ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES:
Shareholder
Information
As
of March 15, 2022, we had 17.2 million shares of our common stock (“Common Shares”) outstanding, held by a total of 5,212
stockholders. The number of stockholders is based on the records of DST Systems Inc., which serves as our registrar and transfer agent.
Market
Information
Our
Common Shares are not currently listed on a national securities exchange. We may seek to list our Common Shares for trading on a national
securities exchange only if a majority of our independent directors believe listing would be in the best interest of our stockholders.
We do not intend to list our Common Shares at this time. We do not anticipate that there would be any active market for our Common Shares
until they are listed for trading. In the event we do not begin the process of achieving a liquidity event prior to September 27, 2024,
which is the tenth anniversary of the termination of our Follow-On Offering, our charter requires either (a) an amendment to our charter
to extend the deadline to begin the process of achieving a liquidity event, or (b) the holding of a stockholders meeting to vote on a
proposal for an orderly liquidation of our portfolio.
Estimated
Net Asset Value (“NAV”) and NAV per Share of Common Stock (“NAV per Share”)
On
March 24, 2022, our Board of Directors determined and approved our estimated NAV of $163.9 million and resulting estimated NAV per
Share of $9.45, both as of December 31, 2021 and both after Lightstone SLP II LLC’s purchase of Subordinated Profits Interests
in our Operating Partnership. In the calculation of our estimated NAV, no allocation of value was made to Lightstone SLP II LLC’s
Subordinated Profits Interests because the estimated NAV per Share did not exceed an aggregate $10.00 price per share plus a cumulative,
pre-tax non-compounded annual return of 7.0% as of December 31, 2021. In connection with our Offerings, which concluded on September 27,
2014, Lightstone SLP II LLC contributed (i) cash of $12.9 million and (ii) aggregate equity interests of 48.6% in Brownmill,
which were aggregately valued at $4.8 million, in exchange for 177.0 Subordinated Profits Interests, at a cost of $100,000 per unit,
with an aggregate value of $17.7 million.
The
estimated NAV of our shares was calculated as of a particular point in time. The estimated NAV of our shares will fluctuate over time
in response to developments related to individual assets in the portfolio and the management of those assets and in response to the real
estate and finance markets. There is no assurance of the extent to which the current estimated valuation should be relied upon for any
purpose after its effective date regardless that it may be published on any statement issued by us or otherwise.
Process
and Methodology
Our
Advisor, along with any necessary material assistance or confirmation of a third-party valuation expert or service, is responsible for
calculating our estimated NAV and resulting NAV per Share, which we currently expect will be done on at least an annual basis unless
our Common Shares are approved for listing on a national securities exchange. Our Board of Directors will review and approve each estimate
of NAV and resulting NAV per Share.
Our
estimated NAV and resulting NAV per Share as of December 31, 2021 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 Subordinated Profits Interests. Our Advisor recommended
and our Board of Directors established the estimated NAV per Share as of December 31, 2021 based upon the analyses and reports provided
by our Advisor and Stanger. The process for estimating the value of our assets, liabilities and any allocation of value to the Subordinated
Profits Interests is performed in accordance with the provisions of the Investment Program Association Practice Guideline 2013-01, “Valuation
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 December 31, 2021 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 December 31, 2021, Stanger prepared appraisal reports (the “Stanger
Appraisal Reports”), summarizing key inputs and assumptions, on 16 properties (14 hospitality properties and two retail
properties and collectively, the ’’Stanger Appraised Properties’’) of the 17 properties in which we held ownership
interests as of December 31, 2021.
Stanger
also prepared a NAV report (the “December 2021 NAV Report”) which estimated the NAV per Share as of December 31,
2021. The December 2021 NAV Report relied upon (i) the Stanger Appraisal Reports for the Stanger Appraised Properties and an
appraisal report prepared by another independent third-party valuation firm for the Hilton Garden Inn – Long Island City, (ii) Stanger’s
estimated value of our mortgage and notes payable, (iii) Stanger’s estimate of the allocation of any value to the Subordinated
Profits Interests, and (iv) our Advisor’s estimate of the value of our cash and cash equivalents, marketable securities, restricted
cash, other assets, other liabilities and other noncontrolling interests, to calculate estimated NAV per Share, all as of December 31,
2021.
The
table below sets forth the calculation of our estimated NAV and resulting estimated NAV per Share as of December 31, 2021 as well
as the comparable calculation as of December 31, 2020.
Dollar
and share amounts are presented in thousands, except per share data.
| | |
As
of
December 31,
2021 | | |
As
of
December 31,
2020 | |
| | |
Value | | |
Per
Share | | |
Value | | |
Per
Share | |
| Net
Assets: | |
| | | |
| | | |
| | | |
| | |
| Real
Estate Properties | |
$ | 283,718 | | |
$ | 16.37 | | |
$ | 259,497 | | |
$ | 14.89 | |
| Non-Real
Estate Assets: | |
| | | |
| | | |
| | | |
| | |
| Cash
and cash equivalents | |
| 15,126 | | |
| | | |
| 15,348 | | |
| | |
| Marketable
securities, available for sale | |
| 6,777 | | |
| | | |
| 6,902 | | |
| | |
| Restricted
cash | |
| 1,833 | | |
| | | |
| 3,075 | | |
| | |
| Other
assets | |
| 2,981 | | |
| | | |
| 2,478 | | |
| | |
| Total
non-real estate assets | |
| 26,717 | | |
| 1.54 | | |
| 27,803 | | |
| 1.59 | |
| Total
Assets | |
| 310,435 | | |
| 17.91 | | |
| 287,300 | | |
| 16.48 | |
| | |
| | | |
| | | |
| | | |
| | |
| Liabilities: | |
| | | |
| | | |
| | | |
| | |
| Mortgages
payable | |
| (136,464 | ) | |
| | | |
| (135,245 | ) | |
| | |
| Margin
loan | |
| (2,292 | ) | |
| | | |
| (2,599 | ) | |
| | |
| Other
liabilities | |
| (6,508 | ) | |
| | | |
| (8,477 | ) | |
| | |
| Total
liabilities | |
| (145,264 | ) | |
| (8.38 | ) | |
| (146,321 | ) | |
| (8.39 | ) |
| Other
Non-Controlling Interests | |
| (1,316 | ) | |
| (0.08 | ) | |
| (1,168 | ) | |
| (0.07 | ) |
| Net
Asset Value before Allocations to Subordinated Profits Interests | |
| 163,856 | | |
$ | 9.45 | | |
| 139,811 | | |
$ | 8.02 | |
| Allocations
to Subordinated Profits Interests | |
| - | | |
| - | | |
| - | | |
| - | |
| Net
Asset Value | |
$ | 163,856 | | |
$ | 9.45 | | |
$ | 139,811 | | |
$ | 8.02 | |
| | |
| | | |
| | | |
| | | |
| | |
| Shares
of Common Stock Outstanding | |
| 17,331 | | |
| | | |
| 17,429 | | |
| | |
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 estimated NAV per Share as of December 31,
2021. Stanger’s services included appraising the Stanger Appraised Properties and preparing the December 2021 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 these 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; and (ii) 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 our 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 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 then 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 December 31,
2021 and Stanger received compensation for those efforts. In addition, we agreed to indemnify Stanger against certain liabilities arising
out of this engagement. Stanger has previously assisted in our prior NAV calculations and has also been engaged by us for certain 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 Appraisal Reports.
During the past two years Stanger has also been engaged to provide appraisal services to another non-trade 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 were addressed to our Board of Directors to assist our Board of Directors
in calculating an estimated value per share of our common stock as of December 31, 2021. The reports were not addressed to the public,
may not be relied upon by any other person to establish an estimated value per share of our common stock, and do not constitute a recommendation
to any person to purchase or sell any shares of our common stock.
Our
goal in calculating our estimated NAV is to arrive at values that are reasonable and supportable using what we deem to be appropriate
valuation methodologies and assumptions. The reports, including the analysis, opinions, and conclusions set forth in such reports, are
qualified by the assumptions, qualifications, and limitations set forth in the respective reports. The following is a summary of our
valuation methodologies used to value our assets and liabilities by key component:
Real
Estate Properties: As of December 31, 2021, we have ownership interests in (i) 14 consolidated properties and
(ii) three unconsolidated real estate properties held in joint ventures (collectively, the “Real Estate Properties”).
With respect to our consolidated properties as of December 31, 2021, we majority owned and consolidated the operating results and
financial condition of 14 hospitality properties, or select services hotels, containing a total of 1,804 rooms (collectively, the “Consolidated
Real Estate Properties”). With respect to our unconsolidated properties as of December 31, 2021, we held a (i) 48.6%
membership interest in the Brownmill Joint Venture, an affiliated real estate entity, which owns two retail properties known as Browntown
Shopping Center located in Old Bridge, New jersey and Milburn Mall located in Vauxhaull, New Jersey and collectively are referred to
as the Brownmill Properties and (ii) 50.0% membership interest in the Hilton Garden Inn Joint Venture, an affiliated real estate
entity, which owns the Hilton Garden Inn – Long Island City, 183-room, limited-service hotel located in Long Island City. We do
not consolidate our membership interests in the Brownmill Joint Venture and the Hilton Garden Inn Joint Venture but rather account for
them both under the equity method of accounting.
As
described above, we engaged Stanger to provide an appraisal of the Stanger Appraised Properties, which consisted of 16 of the 17 Real
Estate Assets in which we held ownership interests as of December 31, 2021. We also engaged another third-party valuation firm to
provide an appraisal report for the Hilton Garden Inn – Long Island City. 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 previous 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 our 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 direct capitalization
analysis (“DC 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
DC 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 the Hilton
Garden Inn – Long Island City, 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 DC 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 each 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 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.
For
four of our hospitality properties included in the Stanger Appraised Properties, all of which are consolidated, Stanger deemed it appropriate
to estimate their values using a DC Analysis. For these four hospitality properties, the weighted-average exit capitalization rate was
6.82%.
The
following summarizes the key assumptions that were used in each DCF Analysis to estimate the value of the remaining Stanger Appraised
Properties (10 hospitality properties, all of which are consolidated, and two retail properties, both of which are unconsolidated) and
the Hilton Garden Inn - Long Island City, which is unconsolidated, as of December 31, 2021:
| | |
Consolidated Real Estate
Properties | | |
Unconsolidated
Real Estate Properties | |
| | |
(10 hospitality
properties) | | |
(two retail
properties) | | |
(one hospitality
property) | |
| Weighted-average: | |
| | | |
| | | |
| | |
| Exit
capitalization rate | |
| 8.15 | % | |
| 7.29 | % | |
| 5.75 | % |
| Discount
rate | |
| 9.76 | % | |
| 7.92 | % | |
| 6.75 | % |
| Annual
market rent growth rate | |
| 6.30 | % | |
| 0.81 | % | |
| 6.44 | % |
| Annual
net operating income growth rate | |
| 20.86 | % | |
| 1.39 | % | |
| 8.78 | % |
| Holding
period (in years) | |
| 10 | | |
| 10 | | |
| 12 | |
While
we believe that the assumptions utilized are reasonable, a change in these assumptions would affect the calculation of the value of our
Real Estate Properties. The table below presents the estimated increase or decrease to our estimated NAV per Share resulting from a 25-basis
point increase and decrease in the discount rates and capitalization rates. The table is presented to provide a hypothetical illustration
of possible results if only one change in assumptions was made, with all other factors remaining constant. Further, each of these assumptions
could change by more or less than 25 basis points or not at all.
| | |
Change
in NAV per Share | |
| | |
Increase
of | | |
Decrease
of | |
| | |
25
basis points | | |
25
basis points | |
| Capitalization
rate | |
$ | (0.39 | ) | |
$ | 0.42 | |
| Discount
rate | |
$ | (0.22 | ) | |
$ | 0.24 | |
As of December 31, 2021, the aggregate estimated
value of our Consolidated Real Estate Properties was $250.6 million and the aggregate carrying value of our Consolidated Real Estate Properties
was $215.2 million, which equates to an overall increase in value of 16.5%.
As
of December 31, 2021, the estimated fair value of our 48.6% membership interest in the Brownmill Joint Venture of $15.3 million was calculated
based on the gross appraised value of the Brownmill Properties of $44.4 million less the fair value of the outstanding indebtedness of
$13.7 million plus all other non-real estate assets and liabilities, net of $0.6 million. The estimated fair value of our 48.6% membership
interest in the Brownmill Joint Venture of $15.3 million compared to our carrying value of $6.8 million, both as of December 31, 2021,
equates to an increase in value of 125%.
As
of December 31, 2021, the estimated fair value of our 50.0% membership interest in the Hilton Garden Inn Joint Venture of $17.9 million
was calculated based on the gross appraised value of the Hilton Garden Inn – Long Island City of $66.5 million less the fair value
of the outstanding indebtedness of $33.1 million plus all other non-real estate assets and liabilities, net of $2.3 million. The estimated
fair value of our 50.0% membership interest in the Hilton Garden Inn Joint Venture of $17.9 million compared to our carrying value of
$11.2 million, both as of December 31, 2021, equates to an increase in value of 59.8%.
Cash
and cash equivalents: The estimated values of our cash and cash equivalents approximate their carrying values due to their
short maturities.
Marketable
securities, available for sale: The estimated values of our marketable securities are based on Level 2 inputs. Level 2 inputs
are inputs that are observable, either directly or indirectly, such as quoted prices in active markets for identical assets or liabilities.
Restricted
cash: The estimated values of our restricted cash 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 were already considered in
our valuation of the respective investments in real estate properties or financial instruments.
Mortgages
payable: The values for our mortgages payable were estimated using a discounted cash flow analysis, which used inputs based
on the remaining loan terms and estimated current market interest rates for 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 mortgages payable ranged from 4.06% to 5.57%.
Margin
loan: Our margin loan bears interest at a variable rate and is due on demand and therefore, its estimated value was assumed
to approximate its carrying value because it bears interest at a variable rate and has a short maturity.
Other
liabilities: Our other liabilities consist of our accounts payable and accrued expenses, amounts due to related parties,
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. Additionally, certain outstanding notes payable were excluded as we expect them to be fully
forgiven.
Other
noncontrolling interests: Our other noncontrolling interests represent the estimated values of the ownership interests of
others in certain of our consolidated properties pursuant to the terms of their applicable operating agreements.
Allocations
of Value to Subordinated Profits Interests:
The
Subordinated Profits Interests held by Lightstone SLP II LLC, an affiliate of our Advisor, are classified in noncontrolling interests
on our consolidated balance sheet. However, for purposes of our NAV, we do not estimate their fair value in accordance with GAAP. Rather,
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 Subordinated Profits Interests are only payable to their holder in a liquidation event,
we believe they should be valued for our NAV in accordance with these provisions.
Accordingly,
pursuant to the terms of our operating agreement, no allocations are to the holder of the Subordinated Profits Interests unless the estimated
NAV per Share would have exceeded $10.00 per share plus a cumulative, pre-tax non-compounded annual return of 7.0% as of the indicated
valuation date. In connection with our Offerings, which concluded on September 27, 2014, Lightstone SLP II LLC acquired an aggregate
of $17.7 million of Subordinated Profits Interests. In the calculation of our estimated NAV, no allocation of value was made to the holder
of the Subordinated Profits Interests because the estimated NAV per Share did not exceed an aggregate $10.00 price per share plus a cumulative,
pre-tax non-compounded annual return of 7.0% as of December 31, 2021.
Historical
Estimated NAV and NAV per Share
Additional
information on our historical reported estimated NAV and NAV per Share as of December 31, 2020 may be found in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2020 filed on March 30, 2021.
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 of common stock 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 noncontrolling interests
less any allocations to the Subordinated Profits Interests 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; |
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● |
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; |
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● |
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; |
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● |
In a liquidation, the real
estate assets may derive a portfolio premium which premium is not considered in determining estimated NAV; |
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● |
In a liquidation, the potential
buyers of the assets may use different estimates and assumptions than those used in determining estimated NAV; |
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● |
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 |
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● |
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. |
Share
Repurchase Program
Our
share repurchase program (the “SRP”) may provide eligible stockholders with limited, interim liquidity by enabling them to
sell Common Shares back to us, subject to restrictions and applicable law.
On
March 19, 2020, the Board of Directors amended the SRP to remove stockholder notice requirements and also approved the suspension of
all redemptions effective immediately.
Effective
May 10, 2021, the Board of Directors reopened the SRP to allow, subject to various conditions as set forth below, for redemptions submitted
in connection with a stockholder’s death or hardship and set the price for all such purchases to our current NAV per Share, as
determined by the Board of Directors and reported by us from time to time.
Deaths
that occurred subsequent to January 1, 2020 were eligible for consideration, subject to certain conditions. Beginning January 1, 2022,
requests for redemptions in connection with a stockholder’s death must be submitted and received by us within one year of the stockholder’s
date of death for consideration.
On
the above noted date, the Board of Directors established that on an annual basis, we would not redeem in excess of 0.5% of the number
of shares outstanding as of the end of the preceding year for either death or hardship redemptions, respectively. Additionally, redemption
requests generally would be processed on a quarterly basis and would be subject to pro ration if either type of redemption requests exceeded
the annual limitation.
For
the year ended December 31, 2021 we repurchased 98,866 shares of Common Shares, pursuant to the SRP, for $8.02 per share. For the period
from January 1 through March 18, 2020, we repurchased 82,413 Common Shares, pursuant to the SRP, for $10.00 per share.
Distributions
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 (“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.
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 our 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 depreciation 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
and Distributions Declared by our Board of Directors
Our
Board of Directors commenced declaring and we began paying regular quarterly distributions on our Common Shares at the pro rata equivalent
of an annual distribution of $0.65 per share, or an annualized rate of 6.5% assuming a purchase price of $10.00 per share, beginning
with the fourth quarter of 2009 through the third quarter of 2015. Beginning in the fourth quarter of 2015, our Board of Directors increased
the regular quarterly distributions on our Common Shares to the pro rata equivalent of an annual distribution of $0.70 per share, or
an annualized rate of 7.0% assuming a purchase price of $10.00 per share. Additionally, in February 2017 our Board of Directors declared,
and in March 2017 we paid a special “catch-up” distribution on our Common Shares at an annualized rate of 0.5% assuming a
purchase price of $10.00 per share for all the quarterly periods beginning with the fourth quarter of 2009 and ending with the third
quarter of 2015.
On
March 19, 2020, our Board of Directors determined to suspend regular quarterly distributions. As a result, there were no distributions
declared during the years ended December 31, 2021 and 2020.
Future
distributions declared, if any, will be at the discretion of the Board of Directors based on their analysis of our performance over the
previous periods and expectations of performance for future periods. The Board of Directors will consider various factors in its determination,
including but not limited to, the sources and availability of capital, revenues and other sources of income, operating and interest expenses
and our ability to refinance near-term debt as well as the IRS’s annual distribution requirement that REITs distribute no less
than 90% of their taxable income. We cannot assure that any future distributions will be made or that we will maintain any particular
level of distributions that we have previously established or may establish.
Distributions
on Subordinated Profits Interests
There
were no distributions paid on the Subordinated Profit Interests through December 31, 2016. However, in connection with the Board of Directors
declaration of a special distribution on our Common Shares on February 28, 2017, they also declared that distributions be brought current
through December 31, 2016 on the Subordinated Profits Interests at a 7% annualized rate of return which amounted to $4.2 million and
were paid to Lightstone SLP II, LLC on March 15, 2017. Beginning with the first quarter of 2017, our Board of Directors declared, and
we paid regular quarterly distributions on the Subordinated Profits Interests at an annualized rate of 7.0% along with the regular quarterly
distributions on our Common Shares for all quarterly periods through December 31, 2019.
These
Subordinated Profits Interests may entitle the Associate General Partner to a portion of any regular and liquidation distributions that
we make to our stockholders, but only after its stockholders have received a stated preferred return. There were no distributions declared
on the Subordinated Profits Interests during the years ended December 31, 2021 and 2020. Since our inception through December 31, 2021,
the cumulative distributions declared and paid on the Subordinated Profits Interests were $7.9 million. Any future distributions on the
Subordinated Profits Interests will always be subordinated until stockholders receive a stated preferred return, as described above.
Recent
Sales of Unregistered Securities
During
the period covered by this Form 10-K, we did not sell any equity securities that were not registered under the Securities Act of 1933.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
You
should read the following discussion and analysis together with our consolidated financial statements and notes thereto included in this
Annual Report on Form 10-K. The following information contains forward-looking statements, which are subject to risks and uncertainties.
Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied
by the forward-looking statements. Please see “Special Note Regarding Forward-Looking Statements” above for a description
of these risks and uncertainties. Dollar amounts are presented in thousands, except per share data and where indicated in millions.
Overview
Lightstone
Value Plus REIT II, Inc. (“Lightstone REIT II”), which was formerly known as Lightstone Value Plus Real Estate Investment
Trust II, Inc. before September 16, 2021, together with Lightstone Value Plus REIT II, LP (the “Operating Partnership” and
collectively “the Company”, also referred to as “we”, “our” or “us”) has and may continue
to acquire and operate commercial (including hospitality and retail properties) and residential real estate assets, as well as other
real estate-related investments, principally in the United States. Our acquisitions and investments are principally conducted through
our Operating Partnership and generally include both portfolios and individual properties. Our commercial holdings currently consist
of hospitality and retail (multi-tenanted shopping centers) properties. Our real estate investments have been and will continue to be
acquired and operated by us alone or jointly with others.
We
do not have employees. We have entered into an advisory agreement pursuant to which the Advisor supervises and manages our day-to-day
operations and selects our real estate and real estate related investments, subject to oversight by our Board of Directors. We pay the
Advisor fees for services related to the investment and management of our assets, and we will reimburse the Advisor for certain expenses
incurred on our behalf.
We
engage in certain activities through taxable REIT subsidiaries (“TRSs”), including when we acquire a hotel we usually establish
a TRS which then enters into an operating lease agreement for the hotel. As such, we are subject to U.S. federal and state income and
franchise taxes from these activities.
Acquisitions
and Investment Strategy
We
have made and intend to continue to make direct or indirect real estate investments that will satisfy our primary investment objectives
of preserving capital, paying distributions, if necessary to maintain our status as a REIT, and achieving appreciation of our assets
over the long term. The ability of our Advisor to identify and execute investment opportunities directly impacts our financial performance.
We
will continue to seek to acquire and operate hotels and other commercial real estate assets primarily located in the United States. We
may also acquire and operate residential properties and make other real estate-related investments. We may acquire and operate all such
properties alone or jointly with another party.
Current
Environment
Our
operating results are substantially impacted by the overall health of local, U.S. national and global economies and may be influenced
by market and other challenges. Additionally, our business and financial performance may be adversely affected by current and future
economic and other conditions; including, but not limited to, availability or terms of financings, financial markets volatility, political
upheaval or uncertainty, natural and man-made disasters, terrorism and acts of war, unfavorable changes in laws and regulations, outbreaks
of contagious diseases, cybercrime, loss of key relationships, and recession.
These
and other market and economic challenges could materially affect (i) the value and performance of our investments, (ii) our ability to
pay future distributions, if any, (iii) the availability or terms of financings, (iv) our ability to make scheduled principal and interest
payments, and (v) our ability to refinance any outstanding debt when contractually due.
COVID-19
Pandemic Operations and Liquidity Update
The
World Health Organization declared COVID-19 a global pandemic on March 11, 2020 and since that time many of the previously imposed restrictions
and other measures which were instituted in response have been subsequently reduced or lifted. However, the COVID-19 pandemic remains
highly unpredictable and dynamic and its duration and extent continue to be dependent on various developments, such as the emergence
of variants to the virus that may cause additional strains of COVID-19, the administration and ultimate effectiveness of vaccines, including
booster shots, and the eventual timeline to achieve a sufficient level of herd immunity among the general population. Accordingly, the
COVID-19 pandemic may continue to have negative effects on the health of the U.S. economy for the foreseeable future.
The
extent to which our business may be affected by the ongoing COVID-19 pandemic will largely depend on both current and future developments,
all of which are highly uncertain and cannot be reasonably predicted.
Furthermore,
as a result of the COVID-19 pandemic, room demand and rental rates for our consolidated and unconsolidated hotels significantly declined
starting in March 2020 at the onset of the pandemic; and while these metrics have improved since then (late 2020 and continuing throughout
2021); room demand and rental rates remain below their pre-pandemic historical levels. Accordingly, the COVID-19 pandemic has negatively
impacted our operations, financial position and cash flow; and while the severity of the impact has lessened, we currently expect we
will continue to experience a negative impact for the foreseeable future.
We
cannot currently estimate if and when room demand and rental rates will return to historical pre-pandemic levels for its hotels. Additionally,
we have an unconsolidated 48.6% membership interest in the Brownmill Joint Venture, which owns two retail properties located in New Jersey
that were subject to various restrictions. If the Brownmill Joint Venture’s retail properties are negatively impacted for an extended
period because its tenants are unable to pay their rent, our equity earnings and the carrying value of its investment in the Brownmill
Joint Venture could be materially and adversely impacted.
In
light of the past, present and potential future impact of the COVID-19 pandemic on the operating results of its hotels, we have taken
various actions to preserve its liquidity, including the following:
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● |
We implemented cost reduction
strategies for all of our hotels, leading to reductions in certain operating expenses and capital expenditures. |
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|
|
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Amendments
to Revolving Credit Facility –
On
June 2, 2020, our revolving credit facility (the “Revolving Credit Facility”) was amended to provide for (i) the deferral
of the six monthly debt service payments aggregating $2.6 million (from April 1, 2020 through September 30, 2020, until November
15, 2021; (ii) a 100 bps reduction in the interest rate spread to LIBOR plus 2.15%, subject to a 3.00% floor, for the six-month period
from September 1, 2020 through February 28, 2021; (iii) us pre-funding $2.5 million into a cash collateral reserve account to cover
the six monthly debt service payments which were due from October 1, 2020 through March 1, 2021; and (iv) a waiver of all financial
covenants for quarter-end periods before June 30, 2021.
Subsequently,
on March 31, 2021, the Revolving Credit Facility was further amended providing for (i) us to pledge the membership interests in another
hotel as additional collateral within 45 days, (ii) us to fund an additional $2.5 million into the cash collateral reserve account;
(iii) a waiver of all financial covenants for quarter-end periods through September 30, 2021 with a phased-in gradual return to the
full financial covenant requirements over the quarter-end periods beginning December 31, 2021 through March 31, 2023; (iv) an extension
of the maturity date from May 17, 2021 to September 15, 2022 upon the pledge of the additional collateral (which was subsequently
completed on May 13, 2021); (v) one additional one-year extension option at the lender’s sole discretion; and (vi) certain
limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.
See
Note 5 of the Notes to Consolidated Financial Statements for additional information. |
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In April 2020 and during
the first quarter of 2021, our consolidated hotels received an aggregate of $3.3 million and $3.7 million, respectively, from loans
provided under the federal Paycheck Protection Program (“PPP Loans”). During 2021, we received notices from the U.S.
Small Business Administration (the “SBA”) that all of the PPP Loans from April 2020 along with their accrued interest
had been legally forgiven. See Note 6 of the Notes to Consolidated Financial Statements for additional information. |
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|
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On March 19, 2020, the
Board of Directors determined to suspend regular quarterly distributions and, as a result, no distributions have been declared on
our Common Shares or the Subordinated Profits Interests since the suspension. Additionally, on March 19, 2020, the Board of Directors
approved the suspension of all redemptions under our shareholder repurchase program (the “SRP”). Subsequently on May
10, 2021, the Board of Directors partially reopened the SRP to allow, subject to various conditions, for redemptions submitted in
connection with a stockholder’s death or hardship. See Note 7 of the Notes to Consolidated Financial Statements for additional
information. |
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|
|
| ● | The
Hilton Garden Inn Joint Venture has obtained various amendments to its non-recourse mortgage
loan secured by the Hilton Garden Inn – Long Island City. See Note 3 of the Notes to
Consolidated Financial Statements for additional information. |
We
believe that these actions, along with our available on hand cash and cash equivalents, restricted cash and marketable securities, as
well as our intention to seek to extend the Revolving Credit Facility to September 15, 2023 pursuant to the lender’s option as
discussed in Note 5 of the Notes to Consolidated Financial Statements, will provide us with sufficient liquidity to meet our obligations
for at least 12 months from the date of issuance of these financial statements.
We
are not currently aware of any other material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to
have a material impact on either capital resources or the revenues or income to be derived from our operations, other than those referred
to above or throughout this Form 10-K. The preparation of financial statements in conformity with generally accepted accounting principles
in the United States of America (“GAAP”) requires our management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses
during a reporting period.
Critical
Accounting Estimates and Policies
General.
Our
consolidated financial statements included in this annual report include our accounts and the Operating Partnership (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 generally accepted accounting principles in the United States (“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 management’s most difficult, subjective
or complex judgments.
Revenue
Recognition.
Our
revenues are comprised primarily of revenues from the operations of hotels.
Room
revenue is generated through contracts with customers whereby the customers agree to pay a daily rate for right to use a hotel room.
Our contract performance obligations are fulfilled at the end of the day that the customer is provided the room and revenue is recognized
daily at the contract rate. Payment from the customer is secured at the end of the contract upon check-out by the customer from our hotel.
We participate in frequent guest programs sponsored by the brand owners of our hotels whereby the brand owner allows guests to earn loyalty
points during their hotel stay. We recognize revenue at the amount earned that it will receive from the brand owner when a guest redeems
their loyalty points by staying at one of our hotels.
Revenue
from food, beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a
hotel room and revenue is recognized when these goods or services are provided to the customer and our contract performance obligations
have been fulfilled.
Some
contracts for rooms, food, beverage or other services require an upfront deposit which is recorded as deferred revenues (or contract
liabilities) and recognized once the performance obligations are satisfied. The contract liabilities are not significant.
There
are no significant judgments regarding the recognition of room, food and beverage or other revenues.
Investments
in Real Estate.
Carrying
Value of Assets
The
amounts to be capitalized as a result of periodic improvements and additions to real estate property, when applicable, and the periods
over which the assets will be depreciated or amortized, are determined based on the application of accounting standards that may require
estimates as to fair value and the allocation of various costs to the individual assets. Differences in the amount attributed to the
assets may be significant based upon the assumptions made in calculating these estimates.
Impairment
Evaluation
We
evaluate our investments in real estate assets for potential impairment whenever events or changes in circumstances indicate that the
undiscounted projected cash flows are less than the carrying amount for a particular property. We evaluate the recoverability of our
investments in real estate assets at the lowest identifiable level, the individual property level. No single indicator would necessarily
result in us preparing an estimate to determine if an individual property’s future undiscounted cash flows are less than its carrying
value. We use judgment to determine if the severity of any single indicator, or the fact there are a number of indicators of less severity
that when combined, would result in an indication that a property requires an estimate of the undiscounted cash flows to determine if
an impairment has occurred. Relevant facts and circumstances include, among others, significant underperformance relative to historical
or projected future operating results and significant negative industry or economic trends. The estimated cash flows used for the impairment
analysis are subjective and require us to use our judgment and the determination of estimated fair value are based on our plans for the
respective assets and our views of market and economic conditions. The estimates consider matters such as future operating income, market
and other applicable trends and residual value, as well as the effects of demand, competition, and recent sales data for comparable properties.
An impairment loss is recognized only if the carrying amount of a property is not recoverable and exceeds its fair value.
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 39 years for buildings and improvements and five to 10 years for furniture and fixtures. Maintenance
and repairs will be charged to expense as incurred.
Investments
in Unconsolidated Entities.
We
evaluate all investments in other entities for consolidation. We consider our percentage interest in the joint venture, evaluation of
control and whether a variable interest entity exists when determining whether or not the investment qualifies for consolidation or if
it should be accounted for as an unconsolidated investment under the equity method of accounting.
If
an investment qualifies for the equity method of accounting, our investment is recorded initially at cost, and subsequently adjusted
for equity in net income or loss and cash contributions and distributions. The net income or loss of an unconsolidated investment is
allocated to its investors in accordance with the provisions of the operating agreement of the entity. The allocation provisions in these
agreements may differ from the ownership interest held by each investor. Differences, if any, between the carrying amount of our investment
in the respective joint venture and our share of the underlying equity of such unconsolidated entity are amortized over the respective
lives of the underlying assets as applicable. These items are reported as a single line item in the statements of operations as income
or loss from investments in unconsolidated entities.
We
review investments for impairment in value whenever events or changes in circumstances indicate that the carrying amount of such investment
may not be recoverable. An investment is impaired only if management’s estimate of the fair value of the investment is less than
the carrying value of the investment, and such decline in value is deemed to be other than temporary. The ultimate realization of our
investment in partially owned entities is dependent on a number of factors including the performance of that entity and market conditions.
If we determine that a decline in the value of a partially owned entity is other than temporary, we record an impairment charge.
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 real estate entities; asset management fees paid to our Advisor and property management fees paid to
its affiliates, which may 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
Advisor’s affiliates may also perform fee-based construction management services for both our development and redevelopment activities
and tenant construction projects. These fees will be 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 development and 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 Advisor’s affiliates. 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 its affiliates are expensed or capitalized to the basis of acquired assets, as appropriate.
Income
Taxes
We
elected to qualify and be taxed as a REIT commencing with the taxable year ending December 31, 2009. 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 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.
We
engage in certain activities through taxable REIT subsidiaries (“TRSs”), including when we acquire a hotel we usually establish
a TRS which then enters into an operating lease agreement for the hotel. As such, we are subject to U.S. federal and state income and
franchise taxes from these activities.
As
of December 31, 2021 and 2020, we had no material uncertain income tax positions. Additionally, even if we continue to qualify as a REIT
for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property
and to U.S. federal income taxes and excise taxes on our undistributed income, if any.
Results
of Operations
We
currently have one operating segment. As of December 31, 2021 we (i) majority owned and consolidated the operating results and financial
condition of 14 limited service hotels containing a total of 1,804 rooms, (ii) held an unconsolidated 48.6% membership interest
in Brownmill LLC (“the Brownmill Joint Venture”), an affiliated entity that owns two retail properties, and (iii) held
an unconsolidated 50.0% membership interest in the Hilton Garden Inn Joint Venture, an affiliated entity that owns and operates the Hilton
Garden Inn – Long Island City, a 183-room limited service hotel. We account for our unconsolidated membership interests in the
Brownmill Joint Venture and the Hilton Garden Inn Joint Venture under the equity method of accounting.
As
of December 31, 2021, seven of our consolidated limited service hotels are held in a joint venture (the “Joint Venture”)
formed between us and Lightstone Value Plus REIT, Inc. (“Lightstone REIT I”), a related party REIT also sponsored by our
Sponsor. We and Lightstone REIT I have 97.5% and 2.5% membership interests in the Joint Venture, respectively. Additionally, as of December
31, 2021, certain of our consolidated hotels also have ownership interests held by unrelated minority owners. The membership interests
of Lightstone REIT I and the unrelated minority owners are accounted for as noncontrolling interest.
Comparison
of the year ended December 31, 2021 vs. December 31, 2020
Consolidated
Our
consolidated revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation
and amortization for the year ended December 31, 2021 and 2020 are attributable to our consolidated hospitality properties, all of which
were owned by us during the entire periods presented.
As
a result of the COVID-19 pandemic, room demand and rental rates for our consolidated and unconsolidated hotels significantly declined
starting in March 2020 at the onset of the pandemic; and while these metrics have improved since then (late 2020 and continuing throughout
2021); room demand and rental rates remain below their pre-pandemic historical levels. Overall, our consolidated hospitality portfolio
experienced increases in (i) the percentage of rooms occupied from 45.6% to 64.6% for the year ended December 31, 2020 and 2021,
respectively, (ii) revenue per available room (“RevPAR”) from $44.49 to $69.59 for the year ended December 31, 2020
and 2021, respectively, and (iii) the average daily rate (“ADR”) from $97.61 to $107.69 for the year ended December
31, 2020 and 2021, respectively.
Revenues
Revenues
increased by $17.1 million to $48.0 million during the year ended December 31, 2021, compared to $30.9 million for the same period
in 2020. This increase reflects the higher occupancy, RevPAR and ADR during the 2021 period.
Property
operating expenses
Property
operating expenses increased by $6.7 million to $32.5 million during the year ended December 31, 2021 compared to $25.8 million
for the same period in 2020. This increase reflects the higher occupancy during the 2021 period.
Real
estate taxes
Real
estate taxes decreased by $0.4 million to $3.2 million during the year ended December 31, 2021 compared to $3.6 million for the
same period in 2020.
General
and administrative expenses
General
and administrative expenses increased slightly by $0.1 million to $4.8 million during the year ended December 31, 2021 compared
to $4.7 million for the same period in 2020.
Depreciation
and amortization
Depreciation
and amortization expense decreased by $0.3 million to $10.4 million during the year ended December 31, 2021 compared to $10.7 million
for the same period in 2020.
Interest
expense
Interest
expense was $6.0 million during the year ended December 31, 2021 compared to $6.1 million for the same period in 2020. Interest
expense is primarily attributable to financings associated with our hotels and reflects both changes in market interest rates on our
variable rate indebtedness and the weighted average principal outstanding during the periods.
Gain
on forgiveness of debt
During
the year ended December 31, 2021, we received notices from the SBA that all of the PPP Loans received in April 2020 totaling $3.3 million
and their related accrued interest aggregating $0.1 million had been legally forgiven and therefore, we recognized a gain on forgiveness
of debt of $3.4 million. See Note 6 of the Notes to Consolidated Financial Statements.
Earnings
from investments in unconsolidated affiliated real estate entities
Our
income from investments in unconsolidated affiliated real estate entities was $44 during the year ended December 31, 2021 compared
to a loss of $2.1 million for the same period in 2020. Our earnings from investments in unconsolidated affiliated real estate entities
is attributable to our ownership interests in the Hilton Garden Inn Joint Venture, the Brownmill Joint Venture. We account for our
membership interests in the Hilton Garden Inn Joint Venture and the Brownmill Joint Venture under the equity method of accounting
commencing on the date that we acquired our interests.
Noncontrolling
interests
The
income or loss allocated to noncontrolling interests relates to the interest in our Operating Partnership held by our Advisor, the membership
interest held by Lightstone I in the Joint Venture, and the ownership interests held by unrelated minority owners in certain of our hotels.
Financial
Condition, Liquidity and Capital Resources
Overview:
In
light of the COVID-19 pandemic’s impact on our operating performance, we have successfully negotiated various changes to the terms
of our Revolving Credit Facility, including forbearance of scheduled debt service, reductions in interest rates, waiver periods and modifications
of financial covenants and an extension option. See “Contractual Mortgage Obligations” for additional information.
As
of December 31, 2021, we had $15.1 million of cash on hand, restricted cash of $1.8 million and marketable securities of $6.8 million.
We currently believe that these items, along with revenues from our properties, interest and dividend income on our marketable securities,
proceeds from the potential sale of marketable securities, distributions received from our unconsolidated affiliated entities will be
sufficient to satisfy our expected cash requirements primarily consisting of our anticipated operating expenses, scheduled debt service
(excluding the Revolving Credit Facility which we intend to seek to extend to September 15, 2023 pursuant to the lender’s option),
capital expenditures (excluding non-recurring capital expenditures), contributions to our unconsolidated affiliated entities, redemptions
and cancellations of shares of our Common Shares, if approved, and distributions, if any, required to maintain our status as a REIT.
However, we may also obtain additional funds through selective asset dispositions, joint venture arrangements, new borrowings and refinancing
of existing borrowings.
As
of December 31, 2021, we have mortgage indebtedness totaling $136.5 million, $3.7 million of PPP Loans (classified as notes payable on
our consolidated balance sheet) and a margin loan of $2.3 million. We have and intend to continue to limit our aggregate long-term permanent
borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of our independent
directors and is disclosed to our stockholders. Market conditions will dictate the overall leverage limit; as such our aggregate long-term
permanent borrowings may be less than 75% of aggregate fair market value of all properties. We may also incur short-term indebtedness,
having a maturity of two years or less.
On March 22, 2022, we completed
the disposition of the Courtyard – Paso Robles for $32.3 million. In connection with the disposition, the Courtyard – Paso
Robles Mortgage Loan ($13.4 million) was fully defeased. Our net proceeds from the disposition of the Courtyard – Paso Robles were
approximately $18.9 million, after the repayment in full of the Courtyard – Paso Robles Mortgage, closing costs, expenses and pro
rations and other working capital adjustments.
Our
charter provides that the aggregate amount of our borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence
of a satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders.
Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our
total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets
level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders,
along with justification for such excess. Market conditions will dictate our overall leverage limit; as such our aggregate borrowings
may be less than 300% of net assets. As of December 31, 2021, our total borrowings aggregated $142.5 million which represented 83% of
our net assets.
Additionally,
in order to leverage our investments in marketable securities and seek a higher rate of return, we have access to borrowings under a
margin loan. This loan is due on demand and any outstanding balance must be paid upon the liquidation of securities.
Any
future properties that we may acquire may be funded through a combination of borrowings and the proceeds received from the selective
disposition of certain of our real estate assets. These borrowings may consist of single-property mortgages as well as mortgages cross-collateralized
by a pool of properties. Such mortgages may be put in place either at the time we acquire a property or subsequent to our purchasing
a property for cash. In addition, we may acquire properties that are subject to existing indebtedness where we choose to assume the existing
mortgages. Generally, though not exclusively, we intend to seek to encumber our properties with debt, which will be on a non-recourse
basis. This means that a lender’s rights on default will generally be limited to foreclosing on the property. However, we may,
at our discretion, secure recourse financing or provide a guarantee to lenders if we believe this may result in more favorable terms.
When we give a guaranty for a property owning entity, we will be responsible to the lender for the satisfaction of the indebtedness if
it is not paid by the property owning entity.
We
may also obtain lines of credit to be used to acquire properties. If obtained, these lines of credit will be at prevailing market terms
and will be repaid from proceeds from the sale or refinancing of properties, working capital and/or permanent financing. Our Sponsor
and/or its affiliates may guarantee our lines of credit although they are not obligated to do so. We expect that such properties may
be purchased by our Sponsor’s affiliates on our behalf, in our name, in order to minimize the imposition of a transfer tax upon
a transfer of such properties to us.
We have
various agreements, including an advisory agreement, with the Advisor to pay certain fees in exchange for services performed by the Advisor
and/or its affiliated entities. Additionally, our ability to secure financing and our real estate operations are dependent upon our Advisor
and its affiliates to perform such services as provided in these agreements.
In
addition to meeting working capital needs and distributions, if any, made to maintain our status as a REIT, our capital resources are
used to make certain payments to our Advisor, including payments related to asset acquisition fees and asset management fees, the reimbursement
of acquisition-related expenses to our Advisor. We also reimburse our advisor for actual expenses it incurs for administrative and other
services provided to us.
The
advisory agreement has a one-year term and is renewable for an unlimited number of successive one-year periods upon the mutual consent
of the Advisor and our independent directors.
The
following table represents the fees incurred associated with the payments to the Advisor for the periods indicated:
| | |
For
the
Years Ended
December 31, | |
| | |
2021 | | |
2020 | |
| Development
fees (1) | |
$ | - | | |
$ | 32 | |
| Asset
management fees (general and administrative costs) | |
| 2,954 | | |
| 2,929 | |
| Total | |
$ | 2,954 | | |
$ | 2,961 | |
| (1) | Generally,
capitalized and amortized over the estimated useful life of the associated asset. |
We
did not incur any fees to affiliates of our Advisor for property management services during the years ended December 31, 2021 and 2020.
Summary
of Cash Flows.
The
following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive
discussion of the changes in our cash flows for the periods presented below:
| | |
Year
Ended
December 31,
2021 | | |
Year
Ended
December 31,
2020 | |
| Cash
flows used in operating activities | |
$ | (416 | ) | |
$ | (5,839 | ) |
| Cash
flows used in investing activities | |
| (3,065 | ) | |
| (2,857 | ) |
| Cash
flows provided by/(used in) financing activities | |
| 2,017 | | |
| (3,097 | ) |
| Net
change in cash, cash equivalents and restricted cash | |
| (1,464 | ) | |
| (11,793 | ) |
| Cash,
cash equivalents and restricted cash, beginning of year | |
| 18,423 | | |
| 30,216 | |
| Cash,
cash equivalents and restricted cash, end of period | |
$ | 16,959 | | |
$ | 18,423 | |
Operating
activities
The
cash used in operating activities of $0.4 million for the year ended December 31, 2021 consisted of our net loss of $5.4 million, gain
on forgiveness of debt of $3.4 million and net changes in operating assets and liabilities of $2.6 million offset by depreciation and
amortization, earnings from investments in unconsolidated affiliated entities, amortization of deferred financing costs and other non-cash
items aggregating $10.9 million.
Investing
activities
The
cash used in investing activities of $3.1 million for the year ended December 31, 2021 consists primarily of the following:
| ● | capital
expenditures of $0.5 million; |
| ● | $3.3
million of contributions to unconsolidated affiliated real estate entities; and |
| ● | $0.8
million of distributions from unconsolidated affiliated real estate entities. |
Financing
activities
The
cash provided by financing activities of $2.0 million for the year ended December 31, 2021 consists primarily of the following:
| ● | proceeds
from notes payable of $3.7 million; |
| ● | payments
of loan fees and expenses of $0.4 million; |
| ● | debt
principal payments of $0.2 million; |
| ● | net
margin loan payments of $0.3 million; and |
| ● | redemption
and cancellation of Common Shares of $0.8 million. |
Share
Repurchase Program
Our
share repurchase program (the “SRP”) may provide eligible stockholders with limited, interim liquidity by enabling them to
sell their Common Shares back to us, subject to restrictions and applicable law.
On
March 19, 2020, the Board of Directors amended the SRP to remove stockholder notice requirements and also approved the suspension of
all redemptions effective immediately.
Effective
May 10, 2021, the Board of Directors reopened the SRP to allow, subject to various conditions as set forth below, for redemptions submitted
in connection with a stockholder’s death or hardship and set the price for all such purchases to our current NAV per Share, as
determined by the Board of Directors and reported by us from time to time.
Deaths
that occurred subsequent to January 1, 2020 were eligible for consideration, subject to certain conditions. Beginning January 1, 2022,
requests for redemptions in connection with a stockholder’s death must be submitted and received by us within one year of the stockholder’s
date of death for consideration.
On
the above noted date, the Board of Directors established that on an annual basis, we would not redeem in excess of 0.5% of the number
of shares outstanding as of the end of the preceding year for either death or hardship redemptions, respectively. Additionally, redemption
requests generally would be processed on a quarterly basis and would be subject to pro ration if either type of redemption requests exceeded
the annual limitation.
For
the year ended December 31, 2021 we repurchased 98,866 shares of Common Shares, pursuant to the SRP, for $8.02 per share. For the period
from January 1 through March 18, 2020, we repurchased 82,413 Common Shares, pursuant to the SRP, for $10.00 per share.
Distributions
Declared by our Board of Directors
On
March 19, 2020, the Board of Directors determined to suspend regular quarterly distributions on our Common Shares. As a result, there
were no distributions declared during the years ended December 31, 2021 and 2020.
Future
distributions declared on our Common Shares, if any, will be at the discretion of the Board of Directors based on their analysis of our
performance over the previous periods and expectations of performance for future periods. The Board of Directors will consider various
factors in its determination, including but not limited to, the sources and availability of capital, revenues and sources of income,
operating and interest expenses and our ability to refinance near-term debt as well as the IRS’s annual distribution requirement
that REITs distribute no less than 90% of their taxable income. We cannot assure that any future distributions will be made or that we
will maintain any particular level of distributions that we have previously established or may establish.
Contractual
Mortgage Obligations
The
following is a summary of our estimated contractual mortgage obligations outstanding over the next five years and thereafter as of December
31, 2021.
| Contractual
Mortgage Obligations | |
2022 | | |
2023 | | |
2024 | | |
2025 | | |
2026 | | |
Thereafter | | |
Total | |
| Principal
maturities | |
$ | 123,256 | | |
$ | 13,208 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 136,464 | |
| Interest
payments(1) | |
| 4,679 | | |
| 670 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 5,349 | |
| Total
Contractual Mortgage Obligations | |
$ | 127,935 | | |
$ | 13,878 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 141,813 | |
Note:
| (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, 2021 was used. |
Revolving
Credit Facility
On
June 2, 2020, our revolving credit facility (the “Revolving Credit Facility”) was amended to provide for (i) the deferral
of the six monthly debt service payments aggregating $2.6 million (from April 1, 2020 through September 30, 2020, until November 15,
2021; (ii) a 100 bps reduction in the interest rate spread to LIBOR plus 2.15%, subject to a 3.00% floor, for the six-month period from
September 1, 2020 through February 28, 2021; (iii) us pre-funding $2.5 million into a cash collateral reserve account to cover the six
monthly debt service payments which were due from October 1, 2020 through March 1, 2021; and (iv) a waiver of all financial covenants
for quarter-end periods before June 30, 2021.
Subsequently,
on March 31, 2021, the Revolving Credit Facility was further amended providing for (i) us to pledge the membership interests in another
hotel as additional collateral within 45 days, (ii) us to fund an additional $2.5 million into the cash collateral reserve account; (iii)
a waiver of all financial covenants for quarter-end periods through September 30, 2021 with a phased-in gradual return to the full financial
covenant requirements over the quarter-end periods beginning December 31, 2021 through March 31, 2023; (iv) an extension of the maturity
date from May 17, 2021 to September 15, 2022 upon the pledge of the additional collateral (which was subsequently completed on May 13,
2021); (v) one additional one-year extension option at the lender’s sole discretion; and (vi) certain limitations and restrictions
on asset sales and additional borrowings related to the pledged collateral.
As
of December 31, 2021, 13 of our hotel properties were pledged as collateral under the Revolving Credit Facility and the outstanding principal
balance was $123.0 million. Additionally, no additional borrowings were available under the Revolving Credit Facility as of December
31, 2021. Although the Revolving Credit Facility is scheduled to mature on September 15, 2022, we currently intend to seek to extend
the Revolving Credit Facility to September 15, 2023 pursuant to the lender’s extension option.
Courtyard
– Paso Robles Mortgage Loan
In connection with our acquisition
of the Courtyard – Paso Robles on December 14, 2017, we assumed the Courtyard - Paso Robles Mortgage Loan. The Courtyard –
Paso Robles Mortgage Loan matures in November 2023, bears interest at a fixed rate of 5.49% and requires monthly principal and interest
payments of $79 through its stated maturity with a balloon payment of $13.0 million due at maturity. The Courtyard – Paso Robles
Mortgage Loan had an outstanding balance of $13.4 million as of December 31, 2021. On March 22, 2022, the Courtyard – Paso Robles
Mortgage Loan was fully defeased in connection with the disposition of the Courtyard – Paso Robles (See note 10 of the Notes to
Consolidated Financial Statements).
PPP
Loans
In
April 2020, we, through various subsidiaries (each such entity, a “Borrower” and collectively, the “Borrowers”)
received aggregate funding of $3.3 million through loans (the “PPP Loans”) originated under the federal Paycheck Protection
Program, which was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered
by the SBA. During the first quarter of 2021, the Borrowers received an additional aggregate funding of $3.7 million of PPP Loans.
The
PPP Loans each have a term of five years and provide for an interest rate of 1.00%. The payment of principal and interest on the PPP
loan is deferred until the day that the forgiven amount is remitted to the lender (approximately five months after the forgiveness application
is submitted to the lender, unless the Borrower appeals a denial of forgiveness) or ten months after the end of the Borrower’s
covered period, whichever is earlier. Pursuant to the terms of the CARES Act, the proceeds of the PPP Loans may be used for payroll costs,
mortgage interest, rent or utility costs.
The
promissory note for each of the PPP Loans contains customary events of default relating to, among other things, payment defaults and
breach of representations and warranties or of provisions of the relevant promissory note. Under the terms of the CARES Act, each Borrower
can apply for and be granted forgiveness for all or a portion of the PPP Loans. Such forgiveness will be determined, subject to limitations,
based on the use of loan proceeds in accordance with the terms of the CARES Act. Although we intend for each Borrower to apply for forgiveness,
no assurance may be given that each Borrower will ultimately obtain forgiveness under its PPP Loan in whole or in part. In the event
all or any portion of a PPP Loan is forgiven, the amount forgiven will be applied to outstanding principal and recorded as income. The
PPP Loans are subject to audit by the SBA for up to six years after the date the loans are forgiven.
During
the year ended December 31, 2021, we received notices from the SBA that all of the PPP Loans received in April 2020 totaling $3.3 million
and their related accrued interest aggregating $0.1 million had been legally forgiven and therefore, we recognized a gain on forgiveness
of debt of $3.4 million on our consolidated statements of operations. As of December 31, 2021 and 2020, the PPP Loans had outstanding
balances of $3.7 million and $3.3 million, respectively, and are classified as Notes Payable on the consolidated balance sheets.
In
addition to the mortgages payable and PPP Loans described above, a margin loan that was made available to us from a financial institution
that holds custody of certain of our marketable securities. The margin loan is collateralized by the marketable securities in our account.
The amounts available to us under the margin loan are at the discretion of the financial institution and not limited to the amount of
collateral in our account.
The
amount outstanding under this margin loan was $2.3 million as of December 31, 2021 and is due on demand. The margin loan bears interest
at LIBOR plus 0.85% (0.96% as of December 31, 2021).
LIBOR
The
Revolving Credit Facility and Margin Loan are indexed to LIBOR. In late 2021, it was announced LIBOR interest rates will cease publication
altogether by June 30, 2023. We have and intend continue to incorporate relatively standardized replacement rate provisions into our
LIBOR-indexed debt documents, including a spread adjustment mechanism designed to equate to the current LIBOR “all in” rate.
There is significant uncertainty with respect to the implementation of the phase out and what alternative indexes will be adopted which
will ultimately be determined by the market as a whole. It therefore remains uncertain how such changes will be implemented and the effects
such changes would have on us and the financial markets generally.
Investments
in Unconsolidated Affiliated Entities
We
have an unconsolidated 48.6% membership interest in Brownmill, LLC (“the Brownmill Joint Venture”), an affiliated entity
that owns two retail properties, and an unconsolidated 50.0% membership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn
Joint Venture”), an affiliated entity that owns and operates a 183-room limited service hotel located in Long Island City, New
York (the “Hilton Garden Inn – Long Island City”). We account for our unconsolidated membership interests in the Brownmill
Joint Venture and the Hilton Garden Inn Joint Venture under the equity method of accounting.
In
light of the impact of the COVID-19 pandemic on the operating results of the Hilton Garden Inn – Long Island City, the Hilton Garden
Inn Joint Venture has entered into certain amendments with respect to its non-recourse mortgage loan (the Hilton Garden Inn Mortgage”)
as discussed below.
On
June 2, 2020, the Hilton Garden Inn Mortgage was amended to provide for (i) the deferral of the six monthly debt service payments aggregating
$0.9 million for the period from April 1, 2020 through September 30, 2020 until March 27, 2023; (ii) a 100 bps reduction in the interest
rate spread to LIBOR plus 2.15%, subject to a 4.03% floor, for the six-month period from September 1, 2020 through February 28, 2021;
(iii) the Hilton Garden Inn Joint Venture pre-funding $1.2 million into a cash collateral reserve account to cover the six monthly debt
service payments due from October 1, 2020 through March 1, 2021; and (iv) waiver of all financial covenants for quarter-end periods before
June 30, 2021.
Additionally,
on April 7, 2021, the Hilton Garden Inn Joint Venture and the lender further amended the terms of the Hilton Garden Inn Mortgage to provide
for (i) the Hilton Garden Inn Joint Venture to make a principal paydown of $1.7 million; (ii) the Hilton Garden Inn Joint Venture to
fund an additional $0.7 million into the cash collateral reserve account; (iii) a waiver of all financial covenants for quarter-end periods
through September 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods beginning
December 31, 2021 through December 31, 2022; (iv) a 11-month interest-only payment period from May 1, 2021 through March 31, 2022; and
(v) certain restrictions on distributions to the members of the Hilton Garden Inn Joint Venture during the interest-only payment period.
See
Note 3 of the Notes to Consolidated Financial Statements for additional information.
Funds
from Operations and Modified Funds from Operations
The
historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line
amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because
real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business
cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for
depreciation and certain other items may be less informative.
Because
of these factors, the National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has published
a standardized measure of performance known as funds from operations (“FFO”), which is used in the REIT industry as a supplemental
performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate
supplemental measure of a REIT’s operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.
We
calculate FFO, a non-GAAP measure, consistent with the standards established over time by the Board of Governors of NAREIT, as restated
in a White Paper approved by the Board of Governors of NAREIT effective in December 2018 (the “White Paper”). The White Paper
defines FFO as net income or loss computed in accordance with GAAP, excluding depreciation and amortization related to real estate, gains
and losses from the sale of certain real estate assets, gains and losses from change in control and impairment write-downs of certain
real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable
real estate held by the entity. Our FFO calculation complies with NAREIT’s definition.
We
believe that the use of FFO provides a more complete understanding of our performance to investors and to management, and reflects
the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and
interest costs, which may not be immediately apparent from net income.
Changes
in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT’s
definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred
for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that
are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed
REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during
the period when they are raising capital through ongoing initial public offerings.
Because
of these factors, the Investment Program Association (the “IPA”), an industry trade group, published a standardized measure
of performance known as modified funds from operations (“MFFO”), which the IPA has recommended as a supplemental measure
for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered,
non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items
the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining
of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we
believe that both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount
of acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating
costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent
to our net income or loss as determined under GAAP.
We
define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered,
Non-Listed REITs: Modified Funds from Operations (the “Practice Guideline”) issued by the IPA in November 2010. The Practice
Guideline defines MFFO as FFO further adjusted for acquisition and transaction-related fees and expenses and other items. In calculating
MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses (which includes costs incurred
in connection with strategic alternatives), amounts relating to deferred rent receivables and amortization of market lease and other
intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent
and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments
included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income from the
extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a
fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity
accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated
to reflect MFFO on the same basis. Certain of the above adjustments are also made to reconcile net income (loss) to net cash provided
by (used in) operating activities, such as for the amortization of a premium and accretion of a discount on debt and securities investments,
amortization of fees, any unrealized gains (losses) on derivatives, securities or other investments, as well as other adjustments.
MFFO
excludes non-recurring impairment of real estate-related investments. We assess the credit quality of our investments and adequacy of
reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. We consider the estimated
net recoverable value of a loan as well as other factors, including but not limited to the fair value of any collateral, the amount and
the status of any senior debt, the prospects for the borrower and the competitive situation of the region where the borrower does business.
We
believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO
can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our
operating performance after the period in which we are acquiring properties and once our portfolio is stabilized. We also believe that
MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our
performance against other publicly registered, non-listed REITs.
Not
all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other
REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow
available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations
as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations as an indication of our
liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO
and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. FFO and MFFO should not
be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating
our operating performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should
be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and
MFFO, and the adjustments to GAAP in calculating FFO and MFFO.
Neither
the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments
that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the
White Paper or the Practice Guidelines or the SEC or another regulatory body could standardize the allowable adjustments across the publicly
registered, non-listed REIT industry, and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.
The
below table illustrates the items deducted from or added to net income in the calculation of FFO and MFFO. Items are presented net of
noncontrolling interest portions where applicable.
| | |
For
the
Years Ended | |
| | |
December 31,
2021 | | |
December 31,
2020 | |
| Net
loss | |
$ | (5,399 | ) | |
$ | (21,720 | ) |
| FFO
adjustments: | |
| | | |
| | |
| Depreciation
and amortization of real estate assets | |
| 10,383 | | |
| 10,748 | |
| Adjustments
to equity in earnings from unconsolidated entities, net | |
| 1,745 | | |
| 1,714 | |
| FFO | |
| 6,729 | | |
| (9,258 | ) |
| MFFO
adjustments: | |
| | | |
| | |
| Other
adjustments: | |
| | | |
| | |
| Acquisition
and other transaction related costs expensed(1) | |
| - | | |
| - | |
| Adjustments
to equity in earnings from unconsolidated entities, net | |
| (238 | ) | |
| (8 | ) |
| Gain
on forgiveness of debt(2) | |
| (3,387 | ) | |
| | |
| Mark-to-market
adjustments(3) | |
| 44 | | |
| (103 | ) |
| Non-recurring
loss/(gain) from extinguishment/sale of debt, derivatives or securities holdings(2) | |
| - | | |
| 292 | |
| MFFO | |
| 3,148 | | |
| (9,077 | ) |
| Straight-line
rent(4) | |
| - | | |
| - | |
| MFFO
- IPA recommended format | |
$ | 3,148 | | |
$ | (9,077 | ) |
| | |
| | | |
| | |
| Net
loss | |
$ | (5,399 | ) | |
$ | (21,720 | ) |
| Less:
loss attributable to noncontrolling interests | |
| 79 | | |
| 397 | |
| Net
loss applicable to Company’s common shares | |
$ | (5,320 | ) | |
$ | (21,323 | ) |
| Net
loss per common share, basic and diluted | |
$ | (0.31 | ) | |
$ | (1.22 | ) |
| | |
| | | |
| | |
| FFO | |
$ | 6,729 | | |
$ | (9,258 | ) |
| Less:
FFO attributable to noncontrolling interests | |
| (132 | ) | |
| 166 | |
| FFO
attributable to Company’s common shares | |
$ | 6,597 | | |
$ | (9,092 | ) |
| FFO
per common share, basic and diluted | |
$ | 0.38 | | |
$ | (0.52 | ) |
| | |
| | | |
| | |
| MFFO
- IPA recommended format | |
$ | 3,148 | | |
$ | (9,077 | ) |
| Less:
MFFO attributable to noncontrolling interests | |
| (67 | ) | |
| 166 | |
| MFFO
attributable to Company’s common shares | |
$ | 3,081 | | |
$ | (8,911 | ) |
| |
| | | |
| | |
| Weighted
average number of common shares outstanding, basic and diluted | |
| 17,407 | | |
| 17,433 | |
| (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 need to be paid
from either additional debt, operational earnings or cash flow proceeds from the sale of
properties or from ancillary cash flows. |
| (2) | 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. |
| (3) | Management
believes that adjusting for mark-to-market adjustments is appropriate because they are items
that may not be reflective of ongoing operations and reflect unrealized impacts on value
based only on then current market conditions, although they may be based upon current operational
issues related to an individual property or industry or general market conditions. Mark-to-market
adjustments are made for items such as ineffective derivative instruments, certain marketable
securities and any other items that GAAP requires we make a mark-to-market adjustment for.
The need to reflect mark-to-market adjustments is a continuous process and is analyzed on
a quarterly and/or annual basis in accordance with GAAP. |
| (4) | Under
GAAP, rental receipts are allocated to periods using various methodologies. This may result
in income recognition that is significantly different than underlying contract terms. By
adjusting for these items (to reflect such payments from a GAAP accrual basis to a cash basis
of disclosing the rent and lease payments), MFFO provides useful supplemental information
on the realized economic impact of lease terms and debt investments, providing insight on
the contractual cash flows of such lease terms and debt investments, and aligns results with
management’s analysis of operating performance. |
The
table below presents our cumulative distributions declared and cumulative FFO:
| | |
For
the period
April, 28, 2008 | |
| | |
(date
of inception)
through | |
| | |
December 31,
2021 | |
| FFO | |
$ | 70,482 | |
| Distributions
declared | |
$ | 85,040 | |
FFO
attributable to our Common Shares for the year ended December 31, 2021 was 6.7 million and cash flow used in operations was $0.4 million.
There were no distributions paid during the year ended December 31, 2021. FFO attributable to our Common Shares for the year ended December
31, 2020 was negative $9.1 million and cash flow used in operations was $5.8 million. For the year ended December 31, 2020, we paid distributions
of $3.1 million.
New
Accounting Pronouncements
See
Note 2 of the Notes to Consolidated Financial Statements for further information.
Subsequent
Events
See
Note 10 of the Notes to Consolidated Financial Statements for further information related to subsequent events during the period from
January 1, 2022 through the date of this filing.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Lightstone
Value Plus REIT II, 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 REIT II, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Lightstone Value Plus REIT II, Inc.
and Subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations,
comprehensive loss, 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 financial position of the Company as of December 31, 2021 and 2020, and the results of their operations
and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States
of America.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the 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.
Critical Audit Matter
The critical audit matter communicated below is
a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the
audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on
the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion
on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment Evaluation of Investment in Real Estate
As of December 31, 2021, the Company had investment
property, net of accumulated depreciation, of approximately $215.2 million. As more fully described in Note 2 to the financial statements,
the Company evaluates its investments in real estate for impairment whenever events or changes in circumstances representing triggering
events indicate that the carrying amount may not be recoverable for a particular property. The Company evaluates the recoverability of
its investments in real estate at the lowest identifiable level, the individual property level. No single indicator would necessarily
result in the Company preparing an estimate to determine if an individual property’s future undiscounted cash flows are less than
its carrying value. The Company uses judgment to determine if the severity of any single indicator, or the fact there are a number
of indicators of less severity that when combined, would result in an indication that a property requires an estimate of the undiscounted
cash flows to determine if an impairment has occurred. Relevant facts and circumstances include, among others, significant underperformance
relative to historical or projected future operating results and significant negative industry or economic trends. The estimated
cash flows used for the impairment analysis are subjective and require the Company to use its judgment and the determination of estimated
fair value is based on the Company’s plans for the respective assets and the Company’s views of market and economic conditions. The
estimates utilize observable and unobservable inputs such as future operating income, market and other applicable trends and residual
value, as well as the estimated impacts of demand, competition, and recent sales data for comparable properties.
We identified the impairment evaluation as a critical
audit matter due to significant judgment by management in identifying indicators of impairment and in the estimated recoverability of
a particular property. This in turn led to a high degree of auditor judgment, subjectivity, and audit effort in performing procedures
to evaluate the reasonableness of management's significant estimates and assumptions related to future operating income, the holding period,
capitalization rates and residual values.
Addressing the matter involved performing procedures
and evaluating audit evidence, in connection with forming our overall opinion on the financial statements. We obtained an understanding
and evaluated the design of controls over the Company’s impairment evaluation process. Our procedures included, among others, assessing
the methodologies applied, identifying the existence of any triggering events, comparing the estimated undiscounted cash flows to historical
operating results by property and evaluating the reasonableness of significant estimates and assumptions including future operating income,
the holding period, capitalization rates and residual values and determining if they were reasonable considering the past and current
performance of the property and if consistent with evidence obtained in other areas of the audit. In addition, we performed sensitivity
analysis over significant estimates and assumptions including future operating income and residual values. We tested the completeness
and accuracy of the underlying data used by management in its evaluation. We held discussions with management about the current status
of certain properties to understand how management’s significant estimates and assumptions are developed considering potential future
market conditions. In addition, we evaluated the mathematical accuracy of the calculations included in the Company’s evaluation.
/s/
EisnerAmper LLP
We
have served as the Company’s auditor since 2010.
EISNERAMPER
LLP
Iselin,
New Jersey
March
28, 2022
274
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(dollars
in thousands, except per share data)
| | |
| | | |
| | |
| | |
December 31,
2021 | | |
December 31,
2020 | |
| Assets | |
| | | |
| | |
| Investment
property: | |
| | | |
| | |
| Land
and improvements | |
$ | 36,709 | | |
$ | 36,689 | |
| Building
and improvements | |
| 203,660 | | |
| 203,561 | |
| Furniture
and fixtures | |
| 36,313 | | |
| 36,010 | |
| Construction
in progress | |
| 119 | | |
| 77 | |
| Gross
investment property | |
| 276,801 | | |
| 276,337 | |
| Less
accumulated depreciation | |
| (61,626 | ) | |
| (51,269 | ) |
| Net
investment property | |
| 215,175 | | |
| 225,068 | |
| | |
| | | |
| | |
| Investments
in unconsolidated affiliated entities | |
| 17,958 | | |
| 15,359 | |
| Cash
and cash equivalents | |
| 15,126 | | |
| 15,348 | |
| Marketable
securities, available for sale | |
| 6,777 | | |
| 6,902 | |
| Restricted
cash | |
| 1,833 | | |
| 3,075 | |
| Accounts
receivable and other assets | |
| 3,867 | | |
| 2,836 | |
| Total
Assets | |
$ | 260,736 | | |
$ | 268,588 | |
| | |
| | | |
| | |
| Liabilities
and Stockholders’ Equity | |
| | | |
| | |
| Accounts
payable and other accrued expenses | |
$ | 6,525 | | |
$ | 7,859 | |
| Margin
loan | |
| 2,292 | | |
| 2,599 | |
| Mortgages
payable, net | |
| 136,167 | | |
| 136,400 | |
| Notes
payable | |
| 3,746 | | |
| 3,343 | |
| Due
to related party | |
| 538 | | |
| 618 | |
| Total
liabilities | |
| 149,268 | | |
| 150,819 | |
| | |
| | | |
| | |
| Commitments
and contingencies | |
| | | |
| | |
| | |
| | | |
| | |
| Stockholders’
Equity: | |
| | | |
| | |
| Company’s
stockholders’ equity: | |
| | | |
| | |
| Preferred
shares, $0.01 par value, 10.0 million shares authorized, none issued and outstanding | |
| - | | |
| - | |
| Common
stock, $0.01 par value; 100.0 million shares authorized, 17.3 million and 17.4 million shares issued and outstanding, respectively | |
| 173 | | |
| 174 | |
| Additional
paid-in-capital | |
| 146,308 | | |
| 147,100 | |
| Accumulated
other comprehensive income | |
| - | | |
| 82 | |
| Accumulated
deficit | |
| (46,506 | ) | |
| (41,186 | ) |
| Total
Company stockholders’ equity | |
| 99,975 | | |
| 106,170 | |
| Noncontrolling
interests | |
| 11,493 | | |
| 11,599 | |
| Total
Stockholders’ Equity | |
| 111,468 | | |
| 117,769 | |
| | |
| | | |
| | |
| Total
Liabilities and Stockholders’ Equity | |
$ | 260,736 | | |
$ | 268,588 | |
The
accompanying notes are an integral part of these consolidated financial statements.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Amounts
in thousands, except per share data)
| | |
| | | |
| | |
| | |
For
the
Years Ended
December 31, | |
| | |
2021 | | |
2020 | |
| Revenues | |
$ | 47,991 | | |
$ | 30,903 | |
| | |
| | | |
| | |
| Expenses: | |
| | | |
| | |
| Property
operating expenses | |
| 32,522 | | |
| 25,766 | |
| Real
estate taxes | |
| 3,198 | | |
| 3,579 | |
| General
and administrative costs | |
| 4,803 | | |
| 4,652 | |
| Depreciation
and amortization | |
| 10,383 | | |
| 10,748 | |
| Total
operating expenses | |
| 50,906 | | |
| 44,745 | |
| | |
| | | |
| | |
| Operating
loss | |
| (2,915 | ) | |
| (13,842 | ) |
| | |
| | | |
| | |
| Interest
and dividend income | |
| 272 | | |
| 513 | |
| Interest
expense | |
| (6,015 | ) | |
| (6,123 | ) |
| Loss
on sale of marketable securities, available for sale | |
| - | | |
| (292 | ) |
| Earnings
from investments in unconsolidated affiliated entities | |
| 44 | | |
| (2,053 | ) |
| Other
(expense)/income, net | |
| (172 | ) | |
| 77 | |
| Gain
on forgiveness of debt | |
| 3,387 | | |
| - | |
| Net
loss | |
| (5,399 | ) | |
| (21,720 | ) |
| Less:
net loss attributable to noncontrolling interests | |
| 79 | | |
| 397 | |
| Net
loss applicable to Company’s common shares | |
$ | (5,320 | ) | |
$ | (21,323 | ) |
| | |
| | | |
| | |
| Net
loss per Company’s common share, basic and diluted | |
$ | (0.31 | ) | |
$ | (1.22 | ) |
| | |
| | | |
| | |
| Weighted
average number of common shares outstanding, basic and diluted | |
| 17,407 | | |
| 17,433 | |
The
accompanying notes are an integral part of these consolidated financial statements.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
(Amounts
in thousands)
| | |
| | | |
| | |
| | |
For
the
Years Ended
December 31, | |
| | |
2021 | | |
2020 | |
| Net
loss | |
$ | (5,399 | ) | |
$ | (21,720 | ) |
| | |
| | | |
| | |
| Other
comprehensive loss: | |
| | | |
| | |
| Holding
loss on available for sale securities | |
| (82 | ) | |
| (382 | ) |
| Reclassification
adjustment for loss included in net loss | |
| - | | |
| 292 | |
| Other
comprehensive loss | |
| (82 | ) | |
| (90 | ) |
| Comprehensive
loss | |
| (5,481 | ) | |
| (21,810 | ) |
| | |
| | | |
| | |
| Less:
Comprehensive loss attributable to noncontrolling interests | |
| 79 | | |
| 397 | |
| | |
| | | |
| | |
| Comprehensive
loss attributable to the Company’s common shares | |
$ | (5,402 | ) | |
$ | (21,413 | ) |
The
accompanying notes are an integral part of these consolidated financial statements.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts
in thousands)
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
Common
Stock | | |
Additional
Paid-In | | |
Accumulated Other Comprehensive | | |
Accumulated | | |
Noncontrolling | | |
Total
Stockholders’ | |
| | |
Shares | | |
Amount | | |
Capital | | |
Income/(Loss) | | |
(Deficit)/Surplus | | |
Interests | | |
Equity | |
| BALANCE,
December 31, 2019 | |
| 17,512 | | |
$ | 175 | | |
$ | 147,924 | | |
$ | 172 | | |
$ | (19,863 | ) | |
$ | 12,214 | | |
$ | 140,622 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| (21,323 | ) | |
| (397 | ) | |
| (21,720 | ) |
| Other
comprehensive loss | |
| - | | |
| - | | |
| - | | |
| (90 | ) | |
| - | | |
| - | | |
| (90 | ) |
| Contributions
of noncontrolling interests | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 110 | | |
| 110 | |
| Distributions
to noncontrolling interests | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (328 | ) | |
| (328 | ) |
| Redemption
and cancellation of shares | |
| (82 | ) | |
| (1 | ) | |
| (824 | ) | |
| - | | |
| - | | |
| - | | |
| (825 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| BALANCE,
December 31, 2020 | |
| 17,430 | | |
$ | 174 | | |
$ | 147,100 | | |
$ | 82 | | |
$ | (41,186 | ) | |
$ | 11,599 | | |
$ | 117,769 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| (5,320 | ) | |
| (79 | ) | |
| (5,399 | ) |
| Other
comprehensive loss | |
| - | | |
| - | | |
| - | | |
| (82 | ) | |
| - | | |
| - | | |
| (82 | ) |
| Contributions
of noncontrolling interests | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 78 | | |
| 78 | |
| Distributions
to noncontrolling interests | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (105 | ) | |
| (105 | ) |
| Redemption
and cancellation of shares | |
| (99 | ) | |
| (1 | ) | |
| (792 | ) | |
| - | | |
| - | | |
| - | | |
| (793 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| BALANCE,
December 31, 2021 | |
| 17,331 | | |
$ | 173 | | |
$ | 146,308 | | |
$ | - | | |
$ | (46,506 | ) | |
$ | 11,493 | | |
$ | 111,468 | |
The
accompanying notes are an integral part of these consolidated financial statements.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Amounts
in thousands)
| | |
| | | |
| | |
| | |
For
the
Years Ended
December 31, | |
| | |
2020 | | |
2020 | |
| CASH
FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| | |
| Net
loss | |
$ | (5,399 | ) | |
$ | (21,720 | ) |
| Adjustments
to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
| Depreciation
and amortization | |
| 10,383 | | |
| 10,748 | |
| Amortization
of deferred financing costs | |
| 369 | | |
| 411 | |
| Loss
on sale of marketable securities, available for sale | |
| - | | |
| 292 | |
| Unrealized
loss on marketable equity securities | |
| 44 | | |
| - | |
| Gain
on forgiveness of debt | |
| (3,387 | ) | |
| - | |
| Earnings
from investments in unconsolidated affiliated entities | |
| (44 | ) | |
| 2,053 | |
| Other
non-cash adjustments | |
| 181 | | |
| 6 | |
| Changes
in assets and liabilities: | |
| | | |
| | |
| (Increase)/decrease
in accounts receivable and other assets | |
| (1,194 | ) | |
| 935 | |
| (Decrease)/increase
in accounts payable and other accrued expenses | |
| (1,289 | ) | |
| 1,405 | |
| (Decrease)/increase
in due to related party | |
| (80 | ) | |
| 31 | |
| Net
cash used in operating activities | |
| (416 | ) | |
| (5,839 | ) |
| | |
| | | |
| | |
| CASH
FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
| Purchase
of investment property | |
| (510 | ) | |
| (3,548 | ) |
| Proceeds
from sale of marketable securities | |
| - | | |
| 5,329 | |
| Investments
in unconsolidated affiliated entities | |
| (3,325 | ) | |
| (1,187 | ) |
| Distributions
from unconsolidated affiliated entities | |
| 770 | | |
| 169 | |
| Net
cash used in investing activities | |
| (3,065 | ) | |
| (2,857 | ) |
| | |
| | | |
| | |
| CASH
FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
| Payments
on mortgages payable | |
| (200 | ) | |
| (187 | ) |
| Payments
on margin loan, net | |
| (307 | ) | |
| (2,145 | ) |
| Payment
of loan fees and expenses | |
| (402 | ) | |
| - | |
| Proceeds
from notes payable | |
| 3,746 | | |
| 3,343 | |
| Redemption
and cancellation of common shares | |
| (793 | ) | |
| (825 | ) |
| Contribution
of noncontrolling interests | |
| 78 | | |
| 110 | |
| Distributions
to noncontrolling interests | |
| (105 | ) | |
| (328 | ) |
| Distributions
to common stockholders | |
| - | | |
| (3,065 | ) |
| Net
cash provided by/(used in) financing activities | |
| 2,017 | | |
| (3,097 | ) |
| | |
| | | |
| | |
| Net
change in cash, cash equivalents and restricted cash | |
| (1,464 | ) | |
| (11,793 | ) |
| Cash,
cash equivalents and restricted cash, beginning of year | |
| 18,423 | | |
| 30,216 | |
| Cash,
cash equivalents and restricted cash, end of year | |
$ | 16,959 | | |
$ | 18,423 | |
See
Note 2 for supplemental cash flow information.
The
accompanying notes are an integral part of these consolidated financial statements.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
Lightstone
Value Plus REIT II, Inc. (“Lightstone REIT II”), which was formerly known as Lightstone Value Plus Real Estate Investment
Trust II, Inc. before September 16, 2021, is a Maryland corporation formed on April 28, 2008, which elected
to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with the
taxable year ended December 31, 2009.
Lightstone
REIT II is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business will be conducted
through Lightstone Value Plus REIT II LP, a Delaware limited partnership (the “Operating Partnership”). As
of December 31, 2021, Lightstone REIT II held an approximately 99% general partnership interest in the Operating Partnership’s
common units.
Lightstone
REIT II and the Operating Partnership and its subsidiaries are collectively referred to as the “Company” and
the use of “we,” “our,” “us” or similar pronouns refers
to Lightstone REIT II, its Operating Partnership or the Company as required by the context in which such pronoun is used.
The
Company has and will continue to seek to acquire a diverse portfolio of real estate assets and real estate-related investments, including
hotels, other commercial and/or residential properties, primarily located in the United States. All such properties may be acquired and
operated by the Company alone or jointly with another party. The Company may also originate or acquire mortgage loans secured by real
estate. Although the Company expects that most of its investments will be of these types, it may invest in whatever types of real estate-related
investments that it believes are in its best interests.
The
Company currently has one operating segment. As of December 31, 2021, we (i) majority owned and consolidated the operating results and
financial condition of 14 limited service hotels containing a total of 1,804 rooms, (ii) held an unconsolidated 48.6% membership interest
in Brownmill, LLC (“Brownmill Joint Venture”), an affiliated entity that owns two retail properties, and (iii) held an unconsolidated
50.0% membership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”), an
affiliated real estate entity that owns and operates a 183-room limited service hotel located in Long Island City, New York (the “Hilton
Garden Inn – Long Island City”). The Company accounts for its membership interests in the Brownmill Joint Venture
and the Hilton Garden Inn Joint Venture under the equity method of accounting.
As
of December 31, 2021, seven of the Company’s consolidated limited service hotels are held in a joint venture (the “Joint
Venture”) formed between us and Lightstone Value Plus REIT, Inc. (“Lightstone REIT I”), a related party REIT also sponsored
by The Lightstone Group, LLC. The Company and Lightstone I have 97.5% and 2.5% membership interests in the Joint Venture, respectively.
Additionally, as of December 31, 2021, certain of the Company’s consolidated hotels also have ownership interests held by unrelated
minority owners. The membership interests of Lightstone I and the unrelated minority owners are accounted for as noncontrolling interests.
The
Company’s advisor is Lightstone Value Plus REIT II LLC (the “Advisor”), which is majority owned by David Lichtenstein.
On May 20, 2008, the Advisor contributed $2 to the Operating Partnership in exchange for 200 limited partner common units in the Operating
Partnership. The Advisor also owns 20,000 shares of the Company’s common stock (“Common Shares”) which were issued
on May 20, 2008 for $200, or $10.00 per share. Mr. Lichtenstein also is a majority owner of the equity interests
of the Lightstone Group, LLC. The Lightstone Group, LLC served as the Company’s sponsor (the “Sponsor”)
during its initial public offering (the “Offering”) and follow-on offering (the “Follow-on Offering”, and collectively,
“the Offerings”), which terminated on August 15, 2012 and September 27, 2014, respectively. The Advisor, pursuant to the
terms of an advisory agreement, together with the Company’s board of directors (the “Board of Directors”), is primarily
responsible for making investment decisions on behalf of the Company and managing its day-to-day operations. Through his ownership and
control of the Lightstone Group, LLC, Mr. Lichtenstein is the indirect owner and manager of Lightstone SLP II LLC, a Delaware limited
liability company (the “Associate General Partner”), which has subordinated profits interests in the Operating Partnership
(“Subordinated Profits Interests”) which were acquired for aggregate consideration of $17.7 million in connection with the
Company’s Offerings. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer. As a result, he exerts
influence over but does not control Lightstone REIT II or the Operating Partnership.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
The
Company does not have any employees. The Advisor receives compensation and fees for services related to the investment and management
of the Company’s assets.
The
Company’s Advisor has certain affiliates which may manage the properties the Company acquires. However, the Company also contracts
with other unaffiliated third-party property managers, principally for the management of its hospitality properties.
The
Company’s Common Shares are not currently listed on a national securities exchange. The Company may seek to list its Common Shares
for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest
of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be
any market for its Common Shares until they are listed for trading. In the event the Company does not obtain listing prior to September
27, 2024, which is the tenth anniversary of the termination of its Follow-On Offering, its charter requires that the Board of Directors
must either (i) seek stockholder approval of an extension or amendment of this listing deadline; or (ii) seek stockholder approval to
adopt a plan of liquidation of the corporation.
COVID-19
Pandemic Operations and Liquidity Update
The
World Health Organization declared COVID-19 a global pandemic on March 11, 2020 and since that time many of the previously imposed restrictions
and other measures which were instituted in response have been subsequently reduced or lifted. However, the COVID-19 pandemic remains
highly unpredictable and dynamic and its duration and extent continue to be dependent on various developments, such as the emergence
of variants to the virus that may cause additional strains of COVID-19, the administration and ultimate effectiveness of vaccines, including
booster shots, and the eventual timeline to achieve a sufficient level of herd immunity among the general population. Accordingly, the
COVID-19 pandemic may continue to have negative effects on the health of the U.S. economy for the foreseeable future.
The
extent to which the Company’s business may be affected by the ongoing COVID-19 pandemic will largely depend on both current and
future developments, all of which are highly uncertain and cannot be reasonably predicted.
Furthermore,
as a result of the COVID-19 pandemic, room demand and rental rates for the Company’s consolidated and unconsolidated hotels significantly
declined starting in March 2020 at the onset of the pandemic; and while these metrics have improved since then (late 2020 and continuing
throughout 2021); room demand and rental rates remain below their pre-pandemic historical levels. Accordingly, the COVID-19 pandemic
has negatively impacted the Company’s operations, financial position and cash flow; and while the severity of the impact has lessened,
the Company currently expects it will continue to experience a negative impact for the foreseeable future.
The
Company cannot currently estimate if and when room demand and rental rates will return to historical pre-pandemic levels for its hotels.
Additionally, the Company has an unconsolidated 48.6% membership interest in the Brownmill Joint Venture, which owns two retail properties
located in New Jersey that were subject to various restrictions. If the Brownmill Joint Venture’s retail properties are negatively
impacted for an extended period because its tenants are unable to pay their rent, the Company’s equity earnings and the carrying
value of its investment in the Brownmill Joint Venture could be materially and adversely impacted.
In
light of the past, present and potential future impact of the COVID-19 pandemic on the operating results of its hotels, the Company has
taken various actions to preserve its liquidity, including the following:
| |
● |
The
Company implemented cost reduction strategies for all of its hotels, leading to reductions in certain operating expenses and capital
expenditures. |
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
| |
● |
Amendments
to Revolving Credit Facility –
On
June 2, 2020, the Company’s revolving credit facility (the “Revolving Credit Facility”) was amended to provide
for (i) the deferral of the six monthly debt service payments aggregating $2.6 million (from April 1, 2020 through September 30,
2020, until November 15, 2021; (ii) a 100 bps reduction in the interest rate spread to LIBOR plus 2.15%, subject to a 3.00% floor,
for the six-month period from September 1, 2020 through February 28, 2021; (iii) the Company pre-funding $2.5 million into a cash
collateral reserve account to cover the six monthly debt service payments which were due from October 1, 2020 through March 1, 2021;
and (iv) a waiver of all financial covenants for quarter-end periods before June 30, 2021.
Subsequently,
on March 31, 2021, the Revolving Credit Facility was further amended providing for (i) the Company to pledge the membership interests
in another hotel as additional collateral within 45 days, (ii) the Company to fund an additional $2.5 million into the cash collateral
reserve account; (iii) a waiver of all financial covenants for quarter-end periods through September 30, 2021 with a phased-in gradual
return to the full financial covenant requirements over the quarter-end periods beginning December 31, 2021 through March 31, 2023;
(iv) an extension of the maturity date from May 17, 2021 to September 15, 2022 upon the pledge of the additional collateral (which
was subsequently completed on May 13, 2021); (v) one additional one-year extension option at the lender’s sole discretion;
and (vi) certain limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.
See
Note 5 for additional information.
|
| |
● |
In
April 2020 and during the first quarter of 2021, the Company’s consolidated hotels received an aggregate of $3.3 million and
$3.7 million, respectively, from loans provided under the federal Paycheck Protection Program (“PPP Loans”). During 2021,
the Company received notices from the U.S. Small Business Administration (the “SBA”) that all of the PPP Loans from April
2020 along with their accrued interest had been legally forgiven. See Note 6 for additional information. |
| ● | On
March 19, 2020, the Board of Directors suspended regular quarterly distributions and, as
a result, no distributions have been declared on the Company’s Common Shares or the
Subordinated Profits Interests since the suspension. Additionally, on March 19, 2020, the
Board of Directors approved the suspension of all redemptions under the Company’s shareholder
repurchase program (the “SRP”). Subsequently on May 10, 2021, the Board of Directors
partially reopened the SRP to allow, subject to various conditions, for redemptions submitted
in connection with a stockholder’s death or hardship. See Note 7 for additional information. |
| ● | The
Hilton Garden Inn Joint Venture has obtained various amendments to its non-recourse mortgage
loan secured by the Hilton Garden Inn – Long Island City. See Note 3 for additional
information. |
The
Company believes that these actions, along with its available on hand cash and cash equivalents, restricted cash and marketable securities,
as well as its intention to seek to extend the Revolving Credit Facility to September 15, 2023 pursuant to the lender’s extension
option, as discussed in Note 4, will provide it with sufficient liquidity to meet its obligations for at least 12 months from the date
of issuance of these consolidated financial statements.
Noncontrolling
Interests –
Partners
of the Operating Partnership
Limited
Partner
On
May 20, 2008, the Advisor contributed $2 to the Operating Partnership in exchange for 200 limited partner common units in the Operating
Partnership. The Advisor has the right to convert limited partner common units into cash or, at the Company’s option, an equal
number of Common Shares.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
Associate
General Partner
In
connection with the Company’s Offerings, which concluded on September 27, 2014, the Associate General Partner contributed (i) cash
of $ million and (ii) equity interests totaling 48.6% in the Brownmill Joint Venture, which were valued at $4.8 million, to the Operating
Partnership in exchange for 177.0 Subordinated Profits Interests in the Operating Partnership with an aggregate value of $17.7 million.
As
the indirect majority owner of the Associate General Partner, Mr. Lichtenstein is the beneficial owner of a 99% interest in such Subordinated
Profits Interests and thus receives an indirect benefit from any distributions made in respect thereof.
These
Subordinated Profits Interests may entitle the Associate General Partner to a portion of any regular and liquidation distributions that
the Company makes to its stockholders, but only after its stockholders have received a stated preferred return. There were no distributions
declared on the Subordinated Profits Interests during the years ended December 31, 2021 and December 31, 2020. Since the Company’s
inception through December 31, 2021, the cumulative distributions declared and paid on the Subordinated Profits Interests were $7.9 million.
Any future distributions on the Subordinated Profits Interests will always be subordinated until stockholders receive a stated preferred
return, as described above.
See
Note 8 for additional information with respect to the Subordinated Profits Interests.
Other
Noncontrolling Interests in Consolidated Subsidiaries
Other
noncontrolling interests consist of the (i) membership interest in the Joint Venture held by Lightstone I and (ii) membership interests
held by minority owners in certain of the Company’s hotels.
The
Advisor and its affiliates and Associate General Partner are related parties of the Company. Certain of these entities are entitled to
compensation and fees for services related to the investment, management and disposition of the Company’s assets during its acquisition,
operational and liquidation stages. The compensation levels during the Company’s acquisition and operational stages are based on
the cost of acquired properties/investments and the annual revenue earned from such properties/investments, and other such fees and reimbursements
as outlined in each of the respective agreements. See Note 8 for additional information.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
| 2. | Summary
of Significant Accounting Policies |
Principles
of Consolidation and Basis of Presentation
The
consolidated financial statements include the accounts of Lightstone REIT II and the Operating Partnership and its subsidiaries (over
which Lightstone REIT II exercises financial and operating control). As of December 31, 2021, Lightstone REIT II had a 99% 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 investments in other
real estate entities and depreciable lives of long-lived assets. Application of these assumptions requires the exercise of judgment as
to future uncertainties and, as a result, actual results could differ from these estimates.
Investments
in other real estate 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 are accounted for using the equity method.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
All cash equivalents are held in commercial paper and money market funds.
As
required by the Company’s lenders, restricted cash is held in escrow accounts for anticipated capital expenditures, real estate
taxes, debt service payments and other reserves for certain of our consolidated properties. Capital reserves are typically utilized for
non-operating expenses such as major capital expenditures. Alternatively, a lender may require its own formula for an escrow of capital
reserves.
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:
| Summary of supplemental cash flow information | |
| | | |
| | |
| | |
Year
Ended
December 31, | |
| | |
2021 | | |
2020 | |
| Cash
and cash equivalents | |
$ | 15,126 | | |
$ | 15,348 | |
| Restricted
cash | |
| 1,833 | | |
| 3,075 | |
| Total
cash, cash equivalents and restricted cash | |
$ | 16,959 | | |
$ | 18,423 | |
Supplemental
disclosure of cash flow information:
| | |
| | | |
| | |
| Cash
paid for interest | |
$ | 8,091 | | |
$ | 3,282 | |
| Holding
loss on available for sale securities | |
$ | 82 | | |
$ | 90 | |
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
Marketable
Securities
Marketable
securities consist of equity and debt securities that are designated as available-for-sale. Marketable debt securities are recorded at
fair value and unrealized holding gains or losses are reported as a component of accumulated other comprehensive income. The Company’s
marketable equity securities are recorded at fair value and unrealized holding gains and losses are recognized on the consolidated statements
of operations.
Realized
gains or losses resulting from the sale of these securities are determined based on the specific identification of the securities sold.
An impairment charge is recognized when the decline in the fair value of a debt security below the amortized cost basis is determined
to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including
the duration and severity of any decline in fair value below our amortized cost basis, any adverse changes in the financial condition
of the issuers and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery
in market value.
Revenue
Recognition
Revenues
consist of amounts derived from hotel operations, including occupied hotel rooms and sales of food, beverage and other ancillary services
and are presented on a disaggregated basis below. Revenues are recorded net of any sales or occupancy tax collected from our guests.
Room
revenue is generated through contracts with customers whereby the customers agree to pay a daily rate for right to use a hotel room.
The Company’s contract performance obligations are fulfilled at the end of the day that the customer is provided the room and revenue
is recognized daily at the contract rate. Payment from the customer is secured at the end of the contract upon check-out by the customer
from our hotel. The Company participates in frequent guest programs sponsored by the brand owners of our hotels whereby the brand owner
allows guests to earn loyalty points during their hotel stay. The Company recognizes revenue at the amount earned that it will receive
from the brand owner when a guest redeems their loyalty points by staying at one of the Company’s hotels.
Revenue
from food, beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a
hotel room and revenue is recognized when these goods or services are provided to the customer and the Company’s contract performance
obligations have been fulfilled.
Some
contracts for rooms, food, beverage or other services require an upfront deposit which is recorded as deferred revenues (or contract
liabilities) and recognized once the performance obligations are satisfied. The contract liabilities are not significant.
The
Company notes no significant judgments regarding the recognition of room, food and beverage or other revenues.
The
following table represents the total revenues from hotel operations on a disaggregated basis:
| Schedule of total revenues from hotel operations on a disaggregated basis | |
| | | |
| | |
| | |
For
the
Year Ended
December 31, | |
| Revenues | |
2021 | | |
2020 | |
| Room | |
$ | 45,803 | | |
$ | 29,341 | |
| Food,
beverage and other | |
| 2,188 | | |
| 1,562 | |
| Total
revenues | |
$ | 47,991 | | |
$ | 30,903 | |
Accounts
Receivable
The
Company analyzes accounts receivable and historical bad debt levels, customer credit worthiness and current economic trends when evaluating
the adequacy of the allowance for doubtful accounts. The Company’s reported net income or loss is directly affected by management’s
estimate of the collectability of accounts receivable.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
Investment
in Real Estate
Accounting
for Asset Acquisitions
When
the Company makes an investment in real estate assets, the cost of real estate assets acquired in an asset acquisition are allocated
to the acquired tangible assets, consisting of land, building and improvements, furniture and fixtures and identified intangible assets
and liabilities, consisting of the value of above-market and below-market leases, acquired in-place leases, and the value of tenant relationships,
based in each case on their relative fair values, at the date of acquisition, based on evaluation of information and estimates available
at that date, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective
property and other relevant market data. 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. Fees incurred related to asset acquisitions are capitalized as part
of the cost of the investment.
Accounting
for Business Combinations
Upon
the acquisition of real estate operating properties that meet the definition of a business, the Company estimates the fair value of acquired
tangible assets and identified intangible assets and liabilities and certain liabilities such as assumed debt and contingent liabilities,
at the date of acquisition, based on evaluation of information and estimates available at that date, including independent appraisals
that may be obtained in connection with the acquisition or financing of the respective property and other relevant market data. 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. Fees incurred related to the acquisition of real estate operating properties that
meet the definition of a business are expensed as incurred within general and administrative costs within the consolidated statements
of operations.
Carrying
Value of Assets
The
amounts capitalized as a result of periodic improvements and additions to real estate property, when applicable, and the periods over
which the assets are depreciated or amortized, are determined based on the application of accounting standards that may require estimates
as to fair value and the allocation of various costs to the individual assets. Differences in the amount attributed to the assets can
be significant based upon the assumptions made in calculating these estimates.
Impairment
Evaluation
The
Company evaluates its investments in real estate assets for potential impairment whenever events or changes in circumstances indicate
that the undiscounted projected cash flows are less than the carrying amount for a particular property. The Company evaluates the recoverability
of its investments in real estate assets at the lowest identifiable level, the individual property level. No single indicator would necessarily
result in the Company preparing an estimate to determine if an individual property’s future undiscounted cash flows are less than
its carrying value. The Company uses judgment to determine if the severity of any single indicator, or the fact there are a number of
indicators of less severity that when combined, would result in an indication that a property requires an estimate of the undiscounted
cash flows to determine if an impairment has occurred. Relevant facts and circumstances include, among others, significant underperformance
relative to historical or projected future operating results and significant negative industry or economic trends. The estimated cash
flows used for the impairment analysis are subjective and require the Company to use its judgment 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 future operating income, market and other applicable trends and residual value, as well as the
effects of demand, competition, and recent sales data for comparable properties. An impairment loss is recognized only if the carrying
amount of a property is not recoverable and exceeds its fair value.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
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 39
years for buildings and improvements and five 5 to 10 years for furniture and fixtures. Expenditures for ordinary maintenance and
repairs are charged to expense as incurred.
Deferred
Costs
Deferred
financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt. Amortization of deferred financing
costs is computed using a method that approximates the effective interest method over the term of the related debt and is included in
interest expense in the consolidated statements of operations. Unamortized deferred financing costs are included as a direct deduction
from the related debt in the consolidated balance sheets.
Investments
in Unconsolidated Entities
The
Company evaluates all investments in other entities for consolidation. The Company considers its percentage interest in the joint venture,
evaluation of control and whether a variable interest entity exists when determining whether or not the investment qualifies for consolidation
or if it should be accounted for as an unconsolidated investment under the equity method of accounting.
If
an investment qualifies for the equity method of accounting, the Company’s investment is recorded initially at cost, and subsequently
adjusted for equity in net income or loss and cash contributions and distributions. The net income or loss of an unconsolidated investment
is allocated to its investors in accordance with the provisions of the operating agreement of the entity. The allocation provisions in
these agreements may differ from the ownership interest held by each investor. Differences, if any, between the carrying amount of the
Company’s investment in the respective joint venture and our share of the underlying equity of such unconsolidated entity are amortized
over the respective lives of the underlying assets as applicable. These items are reported as a single line item in the statements of
operations as earnings from investments in unconsolidated entities.
The
Company reviews investments for impairment in value whenever events or changes in circumstances indicate that the carrying amount of
such investment may not be recoverable. An investment is impaired only
if management’s estimate of the fair value of the investment is less than the carrying value of the investment, and such decline
in value is deemed to be other than temporary. The ultimate realization of our investment in partially owned entities is dependent on
a number of factors including the performance of that entity and market conditions. If the Company determines that a decline in the value
of a partially owned entity is other than temporary, it will record an impairment charge.
The
Company believes no impairment of its investments in unconsolidated affiliated entities existed as of December 31, 2021 and 2020.
Income
Taxes
The
Company elected to qualify and be taxed as a REIT commencing with the taxable year ending December 31, 2009. As a REIT, the Company generally
will not be subject to U.S. federal income tax on its net taxable income that it distributes currently to its stockholders. To maintain
its REIT qualification under the Internal Revenue Code of 1986, as amended, or the Code, 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 regular corporate rates, 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 have a material adverse effect on its net income and net cash available for distribution to its stockholders.
The
Company engages in certain activities through taxable REIT subsidiaries (“TRSs”), including when it acquires a hotel it usually
establishes a TRS which then enters into an operating lease agreement for the hotel. As such, the Company is subject to U.S. federal
and state income taxes and franchise taxes from these activities.
As
of December 31, 2021 and 2020, the Company had no material uncertain income tax positions. Additionally, even if the Company continues
to qualify as a REIT for U.S. federal income tax purposes, it may still be subject to some U.S. federal, state and local taxes on its
income and property and to U.S. federal income taxes and excise taxes on its undistributed income, if any.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
Fair
Value of Financial Instruments
The
carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and other assets, accounts payable and other accrued
expenses, margin loan, notes payable, due to related party, and distributions payable approximated their fair values as of December 31,
2021 and 2020 because of the short maturity of these instruments. The estimated fair value of our mortgages payable is as follows:
| Summary of estimated fair value of mortgages payable | |
| | |
| | |
| | |
| |
| | |
As
of
December 31,
2021 | | |
As
of
December 31,
2020 | |
| | |
Carrying
Amount | | |
Estimated
Fair Value | | |
Carrying
Amount | | |
Estimated
Fair Value | |
| Mortgages
payable | |
$ | 136,464 | | |
$ | 136,592 | | |
$ | 136,664 | | |
$ | 136,743 | |
The
fair value of our mortgages payable was determined by discounting the future contractual interest and principal payments by 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 will record all derivative
instruments at fair value on the consolidated balance sheet.
Concentration
of Risk
The
Company maintains its cash in bank deposit accounts, which, at times, may exceed U.S. federally insured limits. The Company believes
it is not exposed to any significant credit risk on cash and cash equivalents.
Basic
and Diluted Net Earnings per Common Share
The
Company had no potentially dilutive securities outstanding during the periods presented. Accordingly, earnings per share is calculated
by dividing net income attributable to common shareholders by the weighted-average number of shares of Common Shares outstanding during
the applicable period.
New
Accounting Pronouncements
In
June 2016, the FASB issued an accounting standards update which replaces the incurred loss impairment methodology currently in use
with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information
to inform credit loss estimates. The new guidance is effective for fiscal years beginning after December 15, 2022, including interim
periods within those fiscal years. The adoption of this standard will not have a material effect on the Company’s consolidated
financial position, results of operations or cash flows.
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.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
| 3. | Investments
in Unconsolidated Affiliated Entities |
The
entities listed below are partially owned by the Company. The Company accounts for these investments under the equity method of accounting
as the Company exercises significant influence, but does not exercise financial and operating control over these entities. A summary
of the Company’s investments in unconsolidated affiliated entities is as follows:
| Summary of investments in unconsolidated entities | |
| | |
| | | |
| | | |
| | |
| | |
| | |
| | |
As
of | |
| Entity | |
Date
of Ownership | | |
Ownership
% | | |
December 31,
2021 | | |
December 31,
2020 | |
| Brownmill | |
Various | | |
| 48.6 | % | |
$ | 6,793 | | |
$ | 4,710 | |
| Hilton
Garden Inn Joint Venture | |
March 27, 2018 | | |
| 50.0 | % | |
| 11,165 | | |
| 10,649 | |
| Total
investments in unconsolidated affiliated real estate entities | |
| | |
| | | |
$ | 17,958 | | |
$ | 15,359 | |
Brownmill
Joint Venture
During
2010 through 2012, the Company entered into various contribution agreements with Lightstone Holdings LLC (“LGH’’),
a wholly-owned subsidiary of the Sponsor, pursuant to which LGH contributed to the Company an aggregate 48.6% membership interest in
the Brownmill Joint Venture in exchange for the Company issuing an aggregate of 48 units of Subordinated Profits Interests, at $100,000
per unit (at an aggregate total value of $4.8 million), to Lightstone SLP II LLC.
As
of December 31, 2021, the Company owns a 48.6% membership interest in the Brownmill Joint Venture, which is a non-managing interest.
An affiliate of the Company’s Sponsor is the majority owner and manager of the Brownmill Joint Venture. Profit and cash distributions
are allocated in accordance with each investor’s ownership percentage. The Company accounts for its investment in the Brownmill
Joint Venture in accordance with the equity method of accounting. During the year ended December 31, 2021, the Company made aggregate
capital contributions of $2.0 million and received distributions from the Brownmill Joint Venture aggregating $0.3 million. During the
year ended December 31, 2020, the Company made a capital contribution of $0.3 million and received distributions from the Brownmill
Joint Venture aggregating $0.1 million.
The
Brownmill Joint Venture owns two retail properties known as Browntown Shopping Center, located in Old Bridge, New Jersey, and Millburn
Mall, located in Vauxhaull, New Jersey.
Brownmill
Joint Venture Financial Information
The
Company’s carrying value of its interest in the Brownmill Joint Venture differs from its share of member’s equity reported
in the condensed balance sheet of the Brownmill Joint Venture because the basis of the Company’s investment is in excess of the
historical net book value of the Brownmill Joint Venture. The Company’s additional basis, which has been allocated to depreciable
assets, is being recognized on a straight-line basis over the estimated useful lives of the appropriate assets.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
The
following table represents the condensed income statements for the Brownmill Joint Venture for the periods indicated:
| Schedule of condensed income statements | |
| | | |
| | |
| | |
For
the
Year Ended
December 31,
2021 | | |
For
the
Year Ended
December 31,
2020 | |
| Revenues | |
$ | 3,919 | | |
$ | 3,387 | |
| | |
| | | |
| | |
| Property
operating expenses | |
| 1,467 | | |
| 2,040 | |
| Depreciation
and amortization | |
| 767 | | |
| 672 | |
| Operating
income | |
| 1,685 | | |
| 675 | |
| Interest
expense and other, net | |
| (655 | ) | |
| (641 | ) |
| Net
income | |
$ | 1,030 | | |
$ | 34 | |
| Company’s
share of earnings (48.6%) | |
$ | 501 | | |
$ | 16 | |
| Additional
depreciation and amortization expense (1) | |
| (124 | ) | |
| (124 | ) |
| Company’s
earnings from investment | |
$ | 377 | | |
$ | (108 | ) |
| 1. | Additional
depreciation and amortization expense is attributable to the difference between the Company’s
cost of its interest in the Brownmill Joint Venture and the amount of the underlying equity
in net assets of the Brownmill Joint Venture. |
The
following table represents the condensed balance sheets for the Brownmill Joint Venture:
| Schedule of condensed balance sheets | |
| | | |
| | |
| | |
As of | | |
As of | |
| | |
December
31, 2021 | | |
December
31, 2020 | |
| Real
estate, at cost (net) | |
$ | 17,830 | | |
$ | 14,234 | |
| Cash
and restricted cash | |
| 1,152 | | |
| 1,038 | |
| Other
assets | |
| 1,518 | | |
| 1,279 | |
| Total
assets | |
$ | 20,500 | | |
$ | 16,551 | |
| | |
| | | |
| | |
| Mortgage
payable | |
$ | 13,594 | | |
$ | 13,834 | |
| Other
liabilities | |
| 666 | | |
| 1,018 | |
| Members’
capital | |
| 6,240 | | |
| 1,699 | |
| Total
liabilities and members’ capital | |
$ | 20,500 | | |
$ | 16,551 | |
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
Hilton
Garden Inn Joint Venture
On
March 27, 2018, the Company and Lightstone Value Plus REIT III, Inc. (“Lightstone REIT III”), a related party REIT
also sponsored by the Company’s Sponsor, acquired, through the Hilton Garden Inn Joint Venture, a 183-room, limited-service hotel
located at 29-21 41st Avenue, Long Island City, New York (the “Hilton Garden Inn - Long Island City”) from
an unrelated third party, for aggregate consideration of $60.0 million, which consisted of $25.0 million of cash and $35.0 million of
proceeds from a loan from a financial institution (the “Hilton
Garden Inn Mortgage”), excluding closing and other related transaction costs. The Company and Lightstone
REIT III each have a 50.0% membership interest in the Hilton Garden Inn Joint Venture.
The
Company paid $ million for a 50.0% membership interest in the Hilton Garden Inn Joint Venture. The Company’s membership
interest in the Hilton Garden Inn Joint Venture is a co-managing interest. The Company accounts for its membership interest in the Hilton
Garden Inn Joint Venture in accordance with the equity method of accounting because it exerts significant influence over but does not
control the Hilton Garden Inn Joint Venture. All capital contributions and distributions of earnings from the Hilton Garden Inn Joint
Venture are made on a pro rata basis in proportion to each member’s equity interest percentage. Any distributions in excess of
earnings from the Hilton Garden Inn Joint Venture are made to the members pursuant to the terms of the Hilton Garden Inn Joint Venture’s
operating agreement. The Company commenced recording its allocated portion of profit/loss and cash distributions beginning as of March 27,
2018 with respect to its membership interest of 50.0% in the Hilton Garden Inn Joint Venture.
In
light of the impact of the COVID-19 pandemic on the operating results of the Hilton Garden Inn – Long Island City, the Hilton Garden
Inn Joint Venture has entered into certain amendments with respect to the Hilton Garden Inn Mortgage as discussed below.
On
June 2, 2020, the Hilton Garden Inn Mortgage was amended to provide for (i) the deferral of the six monthly debt service payments aggregating
$0.9 million for the period from April 1, 2020 through September 30, 2020 until March 27, 2023; (ii) a 100 bps reduction in the interest
rate spread to LIBOR plus 2.15%, subject to a 4.03% floor, for the six-month period from September 1, 2020 through February 28, 2021;
(iii) the Hilton Garden Inn Joint Venture pre-funding $1.2 million into a cash collateral reserve account to cover the six monthly debt
service payments due from October 1, 2020 through March 1, 2021; and (iv) waiver of all financial covenants for quarter-end periods before
June 30, 2021.
Additionally,
on April 7, 2021, the Hilton Garden Inn Joint Venture and the lender further amended the terms of the Hilton Garden Inn Mortgage to provide
for (i) the Hilton Garden Inn Joint Venture to make a principal paydown of $1.7 million; (ii) the Hilton Garden Inn Joint Venture to
fund an additional $0.7 million into the cash collateral reserve account; (iii) a waiver of all financial covenants for quarter-end periods
through September 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods beginning
December 31, 2021 through December 31, 2022; (iv) an 11-month interest-only payment period from May 1, 2021 through March 31, 2022; and
(v) certain restrictions on distributions to the members of the Hilton Garden Inn Joint Venture during the interest-only payment period.
Subsequent
to the Company’s acquisition of its 50.0% membership interest in the Hilton Garden Joint Venture through December 31, 2021, it
has made an aggregate of $2.8 million of additional capital contributions (of which $1.3 million was made in 2021) and received aggregate
distributions of $2.0 million (of which $0.5 million was received in 2021).
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
Hilton
Garden Inn Joint Venture Financial Information
The
following table represents the condensed income statements for the Hilton Garden Inn Joint Venture for the periods indicated:
| Schedule of condensed income statements | |
| | | |
| | |
| | |
For
the
Year
Ended
December 31,
2021 | | |
For
the
Year Ended
December 31,
2020 | |
| Revenues | |
$ | 7,545 | | |
$ | 3,662 | |
| | |
| | | |
| | |
| Property
operating expenses | |
| 4,306 | | |
| 3,259 | |
| General
and administrative costs | |
| 34 | | |
| 37 | |
| Depreciation
and amortization | |
| 2,496 | | |
| 2,527 | |
| Operating
income/(loss) | |
| 709 | | |
| (2,161 | ) |
| Interest
expense and other, net | |
| (1,755 | ) | |
| (1,728 | ) |
| Gain
on forgiveness of debt | |
| 381 | | |
| - | |
| Net
loss | |
$ | (665 | ) | |
$ | (3,889 | ) |
| Company’s
share of net loss (50.0%) | |
$ | (333 | ) | |
$ | (1,945 | ) |
The
following table represents the condensed balance sheets for the Hilton Garden Inn Joint Venture:
| Schedule of condensed balance sheets | |
| | | |
| | |
| | |
As of | | |
As of | |
| | |
December 31,
2021 | | |
December 31,
2020 | |
| Investment
property, net | |
$ | 52,415 | | |
$ | 54,826 | |
| Cash | |
| 2,841 | | |
| 885 | |
| Other
assets | |
| 1,204 | | |
| 1,211 | |
| Total
assets | |
$ | 56,460 | | |
$ | 56,922 | |
| | |
| | | |
| | |
| Mortgage
payable, net | |
$ | 33,115 | | |
$ | 34,988 | |
| Other
liabilities | |
| 1,585 | | |
| 1,207 | |
| Members’
capital | |
| 21,760 | | |
| 20,727 | |
| Total
liabilities and members’ capital | |
$ | 56,460 | | |
$ | 56,922 | |
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
| 4. | Marketable
Securities, Fair Value Measurements and Margin Loan Marketable Securities: |
The
following is a summary of the Company’s available for sale securities as of the dates indicated:
| Summary of Available for Sale Securities | |
| | | |
| | | |
| | | |
| | |
| | |
As
of December 31, 2021 | |
| | |
Adjusted
Cost | | |
Gross
Unrealized Gains | | |
Gross
Unrealized Losses | | |
Fair
Value | |
| Marketable
Securities: | |
| | | |
| | | |
| | | |
| | |
| Equity
securities: | |
| | | |
| | | |
| | | |
| | |
| Preferred
Equity Securities | |
$ | 6,718 | | |
$ | 59 | | |
$ | - | | |
$ | 6,777 | |
| | |
As
of December 31, 2020 | |
| | |
Adjusted
Cost | | |
Gross
Unrealized Gains | | |
Gross
Unrealized Losses | | |
Fair
Value | |
| Marketable
Securities: | |
| | | |
| | | |
| | | |
| | |
| Equity
securities: | |
| | | |
| | | |
| | | |
| | |
| Preferred
Equities Securities | |
$ | 3,620 | | |
$ | 102 | | |
$ | - | | |
$ | 3,722 | |
| | |
| | | |
| | | |
| | | |
| | |
| Debt
securities: | |
| | | |
| | | |
| | | |
| | |
| Corporate
Bonds | |
| 3,098 | | |
| 82 | | |
| - | | |
| 3,180 | |
| Total | |
$ | 6,718 | | |
$ | 184 | | |
$ | - | | |
$ | 6,902 | |
Fair
Value Measurements
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The
standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last
unobservable, that may be used to measure fair value:
| |
● |
Level
1 – Quoted prices in active markets for identical assets or liabilities. |
| |
|
|
| |
● |
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities. |
| |
|
|
| |
● |
Level
3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities. |
As
of December 31, 2021 and 2020, all of the Company’s marketable securities were classified as Level 2 assets and there were no transfers
between the level classifications during the year ended December 31, 2021. The fair values of the Company’s preferred equity securities
and corporate bonds are measured using readily available quoted prices for these securities; however, the markets for these securities
are not active.
The
Company did not have any other significant financial assets or liabilities, which would require revised valuations that are recognized
at fair value.
Margin
Loan
The
Company has access to a margin loan from a financial institution that holds custody of certain of the Company’s marketable securities.
The margin loan is collateralized by the marketable securities in the Company’s account. The amounts available to the Company under
the margin loan are at the discretion of the financial institution and not limited to the amount of collateral in its account. The amount
outstanding under this margin loan was $2.3 million and $2.6 million as of December 31, 2021 and 2020, respectively, and is due on demand.
The margin loan bears interest at LIBOR plus 0.85% (0.96% as of December 31, 2021).
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
Mortgages
payable, net consisted of the following:
| Schedule of Mortgages Payable | |
| |
| | | |
| |
| | | |
| | | |
| | |
| | |
Interest | |
Weighted
Average
Interest
Rate as of
December 31, | | |
Maturity | |
Amount Due at | | |
As of
December 31, |
|
|
As of
December 31, | |
| Description | |
Rate | |
2021 | | |
Date | |
Maturity | | |
2021 | | |
2020 | |
| Revolving
Credit Facility | |
LIBOR plus 3.15% (floor of 4.00%) | |
| 3.84 | % | |
September 2022 | |
$ | 123,045 | | |
$ | 123,045 | | |
$ | 123,045 | |
| | |
| |
| | | |
| |
| | | |
| | | |
| | |
| Courtyard
– Paso Robles | |
5.49% | |
| 5.49 | % | |
November 2023 | |
| 13,022 | | |
| 13,419 | | |
| 13,619 | |
| | |
| |
| | | |
| |
| | | |
| | | |
| | |
| Total
mortgages payable | |
| |
| 4.00 | % | |
| |
$ | 136,067 | | |
| 136,464 | | |
| 136,664 | |
| | |
| |
| | | |
| |
| | | |
| | | |
| | |
| Less:
Deferred financing costs | |
| |
| | | |
| |
| | | |
| (297 | ) | |
| (264 | ) |
| | |
| |
| | | |
| |
| | | |
| | | |
| | |
| Total
mortgages payable, net | |
| |
| | | |
| |
| | | |
$ | 136,167 | | |
$ | 136,400 | |
Revolving
Credit Facility
The
Company, through certain subsidiaries, has a non-recourse Revolving Credit Facility with a financial institution. The Revolving Credit
Facility provides a line of credit of up to $140.0 million pursuant to which Company may designate its hotel properties as collateral
that allow borrowings up to a 65.0% loan-to-value ratio subject to also meeting certain financial covenants. The Revolving Credit Facility
provides for monthly interest-only payments and the entire principal balance is due upon its scheduled expiration. The Revolving Credit
Facility bears interest at LIBOR plus 3.15%, subject to a 4.00% floor, and is currently scheduled to mature on September 15, 2022,
subject to a one-year extension option at the sole discretion of the lender.
On
June 2, 2020, the Revolving Credit Facility was amended to provide for (i) the deferral of the six monthly debt service payments aggregating
$2.6 million (from April 1, 2020 through September 30, 2020, until November 15, 2021; (ii) a 100 bps reduction in the interest rate spread
to LIBOR plus 2.15%, subject to a 3.00% floor, for the six-month period from September 1, 2020 through February 28, 2021; (iii) the Company
pre-funding $2.5 million into a cash collateral reserve account to cover the six monthly debt service payments which were due from October
1, 2020 through March 1, 2021; and (iv) a waiver of all financial covenants for quarter-end periods before June 30, 2021.
Subsequently,
on March 31, 2021, the Revolving Credit Facility was further amended providing for (i) the Company to pledge the membership interests
in another hotel as additional collateral within 45 days, (ii) the Company to fund an additional $2.5 million into the cash collateral
reserve account; (iii) a waiver of all financial covenants for quarter-end periods through September 30, 2021 with a phased-in gradual
return to the full financial covenant requirements over the quarter-end periods beginning December 31, 2021 through March 31, 2023; (iv)
an extension of the maturity date from May 17, 2021 to September 15, 2022 upon the pledge of the additional collateral (which was subsequently
completed on May 13, 2021); (v) one additional one-year extension option at the lender’s sole discretion; and (vi) certain limitations
and restrictions on asset sales and additional borrowings related to the pledged collateral.
As
of December 31, 2021, 13 of the Company’s hotel properties were pledged as collateral under the Revolving Credit Facility and the
outstanding principal balance was $123.0 million. Additionally, no additional borrowings were available under the Revolving Credit Facility
as of December 31, 2021. Although the Revolving Credit Facility is scheduled to mature on September 15, 2022, the Company currently intends
to seek to extend the Revolving Credit Facility to September 15, 2023 pursuant to the lender’s extension option.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
Courtyard
– Paso Robles Mortgage Loan
In connection
with the Company’s acquisition of the Courtyard – Paso Robles on December 14, 2017, it assumed the Courtyard – Paso
Robles Mortgage Loan. The Courtyard – Paso Robles Mortgage Loan was scheduled to mature in November 2023, bore interest at a fixed
rate of 5.49% and requires monthly principal and interest payments of $79 through its stated maturity with a balloon payment
of $13.0 million due at maturity. On March 22, 2022, the Courtyard – Paso Robles Mortgage Loan was fully defeased in
connection with the disposition of the Courtyard – Paso Robles (See Note 10).
Principal
Mortgage Maturities
The
following table, based on the initial terms of the mortgages, sets forth their aggregate estimated contractual principal maturities,
including balloon payments due at maturity, as of December 31, 2021:
| Schedule of Estimated Contractual Principal Maturities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| | |
2022 | | |
2023 | | |
2024 | | |
2025 | | |
2026 | | |
Thereafter | | |
Total | |
| Principal
maturities | |
$ | 123,256 | | |
$ | 13,208 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 136,464 | |
| Less: deferred financing
costs | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (297 | ) |
| Total principal maturities,
net | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | 136,167 | |
Pursuant
to the Company’s loan agreements, escrows in the amount of $1.8 million and $3.1 million were held in restricted cash accounts
as of December 31, 2021 and 2020, respectively. Such escrows will be released in accordance with the applicable loan agreements for payments
of real estate taxes, debt service payments, insurance and capital improvement transactions, as required. Certain of our debt agreements
also contain clauses providing for prepayment penalties.
In
April 2020, the Company, through various subsidiaries (each such entity, a “Borrower” and collectively, the “Borrowers”),
received aggregate funding of $3.3 million through loans (the “PPP Loans”) originated under the federal Paycheck Protection
Program, which was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered
by the SBA. During the first quarter of 2021, the Borrowers received an additional aggregate funding of $3.7 million of PPP Loans.
The
PPP Loans each have a term of 5 five years and provide for an interest rate of 1.00%. The payment of principal and
interest on the PPP Loan is deferred until the day that the forgiven amount is remitted to the lender (approximately five months
after the forgiveness application is submitted to the lender, unless the Borrower appeals a denial of forgiveness) or ten months
after the end of the Borrower’s covered period, whichever is earlier. Pursuant to the terms of the CARES Act, the proceeds of
the PPP Loans may be used for payroll costs, mortgage interest, rent or utility costs.
The
promissory note for each of the PPP Loans contains customary events of default relating to, among other things, payment defaults and
breach of representations and warranties or of provisions of the relevant promissory note. Under the terms of the CARES Act, each Borrower
can apply for and be granted forgiveness for all or a portion of the PPP Loans. Such forgiveness will be determined, subject to limitations,
based on the use of loan proceeds in accordance with the terms of the CARES Act. Although the Company intends for each Borrower to apply
for loan forgiveness, no assurance can be given that each Borrower will ultimately obtain forgiveness under its PPP Loan, in whole or
in part. In the event all or any portion of a PPP Loan is forgiven, the amount forgiven will be applied to outstanding principal and
recorded as income. The PPP Loans are subject to audit by the SBA for up to six years after the date the loans are forgiven.
During
the year ended December 31, 2021, the Company received notices from the SBA that all of the PPP Loans received in April 2020 totaling $3.3 million and their related accrued interest aggregating $0.1 million had been legally forgiven and therefore, the Company recognized
a gain on forgiveness of debt of $3.4 million in its consolidated statements of operations. As of December 31, 2021 and 2020, the PPP
Loans had outstanding balances of $3.7 million and $3.3 million, respectively, and are classified as Notes Payable on the consolidated
balance sheets.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
Preferred
Shares
Shares
of preferred stock may be issued in the future in one or more series as authorized by the Company’s Board of Directors. Prior to
the issuance of shares of any series, the Board of Directors is required by the Company’s charter to fix the number of shares to
be included in each series and the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends
or other distributions, qualifications and terms or conditions of redemption for each series. Because the Company’s Board of Directors
has the power to establish the preferences, powers and rights of each series of preferred stock, it may provide the holders of any series
of preferred stock with preferences, powers and rights, voting or otherwise, senior to the rights of holders of our Common Shares. 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 Shares. To date, the Company had no outstanding preferred shares.
Common
Shares
All
of the Common Shares 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 Shares will be entitled to receive distributions if authorized by the Board
of Directors and to share ratably in the Company’s assets available for distribution to the stockholders in the event of a liquidation,
dissolution or winding-up.
Each
outstanding share of the Company’s Common Shares 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 Shares can elect all of the directors then standing for election, and the holders of the remaining Common Shares
will not be able to elect any directors.
Holders
of the Company’s Common Shares have no conversion, sinking fund, redemption or exchange rights, and have no pre-emptive 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’s charter provides that the holders of its stock do not have appraisal rights unless a majority of the Board
of Directors determines that such rights shall apply. Shares of the Company’s Common Shares have equal dividend, distribution,
liquidation and other rights.
Under
its charter, the Company cannot make any 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
on Common Shares
The
Company’s Board of Directors commenced declaring and the Company began paying regular quarterly distributions on its Common Shares
at the pro rata equivalent of an annual distribution of $0.65 per share, or an annualized rate of 6.5% assuming a purchase price of $10.00
per share, beginning with the fourth quarter of 2009 through the third quarter of 2015. Beginning in the fourth quarter of 2015, the
Board of Directors increased the regular quarterly distributions on the Company’s Common Shares to the pro rata equivalent of an
annual distribution of $0.70 per share, or an annualized rate of 7.0% assuming a purchase price of $10.00 per share. Additionally, in
February 2017 the Board of Directors declared, and in March 2017 the Company paid a special “catch-up” distribution on its
Common Shares at an annualized rate of 0.5% assuming a purchase price of $10.00 per share for all the quarterly periods beginning with
the fourth quarter of 2009 and ending with the third quarter of 2015.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
On
March 19, 2020, the Board of Directors determined to suspend regular quarterly distributions. As a result, there were no distributions
declared during the years ended December 31, 2021 and 2020.
Future
distributions declared, if any, will be at the discretion of the Board of Directors based on their analysis of the Company’s performance
over the previous periods and expectations of performance for future periods. The Board of Directors will consider various factors in
its determination, including but not limited to, the sources and availability of capital, revenues and other sources of income, operating
and interest expenses and the Company’s ability to refinance near-term debt as well as the IRS’s annual distribution requirement
that REITs distribute no less than 90% of their taxable income. The Company cannot assure that any future distributions will be made
or that it will maintain any particular level of distributions that it has previously established or may establish.
Share
Repurchase Program
The
Company’s SRP may provide its eligible stockholders with limited, interim liquidity by enabling them to sell their Common Shares
back to the Company, subject to restrictions and applicable law.
On
March 19, 2020, the Board of Directors amended the SRP to remove stockholder notice requirements and also approved the suspension of
all redemptions effective immediately.
Effective
May 10, 2021, the Board of Directors reopened the SRP to allow, subject to various conditions as set forth below, for redemptions submitted
in connection with a stockholder’s death or hardship and set the price for all such purchases to the Company’s current NAV
per Share, as determined by the Board of Directors and reported by the Company from time to time.
Deaths
that occurred subsequent to January 1, 2020 were eligible for consideration, subject to certain conditions. Beginning January 1, 2022,
requests for redemptions in connection with a stockholder’s death must be submitted and received by the Company within one year
of the stockholder’s date of death for consideration.
On
the above noted date, the Board of Directors established that on an annual basis, the Company would not redeem in excess of 0.5%
of the number of shares outstanding as of the end of the preceding year for either death or hardship redemptions, respectively. Additionally,
redemption requests generally would be processed on a quarterly basis and would be subject to pro ration if either type of redemption
requests exceeded the annual limitation.
For
the year ended December 31, 2021 the Company repurchased 98,866 shares of common shares, pursuant to its SRP at a price per
share of $8.02 per share. For the period from January 1 through March 18, 2020, the Company repurchased 82,413 common shares
at a price of $10.00 per share.
Noncontrolling
Interests
See
Note 1 and Note 8 for a discussion of Noncontrolling Interests and the rights related to the Subordinated Profits Interests, respectively.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
| 8. | Related
Party and Other Transactions |
The
Company has agreements with the Advisor and its affiliates to pay certain fees, as follows, in exchange for services performed by these
entities and other related party entities. The Company’s ability to secure financing and real estate operations are dependent upon
its Advisor and affiliates to perform such services as provided in these agreements.
| Fees |
|
Amount |
| Acquisition
Fee |
|
The
Advisor is paid an acquisition fee equal to 0.95% of the gross contractual purchase price
(including any mortgage assumed) of each property purchased. The Advisor is also be reimbursed
for expenses that it incurs in connection with the purchase of a property. |
| |
|
|
Property
Management – Residential/Retail/Hospitality |
|
Either
third party or affiliated property managers are paid a monthly management fee of up to 5%
of the gross revenues from residential, hospitality and retail properties. The Company may
pay the property manager a separate fee for (i) the development of (ii) 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. |
| |
|
|
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 Company may pay 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 are paid an asset management fee of 0.95% of the Company’s
average invested assets, as defined, payable quarterly in an amount equal to 0.2375 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
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
Subordinated
Profits Interests
In
connection with the Company’s Offerings which concluded on September 27, 2014, Lightstone SLP II, LLC acquired 177.0 Subordinated
Profits Interests in the Operating Partnership for aggregate consideration of $17.7 million. These Subordinated Profits Interests, for
which the aggregate consideration of $17.7 million will only be repaid after stockholders receive a stated preferred return in addition
to their net investment, entitle Lightstone SLP II, LLC to a portion of any regular distributions made by the Operating Partnership.
There were no distributions paid on the Subordinated Profit Interests through December 31, 2016. However, in connection with the Board
of Directors declaration of a special distribution on the Company’s Common Shares on February 28, 2017, they also declared that
distributions be brought current through December 31, 2016 on the Subordinated Profits Interests at a 7% annualized rate of return which
amounted to $4.2 million and were paid to Lightstone SLP II, LLC on March 15, 2017. Beginning with the first quarter of 2017, the Company’s
Board of Directors declared and the Company paid regular quarterly distributions on the Subordinated Profits Interests at an annualized
rate of 7.0% along with the regular quarterly distributions on its Common Shares for all quarterly periods through December 31, 2019.
There
were no distributions declared on the Subordinated Profits Interests during the years ended December 31, 2021 and 2020. Since the Company’s
inception through December 31, 2021, the cumulative distributions declared and paid on the Subordinated Profits Interests were $7.9 million.
Any future distributions on the Subordinated Profits Interests will always be subordinated until stockholders receive a stated preferred
return, as described below.
The
Subordinated Profits Interests may also entitle Lightstone SLP II, 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 Company and, therefore,
cannot be determined at the present time. Liquidating distributions to Lightstone SLP II, LLC will always be subordinated until stockholders
receive a distribution equal to their initial investment plus a stated preferred return, as described below:
| 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
Subordinated Profits Interests plus a cumulative non-compounded return of 7% per year. |
| |
|
|
| Returns
in Excess of 7% |
|
Once
stockholders have received liquidation distributions, and a cumulative non-compounded return
of 7% per year on their initial net investment, 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 II, LLC, until a 12% return is reached. |
| |
|
|
| Returns
in Excess of 12% |
|
After
stockholders and Lightstone SLP II, LLC have received liquidation distributions, and 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 II, LLC. |
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(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% return on their net investment is realized by stockholders,
Lightstone SLP II, 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 Subordinated Profits Interests. “Net investment”
refers to $10 per share, less a pro rata share of any proceeds received from the sale or
refinancing of the Company’s assets. |
| |
|
|
| Returns
in excess of 7% |
|
Once
a cumulative non-compounded return of 7% per year is realized by stockholders on their net
investment, 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 II, LLC until a 12% return is reached. |
| |
|
|
| Returns
in Excess of 12% |
|
After
the 12% return threshold is realized by stockholders and Lightstone SLP II, 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 II, LLC. |
The
following table represents the fees incurred associated with the payments to the Company’s Advisor for the periods indicated:
| Schedule of fees to related parties | |
| | | |
| | |
| | |
For
the
Years Ended
December 31, | |
| | |
2021 | | |
2020 | |
| Development
fees (1) | |
$ | - | | |
$ | 32 | |
| Asset
management fees (general and administrative costs) | |
| 2,954 | | |
| 2,929 | |
| Total | |
$ | 2,954 | | |
$ | 2,961 | |
| (1) | Generally,
capitalized and amortized over the estimated useful life of the associated asset. |
In
connection with the Company’s Offering and Follow-On Offering, Lightstone SLP II LLC, an affiliate of the Company’s Sponsor,
contributed (i) cash of $12.9 million and (ii) equity interests in the Brownmill Joint Venture valued at $4.8 million to the Operating
Partnership in exchange for 177.0 Subordinated Profits Interests in the Operating Partnership with an aggregate value of $17.7 million,
which are included in noncontrolling interests in the consolidated balance sheets. These Subordinated Profit Interests, the purchase
price of which will be repaid only after stockholders receive a stated preferred return and their net investment, entitle Lightstone
SLP II, LLC to a portion of any regular distributions made by the Operating Partnership.
The
Company did not incur any fees to affiliates of its Advisor for property management services during the years ended December 31, 2021
and 2020.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2021 and 2020
(Dollar
amounts in thousands, except per share/unit data and where indicated in millions)
| 9. | Commitments
and Contingencies |
Management
Agreements
The
Company’s hotels operate pursuant to management agreements (the “Management Agreements”) with various third-party property
management companies. The property management companies perform management functions including, but not limited to, hiring and supervising
employees, establishing room prices, establishing administrative policies and procedures, managing expenditures and arranging and supervising
public relations and advertising. The Management Agreements are for terms ranging from 1 year to 10 years however, the agreements can
be cancelled for any reason by the Company after giving 60 days’ notice after the one year anniversary of the commencement of the
respective agreement.
The
Management Agreements provide for the payment of a base management fee equal to 3% to 3.5% of gross revenues, as defined, and an incentive
management fee based on the operating results of the hotel, as defined. The base management fee and incentive management fee, if any,
are recorded as a component of property operating expenses in the consolidated statements of operations.
Franchise
Agreements
As
of December 31, 2021, the Company’s hotels operated pursuant to various franchise agreements. Under the franchise agreements, the
Company generally pays a fee equal to 5% of gross room sales, as defined, and a marketing fund charge from 1.5% to 3.5% of gross room
sales. The franchise fee and marketing fund charge are recorded as a component of property operating expenses in the consolidated statements
of operations.
The
franchise agreements are generally for initial terms ranging from 15 years to 20 years, expiring between 2025 and 2037.
Legal
Proceedings
From
time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes.
As
of the date hereof, the Company is not a party to any material pending legal proceedings of which the outcome is probable or reasonably
possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure
of the contingency and possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings
in which the potential loss is deemed to be remote.
On February 10, 2022, the Company, through subsidiaries,
entered into a purchase and sale agreement (the “Courtyard – Paso Robles Agreement”) to sell the Courtyard –
Paso Robles, to PHG Acquisitions, LLC, an unaffiliated third party, for a contractual sales price of $32.3 million.
On March 22, 2022, the sale of the Courtyard –
Paso Robles was completed pursuant to the terms of the Courtyard – Paso Robles Agreement. In connection with the transaction,
the Company also defeased the Courtyard – Paso Robles Mortgage Loan with an outstanding principal balance of $13.4 million at a
total cost of $14.1 million and its net proceeds after closing and other costs, pro rations and working capital adjustments were $17.7
million.
PART II.
CONTINUED: