LIGHTSTONE VALUE PLUS REIT I, 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 and where indicated in millions.
Overview
Lightstone Value Plus REIT I, Inc. (the "Lightstone REIT I"), (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, commercial, residential and hospitality 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, 2021 , we have ownership interests in (i) two consolidated operating properties, (ii) two consolidated development properties and (iii) seven unconsolidated operating properties. With respect to our consolidated operating properties, we wholly own theSt. Augustine Outlet Center , a retail property containing 0.3 million square feet of gross leasable area, and have a majority ownership interest of 59.2% inGantry Park Landing , a multi-family residential property containing 199 apartment units. With respect to our consolidated development properties, we wholly own two projects consisting of theLower East Side Moxy Hotel and theExterior Street Project . We also hold a 2.5% ownership interest in seven hotel properties through a joint venture (the "Joint Venture") which we account for using a measurement alternative under which the Joint Venture is measured at cost, adjusted for observable price changes and impairments, if any. The Joint Venture is between us and the operating partnership ofLightstone Value Plus REIT II, Inc. , a real estate investment trust also sponsored by our Sponsor, which has a 97.5% ownership interest in the Joint Venture. Furthermore, we have other real estate-related investments, including preferred contributions that were made pursuant to agreements with various related party entities (the "Preferred Investments") and nonrecourse promissory notes made to unaffiliated third-parties. Our real estate investments have been and are expected to continue to be held by the Company alone or jointly with other parties. We do not have employees. We entered into an advisory agreement 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 (the "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 maintain our qualification as a REIT, we engage in certain activities through taxable REIT subsidiaries ("TRSs"). As such, we may still be subject toU.S. federal and state income and franchise taxes from these activities.
Acquisitions and Investment Strategy
We have, to date, acquired and/or developed residential, commercial and hospitality properties principally, all of which are located inthe United States and also made other real estate-related investments. Our acquisitions have included both portfolios and individual properties. Our current operating properties consist of one retail property (theSt. Augustine Outlet Center ) and one multi-family residential property (Gantry Park Landing ). We have also acquired various parcels of land and air rights related to the development and construction of real estate properties. Additionally, we have made preferred investments in related parties and originated nonrecourse loans to unaffiliated third-party borrowers. Investments in real estate are generally made through the purchase of all or part of a fee simple ownership, or all or part of a leasehold interest. We may also purchase limited partnership interests, limited liability company interests and other equity securities. We may also enter into joint ventures with related parties for the acquisition, development or improvement of properties as well as general partnerships, co-tenancies and other participations with real estate developers, owners and others for the purpose of developing, owning and operating real properties. We will not enter into a joint venture to make an investment that we would not be permitted to make on our own. Not more than 10% of our total assets will be invested in unimproved real property. For purposes of this paragraph, "unimproved real properties" does not include properties acquired for the purpose of producing rental or other operating income, properties under construction and properties for which development or construction is planned within one year. 19 Current Environment Our operating results are substantially impacted by the overall health of local,U.S. national and global economies and may be influenced by market and other challenges. Additionally, our business and financial performance may be adversely affected by current and future economic and other conditions; including, but not limited to, availability or terms of financings, financial markets volatility, political upheaval or uncertainty, natural and man-made disasters, terrorism and acts of war, unfavorable changes in laws and regulations, outbreaks of contagious diseases, cybercrime, loss of key relationships, and recession.
COVID-19 Pandemic
TheWorld Health Organization declared COVID-19 a global pandemic onMarch 11, 2020 and since that time many of the previously imposed restrictions and other measures which were instituted in response have been subsequently reduced or lifted. However, the COVID-19 pandemic remains highly unpredictable and dynamic and its duration and extent continue to be dependent on various developments, such as the emergence of variants to the virus that may cause additional strains of COVID-19, the administration and ultimate effectiveness of vaccines, and the eventual timeline to achieve a sufficient level of herd immunity among the general population. Accordingly, the COVID-19 pandemic may continue to have negative effects on the health of theU.S. economy for the foreseeable future. As a result of previously imposed restrictions, we temporarily closed ourSt. Augustine Outlet Center fromMarch 20, 2020 throughMay 7, 2020 . During the COVID-19 pandemic, the property's occupancy declined and because of limited leasing success, we began exploring various strategic alternatives for ourSt. Augustine Outlet Center and as a result determined during the third quarter of 2021 that we would no longer pursue leasing of space to tenants and therefore, entered into lease termination agreements with certain tenants and also provided notice to our other tenants that we would not renew their leases at scheduled expiration. As a result of this change in leasing strategy and resulting decrease in the fair value of theSt. Augustine Outlet Center , we recorded a non-cash impairment charge of$11.3 million during the third quarter of 2021. See Note 8 of the Notes to Consolidated Financial Statements for additional information. Additionally, as a result of the COVID-19 pandemic, during 2020 we saw deterioration in both the occupancy and rental rates forGantry Park Landing , which is located onLong Island ,New York , as the luxury rental market in the greaterNew York City metropolitan area was negatively impacted. However, both occupancy and rental rates have improved considerably throughout 2021 and have returned to pre-COVID-19 levels. To-date, the COVID-19 pandemic has not had any significant impact on our development projects. Furthermore, our other real estate-related investments (both our preferred investments in related parties and nonrecourse loans made to unaffiliated third-party borrowers) also relate to various development projects which are at different stages in their respective development process. These investments, which are subject to similar restrictions and other measures, have also not yet been significantly impacted by the COVID-19 pandemic. The overall 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. If our operating properties, development projects and real estate-related investments are negatively impacted for an extended period because (i) occupancy levels and rental rates further decline, (ii) tenants are unable to pay their rent, (iii) borrowers are unable to pay scheduled debt service on notes receivable, (iv) development activities are delayed and/or (v) various related party entities are unable to pay monthly preferred distributions on our preferred investments in related parties, our business and financial results could be materially and adversely impacted. We are not currently aware of any other material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from our operations, other than those referred to above or throughout this Form 10-K. The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America ("GAAP") requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. 20
Critical Accounting Estimates and Policies
General
Our consolidated financial statements, included in this annual report, include
our accounts, the
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 our management's most difficult, subjective or complex judgments.
Revenue Recognition
Our revenue, which is comprised largely of rental income, includes rents that tenants pay in accordance with the terms of their respective leases reported on a straight-line basis over the initial term of the lease. Since our leases may provide for rental increases at specified intervals, straight-line basis accounting requires us to record as an asset, and include in revenue, unbilled rent that we only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease. In addition, we will defer the recognition of contingent rental income, such as percentage rents, until the specific target which triggers the contingent rental income is achieved. Cost recoveries from tenants will be included in tenant recovery income in the period the related costs are incurred.
Investments in Real Estate
We generally record investments in real estate at cost and capitalize
improvements and replacements when they extend the useful life or improve the
efficiency of the asset. We expense costs of ordinary repairs and maintenance as
incurred. We compute depreciation using the straight-line method over the
estimated useful lives of the applicable real estate asset. We generally use
estimated useful lives of up to thirty-nine years for buildings and
improvements, five to ten years for furniture and fixtures and the shorter of
the useful life or the remaining lease term for tenant improvements and
leasehold interests.
We make subjective assessments as to the useful lives of our properties for
purposes of determining the amount of depreciation to record on an annual basis
with respect to our investments in real estate. These assessments have a direct
impact on our net income because, if we were to shorten the expected useful
lives of our investments in real estate, we would depreciate these investments
over fewer years, resulting in more depreciation expense and lower net income on
an annual basis.
We record assets and groups of assets and liabilities which comprise disposal
groups as "held for sale" when all of the following criteria are met: a decision
has been made to sell, the assets are available for sale immediately, the assets
are being actively marketed at a reasonable price in relation to the current
fair value, a sale has been or is expected to be concluded within twelve months
of the balance sheet date, and significant changes to the plan to sell are not
expected. The assets and disposal groups held for sale are valued at the lower
of book value or fair value less disposal costs. For sales of real estate or
assets classified as held for sale, we evaluate whether a disposal transaction
meets the criteria of a strategic shift and will have a major effect on our
operations and financial results to determine if the results of operations and
gains on sale of real estate will be presented as part of our continuing
operations or as discontinued operations in our consolidated statements of
operations. If the disposal represents a strategic shift, it will be classified
as discontinued operations for all periods presented; if not, it will be
presented in continuing operations.
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We evaluate the recoverability of our investments in real estate assets at the lowest identifiable level, the individual property level. An impairment loss is recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. We evaluate the long-lived 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. No single indicator would necessarily result in us preparing an estimate to determine if a long-lived asset's future undiscounted cash flows are less than its book 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 long-lived asset 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. Changes in estimated future cash flows due to changes in our plans or views of market and economic conditions could result in recognition of impairment losses, which, under the applicable accounting guidance, may be substantial.
Accounting for Asset Acquisitions
The cost of the acquisition in an asset acquisition is allocated to the acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases for acquired in-place leases and the value of tenant relationships, and certain liabilities such as assumed debt and contingent liabilities on the basis of their relative fair values. Fees incurred related to asset acquisitions are capitalized as part of the cost of the investment.
Accounting for Development Projects
We incur a variety of costs in the development of a property. The costs of land and building under development include specifically identifiable costs. The capitalized costs include, but are not limited to, pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes and other costs incurred during the period of development. We cease capitalization when the development project is substantially complete and placed in service, which may occur in phases. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. Once a development project is placed in service, which may occur in phases or for an entire building or project, the costs capitalized to that development project are transferred to land and improvements, buildings and improvements, and furniture and fixtures on our consolidated balance sheets at the historical cost of the property.
Notes Receivable and Preferred Investments
Notes receivable and preferred investments that we intend to hold to maturity
are carried at cost, net of any unamortized origination costs, fees, discounts,
premiums and unfunded commitments.
Investment income will be recognized on an accrual basis and any related
premium, discount, origination costs and fees are amortized over the life of the
investment using the effective interest method. The amortization is reflected as
an adjustment to investment income in the Company's statements of operations.
Income recognition is suspended when, in the opinion of management, a full
recovery of income and principal becomes doubtful. When the ultimate
collectability of the principal is in doubt, all payments are applied to
principal under the cost recovery method. When the ultimate collectability of
the principal is not in doubt, contractual interest is recorded as investment
income when received, under the cash basis method, until an accrual is resumed
when the instrument becomes contractually current and performance is
demonstrated to be resumed.
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Credit Losses and Impairment on Notes Receivable
Notes receivable are considered impaired when, based on current information and events, it is probable that we will not be able to collect principal and interest amounts due according to the contractual terms. We assess the credit quality of our notes receivable and adequacy of reserves on a quarterly basis, or more frequently as necessary. Significant judgment of management is required in this analysis. We consider the estimated net recoverable value of the notes receivable 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 quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value of the underlying collateral is less than the net carrying value of the notes receivable, a reserve is recorded with a corresponding charge to investment income. The reserve for each note receivable is maintained at a level that is determined to be adequate by management to absorb probable losses.
Credit Losses and Impairment on Preferred Investments
Preferred investments that are accounted for as held to maturity are assessed for impairment at the individual investment level when there is a decline in fair value below the amortized cost basis that is deemed to be other than temporary. In making the determination of an other-than-temporary impairment assessment, the Company considers all available information relevant to the collectability of the investment, including information about past events, current conditions, and reasonable and supportable forecasts when developing the estimate of cash flows expected to be collected. This information includes the remaining redemption terms of the investment, financial condition of the issuer, expected defaults and the value of any underlying collateral. In assessing whether the entire amortized cost basis of the investment will be recovered, the Company compares the present value of cash flows expected to be collected from the investment with the amortized cost basis and records an impairment based on the amount by which the present value of cash flows expected to be collected is less than the amortized cost basis of the investment.
Treatment of Management Compensation, Expense Reimbursements and Operating Partnership Participation Interest
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 affiliated real estate entities; asset management fees paid to our Advisor and property management fees paid to our Property Manager, which manage certain of the properties we acquire, or to other unaffiliated third-party property managers, principally for the management of our hospitality properties. These fees are expensed or capitalized to the basis of acquired assets, as appropriate. Our Property Manager may also perform fee-based construction management services for both our re-development activities and tenant construction projects. These fees are 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 redevelopment activities will be depreciated over the estimated useful life of the associated project.
Leasing activity at certain of our properties has also been outsourced to our Property Manager. Any corresponding leasing fees we pay are capitalized and amortized over the life of the related lease.
Expense reimbursements made to both our Advisor and Property Manager will be expensed or capitalized to the basis of acquired assets, as appropriate.
Through
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Income Taxes
We elected to be taxed and qualify as a REIT commencing with the taxable year
ended December 31, 2005 . If we remain qualified as a REIT, we generally will not
be subject to U.S. federal income tax on our net taxable income that we
distribute currently to our stockholders. To maintain our REIT qualification
under the Internal Revenue Code of 1986, as amended, 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
generally accepted accounting principles in the United States of America , or
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.
To maintain our qualification as a REIT, we engage in certain activities through
taxable REIT subsidiaries ("TRSs"). As such, we may still be subject to U.S.
federal and state income and franchise taxes from these activities.
As of December 31, 2021 and 2020, 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 the
OnJanuary 10, 2019 , we acquired a parcel of land located at2175 Martin Avenue ,Santa Clara, California (the "Martin Avenue Land") from an unaffiliated third party for$10.6 million . Subsequently, we completed certain activities associated with the potential development and construction of a data center on the Martin Avenue Land (the "Santa Clara Data Center "). OnJuly 7, 2021 , we disposed of theSanta Clara Data Center to an unrelated third party for a contractual sales price of$13.9 million . In connection with the disposition of theSanta Clara Data Center , we recognized a gain on sale of investment property of$0.2 million during the third quarter of 2021. The disposition of theSanta Clara Data Center did not qualify to be reported as discontinued operations since it did not represent a strategic shift that had a major effect on our operations and financial results. Accordingly, the operating results of theSanta Clara Data Center are reflected in our results from continuing operations for all periods presented through its date of disposition.
Investment Impairment -
During the COVID-19 pandemic,St. Augustine Outlet Center's occupancy declined and because of limited leasing success, we began been exploring various strategic alternatives for the property and as a result determined during the third quarter of 2021 that we would no longer pursue leasing of space to tenants and therefore, entered into lease termination agreements with certain tenants and also provided notice to its other tenants that it would not renew their leases at scheduled expiration. As a result of this change in leasing strategy and resulting decrease in the fair value of theSt. Augustine Outlet Center , we recorded a non-cash impairment charge of$11.3 million during the third quarter of 2021 to reduce the carrying value of theSt. Augustine Outlet Center to its estimated fair value of$23.3 million as ofSeptember 30, 2021 . In estimating the fair value of theSt. Augustine Outlet Center , we used management's internal analysis prepared with consideration of local market conditions. We believe the reduced carrying value of theSt. Augustine Outlet Center is currently recoverable. However, if market conditions worsen unexpectedly or if changes in its strategy significantly affect any key assumptions used in determining the property's estimated fair value, we may need to take additional impairment charges in future periods. 24
For the Year Ended
Consolidated
Revenues
Our revenues are comprised of rental income and tenant recovery income. Total revenues decreased by$0.9 million to$10.4 million for the year endedDecember 31, 2021 compared to$11.3 million for the same period in 2020. This decrease was primarily attributable to reduced occupancy and rental rates forGantry Park Landing during the 2021 period resulting from the COVID-19 pandemic.
Property operating expenses
Property operating expenses increased by$0.2 million to$4.2 million for the year endedDecember 31, 2021 compared to$4.0 million for the same period in 2020. The increase in property operating expenses is primarily a result of lease termination fees incurred for theSt. Augustine Outlet Center . See "Investment Impairment -St. Augustine Outlet Center " above.
Real estate taxes
Real estate taxes decreased by$0.3 million to$0.3 million for the year endedDecember 31, 2021 compared to$0.6 million for the same period in 2020. The decrease reflects lower real estate taxes resulting from the sale of theSanta Clara Data Center and certain land parcels adjacent to theSt. Augustine Outlet Center .
General and administrative expenses
General and administrative expenses decreased by
Impairment charge
During the third quarter of 2021, we recorded a non-cash impairment charge of$11.3 million to reduce the carrying value of ourSt. Augustine Outlet Center to its estimated fair value as ofSeptember 30, 2021 . See "Investment Impairment -St. Augustine Outlet Center " above.
Depreciation and amortization
Depreciation and amortization increased by$1.5 million to$5.5 million for the year endedDecember 31, 2021 compared to$4.0 million for the same period in 2020. The increase in depreciation and amortization reflects changes to the estimated remaining useful lives of certain tenant-related building improvements resulting from lease terminations for theSt. Augustine Outlet Center . See "Investment Impairment -St. Augustine Outlet Center " above.
Interest and dividend income
Interest and dividend income increased by$0.8 million to$13.8 million for the year endedDecember 31, 2021 compared to$13.0 million for the same period in 2020. The increase primarily reflects higher interest income earned on our notes receivable of$0.3 million and higher interest and dividend income earned on our available cash and investments in marketable securities of$0.7 million , partially offset by lower investment income of$0.2 million from our Preferred Investments. Interest expense Interest expense, including amortization of deferred financing costs, decreased by$0.4 million to$2.6 million for the year endedDecember 31, 2021 compared to$3.0 million for the same period in 2020. During the year endedDecember 31, 2021 and 2020,$8.2 million and$7.8 million , respectively, of interest was capitalized to construction in progress for our development projects. 25
Gain on disposition of real estate, net
Our gain on disposition of real estate, net of$3.9 million during the year endedDecember 31, 2021 primarily is attributable to a second quarter gain of$3.6 million recognized in connection with the disposition of a parcel of land adjacent toSt. Augustine Outlet Center and a third quarter gain of$0.2 million recognized in connection with the disposition of theSanta Clara Data Center .
Our gain on disposition of real estate, net of
Unrealized gain/(loss) on marketable equity securities
During the year endedDecember 31, 2021 , we recorded unrealized gains on marketable equity securities of$16.5 million and during the year endedDecember 31, 2020 , we recorded unrealized losses on marketable equity securities of$12.2 million . These unrealized gains and losses represented the change in the fair value of our marketable equity securities during those periods.
Gain/(loss) on sale and redemption of marketable securities
During the year endedDecember 31, 2021 , we recorded a gain on the sale of marketable securities of$5.9 million and during the year endedDecember 31, 2020 , we recorded a loss on the sale of marketable securities of$0.2 million . These gains and losses represented the difference between the sales price and carrying value of our marketable securities sold during those periods.
Noncontrolling interests
The net earnings allocated to noncontrolling interests relates to (i) parties of the Company that hold units in theOperating Partnership , (ii) the interest inPRO-DFJV Holdings LLC ("PRO") held by our Sponsor, (iii) the ownership interests in50-01 2nd St. Associates LLC (the "2nd Street Joint Venture") held by our Sponsor and other affiliates and (iv) the ownership interest in various joint ventures held by affiliates of our Sponsor that have originated nonrecourse loans to unaffiliated third-party borrowers.
Financial Condition, Liquidity and Capital Resources
Overview:
As ofDecember 31, 2021 , we had$39.4 million of cash on hand,$3.2 million of restricted cash and$62.8 million of marketable securities. We also have the ability to make draws from a line of credit up to$20.0 million , subject to certain conditions (see "Notes Payable - Line of Credit"). We currently believe that these items along with rental income from our operating properties; interest and dividend income earned on our marketable securities, notes receivable and preferred investments; as well as proceeds received from the repayment of the notes receivable and redemptions of the preferred investments will be sufficient to satisfy our expected cash requirements primarily consisting our anticipated operating expenses, scheduled debt service, capital expenditures (including certain of our development activities) and distributions to our shareholders, if any, required to maintain our status as a REIT for the foreseeable future. However, we may also obtain additional funds through selective asset dispositions, joint venture arrangements, new borrowings and refinancing of existing debt. We currently have two development projects (see "Development Activities"). With respect to ourLower East Side Moxy Hotel , which is currently under construction and expected to open during the fourth quarter of 2022, we have obtained construction financings and the remaining costs associated with the construction of theLower East Side Moxy Hotel are expected to be funded from the remaining availability under such construction financings. See "Development Activities -Lower East Side Moxy Hotel " for additional information. OurExterior Street Project is currently under development and we expect to seek construction financing to fund a substantial portion of its future development and construction costs. See "Development Activities -Exterior Street Project "
for
additional information.
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Our borrowings consist of single-property mortgages as well as mortgages
cross-collateralized by a pool of properties. We typically have obtained level
payment financing, meaning that the amount of debt service payable would be
substantially the same each year. As such, most of the mortgages on our
properties provide for a so-called "balloon" payment and are at a fixed interest
rate.
Additionally, in order to leverage our investments in marketable securities and
seek a higher rate of return, we have access to borrowings under a margin loan
and line of credit collateralized by the securities held with the financial
institution that provided the margin loan and line of credit as well as a
portion of our Marco OP Units. These loans are due on demand and any outstanding
balance must be paid upon the liquidation of securities.
Our charter provides that the aggregate amount of 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 the 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. As of December 31, 2021 , our total borrowings of
$171.8 million represented 53% of net assets.
Any future properties that we may acquire or investments we may make may be
funded through a combination of borrowings, proceeds generated from the sale and
redemption of our marketable securities, available for sale, proceeds received
from the selective disposition of our properties and proceeds received from the
redemption of our preferred investments in related parties. These borrowings 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 debt, which will
be on a non-recourse basis. 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 or real
estate-related assets. 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 or permanent financing. Our Sponsor or its affiliates may
guarantee the lines of credit although they will not be 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.
We have various agreements, including an advisory agreement, with the Advisor to
pay certain fees in exchange for services performed by the Advisor and/or its
affiliated entities. Additionally, our ability to secure financing and our real
estate operations are dependent upon our Advisor and its affiliates to perform
such services as provided in these agreements.
In addition to meeting working capital needs and distributions, if any, to our
stockholders, our capital resources are used to make certain payments to our
Advisor and our Property Manager, including 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, the Operating Partnership may be required to make distributions to
Lightstone SLP, 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.
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The following table represents the fees incurred associated with the payments to our Advisor and its affiliates:
For the
Year Ended
December 31 , December 31,
2021 2020Asset management fees (general and administrative costs) $ 849 $ 919 Property management fees (property operating expenses)
362 388
Development fees and cost reimbursement(1) 3,595 1,337
Total $ 4,806 $ 2,644 (1) Development fees and development costs that we reimburse our Advisor for are
capitalized and are included in the carrying value of the associated
development project and classified as construction in progress on the
consolidated balance sheets. As of
its affiliated entities
in accounts payable, accrued expenses and other liabilities on the
consolidated balance sheets. See Note 3 of the Notes to Consolidated
Financial Statements for additional information.
Additionally, we may be required to make distributions on the special general
partner interests ("SLP Units") in the Operating Partnership held by Lightstone
SLP, LLC , an affiliate of the Advisor. In connection with the Company's initial
public offering, Lightstone SLP, LLC purchased an aggregate of $30.0 million of
SLP Units. These SLP Units, the purchase price of which will be repaid only
after stockholders receive a stated preferred return and their net investment,
entitle Lightstone SLP, LLC to a portion of any regular distributions made by
the Operating Partnership .
During both the of the years ended
Our charter states that our operating expenses, excluding offering costs,
property operating expenses and real estate taxes, as well as acquisition fees
and non-cash related items ("Qualified Operating Expenses") are to be less than
the greater of 2% of our average invested net assets or 25% of net income. For
the year ended December 31, 2021 , our Qualified Operating Expenses were less
than the greater of 2% of our average invested net assets or 25% of net income.
In addition, our charter states that our acquisition fees and expenses shall not
exceed 6% of the contractual purchase price or in the case of a mortgage, 6% of
funds advanced unless approved by a majority of the independent directors. For
the year ended December 31, 2021 , the acquisition fees and acquisition expenses
were less than 6% of each of the contract prices.
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,
2021 2020
Cash flows provided by operating activities $ 10,001 $ 10,144
Cash flows provided by/(used in) investing activities 49,161 (54,493 )
Cash flows (used in)/provided by financing activities (63,411 ) 11,390
Net change in cash, cash equivalents and restricted cash (4,249 ) (32,959 ) Cash, cash equivalents and restricted cash, beginning of year 46,841
79,800
Cash, cash equivalents and restricted cash, end of year $ 42,592 $ 46,841
28
Operating activities
The net cash provided by operating activities of
? cash inflows of
items; and
? cash inflows of
assets and liabilities. Investing activities
The net cash provided by investing activities of
? purchases of investment property of
? net proceeds from the sale of marketable securities of
? proceeds from notes receivable of
? proceeds from the sale of investment property of
Financing activities
The net cash used in financing activities of
? debt principal payments of
? proceeds from mortgage financing of
? payment of loan fees and expenses of
? redemption and cancellation of common shares of
? distributions to our noncontrolling interests of
? distributions to our common shareholders of
Development ActivitiesLower East Side Moxy Hotel
OnDecember 3, 2018 , we, through a subsidiary of theOperating Partnership , acquired three adjacent parcels of land located at 147-151 Bowery,New York, New York from unaffiliated third parties for aggregate consideration of$56.5 million , excluding closing and other acquisition related costs. Additionally, onDecember 6, 2018 , we, though a subsidiary of theOperating Partnership , acquired certain air rights located at329 Broome Street ,New York, New York from an unaffiliated third party for$2.4 million , excluding closing and other acquisition related costs. We are using the land and air rights in connection with the development and construction of a 296-roomMarriott Moxy hotel (the "Lower East Side Moxy Hotel "). OnJune 3, 2021 , the Company entered into a development agreement (the "Development Agreement") with an affiliate of the Advisor (the "Moxy Lower East Side Developer") pursuant to which the Lower East Side Moxy Developer will be paid a development fee equal to 3% of hard and soft costs incurred in connection with the development and construction of theLower East Side Moxy Hotel . Additionally onJune 3, 2021 , the Company obtained construction financing for theLower East Side Moxy Hotel .The Lower East Side Moxy Hotel is currently under construction and expected to open during the
fourth quarter of 2022.
29
Previously on December 3, 2018 , we had entered into a mortgage loan which was
collateralized by the Lower East Side Moxy Hotel (the "Lower East Side Moxy
Mortgage") for $35.6 million . The Lower East Side Moxy Mortgage had an initial
term of two years, bore interest at the London Interbank Offered Rate ("LIBOR")
+ 4.25%, subject to a 6.63% floor, and required monthly interest-only payments
through its stated maturity with the entire unpaid balance due upon maturity. In
November 2020 the maturity date of Lower East Side Moxy Mortgage was extended to
March 3, 2021 and in March 2021 it was further extended until June 3, 2021 , on
which date it was then repaid in full as discussed below.
On June 3, 2021 , we, through a wholly owned subsidiary, closed on a recourse
construction loan facility (the "Moxy Senior Loan") providing for up to $90.0
million of funds for the development and construction of the Lower East Side
Moxy Hotel . At closing, $35.6 million of proceeds were initially advanced under
the Moxy Senior Loan, which were used to repay in full the Lower East Side Moxy
Mortgage. The Moxy Senior Loan bears interest at LIBOR + 7.50%, subject to an
8.00% floor, and initially matures on June 3, 2024 , with two one-year extension
options, subject to the satisfaction of certain conditions. The Moxy Senior Loan
is collateralized by the Lower East Side Moxy Hotel . As of December 31, 2021 ,
the outstanding principal balance of the Moxy Senior Loan was $35.6 million and
the remaining availability under the facility was up to $54.4 million .
Simultaneously on June 3, 2021 , we, through the same wholly owned subsidiary,
also entered into a mezzanine construction loan facility (the "Moxy Junior Loan"
and together with the Moxy Senior Loan, the "Moxy Construction Loans") providing
for up to $40.0 million of additional funds for the development and construction
of the Lower East Side Moxy Hotel . The Moxy Junior Loan bears interest at LIBOR
+ 13.50%, subject to a 14.00% floor, and initially matures on June 3, 2024 , with
two one-year extension options subject to the satisfaction of certain
conditions. The Moxy Junior Loan is subordinate to the Moxy Senior loan but also
collateralized by the Lower East Side Moxy Hotel . We provided a principal
guarantee of up to $7.0 million with respect to the Moxy Junior Loan. As of
December 31, 2021 , the outstanding principal balance of the Moxy Junior Loan was
$24.6 million and the remaining availability under the facility was up to $15.4
million .
Future draws to cover the costs associated with the development and construction
of the Lower East Side Moxy Hotel will first be advanced under the Moxy Junior
Loan until it has been fully funded and thereafter, funds will be advanced under
the remaining availability of the Moxy Senior Loan.
In connection with the Moxy Construction Loans, we provided certain completion
and carry cost guarantees. We also entered into an interest rate cap agreement
pursuant to which the LIBOR rate will be capped at 3.00% on the Moxy Senior Loan
through June 3, 2024 at a cost of $0.2 million . Furthermore, in connection with
the Moxy Construction Loans, we paid $5.3 million of loan fees and expenses and
accrued $1.1 million of loan exit fees which are due at the initial maturity
date and are included in accounts payable, accrued expenses and other
liabilities on the consolidated balance sheets as of December 31, 2021 .
OnFebruary 27, 2019 , we, through subsidiaries of theOperating Partnership , acquired two adjacent parcels of land located at355 and 399 Exterior Street ,New York, New York from unaffiliated third parties for an aggregate purchase price of$59.0 million , excluding closing and other acquisition related costs. InSeptember 2021 , we subsequently acquired an additional adjacent parcel of land at cost from an affiliate of our Advisor for$1.0 million in order to achieve certain zoning compliance. We are using the land parcels for the development of a multi-family residential property (the "Exterior Street Project "). OnMarch 29, 2019 , we entered into a$35.0 million loan (the "Exterior Street Loan") which commencing onOctober 10, 2020 bears interest at LIBOR + 2.25% through its scheduled maturity date. The Exterior Street Loan requires monthly interest-only payments with the outstanding principal balance due in full at its maturity date. The Exterior Street Loan was initially scheduled to mature onApril 9, 2021 but duringApril 2021 , its maturity date was further extended toApril 9, 2022 . Additionally, onDecember 21, 2021 , the loan agreement was amended to provide an additional six-month extension and an additional$7.0 million loan (the "Exterior Street Supplemental Loan" and collectively with the Exterior Street Loan, the "Exterior Street Loans") which bears interest at LIBOR + 2.50% and requires monthly interest-only payments through its maturity date. The Exterior Street Loans are scheduled to mature onApril 9, 2022 , with a six-month extension option, subject to certain conditions and are collateralized by theExterior Street Project . 30
The following is a summary of the amounts incurred and capitalized to
development projects on the consolidated balance sheet for the
Development Project Lower East Side Moxy Hotel $ 146,747 Exterior Street Project 87,467 Total$ 234,214
To-date the ongoing COVID-19 pandemic as well as other economic conditions and uncertainties have not had a significant impact on our development activities associated with either theLower East Side Moxy Hotel or theExterior Street Project . As discussed above, we have already obtained construction financing for theLower East Side Moxy Hotel and it is currently under construction and expected to open during the fourth quarter of 2022. However, with respect to ourExterior Street Project which is currently under development, we currently expect to seek construction financing to fund a substantial portion of its future development and construction costs. The ongoing COVID-19 pandemic as well as other economic conditions and uncertainties may (i) affect our ability to obtain construction financing, and/or (ii) cause delays or increase costs associated with building materials or construction services necessary for construction, which could adversely impact our ability to either ultimately commence and/or complete construction as planned, on budget or at all for theExterior Street Project . Although we currently believe our capital resources are sufficient to fund our expected development activities for the next 12 months, there can be no assurance we will be successful in obtaining construction financing at favorable terms, if at all. Preferred Investments We have Preferred Investments that entitle us to monthly preferred distributions. The Preferred Investments are classified as held-to-maturity securities, recorded at cost and included in investments in related parties on the consolidated balance sheets. The fair value of these investments approximated their carrying values based on market rates for similar instruments. During the year endedDecember 31, 2020 , we redeemed$11.0 million of the 40 East End AvenuePreferred Investment and the entire remainingMiami Moxy Preferred Investment of$9.0 million .
The Preferred Investments are summarized as follows:
Preferred Investment Balance Investment Income(1)
For the
As of As of Year Ended
Dividend December 31, December 31, December 31,Preferred Investments Rate 2021 2020 2021 2020 40 East End Avenue 12 %$ 6,000 $ 6,000 $ 730 $ 886 East 11th Street 12 % 8,500 8,500 1,034 1,040 Miami Moxy 12 % - - - 45 Total Preferred Investments$ 14,500 $ 14,500 $ 1,764 $ 1,971 Note: (1) Included in interest and dividend income on the statements of operations. 31 Notes Receivable We formed certain joint ventures (collectively, the "NR Joint Ventures ") between wholly-owned subsidiaries of theOperating Partnership (collectively, the "NR Subsidiaries") and affiliates of the Sponsor (the "NR Affiliates") which have originated nonrecourse loans (collectively, the "Joint Venture Promissory Notes") to unaffiliated third-party borrowers (collectively, the "Joint Venture Borrowers"). We determined that theNR Joint Ventures are VIEs and the NR Subsidiaries are the primary beneficiaries. Since the NR Subsidiaries are the primary beneficiaries, beginning on the applicable date of formation, we consolidated the operating results and financial condition of theNR Joint Ventures and accounted for the respective ownership interests of the NR Affiliates as noncontrolling interests. The Joint Venture Promissory Notes generally provide for monthly interest at a prescribed variable rate, subject to a floor. In connection with the initial funding of the Joint Venture Promissory Notes, theNR Joint Ventures receive origination fees (ranging from 1.00% to 1.50%) based on the principal commitment under the loan and retain a portion of the loan proceeds to establish a reserve for interest and other items (the "Loan Reserves"). The Joint Venture Promissory Notes are recorded in notes receivable, net on the consolidated balance sheets. The Joint Venture Promissory Notes generally have an initial term of one or two years and may provide for additional one-year extension options subject to satisfaction of certain conditions, including the funding of additional Loan Reserves and payment of extension fees. The Joint Venture Promissory Notes are collateralized by either the membership interests of the Joint Venture Borrowers in the borrowing entity or the underlying real property being developed by the Joint Venture Borrower. The Joint Venture Promissory Notes are recorded in notes receivable, net on the consolidated balance sheets. The origination fees received are presented in the consolidated balance sheets as a direct deduction from the carrying value of the Joint Venture Promissory Notes and are amortized into interest income, using a straight-line method that approximates the effective interest method, over the initial term of the Joint Venture Promissory Notes. The Loan Reserves are presented in the consolidated balance sheets as a direct deduction from the carrying value of the Joint Venture Promissory Notes and are applied against the monthly interest due over the initial term.
The Notes Receivable are summarized as follows:
As of
December 31, 2021
Company's Loan Contractual Unamortized
Joint Ownership Commitment Origination Origination Maturity Interest Outstanding Origination Carrying Unfunded
Venture/Lender Percentage Amount Fee Date Date Rate Principal Reserves Fee Value Commitment
LSC 1543 7th LLC Libor plus
(1) 5.40% (Floor
50 % 20,000 1.00 % $ - $ (33 )$ 17,467 $ - LSC 11640 Libor plus Mayfield LLC (2) 11.00% (Floor 50 % 18,000 1.50 %March 4, 2020 March 1, 2022 of 13.00%) 10,040 (629 ) (24 ) 9,387 6,960 Total$ 27,540 $ (629 ) $ (57 )$ 26,854 $ 6,960 32 As of December 31, 2020 Company's Loan Contractual Unamortized Joint Ownership Commitment Origination Origination Maturity Interest Outstanding Origination Carrying Unfunded Venture/Lender Percentage Amount Fee Date Date Rate Principal Reserves Fee Value Commitment LSC 162nd LIBOR + 7.50% Capital I LLC (Floor of (3) 45.45 %$ 4,234 1.50 %
$ (338 ) $ (33 )$ 3,705 $ - LSC 162nd LIBOR + 7.50% Capital II LLC (Floor of (3) 45.45 % 9,166 1.50 %
February 5, 2019 September 11, 2021 11%) 8,824
(732 ) (71 ) 8,021 -
LSC 1543 7th LLC LIBOR + 5.40%
(Floor of
50 % 20,000 1.00 % August 27, 2019 August 26, 2021 7.90%) 20,000
- (33 ) 19,967 -
LSC 1650 Lincoln LIBOR + 5.40%
LLC (3) (Floor of
50 % 24,000 1.00 % August 27, 2019 August 26, 2021 7.90%) 24,000
- (40 ) 23,960 -
LSC 11640 LIBOR +
Mayfield LLC 10.50% (Floor
50 % 18,000 1.50 % March 4, 2020 March 1, 2022 of 12.50%) 10,750
(2,369 ) (158 ) 8,223 7,250
LSC 87 Newkirk LIBOR + 6.00%
LLC (4) (Floor of
50 % 42,700 1.25 % July 2, 2020 December 1, 2021 7.00%) 42,700 (1,597 ) (355 ) 40,748 - Total$ 110,350 $ (5,036 ) $ (690 ) $ 104,624 $ 7,250 Notes:
(1) Repaid in full during
(2) Repaid in full during
(3) Repaid in full during
(4) Repaid in full during
The following summarizes the interest earned (included in interest and dividend income on the consolidated statements of operations) for each of the Joint Venture Promissory Notes during the periods indicated:
For the For the
Year Ended Year Ended
December 31, December 31,
Joint Venture/Lender 2021 2020
LSC 162nd Capital I LLC $ 491 $ 641
LSC 162nd Capital II LLC 1,063 1,387
LSC 1543 7th LLC 1,802 1,770
LSC 1650 Lincoln LLC 2,317 2,124
LSC 11640 Mayfield LLC 1,875 1,243
LSC 87 Newkirk LLC 1,585 1,625
Total $ 9,133 $ 8,790
33
Stockholder's Equity
Share Repurchase Program
Our share repurchase program (the "SRP") may provide our stockholders with limited, interim liquidity by enabling them to sell their shares of common stock back to us, subject to restrictions.
On
EffectiveMarch 15, 2021 andMay 14, 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 NAV per Share, as determined by the Board of Directors and reported by the Company 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. At the above noted dates, 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 pro ration if either type of redemption requests exceeded the annual limitation. For the year endedDecember 31, 2021 , we repurchased 143,918 shares of common stock for$11.18 per share, pursuant to the SRP. For the period fromJanuary 1 through March 24, 2020 , we repurchased 287,987 shares of common stock for$10.87 per share, pursuant to the SRP.
On
2020 Tender Offer
We commenced a tender offer onJune 15, 2020 , pursuant to which we offered to acquire up to 225,000 of our shares of common stock at a purchase price of$5.00 per share, or$1.1 million in the aggregate (the "2020 Tender Offer"). Pursuant to the terms of the 2020 Tender Offer, which expired onJuly 24, 2020 , we repurchased 0.1 million shares of our common stock for an aggregate of$0.3 million inAugust 2020 .
Distribution Reinvestment Program ("DRIP")
Our distribution reinvestment program ("DRIP") provides our shareholders with an
opportunity to purchase additional shares of our common stock at a discount by
reinvesting distributions. Under our distribution reinvestment program, a
shareholder may acquire, from time to time, additional shares of our common
stock by reinvesting cash distributions payable by us to such shareholder,
without incurring any brokerage commission, fees or service charges.
The DRIP had been suspended since 2015 until our DRIP Registration Statement on
Form S-3D was filed and became effective as amended and restated, under the
Securities Act of 1933 on
Pursuant to the DRIP following its reactivation, our stockholderswho elect to participate may invest all or a portion of the cash distributions that we pay them on shares of our common stock in additional shares of our common stock without paying any fees or commissions. The purchase price for shares under the DRIP will be equal to 95% of our current NAV per Share, as determined by the Board of Directors and reported by us from time to time. OnDecember 16, 2021 , the Board of Directors determined our NAV per Share of$11.75 , as ofSeptember 30, 2021 , which resulted in a purchase price for shares under the DRIP of$11.16 per share. As ofDecember 31, 2021 , 9.9 million shares remain available for issuance under our DRIP.
The Board of Directors reserves the right to terminate the DRIP for any reason without cause by providing written notice of termination of the DRIP to all participants.
34
Distributions Declared by the Board of Directors
Common Shares
During the years endedDecember 31, 2021 and 2020, distributions on our Common Shares were declared quarterly, for each calendar quarter end, at the pro rata equivalent of an annual distribution of$0.70 per share, or an annualized rate of 7.0% assuming a purchase price of$10.00 per share, to stockholders of record at the close of business on the last day of the quarter-end. All distributions were paid on or about the 15th day of the month following the quarter-end.
Total distributions declared during both of the years ended
OnMarch 18, 2022 , the Board of Directors authorized and declared a Common Share distribution of$0.175 per share for the quarterly period endingMarch 31, 2022 . The quarterly distribution is the pro rata equivalent of an annual distribution of$0.70 per share, or an annualized rate of 7.0% assuming a purchase price of$10.00 per share. 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. The stockholders have an option to elect the receipt of shares under the Company's DRIP.
SLP Units
For both of the years endedDecember 31, 2021 and 2020, total distributions declared and paid on the SLP Units were$2.1 million . Additionally, onMarch 18, 2022 , the Board of Directors declared a quarterly distribution for the quarterly period endingMarch 31, 2022 on the SLP Units at an annualized rate of 7.0%. Any future distributions on the SLP Units will always be subordinated until stockholders receive a stated preferred return.
Contractual Obligations
The following is a summary of our contractual obligations outstanding over the
next five years and thereafter as of
Contractual Obligations 2022 2023 2024 2025 2026 Thereafter Total Mortgage Payable$ 43,389 $ 1,454 $ 126,910 $ - $ - $ -$ 171,753 Interest Payments1 9,786 9,446 6,169 - - - 25,401 Total Contractual Obligations$ 53,175 $ 10,900 $ 133,079 $ - $ - $ -$ 197,154
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 December 31, 2021
was used.
35
Notes Payable
Margin Loan
We have access to a margin loan (the "Margin Loan") from a financial institution
that holds custody of certain of our marketable securities. The Margin Loan,
which is due on demand, bears interest at LIBOR + 0.85% (0.95% as of December
31, 2021 ) and is collateralized by the marketable securities in our account. The
amounts available to us under the Margin Loan are at the discretion of the
financial institution and not limited to the amount of collateral in our
account. There were no amounts outstanding under the Margin Loan as of December
31, 2021 and 2020.
Line of Credit
We have a non-revolving credit facility (the "Line of Credit") with a financial
institution that provides for borrowings up to a maximum of $20.0 million ,
subject to a 55% loan-to-value ratio based on the fair value of the underlying
collateral, matures on November 30, 2022 and bears interest at LIBOR + 1.35%
(1.45% as of December 31, 2021 ). The Line of Credit is collateralized by an
aggregate of 209,243 of Marco OP Units and Marco II OP Units and was guaranteed
by PRO. As of December 31, 2021 , the amount of borrowings available to be drawn
under the Line of Credit was $18.4 million . No amounts were outstanding under
the Line of Credit as of both December 31, 2021 and 2020.
LIBOR
The Moxy Construction Loans, Exterior Street Loans, Margin Loan and Line of Credit are indexed to LIBOR. In late 2021, it was announced LIBOR interest rates will cease publication altogether byJune 30, 2023 . We have and intend continue to incorporate relatively standardized replacement rate provisions into our LIBOR-indexed debt documents, including a spread adjustment mechanism designed to equate to the current LIBOR "all in" rate. There is significant uncertainty with respect to the implementation of the phase out and what alternative indexes will be adopted which will ultimately be determined by the market as a whole. It therefore remains uncertain how such changes will be implemented and the effects such changes would have on us and the financial markets generally.
Debt Maturities
The Exterior Street Loans (outstanding principal balance of$42.0 million as ofDecember 31, 2021 ) mature onApril 9, 2022 . We currently intend to extend or refinance the Exterior Street Loans on or before their maturity date.
However, if we are unable to extend or refinance any of our maturing indebtedness at favorable terms, we will look to repay the then outstanding balance with available cash and/or proceeds from selective asset sales. We have no additional significant maturities of mortgage debt over the next 12 months.
36
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 and are no longer incurring a significant amount of acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP. We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline") issued by the IPA inNovember 2010 . The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction-related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses (which includes costs incurred in connection with strategic alternatives), amounts relating to deferred rent receivables and amortization of market lease and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. 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.
37
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. 38 The below table illustrates the items deducted in the calculation of FFO and MFFO. Items are presented net of non-controlling interest portions where applicable. For the Years Ended December 31, December 31, 2021 2020 Net income/(loss)$ 23,963 $ (1,087 ) FFO adjustments: Depreciation and amortization 5,523 3,956 Gain on disposal of real estate, net (3,947 ) (1,562 ) Impairment charge 11,341 - FFO 36,880 1,307 MFFO adjustments: Other adjustments:
Acquisition and other transaction related costs expensed(1) - - Noncash adjustments: Amortization of above or below market leases and liabilities(2) - - Mark to market adjustments(3) (16,650 ) 12,204 Loss on debt extinguishment(4) 103 - (Gain)/loss on sale of marketable securities(4) (5,882 ) 230 MFFO 14,451 13,741 Straight-line rent(5) 5 104 MFFO - IPA recommended format$ 14,456 $ 13,845 Net income/(loss)$ 23,963 $ (1,087 ) Less: income attributable to noncontrolling interests (4,880 ) (3,202 )
Net income/(loss) applicable to Company's common shares
FFO$ 36,880 $ 1,307 Less: FFO attributable to noncontrolling interests (5,799 ) (1,697 ) FFO attributable to Company's common shares$ 31,081 $ (390 ) FFO per common share, basic and diluted $
1.40
MFFO - IPA recommended format$ 14,456 $ 13,845 Less: MFFO attributable to noncontrolling interests (4,755 ) (3,634 ) MFFO attributable to Company's common shares $
9,701
Weighted average number of common shares outstanding, basic
and diluted 22,254 22,337
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Notes:(1) The purchase of properties, and the corresponding expenses associated with
that process, is a key operational feature of our business plan to generate
operational income and cash flows in order to make distributions to
investors. In evaluating investments in real estate, management
differentiates the costs to acquire the investment from the operations
derived from the investment. Such information would be comparable only for
non-listed REITs that have completed their acquisition activity and have
other similar operating characteristics. By excluding expensed acquisition
costs, management believes MFFO provides useful supplemental information that
is comparable for each type of real estate investment and is consistent with
management's analysis of the investing and operating performance of our
properties. Acquisition fees and expenses include payments to our advisor or
third parties. Acquisition fees and expenses under GAAP are considered
operating expenses and as expenses included in the determination of net
income and income from continuing operations, both of which are performance
measures under GAAP. Such fees and expenses are paid in cash, and therefore
such funds will not be available to distribute to investors. Such fees and
expenses negatively impact our operating performance during the period inwhich properties are being acquired. Therefore, MFFO may not be an accurate
indicator of our operating performance, especially during periods in which
properties are being acquired. All paid and accrued acquisition fees and
expenses will have negative effects on returns to investors, the potential
for future distributions, and cash flows generated by us, unless earnings
from operations or net sales proceeds from the disposition of properties are
generated to cover the purchase price of the property, these fees and
expenses and other costs related to the property. Acquisition fees and
expenses will not be paid or reimbursed, as applicable, to our advisor even
if there are no further proceeds from the sale of shares in our offering, and
therefore such fees and expenses would need to be paid from either additional
debt, operational earnings or cash flows, net proceeds from the sale of
properties or from ancillary cash flows.
(2) Under GAAP, certain intangibles are accounted for at cost and reviewed at
least annually for impairment, and certain intangibles are assumed to
diminish predictably in value over time and amortized, similar to
depreciation and amortization of other real estate related assets that are
excluded from FFO. However, because real estate values and market lease rates
historically rise or fall with market conditions, management believes that by
excluding charges relating to amortization of these intangibles, MFFO
provides useful supplemental information on the performance of the real
estate.
(3) 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. 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.
(4) 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.
(5) 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 paid and cumulative FFO:
From
inception through
December 31,
2021
FFO attributable to Company's common shares $ 266,732
Distributions Paid $ 263,308
For the year ended December 31, 2021 , we paid cash distributions of $15.3
million . Cash flow from operations was $10.0 million and FFO attributable to
Company's common shares for the year ended December 31, 2021 was $31.1 million .
For the year ended December 31, 2020 , we paid cash distributions of $15.4
million . Cash flow from operations was $10.1 million and FFO attributable to
Company's common shares for the year ended December 31, 2020 was negative $0.4
million .
New Accounting Pronouncements
See Note 2 to the Notes to Consolidated Financial Statements for further information concerning accounting standards that we have not yet been required to adopt and may be applicable to our future operations.
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