LIGHTSTONE VALUE PLUS REIT III, INC. The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements ofLightstone Value Plus REIT III, Inc. and Subsidiaries and the notes thereto. As used herein, the terms "we," "our" and "us" refer toLightstone Value Plus REIT III, Inc. , aMaryland 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 theUnited 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 ofLightstone 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, tenant or joint venture partner(s) bankruptcies, our lack of
operating history, the availability of cash flows from operations to pay
distributions, changes in governmental, tax, real estate and zoning laws and
regulations, failure to increase tenant occupancy and operating income,
rejection of leases by tenants in bankruptcy, financing and development risks,
construction and lease-up delays, cost overruns, the level and volatility of
interest rates, the rate of revenue increases versus expense increases, the
financial stability of various tenants and industries, the failure of the
Company to make additional investments in real estate properties, the failure to
upgrade our tenant mix, restrictions in current financing arrangements, the
failure to fully recover tenant obligations for common area maintenance,
insurance, taxes and other property expenses, the failure of the Company 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, the effect of the phase-out of the London Interbank Offered Rate, or
LIBOR, as a variable rate debt benchmark and the transition to a different
benchmark interest rate, 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 the Company's 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 March 31, 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 have one operating segment. As of March 31, 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. 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 toMarch 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.
22
Noncontrolling Interests - Partners of the
Limited Partner
OnJuly 16, 2014 , the Advisor contributed$2 to theOperating Partnership in exchange for 200 limited partner units in theOperating 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 onMarch 31, 2017 , the Special Limited Partner purchased from theOperating 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 throughMarch 31, 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 forU.S. federal income tax purposes beginning with the taxable year endedDecember 31, 2015 . As a REIT, we generally will not be subject toU.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 inthe 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 toU.S. federal and state income taxes and franchise taxes from these activities. As ofMarch 31, 2022 andDecember 31, 2021 , we had no material uncertain income tax positions. Additionally, even if we continue to qualify as a REIT forU.S. federal income tax purposes, we may still be subject to someU.S. federal, state and local taxes on our income and property and toU.S. federal income taxes and excise taxes on our undistributed income, if any.
Current Environment
Our operating results are substantially impacted by the overall health of local,U.S. national and global economies and may be influenced by market and other challenges. Additionally, our business and financial performance may be adversely affected by current and future economic and other conditions; including, but not limited to, availability or terms of financings, financial markets volatility, political upheaval or uncertainty, natural and man-made disasters, terrorism and acts of war, unfavorable changes in laws and regulations, outbreaks of contagious diseases, cybercrime, loss of key relationships, and recession. These and other market and economic challenges could materially affect (i) the value and performance of our investments, (ii) our ability to pay future distributions, if any, (iii) the availability or terms of financings, (iv) our ability to make scheduled principal and interest payments, and (v) our ability to refinance any outstanding debt when contractually due. 23
COVID-19 Pandemic Operations and Liquidity Update
TheWorld Health Organization declared COVID-19 a global pandemic onMarch 11, 2020 and since that time many of the previously imposed restrictions and other measures which were instituted in response have been subsequently reduced or lifted. However, the COVID-19 pandemic remains highly unpredictable and dynamic and its duration and extent continue to be dependent on various developments, such as the emergence of variants to the virus that may cause additional strains of COVID-19, the administration and ultimate effectiveness of vaccines, including booster shots, and the eventual timeline to achieve a sufficient level of herd immunity among the general population. Accordingly, the COVID-19 pandemic may continue to have negative effects on the health of theU.S. economy for the foreseeable future.
The extent to which our business may be affected by the ongoing COVID-19 pandemic will largely depend on both current and future developments, all of which are highly uncertain and cannot be reasonably predicted.
Furthermore, as a result of the COVID-19 pandemic, room demand and rental rates for our consolidated and unconsolidated hotels significantly declined starting inMarch 2020 at the onset of the pandemic; and while these metrics have improved since then (beginning late 2020 and continuing through the first quarter of 2022); overall room demand and rental rates remain below their pre-pandemic historical levels. Accordingly, the COVID-19 pandemic has negatively impacted our operations, financial position and cash flow; and while the severity of the impact has lessened, we currently expect we will continue to experience a negative impact for the foreseeable future. We cannot currently estimate if and when room demand and rental rates will return to historical pre-pandemic levels for our hotels. We also have a 25% membership interest inBedford 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 theWilliamsburg Moxy Hotel , which is expected to open during the fourth quarter of 2022.
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
aggregate of
under the federal Paycheck Protection Program ("PPP Loans"). See Note 6 of the
Notes to Consolidated Financial Statements for additional information.
? Previously in
monthly distributions on our Common Shares and have not declared any
distributions since the suspension. Additionally, in
Directors approved the suspension of all redemptions under our shareholder
repurchase program (the "SRP"). Subsequently in
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
amendments to its non-recourse mortgage loan secured by the
for additional information.
We believe that these actions, along with our available cash on hand and marketable securities, as well as our intention to seek to extend the Revolving Credit Facility toJuly 13, 2023 pursuant to the lender's first 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.
24
Portfolio Summary -
Percentage
Occupied RevPAR ADR
for the for the For the
Three Months Three Months Three Months
Year to Date Ended Ended Ended
Year Date Available March 31, March 31, March 31,
Location Built Acquired Rooms 2022 2022 2022
Wholly-Owned and
Consolidated Hospitality
Properties:
Iowa 1987 2/4/2015 10,800 58 % $ 59.93 $ 103.27
Courtyard - Durham Durham, North
Carolina 1996 5/15/2015 13,140 50 % $ 47.48 $ 95.07
Michigan 2013 3/10/2016 7,740 59 % $ 62.36 $ 104.94 Courtyard -
Rhode Island 2003 3/23/2016 8,280 50 % $ 57.25 $ 113.48 Home2 Suites - Salt Lake
City, Utah 2013 8/2/2016 11,250 63 % $ 67.27 $ 106.31 Home2 Suites - Tukwila Tukwila,
Washington 2015 8/2/2016 12,510 88 % $ 116.88 $ 133.21
Fairfield Inn - Austin Austin, Texas 2014 9/13/2016 7,560 100 %$ 75.00 $ 75.00 Staybridge Suites - Austin Austin, Texas 2009 10/7/2016 7,200 80 %$ 81.15 $ 101.67 Total 78,480 68 %$ 71.33 $ 105.61
Unconsolidated Affiliated Real Estate Entity:
Percentage
Occupied RevPAR ADR
for the for the For the
Three Months Three Months Three Months
Year to Date Ended Ended Ended
Year Date Available March 31, March 31, March 31,
Hospitality Location Built Acquired Rooms 2022 2022 2022
Hilton Garden Inn - Long Island
Long Island City City, New
York 2014 3/27/2018 16,470 88.0 % $ 124.16 $ 141.32 As of
25
Critical Accounting Policies and Estimates
There were no material changes during the three months endedMarch 31, 2022 to our critical accounting policies as reported in our Annual Report on Form 10-K, for the year endedDecember 31, 2021 .
Results of Operations
We currently have one operating segment. As ofMarch 31, 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 inLVP LIC Hotel JV LLC (the "Hilton Garden Inn Joint Venture ") and (iii) held an unconsolidated 25.0% membership interest inBedford Avenue Holdings LLC (the "Williamsburg Moxy Hotel Joint Venture "). We account for our unconsolidated membership interests in theHilton Garden Inn Joint Venture and theWilliamsburg Moxy Hotel Joint Venture under the equity method of accounting.
Comparison of the three months ended
Consolidated
Our consolidated revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation and amortization for the three months endedMarch 31, 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 inMarch 2020 at the onset of the pandemic; and while these metrics have improved since then (beginning in late 2020 and continuing through the first quarter of 2022); overall room demand and rental rates remain below their pre-pandemic historical levels. Overall, our hospitality portfolio experienced increases in the percentage of rooms occupied from 58% to 68% for the first quarter of 2021 and 2022, respectively, RevPAR from$45.68 to$71.33 for the first quarter of 2021 and 2022, respectively, and the ADR from$79.10 to$105.61 for the first quarter of 2021 and 2022, respectively
Revenues
Revenues increased by
Property operating expenses
Property operating expenses increased by$1.1 million to$3.8 million during the three months endedMarch 31, 2022 compared to$2.7 million for the same period in 2021. This increase reflects the higher occupancy during the 2022 period.
Real estate taxes
Real estate taxes were relatively unchanged at
General and administrative expense
General and administrative expenses decreased slightly by$0.1 million to$0.7 million during the three months endedMarch 31, 2022 compared to$0.6 million for the same period in 2021.
Depreciation and amortization
Depreciation and amortization expense was relatively unchanged at
26
Interest expense
Interest expense was relatively unchanged at
Gain on forgiveness of debt
During the three months endedMarch 31, 2022 notice was received from the SBA that$0.2 million of PPP Loans and related accrued interest had been legally forgiven and therefore, we recognized a gain on forgiveness of debt for that amount during the three months endedMarch 31, 2022 . Earnings from investments in unconsolidated affiliated real estate entities Our loss from investments in unconsolidated affiliated real estate entities was$0.2 million during both of the three months endedMarch 31, 2022 and 2021. Our earnings from investments in unconsolidated affiliated real estate entities are attributable to our unconsolidated 50.0% membership interest in theHilton Garden Inn Joint Venture and our unconsolidated 25.0% membership interestWilliamsburg Moxy Hotel Joint Venture .
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$16.4 million and marketable securities of$1.8 million , all as ofMarch 31, 2022 , as well as our intention to seek to extend the Revolving Credit Facility toJuly 13, 2023 pursuant to the lender's first extension option, 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 agree to the first 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 have successfully negotiated various changes to the terms of our Revolving Credit Facility, including modifications of financial covenants. See "Contractual Mortgage Obligations" for additional information. As ofMarch 31, 2022 , we have$61.3 million of outstanding mortgage debt and$1.6 million of PPP Loans (classified as notes payable on our consolidated balance sheet). 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 satisfactory showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. Market conditions will dictate our overall leverage limit; as such our aggregate borrowings may be less than 300% of net assets. As ofMarch 31, 2022 , our total borrowings were$63.0 million which represented 59% of our net assets. 27 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. 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, asset management fees and 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, theOperating Partnership may be required to make distributions toLightstone 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, ourOperating Partnership may be required to make distributions toLightstone 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 EndedMarch 31 . 2022 2021
Asset management fees (general and administrative costs)
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