Quarterly Report (10-q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2022

 

OR

 

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

 

For the transition period from __________ to __________

 

Commission file number 000-55619

 

LIGHTSTONE VALUE PLUS REIT III, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland		46-1140492
(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)

 

[phone]

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑   No ☐

 

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☑   No ☐

 

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

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☑	Smaller reporting company	☑
		Emerging growth company	☐

 

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

 

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

Yes ☐   No ☑

 

As of November 7, 2022, there were approximately 13.0 million outstanding shares of common stock of Lightstone Value Plus REIT III, Inc., including shares issued pursuant to the dividend reinvestment plan.

 

 

 

 

 

 

LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES

 

INDEX

 

				Page
PART I		FINANCIAL INFORMATION		1
Item 1.		Financial Statements (unaudited)		1
		Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021		1
		Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021		2
		Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2022 and 2021		3
		Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021		4
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021		5
		Notes to Consolidated Financial Statements		6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 4.		Controls and Procedures		38
PART II		OTHER INFORMATION		39
Item 1.		Legal Proceedings		39
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		39
Item 3.		Defaults Upon Senior Securities		39
Item 4.		Mine Safety Disclosures		39
Item 5.		Other Information		39
Item 6.		Exhibits		40

 

i

 

 

PART I. FINANCIAL INFORMATION:

ITEM 1. FINANCIAL STATEMENTS:

 

LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except per share data)

 

		September 30, 2022				December 31, 2021
		(unaudited)
Assets
Investment property:
Land and improvements		$	21,678			$	21,662
Building and improvements			91,978				91,919
Furniture and fixtures			16,423				16,291
Construction in progress			79				115
Gross investment property			130,158				129,987
Less accumulated depreciation			(31,262	)			(27,638	)
Net investment property			98,896				102,349
Investments in unconsolidated affiliated real estate entities			22,386				23,545
Cash and cash equivalents			19,495				16,639
Marketable securities, available for sale			1,639				1,810
Accounts receivable and other assets			2,577				1,554
Total Assets		$	144,993			$	145,897
Liabilities and Stockholders’ Equity
Accounts payable and other accrued expenses		$	3,158			$	2,942
Mortgages payable, net			60,777				60,691
Notes payable			-				1,869
Due to related parties			302				301
Total liabilities			64,237				65,803
Commitments and Contingencies
Stockholders’ Equity:
Company’s stockholders’ equity:
Preferred stock, $0.01 par value; 50.0 million shares authorized, none issued and outstanding			-				-
Common stock, $0.01 par value; 200.0 million shares authorized, 13.0 million and 13.1 million shares issued and outstanding, respectively.			130				131
Additional paid-in-capital			111,724				112,581
Accumulated other comprehensive loss			(236	)			(107	)
Accumulated deficit			(42,954	)			(44,603	)
Total Company stockholders’ equity			68,664				68,002
Noncontrolling interests			12,092				12,092
Total Stockholders’ Equity			80,756				80,094
Total Liabilities and Stockholders’ Equity		$	144,993			$	145,897

 

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 REIT III, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2022				2021				2022				2021
Revenues		$	8,218			$	6,807			$	21,949			$	15,876
Expenses:
Property operating expenses			5,063				4,103				13,591				9,994
Real estate taxes			221				341				928				1,084
General and administrative costs			593				560				1,871				1,751
Depreciation and amortization			1,191				1,282				3,673				3,834
Total operating expenses			7,068				6,286				20,063				16,663
Operating income/(loss)			1,150				521				1,886				(787	)
Interest expense			(930	)			(714	)			(2,300	)			(2,092	)
Earnings from investments in unconsolidated affiliated real estate entities			283				125				184				(290	)
Gain on forgiveness of debt			762				455				1,893				906
Other income/(loss), net			74				31				(14	)			106
Net income/(loss)			1,339				418				1,649				(2,157	)
Less: net loss/(income) attributable to noncontrolling interests			-				-				-				-
Net income/(loss) applicable to Company’s common shares		$	1,339			$	418			$	1,649			$	(2,157	)
Net income/(loss) per Company’s common shares, basic and diluted		$	0.10			$	0.03			$	0.13			$	(0.16	)
Weighted average number of common shares outstanding, basic and diluted			13,060				13,229				13,091				13,230

 

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

 

2

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2022				2021				2022				2021
Net income/(loss)		$	1,339			$	418			$	1,649			$	(2,157	)
Other comprehensive (loss)/income:
Holding (loss)/gain on marketable securities, available for sale			(53	)			(23	)			(129	)			81
Reclassification adjustment for loss included in net loss			-				-				-				23
Other comprehensive (loss)/income			(53	)			(23	)			(129	)			104
Comprehensive income/(loss)			1,286				395				1,520				(2,053	)
Less: Comprehensive (income)/loss attributable to noncontrolling interests			-				-				-				-
Comprehensive income/(loss) attributable to the Company’s common shares		$	1,286			$	395			$	1,520			$	(2,053	)

 

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 REIT III, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in thousands)

(Unaudited)

 

		Common								Additional Paid-In				Accumulated Other Comprehensive				Accumulated				Total Noncontrolling				Total
		Shares				Amount				Capital				Loss				Deficit				Interests				Equity
BALANCE, June 30, 2021			13,230			$	132			$	113,205			$	(94	)		$	(44,445	)		$	12,092			$	80,890
Net income			-				-				-				-				418				-				418
Other comprehensive loss			-				-				-				(23	)			-				-				(23	)
Redemption and cancellation of common shares			(1	)			-				(8	)			-				-				-				(8	)
BALANCE, September 30, 2021			13,229			$	132			$	113,197			$	(117	)		$	(44,027	)		$	12,092			$	81,277

 

		Common								Additional Paid-In				Accumulated Other Comprehensive				Accumulated				Total Noncontrolling				Total
		Shares				Amount				Capital				Loss				Deficit				Interests				Equity
BALANCE, December 31, 2020			13,230			$	132			$	113,205			$	(221	)		$	(41,870	)		$	12,092			$	83,338
Net loss			-				-				-				-				(2,157	)			-				(2,157	)
Other comprehensive income			-				-				-				104				-				-				104
Redemption and cancellation of common shares			(1	)			-				(8	)			-				-				-				(8	)
BALANCE, September 30, 2021			13,229			$	132			$	113,197			$	(117	)		$	(44,027	)		$	12,092			$	81,277

 

		Common								Additional Paid-In				Accumulated Other Comprehensive				Accumulated				Total Noncontrolling				Total
		Shares				Amount				Capital				Loss				Deficit				Interests				Equity
BALANCE, June 30, 2022			13,069			$	130			$	111,839			$	(183	)		$	(44,293	)		$	12,092			$	79,585
Net income			-				-				-				-				1,339				-				1,339
Other comprehensive loss			-				-				-				(53	)			-				-				(53	)
Redemption and cancellation of shares			(12	)			-				(115	)			-				-				-				(115	)
BALANCE, September 30, 2022			13,057			$	130			$	111,724			$	(236	)		$	(42,954	)		$	12,092			$	80,756

 

		Common								Additional Paid-In				Accumulated Other Comprehensive				Accumulated				Total Noncontrolling				Total
		Shares				Amount				Capital				Loss				Deficit				Interests				Equity
BALANCE, December 31, 2021			13,152			$	131			$	112,581			$	(107	)		$	(44,603	)		$	12,092			$	80,094
Net income			-				-				-				-				1,649				-				1,649
Other comprehensive loss			-				-				-				(129	)			-				-				(129	)
Redemption and cancellation of shares			(95	)			(1	)			(857	)			-				-				-				(858	)
BALANCE, September 30, 2022			13,057			$	130			$	111,724			$	(236	)		$	(42,954	)		$	12,092			$	80,756

 

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

 

4

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

ITEM 1. FINANCIAL STATEMENTS, CONTINUED:

 

LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

		For the Nine Months Ended September 30,
		2022				2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss)		$	1,649			$	(2,157	)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Earnings from investments in unconsolidated affiliated real estate entities			(184	)			290
Depreciation and amortization			3,673				3,834
Amortization of deferred financing costs			183				103
Gain on forgiveness of debt			(1,893	)			(906	)
Other non-cash adjustments			142				39
Changes in assets and liabilities:
Increase in accounts receivable and other assets			(1,081	)			(610	)
Increase in accounts payable and other accrued expenses			240				727
Increase in due to related parties			1				1
Net cash provided by operating activities			2,730				1,321
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment property			(261	)			(183	)
Purchase of marketable securities			(2	)			(1	)
Proceeds from sale of marketable securities			-				1,500
Distributions from unconsolidated affiliated real estate entity			1,636				500
Investments in unconsolidated affiliated real estate entity			(293	)			(12,227	)
Net cash provided by/(used in) investing activities			1,080				(10,411	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on mortgages payable			-				(4,223	)
Proceeds received from notes payable			-				1,869
Payment of loan fees and expenses			(96	)			(91	)
Redemption and cancellation of common shares			(858	)			(8	)
Net cash used in financing activities			(954	)			(2,453	)
Net change in cash, cash equivalents and restricted cash			2,856				(11,543	)
Cash, cash equivalents and restricted cash, beginning of year			16,639				29,971
Cash, cash equivalents and restricted cash, end of period		$	19,495			$	18,428
Supplemental cash flow information for the periods indicated is as follows:
Cash paid for interest		$	1,209			$	959
Accrued finance fee - related party		$	-			$	144
Holding loss/gain on marketable securities, available for sale		$	129			$	104
The following is a summary of the Company’s cash, cash equivalents and restricted cash total as presented in our statements of cash flows for the periods presented:
Cash and cash equivalents		$	19,495			$	15,753
Restricted cash			-				2,675
Total cash, cash equivalents and restricted cash		$	19,495			$	18,428

 

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

 

5

 

 

LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

1.

Structure

 

Lightstone Value Plus REIT III, Inc. (“Lightstone REIT III”), which was formerly known as Lightstone Value Plus Real Estate Investment Trust III, Inc. before September 16, 2021, 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 September 30, 2022, Lightstone REIT III had a 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 September 30, 2022, the Company (i) majority owned and consolidated the operating results and financial condition of eight limited service hotels containing a total of 872 rooms, (ii) held an unconsolidated 50.0% membership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”) and (iii) held an unconsolidated 25.0% membership interest in Bedford Avenue Holdings LLC (the “Williamsburg Moxy Hotel Joint Venture”). The Company accounts for its unconsolidated membership interests in the Hilton Garden Inn Joint Venture and the Williamsburg Moxy Hotel 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 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, 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.

 

6

 

 

LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

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.

 

Noncontrolling Interests – Partners of the Operating Partnership

 

Limited Partner

 

On July 16, 2014, the Advisor contributed $2 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 242 Subordinated Participation Interests for consideration of $12.1 million. The Subordinated Participation Interests were each purchased for $50 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 September 30, 2022, 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. See Note 8 – Related Party Transactions for additional information.

 

7

 

 

LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

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, 2021. The unaudited interim consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in the judgment of management for a fair presentation of the results for the periods presented. The accompanying unaudited consolidated financial statements of the Lightstone Value Plus REIT 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, 2021 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.

 

Revenue

 

The following table represents the total revenues from hotel operations on a disaggregated basis:

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
Revenues		2022				2021				2022				2021
Room		$	7,985			$	6,633			$	21,374			$	15,432
Food, beverage and other			233				174				575				444
Total revenues		$	8,218			$	6,807			$	21,949			$	15,876

 

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 September 30, 2022, Lightstone REIT III had a 99% general partnership interest in the common units of the Operating Partnership. All inter-company accounts and transactions have been eliminated in consolidation.

 

8

 

 

LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

COVID-19 Pandemic Operations and Liquidity Update

 

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and it remains highly unpredictable and dynamic and its ultimate 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, and the ongoing development, administration and ultimate effectiveness of vaccines, including booster shots. Accordingly, the ongoing COVID-19 pandemic may continue to have negative effects on the U.S. and global economies for the foreseeable future.

 

The extent to which the Company’s business may be affected by the ongoing COVID-19 pandemic will largely depend on both current and future developments, all of which are highly uncertain and cannot be reasonably predicted.

 

Furthermore, as a result of the COVID-19 pandemic, room demand and rental rates for the Company’s consolidated and unconsolidated hotels significantly declined starting in March 2020 at the onset of the pandemic; and while these metrics have improved since then (beginning late 2020 and continuing through the third quarter of 2022); room demand and rental rates still remain below their pre-pandemic historical levels for some of the Company’s hotels. Accordingly, the COVID-19 pandemic has negatively impacted the Company’s operations, financial position and cash flow; and while the severity of the impact has lessened considerably, the Company may experience a negative impact for the foreseeable future. The Company cannot currently estimate if and when room demand and rental rates will return to historical pre-pandemic levels for all of its hotels.

 

The Company also has a 25% membership interest in the Williamsburg Moxy Joint Venture, which is developing and constructing a 210-room branded hotel (the “Williamsburg Moxy Hotel”). To-date, the COVID-19 pandemic has not had any significant impact on development and construction of the Williamsburg Moxy Hotel, which is currently expected to open during the first quarter of 2023.

 

In light of the past, present and potential future impact of the COVID-19 pandemic on the operating results of its hotels, the Company has taken various actions to preserve its liquidity, including the following:

 

●

The Company has implemented cost reduction strategies for all of its hotels, leading to reductions in certain operating expenses and capital expenditures.

 

●

During 2020 and 2021, the Company obtained certain amendments to its revolving credit facility (the “Revolving Credit Facility”). See Note 5 for additional information.

 

●

In April 2020 and during the first quarter of 2021, the Company’s hotels received an aggregate of $1.5 million and $1.9 million, respectively, from loans provided under the federal Paycheck Protection Program (“PPP Loans”). See Note 6 for additional information.

 

●

Previously, in June 2019, the Board of Directors determined to suspend regular monthly distributions on the Company’s Common Shares and has not declared any distributions since the suspension. Additionally, in March 2020, the Board of Directors approved the suspension of all redemptions under the Company’s shareholder repurchase program (the “SRP”). Subsequently in May 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.

 

●

During 2020 and 2021, the Hilton Garden Inn Joint Venture obtained various amendments to its non-recourse mortgage loan secured by the Hilton Garden Inn-Long Island City. See Note 3 for additional information.

 

9

 

 

LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

On July 13, 2022, the maturity date of the Revolving Credit Facility was extended until July 13, 2023.

 

The Company believes that these actions, along with its available cash on hand and marketable securities, as well as its intention to seek to further extend the maturity date of the Revolving Credit Facility to July 13, 2024 subject to the conditions, including the lender’s approval, of the remaining one year extension option, as discussed in Note 5, will provide it with sufficient liquidity to meet its obligations for at least 12 months from the date of issuance of these consolidated financial statements.

 

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

 

									As of
Entity		Date of Ownership			Ownership %				September 30, 2022				December 31, 2021
LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”)		March 27, 2018				50.00	%		$	10,043			$	11,180
Bedford Avenue Holdings LLC (the “Williamsburg Moxy Hotel Joint Venture”)		August 5, 2021				25.00	%			12,343				12,365
Total investments in unconsolidated affiliated real estate entities									$	22,386			$	23,545

 

 

Hilton Garden Inn Joint Venture

 

On March 27, 2018, the Company and Lightstone Value Plus REIT II, Inc. (“Lightstone REIT II”), a REIT also sponsored by the Company’s Sponsor and a related party, acquired, through the Hilton Garden Inn Joint Venture, a 183-room, limited-service hotel located at 29-21 41^st 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.

 

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.

 

10

 

 

LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

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 previously 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.

 

As of September 30, 2022, the Hilton Garden Inn Joint Venture is in compliance with respect to all of its financial debt covenants. 

 

Subsequent to the Company’s acquisition of its 50.0% membership interest in the Hilton Garden Joint Venture through September 30, 2022, it has made an aggregate of $2.8 million of additional capital contributions (all of which was made prior to 2022) and received aggregate distributions of $3.5 million (of which $1.5 million was received in 2022).

 

Hilton Garden Inn Joint Venture Financial Information

 

The following table represents the condensed statements of operations for the Hilton Garden Inn Joint Venture for the periods indicated:

 

		For the Three Months Ended September 30, 2022				For the Three Months Ended September 30, 2021				For the Nine Months Ended September 30, 2022				For the Nine Months Ended September 30, 2021
Revenues		$	3,130			$	2,043			$	8,208			$	5,226
Property operating expenses			1,844				1,107				4,790				3,016
General and administrative costs			2				10				18				27
Depreciation and amortization			609				620				1,835				1,876
Operating income			675				306				1,565				307
Gain on forgiveness of debt			516				381				516				381
Interest expense			(466	)			(437	)			(1,341	)			(1,268	)
Net income/(loss)		$	725			$	250			$	740			$	(580	)
Company’s share of net income/(loss) (50.00%)		$	363			$	125			$	370			$	(290	)

 

11

 

 

LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

The following table represents the condensed balance sheets for the Hilton Garden Inn Joint Venture as of the dates indicated:

 

		As of				As of
(amounts in thousands)		September 30, 2022				December 31, 2021
Investment property, net		$	50,844			$	52,415
Cash			1,370				2,841
Other assets			1,479				1,204
Total assets		$	53,693			$	56,460
Mortgage payable, net		$	32,322			$	33,115
Other liabilities			1,885				1,585
Members’ capital			19,486				21,760
Total liabilities and members’ capital		$	53,693			$	56,460

 

Williamsburg Moxy Hotel Joint Venture

 

On August 5, 2021, the Company formed the Williamsburg Moxy Hotel Joint Venture with Lightstone Value Plus REIT IV, Inc. (“Lightstone REIT IV”), a REIT also sponsored by the Company’s Sponsor and a related party, pursuant to which the Company acquired 25% of Lightstone REIT IV’s membership interest in Bedford Avenue Holdings LLC for aggregate consideration of $7.9 million.

 

Subsequent to its initial acquisition, the Company has made additional net capital contributions to the Williamsburg Moxy Hotel Joint Venture of $4.3 million through September 30, 2022 (of which $0.2 million was made during the nine months ended September 30, 2022).

 

Bedford Avenue Holdings LLC previously acquired four adjacent parcels of land located at 353-361 Bedford Avenue in the Williamsburg neighborhood of Brooklyn in New York City, on which it is developing and constructing a 210-room branded hotel (the “Williamsburg Moxy Hotel”).

 

As a result, the Company and Lightstone REIT IV have 25% and 75% membership interests, respectively, in the Williamsburg Moxy Hotel Joint Venture. The Company has determined that the Williamsburg Moxy Hotel Joint Venture is a variable interest entity and the Company is not the primary beneficiary, as it was determined that REIT IV is the primary beneficiary. The Company accounts for its membership interest in the Williamsburg Moxy Hotel Joint Venture in accordance with the equity method because it exerts significant influence over but does not control the Williamsburg Moxy Hotel Joint Venture. All capital contributions and distributions of earnings from the Williamsburg Moxy Hotel 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 Williamsburg Moxy Hotel Joint Venture are made to the members pursuant to the terms of the Williamsburg Moxy Hotel Joint Venture’s operating agreement. The Williamsburg Moxy Hotel is currently under construction and currently expected to open during the first quarter of 2023.

 

In preparation for the opening of the Williamsburg Moxy Hotel, the Williamsburg Moxy Hotel Joint Venture incurred pre-opening costs of $0.3 million and $0.7 million during the three and nine months ended September 30, 2022, respectively. No pre-opening costs were incurred in the 2021 periods. Pre-opening costs generally consist of non-recurring personnel, marketing and other costs.

 

12

 

 

LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

Moxy Construction Loan

 

On August 5, 2021, the Williamsburg Moxy Hotel Joint Venture entered into a recourse construction loan facility for up to $77.0 million (the “Moxy Construction Loan”) to fund the development, construction and certain pre-opening costs associated with the Williamsburg Moxy Hotel. The Moxy Construction Loan is scheduled to initially mature on February 5, 2024, with two, six-month extension options, subject to the satisfaction of certain conditions. The Moxy Construction Loan bears interest at LIBOR plus 9.00%, subject to a 9.50% floor, with the first 7.50% drawn under the facility and the excess added to the outstanding loan balance due at maturity. The Moxy Construction Loan is collateralized by the Williamsburg Moxy Hotel.

 

As of September 30, 2022 and December 31, 2021, the outstanding principal balance of the Moxy Construction Loan was $53.0 million (including $0.9 million of interest capitalized to principal) which is presented, net of deferred financing fees of $2.4 million and $18.6 million (including $0.1 million of interest capitalized to principal) which is presented, net of deferred financing fees of $3.7 million, respectively, on the condensed balance sheets and is classified as loans payable, net. As of September 30, 2022, the remaining availability under the facility was up to $24.9 million and its interest rate was 11.76%.

 

In connection with the Moxy Construction Loan, the Williamsburg Moxy Hotel Joint Venture has provided certain completion and carry cost guarantees.

 

Williamsburg Moxy Hotel Joint Venture Financial Information

 

The Williamsburg Moxy Hotel Joint Venture had no operating results from August 5, 2021 (date of acquisition) through December 31, 2021. The following table represents the condensed statements of operations for the Williamsburg Moxy Joint Venture for the periods indicated:

 

		For the Three Months Ended September 30, 2022				For the Nine Months Ended September 30, 2022
Pre-opening costs		$	319			$	738
General and administrative costs			1				8
Net loss		$	(320	)		$	(746	)
Company’s share of net loss (25%)		$	(80	)		$	(187	)

 

Williamsburg Moxy Hotel Joint Venture Financial Information

 

The following table represents the condensed balance sheets for the Williamsburg Moxy Hotel Joint Venture as of the dates indicated:

 

		As of				As of
(amounts in thousands)		September 30, 2022				December 31, 2021
Construction in progress		$	104,119			$	73,000
Cash			1,294				101
Other assets			1,461				423
Total assets		$	106,874			$	73,524
Loans payable, net		$	50,625			$	14,844
Other liabilities			7,464				9,822
Members’ capital			48,785				48,858
Total liabilities and members’ capital		$	106,874			$	73,524

 

13

 

 

LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(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:

 

		As of September 30, 2022
		Adjusted Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Marketable Securities:
Equity securities:
Preferred Equity Securities		$	961			$	-			$	(47	)		$	914
Mutual Funds			221				-				(6	)			215
			1,182				-				(53	)			1,129
Debt securities:
Corporate Bonds			746				-				(236	)			510
Total		$	1,928			$	-			$	(289	)		$	1,639

 

		As of December 31, 2021
		Adjusted Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Marketable Securities:
Equity securities:
Preferred Equity Securities		$	961			$	-			$	(8	)		$	953
Mutual Funds			219				-				(1	)			218
			1,180				-				(9	)			1,171
Debt securities:
Corporate Bonds			746				-				(107	)			639
Total		$	1,926			$	-			$	(116	)		$	1,810

 

The Company considers the declines in market value of its investments in debt securities to be temporary in nature as the unrealized losses were caused primarily by financial market volatility. 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 nine months ended September 30, 2022 and 2021, the Company did not recognize any impairment charges on its investments in debt securities. As of September 30, 2022, 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.

 

14

 

 

LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

Fair Value Measurements

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

 

The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

 

	●	Level 1 – Quoted prices in active markets for identical assets or liabilities.
	●	Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
	●	Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

As of September 30, 2022, the Company’s mutual funds were classified as Level 1 assets and the Company’s equity securities and corporate bonds were classified as Level 2 assets. There were no transfers between the level classifications during the nine months ended September 30, 2022.

 

The fair values of the Company’s investments in mutual funds are measured using quoted prices in active markets for identical assets and its preferred equity securities and corporate bonds are measured using readily available quoted prices for these securities; however, the markets for these securities are not active.

 

The 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 September 30, 2022
Due in 1 year		$	-
Due in 1 year through 5 years			-
Due in 5 year through 10 years			-
Due after 10 years			510
Total		$	510

 

The Company did not have any other significant financial assets or liabilities, which would require revised valuations that are recognized at fair value.

 

15

 

 

LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

5.	Mortgages payable, net

 

Mortgages payable, net consists of the following:

 

				Weighted Average Interest Rate
Description		Interest Rate		as of September 30, 2022				Maturity Date		Amount Due at Maturity				As of September 30, 2022				As of December 31, 2021
Revolving Credit Facility		AMERIBOR + 3.15% (floor of 4.00%)			4.48	%		July 2023		$	34,573			$	34,573			$	34,573
Home2 Suites Tukwila Loan		LIBOR + 3.50% (floor of 3.75%)			4.61	%		December 2026			15,006				16,210				16,210
Home2 Suites Salt Lake City Loan		LIBOR + 3.50% (floor of 3.75%)			4.61	%		December 2026			9,757				10,540				10,540
Total mortgages payable					4.54	%				$	59,336				61,323				61,323
Less: Deferred financing costs															(546	)			(632	)
Total mortgage payable, net														$	60,777			$	60,691

 

LIBOR as of September 30, 2022 and December 31, 2021 was 2.52% and 0.10%, respectively. AMERIBOR as of September 30, 2022 was 2.40%.

 

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. The Revolving Credit Facility provides for monthly interest-only payments and the entire principal balance is due upon its expiration.

 

Except as discussed below, the Revolving Credit Facility, which was scheduled to mature on July 13, 2022, bore interest at LIBOR + 3.15%, subject to a 4.00% floor. However, on July 13, 2022, the maturity date of the Revolving Credit Facility was extended to July 13, 2023, subject to the conditions of the first one-year extension options, which included the lender’s approval. In connection with the extension of the Revolving Credit Facility, the interest rate was prospectively changed to AMERIBOR + 3.15%, subject to a 4.00% floor. The remaining one-year extension option is subject to certain conditions, including lender approval.

 

16

 

 

LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

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 (which was paid in connection with the extension of the Revolving Credit Facility as discussed above); (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 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 of $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, subject to certain conditions, including the lender’s approval (including the first extension option which was exercised on July 13, 2022); and (v) certain limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.

 

As of both September 30, 2022 and December 31, 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 September 30, 2022. Although the Revolving Credit Facility is scheduled to mature on July 13, 2023, the Company currently intends to seek to further extend the maturity date of the Revolving Credit Facility to July 13, 2024 subject to the conditions, including the lender’s approval, of the one remaining one-year extension option, however, there can be no assurances that it will be successful in such endeavors.

 

Principal Maturities

 

The following table sets forth the aggregate estimated contractual principal maturities of the Company’s mortgages payable, including balloon payments due at maturity, as of September 30, 2022:

 

		Remainder of 2022				2023				2024				2025				2026				Thereafter				Total
Principal maturities		$	-			$	34,573			$	656			$	684			$	25,410			$	-			$	61,323
Less: Deferred financing costs																											(546	)
Total principal maturities, net																										$	60,777

 

Certain of the Company’s debt agreements also contain clauses providing for prepayment penalties. The Company is currently in compliance with respect to all of its financial debt covenants. 

 

17

 

 

LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

6.

Notes Payable

 

During the first quarter of 2021, the Company, through various subsidiaries (each such entity, a “Borrower” and collectively, the “Borrowers”), received aggregate funding of $1.9 million through 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 Small Business Administration (“SBA”).

 

The PPP Loans each had a term of five years and provided for an interest rate of 1.00%. The payment of principal and interest on the PPP Loan was deferred until the day that the forgiven amount was 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 contained 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 could apply for and be granted forgiveness for all or a portion of the PPP Loans. Such forgiveness was determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act. In the event all or any portion of a PPP Loan was forgiven, the amount forgiven was applied to outstanding principal and recorded as income. The PPP Loans are subject to audit by the SBA for up to six years after the date the loans were forgiven.

 

The PPP Loans were classified as Notes Payable in the consolidated balance sheets.

 

During the year ended December 31, 2021, the Company received notices from the SBA that all of the PPP Loans received in April 2020 totaling $1.5 million and their related accrued interest aggregating $19 had been legally forgiven, and as a result, the remaining PPP Loans had an outstanding balance of $1.9 million as of December 31, 2021. During the three and nine months ended September 30, 2021, the Company recognized a gain on forgiveness of debt of $0.5 million and $0.9 million, respectively, on its consolidated statements of operations representing the PPP Loans and related accrued interest legally forgiven in the periods.

 

During the three and nine months ended September 30, 2022, the Company received notices from the SBA that $0.8 million and $1.9 million, respectively, of additional PPP Loans and related accrued interest had been legally forgiven and therefore, recognized a gain on forgiveness of debt for these amounts on its consolidated statements of operations during those periods, respectively. As a result, all of the PPP Loans received have been legally forgiven and no amounts were owed as of September 30, 2022.

 

18

 

 

LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

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.

 

Future distributions declared, if any, will be at the discretion of the Board of Directors based on their analysis of the Company’s performance over the previous periods and expectations of performance for future periods. The Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, revenues and other sources of income, operating and interest expenses and the Company’s ability to refinance near-term debt as well as the IRS’s annual distribution requirement that REITs distribute no less than 90% of their taxable income. The Company cannot assure that any future distributions will be made or that it will maintain any particular level of distributions that it has previously established or may establish.

 

Share Repurchase Program

 

The Company’s SRP may provide its eligible stockholders with limited, interim liquidity by enabling them to sell their Common Shares back to the Company, subject to restrictions and applicable law.

 

On March 19, 2020, the Board of Directors amended the SRP to remove stockholder notice requirements and also approved the suspension of all redemptions.

 

Effective 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 the Company’s current estimated net asset value per share, as determined by the Board of Directors and reported by the Company from time to time.

 

Deaths that occurred subsequent to January 1, 2020 were eligible for consideration, subject to certain conditions. Beginning January 1, 2022, requests for redemptions in connection with a stockholder’s death must be submitted and received by the Company within one year of the stockholder’s date of death for consideration.

 

On the above noted date, the Board of Directors established that on an annual basis, the Company would not redeem in excess of 0.5% of the number of shares outstanding as of the end of the preceding year for either death or hardship redemptions, respectively. Additionally, redemption requests generally would be processed on a quarterly basis and would be subject to pro ration if either type of redemption requests exceeded the annual limitation.

 

For the nine months ended September 30, 2022 the Company repurchased 95,309 shares of common stock, pursuant to its SRP at an average price per share of $9.00 per share.

 

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.

 

19

 

 

LIGHTSTONE VALUE PLUS REIT III, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit data and where indicated in millions)
(Unaudited)

 

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:

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2022				2021				2022				2021
Finance fees (1)		$	-			$	144			$	-			$	144
Asset management fees (general and administrative costs)			302				301				905				904
Total		$	302			$	445			$	905			$	1,048

 

 

(1)

A finance fee of $144 paid to the Advisor in connection with arranging the Williamsburg Moxy Hotel Joint Venture’s construction loan was capitalized in 2021 and is included in investment in unconsolidated affiliated real estate entities on the consolidated balance sheets.

 

The advisory agreement has a one-year term and is renewable for an unlimited number of successive one-year periods upon the mutual consent of 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.

 

9.

Financial Instruments

 

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 and due to related parties approximate their fair values because of the short maturity of these instruments.

 

The carrying amount of the mortgages payable approximate fair value because the interest rates are variable and reflective of market 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.

 

20

 

 

PART I. FINANCIAL INFORMATION, CONTINUED:

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Lightstone Value Plus REIT III, Inc. and Subsidiaries and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Lightstone Value Plus REIT III, Inc., a Maryland corporation, and, as required by context, Lightstone Value Plus REIT III, L.P., which we collectively refer to as the “Operating Partnership”. Dollar amounts are presented in thousands, except per share data, revenue per available room (“RevPAR”), average daily rate (“ADR”) and where indicated in millions.

 

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 United States Securities and Exchange Commission (the “SEC”), contain or will contain, forward-looking statements. All statements, other than statements of historical facts, including, among others, statements regarding our possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives, are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of Lightstone Value Plus REIT III, 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, 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, financing and development risks, construction delays, cost overruns, the level and volatility of interest rates, the rate of revenue increases versus expense increases, our failure to make additional investments in real estate properties, restrictions in current financing arrangements, insurance, taxes and other property expenses, our failure 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 and uncertainties regarding the impact of the current COVID-19 pandemic, and restrictions and other measures intended to prevent its spread on our business and the economy generally, as well as other risks listed from time to time in this Form 10-Q, our Form 10-K and in our other reports filed with the SEC.

 

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

 

21

 

 

Structure

 

Lightstone Value Plus REIT III, Inc. (“Lightstone REIT III”), which was formerly known as Lightstone Value Plus Real Estate Investment Trust III, Inc. before September 16, 2021, 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 ending December 31, 2015.

 

Lightstone REIT III is structured as an umbrella partnership REIT (“UPREIT”), and substantially all of its current and future business is and will be conducted through Lightstone Value Plus REIT III LP, a Delaware limited partnership (the “Operating Partnership”). As of September 30, 2022, Lightstone REIT III had a 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 in this annual report refers to the Lightstone REIT III, its Operating Partnership or the Company as required by the context in which such pronoun is used.

 

We have 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 us alone or jointly with another party. We may also originate or acquire mortgage loans secured by real estate. Although we expect that most of our investments will be of these types, we may make other investments. In fact, we may invest in whatever types of real estate-related investments that we believe are in our best interests. We currently intend to hold our investments until such time as we determine that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that the objectives will not be met.

 

We currently have one operating segment. As of September 30, 2022, we (i) majority owned and consolidated the operating results and financial condition of eight limited service hotels containing a total of 872 rooms, (ii) held an unconsolidated 50.0% membership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”) and (iii) held an unconsolidated 25.0% membership interest in Bedford Avenue Holdings LLC (the “Williamsburg Moxy Hotel Joint Venture”). We account for our unconsolidated membership interests in the Hilton Garden Inn Joint Venture and the Williamsburg Moxy Hotel Joint Venture under the equity method of accounting.

 

Our 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 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. Our Advisor also owns 20,000 shares of our common stock (“Common Shares”) which were issued on December 24, 2012 for $200, or $10.00 per share. Mr. Lichtenstein also is the majority owner of the equity interests of the Lightstone Group, LLC. The Lightstone Group, LLC served as our sponsor (the “Sponsor”) during our 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 our board of directors (the “Board of Directors”), the Advisor has primary responsibility for making investment decisions on our behalf and managing our 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 our Offering. Mr. Lichtenstein also acts as our Chairman and Chief Executive Officer. As a result, he exerts influence over but does not control Lightstone REIT III or the Operating Partnership.

 

We do not have employees. The Advisor receives compensation and fees for services related to the investment and management of our assets.

 

Our Advisor has affiliated property managers (the “Property Managers”), which may manage certain of the properties we acquire. We also use other unaffiliated third-party property managers, principally for the management of our hospitality properties.

 

22

 

 

Our Common Shares are not currently listed on a national securities exchange. We may seek to list our Common Shares for trading on a national securities exchange only if a majority of our independent directors believe listing would be in the best interest of our stockholders. We do not intend to list our Common Shares at this time. We do not anticipate that there would be any active market for our Common Shares until they are listed for trading. In the event we do not begin the process of achieving a liquidity event prior to March 31, 2025, which is the eighth anniversary of the termination of our Offering, our charter requires either (a) an amendment to our charter to extend the deadline to begin the process of achieving a liquidity event, or (b) the holding of a stockholders meeting to vote on a proposal for an orderly liquidation of our portfolio.

 

Noncontrolling Interests – Partners of the Operating Partnership

 

Limited Partner

 

On July 16, 2014, the Advisor contributed $2 to the Operating Partnership in exchange for 200 limited partner units in the Operating Partnership. The Advisor has the right to convert the limited partner units into cash or, at our option, an equal number of our Common Shares.

 

Special Limited Partner

 

In connection with our Offering, which terminated on March 31, 2017, the Special Limited Partner purchased from the Operating Partnership an aggregate of 242 Subordinated Participation Interests for consideration of $12.1 million. The Subordinated Participation Interests were each purchased for $50 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 we make to our stockholders, but only after our stockholders have received a stated preferred return. From our inception through September 30, 2022, no distributions have been declared or paid on the Subordinated Participation Interests.

 

Tax Status

 

We elected to qualify and be taxed as a REIT for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2015. As a REIT, we generally will not be subject to U.S. federal income tax on our net taxable income that we distribute currently to our stockholders. To maintain our REIT qualification under the Internal Revenue Code of 1986, as amended, (the “Code”), we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income, which does not equal net income, as calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”), determined without regard to the deduction for dividends paid and excluding any net capital gain. If we fail to remain qualified for taxation as a REIT in any subsequent year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify as a REIT. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders.

 

We engage in certain activities through taxable REIT subsidiaries (“TRSs”), including when we acquire a hotel we usually establish a TRS which then enters into an operating lease agreement for the hotel. As such, we may be subject to U.S. federal and state income taxes and franchise taxes from these activities.

 

As of September 30, 2022 and December 31, 2021, we had no material uncertain income tax positions. Additionally, even if we continue to qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some U.S. federal, state and local taxes on our income and property and to U.S. federal income taxes and excise taxes on our undistributed income, if any.

 

23

 

 

Current Environment

 

Our operating results are substantially impacted by the overall health of local, U.S. national and global economies and may be influenced by market and other challenges. Additionally, our business and financial performance may be adversely affected by current and future economic and other conditions; including, but not limited to, availability or terms of financings, financial markets volatility, political upheaval or uncertainty, natural and man-made disasters, terrorism and acts of war, unfavorable changes in laws and regulations, outbreaks of contagious diseases, cybercrime, loss of key relationships, competition, inflation, recession, supply disruptions and labor shortages.

 

These and other market and economic challenges could materially affect (i) the value and performance of our investments, (ii) our ability to pay future distributions, if any, (iii) the availability or terms of financings, (iv) our ability to make scheduled principal and interest payments, and (v) our ability to refinance any outstanding debt when contractually due.

 

COVID-19 Pandemic Operations and Liquidity Update

 

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and it remains highly unpredictable and dynamic and its ultimate 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, and the ongoing development, administration and ultimate effectiveness of vaccines, including booster shots. Accordingly, the ongoing COVID-19 pandemic may continue to have negative effects on the U.S. and global economies for the foreseeable future.

 

The extent to which our business may be affected by the ongoing COVID-19 pandemic will largely depend on both current and future developments, all of which are highly uncertain and cannot be reasonably predicted.

 

Furthermore, as a result of the COVID-19 pandemic, room demand and rental rates for our consolidated and unconsolidated hotels significantly declined starting in March 2020 at the onset of the pandemic; and while these metrics have improved since then (beginning late 2020 and continuing through the third quarter of 2022); room demand and rental rates still remain below their pre-pandemic historical levels for some of our hotels. Accordingly, the COVID-19 pandemic has negatively impacted our operations, financial position and cash flow; and while the severity of the impact has lessened considerably, we may experience a negative impact for the foreseeable future. We cannot currently estimate if and when room demand and rental rates will return to historical pre-pandemic levels for all of our hotels.

 

We also have a 25% membership interest in Bedford Avenue Holdings LLC (the “Williamsburg Moxy Joint Venture”), which is developing and constructing a 210-room branded hotel (the “Williamsburg Moxy Hotel”). To-date, the COVID-19 pandemic has not had any significant impact on development and construction of the Williamsburg Moxy Hotel, which is expected to open during the first quarter of 2023.

 

In light of the past, present and potential future impact of the COVID-19 pandemic on the operating results of our hotels, we have taken various actions to preserve our liquidity, including the following: 

 

●

We have implemented cost reduction strategies for all of our hotels, leading to reductions in certain operating expenses and capital expenditures.

 

●

During 2020 and 2021, we obtained certain amendments to our revolving credit facility (the “Revolving Credit Facility”). See Note 5 of the Notes to Consolidated Financial Statements for additional information.

 

●

In April 2020 and during the first quarter of 2021, our hotels received an aggregate of $1.5 million and $1.9 million, respectively, from loans provided under the federal Paycheck Protection Program (“PPP Loans”). See Note 6 of the Notes to Consolidated Financial Statements for additional information.

 

24

 

 

●

Previously in June 2019, the Board of Directors determined to suspend regular monthly distributions on our Common Shares and have not declared any distributions since the suspension. Additionally, in March 2020, the Board of Directors approved the suspension of all redemptions under our shareholder repurchase program (the “SRP”). Subsequently in May 2021, the Board of Directors partially reopened the SRP to allow, subject to various conditions, for redemptions submitted in connection with a stockholder’s death or hardship. See Note 7 of the Notes to Consolidated Financial Statements for additional information.

 

●

During 2020 and 2021, the Hilton Garden Inn Joint Venture obtained various amendments to its non-recourse mortgage loan secured by the Hilton Garden Inn – Long Island City. See Note 3 of the Notes to Consolidated Financial Statements for additional information.

 

On July 13, 2022, the maturity of the Revolving Credit Facility was extended to July 13, 2023.

 

We believe that these actions, along with our available cash on hand and marketable securities, as well as our intention to seek to further extend the maturity date of the Revolving Credit Facility to July 13, 2024 subject to the conditions, including the lender’s approval, of the remaining one-year extension option, as discussed in Note 5 of the Notes to Consolidated Financial Statements, will provide us with sufficient liquidity to meet our obligations for at least 12 months from the date of issuance of these consolidated financial statements.

 

We are not currently aware of any other material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from our operations, other than those referred to above or throughout this Form 10-Q.

 

Portfolio Summary –

 

									Year to Date				Percentage Occupied for the Nine Months Ended				Rev PAR for the Nine Months Ended				ADR For the Nine Months Ended
		Location		Year Built			Date Acquired		Available Rooms				September 30, 2022				September 30, 2022				September 30, 2022
Wholly-Owned and Consolidated Hospitality Properties:
Hampton Inn – Des Moines		Des Moines, Iowa		1987			2/4/2015			32,760				64	%		$	73.64			$	115.36
Courtyard – Durham		Durham, North Carolina		1996			5/15/2015			39,858				60	%		$	63.08			$	105.71
Hampton Inn – Lansing		Lansing, Michigan		2013			3/10/2016			23,478				65	%		$	78.11			$	119.73
Courtyard – Warwick		Warwick, Rhode Island		2003			3/23/2016			25,116				72	%		$	98.81			$	137.08
Home2 Suites – Salt Lake		Salt Lake City, Utah		2013			8/2/2016			34,125				71	%		$	81.17			$	114.94
Home2 Suites – Tukwila		Tukwila, Washington		2015			8/2/2016			37,947				93	%		$	149.13			$	159.61
Fairfield Inn – Austin		Austin, Texas		2014			9/13/2016			22,932				78	%		$	74.99			$	95.91
Staybridge Suites – Austin		Austin, Texas		2009			10/7/2016			21,840				83	%		$	90.77			$	110.07
							Total			238,056				73	%		$	89.78			$	123.11

 

25

 

 

Unconsolidated Affiliated Real Estate Entity:

 

Year to Date

Percentage Occupied for the Nine Months Ended

Rev PAR for the Nine Months Ended

ADR For the Nine Months Ended

Hospitality

Location

Year Built

Date Acquired

Available Rooms

September 30, 2022

September 30, 2022

September 30, 2022

Hilton Garden Inn - Long Island City

Long Island City, New York

2014

3/27/2018

49,959

91

%

$

156.73

$

171.58

 

As of September 30, 2022, we held an unconsolidated 25.0% membership interest in the Williamsburg Moxy Hotel Joint Venture which is developing and constructing a 210-room branded hotel (the “Williamsburg Moxy Hotel”) in the Williamsburg neighborhood of Brooklyn in New York City, which is currently expected to open during the first quarter of 2023.

 

Critical Accounting Policies and Estimates

 

There were no material changes during the nine months ended September 30, 2022 to our critical accounting policies as reported in our Annual Report on Form 10-K, for the year ended December 31, 2021.

 

Results of Operations

 

We currently have one operating segment. As of September 30, 2022, we (i) majority owned and consolidated the operating results and financial condition of eight limited service hotels containing a total of 872 rooms, (ii) held an unconsolidated 50.0% membership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”) and (iii) held an unconsolidated 25.0% membership interest in Bedford Avenue Holdings LLC (the “Williamsburg Moxy Hotel Joint Venture”). We account for our unconsolidated membership interests in the Hilton Garden Inn Joint Venture and the Williamsburg Moxy Hotel Joint Venture under the equity method of accounting.

 

Comparison of the three months ended September 30, 2022 vs. September 30, 2021

 

Consolidated

 

Our consolidated revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation and amortization for the three months ended September 30, 2022 and 2021 are attributable to our consolidated hospitality properties, all of which were owned by us during the entire periods presented.

 

As a result of the COVID-19 pandemic, room demand and rental rates for our consolidated and unconsolidated hotels significantly declined starting in March 2020 at the onset of the pandemic; and while these metrics have improved since then (beginning late 2020 and continuing through the third quarter of 2022); room demand and rental rates remain below their pre-pandemic historical levels for some of our hotels. Overall, our hospitality portfolio experienced a slight decrease in the percentage of rooms occupied from 75% to 74% for the third quarter of 2021 and 2022, respectively, and increases in RevPAR from $82.68 to $99.53 for the third quarter of 2021 and 2022, respectively, and the ADR from $110.00 to $135.00 for the third quarter of 2021 and 2022, respectively.

 

Revenues

 

Revenues increased by $1.4 million to $8.2 million during the three months ended September 30, 2022 compared to $6.8 million for the same period in 2021. This increase reflects the higher RevPAR and ADR during the 2022 period partial offset by the slightly lower occupancy.

 

Property operating expenses

 

Property operating expenses increased by $1.0 million to $5.1 million during the three months ended September 30, 2022 compared to $4.1 million for the same period in 2021. This increase reflects higher labor costs, property management fees and franchise fees during the 2022 period.

 

26

 

 

Real estate taxes

 

Real estate taxes decreased slightly by $0.1 million to $0.2 million during the three months ended September 30, 2022 compared to $0.3 million for the same period in 2021.

 

General and administrative costs

 

General and administrative costs were unchanged at $0.6 million during both the three months ended September 30, 2022 and 2021.

 

Depreciation and amortization

 

Depreciation and amortization expense decreased slightly by $0.1 million to $1.2 million during the three months ended September 30, 2022 compared to $1.3 million for the same period in 2021.

 

Interest expense

 

Interest expense increased by $0.2 million to $0.9 million during the three months ended September 30, 2022 compared to $0.7 million for the same period in 2021. Interest expense is attributable to financings associated with our hotels and also reflect changes in LIBOR and AMERIBOR during these periods.

 

Gain on forgiveness of debt

 

During the three months ended September 30, 2022 and 2021 notice was received from the Small Business Administration (“SBA”) that $0.8 million and $0.5 million, respectively, of PPP Loans and related accrued interest had been legally forgiven and therefore, we recognized a gain on forgiveness of debt for these amounts during those periods.

 

Earnings from investments in unconsolidated affiliated real estate entities

 

Our income from investments in unconsolidated affiliated real estate entities was $0.3 million during the three months ended September 30, 2022 compared to $0.1 million for the same period in 2021. Our earnings from investments in unconsolidated affiliated real estate entities are attributable to our unconsolidated 50.0% membership interest in the Hilton Garden Inn Joint Venture and our unconsolidated 25.0% membership interest Williamsburg Moxy Hotel Joint Venture.

 

Comparison of the nine months ended September 30, 2022 vs. September 30, 2021

 

Consolidated

 

Our consolidated revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation and amortization for the nine months ended September 30, 2022 and 2021 are attributable to our consolidated hospitality properties, all of which were owned by us during the entire periods presented.

 

As a result of the COVID-19 pandemic, room demand and rental rates for our consolidated and unconsolidated hotels significantly declined starting in March 2020 at the onset of the pandemic; and while these metrics have improved since then (beginning late 2020 and continuing through the third quarter of 2022); room demand and rental rates remain below their pre-pandemic historical levels for some of our hotels. Overall, our hospitality portfolio experienced increases in the percentage of rooms occupied from 68% to 73% for the nine months ended September 30, 2021 and 2022, respectively, RevPAR from $64.83 to $89.78 for the nine months ended September 30, 2021 and 2022, respectively, and the ADR from $95.61 to $123.11 for the nine months ended September 30, 2021 and 2022, respectively.

 

27

 

 

Revenues

 

Revenues increased by $6.0 million to $21.9 million during the nine months ended September 30, 2022 compared to $15.9 million for the same period in 2021. This increase reflects the higher occupancy, RevPAR and ADR during the 2022 period.

 

Property operating expenses

 

Property operating expenses increased by $3.6 million to $13.6 million during the nine months ended September 30, 2022 compared to $10.0 million for the same period in 2021. This increase is attributable to higher occupancy but also reflects higher labor costs, property management and franchise fees during the 2022 period.

 

Real estate taxes

 

Real estate taxes decreased by $0.2 million to $0.9 million during the nine months ended September 30, 2022 compared to $1.1 million for the same period in 2021.

 

General and administrative costs

 

General and administrative costs increased slightly by $0.1 million to $1.9 million during the nine months ended September 30, 2022 compared to $1.8 million for the same period in 2021.

 

Depreciation and amortization

 

Depreciation and amortization expense decreased slightly by $0.1 million to $3.7 million during the nine months ended September 30, 2022 compared to $3.8 million for the same period in 2021.

 

Interest expense

 

Interest expense increased by $0.2 million to $2.3 million during the nine months ended September 30, 2022 compared to $2.1 million for the same period in 2021. Interest expense is attributable to financings associated with our hotels and also reflects the changes in LIBOR and AMERIBOR during these periods.

 

Gain on forgiveness of debt

 

During the nine months ended September 30, 2022 and 2021 notice was received from the SBA that $1.9 million and $0.9 million, respectively, of PPP Loans and related accrued interest had been legally forgiven and therefore, we recognized a gain on forgiveness of debt for these amounts during those periods.

 

Earnings from investments in unconsolidated affiliated real estate entities

 

Our income from investments in unconsolidated affiliated real estate entities was $0.2 million during the nine months ended September 30, 2022 compared to a loss of $0.3 million for the same period in 2021. Our earnings from investments in unconsolidated affiliated real estate entities are attributable to our unconsolidated 50.0% membership interest in the Hilton Garden Inn Joint Venture and our unconsolidated 25.0% membership interest Williamsburg Moxy Hotel Joint Venture.

 

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Financial Condition, Liquidity and Capital Resources

 

Overview:

 

Revenues, interest and dividend income, proceeds from the sale of marketable securities, cash on hand and borrowings are our principal sources of funds to pay operating expenses, scheduled debt service, capital expenditures (excluding non-recurring capital expenditures), contributions to our unconsolidated affiliated entities, redemptions and cancellations of shares of our common stock, if approved, and distributions, if any, required to maintain our status as a REIT.

 

We currently believe that these cash resources along with our available cash on hand of $19.5 million and marketable securities of $1.6 million, all as of September 30, 2022, as well as our intention to seek to further extend the maturity date of the Revolving Credit Facility to July 13, 2024, subject to the conditions, including the lender’s approval, of the remaining one-year, as discussed in Note 5 of the Notes to Consolidated Financial Statements, will be sufficient to satisfy our cash requirements for the foreseeable future, and we do not currently anticipate a need to raise funds from other than these sources within the next 12 months. However, to the extent that cash flow from operations and available cash on hand and marketable securities are not sufficient to cover our cash needs or our lender does not approve the remaining one-year extension option under the Revolving Credit Facility, we may use proceeds from additional borrowings and/or selective asset sales to fund such needs.

 

In light of the COVID-19 pandemic’s impact on our operating performance, we previously negotiated various changes to the terms of our Revolving Credit Facility, including modifications of financial covenants. See “Contractual Mortgage Obligations” for additional information.

 

As of September 30, 2022, we have $61.3 million of outstanding mortgage debt. We have and intend to continue to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to our stockholders. Market conditions will dictate our overall leverage limit; as such, our aggregate long-term permanent borrowings may be less than 75% of aggregate fair market value of all properties. We may also incur short-term indebtedness, having a maturity of two years or less.

 

Our charter provides that the aggregate amount of our borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a justification showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. Market conditions will dictate our overall leverage limit; as such, our aggregate borrowings may be less than 300% of net assets. As of September 30, 2022, our total borrowings were $61.3 million which represented 55% of our net assets.

 

Our borrowings currently consist of mortgages cross-collateralized by a pool of properties. Our mortgages typically provide for either interest-only payments (generally for variable-rate indebtedness) or level payments (generally for fixed-rate indebtedness) with “balloon” payments due at maturity.

 

Any future properties that we may acquire or develop may be funded through a combination of borrowings and the proceeds received from the disposition of certain of our assets. These borrowing may consist of single-property mortgages as well as mortgages cross-collateralized by a pool of properties. Such mortgages may be put in place either at the time we acquire a property or subsequent to our purchasing a property for cash. In addition, we may acquire properties that are subject to existing indebtedness where we choose to assume the existing mortgages. Generally, though not exclusively, we intend to seek to encumber our properties with non-recourse debt. This means that a lender’s rights on default will generally be limited to foreclosing on the property. However, we may, at our discretion, secure recourse financing or provide a guarantee to lenders if we believe this may result in more favorable terms. When we give a guaranty for a property owning entity, we will be responsible to the lender for the satisfaction of the indebtedness if it is not paid by the property owning entity.

 

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We may also obtain lines of credit to be used to acquire properties. If obtained, these lines of credit will be at prevailing market terms and will be repaid from proceeds from the sale or refinancing of properties, working capital and/or permanent financing. Our Sponsor and/or its affiliates may guarantee our lines of credit although they are not obligated to do so. We expect that such properties may be purchased by our Sponsor’s affiliates on our behalf, in our name, in order to minimize the imposition of a transfer tax upon a transfer of such properties to us.

 

In addition to meeting working capital needs and distributions, if any, made to maintain our status as a REIT, our capital resources are used to make certain payments to our Advisor, including payments related to asset acquisition fees and asset management fees, the reimbursement of acquisition-related expenses to our Advisor. We also reimburse our advisor for actual expenses it incurs for administrative and other services provided to us. Additionally, the Operating Partnership may be required to make distributions to Lightstone SLP III LLC, an affiliate of the Advisor.

 

We have agreements with the Advisor to pay certain fees in exchange for services performed by the Advisor and/or its affiliated entities. Upon the liquidation of assets, we may pay our Advisor or its affiliates a real estate disposition commission. Additionally, our Operating Partnership may be required to make distributions to Lightstone SLP III LLC, an affiliate of the Advisor.

 

The advisory agreement has a one-year term and is renewable for an unlimited number of successive one-year periods upon the mutual consent of the Advisor and our independent directors.

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2022				2021				2022				2021
Finance fees (1)		$	-			$	144			$	-			$	144
Asset management fees (general and administrative costs)			302				301				905				904
Total		$	302			$	445			$	905			$	1,048

 

 

(1)	A finance fee of $144 paid to the Advisor in connection with arranging the Williamsburg Moxy Hotel Joint Venture’s construction loan was capitalized in 2021 and is included in investment in unconsolidated affiliated real estate entities on the consolidated balance sheets.

 

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 Nine Months Ended September 30,
		2022				2021
Net cash provided by operating activities		$	2,730			$	1,321
Net cash provided by/(used in) investing activities			1,080				(10,411	)
Net cash used in financing activities			(954	)			(2,453	)
Net change in cash, cash equivalents and restricted cash			2,856				(11,543	)
Cash, cash equivalents and restricted cash, beginning of year			16,639				29,971
Cash, cash equivalents and restricted cash, end of the period		$	19,495			$	18,428

 

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Operating activities

 

The net cash provided by operating activities of $2.7 million during the nine months ended September 30, 2022 consisted of our net income of $1.6 million plus depreciation and amortization, amortization of deferred financing costs and other non-cash items aggregating $4.0 million partially offset by gain on forgiveness of debt of $1.9 million, gain from investments in unconsolidated affiliated real estate entities of $0.2 million and net changes in operating assets and liabilities of $0.8 million.

 

Investing activities

 

The net cash provided by investing activities of $1.1 million during the nine months ended September 30, 2022 consisted of distributions from our investment in the Hilton Garden Inn Joint Venture of $1.5 million partially offset by additional net investments in the Williamsburg Moxy Hotel Joint Venture of $0.2 million and capital expenditures of $0.3 million.

 

Financing activities

 

The cash used in financing activities of $1.0 million during the nine months ended September 30, 2022 consisted primarily of redemptions and cancellations of common shares.

 

Distributions on Common Shares

 

On June 19, 2019, our Board of Directors determined to suspend regular monthly distributions on our Common Shares and as a result, no distributions have been declared since the suspension.

 

Future distributions declared on our Common Shares, if any, will be at the discretion of the Board of Directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. The Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, revenues and sources of income, operating and interest expenses and our ability to refinance near-term debt as well as the IRS’s annual distribution requirement that REITs distribute no less than 90% of their taxable income. We cannot assure that any future distributions will be made or that we will maintain any particular level of distributions that we have previously established or may establish.

 

Contractual Mortgage Obligations

 

The following is a summary of the estimated contractual obligations related to our mortgage payable over the next five years and thereafter as of September 30, 2022.

 

Contractual Mortgage Obligations		Remainder of 2022				2023				2024				2025				2026				Thereafter				Total
Principal maturities		$	-			$	34,573			$	656			$	684			$	25,410			$	-			$	61,323
Interest payments(1)			651				1,615				1,610				1,703				3,189				-				8,768
Total Contractual Mortgage Obligations		$	651			$	36,188			$	2,266			$	2,387			$	28,599			$	-			$	70,091

 

 

(1)

These amounts represent future interest payments related to mortgage payable obligations based on the fixed and variable interest rates specified in the associated debt agreement. All variable rate debt agreements are based on one-month LIBOR rate, except for the Revolving Credit Facility which is based on the one-month AMERIBOR rate. For purposes of calculating future interest amounts on variable interest rate debt the one-month LIBOR and one-month AMERIBOR rates as of September 30, 2022 were used.

 

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Revolving Credit Facility

 

We, through certain subsidiaries, have a non-recourse Revolving Credit Facility with a financial institution. The Revolving Credit Facility provides us with a line of credit of up to $60.0 million pursuant to which we may designate properties as collateral that allow borrowings up to a 65.0% loan-to-value ratio subject to also meeting certain financial covenants. The Revolving Credit Facility provides for monthly interest-only payments and the entire principal balance is due upon its expiration.

 

Except as discussed below, the Revolving Credit Facility, which was scheduled to mature on July 13, 2022, bore interest at LIBOR + 3.15%, subject to a 4.00% floor. However, on July 13, 2022 the maturity date of the Revolving Credit Facility was extended to July 13, 2023, subject to the conditions of the first one-year extension options, which included the lender’s approval. In connection with the extension of the Revolving Credit Facility, the interest rate was prospectively changed to AMERIBOR + 3.15%, subject to a 4.00% floor. The remaining one-year extension option is subject to certain conditions, including lender approval.

 

On June 2, 2020, our 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 (which was paid in connection with the extension of the Revolving Credit facility as discussed above) ; (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) our pre-funding $0.8 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, of $0.3 million, which were made in June 2020 and September 2020.

 

Subsequently, on March 31, 2021, our Revolving Credit Facility was further amended providing for (i) us to make another principal paydown of $3.8 million, (ii) us 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, subject to certain conditions, including the lender’s approval (including the first extension option which was exercised on July 13, 2022); and (v) certain limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.

 

We are currently in compliance with respect to all of our financial debt covenants. 

 

As of September 30, 2022, the Revolving Credit Facility had an outstanding principal balance of $34.6 million and six of our hotel properties were pledged as collateral. Additionally, no additional borrowings were available under the Revolving Credit Facility as of September 30, 2022. Although the Revolving Credit Facility is scheduled to mature on July 13, 2023, we currently intend to seek to further extend the Revolving Credit Facility to July 13, 2024 subject to the conditions, including the lender’s approval, of the one remaining one-year extension option, however, there can be no assurances that we will be successful in such endeavors.

 

PPP Loans

 

During the first quarter of 2021, we, through various subsidiaries (each such entity, a “Borrower” and collectively, the “Borrowers”), received aggregate funding of $1.9 million through 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.

 

The PPP Loans were classified as Notes Payable on the consolidated balance sheets. 

 

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During the year ended December 31, 2021, we received notices from the SBA that all of the PPP Loans received in April 2020 totaling $1.5 million and their related accrued interest aggregating $19 had been legally forgiven and as a result, the remaining PPP Loans had an outstanding balance of $1.9 million as of December 31, 2021. During the three and nine months ended September 30, 2021, we recognized a gain on forgiveness of debt of $0.5 million and $0.9 million, respectively, on our consolidated statements of operations representing the PPP Loans and related accrued interest legally forgiven in the periods.

 

During the three and nine months ended September 30, 2022, we received notices from the SBA that $0.8 million and $1.9 million, respectively, of additional PPP Loans and related accrued interest had been legally forgiven and therefore, recognized a gain on forgiveness of debt for these amounts on our consolidated statements of operations during those periods, respectively. As a result, all of the PPP Loans received have been legally forgiven and no amounts were owed as of September 30, 2022. 

 

Our PPP Loans remain subject to audit by the SBA for up to six years after the date the loans were forgiven.

 

Investments in Unconsolidated Affiliated Entities

 

Hilton Garden Inn Joint Venture

 

On March 27, 2018, we and Lightstone Value Plus REIT II, Inc. (“Lightstone REIT II”), a REIT also sponsored by our Sponsor and a related party, acquired, through LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”), a 183-room, limited-service hotel located at 29-21 41st Avenue, Long Island City, New York (the “Hilton Garden Inn — Long Island City”) from an unrelated third party, for aggregate consideration of $60.0 million, which consisted of $25.0 million of cash and $35.0 million of proceeds from a loan from a financial institution (the “Hilton Garden Inn Mortgage”), excluding closing and other related transaction costs. We and Lightstone II each have a 50.0% membership interest in the Hilton Garden Inn Joint Venture.

 

We paid $12.9 million for a 50.0% membership interest in the Hilton Garden Inn Joint Venture. Our membership interest in the Hilton Garden Inn Joint Venture is a co-managing interest. We account for our membership interest in the Hilton Garden Inn Joint Venture in accordance with the equity method of accounting because we exert significant influence over but do 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. We commenced recording our allocated portion of profit/loss and cash distributions beginning as of March 27, 2018 with respect to our 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 previously entered into certain amendments with respect to its non-recourse mortgage loan (the Hilton Garden Inn Mortgage”) as discussed below.

 

On June 2, 2020, the Hilton Garden Inn Mortgage was amended to provide for (i) the deferral of the six monthly debt service payments aggregating $0.9 million for the period from April 1, 2020 through September 30, 2020 until March 27, 2023; (ii) a 100 bps reduction in the interest rate spread to LIBOR plus 2.15%, subject to a 4.03% floor, for the six-month period from September 1, 2020 through February 28, 2021; (iii) the Hilton Garden Inn Joint Venture pre-funding $1.2 million into a cash collateral reserve account to cover the six monthly debt service payments due from October 1, 2020 through March 1, 2021; and (iv) of all financial covenants for quarter-end periods before June 30, 2021.

 

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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.

 

As of September 30, 2022, the Hilton Garden Inn Joint Venture is currently in compliance with respect to all of its financial debt covenants. 

 

Subsequent to the acquisition of our 50.0% membership interest in the Hilton Garden Joint Venture through September 30, 2022, we made an aggregate of $2.8 million of additional capital contributions (all of which was made prior to 2022) and received aggregate distributions of $3.5 million (of which $1.5 million was received in 2022).

 

Williamsburg Moxy Hotel Joint Venture

 

On August 5, 2021, we formed a joint venture with Lightstone Value Plus REIT IV, Inc. (“Lightstone REIT IV”), a REIT also sponsored by the Sponsor and a related party, pursuant to which we acquired 25% of Lightstone REIT IV’s membership interest in the Bedford Avenue Holdings LLC (the “Williamsburg Moxy Hotel Joint Venture”) for aggregate consideration of $7.9 million.

 

Subsequent to our initial acquisition, we made additional net capital contributions to the Williamsburg Moxy Hotel Joint Venture of $4.3 million through September 30, 2022 (of which $0.2 million was made during the nine months ended September 30, 2022).

 

Bedford Avenue Holdings LLC previously acquired four adjacent parcels of land located at 353-361 Bedford Avenue in the Williamsburg neighborhood of Brooklyn in New York City, on which it is developing and constructing a 210-room branded hotel (the “Williamsburg Moxy Hotel”).

 

As a result, we and Lightstone REIT IV have 25% and 75% membership interests, respectively, in the Williamsburg Moxy Hotel Joint Venture. We account for our membership interest in the Williamsburg Moxy Hotel Joint Venture in accordance with the equity method because we exert significant influence over but do not control the Williamsburg Moxy Hotel Joint Venture. All capital contributions and distributions of earnings from the Williamsburg Moxy Hotel 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 Williamsburg Moxy Hotel Joint Venture are made to the members pursuant to the terms of the Williamsburg Moxy Hotel Joint Venture’s operating agreement. The Williamsburg Moxy Hotel is currently under construction and expected to open during the first quarter of 2023.

 

Moxy Construction Loan

 

On August 5, 2021, the Williamsburg Moxy Hotel Joint Venture entered into a recourse construction loan facility for up to $77.0 million (the “Moxy Construction Loan”) to fund the development, construction and certain pre-opening costs associated with the Williamsburg Moxy Hotel. The Moxy Construction Loan is scheduled to initially mature on February 5, 2024, with two, six-month extension options, subject to the satisfaction of certain conditions. The Moxy Construction Loan bears interest at LIBOR plus 9.00%, subject to a 9.50% floor, with the first 7.50% drawn under the facility and the excess added to the outstanding loan balance and due at maturity. The Moxy Construction Loan is collateralized by the Williamsburg Moxy Hotel.

 

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As of September 30, 2022 and December 31, 2021, the outstanding principal balance of the Moxy Construction Loan was $53.0 million (including $0.9 million of interest capitalized to principal) which is presented, net of deferred financing fees of $2.4 million and $18.6 million (including $0.1 million of interest capitalized to principal) which is presented, net of deferred financing fees of $3.7 million, respectively, on the condensed balance sheets and is classified as loans payable, net. As of September 30, 2022, the remaining availability under the facility was up to $24.9 million and its interest rate was 11.76%.

 

In connection with the Moxy Construction Loan, the Williamsburg Moxy Hotel Joint Venture has provided certain completion and carry cost guarantees.

 

See Note 3 of the Notes to Consolidated Financial Statements for additional information.

 

Funds from Operations and Modified Funds from Operations

 

The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative.

 

Because of these factors, the National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has published a standardized measure of performance known as funds from operations (“FFO”), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT’s operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.

 

We calculate FFO, a non-GAAP measure, consistent with the standards established over time by the Board of Governors of NAREIT, as restated in a White Paper approved by the Board of Governors of NAREIT effective in December 2018 (the “White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Our FFO calculation complies with NAREIT’s definition.

 

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

 

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

 

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

 

We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the “Practice Guideline”) issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction-related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses (which includes costs incurred in connection with strategic alternatives), amounts relating to deferred rent receivables and amortization of market lease and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. Certain of the above adjustments are also made to reconcile net income (loss) to net cash provided by (used in) operating activities, such as for the amortization of a premium and accretion of a discount on debt and securities investments, amortization of fees, any unrealized gains (losses) on derivatives, securities or other investments, as well as other adjustments.

 

MFFO excludes non-recurring impairment of real estate-related investments. We assess the credit quality of our investments and adequacy of reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. We consider the estimated net recoverable value of a loan as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive situation of the region where the borrower does business.

 

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

 

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

 

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

 

The below table illustrates the items deducted in the calculation of FFO and MFFO. Items are presented net of non-controlling interest portions where applicable.

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2022				2021				2022				2021
Net income/(loss)		$	1,339			$	418			$	1,649			$	(2,157	)
FFO adjustments:
Depreciation and amortization of real estate assets			1,191				1,282				3,673				3,834
Adjustments to equity earnings from unconsolidated affiliated real estate entities			305				310				917				938
FFO			2,835				2,010				6,239				2,615
MFFO adjustments:
Loss on sale of marketable securities			-				-				-				23
Gain on forgiveness of debt(1)			(762	)			(455	)			(1,893	)			(906	)
Adjustments to equity earnings from unconsolidated affiliated real estate entities			(258	)			(191	)			(258	)			(191	)
Unrealized (gain)/loss on sale of marketable equity securities (2)			(7	)			-				43				-
MFFO			1,808				1,364				4,131				1,541
Straight-line rent(3)			-				-				-				-
MFFO - IPA recommended format		$	1,808			$	1,364			$	4,131			$	1,541
Net income/(loss)		$	1,339			$	418			$	1,649			$	(2,157	)
Less: net loss/(income) attributable to noncontrolling interests			-				-				-				-
Net income/(loss) applicable to Company’s common shares		$	1,339			$	418			$	1,649			$	(2,157	)
Net income/(loss) per common share, basic and diluted		$	0.10			$	0.03			$	0.13			$	(0.16	)
FFO		$	2,835			$	2,010			$	6,239			$	2,615
Less: FFO attributable to noncontrolling interests			-				-				-				-
FFO attributable to Company’s common shares		$	2,835			$	2,010			$	6,239			$	2,615
FFO per common share, basic and diluted		$	0.22			$	0.15			$	0.48			$	0.20
MFFO - IPA recommended format		$	1,808			$	1,364			$	4,131			$	1,541
Less: MFFO attributable to noncontrolling interests			-				-				-				-
MFFO attributable to Company’s common shares		$	1,808			$	1,364			$	4,131			$	1,541
Weighted average number of common shares outstanding, basic and diluted			13,060				13,229				13,091				13,230

 

 

(1)

Management believes that adjusting for gains or losses related to extinguishment/sale of debt, derivatives or securities holdings is appropriate because they are items that may not be reflective of ongoing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods.

 

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(2)

Management believes that adjusting for mark-to-market adjustments is appropriate because they are nonrecurring items that may not be reflective of ongoing operations and reflects unrealized impacts on value based only on then current market conditions, although they may be based upon current operational issues related to an individual property or industry or general market conditions. Mark-to-market adjustments are made for items such as ineffective derivative instruments, certain marketable securities and any other items that GAAP requires we make a mark-to-market adjustment for. The need to reflect mark-to-market adjustments is a continuous process and is analyzed on a quarterly and/or annual basis in accordance with GAAP.

(3)

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

 

The table below presents our cumulative FFO attributable to our common shares:

 

		For the period October 5, 2012
		(date of inception) through
		September 30, 2022
FFO attributable to Company’s common shares		$	21,486
Distributions declared and paid		$	25,876

 

New Accounting Pronouncements

 

See Note 2 of the Notes to Consolidated Financial Statements for further information of certain accounting standards that have been issued or adopted during 2022, if any, and certain accounting standards that we have not yet been required to implement and may be applicable to our future operations.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

As of the end of the period covered by this report, management, including our chief executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of the evaluation, our chief executive officer and principal financial officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.

 

There have been no changes in our internal control over financial reporting that occurred during 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 Company may become subject to legal proceedings, claims or disputes.

 

As of the date hereof, the Company is not a party to any material pending legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Recent Sales of Unregistered Securities

 

During the period covered by this Form 10-Q, the Company did not sell any unregistered securities.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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ITEM 6. EXHIBITS

 

Exhibit Number		Description
31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551 this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”
101*		XBRL (extensible Business Reporting Language).The following financial information from Lightstone Value Plus REIT III, Inc. on Form 10-Q for the quarter ended September 30, 2022, filed with the SEC on November 14, 2022, formatted in XBRL includes: (1) Consolidated Balance Sheets, (2) Consolidated Statements of Operations, (3) Consolidated Statements of Comprehensive Income, (4) Consolidated Statements of Stockholders’ Equity, (5) Consolidated Statements of Cash Flows, and (6) the Notes to the Consolidated Financial Statement.

 

 

*

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 REIT III, INC.
Date: November 14, 2022	By:	/s/ David Lichtenstein
		David Lichtenstein
		Chairman and Chief Executive Officer (Principal Executive Officer)

 

Date: November 14, 2022	By:	/s/ Seth Molod
		Seth Molod
		Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)

 

41