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 thousands, except
per share data, revenue per available room ("RevPAR"), average daily rate
("ADR") and where indicated in millions.
Overview
Lightstone Value Plus REIT III, Inc. ("Lightstone REIT III"), which was formerly
known as Lightstone Value Plus Real Estate Investment Trust III, Inc. before
September 16, 2021 , together with the Operating 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 in the United States . Our acquisitions and investments
are, principally conducted through the Operating Partnership , and may include
both portfolios and individual properties. As of December 31, 2022 , our
portfolio of properties consisted of ten hospitality properties (eight
consolidated and two unconsolidated). Our real estate investments have been and
are expected to continue to be held by us alone or jointly with other parties.
As of December 31, 2022 , we (i) majority owned and consolidated the operating
results and financial condition of eight limited-service hotels containing a
total of 872 rooms, (ii) held an unconsolidated 50.0% membership interest in LVP
LIC Hotel JV LLC (the "Hilton Garden Inn Joint Venture ") and (iii) held an
unconsolidated 25.0% membership interest in Bedford Avenue Holdings LLC (the
"Williamsburg Moxy Hotel Joint Venture "). We account for our unconsolidated
membership interests in the Hilton Garden Inn Joint Venture and the Williamsburg
Moxy Hotel Joint Venture under the equity method of accounting.
The Hilton Garden Inn Joint Venture owns a 183-room, limited-service hotel (the
"Hilton Garden Inn - Long Island City ) located in the Long Island City
neighborhood in the Queens borough of New York City . The Williamsburg Moxy Hotel
Joint Venture developed, constructed and owns a 210-room branded hotel (the
"Williamsburg Moxy Hotel ") located in the Williamsburg neighborhood in the
Brooklyn borough of New York City , which opened on March 7, 2023 . Both the
Hilton Garden Inn Joint Venture and the Williamsburg Moxy Hotel Joint Venture
are between us and related parties.
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We have no employees. Our Advisor and its affiliates perform a full range of
real estate services for us, including asset management, accounting, legal, and
property management, as well as investor relations services.
We are dependent on the Advisor and its affiliates for services that are
essential to us, including asset management and acquisition, disposition and
financing activities, and other general administrative responsibilities. If the
Advisor and its affiliates are unable to provide these services to us, we would
be required to provide the services ourselves or obtain the services from other
parties.
We also use other unaffiliated third-party property managers, principally for the management of our hospitality properties.
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 and expect to continue to invest in commercial properties (including full-service or limited-service hotels and extended-stay hotels) and residential properties, as well as other real estate-related investments principally inNorth America . Our acquisitions may include both portfolios and individual properties. Full-service hotels generally provide a full complement of guest amenities including restaurants, concierge and room service, porter service or valet parking. Limited-service hotels typically do not include these amenities. Extended-stay hotels offer upscale, high-quality, residential style lodging with a comprehensive package of guest services and amenities for extended-stay business and leisure travelers. We have no limitation as to the brand of franchise or license with which our hotels are associated. We generally intend to hold each acquired property until its investment objectives are met or it is likely they will not be met.
Even though we have and expect to continue primarily to acquire hotels, we have and may continue to purchase other types of real estate. Assets other than hotels may include, without limitation, office buildings, shopping centers, business and industrial parks, manufacturing facilities, single-tenant properties, multifamily properties, student housing properties, warehouses and distribution facilities and medical office properties. We have and expect to continue to invest mainly in direct real estate investments and other equity interests; however, we may also invest in debt interests, which may include bridge or mezzanine loans, including in furtherance of a loan-to-own strategy. We have not established any limits on the percentage of our portfolio that may be comprised of various categories of assets which present differing levels
of risk. We have and expect to continue to enter into joint ventures, tenant-in-common investments or other co-ownership arrangements for the acquisition, development or improvement of properties with third parties or certain affiliates of our Advisor, including other present and future REITs and real estate limited partnerships sponsored by affiliates of our Advisor. Current Environment
Our operating results and financial condition 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 and uncertainty as a result of recent banking failures, 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, inflation and recession. Our overall performance depends in part on worldwide economic and geopolitical conditions and their impacts on consumer behavior. Worsening economic conditions, increases in costs due to inflation, higher interest rates, certain labor and supply chain challenges, developments related to the COVID-19 pandemic and other changes in economic conditions may adversely affect our results of operations and financial performance. 17 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. The preparation of financial statements in conformity with generally accepted accounting principles 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.
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 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 undiscounted
projected cash flows are less than the carrying amount 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 that 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
undiscounted projected 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 fair value.
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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 39 years for buildings and improvements and 5 to 10 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.
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.
Tax Status and Income Taxes We elected to be taxed and qualify as a REIT commencing with the taxable year endedDecember 31, 2015 . As a REIT, we generally will not be subject toU.S. federal income tax on our net taxable income that we distribute currently to our stockholders. To maintain our REIT qualification under the Internal Revenue Code of 1986, as amended, or 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. Additionally, even if we continue to qualify as a REIT forU.S. federal income tax purposes, we may still be subject to someU.S. federal, state and local taxes on our income and property and toU.S. federal income taxes and excise taxes on our undistributed income, if any. 19 To maintain our qualification as a REIT, we engage in certain activities through taxable REIT subsidiaries ("TRSs"), including when we acquire a hotel we usually establish a TRS and enter into an operating lease agreement for the hotel. As such, we are subject toU.S. federal and state income taxes and franchise taxes from these activities.
As of
Results of Operations
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, 2022 and 2021 are attributable to our consolidated hospitality properties, all of which were owned by us during the entire periods presented.
As a result of the COVID-19 pandemic, room demand and rental rates for our consolidated and unconsolidated hotels significantly declined starting inMarch 2020 at the onset of the pandemic; and while these metrics have improved since then (beginning late 2020 and continuing through the end 2022); room demand and rental rates still remain below their pre-pandemic historical levels for certain of our hotels. During the year endedDecember 31, 2022 compared to same period in 2021, our consolidated hospitality portfolio experienced increases in (i) the percentage of rooms occupied to 70.7% from 68.1%, (ii) RevPAR to$86.48 from$66.51 , and (iii) ADR to$122.32 from$97.65 . Revenues Revenues increased by$6.5 million to$28.3 million during the year endedDecember 31 , 2022compared to$21.8 million for the same period in 2021. This increase reflects the higher occupancy, RevPAR and ADR during the 2022 period, which were attributable to the continuing economic recovery from the COVID-19 pandemic. Furthermore, the higher RevPAR and ADR reflect the effect of inflation on our room rental rates. Property operating expenses Property operating expenses increased by$4.3 million to$18.1 million during the year endedDecember 31, 2022 compared to$13.8 million for the same period in 2021. This increase is substantially attributable to the higher occupancy, but also includes higher labor costs resulting from wage inflation and increased property management fees and franchise fees, which are generally based on the increase in revenues. Real estate taxes
Real estate taxes decreased slightly by$0.1 million to$1.3 million during the year endedDecember 31, 2022 compared to$1.4 million for the same period in 2021.
General and administrative expense
General and administrative expenses increased slightly by$0.1 million to$2.6 million during the year endedDecember 31, 2022 compared to$2.5 million for the same period in 2021.
Depreciation and amortization
Depreciation and amortization expense decreased by$0.2 million to$4.9 million during the year endedDecember 31, 2022 compared to$5.1 million for the same period in 2021. Interest expense
Interest expense increased by$0.5 million to$3.4 million during the year endedDecember 31, 2022 compared to$2.9 million for the same period in 2021. Interest expense is attributable to the financings associated with our hotels and reflects higher interest expense on our mortgage debt, all of which bears interest at variable rates, during the 2022 period. 20 Gain on forgiveness of debt
During the years endedDecember 31, 2022 and 2021, notice was received from theU.S. Small Business Administration (the "SBA") that$1.9 million and$1.5 million , respectively, of Paycheck Protection loans (the "(PPP Loans") and related accrued interest had been legally forgiven and therefore, we recognized a gain on forgiveness of debt for these amounts during those periods. Earnings from investments in unconsolidated affiliated real estate entities Our income from investments in unconsolidated affiliated real estate entities was$3 during the year endedDecember 31, 2022 compared to a loss of$0.3 million for the same period in 2021. Our earnings from investments in unconsolidated affiliated real estate entities are attributable to our unconsolidated 50.0% membership interest in the Hilton Garden Inn Joint Venture and our unconsolidated 25.0% membership interestWilliamsburg Moxy Hotel Joint Venture .
Financial Condition, Liquidity and Capital Resources
Overview: As ofDecember 31, 2022 , we had$18.4 million of cash on hand and$3.3 million of marketable securities. We currently believe that these items along with revenues from our hospitality properties, interest and dividend income earned on our marketable securities, distributions received from our unconsolidated affiliated real estate entities and proceeds received from the sale of marketable securities will be sufficient to satisfy our expected cash requirements for at least twelve months from the date of filing this report, which primarily consist of our anticipated operating expenses, scheduled debt service (excluding balloon payments due at maturity), capital expenditures (excluding non-recurring capital expenditures), contributions to our unconsolidated affiliated real estate entities, redemptions and cancellations of shares of our common stock and distributions to our shareholders, if any, required to maintain our status as a REIT for the foreseeable future. Additionally, we currently intend to seek to extend the maturity for our revolving credit facility (the "Revolving Credit Facility"), which had an outstanding principal balance of$34.6 million as ofDecember 31, 2022 , toJuly 13, 2024 pursuant to the lender's remaining one-year extension option, as discussed in Note 5 of the Notes to Consolidated Financial Statements. However, to the extent that our cash flow from operations and available cash on hand and marketable securities are not sufficient to cover our cash needs or our lender does not agree to the extension option under the Revolving Credit Facility, we may use proceeds from additional borrowings and/or selective asset sales to
fund such needs. As ofDecember 31, 2022 , we have$61.3 million of outstanding mortgage debt. We have and intend to continue to limit our aggregate long-term permanent borrowings to 75% of the aggregate fair market value of all properties unless any excess borrowing is approved by a majority of the independent directors and is disclosed to our stockholders. Market conditions will dictate our overall leverage limit; as such our aggregate long-term permanent borrowings may be less than 75% of aggregate fair market value of all properties. We may also incur short-term indebtedness, having a maturity of two years or less. Our charter provides that the aggregate amount of our borrowing, both secured and unsecured, may not exceed 300% of net assets in the absence of a justification showing that a higher level is appropriate, the approval of our Board of Directors and disclosure to stockholders. Net assets means our total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less our total liabilities, calculated at least quarterly on a basis consistently applied. Any excess in borrowing over such 300% of net assets level must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report to stockholders, along with justification for such excess. Market conditions will dictate our overall leverage limit; as such our aggregate borrowings may be less than 300% of net assets. As ofDecember 31, 2022 , our total borrowings were$61.3 million which represented 55% of our net assets. Our borrowings currently consist of mortgages cross-collateralized by a pool of properties. Our mortgages typically provide for either interest-only payments (generally for variable-rate indebtedness) or level payments (generally for fixed-rate indebtedness) with "balloon" payments due at maturity. 21
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 our working capital needs and making distributions, if any, to our stockholders, our capital resources are used to make certain payments to our Advisor and its affiliates, such as payments related to asset acquisition fees, development fees and leasing commissions, asset management fees, the reimbursement of acquisition related expenses to our Advisor and property management fees. We also reimburse our Advisor and its affiliates for actual expenses it incurs for administrative and other services provided to us. Additionally, in the event of a liquidation of our assets, we may pay our Advisor or its affiliates a real estate disposition fee. Furthermore, theOperating Partnership may be required to make distributions toLightstone SLP III, LLC , an affiliate of the Advisor. The advisory agreement has a one-year term and is renewable for an unlimited number of successive one-year periods upon the mutual consent of the Advisor and our independent directors.
The following table represents the fees incurred associated with the payments to the Advisor for the periods indicated:
For the
Year Ended
December 31,
2022 2021
Finance fees (1) (2) $ - $ 345
Asset management fees (general and administrative costs) 1,207 1,205
Total $ 1,207 $ 1,550 (1) A finance fee of
included in investment in unconsolidated affiliated real estate entities on
the consolidated balance sheets.
(2) An aggregate finance fee of
arranging the Home2 Suites - Tukwila Loan and the Home2 Suites -
City was capitalized and included in mortgages payable, net on the
consolidated balance sheets as a direct deduction from the carrying value of
the corresponding loan.
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:
22
Year Ended Year Ended
December 31 , December 31,
2022 2021
Net cash flows provided by operating activities
1,663
Net cash flows used in investing activities (207 ) (12,051 ) Net cash flows used in financing activities (1,112 ) (2,944 ) Change in cash and cash equivalents 1,752 (13,332 ) Cash and cash equivalents, beginning of year 16,639
29,971
Cash and cash equivalents, end of year$ 18,391 $
16,639 Operating activities The net cash provided by operating activities of$3.1 million during the year endedDecember 31, 2022 consisted of our net loss of$0.2 million plus depreciation and amortization, amortization of deferred financing costs and other non-cash items aggregating$5.3 million , less gain on forgiveness of debt of$1.9 million and the net changes in operating assets and liabilities of
$0.1 million . Investing activities The net cash used in investing activities of$0.2 million during the year endedDecember 31, 2022 consisted of purchases of marketable securities of$1.7 million , additional net investments in theWilliamsburg Moxy Hotel Joint Venture of$0.3 million and capital expenditures of$0.3 million ; partially offset by distributions from our investment in the Hilton Garden Inn Joint Venture of
$2.1 million . Financing activities The net cash used in financing activities of$1.1 million during the year endedDecember 31, 2022 consisted of redemptions and cancellations of common shares of$1.0 million and the payment of loan fees and expenses of$0.1 million . Distributions Common Shares OnJune 19, 2019 , our Board of Directors determined to suspend regular monthly distributions on our Common Shares and as a result, no distributions have been declared since the suspension. Previously, distributions on our Common Shares in an amount equal to a 6.0% annualized rate, based on a share price of$10.00 , were declared on a monthly basis beginning onJanuary 14, 2015 throughJune 30, 2019 and were paid on or about the 15th day following each month end.
There were no distributions declared or paid during the years ended
OnMarch 22, 2023 , the Board of Directors authorized and we declared a Common Share distribution of$0.075 per share for the quarterly period endingMarch 31, 2023 . The distribution is the pro rata equivalent of an annual distribution of$0.030 per share, or an annualized rate of 3% based on a share price of$10.00 . The distribution will be paid on or about the 15th day of the month following the quarter-end to stockholders of record at the close of business on the last day of the quarter end. Future distributions declared, if any, will be at the discretion of the Board of Directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. The Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, revenues and other sources of income, operating and interest expenses and our 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. We cannot assure that any future distributions will be made or that we will maintain any particular level of distributions that we have previously established or may establish. 23
Subordinated Participation Interests
In connection with our initial public offering (the "Offering"), which terminated onMarch 31, 2017 ,Lightstone SLP III LLC , aDelaware limited liability company (the "Special Limited Partner"), purchased fromLightstone Value Plus REIT III LP , aDelaware limited partnership (the "Operating Partnership") an aggregate of 242 Subordinated Participation Interests for consideration of$12.1 million . The Subordinated Participation Interests were each purchased for$50 in consideration and may be entitled to receive liquidation distributions upon the liquidation of Lightstone REIT III. These Subordinated Participation Interests entitle the Special Limited Partner to a portion of any regular and liquidation distributions that we make to stockholders, but only after stockholders have received a stated preferred return. From our inception throughDecember 31, 2022 , no distributions have been declared or paid on the Subordinated Participation Interests. SRP
Our share repurchase program (the "SRP") may provide eligible stockholders with limited, interim liquidity by enabling them to sell Common Shares back to us, subject to restrictions and applicable law.
On
EffectiveMay 10, 2021 , the Board of Directors partially reopened the SRP to allow, subject to various conditions as set forth below, for redemptions submitted in connection with a stockholder's death and hardship, respectively, and set the price for all such purchases to our current estimated net asset value per share of common stock, as determined by our board of directors and reported by us from time to time. Deaths that occurred subsequent toJanuary 1, 2020 were eligible for consideration, subject to certain conditions. BeginningJanuary 1, 2022 , requests for redemptions in connection with a stockholder's death must be submitted and received by us within one year of the stockholder's date of death for consideration. On the above noted date, the Board of Directors established that on an annual basis, we would not redeem in excess of 0.5% of the number of shares outstanding as of the end of the preceding year for either death or hardship redemptions, respectively. Additionally, redemption requests generally would be processed on a quarterly basis and would be subject to proration if either type of redemption requests exceeded the annual limitation. For the year endedDecember 31, 2022 , we repurchased 110,093 Common Shares at a weighted average price per share of$9.06 . For the year endedDecember 31, 2021 we repurchased 77,678 Common Shares at a weighted average price per share of$8.05 .
Contractual Mortgage Obligations
The following is a summary of our estimated contractual mortgage obligations
outstanding over the next 5 years and thereafter as of
Contractual Mortgage Obligations 2023 2024 2025 2026 2027 Thereafter Total Principal maturities$ 34,573 $ 656 $ 684 $ 25,410 $ - $ -$ 61,323 Interest payments(1) 1,907 2,071 2,192 4,103 - - 10,273 Total Contractual Mortgage Obligations$ 36,480 $ 2,727 $ 2,876 $ 29,513 $ - $ -$ 71,596
(1) These amounts represent future interest payments related to mortgage payable
obligations based on the interest rates specified in the associated debt
agreement. All of our mortgage debt outstanding as of
interest (i) based on one-month LIBOR, plus a specified spread, subject to a
floor, or (ii) based on one-month AMERIBOR plus a specified spread, subject
to a floor. For purposes of calculating future interest amounts on our
variable interest rate debt, the one-month LIBOR and one-month AMERIBOR rates
as of December 31, 2022 were used.
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Revolving Credit Facility
We, through certain subsidiaries, have a non-recourse revolving credit facility
(the "Revolving Credit Facility") with a financial institution. The Revolving
Credit Facility provides us with a line of credit of up to $60.0 million
pursuant to which we may designate properties as collateral that allow
borrowings up to a 65.0% loan-to-value ratio subject to also meeting certain
financial covenants. The Revolving Credit Facility provides for monthly
interest-only payments and the entire principal balance is due upon its
expiration.
Except as discussed below, the Revolving Credit Facility, which was scheduled to
mature on July 13, 2022 , bore interest at LIBOR plus 3.15%, subject to a 4.00%
floor. However, on July 13, 2022 the maturity date of the Revolving Credit
Facility was extended to July 13, 2023 , subject to the conditions of the first
of two one-year extension options, which included the lender's approval. In
connection with the extension of the Revolving Credit Facility, the interest
rate was prospectively changed to AMERIBOR plus 3.15%, subject to a 4.00% floor.
The remaining one-year extension option is subject to certain conditions,
including lender approval.
On June 2, 2020 , our Revolving Credit Facility was amended to provide for (i)
the deferral of the six monthly debt service payments aggregating $0.8 million
for the period from April 1, 2020 through September 30, 2020 until July 13, 2022
(which was paid in connection with the extension of the Revolving Credit
facility as discussed above); (ii) a 100 bps reduction in the interest rate
spread to LIBOR plus 2.15%, subject to a 3.00% floor, for the six-month period
from September 1, 2020 through February 28, 2021 ; (iii) our pre-funding $0.8
million into a cash collateral reserve account to cover the six monthly debt
service payments due from October 1, 2020 through March 1, 2021 ; and (iv) a
waiver of all financial covenants for quarter-end periods before June 30, 2021 .
Additionally, a principal paydown of $0.6 million , which was previously due on
April 1, 2020 was bifurcated into two separate principal paydowns, of $0.3
million , which were made in June 2020 and September 2020 .
Subsequently, on March 31, 2021 , our Revolving Credit Facility was further
amended providing for (i) us to make another principal paydown of $3.8 million ,
(ii) us to fund an additional $0.7 million into the cash collateral reserve
account; (iii) a waiver of all financial covenants for quarter-end periods
through September 30, 2021 with a phased-in gradual return to the full financial
covenant requirements over the quarter-end periods beginning December 31, 2021
through March 31, 2023 ; (iv) two one-year extension options, subject to certain
conditions, including the lender's approval (including the first extension
option which was exercised on July 13, 2022 ); and (v) certain limitations and
restrictions on asset sales and additional borrowings related to the pledged
collateral.
As of December 31, 2022 , the Revolving Credit Facility had an outstanding
principal balance of $34.6 million and six of our hotel properties were pledged
as collateral. Additionally, no additional borrowings were available under the
Revolving Credit Facility as of December 31, 2022 . Although the Revolving Credit
Facility is currently scheduled to mature on July 13, 2023 , we currently intend
to seek to further extend the Revolving Credit Facility to July 13, 2024 subject
to the conditions, including the lender's approval, of the one remaining
one-year extension option, however, there can be no assurances that we willbe successful in such endeavors.
All of our outstanding mortgage debt that currently bear interest at a rate
indexed to one-month LIBOR contain provisions to provide for a replacement
benchmark rate in connection with the phase-out of LIBOR, which is expected to
be for periods after
We are currently in compliance with respect to all of our financial debt covenants.
Home2 Suites Financings OnOctober 5, 2016 , we entered into a non-recourse promissory note (the "Home2 Suites Promissory Note") for$28.4 million . The Promissory Note had a term of 5 years and bore interest at 4.73%. The Home2 Suites Promissory Note was cross-collateralized by the Home2 Suites - Tukwila and the Home2 Suites -Salt Lake City .
OnDecember 6 , 2021,we entered into a non-recourse loan facility providing for up to$19.1 million (the "Home2 Suites - Tukwila Loan"). At closing, we initially received$16.2 million and the remaining$2.9 million is available afterDecember 31, 2022 , subject to satisfaction of certain conditions. The Home2 Suites - Tukwila Loan is scheduled to mature onDecember 6, 2026 , bears interest at LIBOR+3.50%, subject to a 3.75% floor, and requires monthly interest-only payments throughDecember 2023 and subsequently, monthly payments of interest and principal of$0.1 million through its maturity date. The Home2 Suites Tukwila Loan is cross-collateralized by the Home2 Suites - Tukwila and the Home2 Suites -Salt Lake City . 25
OnDecember 6, 2021 , we entered into a non-recourse loan facility providing for up to$12.5 million (the "Home2 Suites - Salt Lake City Loan"). At closing we initially received$10.5 million , and the remaining$2.0 million is available afterDecember 31, 2022 subject to satisfaction of certain conditions. The Home2 Suites - Salt Lake City Loan scheduled to mature onDecember 6, 2026 , bears interest at LIBOR+3.50%, subject to a 3.75% floor, and requires monthly interest-only payments throughDecember 2023 and subsequently, monthly payments of interest and principal of$0.1 million through its maturity date. The Home2 Suites Salt Lake City Loan is cross-collateralized by the Home2 Suites -Salt Lake City and the Home2 Suites - Tukwila. OnDecember 6, 2021 , we repaid the Home2 Suites Promissory Note (outstanding principal balance of$26.0 million ) in full using the initial proceeds from the Home2 Suites - Tukwila Loan and the Home2 Suites - Salt Lake City Loan. PPP Loans InApril 2020 , we, through various subsidiaries (each such entity, a "Borrower" and collectively, the "Borrowers"), received aggregate funding of$1.5 million through PPP Loans originated under the federal Paycheck Protection Program, which was established under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and is administered by the SBA. During the first quarter of 2021, the Borrowers received an additional aggregate funding of$1.9 million of PPP Loans. The PPP Loans are classified as Notes Payable in the consolidated balance sheets. The PPP Loans each had a term of five years and provided for an interest rate of 1.00%. The payment of principal and interest on the PPP Loans was deferred until the day that the forgiven amount was remitted to the lender (approximately 5 months after the forgiveness application is submitted to the lender, unless the Borrower appealed a denial of forgiveness) or 10 months after the end of the Borrower's covered period, whichever was earlier. Pursuant to the terms of the CARES Act, the proceeds of the PPP Loans were to be used for payroll costs, mortgage interest, rent and/or utility costs. The promissory note for each of the PPP Loans contained customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note. Under the terms of the CARES Act, each Borrower could apply for and be granted forgiveness for all or a portion of the PPP Loans, with such forgiveness determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act. We applied for forgiveness of all of our PPP Loans and during the years endedDecember 31, 2022 and 2021, we received notices from the SBA that an aggregate of$1.9 million and$1.5 million of the PPP Loans and their related accrued interest had been legally forgiven and we recognized gains on forgiveness of debt in those amounts, respectively, in our consolidated statements of operations. As ofDecember 31, 2022 , all of our PPP Loans and their related accrued interest have been legally forgiven, however each of the PPP Loans still remains subject to audit by the SBA for up to six years after the date on which it was legally forgiven.
Investments in Unconsolidated Affiliated Entities
Hilton Garden Inn Joint Venture
OnMarch 27, 2018 , we andLightstone Value Plus REIT II, Inc. ("Lightstone REIT II"), a REIT also sponsored by our Sponsor and a related party, acquired, through the newly formed Hilton Garden Inn Joint Venture theHilton Garden Inn -Long Island City from an unrelated third party for aggregate consideration of$60.0 million , which consisted of$25.0 million of cash and$35.0 million of proceeds from a five-year term, non-recourse mortgage loan from a financial institution (the "Hilton Garden Inn Mortgage "), excluding closing and other related transaction costs. We paid$12.9 million for a 50.0% membership interest in the Hilton Garden Inn Joint Venture.The Hilton Garden Inn Mortgage bore interest at LIBOR plus 3.15%, subject to a 5.03% floor, initially provided for monthly interest-only payments for the first 30 months of its term with principal and interest payments pursuant to a 25-year amortization schedule thereafter, and the remaining unpaid balance due in full at its maturity onMarch 27, 2023 .The Hilton Garden Inn Mortgage is collateralized by theHilton Garden Inn -Long Island City . 26 We and Lightstone II each have a 50.0% co-managing membership interest in the Hilton Garden Inn Joint Venture. We account for our membership interest in the Hilton Garden Inn Joint Venture in accordance with the equity method of accounting because we exert significant influence over but do not control the Hilton Garden Inn Joint Venture. All capital contributions and distributions of earnings from the Hilton Garden Inn Joint Venture are made on a pro rata basis in proportion to each member's equity interest percentage. Any distributions in excess of earnings from the Hilton Garden Inn Joint Venture are made to the members pursuant to the terms of the Hilton Garden Inn Joint Venture's operating agreement. We commenced recording our allocated portion of profit/loss and cash distributions beginning as ofMarch 27, 2018 with respect to our membership interest of 50.0% in the Hilton Garden Inn Joint Venture. In light of the impact of the COVID-19 pandemic on the operating results of theHilton Garden Inn -Long Island City , the Hilton Garden Inn Joint Venture previously entered into certain amendments with respect to the Hilton Garden Inn Mortgage as discussed below.
OnJune 2, 2020 , the Hilton Garden Inn Mortgage was amended to provide for (i) the deferral of the six monthly debt service payments aggregating$0.9 million for the period fromApril 1, 2020 throughSeptember 30, 2020 untilMarch 27, 2023 ; (ii) a 100 bps reduction in the interest rate spread to LIBOR plus 2.15%, subject to a 4.03% floor, for the six-month period 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, onApril 7, 2021 , the Hilton Garden Inn Joint Venture and the lender further amended the terms of the Hilton Garden Inn Mortgage to provide for (i) the Hilton Garden Inn Joint Venture to make a principal paydown of$1.7 million ; (ii) the Hilton Garden Inn Joint Venture to fund an additional$0.7 million into the cash collateral reserve account; (iii) a waiver of all financial covenants for quarter-end periods 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) an 11-month interest-only payment period fromMay 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.
As of
Subsequent to the acquisition of our 50.0% membership interest in theHilton Garden Joint Venture throughDecember 31, 2022 , we made an aggregate of$2.8 million of additional capital contributions (all of which was made prior to 2022) and received aggregate distributions of$4.0 million (of which$2.0 million was received in 2022). OnMarch 27, 2023 , the Hilton Garden Inn Joint Venture and the lender amended the Hilton Garden Inn Mortgage to extend the maturity date for 90 days, throughJune 25, 2023 , to provide additional time to finalize the terms of a long-term extension.
OnAugust 5, 2021 , we formed a joint venture withLightstone Value Plus REIT IV, Inc. ("Lightstone REIT IV"), a REIT also sponsored by the Sponsor and a related party, pursuant to which we acquired 25% of Lightstone REIT IV's membership interest in theBedford Avenue Holdings LLC , which effective on that date became theWilliamsburg Moxy Hotel Joint Venture , for aggregate consideration of$7.9 million . Subsequent to our acquisition, we have made aggregate net capital contributions to theWilliamsburg Moxy Hotel Joint Venture of$4.3 million throughDecember 31, 2022 (of which$0.2 million was made during the year endedDecember 31, 2022 ).
In
27
As a result, we and Lightstone REIT IV have 25% and 75% membership interests,
respectively, in the Williamsburg Moxy Hotel Joint Venture . We have determined
that the Williamsburg Moxy Hotel Joint Venture is a variable interest entity and
we are not the primary beneficiary, as it was determined that REIT IV is the
primary beneficiary. Therefore, we account for our membership interest in the
Williamsburg Moxy Hotel Joint Venture in accordance with the equity method
because we exert significant influence over but do not control the Williamsburg
Moxy Hotel Joint Venture . All capital contributions and distributions of
earnings from the Williamsburg Moxy Hotel Joint Venture are made on a pro rata
basis in proportion to each member's equity interest percentage. Any
distributions in excess of earnings from the Williamsburg Moxy Hotel Joint
Venture are made to the members pursuant to the terms of the Williamsburg Moxy
Hotel Joint Venture's operating agreement.
On August 5, 2021 , the Williamsburg Moxy Hotel Joint Venture entered into a
development agreement (the "Development Agreement") with an affiliate of the
Advisor (the "Williamsburg Moxy Developer") pursuant to which the Williamsburg
Moxy Developer is being paid a development fee equal to 3% of hard and soft
costs, as defined in the Development Agreement, incurred in connection with the
development and construction of the Williamsburg Moxy Hotel . Additionally on
August 5, 2021 , the Williamsburg Moxy Hotel Joint Venture obtained construction
financing for the Williamsburg Moxy Hotel as discussed below. Additionally, the
Advisor and its affiliates are reimbursed for certain development and
development-related costs attributable to the Williamsburg Moxy Hotel .
As of December 31, 2022 , the Williamsburg Moxy Hotel Joint Venture incurred and
capitalized to construction in progress an aggregate of $114.6 million
(including cumulative capitalized interest of $9.8 million ) consisting of
acquisition and other costs attributable to the development and construction of
the Williamsburg Moxy Hotel . During the years ended December 31, 2022 and 2021,
$6.6 million and $1.7 million , respectively, of interest was capitalized to
construction in progress.
In preparation for the opening of the Williamsburg Moxy Hotel , which opened on
March 7, 2023 , the Williamsburg Moxy Hotel Joint Venture incurred pre-opening
costs of $1.5 million during the year ended December 31, 2022 . No pre-opening
costs were incurred during 2021 period. Pre-opening costs generally consist of
non-recurring personnel, marketing and other costs and are expensed as incurred.
An adjacent land owner has questioned the Williamsburg Moxy Hotel Joint
Venture's right to develop and construct the Williamsburg Moxy Hotel without his
consent. The Williamsburg Moxy Hotel Joint Venture is currently responding to
this concern and we believe it will, in due course, be recognized that the
adjacent owner waived his right to object in 2017 when he signed a waiver,
consent and subordination allowing the future development of our property as it
exists today. While this matter is currently pending in the court system, the
continued use of the property will ultimately be determined by the government of
New York City and we have a number of avenues that we believe are viable paths
to unfettered certificates of occupancy. While any dispute has an element of
uncertainty, we currently believe that the likelihood of an unfavorable outcome
with respect to any of the aforementioned proceedings is remote. No provision
for loss has been recorded in connection therewith. See Note 9 of the Notes to
Consolidated Financial Statements for additional information.
Moxy Construction Loan
OnAugust 5, 2021 , theWilliamsburg Moxy Hotel Joint Venture entered into a recourse construction loan facility for up to$77.0 million (the "Moxy Construction Loan") to fund the development, construction and certain pre-opening costs associated with theWilliamsburg Moxy Hotel . The Moxy Construction Loan is scheduled to initially mature onFebruary 5, 2024 , with two, six-month extension options, subject to the satisfaction of certain conditions. The Moxy Construction Loan bears interest at LIBOR plus 9.00%, subject to a 9.50% floor, with monthly interest-only payments based on a rate of 7.50% and the excess added to the outstanding loan balance due at maturity. LIBOR as ofDecember 31, 2022 and 2021 was 4.39% and 0.10%, respectively. Additionally, the Moxy Construction Loan provides for a replacement benchmark rate based on SOFR in connection with the phase-out of LIBOR afterJune 30, 2023 . The Moxy Construction Loan is collateralized by theWilliamsburg Moxy Hotel . As ofDecember 31, 2022 and 2021, the outstanding principal balance of the Moxy Construction Loan was$65.6 million (including$1.7 million of interest capitalized to principal) which is presented, net of deferred financing fees of$2.0 million and$18.6 million (including$0.1 million of interest capitalized to principal) which is presented, net of deferred financing fees of$3.7 million , respectively, on the condensed balance sheets and is classified as loans payable, net. As ofDecember 31, 2022 , the remaining availability under the facility was up to$11.4 million and its interest rate was 13.39%. 28
In connection with the Moxy Construction Loan, theWilliamsburg Moxy Hotel Joint Venture has provided certain completion and carry cost guarantees. Furthermore, in connection with the Moxy Construction Loan, theWilliamsburg Moxy Hotel Joint Venture paid$3.7 million of loan fees and expenses and accrued$0.8 million of loan exit fees which are due at the initial maturity date and are included in other liabilities on the condensed balance sheets as of both andDecember 31, 2022 and 2021.
See Note 3 of the Notes to Consolidated Financial Statements for additional information.
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative. Because of these factors, 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 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. 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, 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.
29
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 incurred for business combinations,
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 borrowerdoes business. We believe that, because MFFO excludes costs that we consider more reflective of 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 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. 30
The below table illustrates the items deducted from or added to net loss in the
calculation of FFO and MFFO. Items are presented net of noncontrolling interest
portions where applicable.
For the
Year Ended
December 31,
2022 2021
Net loss $ (215 ) $ (2,733 )
FFO adjustments:
Adjustments to equity earnings from unconsolidated entities,
net 1,221 1,248
Depreciation and amortization of real estate assets 4,865
5,114
FFO 5,871
3,629
MFFO adjustments: Loss on sale of marketable securities(1) -
23
Unrealized loss on marketable equity securities(2) 40
9
Adjustments to equity earnings from unconsolidated affiliated real estate entities
(258 ) (191 )
Gain on forgiveness of debt(1) (1,893 )
(1,470 )
MFFO 3,760 2,000
Straight-line rent(3) - -MFFO - IPA recommended format$ 3,760
Net loss$ (215 ) $ (2,733 ) Less: net loss attributable to noncontrolling interests -
-
Net loss applicable to Company's common shares$ (215 ) $ (2,733 ) Net loss per common share, basic and diluted$ (0.02 )
FFO$ 5,871 $ 3,629 Less: FFO attributable to noncontrolling interests -
-
FFO attributable to Company's common shares$ 5,871 $ 3,629 FFO per common share, basic and diluted$ 0.45
MFFO - IPA recommended format$ 3,760 $ 2,000 Less: MFFO attributable to noncontrolling interests -
-
MFFO attributable to Company's common shares$ 3,760
Weighted average number of common shares outstanding, basic and diluted 13,080 13,215
(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.
31
The table below presents our cumulative distributions declared and cumulative
FFO:
For the period
October 5, 2012
(date of inception) through
December 31,
2022 FFO attributable to Company's common shares $ 21,118 Cumulative distributions declared $ 25,876 FFO attributable to our Common Shares for the year endedDecember 31, 2022 was$5.9 million and cash flow provided by operations was$3.1 million . FFO attributable to our Common Shares for the year ended December 31, 2021 was$ 3.6 million and cash flow provided by operations was$ 1.7 million . There were no distributions paid during the years endedDecember 31, 2022 and 2021.
New Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements for further information.
32
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