Notes to Consolidated Financial Statements
(Unaudited)
Lightstone Value Plus Real Estate Investment
Trust III, Inc. (“Lightstone REIT III”), is a Maryland corporation, formed on October 5, 2012, which elected to qualify as
a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning with the taxable year ended December
31, 2015.
The Lightstone REIT III is structured
as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business will be conducted through Lightstone
Value Plus REIT III LP, a Delaware limited partnership (the “Operating Partnership”). As of June 30, 2021, Lightstone REIT
III held an approximately 99% general partnership interest in the Operating Partnership’s common units.
Lightstone REIT III and the Operating
Partnership and its subsidiaries are collectively referred to as the “Company” and the use of “we,” “our,”
“us” or similar pronouns refers to Lightstone REIT III, 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 make other investments. In fact, it may invest in whatever types of real estate-related
investments that it believes are in its best interests.
The Company currently has one operating
segment. As of June 30, 2021, the Company (i) majority owned and consolidated the operating results and financial condition of eight limited
service hotels containing a total of 872 rooms and an unconsolidated 50.0% membership interest in LVP LIC Hotel JV LLC (the
“Hilton Garden Inn Joint Venture”). The Company accounts for its unconsolidated membership interest in the Hilton Garden Inn
Joint Venture under the equity method of accounting.
The Company’s advisor is Lightstone
Value Plus REIT III LLC (the “Advisor”), which is majority owned by David Lichtenstein. On July 16, 2014, the Advisor contributed
$2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The Advisor also owns 20,000
shares of our common stock (“Common Shares”) which were issued on December 24, 2012 for $200,000, 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”) which terminated on
March 31, 2017. Mr. Lichtenstein owns 222,222 Common Shares which were issued on December 11, 2014 for $2.0 million, or $9.00 per share.
Pursuant to the terms of an advisory agreement and subject to the oversight of the Company’s board of directors (the “Board
of Directors”), the Advisor has primary responsibility 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 III LLC, a Delaware limited liability company (the “Special Limited Partner”), which owns 242 subordinated
participation interests (“Subordinated Participation Interests”) in the Operating Partnership which were acquired for $12.1
million in connection with the Offering. 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 III or the Operating Partnership.
The Company does not have any employees.
The Advisor receives compensation and fees for services related to the investment and management of the Company’s assets.
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 Common Shares at this time. The Company does not anticipate that there would be any market for its Common
Shares until they are listed for trading. In the event the Company does not begin the process of achieving a liquidity event prior to
March 31, 2025, which is the eighth anniversary of the termination of its Offering, its charter requires either (a) an amendment to its
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 its portfolio.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT
TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Noncontrolling Interests – Partners of the Operating
Partnership
Limited Partner
On July 16, 2014, the Advisor contributed
$2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The Advisor has the right
to convert limited partner units into cash or, at the Company’s option, an equal number of its Common Shares.
Special Limited Partner
In connection with the Company’s
Offering, which terminated on March 31, 2017, the Special Limited Partner purchased from the Operating Partnership an aggregate of approximately
242 Subordinated Participation Interests for consideration of $12.1 million. The Subordinated Participation Interests were each purchased
for $50,000 in consideration and may be entitled to receive liquidation distributions upon the liquidation of Lightstone REIT III.
As the majority owner of the Special
Limited Partner, Mr. Lichtenstein is the beneficial owner of a 99% interest in such Subordinated Participation Interests and will thus
receive an indirect benefit from any distributions made in respect thereof.
These Subordinated Participation Interests
entitle the Special Limited Partner to a portion of any regular and liquidation distributions that the Company makes to its stockholders,
but only after its stockholders have received a stated preferred return. From the Company’s inception through June 30, 2021, no
distributions have been declared or paid on the Subordinated Participation Interests.
The Advisor and its affiliates and
the Special Limited Partner are related parties of the Company. Certain of these entities are entitled to compensation for services related
to the investment, management and disposition of our assets during the Company’s acquisition, operational and liquidation stages.
The compensation levels during the acquisition and operational stages are based on the cost of acquired properties/investments and the
annual revenue earned from such properties/investments, and other such fees and expense reimbursements as outlined in each of the respective
agreements.
|
|
2.
|
Summary of Significant
Accounting Policies
|
The accompanying unaudited interim
consolidated financial statements and related notes should be read in conjunction with the audited Consolidated Financial Statements
of the Company and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 2020. The unaudited interim financial statements include all adjustments (consisting only of normal recurring adjustments) and
accruals necessary in the judgment of management for a fair presentation of the results for the periods presented. The accompanying
unaudited consolidated financial statements of the Lightstone Value Plus Real Estate Investment Trust III, Inc. and its Subsidiaries
have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete financial statements.
The consolidated financial statements
have been prepared in accordance with 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 depreciable
lives. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results
could differ from these estimates.
The consolidated balance sheet as of
December 31, 2020 included herein has been derived from the consolidated balance sheet included in the Company's Annual Report on Form
10-K.
The unaudited consolidated statements
of operations for interim periods are not necessarily indicative of results for the full year or any other period.
To qualify or maintain our qualification
as a REIT, we engage in certain activities through wholly-owned taxable REIT subsidiaries (“TRS”). As such, we are subject
to U.S. federal and state income and franchise taxes from these activities.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT
TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Revenue
The following table represents the total
revenues from hotel operations on a disaggregated basis:
|
Schedule of revenues from hotel operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
Revenues
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Room
|
|
$
|
5,215,358
|
|
|
$
|
2,282,954
|
|
|
$
|
8,800,118
|
|
|
$
|
7,329,771
|
|
|
Food, beverage and other
|
|
|
143,340
|
|
|
|
67,560
|
|
|
|
269,125
|
|
|
|
297,143
|
|
|
Total revenues
|
|
$
|
5,358,698
|
|
|
$
|
2,350,514
|
|
|
$
|
9,069,243
|
|
|
$
|
7,626,914
|
|
Principles of Consolidation and Basis of Presentation
The consolidated financial statements
include the accounts of Lightstone REIT III and the Operating Partnership and its subsidiaries (over which the Company exercises financial
and operating control). As of June 30, 2021, Lightstone REIT III had an approximate 99% general partnership interest in the common units
of the Operating Partnership. All inter-company accounts and transactions have been eliminated in consolidation.
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, 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.
As a result of the COVID-19 pandemic,
room demand for the Company’s consolidated and unconsolidated hotels began to significantly decline in March 2020 and while
there has been sequential improvement since then; room demand continues to be below historical levels. Since March 2020, the COVID-19
pandemic has had a significant negative impact on the Company's operations, financial position and cash flow and the Company currently
expects that it will continue to do so for the foreseeable future. The Company cannot currently estimate if and when room demand will
return to pre-pandemic levels for its hotels.
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, but not limited to, those described below:
|
|
·
|
The Company implemented cost
reduction strategies for all of its hotels, leading to reductions in certain operating expenses and capital expenditures.
|
|
|
·
|
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 $0.8 million for the period from April 1, 2020 through September 30, 2020 until July 13, 2022; (ii) a 100 bps reduction
in the interest rate spread to LIBOR + 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 $0.7 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) a waiver of all financial covenants for quarter-end periods before
June 30, 2021. Additionally, a principal paydown of $0.6 million, which was previously due on April 1, 2020 was bifurcated into two
separate principal paydowns, each one $0.3 million, which were made in June 2020 and September 2020.
Subsequently, on March
31, 2021, the Revolving Credit Facility was further amended providing for (i) the Company to make another principal paydown of $3.8 million,
(ii) the Company 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 March 31, 2023; (iv) two one-year extension options at the lender’s sole
discretion; and (v) certain limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.
See Note 5 for additional information.
|
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT
TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
|
|
·
|
In April 2020 and March
2021, the Company’s hotels received $1.5 million and $1.9 million, respectively, from loans provided under the federal Paycheck
Protection Program (“PPP Loans”). Subsequently during the second quarter of 2021, the Company received notice from the U.S.
Small Business Administration (the “SBA”) that $0.5 million of its PPP Loans and related accrued interest had been legally
forgiven. See Note 6 for additional information.
|
|
|
·
|
On June 19, 2019, the Board
of Directors had previously determined to suspend regular monthly distributions and, as a result, has not declared any distributions
on the Company’s Common Shares 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 Company had $5.2 million
of funds previously held in escrow with a qualified intermediary to facilitate a potential like-kind exchange transaction in accordance
with Section 1031 of the Internal Revenue Code of 1986, as amended, released to it in May 2020.
|
|
|
·
|
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 cash on hand, restricted cash and marketable securities will provide it with sufficient liquidity to meet its
obligations for at least 12 months from the date of issuance of these financial statements.
New Accounting Pronouncements
The Company has reviewed and determined
that other recently issued accounting pronouncements will not have a material impact on its financial position, results of operations
and cash flows, or do not apply to its current operations.
|
|
3.
|
Investments in Unconsolidated
Affiliated Real Estate Entities
|
The entity below is partially owned
by the Company. The Company accounts for this investment under the equity method of accounting as the Company exercises significant influence,
but does not exercise financial and operating control over this entity. A summary of the Company’s investment in the unconsolidated
affiliated real estate entity is as follows:
|
Schedule of investments in the unconsolidated affiliated real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
Entity
|
|
Date Acquired
|
|
Ownership %
|
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
|
LVP LIC Hotel JV LLC (the "Hilton Garden Inn Joint Venture")
|
|
March 27, 2018
|
|
|
50.00
|
%
|
|
$
|
11,097,533
|
|
|
$
|
10,663,655
|
|
Hilton Garden Inn Joint
Venture
On March 27, 2018, the Company
and its Sponsor’s other public program, Lightstone Value Plus Real Estate Investment Trust II, Inc. (“Lightstone REIT
II”), 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 mortgage loan from a financial institution
(the “Hilton Garden Inn Mortgage”), excluding closing and other related transaction costs. The Company and Lightstone REIT
II each have a 50.0% membership interest in the Hilton Garden Inn Joint Venture.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT
TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The Company paid $12.9 million for
a 50.0% membership interest in the Hilton Garden Inn Joint Venture. The Company’s membership interest in the Hilton Garden
Inn Joint Venture is a co-managing interest. The Company accounts for its membership interest in the Hilton Garden Inn Joint Venture in
accordance with the equity method of accounting because it exerts significant influence over but does not control the Hilton Garden Inn
Joint Venture. All capital contributions and distributions of earnings from the Hilton Garden Inn Joint Venture are made on a pro
rata basis in proportion to each member’s equity interest percentage. Any distributions in excess of earnings from the Hilton Garden
Inn Joint Venture are made to the members pursuant to the terms of the Hilton Garden Inn Joint Venture’s operating agreement. The
Company commenced recording its allocated portion of profit/loss and cash distributions beginning as of March 27, 2018 with respect
to its membership interest of 50.0% in the Hilton Garden Inn Joint Venture.
In light of the impact of the COVID-19
pandemic on the operating results of the Hilton Garden Inn – Long Island City, the Hilton Garden Inn Joint Venture has entered into
certain amendments with respect 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 + 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.
Subsequent to the Company’s acquisition
of its 50.0% membership interest in the Hilton Garden Joint Venture through June 30, 2021, it has made an aggregate of $2.8 million of
additional capital contributions, of which $1.3 million was made during the second quarter of 2021 and received aggregate distributions
of $2.0 million, of which $0.5 million was received during the second quarter of 2021.
Hilton Garden Inn Joint Venture
Financial Information
The following
table represents the condensed income statement for the Hilton Garden Inn Joint Venture for the period indicated:
|
Schedule of condensed income statement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
For the Three Months Ended
June 30,
2021
|
|
|
For the Three Months Ended
June 30,
2020
|
|
|
For the Six Months Ended
June 30,
2021
|
|
|
For the Six Months Ended
June 30,
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,764
|
|
|
$
|
680
|
|
|
$
|
3,183
|
|
|
$
|
2,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses
|
|
|
1,037
|
|
|
|
617
|
|
|
|
1,909
|
|
|
|
1,961
|
|
|
General and administrative costs
|
|
|
8
|
|
|
|
11
|
|
|
|
18
|
|
|
|
29
|
|
|
Depreciation and amortization
|
|
|
621
|
|
|
|
614
|
|
|
|
1,256
|
|
|
|
1,245
|
|
|
Operating income/(loss)
|
|
|
98
|
|
|
|
(562
|
)
|
|
|
-
|
|
|
|
(1,015
|
)
|
|
Interest expense
|
|
|
(434
|
)
|
|
|
(460
|
)
|
|
|
(831
|
)
|
|
|
(917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(336
|
)
|
|
$
|
(1,022
|
)
|
|
$
|
(831
|
)
|
|
$
|
(1,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company's share of net loss (50.00%)
|
|
$
|
(168
|
)
|
|
$
|
(511
|
)
|
|
$
|
(415
|
)
|
|
$
|
(966
|
)
|
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT
TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The following table represents the
condensed balance sheet for the Hilton Garden Inn Joint Venture:
|
Schedule of condensed balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
(amounts in thousands)
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
|
|
|
|
|
|
|
|
|
Investment property, net
|
|
$
|
53,629
|
|
|
$
|
54,826
|
|
|
Cash
|
|
|
1,661
|
|
|
|
885
|
|
|
Other assets
|
|
|
1,185
|
|
|
|
1,211
|
|
|
Total assets
|
|
$
|
56,475
|
|
|
$
|
56,922
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans payable, net
|
|
$
|
33,462
|
|
|
$
|
34,988
|
|
|
Other liabilities
|
|
|
1,399
|
|
|
|
1,207
|
|
|
Members' capital
|
|
|
21,614
|
|
|
|
20,727
|
|
|
Total liabilities and members' capital
|
|
$
|
56,475
|
|
|
$
|
56,922
|
|
The Cove Joint Venture
On January 31, 2017, the Company, through
its wholly owned subsidiary, REIT III COVE LLC along with LSG Cove LLC, an affiliate of the Sponsor and a related party, REIT IV COVE
LLC, a wholly owned subsidiary of Lightstone Real Estate Income Trust, Inc. (“Lightstone IV”), a real estate investment
trust also sponsored by the Sponsor and a related party and Maximus Cove Investor LLC (“Maximus”), an unrelated third party,
completed the acquisition of all of RP Cove, L.L.C’s membership interest in RP Maximus Cove, L.L.C. (the “Cove Joint Venture”)
for aggregate consideration of $255.0 million (the “Cove Transaction”). Excluding mortgage financing obtained by the Cove
Joint Venture in connection with the Cove Transaction, the Company paid $20.0 million for a 22.5% non-managing membership interest in
the Cove Joint Venture.
The Cove Joint Venture owned and operated
The Cove at Tiburon (“the Cove”), a 281-unit, luxury waterfront multifamily residential property located in Tiburon, California
from January 31, 2017 through February 12, 2020. As discussed below, the Company disposed of its 22.5% membership interest in the Cove
Joint Venture on February 12, 2020.
The Company accounted for its 22.5%
membership interest in the Cove Joint Venture in accordance with the equity method of accounting. For the period from January 1, 2020
through February 12, 2020, the Company’s share of the Cove Joint Venture’s loss of $0.7 million was $0.2 million, which is
included in the loss from investments in unconsolidated affiliated real estate entities on the consolidated statements of operations.
On February 12, 2020, REIT IV
Cove LLC, LSG Cove LLC and REIT III COVE LLC each redeemed their respective membership interests in the Cove Joint Venture for an aggregate
redemption price of $87.6 million. In connection, with the redemption of the Company’s 22.5% membership interest in the Cove Joint
Venture, it received proceeds of $21.9 million which resulted in the recognition of a gain on the disposition of unconsolidated affiliated
real estate entity of $7.9 million during the first quarter of 2020.
As a result of the redemption of the
Company’s 22.5% membership interest in the Cove Joint Venture on February 12, 2020, it no longer has an ownership interest in the
Cove Joint Venture. During August 2020, the Company received $0.1 million of additional proceeds related to the redemption of its membership
interest in the Cove Joint Venture and recognized a gain on the disposition of investment in unconsolidated affiliated real estate entity
of $0.1 million during the third quarter of 2020. As a result, the Company recognized an aggregate gain on the disposition of investment
in unconsolidated affiliated real estate entity of $8.0 million during the year ended December 31, 2020.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT
TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
|
|
4.
|
Marketable Securities
and Fair Value Measurements
|
Marketable Securities
The following is a summary of the Company’s
available for sale securities as of the dates indicated:
|
Schedule of available-for-sale Securities Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2021
|
|
|
|
|
Adjusted Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair Value
|
|
|
Marketable Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
218,563
|
|
|
$
|
47
|
|
|
$
|
-
|
|
|
$
|
218,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds
|
|
|
1,707,096
|
|
|
|
11,660
|
|
|
|
(106,273
|
)
|
|
|
1,612,483
|
|
|
Total
|
|
$
|
1,925,659
|
|
|
$
|
11,707
|
|
|
$
|
(106,273
|
)
|
|
$
|
1,831,093
|
|
|
|
|
As of December 31, 2020
|
|
|
|
|
Adjusted Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair Value
|
|
|
Marketable Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
218,206
|
|
|
$
|
258
|
|
|
$
|
-
|
|
|
$
|
218,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds
|
|
|
3,229,608
|
|
|
|
10,039
|
|
|
|
(231,258
|
)
|
|
|
3,008,389
|
|
|
Total
|
|
$
|
3,447,814
|
|
|
$
|
10,297
|
|
|
$
|
(231,258
|
)
|
|
$
|
3,226,853
|
|
The Company considers the declines
in market value of its investments in debt securities to be temporary in nature. When evaluating its investments in debt securities for
other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below
cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more
likely than not it will be required to sell, the debt security before recovery of its amortized cost basis. During the six months ended
June 30, 2021 and 2020, the Company did not recognize any impairment charges on its investments in debt securities. As of June 30, 2021,
the Company does not consider any of its investments in debt securities to be other-than-temporarily impaired.
The Company may sell certain of its
investments in marketable debt securities prior to their stated maturities for strategic purposes, in anticipation of credit deterioration,
or for duration management.
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.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT
TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 June 30, 2021 and December 31,
2020, the Company’s equity securities were classified as Level 1 assets and the Company’s debt securities were classified
as Level 2 assets. There were no transfers between the level classifications during the during the six months ended June 30, 2021.
The fair values of the Company’s
investments in equity securities are measured using quoted prices in active markets for identical assets and debt securities are
measured using readily available quoted prices for similar assets.
The following table summarizes the
estimated fair value of our investments in marketable debt securities with stated contractual maturity dates, accounted for as available-for-sale
securities and classified by the contractual maturity date of the securities:
|
Schedule of estimated fair value of investments
|
|
|
|
|
|
|
|
As of
June 30,
2021
|
|
|
Due in 1 year
|
|
$
|
-
|
|
|
Due in 1 year through 5 years
|
|
|
972,508
|
|
|
Due in 5 year through 10 years
|
|
|
-
|
|
|
Due after 10 years
|
|
|
639,975
|
|
|
Total
|
|
$
|
1,612,483
|
|
The Company did not have any other
significant financial assets or liabilities, which would require revised valuations that are recognized at fair value.
|
5.
|
Mortgages payable, net
|
Mortgages payable, net consists of
the following:
|
Schedule of mortgages Payable, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Interest
Rate
|
|
as of
June 30,
2021
|
|
|
Maturity
Date
|
|
Amount Due
at Maturity
|
|
|
As of
June 30, 2021
|
|
|
As of
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility
|
|
LIBOR + 3.15% (floor of 4.00%)
|
|
|
3.72
|
%
|
|
July 2022
|
|
$
|
34,573,333
|
|
|
$
|
34,573,333
|
|
|
$
|
38,414,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory Note, secured by two properties
|
|
4.73%
|
|
|
4.73
|
%
|
|
October 2021
|
|
|
26,127,572
|
|
|
|
26,254,162
|
|
|
|
26,509,613
|
|
|
Total mortgages payable
|
|
|
|
|
4.16
|
%
|
|
|
|
$
|
60,700,905
|
|
|
|
60,827,495
|
|
|
|
64,924,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Deferred financing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122,579
|
)
|
|
|
(169,978
|
)
|
|
Total mortgage payable, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60,704,916
|
|
|
$
|
64,754,449
|
|
Revolving Credit Facility
The Company, through certain subsidiaries,
has a non-recourse Revolving Credit Facility with a financial institution. The Revolving Credit Facility provides the Company with a line
of credit of up to $60.0 million pursuant to which it may designate properties as collateral that allow borrowings up to a 65.0% loan-to-value
ratio subject to also meeting certain financial covenants, including a prescribed minimum debt yield. The Revolving Credit Facility provides
for monthly interest-only payments and the entire principal balance is due upon its expiration.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT
TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The Revolving Credit Facility, which
was entered into on July 13, 2016, had an initial maturity date of July 13, 2019, subject to two one-year options to extend at the sole
discretion of the lender. The initial interest rate on the Revolving Credit Facility was LIBOR+ 4.95% until it was reduced to LIBOR +
3.50% effective June 18, 2018. On July 11, 2019, the Company and the lender amended the Revolving Credit Facility to extend the initial
maturity date for 60 days to provide additional time to finalize the terms of a long-term extension. In connection with this amendment,
the interest rate on the Revolving Credit Facility was reduced from LIBOR + 3.50% to LIBOR + 3.15%, subject to a 4.00% floor, effective
July 1, 2019 and the requirements under the minimum debt yield ratio were modified effective as of March 31, 2019. On August 22,
2019, the Company and the lender further amended the Revolving Credit Facility to extend the maturity date to July 13, 2022, subject to
two, one-year options to extend at the sole discretion of the lender. In connection with this amendment, the Company made principal paydowns
of $0.6 million on both August 22, 2019 and December 31, 2019, respectively, and in certain circumstances would be required to make an
additional principal paydown of $0.6 million on April 1, 2020.
On June 2, 2020, the Company’s
Revolving Credit Facility was amended to provide for (i) the deferral of the six monthly debt service payments aggregating $0.8 million
for the period from April 1, 2020 through September 30, 2020 until July 13, 2022; (ii) a 100 bps reduction in the interest rate spread
to LIBOR + 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 $0.8 million into a cash collateral reserve account (of which $0.3 million was included in restricted cash on the Company’s
consolidated balance sheet as of December 31, 2020) to cover the six monthly debt service payments 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. Additionally, a principal paydown
of $0.6 million, which was previously due on April 1, 2020 was bifurcated into two separate principal paydowns, each one $0.3 million,
which were made in June 2020 and September 2020.
Subsequently, on March 31, 2021, the
Revolving Credit Facility was further amended providing for (i) the Company to make another principal paydown of $3.8 million, (ii) the
Company 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 March 31, 2023; (iv) two one-year extension options at the lender’s sole discretion; and (v)
certain limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.
As of June 30, 2021, the Revolving
Credit Facility had an outstanding principal balance of $34.6 million and six of the Company’s hotel properties were pledged as
collateral. Additionally, no additional borrowings were available under the Revolving Credit Facility as of June 30, 2021.
Home2 Suites Promissory
Note
On October 5, 2016, the Company entered
into a non-recourse promissory note (the “Home2 Suites Promissory Note”) for $28.4 million. The Promissory Note has a term
of five years, bears interest at 4.73% and requires monthly interest and principal payments of $147,806 through its stated maturity with
the then remaining unpaid balance of $26.1 million due upon maturity. The Home2 Suites Promissory Note is cross-collateralized by two
of the Company’s hotel properties (Home2 Suites – Tukwila and Home2 Suites – Salt Lake City). The Home2 Suites Promissory
Note matures on October 5, 2021. The Company currently intends to refinance the Home2 Suites Promissory Note on or before its maturity
date.
Although the Company is current with respect to the payment of debt
service on its nonrecourse Home2 Suites Promissory Note, it has not met the required minimum debt service coverage ratio for all of the
quarterly periods beginning with the third quarter of 2020 because of the negative impact of the COVID-19 pandemic on the operating performance
of these two hotels. As a result, the lender may elect to retain any excess cash flow from these two hotels. If the lender elects to
retain any excess cash flow from these two hotels, the Company does not believe it would have a material effect on its liquidity or financial
condition as the Company intends to refinance the Home2Suites Promissory Note on or before its maturity date.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT
TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Principal Maturities
The following table, based on the initial
terms of the mortgage, sets forth their aggregate estimated contractual principal maturities, including balloon payments due at maturity,
as of June 30, 2021:
|
Schedule of principal maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
2025
|
|
|
Thereafter
|
|
|
Total
|
|
|
Principal maturities
|
|
$
|
26,254,162
|
|
|
$
|
34,573,333
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
60,827,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Deferred financing costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122,579
|
)
|
|
Total principal maturities, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60,704,916
|
|
Pursuant to the Company’s debt
agreements, $2.8 million and $3.0 million of funds were held in restricted escrow accounts as of June 30, 2021 and December 31, 2020,
respectively. Such escrows are subject to release in accordance with the applicable debt agreement for the payment of real estate taxes,
debt service payments, insurance and capital improvements, as required. Certain of our debt agreements also contain clauses providing
for prepayment penalties.
During April 2020, the Company, through
various subsidiaries (each such entity, a “Borrower” and collectively, the “Borrowers”), received aggregate funding
of $1.5 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 March
2021, the Borrowers received an additional aggregate funding of $1.9 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 the Company intends for each Borrower to apply for loan forgiveness, no assurance
can be given that all of the Borrowers will ultimately obtain forgiveness under any relevant PPP Loan, in whole or in part. In the event
all or any portion of the PPP Loans is forgiven, the amount forgiven will be applied to outstanding principal and recorded as income.
During the second quarter of 2021 notice was received from the SBA that $0.5 million of PPP Loans and related accrued interest had been
legally forgiven and therefore, the Company recognized a gain on forgiveness of debt for that amount on its consolidated statements of
operations during the second quarter of 2021.
As of June 30, 2021 and December 31,
2020, the PPP Loans had an outstanding balance of $2.9 million and $1.5 million, respectively, and are classified as Notes Payable on
the consolidated balance sheets.
|
|
7.
|
Company’s Stockholder’s Equity
|
Distributions on Common Shares
On June 19, 2019, the Board of Directors
determined to suspend regular monthly distributions on the Company’s Common Shares and as a result, no distributions have been declared
since the suspension.
Previously, distributions on the Company’s
Common Shares in an amount equal to a 6.0% annualized rate, based on a share price of $10.00, were declared on a monthly basis beginning
on January 14, 2015 through June 30, 2019 and were paid on or about the 15th day following each month end.
Future distributions declared on the
Company’s Common Shares, 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.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT
TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Share Repurchase Program
The Company’s SRP may provide
its stockholders with limited, interim liquidity by enabling them to sell their Common Shares back to the Company, subject to restrictions.
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. On
March 25, 2020, the Board of Directors determined to suspend the SRP effective immediately.
Effective May 10, 2021, the Board of
Directors partially reopened the SRP to allow, subject to various conditions as set forth below, for redemptions submitted in connection
with a stockholder’s death or hardship and set the price for all such purchases to 100% of the NAV per Share ($8.05 as of December
31, 2020).
Deaths that occurred subsequent to
January 1, 2020 are eligible for consideration. 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 an annual basis, the Company will
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. Redemption requests are expected to be processed on a quarterly basis and may be subject to pro ration if either type of
redemption requests exceed the annual limitation.
Earnings per Share
The Company had no potentially dilutive
securities outstanding during the periods presented. Accordingly, basic and diluted earnings per share is calculated by dividing net income/(loss)
by the weighted-average number of shares of common stock outstanding during the applicable period.
|
|
8.
|
Due to related parties
and other transactions
|
The Company has various agreements,
including an advisory agreement, with the Advisor to pay certain fees in exchange for services performed by the Advisor and/or its affiliated
entities. Additionally, the Company’s ability to secure financing and its real estate operations are dependent upon its Advisor
and its affiliates to perform such services as provided in these agreements. Amounts the Company owes to the Advisor and its affiliated
entities are principally for asset management fees, and are classified as due to related parties on the consolidated balance sheets.
The following table represents the
fees incurred associated with the payments to the Company’s Advisor for the periods indicated:
|
Schedule of fees payments to Company's Advisor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Asset management fees (general and administrative costs)
|
|
$
|
301,063
|
|
|
$
|
299,597
|
|
|
$
|
602,057
|
|
|
$
|
655,415
|
|
|
Disposition fees (general and administrative costs)
|
|
|
-
|
|
|
|
39,200
|
|
|
|
-
|
|
|
|
39,200
|
|
|
Total
|
|
$
|
301,063
|
|
|
$
|
338,797
|
|
|
$
|
602,057
|
|
|
$
|
694,615
|
|
The advisory agreement has a one-year
term and is renewable for an unlimited number of successive one-year periods upon the mutual consent of the Advisor and the Company’s
independent directors. Payments to the Advisor or its affiliates may include asset acquisition fees and the reimbursement of acquisition-related
expenses, development fees and the reimbursement of development-related costs, financing coordination fees, asset management fees or asset
management participation, and construction management fees. The Company may also reimburse the Advisor and its affiliates for actual expenses
it incurs for administrative and other services provided for it. Upon the liquidation of the Company’s assets, it may pay the Advisor
or its affiliates a disposition commission.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT
TRUST III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable and other assets, accounts payable and
other accrued expenses, due to related parties and notes payable approximate their fair values because of the short maturity of these
instruments.
The carrying amount and estimated fair
value of our mortgages payable are as follows:
|
Schedule of Mortgages payable and the related estimated fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2021
|
|
|
As of December 31, 2020
|
|
|
|
|
Carrying
Amount
|
|
|
Estimated Fair
Value
|
|
|
Carrying
Amount
|
|
|
Estimated Fair
Value
|
|
|
Mortgages payable
|
|
$
|
60,827,495
|
|
|
$
|
60,839,600
|
|
|
$
|
64,924,427
|
|
|
$
|
64,823,777
|
|
The fair value of our mortgages payable
was determined by discounting the future contractual interest and principal payments by market interest rates.
|
|
10.
|
Commitments and Contingencies
|
Legal Proceedings
From time to time
in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes.
As of the date
hereof, we are not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a
material adverse effect on its results of operations or financial condition, which would require accrual or disclosure of the contingency
and possible range of loss.
On July 30, 2021, the Company
formed a joint venture (the “Williamsburg Moxy Hotel Joint Venture”) with Lightstone Real Estate Income Trust Inc. (’‘Lightstone
Income Trust’’), a real estate investment trust also sponsored by the Company’s Sponsor, pursuant to which the
Company acquired 25% of the Lightstone Income Trust’s membership interest in the Bedford Avenue Holdings LLC for aggregate consideration
of $7.9 million.
Bedford Avenue Holdings LLC previously
acquired four adjacent parcels of land located at 353-361 Bedford Avenue in Brooklyn, New York, on which it is developing and constructing
a 210-room branded hotel.
As a result, the Company and Lightstone
Income Trust have 25% and 75% membership interests, respectively, in the Williamsburg Moxy Hotel Joint Venture.
Additional, on August 5, 2021, Williamsburg
Moxy Hotel Joint Venture entered into a recourse construction loan facility for up to $77.0 million (the “Williamsburg Construction
Loan”) scheduled to mature on February 5, 2024, with two, six-month extension options, subject to certain conditions. The
Williamsburg Construction Loan bears interest at LIBOR plus 9.00%, subject to a 9.50% floor, with monthly interest-only payments
based on LIBOR plus 7.50% with the accrued and unpaid interest due at maturity. The Williamsburg Construction Loan is collateralized by
the Williamsburg Moxy Hotel. The Williamsburg Moxy Hotel Joint Venture received initial proceeds of $16.0 million under the Williamsburg
Construction Loan and repaid the Williamsburg Mortgage ($16.0 million) in full. As a result, the Williamsburg Construction Loan has remaining
availability of $61.0 million.
PART I. FINANCIAL INFORMATION, CONTINUED: