UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One) | ||
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 333-151532
LIGHTSTONE VALUE PLUS REAL ESTATE
INVESTMENT TRUST II, INC.
(Exact Name of Registrant as Specified in Its Charter)
Maryland | 83-0511223 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
1985 Cedar Bridge Avenue, Suite 1 Lakewood, New Jersey | 08701 | |
(Address of Principal Executive Offices) | (Zip Code) |
(732) 367-0129
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yeso Nox
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero | Accelerated filero | Non-accelerated filerx |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Nox
As of May 7, 2010, there were 2.2 million outstanding shares of common stock of Lightstone Value Plus Real Estate Investment Trust II, Inc., including shares issued pursuant to the distribution reinvestment plan.
LIGHTSTONE VALUE PLUS REAL ESTATE
INVESTMENT TRUST II, INC. AND SUBSIDIARIES
INDEX
Page | ||||
PART I FINANCIAL INFORMATION | ||||
Item 1. Financial Statements | 1 | |||
Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December 31, 2009 | 1 | |||
Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2010 and 2009 | 2 | |||
Consolidated Statement of Stockholders’ Equity and Comprehensive Loss (unaudited) for the Three Months Ended March 31, 2010 | 3 | |||
Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2010 and 2009 | 4 | |||
Notes to Consolidated Financial Statements | 5 | |||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of | 8 | |||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 14 | |||
Item 4T. Controls and Procedures | 14 | |||
PART II OTHER INFORMATION | ||||
Item 1. Legal Proceedings | 15 | |||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 15 | |||
Item 3. Defaults Upon Senior Securities | 16 | |||
Item 4. Removed and Reserved | 16 | |||
Item 5. Other Information | 16 | |||
Item 6. Exhibits | 16 |
i
PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
LIGHTSTONE VALUE PLUS REAL ESTATE
INVESTMENT TRUST II, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2010 | December 31, 2009 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Investments in unconsolidated real estate entity, at cost | $ | 1,690,000 | $ | 1,690,000 | ||||
Cash and cash equivalents | 12,634,671 | 8,596,008 | ||||||
Prepaid expenses and other assets | 272,519 | 109,447 | ||||||
Total Assets | $ | 14,597,190 | $ | 10,395,455 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Accounts Payable and other accrued expenses | $ | 1,109,863 | $ | 1,110,312 | ||||
Due to Sponsor | 18,784 | 1,569,001 | ||||||
Distributions payable | 248,730 | 157,177 | ||||||
Total liabilities | 1,377,377 | 2,836,490 | ||||||
Commitments and contingencies (Note 8) | ||||||||
Stockholders’ Equity: | ||||||||
Company’s stockholders’ equity: | ||||||||
Preferred shares, $0.01 par value, 10,000,000 shares authorized, none outstanding | — | — | ||||||
Common stock, $0.01 par value; 100,000,000 shares authorized, 1,993,852 and 1,236,037 shares issued and outstanding in 2010 and 2009, respectively | 19,939 | 12,360 | ||||||
Additional paid-in-capital | 15,096,540 | 8,616,032 | ||||||
Subscription receivable | (1,149,127 | ) | (665,882 | ) | ||||
Accumulated distributions in excess of net loss | (749,455 | ) | (405,503 | ) | ||||
Total Company stockholder’s equity | 13,217,897 | 7,557,007 | ||||||
Noncontrolling interest | 1,916 | 1,958 | ||||||
Total Stockholders’ Equity | 13,219,813 | 7,558,965 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 14,597,190 | $ | 10,395,455 |
The accompanying notes are an integral part of these consolidated financial statements.
1
PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
LIGHTSTONE VALUE PLUS REAL ESTATE
INVESTMENT TRUST II, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended March 31, 2010 | For the Three Months Ended March 31, 2009 | |||||||
Expenses: | ||||||||
General and administrative costs | $ | 151,252 | $ | 52,571 | ||||
Total operating expenses | 151,252 | 52,571 | ||||||
Operating loss | (151,252 | ) | (52,571 | ) | ||||
Interest income | 55,715 | — | ||||||
Net loss | (95,537 | ) | (52,571 | ) | ||||
Less: net loss attributable to noncontrolling interest | 10 | — | ||||||
Net loss attributable to Company’s common shares | $ | (95,527 | ) | $ | (52,571 | ) | ||
Net loss per Company’s common share, basic and diluted | $ | (0.06 | ) | $ | (2.63 | ) | ||
Weighted average number of common shares outstanding, basic and diluted | 1,639,055 | 20,000 |
The accompanying notes are an integral part of these consolidated financial statements.
2
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS.
LIGHTSTONE VALUE PLUS REAL ESTATE
INVESTMENT TRUST II, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
(UNAUDITED)
Preferred Shares | Common Shares | Additional Paid-In Capital | Subscription Receivable | Accumulated Distributions in Excess of Net Loss | Total Company Stockholders’ Equity | Total Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||
Preferred Shares | Amount | Common Shares | Amount | |||||||||||||||||||||||||||||||||||||
BALANCE, December 31, 2009 | — | — | 1,236,037 | 12,360 | 8,616,032 | (665,882 | ) | (405,503 | ) | 7,557,007 | 1,958 | 7,558,965 | ||||||||||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | (95,527 | ) | (95,527 | ) | (10 | ) | (95,537 | ) | ||||||||||||||||||||||||||
Total comprehensive loss | — | — | — | — | — | — | (95,527 | ) | (95,527 | ) | (10 | ) | (95,537 | ) | ||||||||||||||||||||||||||
Distributions declared | — | — | — | — | — | — | (248,425 | ) | (248,425 | ) | — | (248,425 | ) | |||||||||||||||||||||||||||
Distributions paid to noncontrolling interests | (32 | ) | (32 | ) | ||||||||||||||||||||||||||||||||||||
Proceeds from offering | 750,129 | 7,502 | 7,488,537 | (483,245 | ) | 7,012,794 | — | 7,012,794 | ||||||||||||||||||||||||||||||||
Selling commissions and dealer manager fees | (695,124 | ) | (695,124 | ) | (695,124 | ) | ||||||||||||||||||||||||||||||||||
Other offering costs | (385,846 | ) | (385,846 | ) | (385,846 | ) | ||||||||||||||||||||||||||||||||||
Proceeds from distribution reinvestment program | 7,686 | 77 | 72,941 | 73,018 | 73,018 | |||||||||||||||||||||||||||||||||||
BALANCE, March 31, 2010 | — | $ | — | 1,993,852 | $ | 19,939 | $ | 15,096,540 | $ | (1,149,127 | ) | $ | (749,455 | ) | $ | 13,217,897 | $ | 1,916 | $ | 13,219,813 |
The accompanying notes are an integral part of these consolidated financial statements.
3
PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 1. FINANCIAL STATEMENTS, CONTINUED:
LIGHTSTONE VALUE PLUS REAL ESTATE
INVESTMENT TRUST II, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended | ||||||||
March 31, 2010 | March 31, 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (95,537 | ) | $ | (52,571 | ) | ||
Changes in assets and liabilities: | ||||||||
Increase in prepaid expenses and other assets | (163,072 | ) | — | |||||
(Decrease)/increase in accounts payable and other accrued expenses | (105,107 | ) | 23,038 | |||||
Increase in due to sponsor | 7,322 | — | ||||||
Net cash used in operating activities | (356,394 | ) | (29,533 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Decrease due from sponsor | 102,296 | 27,825 | ||||||
Proceeds from issuance of common stock | 7,012,794 | — | ||||||
Payment of offering costs | (2,635,842 | ) | — | |||||
Distributions to noncontrolling interests | (32 | ) | — | |||||
Distributions to common stockholders | (84,159 | ) | — | |||||
Net cash provided by financing activities | 4,395,057 | 27,825 | ||||||
Net change in cash and cash equivalents | 4,038,663 | (1,708 | ) | |||||
Cash and cash equivalents, beginning of period | 8,596,008 | 99,703 | ||||||
Cash and cash equivalents, end of period | $ | 12,634,671 | $ | 97,995 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Distributions declared | $ | 248,425 | $ | — | ||||
Value of shares issued from distribution reinvestment program | $ | 73,018 | $ | — | ||||
Non cash commissions and other offering costs in accounts payable and other accrued expenses | $ | 1,047,333 | $ | — | ||||
Subscription receivable | $ | 483,245 | $ | — |
The accompanying notes are an integral part of these consolidated financial statements.
4
LIGHTSTONE VALUE PLUS REAL ESTATE
INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization
Lightstone Value Plus Real Estate Investment Trust II, Inc., a Maryland corporation (the “Lightstone REIT” or the “Company”) was formed on April 28, 2008. The Company was formed primarily for the purpose of engaging in the business of investing in and owning commercial and residential real estate properties located throughout North America, as well as real estate-related securities, such as collateralized debt obligations, commercial mortgage-backed securities and mortgage and mezzanine loans secured, directly or indirectly, by the same types of properties which it may acquire directly.
The Lightstone REIT is structured as an umbrella partnership real estate investment trust, or UPREIT, and substantially all of the Lightstone REIT’s current and future business is and will be conducted through Lightstone Value Plus REIT II LP, a Delaware limited partnership formed on April 30, 2008 (the “Operating Partnership”).
The Company commenced an initial public offering to sell a maximum of 51,000,000 shares of common shares on April 24, 2009, at a price of $10 per share (exclusive of 6.5 million shares available pursuant to the Company’s distribution reinvestment plan, 75,000 shares that are reserved for issuance under the Company’s stock option plan and 255,000 shares reserved for issuance under the Company’s Employee and Director Incentive Restricted Share Plan). The Company’s Registration Statement on Form S-11 (the “Registration Statement”) was declared effective under the Securities Act of 1933 on February 17, 2009, and on April 24, 2009, the Lightstone REIT began offering its common shares for sale to the public. Lightstone Securities, LLC (the “Dealer Manager”), an affiliate of The Lightstone Group (the “Sponsor”), is serving as the dealer manager of the Company’s public offering (the “Offering”).
The Company issued 20,000 shares to Lightstone Value Plus REIT II, LLC, (the “Advisor”) on May 20, 2008, for $10 per share. In addition, as of September 30, 2009, the Company had reached its minimum offering by receiving subscriptions of its common shares, representing gross offering proceeds of approximately $6.5 million, and investors were admitted as stockholders on October 1, 2009. Through March 31, 2010, cumulative gross offering proceeds and distribution reinvestment proceeds of $19.9 million were released to the Lightstone REIT. The Lightstone REIT invested the proceeds from this sale and proceeds from the Advisor in the Operating Partnership, and as a result, held a 99.99% general partnership interest at March 31, 2010 in the Operating Partnership’s common units. The Operating Partnership commenced operations as of October 1, 2009.
Noncontrolling Interest — Partners of Operating Partnership
On May 20, 2008, the Advisor contributed $2,000 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The limited partner has the right to convert operating partnership units into cash or, at the option of the Company, an equal number of common shares of the Company, as allowed by the limited partnership agreement.
Lightstone SLP II, LLC, which is wholly owned and controlled by our Sponsor, will purchase subordinated general partner participation units (“subordinated profits interests”) in the Operating Partnership at a cost of $100,000 per unit. Lightstone SLP II, LLC may elect to purchase the subordinated profits interests with either cash or an interest in real property of equivalent value. The proceeds received from the cash sale of the subordinated profits interests will be used to offset payments made by Lightstone REIT from offering proceeds to pay the dealer manager fees and selling commissions and other offering costs. As of March 31, 2010, Lightstone SLP II, LLC had not purchased any subordinated profits interests.
5
LIGHTSTONE VALUE PLUS REAL ESTATE
INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and the Operating Partnership and its subsidiaries (over which Lightstone REIT exercises financial and operating control). As of March 31, 2010, the Company had a 99.99% general partnership interest in the common units of the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation.
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, 2009. 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 statement of the results for the periods presented. The accompanying unaudited condensed consolidated financial statements of and its Subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.
The unaudited consolidated statements of operations for interim periods are not necessarily indicative of results for the full year or any other period.
New Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”, which was primarily codified into Topic 810 in the ASC. This standard requires ongoing assessments to determine whether an entity is a variable entity and requires qualitative analysis to determine whether an enterprise’s variable interest(s) give it a controlling financial interest in a variable interest entity. In addition, it requires enhanced disclosures about an enterprise’s involvement in a variable interest entity. This standard is effective for the fiscal year that begins after November 15, 2009. The Company adopted this standard on January 1, 2010 and the adoption did not have a material impact on the Company’s consolidated financial statements.
In January 2010, the FASB issued FASB Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”. ASU No. 2010-06 amends ASC 820 and clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements. This ASU becomes effective for the Company on January 1, 2010. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
The Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial position, results of operations and cash flows, or do not apply to its operations.
3. Selling Commission, Dealer Manager Fees and Organizational and Offering Costs
Selling commissions and dealer manager fees paid to the Dealer Manager, and other third-party offering expenses such as registration fees, due diligence fees, marketing costs, and professional fees are accounted for as a reduction against additional paid-in capital (“APIC”) as costs are incurred. Any organizational costs are accounted for as general and administrative costs. For the three months ended March 31, 2010, the Company has incurred approximately $0.7 million in selling commissions and dealer manager fees and $0.4 million of offering costs. Since commencement of its initial public offering through March 31, 2010, the Company has incurred approximately $1.7 million in selling commissions and dealer manager fees and $3.1 million of offering costs.
6
LIGHTSTONE VALUE PLUS REAL ESTATE
INVESTMENT TRUST II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
4. Distributions
On March 23, 2010, the Company’s Board of Directors declared the quarterly distribution for the three-month period ended March 31, 2010 in the amount of $0.00178082191 per share per day which equals a daily amount that, if paid each day for a 365-day period, of 6.5% annualized rate based on a share price of $10.00 payable to stockholders of record on the close of business each day during the quarter. The distribution was paid in full on April 15, 2010 using a combination of cash ($122,365) and shares ($126,365) which represents 13,301 shares of the Company’s common stock issued pursuant to the Company’s Distribution Reinvestment Program, at a discounted price of $9.50 per share.
The amount of distributions to be distributed to our stockholders in the future will be determined by our Board of Directors and are dependent on a number of factors, including funds available for payment of distributions, our financial condition, capital expenditure requirements and annual distribution requirements needed to maintain our status as a Real Estate Investment Trust under the Internal Revenue Code.
5. Subscription Receivable
As of March 31, 2010, the Company recorded a subscription receivable of $1,149,127 as a reduction in the Company’s equity on the consolidated balance sheets. The subscription receivable relates to shares issued to the Company’s shareholders for which the proceeds have not yet been received by the Company solely due to a fact of timing of transfers from the escrow agent holding the funds.
6. Related Party Transactions
The Lightstone REIT has agreements with the Advisor and Lightstone Value Plus REIT Management LLC (the “Property Manager”) to pay certain fees in exchange for services performed by these entities and other affiliated entities. The Lightstone REIT’s ability to secure financing and subsequent real estate operations are dependent upon its Advisor, Property Manager and their affiliates to perform such services as provided in these agreements.
The Lightstone REIT pursuant to the related party arrangements has incurred $4,014 related to asset management fees and zero related to acquisition fees, property management fees or other fees for the three months ended March 31, 2010. The Lightstone REIT has not incurred any fees associated with related party agreements during the three months ended March 31, 2009.
7. Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate their fair values because of the short maturity of these instruments.
8. Commitments and Contingencies
Legal Proceedings
From time to time in the ordinary course of business, the Lightstone REIT may become subject to legal proceedings, claims or disputes. As of the date hereof, we are not a party to any material pending legal proceedings.
7
PART I. FINANCIAL INFORMATION, CONTINUED:
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the accompanying financial statements of Lightstone Value Plus Real Estate Investment Trust II, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Lightstone Value Plus Real Estate Investment Trust II, Inc., a Maryland corporation, and, as required by context, Lightstone Value Plus REIT, L.P. and its wholly owned subsidiaries, which we collectively refer to as “the Operating Partnership.”
Forward-Looking Statements
Certain information included in this Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by us with the Securities and Exchange Commission, or the SEC, contain or will contain, forward-looking statements. All statements, other than statements of historical facts, including, among others, statements regarding our possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives, are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of Lightstone Value Plus Real Estate Investment Trust II, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that actual results may differ materially from those contemplated by such forward-looking statements.
Such statements are based on assumptions and expectations which may not be realized and are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, may differ from the results discussed in the forward-looking statements.
Risks and other factors that might cause differences, some of which could be material, include, but are not limited to, economic and market conditions, competition, tenant or joint venture partner(s) bankruptcies, our lack of operating history, the availability of cash flows from operations to pay distributions, changes in governmental, tax, real estate and zoning laws and regulations, failure to increase tenant occupancy and operating income, rejection of leases by tenants in bankruptcy, financing and development risks, construction and lease-up delays, cost overruns, the level and volatility of interest rates, the rate of revenue increases versus expense increases, the financial stability of various tenants and industries, the failure of the Company to make additional investments in real estate properties, the failure to upgrade our tenant mix, restrictions in current financing arrangements, the failure to fully recover tenant obligations for common area maintenance (“CAM”), insurance, taxes and other property expenses, the failure of the Lightstone REIT to continue to qualify as a real estate investment trust (“REIT”), the failure to refinance debt at favorable terms and conditions, an increase in impairment charges, loss of key personnel, failure to achieve earnings/funds from operations targets or estimates, conflicts of interest with the Advisor and the Sponsor and their affiliates, failure of joint venture relationships, significant costs related to environmental issues as well as other risks listed from time to time in this Form 10-Q, our Form 10-K, our Registration Statement on Form S-11 (File No. 333-151532), as the same may be amended and supplemented from time to time, and in the Company’s other reports filed with the Securities and Exchange Commission (“SEC”).
We believe these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are qualified in their entirety by these cautionary statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time unless required by law.
8
Overview
Lightstone Value Plus Real Estate Investment Trust II, Inc. (the “Lightstone REIT” or “Company”) intends to acquire and operate commercial, residential and hospitality properties, principally in North America. Principally through the Lightstone Value Plus REIT II, LP, (the “Operating Partnership”), our acquisitions may include both portfolios and individual properties. We expect that our commercial holdings will consist of retail (primarily multi-tenanted shopping centers), lodging, industrial and office properties and that our residential properties located either in or near major metropolitan areas.
Capital required for the purchase of real estate and real estate related investments will be obtained from the public offering of up to 51,000,000 common shares for $10 per share, and from any indebtedness that we may incur in connection with the acquisition of any real estate and real estate related investments thereafter. A Registration Statement on Form S-11 covering our public offering was declared effective under the Securities Act of 1933 on February 17, 2009. The offering commenced on April 24, 2009 and is ongoing. We are dependent upon the net proceeds from the offering to conduct our proposed activities.
We do not have employees. We entered into an advisory agreement dated February 17, 2009 with Lightstone Value Plus REIT II LLC, a Delaware limited liability company, which we refer to as the “Advisor,” pursuant to which the Advisor supervises and manages our day-to-day operations and selects our real estate and real estate related investments, subject to oversight by our board of directors. We pay the Advisor fees for services related to the investment and management of our assets, and we will reimburse the Advisor for certain expenses incurred on our behalf.
Current Environment
Our operating results as well as our investment opportunities are impacted by the health of the North American economies. Our business and financial performance may be adversely affected by current and future economic conditions, such as a reduction in the availability of credit, financial markets volatility, and recession.
U.S. and global credit and equity markets have recently undergone significant disruption, making it difficult for many businesses to obtain financing on acceptable terms or at all. As a result of this disruption, in general there has been an increase in the costs associated with the borrowings and refinancing as well as limited availability of funds for refinancing. If these conditions continue or worsen, our cost of borrowing may increase and it may be more difficult to finance investment opportunities in the short term.
We are not aware of any other material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting real estate generally, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from the acquisition and operation of real estate and real estate related investments, other than those referred to in this Form 10-Q.
Critical Accounting Policies and Estimates
There were no material changes during the three months ended March 31, 2010 to our critical accounting policies as reported in our Annual Report on Form 10-K, for the year ended December 31, 2009.
Results of Operations
We commenced operations on October 1, 2009 upon the release of our offering proceeds from escrow. In November 2009, we acquired an investment of a 32.42% Class D Member Interest in HG CMBS Finance, LLC, a real estate limited liability company that invests in commercial mortgage-backed securities. Through March 31, 2010, we have not acquired any other properties or investments.
The Company’s primary financial measure for evaluating each of its properties will be net operating income (“NOI”). NOI represents rental income less property operating expenses, real estate taxes and general and administrative expenses. The Company believes that NOI is helpful to investors as a supplemental measure of the operating performance of a real estate company because it will be a direct measure of the actual operating results of the Company’s properties.
9
For the Three Months Ended March 31, 2010 vs. March 31, 2009
Consolidated
General and administrative expenses
General and administrative costs increased by $98,681 to $151,252 primarily due to insurance costs and consulting and accounting fees which did not occur during the three months ended March 31, 2009 as we did not commence operations until October 2009.
Interest Income
Interest income was $55,715 for the three months ended March 31, 2010 compared to zero for the three months ended March 31, 2009. The interest income primarily relates to interest earned on our investment in HG CMBS Finance LLC. During the three months ended March 31, 2010, we did not own any investments.
Noncontrolling interests
The loss allocated to Noncontrolling interests relates to the interest in the Operating Partnership held by our Sponsor.
Financial Condition, Liquidity and Capital Resources
Overview:
For the three months ended March 31, 2010, our primary source of funds was from $4.4 million proceeds from our public offering, net of commissions and offering costs. We are dependent upon the net proceeds to be received from our public offering to conduct our proposed activities. The capital required to purchase real estate investments will be obtained from our offering and from any indebtedness that we may incur in connection with the acquisition and operations of any real estate investments thereafter.
We intend to utilize leverage in acquiring our properties. The number of different properties we will acquire will be affected by numerous factors, including, the amount of funds available to us. When interest rates on mortgage loans are high or financing is otherwise unavailable on terms that are satisfactory to us, we may purchase certain properties for cash with the intention of obtaining a mortgage loan for a portion of the purchase price at a later time.
Our sources of funds in the future will primarily be the net proceeds of our offering, operating cash flows and borrowings. We believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.
We currently have no outstanding debt under any financing facilities and have not identified any sources of debt financing. We intend to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to our stockholders. Market conditions will dictate 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.
Our charter provides that the aggregate amount of borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a satisfactory showing that a higher level is appropriate, the approval of our board of directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. Market conditions will dictate the overall leverage limit; as such our aggregate borrowings may be less than 300% of net assets.
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
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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.
In general the type of financing executed by us to a large extent will be dictated by the nature of the investment and current market conditions. For long-term real estate investments, it is our intent to finance the acquisition using long-term fixed rate debt. However there may certain types of investments and market circumstances which may result in variable rate debt being the more appropriate choice of financing. To the extent floating rate debt is used to finance the purchase of real estate, management will evaluate a number of protections against significant increases in interest rates, including the purchase of interest rate caps instruments.
We may also obtain lines of credit to be used to acquire properties. These lines of credit will be at prevailing market terms and will be repaid from offering proceeds, proceeds from the sale or refinancing of properties, working capital or permanent financing. Our Sponsor or its affiliates may guarantee the lines of credit although they will not be obligated to do so. We may draw upon the lines of credit to acquire properties pending our receipt of proceeds from our initial public offering. We expect that such properties may be purchased by our Sponsor’s affiliates on our behalf, in our name, in order to minimize the imposition of a transfer tax upon a transfer of such properties to us.
In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make certain payments to our Advisor, our Dealer Manager, and our Property Manager during the various phases of our organization and operation. During our organizational and offering stage, these payments include payments to our Dealer Manager for selling commissions and the dealer manager fee, and payments to our Advisor for the reimbursement of organizational and offering costs. During the acquisition and development stage, these payments will include asset acquisition fees and asset management fees, and the reimbursement of acquisition related expenses to our Advisor. During the operational stage, we will pay our Property Manager a property management fee and our Advisor an asset management fee. We will also reimburse our Advisor and its affiliates for actual expenses it incurs for administrative and other services provided to us. Additionally, the Operating Partnership may be required to make distributions to Lightstone SLP II, LLC, an affiliate of the Advisor.
The following table represents the fees incurred associated with the payments to our Advisor and our Property Manager for the three months ended March 31, 2010:
2010 | 2009 | |||||||
Acquisition fees | $ | — | $ | — | ||||
Asset management fees | 4,014 | — | ||||||
Property management fees | — | — | ||||||
Acquisition expenses reimbursed to Advisor | — | — | ||||||
Development fees | — | — | ||||||
Leasing commissions | — | — | ||||||
Total | $ | 4,014 | $ | — |
In addition, total selling commissions and dealer fees incurred during the three months ended March 31, 2010 was $0.7 million.
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Summary of Cash Flows. The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below:
For the Three Months Ended | ||||||||
March 31, 2010 | March 31, 2009 | |||||||
Cash flows used in operating activities | $ | (356,394 | ) | $ | (29,533 | ) | ||
Cash flows provided by financing activities | 4,395,057 | 27,825 | ||||||
Net change in cash and cash equivalents | 4,038,663 | (1,708 | ) | |||||
Cash and cash equivalents, beginning of the period | 8,596,008 | 99,703 | ||||||
Cash and cash equivalents, end of the period | $ | 12,634,671 | $ | 97,995 |
Our principal source of cash flow was derived from the net offering proceeds received. In the future, we intend to acquire properties which will provide a relatively consistent stream of cash flow that provides us with resources to fund operating expenses, debt service and quarterly distributions.
Our principal demands for liquidity currently are acquisition and development activities as well as costs associated with our public offering. The principal sources of funding for our operations are currently the issuance of equity securities.
Operating activities
During the three months ended March 31, 2010, cash flows used in operating activities was $356,394 compared to $29,533 for three months ended March 31, 2009. The cash used during 2009 related to net loss of $95,537 plus the increase in prepaid expenses and other assets due to the upfront payment of insurance premiums during the quarter.
Financing activities
Cash provided by financing activities during the three months ended March 31, 2010 is primarily the proceeds from the issuance of common stock of $7.0 million offset by the payment of selling commissions, dealer manger fees and other offering costs of $2.6 million.
Cash provided by financing activities during the three months ended March 31, 2010 due to change in amount due to our Sponsor for reimbursement of offering costs.
We believe that these cash resources will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.
Contractual Obligations
None
Funds from Operations
We consider Funds from Operations, or FFO, a widely accepted and appropriate measure of performance for a REIT. FFO provides a non-GAAP supplemental measure to compare our performance and operations to other REIT’s. Due to certain unique operating characteristics of real estate companies, The National Association of Real Estate Investment Trusts, Inc. (NAREIT) has promulgated a standard known as FFO, which it believes more accurately reflects the operating performance of a REIT such as ours. As defined by NAREIT, FFO means net income computed in accordance with GAAP, excluding gains (or losses) from sales of operating property, plus depreciation and amortization and after adjustment for unconsolidated partnership and joint ventures in which the REIT holds an interest. We have adopted the NAREIT definition of computing FFO.
We believe that FFO and FFO available to common shares are helpful to investors as supplemental measures of the operating performance of a real estate company, because they are recognized measures of performance by the real estate industry and by excluding gains or losses related to dispositions of depreciable property and excluding real estate depreciation (which can vary among owners of identical assets in similar
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condition based on historical cost accounting and useful life estimates), FFO and FFO available to common shares can help compare the operating performance of a company’s real estate between periods or as compared to different companies. FFO and FFO available to common shares do not represent net income, net income available to common shares or net cash flows from operating activities in accordance with GAAP. Therefore, FFO and FFO available to common shares should not be exclusively considered as alternatives to net income, net income available to common shares or net cash flows from operating activities as determined by GAAP or as measures of liquidity. The Company’s calculation of FFO and FFO available to common shares may differ from other real estate companies due to, among other items, variations in cost capitalization policies for capital expenditures and, accordingly, may not be comparable to such other real estate companies.
Below is a reconciliation of net income to FFO for the three months ended March 31, 2010 and 2009:
For the Three Months Ended | ||||||||
March 31, 2010 | March 31, 2009 | |||||||
Net loss | $ | (95,537 | ) | $ | (52,571 | ) | ||
Adjustments: | ||||||||
None | ||||||||
FFO | (95,537 | ) | (52,571 | ) | ||||
Less: FFO attributable to noncontrolling interests | 10 | — | ||||||
FFO attributable to Company’s common share | $ | (95,527 | ) | $ | (52,571 | ) | ||
FFO per common share, basic and diluted | $ | (0.06 | ) | $ | (2.63 | ) | ||
Weighted average number of common shares outstanding, basic and diluted | 1,639,055 | 20,000 |
Sources of Distribution
On March 23, 2010, the Company’s Board of Directors declared the quarterly distribution for the three-month period ended March 31, 2010 in the amount of $0.00178082191 per share per day which equals a daily amount that, if paid each day for a 365-day period, of 6.5% annualized rate based on a share price of $10.00 payable to stockholders of record on the close of business each day during the quarter. The distribution was paid in full on April 15, 2010 using a combination of cash ($122,365) and shares ($126,365) which represents 13,301 shares of the Company’s common stock issued pursuant to the Company’s Distribution Reinvestment Program, at a discounted price of $9.50 per share. We used proceeds from our offering of common stock to fund our cash distribution.
The following table provides a summary of the quarterly distributions declared and the source of distribution based upon cash flows provided by operations for the three months ended March 31, 2010. We did not declare a distribution for the three months ended March 31, 2009 as we did not begin operations until October 2009.
Quarter ended March 31, | ||||
Distribution period: | Q1 2010 | |||
Date distribution declared | March 23, 2010 | |||
Date distribution paid | April 15, 2010 | |||
Distributions Paid | $ | 122,365 | ||
Distributions Reinvested | 126,365 | |||
Total Distributions | $ | 248,730 | ||
Source of distributions | ||||
Cash flows used in operations | $ | (356,394 | ) | |
Proceeds from issuance of common stock | 605,124 | |||
Total Sources | $ | 248,730 |
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New Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”, which was primarily codified into Topic 810 in the ASC. This standard requires ongoing assessments to determine whether an entity is a variable entity and requires qualitative analysis to determine whether an enterprise’s variable interest(s) give it a controlling financial interest in a variable interest entity. In addition, it requires enhanced disclosures about an enterprise’s involvement in a variable interest entity. This standard is effective for the fiscal year that begins after November 15, 2009. The Company adopted this standard on January 1, 2010 and the adoption did not have a material impact on the Company’s consolidated financial statements.
In January 2010, the FASB issued FASB Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”. ASU No. 2010-06 amends ASC 820 and clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements. This ASU becomes effective for the Company on January 1, 2010. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
The Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial position, results of operations and cash flows, or do not apply to its operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk.
We may be exposed to the effects of interest rate changes primarily as a result of borrowings used to maintain liquidity and fund the expansion and refinancing of our real estate investment portfolio and operations. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes. As of December 31, 2009, we did not have any other swap or derivative agreements outstanding.
In addition to changes in interest rates, the value of our real estate will be subject to fluctuations based on changes in the real estate capital markets, market rental rates for office space, local, regional and national economic conditions and changes in the creditworthiness of tenants. All of these factors may also affect our ability to refinance our debt if necessary.
ITEM 4 (T). CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.
There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There were no significant deficiencies or material weaknesses identified in the evaluation, and therefore, no corrective actions were taken.
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PART II. OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS
From time to time in the ordinary course of business, the Lightstone REIT 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
During the period covered by this Form 10-Q, we did not sell any unregistered securities. Through March 31, 2010, we have not repurchased any of our securities.
Use of Initial Public Offering Proceeds
On February 17, 2009, our Registration Statement on Form S-11 (File No. 333-151532), covering a public offering, which we refer to as the “Offering,” of up to 51,000,000 common shares for $10 per share (exclusive of 6,500,000 shares available pursuant to the Company’s distribution reinvestment plan, 75,000 shares that are reserved for issuance under the Company’s stock option plan and 255,000 shares reserved for issuance under the Company’s employee and director incentive restricted share plan) was declared effective under the Securities Act of 1933.
We issued 20,000 shares to the Advisor on May 20, 2008, for $10 per share. In addition, as of September 30, 2009, we had reached its minimum offering by receiving subscriptions of its common shares, representing gross offering proceeds of approximately $6.5 million. Through March 31, 2010, cumulative gross offering proceeds of $19.9 million were released to the Lightstone REIT. The Lightstone REIT invested the proceeds from this sale and proceeds from the Advisor in the Operating Partnership, and as a result, held a 99.99% general partnership interest at March 31, 2010 in the Operating Partnership’s common units.
Lightstone SLP II, LLC will purchase subordinated profits interests in the Operating Partnership at a cost of $100,000 per unit. Lightstone SLP II, LLC may elect to purchase the subordinated profits interests with either cash or an interest in real property of equivalent value. The proceeds received from the cash sale of the subordinated profits interests will be used to offset payments made by us from offering proceeds to pay the dealer manager fees and selling commissions and other offering costs. As of March 31, 2010, Lightstone SLP II, LLC had not purchase any subordinated profits interests.
We will utilize a portion of offering proceeds towards funding the dealer manager fees, selling commissions and other offering costs.
Below is a summary of the expenses we have incurred life to date in connection with the issuance and distribution of the registered securities.
Type of Expense Amount | ||||
Underwriting discounts and commissions | $ | 1,736,595 | ||
Other expenses incurred to be paid non-affiliates | 3,056,140 | |||
Total offering expenses incurred through March 31, 2010 | $ | 4,792,735 |
As of March 31, 2010, the total costs of raising capital associated with our offering which we have funded, including fees paid to our Dealer Manager was approximately 24% of total proceeds compared to 31% as of December 31, 2009. As a significant amount of offering costs associated with accounting, legal and marketing costs are incurred prior to the sale of shares, the percentage of proceeds utilized towards commissions, dealer manager fees and other offering costs is higher than our estimate of approximately 10% of offering proceeds. As we sell more shares, this percentage will decline over time.
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Cumulatively, we have used the net offering proceeds of $15.1 million, after deduction of offering expenses incurred, as follows:
At March 31, 2010 | ||||
Construction of plant, building and facilities | $ | — | ||
Purchase of real estate interests | — | |||
Repayment of indebtedness | — | |||
Investment in real estate securities | 1,690,000 | |||
Cash and cash equivalents (as of March 31, 2010) | 12,631,671 | |||
Subscriptions Receivable | 1,149,127 | |||
Other uses (primarily timing of payables) | (354,319 | ) | ||
Total uses | $ | 15,116,479 |
As of May 7, 2010, we have sold 2,150,205 shares at an aggregate of price of approximately $21.5 million. In addition, we have sold approximately 20,985 shares at an aggregate price of approximately $0.2 million under our Distribution Reinvestment Plan.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. REMOVED AND RESERVED
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
Exhibit Number | Description | |
31.1* | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. | |
31.2* | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. | |
32.1* | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.” | |
32.2* | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.” |
* | Filed herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LIGHTSTONE VALUE PLUS REAL ESTATE INVESTMENT TRUST II, INC. | ||
Date: May 17, 2010 | By: /s/ David Lichtenstein | |
Date: May 17, 2010 | By: /s/ Donna Brandin |
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