 2014 to the present, Mr. Hochberg has served as President and Chief Operating Officer of Lightstone IV and its advisor. From October 2014 to the present, Mr. Hochberg has served as President of Lightstone Enterprises. Mr. Hochberg was appointed Chief Executive Officer of Behringer Harvard Opportunity REIT I, Inc. (“BH OPP I”) and Lightstone V effective as of September 28, 2017. Prior to joining The Lightstone Group in August 2012, Mr. Hochberg served as principal of Madden Real Estate Ventures, a real estate investment, development and advisory firm specializing in hospitality and residential projects from 2007 to August 2012 when it combined with our sponsor. Mr. Hochberg held the position of President and Chief Operating Officer of Ian Schrager Company, a developer and manager of innovative luxury hotels and residential projects in the United States from early 2006 to early 2007 and prior to that Mr. Hochberg founded Spectrum Communities, a developer of luxury residential neighborhoods in the Northeast in 1985 where for 20 years he served as its President and Chief Executive Officer. Additionally, Mr. Hochberg serves on the board of directors of Belmond Ltd and through October 2014 served on the board of directors and as Chairman of the board of directors of Orleans Homebuilders, Inc. Mr. Hochberg received his law degree from Columbia University School of Law where he was a Harlan Fiske Stone Scholar and graduated magna cum laude from New York University College of Business and Public Administration with a Bachelor of Science degree in accounting and finance.
Joseph E. Teichman is our General Counsel and also serves as General Counsel of Lightstone II, Lightstone III and Lightstone IV and their respective advisors. Mr. Teichman also serves as Executive Vice President and General Counsel of our Advisor and Sponsor. From October 2014 to the present, Mr. Teichman has served as Secretary and a Director of Lightstone Enterprises. Prior to joining us in January 2007, Mr. Teichman practiced law at the law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP in New York, NY from September 2001 to January 2007. Mr. Teichman earned his J.D. from the University of Pennsylvania Law School in May 2001. Mr. Teichman earned a B.A. from Beth Medrash Govoha, Lakewood, NJ. Mr. Teichman is licensed to practice law in New York and New Jersey. Mr. Teichman was also a director and officer of certain subsidiaries of Extended Stay that filed for Chapter 11 protection with Extended Stay. Extended Stay and its subsidiaries filed for bankruptcy protection on June 15, 2009 so they could reorganize their debts in the face of looming amortization payments. Extended Stay emerged from bankruptcy on October 8, 2010. Mr. Teichman is no longer affiliated with Extended Stay. Mr. Teichman is also a member of the Board of Directors of Yeshiva Orchos Chaim, Lakewood, NJ and was appointed to the Ocean County College Board of Trustees in February 2016.
Seth Molod is our Chief Financial Officer and Treasurer and also serves as Chief Financial Officer and Treasurer of Lightstone II, Lightstone III, Lightstone IV and Lightstone V. Mr. Molod also serves as the Executive Vice President and Chief Financial Officer of our Sponsor and as the Chief Financial Officer of our Advisor and the advisors of Lightstone II, Lightstone III, Lightstone IV and Lightstone V. Prior to joining the Lightstone Group in August of 2018, Mr. Molod served as an Audit Partner, Chair of Real Estate Services and on the Executive Committee of Berdon LLP, a full service accounting, tax, financial and management advisory firm (“Berdon”). Mr. Molod joined Berdon in 1989. He has extensive experience advising some of the nation’s most prominent real estate owners, developers, managers, and investors in both commercial and residential projects. Mr. Molod has worked with many privately held real estate companies as well as institutional investors, REITs, and other public companies. Mr. Molod is a licensed certified public accountant in New Jersey and New York and a member of the American Institute of Certified Public Accountants. Mr. Molod holds a Bachelor of Business Administration degree in Accounting from Muhlenberg College.
Section 16 (a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires each director, officer and individual beneficially owning more than 10% of our common stock to file initial statements of beneficial ownership (Form 3) and statements of changes in beneficial ownership (Forms 4 and 5) of our common stock with the Securities Exchange Commission ("SEC"). Officers, directors and greater than 10% beneficial owners are required by SEC rules to furnish us with copies of all such forms they file. Based solely on a review of the copies of such forms furnished to us during and with respect to the fiscal year ended December 31, 2018, or written representations that no additional forms were required, we believe that all of our officers and directors and persons that beneficially own more than 10% of the outstanding shares of our common stock complied with these filing requirements in 2017.
Information Regarding Audit Committee
Our Board of Directors (the Board”) established an audit committee in April 2005. The charter of audit committee is available at www.lightstonecapitalmarkets.com/sec-filings or in print to any shareholder who requests it c/o Lightstone Value Plus REIT, 1985 Cedar Bridge Avenue, Lakewood, NJ 08701. Our audit committee consists of George R. Whittemore and Yehuda “Judah” L. Angster, each of whom is “independent” within the meaning of the NYSE listing standards. The Board determined that Mr. Whittemore is qualified as an audit committee financial expert as defined in Item 401 (h) of Regulation S-K. For more information regarding the relevant professional experience of Mr. Whittemore, Mr. Retkinsky and Mr. Angster, see “Directors”.
Code of Conduct and Ethics
We have adopted a Code of Conduct and Ethics that applies to all of our executive officers and directors, including but not limited to, our principal executive officer and principal financial officer. Our Code of Conduct and Ethics can be found at www.lightstonecapitalmarkets.com/sec-filings.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Executive Officers
We currently have no employees. Our Advisor performs our day-to-day management functions. Our executive officers are all employees of the Advisor. We do not pay any of these individuals for serving in their respective positions.
Compensation of Board
We pay each of our independent directors an annual fee of $40,000.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Executive Officers:
The following table presents certain information as of March 15, 2019 concerning each of our directors and executive officers serving in such capacities:
EQUITY COMPENSATION PLAN INFORMATION
We previously adopted a stock option plan under which our independent directors were eligible to receive annual nondiscretionary awards of nonqualified stock options. This plan expired in April 2015. Our stock option plan was designed to enhance our profitability and value for the benefit of our stockholders by enabling us to offer independent directors stock-based incentives, thereby creating a means to raise the level of equity ownership by such individuals in order to attract, retain and reward such individuals and strengthen the mutuality of interests between such individuals and our stockholders.
We authorized and reserved 75,000 shares of our Common Stock for issuance under our stock option plan. The Board of Directors could make appropriate adjustments to the number of shares available for awards and the terms of outstanding awards under our stock option plan to reflect any change in our capital structure or business, stock dividend, stock split, recapitalization, reorganization, merger, consolidation or sale of all or substantially all of our assets.
Our stock option plan provided for the automatic grant of a nonqualified stock option through April 2015 to each of our independent directors, without any further action by our Board of Directors or the stockholders, to purchase 3,000 shares of our Common Stock on the date of each annual stockholders meeting. The exercise price for all stock options granted under our stock option plan was equal to the fair market value of a share on the last business day preceding the annual meeting of stockholders. The term of each such option was 10 years. Options granted to non-employee directors will vest and become exercisable on the second anniversary of the date of grant, provided that the independent director is a director on the Board of Directors on that date. At each of our annual stockholder meetings, beginning in July 2007, options were granted to each of our independent directors. During the year ended December 31, 2018, options to purchase 3,000 shares of stock expired unexercised. As of December 31, 2018, options to purchase 18,000 shares of stock were outstanding at a weighted average exercise price of $10.68 per share and 18,000 were fully vested at exercise prices between $9.80 per share and $11.80 per share.
Notwithstanding any other provisions of our stock option plan to the contrary, no stock option issued pursuant thereto may be exercised if such exercise would jeopardize our status as a REIT under the Internal Revenue Code.
The following table sets forth information regarding securities authorized for issuance under our Employee and Director Incentive Share Plan as of December 31, 2018:
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
David Lichtenstein serves as the Chairman of our Board, our Chief Executive Officer and our President. Our Advisor and affiliated property managers (collectively, our “Property Managers”) are wholly or majority owned and controlled by our Sponsor, The Lightstone Group, which is wholly owned by Mr. Lichtenstein. On April 22, 2005, we entered into agreements with our Advisor and Property Managers to pay certain fees, as described below, in exchange for services performed by these and other affiliated entities. As the indirect owner of those entities, Mr. Lichtenstein benefits from fees and other compensation that they receive pursuant to these agreements.
Property Managers
Our Property Managers manage certain of the properties we have acquired and may manage additional properties we acquire. We also use other unaffiliated third-party property managers, principally for the management of our hospitality properties.
We have agreed to pay our Property Managers a monthly management fee of up to 5% of the gross revenues from our residential and retail properties. In addition, for the management and leasing of our office and industrial properties, we pay to our Property Managers, property management and leasing fees of up to 4.5% of gross revenues from our office and industrial properties. We may pay our Property Managers a separate fee for (i) the development of, (ii) the one-time initial rent-up or (iii) leasing-up of newly constructed properties in an amount not to exceed the fee customarily charged in arm's length transactions by others rendering similar services in the same geographic area for similar properties as determined by a survey of brokers and agents in such area. Our Property Manager will also be paid a monthly fee for any extra services equal to no more than that which would be payable to an unrelated party providing the services. We have recorded the following amounts related to the Property Managers for the years indicated:
Advisor
We have agreed to pay our Advisor an acquisition fee equal to 2.75% of the gross contractual purchase price (including any mortgage indebtedness assumed) of each property we purchase and reimburse our Advisor for expenses that it incurs in connection with the purchase of a property. We anticipate that acquisition expenses will typically be between 1% and 1.5% of a property's purchase price, and acquisition fees and expenses are capped at 5% of the gross contract purchase price of a property. The Advisor is also paid an advisor asset management fee of 0.55% of our average invested assets and we reimburse some expenses of the Advisor. We have recorded the following amounts related to the Advisor for the years indicated:
Sponsor
On April 22, 2005, the Operating Partnership entered into an agreement with Lightstone SLP, LLC pursuant to which the Operating Partnership has issued special general partner interests to Lightstone SLP, LLC in an amount equal to all expenses, dealer manager fees and selling commissions that we incurred in connection with our organization and the initial public offering of our common stock. Through December 31, 2018, Lightstone SLP, LLC had contributed $30.0 million to the Operating Partnership in exchange for special general partner interests. As the sole member of our Sponsor, which wholly owns Lightstone SLP, LLC, Mr. Lichtenstein is the indirect, beneficial owner of such special general partner interests and will thus receive an indirect benefit from any distributions made in respect thereof.
These special general partner interests entitle Lightstone SLP, LLC to a portion of any regular and liquidation distributions that we make to stockholders, but only after stockholders have received a stated preferred return. Although the actual amounts are dependent upon results of operations and, therefore, cannot be determined at the present time, distributions to Lightstone SLP, LLC, as holder of the special general partner interests, could be substantial.
From time to time, Lightstone purchases title insurance from an agent in which our Sponsor owns a 50.0% limited partnership interest. Because this title insurance agent receives significant fees for providing title insurance, our Advisor may face a conflict of interest when considering the terms of purchasing title insurance from this agent. However, prior to the purchase by Lightstone of any title insurance, an independent title consultant with more than 25 years of experience in the title insurance industry reviews the transaction, and performs market research and competitive analysis on our behalf. This process results in terms similar to those that would be negotiated at an arm’s-length basis.
Preferred Investments
We have entered into several agreements with various related party entities that provide for us to make preferred contributions pursuant to certain instruments (the “Preferred Investments”) that entitle us to certain prescribed monthly preferred distributions. The Preferred Investments had an aggregate balance of $100.7 million and $158.3 million as of December 31, 2018 and 2017, respectively, and are classified as held-to-maturity securities, recorded at cost and included in investments in related parties on the consolidated balance sheets. The fair value of these investments approximated their carrying values based on market rates for similar instruments. As of December 31, 2018, remaining contributions of up to $2.3 million were unfunded. Additionally, during the years ended December 31, 2018 and 2017, the Company recognized investment income of $14.3 million and $17.6 million, respectively, which is included in interest and dividend income on the consolidated statements of operations.
The Preferred Investments (dollar amounts in thousands) are summarized as follows:
40 East End Avenue Preferred Investment
In May 2015, we entered into an agreement with various related party entities that provided for us to make contributions of up to $30.0 million in a related party entity, which is now a joint venture between an affiliate of our Sponsor and Lightstone Real Estate Income Trust Inc. (“Lightstone IV”), a related party REIT also sponsored by our Sponsor, which owns a parcel of land located at the corner of 81st Street and East End Avenue in the Upper East Side of New York City on which it is constructing a luxury residential project consisting of 29 condominiums. Contributions were made pursuant to an instrument, the “40 East Side Avenue Preferred Investment,” that is entitled to monthly preferred distributions, initially at a rate of 8% per annum which increased to 12% per annum upon procurement of construction financing in March 2017, and is redeemable by us beginning on April 27, 2022.
30-02 39th Avenue Preferred Investment
In August 2015, we entered into certain agreements that provided for us to make aggregate contributions of up to $50.0 million in various affiliates of our Sponsor which own a parcel of land located at 30-02 39th Avenue in Long Island City, Queens, New York on which they are constructing a residential apartment project. On March 31, 2017, the 30-02 39th Preferred Investment was amended so that our total aggregate required contributions would decrease by $40.0 million to $10.0 million. Contributions were made pursuant to instruments, the “30-02 39thAvenue Preferred Investment,” that were entitled to monthly preferred distributions between 9% and 12% per annum and is redeemable by us upon the occurrence of certain capital transactions. As of December 31, 2018, there were no remaining unfunded contributions and the outstanding 30-02 39th Preferred Investment is entitled to monthly preferred distributions at a rate of 12% per annum. On February 11, 2019, we redeemed the entire 30-02 39th Street Preferred Investment of $ 10.0 million.
485 7th Avenue Preferred Investment
In December 2015, we entered into an agreement with various related party entities that provided for us to make contributions of up to $60.0 million in an affiliate of our Sponsor which owns a parcel of land located at 485 7th Avenue, New York, New York on which they constructed a 612-room Marriott Moxy hotel, which opened during the third quarter of 2017. Contributions were made pursuant to an instrument, the “485 7th Avenue Preferred Investment,” that were entitled to monthly preferred distributions at a rate of 12% per annum and was redeemable by us upon the occurrence of certain capital transactions. In January 2018, the Company redeemed $37.5 million of the 485 7th Avenue Preferred Investment. In April 2018, the Company redeemed the remaining $22.5 million of the 485 7th Avenue Preferred Investment.
East 11th Street Preferred Investment
On April 21, 2016, we entered into an agreement, as amended, with various related party entities that provided for us to make contributions of up to $57.5 million in an affiliate of our Sponsor (the “East 11th Street Developer”) which owned two residential buildings located at 112-120 East 11th Street and 85 East 10th Street in New York, New York. The East 11th Street Developer is developing a hotel at 112-120 East 11th Street (the “East 11th Street Project”). Contributions were made pursuant to an instrument, the “East 11th Street Preferred Investment,” that entitles us to monthly preferred distributions at a rate of 12% per annum. We may redeem our investment in the East 11th Street Preferred Investment upon the consummation of certain capital transactions. Additionally, the East 11th Street Developer may redeem our investment at any time or upon the consummation of any capital transaction. Any redemption by us or the East 11th Street Developer under the East 11th Street Preferred Investment will be made at an amount equal to the amount we have invested plus a 12.0% annual cumulative, pre-tax, non-compounded return on the aggregate amount we have invested. During 2018, the Company redeemed $14.5 million of the East 11th Street Preferred Investment.
Miami Moxy Preferred Investment
On September 30, 2016, we entered into an agreement with various related party entities that provides for us to make contributions of up to $20.0 million in an affiliate of our Sponsor (the “Miami Moxy Developer”) which owns parcels of land located at 915 through 955 Washington Avenue in Miami Beach, Florida, on which the Miami Moxy Developer is developing a 205-room Marriott Moxy hotel (the “Miami Moxy”). Contributions are made pursuant to an instrument, the “Miami Moxy Preferred Investment,” that entitles us to monthly preferred distributions at a rate of 12% per annum. We may redeem our investment in the Miami Moxy Preferred Investment upon the consummation of certain capital transactions. Additionally, the Miami Moxy Developer may redeem our investment at any time or upon the consummation of any capital transaction. Any redemption by us or the Miami Moxy Developer under the Miami Moxy Preferred Investment will be made at an amount equal to the amount we have invested plus a 12.0% annual cumulative, pre-tax, non-compounded return on the aggregate amount we have invested.
The Joint Venture
During 2015, the Company formed a joint venture (the “Joint Venture”) with Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone II”), a related party real estate investment trust also sponsored by the Company’s Sponsor. We have a 2.5% membership interest in the Joint Venture and Lightstone II holds the remaining 97.5% membership interest. The Joint Venture previously acquired our membership interests in a portfolio of 11 hotels in a series of transactions completed during 2015. During the third quarter of 2017, the Joint Venture sold its ownership interests in four of the hotels to an unrelated third party. As a result, the Joint Venture now holds ownership interests in eight hotels, including an additional hotel it acquired on November 6, 2017 from an unrelated third party.
We account for our 2.5% membership interest in the Joint Venture under the cost method and as of December 31, 2018 and 2017, the carrying value of our investment was $1.3 million and $1.5 million, respectively, which is included in investments in related parties on the consolidated balance sheets.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accounting Firm Fees
The following table presents the aggregate fees billed to the Company for the years indicated by the Company’s principal accounting firms:
a)Fees for audit services consisted of the audit of the Company’s annual consolidated financial statements, interim reviews of the Company’s quarterly consolidated financial statements and services normally provided in connection with statutory and regulatory filings including registration statement consents.
b)Fees for audit related services related to audits of entities or subsidiaries that the Company already owns, has acquired or proposed to acquire.
c)Fees for tax services.
In considering the nature of the services provided by the independent auditor, the audit committee determined that such services are compatible with the provision of independent audit services. The audit committee discussed these services with the independent auditor and the Company’s management to determine that they are permitted under the rules and regulations concerning auditor independence promulgated by the SEC to implement the related requirements of the Sarbanes-Oxley Act of 2002, as well as the American Institute of Certified Public Accountants.
AUDIT COMMITTEE REPORT
To the Directors of Lightstone Value Plus Real Estate Investment Trust, Inc.:
We have reviewed and discussed with management Lightstone Value Plus Real Estate Investment Trust, Inc.’s audited consolidated financial statements as of and for the year ended December 31, 2018.
We have discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standard No. 16, “Communication with Audit Committees,” as amended, as adopted by the Public Company Accounting Oversight Board.
We have received and reviewed the written disclosures and the letter from the independent auditors required by the Public Company Accounting Oversight Board Rule 3526, Communication with Audit Committees Concerning Independence and have discussed with the auditors the auditors’ independence.
Based on the reviews and discussions referred to above, we recommend to the Board that the consolidated financial statements referred to above be included in Lightstone Value Plus Real Estate Investment Trust, Inc.’s Annual Report on consolidated Form 10-K for the year ended December 31, 2018.
Audit Committee
George R. Whittemore
Yehuda “Judah” L. Angster
Alan Retkinsky
INDEPENDENT DIRECTORS’ REPORT
To the Stockholders of Lightstone Value Plus Real Estate Investment Trust, Inc.:
We have reviewed the Company’s policies and determined that they are in the best interest of the Company’s stockholders. Set forth below is a discussion of the basis for that determination.
General
The Company’s primary objective is to achieve capital appreciation with a secondary objective of income without subjecting principal to undue risk. The Company intends to achieve this goal primarily through acquisitions and development of real estate properties and other real estate-related investments.
The Company, to date, has acquired and developed residential and commercial properties principally, all of which are located in the United States and made real estate-related investments. The Company’s acquisitions have included both portfolios and individual properties. The Company current commercial holdings consist of retail (primarily multi-tenanted shopping centers) and industrial properties. The Company also has acquired various parcels of land and air rights related to the development and construction of real estate properties. Additionally, the Company has made certain preferred equity investments in related parties.
The following is descriptive of the Company’s:
Acquisition and investment policies:
•Reflecting a flexible operating style, the Company’s portfolio is likely to be diverse and include properties of different types (such as retail, lodging, office, industrial and residential properties); both passive and active investments; real estate-related investments (such as preferred equity investments) and joint venture transactions. The portfolio is likely to be determined largely by the purchase opportunities that the market offers, whether on an upward or downward trend. This is in contrast to those funds that are more likely to hold investments of a single type, usually as outlined in their charters.
•The Company may invest in properties that are not sold through conventional marketing and auction processes. The Company’s investments may be at a dollar cost level lower than levels that attract those funds that hold investments of a single type.
•The Company may be more likely to make investments that are in need of rehabilitation, redirection, remarketing and/or additional capital investment.
•The Company may place major emphasis on a bargain element in its purchases, and often on the individual circumstances and motivations of the sellers. The Company will search for bargains that become available due to circumstances that occur when real estate cannot support the mortgages securing the property.
•The Company intends to pursue returns in excess of the returns targeted by real estate investors who target a single type of property investment.
Financing Policies
The Company utilizes leverage to acquire and develop properties. The number of different properties the Company acquires and develops is affected by numerous factors, including, the amount of funds available to us. When interest rates on loans are high or financing is otherwise unavailable on terms that are satisfactory to the Company, the Company may purchase or develop certain properties for cash with the intention of obtaining a loan for a portion of the purchase price or development costs at a later time. There is no limitation on the amount the Company may invest in any single property or on the amount the Company can borrow for any property.
The Company currently intends to limit its aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to the Company’s stockholders. The Company may also incur short-term indebtedness, having a maturity of two years or less. By operating on a leveraged basis, the Company may have more funds available for investment in properties. This may allow the Company to make more investments than would otherwise be possible, resulting in a more diversified portfolio. Although the Company’s liability for the repayment of indebtedness is expected to be limited to the value of the property securing the liability and the rents or profits derived therefrom, the Company’s use of leveraging increases the risk of default on the mortgage payments and a resulting foreclosure of a particular property. To the extent that the Company does not obtain loans on the Company’s properties, the Company’s ability to acquire or develop additional properties may be restricted. The Company will endeavor to obtain financing on the most favorable terms available.
Policy on Sale or Disposition of Properties
The Company’s Board will determine whether a particular property should be sold or otherwise disposed of after considering the relevant factors, including performance or projected performance of the property and market conditions, with a view toward achieving its principal investment objectives.
The Company may, sell properties at any time and if so, may invest the proceeds from any sale, financing, refinancing or other disposition of its properties into acquiring or developing additional properties. Alternatively, the Company may use these proceeds to fund maintenance or repair of existing properties or to increase reserves for such purposes. The Company may choose to reinvest the proceeds from the sale, financing and refinancing of its properties to increase its real estate assets and its net income. Notwithstanding this policy, the Board, in its discretion, may distribute all or part of the proceeds from the sale, financing, refinancing or other disposition of all or any of the Company’s properties to the Company’s stockholders. In determining whether to distribute these proceeds to stockholders, the Board will consider, among other factors, the desirability of properties available for purchase, real estate market conditions and compliance with the applicable requirements under federal income tax laws.
When the Company sells a property, it intends to obtain an all-cash sale price. However, the Company may take a purchase money obligation secured by a mortgage on the property as partial payment, and there are no limitations or restrictions on the Company’s ability to take such purchase money obligations. The terms of payment to the Company will be affected by custom in the area in which the property being sold is located and the then prevailing economic conditions. If the Company receives notes and other property instead of cash from sales, these proceeds, other than any interest payable on these proceeds, will not be available for distributions until and to the extent the notes or other property are actually paid, sold, refinanced or otherwise disposed. Therefore, the distribution of the proceeds of a sale to the stockholders may be delayed until that time. In these cases, the Company will receive payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years.
Independent Directors
George R. Whittemore
Yehuda “Judah” L. Angster
Alan Retkinsky
PART IV.
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
Annual Report on Form 10-K
For the fiscal year ended December 31, 2018
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report on Form 10-K or incorporated by reference herein:
EXHIBIT NO.
DESCRIPTION
3.1(1)
Amended and Restated Charter of Lightstone Value Plus Real Estate Investment Trust, Inc.
3.2(2)
Amended and Restated Bylaws of Lightstone Value Plus Real Estate Investment Trust, Inc.
4.1(3)
Amended and Restated Agreement of Limited Partnership of Lightstone Value Plus REIT LP
10.2(2)
Advisory Agreement by and among Lightstone Value Plus Real Estate Investment Trust, Inc., Lightstone Value Plus REIT LP and Lightstone Value Plus REIT LLC.
10.3(2)
Management Agreement, by and among Lightstone Value Plus Real Estate Investment Trust, Inc., Lightstone Value Plus REIT LP and Lightstone Value Plus REIT Management LLC.
10.4(2)
Form of the Company’s Stock Option Plan.
10.5(2)
Form of Indemnification Agreement by and between The Lightstone Group and the directors and executive officers of Lightstone Value Plus Real Estate Investment Trust, Inc.
21.1*
Subsidiaries of the Registrant
23.1*
Consent of EisnerAmper LLP
31.1*
Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification Pursuant to Rule 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certification Pursuant to Rule 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1*
Consent of Robert A. Stanger & Co., Inc
101*
XBRL (eXtensible Business Reporting Language). The following financial information from Lightstone Value Plus Real Estate Investment Trust, Inc. on Form 10-K for the year ended December 31, 2018, filed with the SEC on April 1, 2019, formatted in XBRL includes: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Operations, (3) Consolidated Statements of Comprehensive Income, (4) Consolidated Statements of Stockholders’ Equity, (5) Consolidated Statements of Cash Flows and (6) the Notes to the Consolidated Financial Statement. As provided in Rule 406T of Regulation S-T, this information in furnished and not filed for purpose of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
*Filed herewith.
(1)Incorporated by reference from Lightstone Value Plus Real Estate Investment Trust, Inc.’s Amended Registration Statement on Form S-11/A (File No. 333-166930), filed with the Securities and Exchange Commission on October 19, 2010.
(2)Incorporated by reference from Lightstone Value Plus Real Estate Investment Trust, Inc.’s Registration Statement on Form S-11 (File No. 333-166930), filed with the Securities and Exchange Commission on May 18, 2010.
(3)Incorporated by reference from Lightstone Value Plus Real Estate Investment Trust, Inc.’s Post-Effective Amendment No. 1 to its Registration Statement on Form S-11 (File No. 333-117367), filed with the Securities and Exchange Commission on May 23, 2005.
Item 16.Form 10-K Summary
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST, INC.
Date: April 1, 2019 By: s/ David Lichtenstein
David Lichtenstein
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME
CAPACITY
DATE
/s/ David Lichtenstein
Chief Executive Officer and Chairman of the Board
April 1, 2019
David Lichtenstein
(Principal Executive Officer)
/s/ Seth Molod
Chief Financial Officer and Treasurer
April 1, 2019
Seth Molod
(Principal Financial Officer and Principal
Accounting Officer)
/s/ George R. Whittemore
Director
April 1, 2019
George R. Whittemore
/s/ Yehuda L. Angster
Director
April 1, 2019
Yehuda L. Angster
/s/ Alan Retkinski
Director
April 1, 2019
Alan Retkinski