LIGHTSTONE VALUE PLUS REIT III, INC. You should read the following discussion and analysis together with our consolidated financial statements and notes thereto included in this Annual Report on Form 10-K. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see "Special Note Regarding Forward-Looking Statements" above for a description of these risks and uncertainties. Dollar amounts are presented in whole numbers, except per share data and where indicated in millions. Overview The Lightstone REIT III, together with theOperating Partnership (as defined below), the "Company", also referred to as "we", "our" or "us" herein) has and expects to continue to acquire and operate or develop in the future, hospitality, residential and/or commercial properties and/or make real estate-related investments, principally inthe United States . Our acquisitions and investments are, principally conducted through theOperating Partnership , and may include both portfolios and individual properties. As ofDecember 31, 2020 , our portfolio of properties consisted of nine hospitality properties (eight consolidated and one unconsolidated). Our real estate investments have been and are expected to continue to be held by us alone or jointly with other parties. We do not have employees. We entered into an advisory agreement withLightstone Value Plus REIT III LLC , aDelaware limited liability company, which we refer to as the "Advisor," pursuant to which the Advisor supervises and manages our day-to-day operations and selects our real estate and real estate related investments, subject to oversight by our Board of Directors. We pay the Advisor fees for services related to the investment and management of our assets, and we will reimburse the Advisor for certain expenses incurred on our behalf.
To qualify or maintain our qualification as a REIT, we engage in certain
activities through a wholly-owned taxable REIT subsidiary ("TRS"). As such, we
are subject to
Acquisitions and Investment Strategy
We have made and intend to continue to make direct or indirect real estate investments that will satisfy our primary investment objectives of preserving capital, making cash distributions as necessary to maintain our status as a REIT and achieving appreciation of our assets over the long term. The ability of our Advisor to identify and execute investment opportunities directly impacts our financial performance.
We will continue to seek to acquire and operate hotels and other commercial real estate assets, residential properties and make other real estate-related investments primarily located inthe United States . We may acquire and operate all such properties alone or jointly with another party. 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. 15
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. 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-K.
COVID-19 Pandemic Operations and Liquidity Update
OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a global pandemic leading many countries, includingthe United States , particularly at the individual state level, to subsequently impose various degrees of restrictions and other measures, including, but not limited to, mandatory temporary closures, quarantine guidelines, limitations on travel, and "shelter in place" rules in an effort to reduce its duration and the severity of its spread. Although the COVID-19 pandemic has continued to evolve, most of these previously imposed restrictions and other measures have now been reduced and/or lifted. However, the COVID-19 pandemic remains highly unpredictable and dynamic and its duration and extent is likely dependent on numerous developments such as the regulatory approval, mass production, administration and ultimate effectiveness of vaccines, as well as the timeline to achieve a level of sufficient herd immunity amongst the general population. Accordingly, the COVID-19 pandemic may continue to have negative effects on the overall 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. As a result of the COVID-19 pandemic, room demand for our consolidated and unconsolidated hotels began to significantly decline inMarch 2020 and while there has been some slight improvement; room demand continues to be substantially below historical levels. The COVID-19 pandemic has had a significant negative impact on our operations and financial results to date and we currently expect that the COVID-19 pandemic will continue to have a significant negative impact on our results of operations, financial position and cash flow for the foreseeable future. We cannot currently estimate if and when room demand will fully recover to pre-pandemic levels for our hotels. In light of the impact of the COVID-19 pandemic on the operating results of our hotels, we have taken various actions to preserve our liquidity, including, but not limited to, those described below:
? We implemented cost reduction strategies for all of our hotels, leading to
reductions in certain operating expenses and capital expenditures.
? Amendments to Revolving Credit Facility -
On June 2, 2020 , our revolving credit facility (the "Revolving CreditFacility") was amended to provide for (i) the deferral of the six monthly debt
service payments aggregating
through
the interest rate spread to LIBOR + 2.15%, subject to a 3.00% floor, for the
six-month period from
pre-funding
six monthly debt service payments due from
2021; and (iv) a waiver of all financial covenants for quarter-end periods
before
was previously due on
paydowns, each one
2020.
We and the lender have agreed in principle to certain amendments to the terms
of the Revolving Credit Facility, that we expect will be finalized shortly,
that provide for (i) us to make another principal paydown of
(ii) us to fund an additional
account; (iii) a waiver of all financial covenants for quarter-end periods
through
financial covenant requirements over the quarter-end periods beginning
at the lender's sole discretion; and (v) certain limitations and restrictions
on asset sales and additional borrowings related to the pledged collateral.
See Note 6 of the Notes to Consolidated Financial Statements for additional
information.
? Paycheck Protection Program Loans -
In
federal Paycheck Protection Program ("PPP Loans"). Subsequently, during the
first quarter of 2021, our hotels received an additional
Loans. See Note 7 of the Notes to Consolidated Financial Statements for
additional information.
? On
regular monthly distributions and, as a result, did not declare any
distributions on our Common Shares during 2020. Additionally, on
2020, the Board of Directors approved the suspension of all redemptions under
our shareholder redemption program. See Note 8 of the Notes to Consolidated
Financial Statements for additional information.
16
? In
escrow account. See Note 3 of the Notes to Consolidated Financial Statements
for additional information.
?
various amendments to its non-recourse mortgage loan secured by the Hilton
Garden Inn -
shortly. See Note 4 of the Notes to Consolidated Financial Statements for
additional information.
Based on these actions, along with our cash and cash equivalents on hand, we
believe that we will have sufficient liquidity to meet our obligations for at
least 12 months from the date of issuance of these financial statements.
Critical Accounting Estimates and Policies
General. Our consolidated financial statements included in this annual report include our accounts and theOperating Partnership (over which we exercise financial and operating control). All inter-company balances and transactions have been eliminated in consolidation. The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The preparation of our financial statements requires us to make estimates and judgments about the effects of matters or future events that are inherently uncertain. These estimates and judgments may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including contingencies and litigation. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. To assist in understanding our results of operations and financial position, we have identified our critical accounting policies and discussed them below. These accounting policies are most important to the portrayal of our results and financial position, either because of the significance of the financial statement items to which they relate or because they require management's most difficult, subjective or complex judgments. Investments in Real Estate Carrying Value of Assets The amounts to be capitalized as a result of periodic improvements and additions to real estate property, when applicable, and the periods over which the assets will be depreciated or amortized, are determined based on the application of accounting standards that may require estimates as to fair value and the allocation of various costs to the individual assets. Differences in the amount attributed to the assets may be significant based upon the assumptions made in calculating these estimates. Impairment Evaluation
We evaluate our investments in real estate assets for potential impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable for a particular property. We evaluate the recoverability
of our investments in real estate assets at the lowest identifiable level, the
individual property level. No single indicator would necessarily result in us
preparing an estimate to determine if an individual property's future
undiscounted cash flows are less than its carrying value. We use judgment to
determine if the severity of any single indicator, or the fact there are a
number of indicators of less severity that when combined, would result in an
indication that a property requires an estimate of the undiscounted cash flows
to determine if an impairment has occurred. Relevant facts and circumstances
include, among others, significant underperformance relative to historical or
projected future operating results and significant negative industry or economic
trends. The estimated cash flows used for the impairment analysis are
subjective and require us to use our judgment and the determination of estimated
fair value are based on our plans for the respective assets and our views of
market and economic conditions. The estimates consider matters such as future
operating income, market and other applicable trends and residual value, as well
as the effects of demand, competition, and recent sales data for comparable
properties. An impairment loss is recognized only if the carrying amount of a
property is not recoverable and exceeds its estimated fair value. The results of
our 2020 impairment analysis did not identify any properties where the
undiscounted cash flows were less than the carrying value. However, any changes
in assumptions used in our impairment analysis could result in future impairment
losses, which could be material.
17
Depreciation and Amortization
Depreciation expense is computed based on the straight-line method over the estimated useful life of the applicable real estate asset. We generally use estimated useful lives of up to thirty-nine years for buildings and improvements and five to ten years for furniture and fixtures. Maintenance and repairs will be charged to expense as incurred.
Investments in Unconsolidated Entities.
We evaluate all investments in other entities for consolidation. We consider our percentage interest in the joint venture, evaluation of control and whether a variable interest entity exists when determining whether or not the investment qualifies for consolidation or if it should be accounted for as an unconsolidated investment under the equity method of accounting. If an investment qualifies for the equity method of accounting, our investment is recorded initially at cost, and subsequently adjusted for equity in net income or loss and cash contributions and distributions. The net income or loss of an unconsolidated investment is allocated to its investors in accordance with the provisions of the operating agreement of the entity. The allocation provisions in these agreements may differ from the ownership interest held by each investor. Differences, if any, between the carrying amount of our investment in the respective joint venture and our share of the underlying equity of such unconsolidated entity are amortized over the respective lives of the underlying assets as applicable. These items are reported as a single line item in the statements of operations as income or loss from investments in unconsolidated affiliated entities. We review investments for impairment in value whenever events or changes in circumstances indicate that the carrying amount of such investment may not be recoverable. An investment is impaired only if management's estimate of the fair value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary. The ultimate realization of our investment in partially owned entities is dependent on a number of factors including the performance of that entity and market conditions. If we determine that a decline in the value of a partially owned entity is other than temporary, we will record an impairment charge. Revenue Recognition
Our revenues are comprised primarily of revenues from the operations of hotels.
Room revenue is generated through contracts with customers whereby the customers agree to pay a daily rate for right to use a hotel room. Our contractual performance obligations are fulfilled at the end of the day that the customer is provided the room and revenue is recognized daily at the contract rate. Payment from the customer is secured at the end of the contract upon check-out by the customer from our hotel. We participate in frequent guest programs sponsored by the brand owners of our hotels whereby the brand owner allows guests to earn loyalty points during their hotel stay. We recognize revenue at the amount earned that it will receive from the brand owner when a guest redeems their loyalty points by staying at one of our hotels. Revenue from food, beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a hotel room and revenue is recognized when these goods or services are provided to the customer and our contractual performance obligations have been fulfilled. Some contracts for rooms, food, beverage or other services require an upfront deposit which is recorded as deferred revenues (or contract liabilities) and recognized once the performance obligations are satisfied. The contractual liabilities are not significant.
We note no significant judgments regarding the recognition of room, food and beverage or other revenues.
Treatment of Management Compensation, Expense Reimbursements
Management of our operations is outsourced to our Advisor and certain other affiliates of our Sponsor. Fees related to each of these services are accounted for based on the nature of such service and the relevant accounting literature. Such fees include acquisition fees associated with the purchase of interests in real estate entities; asset management fees paid to our Advisor and property management fees paid to affiliates of our Advisor. These fees are expensed or capitalized to the basis of acquired assets, as appropriate. Affiliates of our Advisor may also perform fee-based construction management services for both our development and redevelopment activities and tenant construction projects. These fees will be considered incremental to the construction effort and will be capitalized to the associated real estate project as incurred. Costs incurred for tenant construction will be depreciated over the shorter of their useful life or the term of the related lease. Costs related to development and redevelopment activities will be depreciated over the estimated useful life of the associated project.
Leasing activity at our properties may be outsourced to affiliates of our Advisor. Any corresponding leasing fees we pay will be capitalized and amortized over the life of the related lease.
Expense reimbursements made to both our Advisor and affiliates of our Advisor are expensed or capitalized to the basis of acquired assets, as appropriate.
18
Income Taxes
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 are not 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 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. When we
purchase a hotel we establish a TRS and enter into an operating lease agreement
for the hotel. As such, we are subject to U.S. federal and state income taxes
and franchise taxes from these activities.
As of December 31, 2020 and 2019, 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.
Results of Operations
Disposition of an unconsolidated 22.5% membership interest in the Cove Joint Venture
OnFebruary 12, 2020 , we completed the disposition of an unconsolidated 22.5% membership interest in the Cove Joint Venture which resulted in the recognition of a gain on the disposition of unconsolidated affiliated real estate entity of$7.9 million during the first quarter of 2020. DuringAugust 2020 , we received$0.1 million of additional proceeds related to the redemption of our membership interest in the Cove Joint Venture and recognized a gain on the disposition of investment in unconsolidated affiliated real estate entity of$0.1 million during the third quarter of 2020. As a result, we have recognized an aggregate gain on the disposition of investment in unconsolidated affiliated real estate entity of$8.0 million during the year endedDecember 31, 2020 .
Disposition of SpringHill Suites -
OnOctober 24, 2019 , we completed the disposition of the SpringHill Suites -Green Bay for an aggregate contractual sales price of$19.4 million , net of expenses of$0.2 million . In connection with the disposition of the SpringHill Suites -Green Bay , we recognized a net gain on the disposition of real estate of$1.4 million during the third quarter of 2019. The disposition of the SpringHill Suites -Green Bay did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift in our operations that had a major effect on our operations and financial results. Accordingly, the operating results of the SpringHill Suites -Green Bay are reflected in our results from continuing operations for all periods presented through its date of disposition. We currently have one operating segment. As ofDecember 31, 2020 , we majority owned and consolidated the operating results and financial condition of eight limited service hotels containing a total of 872 rooms and an unconsolidated 50.0% membership interest in the Hilton Garden Inn Joint Venture, which we account for under the equity method of accounting.
See Notes 3 and 4 of the Notes to Consolidated Financial Statements for additional information on our dispositions.
19
Comparison of the year ended
Consolidated
Our consolidated revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation and amortization for the years endedDecember 31, 2020 and 2019 are attributable to our consolidated hospitality properties, including the SpringHill Suites -Green Bay through its date of disposition. Overall, our hospitality portfolio experienced decreases in the percentage of rooms occupied from 74.7% to 49.0% for 2019 and 2020, respectively, revenue per available room ("RevPAR") from$87.87 to$42.75 for 2019 and 2020, respectively, and the average daily rate per room ("ADR") from$117.65 to$87.30 for 2019 and 2020, respectively. Revenues
Revenues decreased by$18.3 million to$14.2 million during the year endedDecember 31, 2020 compared to$32.5 million for the same period in 2019. Excluding the effect of the disposition of the SpringHill Suites -Green Bay , revenues for ourSame Store Hotels decreased by$15.1 million . This decrease reflects lower occupancy, RevPAR and ADR during 2020 compared to 2019, all of which were primarily attributable to reduced room demand during the 2020 period resulting from the COVID-19 pandemic. Property operating expenses Property operating expenses decreased by$9.5 million to$11.2 million during the year endedDecember 31, 2020 compared to$20.7 million for the same period in 2019. Excluding the effect of the disposition of the SpringHill Suites -Green Bay , property operating expenses for ourSame Store Hotels decreased by$7.5 million . This decrease reflects the lower occupancy during 2020 resulting from the COVID-19 pandemic. Real estate taxes
Real estate taxes decreased slightly by$0.1 million to approximately$1.5 million during the year endedDecember 31, 2020 compared to$1.6 million for the same period in 2019 due primarily to the lower real estate taxes as a result of the disposition of the SpringHill Suites -Green Bay .
General and administrative expense
General and administrative expenses decreased by$0.5 million to$2.5 million during the year endedDecember 31, 2020 compared to$3.0 million for the same period in 2019 principally due to lower asset management fees as a result of the dispositions of the SpringHill Suites -Green Bay and our 22.5% membership interest in the Cove Joint Venture.
Depreciation and amortization
Depreciation and amortization expense decreased slightly by$0.6 million to$5.1 million during the year endedDecember 31, 2020 compared to$5.7 million for the same period in 2019 due primarily to the lower depreciation expense as a result of the disposition of the SpringHill Suites -Green Bay . Interest expense
Interest expense decreased by$1.4 million to$3.0 million during the year endedDecember 31, 2020 compared to$4.4 million for the same period in 2019. Interest expense is attributable to financings associated with our hotels and reflects both changes in market interest rates on our variable rate indebtedness and the weighted average principal outstanding during the periods.
Gain on disposition of unconsolidated affiliated real estate entity
OnFebruary 12, 2020 , we completed the disposition of an unconsolidated 22.5% membership interest in the Cove Joint Venture which resulted in the recognition of a gain on the disposition of unconsolidated affiliated real estate entity of$7.9 million during the first quarter of 2020. DuringAugust 2020 , we received$0.1 million of additional proceeds related to the redemption of our membership interest in the Cove Joint Venture and recognized a gain on the disposition of investment in unconsolidated affiliated real estate entity of$0.1 million during the third quarter of 2020. As a result, we have recognized an aggregate gain on the disposition of investment in unconsolidated affiliated real estate entity of approximately$8.0 million during the year endedDecember 31, 2020 .
Gain on disposition of investment property
During the year endedDecember 31, 2019 , we recognized a gain on the disposition of investment property of approximately$1.4 million related to the disposition of the SpringHill Suites -Green Bay onOctober 24, 2019 . Earnings from investments in unconsolidated affiliated real estate entities Our loss from investments in unconsolidated affiliated real estate entities during the year endedDecember 31, 2020 was$2.1 million compared to$2.8 million for the same period in 2019. Our loss from investments in unconsolidated affiliated real estate entities is attributable to our unconsolidated 50.0% membership interest in the Hilton Garden Inn Joint Venture and our unconsolidated 22.5% membership interest in the Cove Joint Venture (through the date of the redemption of our membership interest onFebruary 12, 2020 ). We account for our membership interests in the Hilton Garden Inn Joint Venture and the Cove Joint Venture under the equity method of accounting commencing on the date that we acquired our interests. 20
Financial Condition, Liquidity and Capital Resources
Overview: Revenues, interest and dividend income, proceeds from the sale of marketable securities, distributions from unconsolidated affiliated investments 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 entity, redemptions and cancellations of shares of our common stock, if approved, and distributions, if any, required to maintain our status as a REIT. During the year endedDecember 31, 2020 , our primary source of funds was approximately$22.0 million of proceeds generated from the disposition of our 22.5% membership interest in the Cove Joint Venture. We currently believe that these cash resources along with our available cash on hand of$27.0 million and marketable securities, available for sale, of$3.2 million , both as ofDecember 31, 2020 , 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 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. As ofDecember 31, 2020 , we have$64.8 million of outstanding mortgage debt and$1.5 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 ofDecember 31, 2020 , our total borrowings were$66.3 million which represented 63% 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. 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, theOperating Partnership may be required to make distributions toLightstone SLP III LLC , an affiliate of the Advisor. 21 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 following table represents the fees incurred associated with the payments to our Advisor for the periods indicated:
For the Years Ended
December 31,
2020 2019
Disposition fee (1) $ - $ 39,200
Finance fees (2) - 303,750Asset management fees (general and administrative costs) 1,256,459
1,802,505
Construction management fees (3) -
4,954
Total $ 1,256,459 $ 2,150,409 (1) A disposition fee of
the SpringHill Suites -
costs.
(2) Finance fees of
of our investment in the Cove Joint Venture, which was included in
investments in unconsolidated affiliated real estate entities on the
consolidated balance sheets through the date of disposition (
2020) of our 22.5% membership interest.
(3) Generally, capitalized and amortized over the estimated useful life of the
associated asset.
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:
Year Ended Year Ended
December 31, December 31,
2020 2019
Cash flows (used in)/provided by operating activities $ (3,765,414 ) $ 3,274,266
Cash flows provided by investing activities 20,600,226 18,655,902
Cash flows used in financing activities (406,759 ) (20,025,656 )
Net change in cash, cash equivalents and restricted cash 16,428,053 1,904,512
Cash, cash equivalents and restricted cash, beginning of year 13,543,193 11,638,681
Cash, cash equivalents and restricted cash, end of year $ 29,971,246 $ 13,543,193 Our principal source of cash flow during the year endDecember 31, 2020 has been derived from the disposition of our 22.5% membership interest in the Cove Joint Venture. We believe our cash available on hand and any proceeds from the sale of our marketable securities, together with our expected earnings, and/or distributions from our investments will provide us with sufficient resources to fund our operating expenses, expected debt service, capital contributions and distributions, if any, required to maintain our qualification as a REIT. 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. 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 forbearance of scheduled debt service, reductions in interest rates and waiver periods and modifications of financial covenants. See "Contractual Mortgage Obligations" for additional information. Operating activities The net cash used in operating activities of$3.8 million during the year endDecember 31, 2020 consisted of our net loss of$2.9 million , a gain of$8.0 million on the disposition of our 22.5% membership interest in the Cove Joint Venture and net changes in operating assets and liabilities of$0.3 million offset by depreciation and amortization, amortization of deferred financing costs and other non-cash items aggregating$7.4 million . The net use of cash in operating activities of$3.8 million during the year endDecember 31, 2020 was principally attributable to the negative effect of the COVID-19 pandemic on
our operating performance. Investing activities The net cash provided by investing activities of$20.6 million during the year endDecember 31, 2020 primarily consisted of proceeds received in connection with the redemption of our 22.5% membership interest in the Cove Joint Venture of$22.0 million partially offset by contributions to the Hilton Garden Inn Joint Venture of$0.9 million and capital expenditures of$0.4 million . 22 Financing activities The cash used in financing activities of$0.4 million during the year endDecember 31, 2020 consisted of payments on our mortgages payable of$1.1 million and redemptions and cancellations of common stock of$0.8 million , partially offset by proceeds received from PPP Loans of$1.5 million .
Distributions on Common Shares
On
Previously, distributions in an amount equal to a 6.0% annualized rate were
declared on a monthly basis beginning on
There were no distributions declared during the year endedDecember 31, 2020 . Total distributions declared during the year endedDecember 31, 2019 were$4.0 million . 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 theIRS'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 For the period fromJanuary 1 through March 18, 2020 , 80,436 shares of common stock were repurchased under our share repurchase program at an average price per share of$9.92 per share. For the year endedDecember 31, 2019 , we repurchased 141,204 shares of common stock at an average price per share of$9.77 . OnMarch 19, 2020 , the Board of Directors amended the share repurchase program to remove stockholder notice requirements and also approved the suspension of all redemptions effective immediately.
Contractual Mortgage Obligations
The following is a summary of our estimated contractual mortgage obligations outstanding over the next five years and thereafter as ofDecember 31, 2020 . Contractual Mortgage Obligations 2021 2022 2023 2024 2025 Thereafter Total Principal maturities$ 26,509,613 $ 38,414,814 $ - $ - $ - $ -$ 64,924,427 Interest payments(1) 2,513,093 1,783,220 - - - - 4,296,313 Total Contractual Mortgage Obligations$ 29,022,706 $ 40,198,034 $ - $ - $ - $ -$ 69,220,740 Note:
(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 the
one-month LIBOR rate. For purposes of calculating future interest amounts on
variable interest rate debt the one-month LIBOR rate as of
was used.
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, including a prescribed
minimum debt yield. The Revolving Credit Facility provides for monthly
interest-only payments and the entire principal balance is due upon its
expiration.
23
The Revolving Credit Facility, which was entered into onJuly 13, 2016 , had an initial maturity date ofJuly 13, 2019 , subject to two one-year options to extend at the sole discretion of the lender. The initial interest rate on the Revolving Credit Facility was LIBOR + 4.95% until it was reduced to LIBOR + 3.50% effectiveJune 18, 2018 . OnJuly 11, 2019 , we and the lender amended the Revolving Credit Facility to extend the initial maturity date for 60 days to provide additional time to finalize the terms of a long-term extension. In connection with this amendment, the interest rate on the Revolving Credit Facility was reduced from LIBOR + 3.50% to LIBOR + 3.15%, effectiveJuly 1, 2019 and the requirements under the minimum debt yield ratio were modified effective as ofJune 30, 2019 . OnAugust 22, 2019 , we and the lender further amended the Revolving Credit Facility to extend the maturity date toJuly 13, 2022 , subject to two, one-year options to extend at the sole discretion of the lender. In connection with this amendment, we were required to make principal paydowns of$0.6 million on bothAugust 22, 2019 andDecember 31, 2019 , respectively, and in certain circumstances would be required to make an additional principal paydown of$0.6 million onApril 1, 2020 . OnJune 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 fromApril 1, 2020 throughSeptember 30, 2020 untilJuly 13, 2022 ; (ii) a 100 bps reduction in the interest rate spread to LIBOR + 2.15%, subject to a 3.00% floor, for the six-month period fromSeptember 1, 2020 throughFebruary 28, 2021 ; (iii) our pre-funding$0.8 million into a cash collateral reserve account (of which$0.3 million was included in restricted cash on our consolidated balance sheet as ofDecember 31, 2020 ) to cover the six monthly debt service payments due fromOctober 1, 2020 throughMarch 1, 2021 ; and (iv) a waiver of all financial covenants for quarter-end periods beforeJune 30, 2021 . Additionally, a principal paydown of$0.6 million , which was previously due onApril 1, 2020 was bifurcated into two separate principal paydowns, each one$0.3 million , which were made inJune 2020 andSeptember 2020 . We and the lender have agreed in principle to certain amendments to the terms of the Revolving Credit Facility, which we expect will be finalized shortly, that provide for (i) us to make another principal paydown of$3.8 million , (ii) us to fund an additional$0.9 million into the cash collateral reserve account; (iii) a waiver of all financial covenants for quarter-end periods throughSeptember 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods beginningDecember 31, 2021 throughMarch 31, 2023 ; (iv) two one-year extension options at the lender's sole discretion; and (v) certain limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.
As of
Home2 Suites Promissory Note
OnOctober 5, 2016 , we entered into a non-recourse promissory note (the "Home2 Suites Promissory Note") for$28.4 million . The Promissory Note has a term of five years, bears interest at 4.73% and requires monthly interest and principal payments of$147,806 through its stated maturity with the then remaining unpaid balance of approximately$26.1 million due upon maturity. The Home2 Suites Promissory Note is cross-collateralized by two of our hotel properties (Home2 Suites - Tukwila and Home2 Suites -Salt Lake City ). As ofDecember 31, 2020 , the Home2 Suites Promissory Note had an outstanding balance of approximately$26.5 million . The Home2 Suites Promissory Note matures onOctober 5, 2021 . We currently intend to refinance Home2 Suites Promissory Note on or before its maturity date. Although we are current with respect to the payment of debt service on our nonrecourse Home2 Suites Promissory Note, we did not meet the required minimum debt service coverage ratio for the third and fourth quarters of 2020 because of the impact of the COVID-19 pandemic on the operating performance of these two hotels. As a result, the lender may elect to retain any excess cash flow from these two hotels until such time as a prescribed minimum debt service coverage ratio is achieved for two successive quarters. If the lender elects to retain any excess cash flow from these two hotels, we do not believe it would have a material effect on our liquidity or financial condition. PPP Loans DuringApril 2020 , we, through various subsidiaries (each such entity, a "Borrower") received aggregate funding of$1.5 million through loans (the "PPP Loans") originated under the federal Paycheck Protection Program, which was established under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and is administered by theU.S. Small Business Administration . The PPP Loans each have a term of five years and provide for an interest rate of 1.00%. The payment of principal and interest on the PPP loan is deferred until the day that the forgiven amount is remitted to the lender (approximately five months after the forgiveness application is submitted to the lender, unless the Borrower appeals a denial of forgiveness) or ten months after the end of the Borrower's covered period, whichever is earlier. Pursuant to the terms of the CARES Act, the proceeds of the PPP Loans may be used for payroll costs, mortgage interest, rent or utility costs. The promissory note for each of the PPP Loans contains customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note. Under the terms of the CARES Act, each Borrower can apply for and be granted forgiveness for all or a portion of the PPP Loans. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act. Although we intend for each Borrower to apply for forgiveness, no assurance may be given that any Borrower will ultimately obtain forgiveness under any relevant PPP Loan in whole or in part. As ofDecember 31, 2020 , the PPP Loans had an outstanding balance of$1.5 million , which is classified as Notes Payable on the consolidated balance sheets. 24
Subsequently, during the first quarter of 2021, our hotels received an
additional
Investments in Unconsolidated Affiliated Entities
We have an unconsolidated 50.0% membership interest inLVP LIC Hotel JV LLC (the "Hilton Garden Inn Joint Venture"), an affiliated entity that owns and operates a 183-room limited service hotel located inLong Island City, New York (the "Hilton Garden Inn -Long Island City "). We account for our unconsolidated membership interests in the Hilton Garden Inn Joint Venture under the equity method of accounting. In light of the impact of the COVID-19 pandemic on the operating results of theHilton Garden Inn -Long Island City , the Hilton Garden Inn Joint Venture has entered into certain amendments with respect to its non-recourse mortgage loan (theHilton Garden Inn Mortgage ") as discussed below. OnJune 2, 2020 , theHilton 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 fromApril 1, 2020 throughSeptember 30, 2020 untilMarch 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 fromSeptember 1, 2020 throughFebruary 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 fromOctober 1, 2020 throughMarch 1, 2021 ; and (iv) waiver of all financial covenants for quarter-end periods beforeJune 30, 2021 . Additionally, the Hilton Garden Inn Joint Venture and the lender have agreed in principle to certain amendments to the terms of theHilton Garden Inn Mortgage , which they expect will be finalized shortly, that 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 throughSeptember 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods beginningDecember 31, 2021 throughDecember 31, 2022 ; (iv) a 12-month interest-only payment period fromApril 1, 2021 throughMarch 31, 2022 ; and (v) certain restrictions on distributions to the members of the Hilton Garden Inn Joint Venture during the interest-only payment period.
See Note 4 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, 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 GAAP. We define FFO, a non-GAAP measure, consistent with the standards set forth in the White Paper on FFO approved by theBoard of Governors of NAREIT, as revised inFebruary 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding gains or losses from sales of property and real estate related impairments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.
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, 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. 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. The below table illustrates the items deducted from or added to net loss in the calculation of FFO and MFFO during the periods presented. The table discloses MFFO in the IPA recommended format and MFFO without the straight-line rent adjustment which management also uses as a performance measure. Items are presented net of non-controlling interest portions where applicable. 26 For the Year Ended December 31, 2020 2019 Net loss$ (2,886,775 ) $ (4,063,908 ) FFO adjustments: Adjustments to equity earnings from unconsolidated entities, net 1,484,152 3,890,764 Depreciation and amortization of real estate assets 5,101,313 5,673,357
Gain on disposition of unconsolidated affiliated real estate entity
(7,996,967 ) -
Gain on disposition of investment property - (1,368,810 )
FFO (4,298,277 ) 4,131,403
MFFO adjustments:
Loss on sale of marketable securities(1) 18,666 38,359
Acquisition and other transaction related costs expensed 2,113 40,000
Unrealized gain on marketable equity securities(2) (265 ) -
Adjustments to equity earnings from unconsolidated affiliated real estate entities (loss on debt extinguishment)(1)
- 342,163
MFFO (4,277,763 ) 4,551,925
Straight-line rent(2) - -
MFFO - IPA recommended format $
(4,277,763 )
Net loss$ (2,886,775 ) $ (4,063,908 ) Less: net loss attributable to noncontrolling interests 30 48 Net loss applicable to Company's common shares$ (2,886,745 ) $ (4,063,860 ) Net loss per common share, basic and diluted $
(0.22 )
FFO$ (4,298,277 ) $ 4,131,403 Less: FFO attributable to noncontrolling interests 53 (74 ) FFO attributable to Company's common shares$ (4,298,224 ) $ 4,131,329 FFO per common share, basic and diluted $
(0.32 )
MFFO - IPA recommended format$ (4,277,763 ) $ 4,551,925 Less: MFFO attributable to noncontrolling interests 51 (66 ) MFFO attributable to Company's common shares $
(4,277,712 )
Weighted average number of common shares outstanding, basic and diluted 13,233,527 13,366,468
(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.
(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 distributions declared and cumulative
FFO:
For the period
October 5,
2012
(date of inception) through
December 31,
2020 FFO attributable to Company's common shares $ 11,618,167
Cumulative distributions declared $ 25,876,082
27
© Edgar Online, source
