LIGHTSTONE VALUE PLUS REIT V, INC. The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.
Forward-Looking Statements Certain statements in this Quarterly Report on Form 10-Q constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements include discussion and analysis of the financial condition ofLightstone Value Plus REIT V, Inc. and our subsidiaries (which may be referred to herein as the "Company," "we," "us" or "our"), which was formerly known asLightstone Value Plus Real Estate Investment Trust V, Inc. beforeAugust 31, 2021 , including our ability to make accretive real estate or real estate-related investments, rent space on favorable terms, to address our debt maturities and to fund our liquidity requirements, to sell our assets when we believe advantageous to achieve our investment objectives, our anticipated capital expenditures, the amount and timing of anticipated future cash distributions to our stockholders, the estimated net asset value per share of our common stock ("NAV per Share"), and other matters. Words such as "may," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "would," "could," "should" and variations of these words and similar expressions are intended to identify forward-looking statements. These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors described below: ? market and economic challenges experienced by theU.S. and global economies or real estate industry as a whole and the local economic conditions in the markets in which our investments are located.
Additionally, our business and financial performance may be adversely
affected by current and future economic and other conditions; such as
recession, political upheaval or uncertainty, terrorism and acts of war,natural and man-made disasters, cybercrime, and outbreaks of contagious
diseases;
? 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;
? the availability of cash flow from operating activities for distributions,
if any;
? conflicts of interest arising out of our relationships with our advisor
and its affiliates;
? our ability to retain our executive officers and other key individuals
provide advisory and property management services to us;
? our level of debt and the terms and limitations imposed on us by our debt
agreements;
? the availability of credit generally, and any failure to obtain debt
financing at favorable terms or a failure to satisfy the conditions and
requirements of that debt;? our ability to make accretive investments in a diversified portfolio of
assets;
? future changes in market factors that could affect the ultimate
performance of any development or redevelopment projects, including but
not limited to construction costs, plan or design changes, scheduledelays, availability of construction financing, performance of developers,
contractors and consultants and growth in rental rates and operating
costs;
? our ability to secure leases at favorable rental rates;
? our ability to sell our assets at a price and on a timeline consistent
with our investment objectives;
? impairment charges;
? unfavorable changes in laws or regulations impacting our business, our
assets or our key relationships; and
? factors that could affect our ability to qualify as a real estate
investment trust.
16
Forward-looking statements in this Quarterly Report on Form 10-Q reflect our
management's view only as of the date of this Report, and may ultimately prove
to be incorrect. 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, except as required by applicable
law. We intend for these forward-looking statements to be covered by the
applicable safe harbor provisions created by Section 21E of the Exchange Act.
Cautionary Note
The representations, warranties, and covenants made by us in any agreement filed as an exhibit to this Quarterly Report on Form 10-Q are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the parties to the agreement, and should not be deemed to be representations, warranties, or covenants to or with any other parties. Moreover, these representations, warranties, or covenants should not be relied upon as accurately describing or reflecting the current state of
our affairs. Executive Overview
We were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis. In particular, we have focused generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment or repositioning, those located in markets and submarkets with high growth potential, and those available from sellerswho were distressed or faced time-sensitive deadlines. In addition, our opportunistic and value-add investment strategy has included investments in real estate-related assets that present opportunities for higher current income. Since inception, we have acquired a wide variety of commercial properties, including office, industrial, retail, hospitality, and multifamily. We have purchased existing, income-producing properties and newly constructed properties. We have also invested in mortgage and mezzanine loans. We have made our investments in or in respect of real estate assets located inthe United States and other countries based on our view of existing market conditions. As ofSeptember 30, 2021 , our investments included multifamily and student housing communities and a note receivable. All of our current investments are located inthe United States . We currently intend to hold our various real properties until such time as our board of directors determines 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. 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. COVID-19 Pandemic
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, 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. 17 As ofSeptember 30, 2021 , our consolidated portfolio of properties consisted of seven multi-family apartment complexes and one student housing complex. Our multi-family properties have not been significantly impacted by the COVID-19 pandemic and their occupancy levels, rental rates and rental collection have remained stable. Our student housing complex, which consists of theRiver Club Apartments and the Townhomes atRiver Club , are located inAthens, Georgia and principally serve as "off-campus" lodging for students attending theUniversity of Georgia ("UGA"). Leases for theRiver Club Apartments and Townhomes atRiver Club generally have a term of one year running from August through July. Shortly after the onset of the COVID-19 pandemic, UGA transitioned to online instruction during its Spring 2020 semester but subsequently resumed "on-campus" classes beginning with its Fall 2020. Our student housing complex is located "off-campus" and therefore, its tenants would not be required to vacate even if UGA did not conduct "on-campus" classes. Our student housing complex has also not been significantly impacted by the COVID-19 pandemic and its occupancy level, rental rates and rental collections have remained stable. However, if UGA decides to return to online instruction for its students in lieu of "on-campus" classes in future semesters, it could adversely impact leasing demand, occupancy levels and the operating results of our student housing complex in future periods. Additionally, our note receivable is collateralized by a condominium development project located in New Yok City (the "Condominium Project "), which has been subject to similar restrictions and risks. To date, both theCondominium Project and our note receivable have not been significantly impacted by the COVID-19 pandemic.
We continue to closely monitor the overall extent as to which our business may be affected by the ongoing COVID-19 pandemic which will largely depend on both current and future developments, all of which are highly uncertain and cannot be reasonably predicted. If our properties and real estate-related investments are negatively impacted in future periods for an extended period because (i) tenants are unable to pay their rent, (ii) leasing demand falls causing declines in occupancy levels and/or rental rates, and (iii) our borrower is unable to pay scheduled debt service on the outstanding note receivable; our business and financial results could be materially and adversely impacted. 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. The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America ("GAAP") requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. Actual results may differ from those estimates and assumptions used in these consolidated financial statements.
Liquidity and Capital Resources
We had cash and cash equivalents of$38.1 million , marketable securities, available for sale of$3.7 million and restricted cash of$7.1 million as ofSeptember 30, 2021 . Our principal demands for funds going forward will be for the payment of (a) operating expenses and (b) scheduled interest and principal payments on our outstanding indebtedness. We also may, at our discretion use funds for (a) tender offers and/or redemptions of shares of our common stock, (b) distributions, if any, to our shareholders, and (c) selective acquisitions and/or real estate-related investments. Generally, we expect to meet our cash needs with our cash on hand and cash flow from operations as well as the release of certain funds held in restricted cash. However, to the extent that our cash on hand and cash flow from operations are not sufficient to cover our cash needs, we may use proceeds from additional borrowings and/or selective asset sales to fund such needs. We have borrowed money to acquire properties and make other investments. Under our charter, the maximum amount of our indebtedness is limited to 300% of our "net assets" (as defined by our charter) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors. In addition to our charter limitation, our board of directors has adopted a policy to generally limit our aggregate borrowings to 75% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests. Our policy limitation, however, does not apply to individual real estate assets. 18
Acquisition and Disposition Activities
Acquisition of
OnJuly 7, 2021 , we completed the acquisition of a 368-unit multifamily property located inTampa, Florida (the "BayVue Apartments ") from an unrelated third party, for an aggregate purchase price of$59.5 million , excluding closing and other related transaction costs. In connection with the acquisition, we paid the Advisor an aggregate of$1.3 million in acquisition fees, acquisition expense reimbursements and debt financing fees.
Disposition of Lakes of
OnMarch 17, 2021 , we completed the disposition of the Lakes ofMargate for a contractual sales price of$50.8 million to an unrelated third party. At closing, the buyer paid$15.1 million and assumed the existing mortgage loan secured by the Lakes ofMargate with an outstanding principal balance of$35.7 million . In connection with the disposition of the Lakes ofMargate , we recognized a gain on the sale of investment property of$27.8 million during the first quarter of 2021.
Acquisition of
OnMarch 17, 2020 , we completed the acquisition of a 280-unit multifamily property located inNoblesville, Indiana (the "Autumn Breeze Apartments ") from an unrelated third party, for an aggregate purchase price of$43.0 million , excluding closing and other related transaction costs. In connection with the acquisition, we paid the Advisor an aggregate of$0.8 million in acquisition fees and acquisition expense reimbursements.
Disposition of
OnJanuary 15, 2020 , we and our noncontrolling member completed the disposition of theGardens Medical Pavilion for a contractual sales price of$24.3 million to an unrelated third-party. In connection with the disposition of theGardens Medical Pavilion , we recognized a gain on the sale of investment property of$5.5 million during the first quarter of 2020.$12.6 million of the proceeds were used towards the repayment in full of a mortgage loan secured by theGardens Medical Pavilion . Additionally,$1.8 million of the remaining proceeds were distributed to the noncontrolling member.
Acquisition of
On
In connection with the acquisition of theCitadel Apartments , we simultaneously entered into a non-recourse mortgage loan facility for up to$49.0 million (the "Citadel Mortgage") scheduled to initially mature onOctober 11, 2024 , with two, one-year extension options, subject to certain conditions.The Citadel Mortgage requires monthly interest-only payments through its maturity date and bears interest at LIBOR+2.95% subject to a 3.05% floor. The Citadel Mortgage is collateralized by theCitadel Apartments . In connection with the acquisition of theCitadel Apartments ,$38.0 million was initially funded under theCitadel Mortgage and we paid the balance of the purchase price of$28.0 million with cash. As a result, the Citadel Mortgage has remaining availability of$11.0 million .
In connection with the acquisition, the Advisor received an aggregate of
Debt Financings From time to time, we have obtained mortgage, bridge, or mezzanine loans for acquisitions and investments, as well as property development. In the future, we may obtain new financings to acquire properties and for property renovation development and redevelopment activities or refinance our existing real estate assets, depending on multiple factors. BayVue Mortgage
OnJuly 7, 2021 , we entered into a non-recourse mortgage loan facility for up to$52.2 million (the "BayVue Mortgage") scheduled to initially mature onJuly 7, 2024 , with two, one-year extension options, subject to certain conditions. The BayVue Mortgage requires monthly interest-only payments through its maturity date and bears interest at LIBOR+3.10% subject to a 3.10% floor. The BayVue Mortgage is collateralized by theBayVue Apartments . As ofSeptember 30, 2021 , the outstanding principal balance of the BayVue Mortgage was$44.3 million and the remaining availability under the facility was up to$7.9 million . 19
Flats at Fisher Supplemental Mortgage
OnAugust 16, 2021 , we entered into a non-recourse subordinated mortgage loan for$9.2 million (the "Flats at Fisher Supplemental Mortgage") scheduled to mature onJuly 1, 2026 . The Flats at Fisher Supplemental Mortgage requires monthly payments of interest and principal of$43,083 through its maturity date and bears interest at 3.85%. The Flats at Fisher Supplemental Mortgage is collateralized with a subordinated mortgage interest in the Flats at Fisher. As ofSeptember 30, 2021 , the outstanding principal balance of the Flats at Fisher Supplemental Mortgage was$9.2 million . In connection with the Flats at Fisher Supplemental Mortgage, the Advisor received$0.1 million in debt financing fees.
Arbors Harbor Town Supplemental Mortgage
OnSeptember 30, 2021 , we entered into a non-recourse subordinated mortgage loan for$5.9 million (the "Arbors Harbor Town Supplemental Mortgage") scheduled to mature onJanuary 1, 2026 . The Arbors Harbor Town Supplemental Mortgage requires monthly payments of interest and principal of$26,379 through its maturity date and bears interest at 3.52%. The Arbors Harbor Town Supplemental Mortgage is collateralized with a subordinated mortgage interest in theArbors Harbor Town . As ofSeptember 30, 2021 , the outstanding principal balance of theArbors Harbor Town Supplemental Mortgage was$5.9 million . In connection with the Arbors Harbor Town Supplemental Mortgage, the Advisor received$0.1 million in debt financing fees. As ofSeptember 30, 2021 , our outstanding notes payable were$270.6 million , net of deferred financing fees of$4.5 million and had a weighted average interest rate of 3.68%. As ofDecember 31, 2020 , we had notes payable of$213.0 million , net of deferred financing fees of$3.4 million , with a weighted average interest rate of 3.71%. One of our principal short-term and long-term liquidity requirements includes the repayment of maturing debt. The following table provides information with respect to the contractual maturities and scheduled principal repayments of our indebtedness as ofSeptember 30, 2021 (dollars in thousands). Contractual Obligations 2021 2022 2023 2024 2025 Thereafter Total Mortgage Payable$ 404 $ 1,740 $ 2,781 $ 47,773 $ 46,895 $ 175,462 $ 275,055 Interest Payments 2,544 10,238 10,157 9,474 7,832 5,752 45,997
Total Contractual Obligations
Results of Operations
As of
20
The tables below reflect occupancy and effective monthly rental rates for our
operating properties owned as of
Effective Monthly Rent per
Occupancy Bed/Unit(1)
As of September 30, As of September 30,
Property 2021 2020 2021 2020
River Club and the Townhomes at
River Club 99 % 97 % $ 487.91 $ 471.84 per bed
Arbors Harbor Town 96 % 95 % $ 1,460.73 $ 1,331.67 per unit
Parkside 98 % 95 % $ 1,256.29 $ 1,179.61 per unit
Flats at Fishers 97 % 96 % $ 1,335.79 $ 1,169.65 per unit
Axis at Westmont 95 % 94 % $ 1,268.38 $ 1,167.06 per unit
Valley Ranch Apartments 93 % 95 % $ 1,581.53 $ 1,378.67 per unitAutumn Breeze Apartments (2) 91 % 95 %$ 1,192.62 $ 1,058.45 per unit BayVue Apartments (3) 96 % N/A $
1,123.31 N/A per unit
(1) Effective monthly rent is calculated as in-place contracted monthly rental
revenue, including any premiums due for short-term or month-to-month leases,
less any concessions or discounts.
(2)
(3)
OnMarch 17, 2020 , we acquired theAutumn Breeze Apartments (the "2020 Acquisition") and onJuly 7, 2021 we acquired theBayVue Apartments (the "2021 Acquisition" and collectively, the "Acquisitions"). OnJanuary 15, 2020 , we disposed of theGardens Medical Pavilion (the "2020 Disposition") and onMarch 17, 2021 , we disposed of the Lakes ofMargate (the "2021 Disposition" and collectively, the "Dispositions"). In connection with the dispositions ofGardens Medical Pavilion and the Lakes ofMargate , we recognized gains on the sale of investment property of$5.5 million during the first quarter of 2020 and$27.8 million during the first quarter of 2021, respectively. The Dispositions did not qualify to be reported as discontinued operations since neither disposition represented a strategic shift that had a major effect on our operations and financial results. Accordingly, the operating results of these properties are reflected in our results from continuing operations for all periods presented through their respective dates of disposition.
Our results of operations for the respective periods presented reflect our acquisition and disposition activities. Properties owned by us during the entire periods presented are referred to as our "Same Store" properties.
Three months ended
The following table provides summary information about our results of operations
(dollars in thousands):
Three Months Ended Change Change Change
September 30, Increase/ Percentage due to due to due to
2021 2020 (Decrease) Change Acquisitions(1) Dispositions(2) Same Store(3)
Rental revenues $ 11,187 $ 10,185 $ 1,002 10.0 % $ 1,446 $ (1,185 ) $ 741
Property operating expenses 4,097 3,694 403 11.0 % 658 (425 ) 170
Real estate taxes 1,399 1,496 (97 ) (6.0 %) 147 (221 ) (23 )
General and administrative 1,825 1,634 191 12.0 % 26 (5 ) 170Depreciation and amortization 3,925 3,145 780
25.0 % 1,143 (263 ) (100 )
Interest expense, net 2,735 2,556 179 7.0 % 452 (303 ) 30
Notes:
(1) Represents the effect on our operating results for the periods indicated
resulting from the 2021 Acquisition.
(2) Represents the effect on our operating results for the periods indicated
resulting from the 2021 Disposition.
(3) Represents the change for the three months ended
to the same period in 2020 for real estate and real estate-related
investments owned by us during the entire periods presented ("Same Store").
Our results for Same Store properties for the three months ended September
30, 2021 and 2020 include
Apartments and the Autumn Breeze Apartments .
21
The following table reflects total rental revenues and total property operating
expenses for the three months ended September 30, 2021 and 2020 for: (i) our
Same Store properties, (ii) the 2021 Acquisition and (iii) the 2021 Disposition
(dollars in thousands):
Three Months Ended
September 30,
Description 2021 2020 Change
Rental Revenues:
Same Store $ 9,741 $ 9,000 $ 741
2021 Acquisition 1,446 - 1,446
2021 Disposition - 1,185 (1,185 )
Total rental revenues $ 11,187 $ 10,185 $ 1,002
Property operating expenses:
Same Store $ 3,426 $ 3,256 $ 170
2021 Acquisition 658 - 658
2021 Disposition 13 438 (425 )
Total property operating expenses
Revenues. Rental revenues for the three months endedSeptember 30, 2021 were$11.2 million , an increase of$1.0 million , compared to$10.2 million for the same period in 2020. Excluding the effect of our acquisition and disposition activities, our rental revenues increased by$0.7 million for our Same Store properties primarily as a result of increased average monthly rent per unit and increased occupancy during the 2021 period. Property Operating Expenses. Property operating expenses for the three months endedSeptember 30, 2021 were$4.1 million , an increase of$0.4 million , compared to$3.7 million for the same period in 2020. Excluding the effect of our acquisition and disposition activities, our property operating expenses increased by$0.2 million for our Same Store properties primarily as a result of higher occupancy during the 2021 period and the resulting increase in utilities and repair and maintenance costs. Real Estate Taxes. Real estate taxes for the three months endedSeptember 30, 2021 were$1.4 million , a decrease of$0.1 million , compared to$1.5 million for the same period in 2020. Excluding the effect of our acquisition and disposition activities, real estate taxes were unchanged for our Same Store properties. General and Administrative Expenses. General and administrative expenses for the three months endedSeptember 30, 2021 were$1.8 million , an increase of$0.2 million , compared to$1.6 million for the same period in 2020. Excluding the effect of our acquisition and disposition activities, our general and administrative expenses increased by$0.2 million for our Same Store properties. Depreciation and Amortization. Depreciation and amortization expense for the three months endedSeptember 30, 2021 was$3.9 million , an increase of$0.8 million , compared to$3.1 million for the same period in 2020. Excluding the effect of our acquisition and disposition activities, depreciation and amortization expenses decreased slightly by$0.1 million for our Same Store
properties. Interest Expense, net. Interest expense for the three months endedSeptember 30, 2021 was$2.7 million , an increase of$0.1 million , compared to$2.6 million for the same period in 2020. Excluding the effect of our acquisition and disposition activities, interest expense was unchanged for our Same Store properties. 22
Nine months ended
The following table provides summary information about our results of operations
(dollars in thousands):
Nine Months Ended Change Change Change
September 30, Increase/ Percentage due to due to due to
2021 2020 (Decrease) Change Acquisitions(1) Dispositions(2) Same Store(3)
Rental revenues $ 30,864 $ 29,662 $ 1,202 4.0 % $ 2,434 $ (2,685 ) $ 1,453
Property
operating
expenses 10,336 9,749 587 6.0 % 954 (895 ) 528
Real estate taxes 4,228 4,161 67 2.0 % 300 (513 ) 280
General and
administrative 5,046 4,745 301 6.0 % 36 (23 ) 288
Depreciation and
amortization 9,590 9,067 523 6.0 % 1,360 (793 ) (44 )
Interest expense,
net 7,403 7,087 316 4.0 % 720 (53 ) (351 )
Notes:
(1) Represents the effect on our operating results for the periods indicated
resulting from the Acquisitions.
(2) Represents the effect on our results for the periods indicated resulting from
the Dispositions.
(3) Represents the change for the nine months ended
to the same period in 2020 for real estate and real estate-related
investments owned by us during the entire periods presented ("Same Store").
Our results for Same Store properties for the nine months ended
2021 and 2020 include
Ranch Apartments . The following table reflects total rental revenues and total property operating expenses for the nine months endedSeptember 30, 2021 and 2020 for: (i) our Same Store properties, (ii) the Acquisitions and (iii) the Dispositions (dollars
in
thousands):
Nine Months Ended September 30,
Description 2021 2020 Change
Rental Revenues:
Same Store $ 25,387 $ 23,934 $ 1,453
Acquisitions 4,416 1,982 2,434
Disposition 1,061 3,746 (2,685 )
Total rental revenues $ 30,864 $ 29,662 $ 1,202
Property operating expenses:
Same Store $ 8,318 $ 7,790 $ 528
Acquisitions 1,616 662 954
Disposition 402 1,297 (895 )Total property operating expenses$ 10,336 $ 9,749
$ 587 Revenues. Rental revenues for the nine months endedSeptember 30, 2021 were$30.9 million , an increase of$1.2 million , compared to$29.7 million for the same period in 2020. Excluding the effect of our acquisition and disposition activities, our rental revenues increased by$1.5 million for our Same Store properties primarily as a result of increased average monthly rent per unit and increased occupancy during the 2021 period. Property Operating Expenses. Property operating expenses for the nine months endedSeptember 30, 2021 were$10.3 million , an increase of$0.6 million , compared to$9.7 million for the same period in 2020. Excluding the effect of our acquisition and disposition activities, our property operating expenses increased by$0.5 million for our Same Store properties primarily as a result of higher occupancy during the 2021 period and the resulting increase in utilities and repair and maintenance costs. Real Estate Taxes. Real estate taxes for both the three months endedSeptember 30, 2021 and 2020 were$4.2 million . Excluding the effect of our acquisition and disposition activities, our real estate taxes increased by$0.3 million for
our Same Store properties.
General and Administrative Expenses. General and administrative expenses for the nine months endedSeptember 30, 2021 was$5.0 million , an increase of$0.3 million , compared to$4.7 million for the same period in 2020. Excluding the effect of our acquisition and disposition activities, general and administrative expenses increased by$0.3 million for ourSame Store Properties . 23
Depreciation and Amortization. Depreciation and amortization expense for the nine months endedSeptember 30, 2021 was$9.6 million , an increase of$0.5 million , compared to$9.1 million for the same period in 2020. Excluding the effect of our acquisition and disposition activities, depreciation and amortization was unchanged for our Same Store properties. Interest Expense, net. Interest expense for the nine months endedSeptember 30, 2021 was$7.4 million , an increase of$0.3 million , compared to$7.1 million for the same period in 2020. Excluding the effect of our acquisition and disposition activities, interest expense decreased by$0.4 million for our Same Store properties primarily as a result of lower interest rates on our variable rate loan resulting from the decrease in LIBOR. Gain on Sale of Investment Property. During the first quarter of 2021, we recognized a gain on the sale of Lakes ofMargate of$27.8 million . See Note 4 of the Notes to Consolidated Financial Statements for additional information. During the first quarter of 2020, we recognized a gain on the sale of theGardens Medical Pavilion of$5.5 million . Gain on Disposition of Unconsolidated Joint Venture. During the second quarter of 2021, we recognized a gain of$1.5 million for the settlement of our prior participation in the residual interests ofProspect Park . See Note 2 of the Notes to Consolidated Financial Statements for additional information. Related Party Transactions We have agreements with the Advisor and its affiliate to pay certain fees in exchange for services performed by these entities and other related parties. These agreements have one-year terms and currently extend throughJune 10, 2022 . We are dependent on the Advisor and its affiliates for certain services that are essential to us, including asset disposition decisions, property management and leasing services, and other general administrative responsibilities. In the event that these companies were unable to provide us with their respective services, we would be required to obtain such services from other sources.
The following table represents the fees incurred associated with the payments to our Advisor and its affiliates for the periods indicated:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Acquisition fees and acquisition expense
reimbursement (1) $ 1,041 $ - $ 1,041 $ 764
Debt financing fees (2) 448 - 448 656
Property management fees (property
operating expenses) 109 123 337 350
Administrative services reimbursement
(general and administrative costs) 347 333 1,012 989
Asset management fees (general and
administrative costs) 723 691 2,044 2,014
Total $ 2,668 $ 1,147 $ 4,882 $ 4,773 (1) Capitalized to the corresponding asset and amortized over its estimated
useful life.
(2) Capitalized upon the execution of the loan, presented in the consolidated
balance sheets as a direct deduction from the carrying value of the
corresponding loan and amortized over the initial term of the corresponding
loan.
Summary of Cash Flows
Operating activities
The net cash provided by operating activities of $8.0 million for the nine
months ended September 30, 2021 consisted primarily of our net income of $25.5
million , depreciation and amortization and amortization of deferred financing
costs aggregating $10.2 million and the net change in assets and liabilities of
$2.5 million offset by a gain on the sale of investment property from the sale
of the Lakes of Margate of $27.8 million , a gain on the disposition of
unconsolidated joint venture from the settlement of our participation in the
residual interests of Prospect Park of $1.5 million and non-cash interest income
of $1.0 million .
24
Investing activities
The net cash used in investing activities of
? net proceeds from the sale of Lakes of
? net proceeds from the settlement of our participation in the residual interests
of
? the acquisition of the
? payment of
interest in the Lakes of
? capital expenditures of
Financing activities
The net cash provided by financing activities of
? net proceeds from notes payable of
? debt principal payments of
? distributions paid to noncontrolling interests of
? redemptions and cancellation of common stock of
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and 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, theNational 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 generally accepted accounting principles inthe United States of America ("GAAP"). We calculate FFO, a non-GAAP measure, consistent with the standards established over time by theBoard of Governors of NAREIT, as restated in a White Paper approved by theBoard of Governors of NAREIT effective inDecember 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. 25 Because of these factors, theInvestment 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 inNovember 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. We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs. Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. FFO and MFFO should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO. Neither theSEC , 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 theSEC 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. 26
Our calculations of FFO and MFFO are presented below (dollars and shares in thousands, except per share amounts):
For the Three Months Ended For the Nine Months Ended
September 30 , September 30 ,Description 2021 2020 2021 2020 Net (loss)/income$ (2,089 ) $ (1,679 ) $ 25,522 $ 2,251 FFO adjustments: Depreciation and amortization of real estate assets 3,925 3,145 9,590 9,067 Gain on disposition of unconsolidated joint venture - - (1,457 ) - Gain on sale of investment property -
- (27,821 ) (5,474 ) FFO 1,836 1,466 5,834 5,844 MFFO adjustments: Other adjustments: Acquisition and other transaction related costs expensed(1) - - - - Noncash adjustments: Gain on on forgiveness of debt(3) (128 ) - (128 ) - Amortization of above or below market leases and liabilities - - - - Mark-to-market adjustments(2) (7 ) (4 ) (9 ) 5 Loss/(gain) on sale of marketable securities(3) 159 (11 ) 152 (63 ) MFFO before straight-line rent 1,860 1,451 5,849 5,786 Straight-line rent(4) - - (32 ) MFFO - IPA recommended format$ 1,860 $
1,451
Net (loss)/income$ (2,089 ) $ (1,679 ) $ 25,522 $ 2,251 Less: (income)/loss attributable to noncontrolling interests (14 ) 5 (145 ) (1,227 ) Net (loss)/income applicable to Company's common shares$ (2,103 ) $ (1,674 ) $ 25,377 $ 1,024 Net (loss)/income per common share, basic and diluted$ (0.10 ) $ (0.08 ) $ 1.26$ 0.05 FFO$ 1,836 $ 1,466 $ 5,834 $ 5,844 Less: FFO attributable to noncontrolling interests (97 ) (89 ) (385 ) (368 ) FFO attributable to Company's common shares$ 1,739 $
1,377
MFFO - IPA recommended format$ 1,860 $ 1,451 $ 5,849 $ 5,754 Less: MFFO attributable to noncontrolling interests (97 ) (89 ) (385 ) (362 ) MFFO attributable to Company's common shares$ 1,763 $
1,362
Weighted average number of common shares outstanding, basic and diluted 20,157 20,201 20,181 20,925
1) The purchase of properties, and the corresponding expenses associated with
that process, is a key operational feature of our business plan to generate
operational income and cash flows in order to make distributions to investors.
In evaluating investments in real estate, management differentiates the costs
to acquire the investment from the operations derived from the investment.
Such information would be comparable only for non-listed REITs that have
completed their acquisition activity and have other similar operating
characteristics. By excluding expensed acquisition costs, management believes
MFFO provides useful supplemental information that is comparable for each type
of real estate investment and is consistent with management's analysis of the
investing and operating performance of our properties. Acquisition fees and
expenses include payments to our advisor or third parties. Acquisition fees
and expenses under GAAP are considered operating expenses and as expenses
included in the determination of net income and income from continuing
operations, both of which are performance measures under GAAP. Such fees and
expenses are paid in cash, and therefore such funds will not be available to
distribute to investors. Such fees and expenses negatively impact our
operating performance during the period in which properties are being
acquired. Therefore, MFFO may not be an accurate indicator of our operating
performance, especially during periods in which properties are being acquired.
All paid and accrued acquisition fees and expenses will have negative effects
on returns to investors, the potential for future distributions, and cash
flows generated by us, unless earnings from operations or net sales proceeds
from the disposition of properties are generated to cover the purchase price
of the property, these fees and expenses and other costs related to the
property. Acquisition fees and expenses will not be paid or reimbursed, as
applicable, to our advisor even if there are no further proceeds from the sale
of shares in our offering, and therefore such fees and expenses would need to
be paid from either additional debt, operational earnings or cash flows, net
proceeds from the sale of properties or from ancillary cash flows.
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 equity 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.
27
3) 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.
4) Under GAAP, rental receipts are allocated to periods using various
methodologies. This may result in income recognition that is significantly
different than underlying contract terms. By adjusting for these items (to
reflect such payments from a GAAP accrual basis to a cash basis of disclosing
the rent and lease payments), MFFO provides useful supplemental information on
the realized economic impact of lease terms and debt investments, providing
insight on the contractual cash flows of such lease terms and debt
investments, and aligns results with management's analysis of operating
performance.
Distributions
We made an election to qualify as a REIT for federal income tax purposes
commencing with our taxable year ended December 31, 2008 . U.S. federal tax law
requires a REIT to distribute at least 90% of its annual REIT taxable income
(which does not equal net income, as calculated in accordance with generally
accepted accounting principles, or GAAP) determined without regard to the
deduction for dividends paid and excluding any net capital gain. In order to
continue to qualify for REIT status, we may be required to make distributions in
excess of cash available. Distributions, if any, are authorized at the
discretion of our board of directors based on their analysis of our performance
over the previous periods and expectations of performance for future periods.
Such analyses may include actual and anticipated operating cash flow, capital
expenditure needs, general financial and market conditions, proceeds from asset
sales and other factors that our board of directors deems relevant. Our board of
directors' decisions will be substantially influenced by their obligation to
ensure that we maintain our federal tax status as a REIT. We cannot provide
assurance that we will pay distributions at any particular level, or at all.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On a regular basis, we evaluate these estimates, including investment impairment. These estimates include such items as impairment of long-lived assets, depreciation and amortization, and allowance for doubtful accounts. Actual results could differ from those estimates. Our critical accounting policies and estimates have not changed significantly from the discussion found in the Management Discussion and Analysis and Results of Operations in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission onMarch 25, 2021 .
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