Item 1.
Financial Statements.
Lightstone
Value Plus REIT V, Inc.
Consolidated
Balance Sheets
(dollars
in thousands, except per share amounts)
| |
| | | |
| | |
| |
March 31,
2023 | | |
December 31,
2022 | |
| |
(unaudited) | | |
| | |
Assets | |
| | | |
| | |
| |
| | | |
| | |
Investment
property: | |
| | | |
| | |
Land
and improvements | |
$ | 84,609 | | |
$ | 84,439 | |
Building
and improvements | |
| 325,415 | | |
| 324,335 | |
Furniture,
fixtures and equipment | |
| 10,049 | | |
| 9,975 | |
Gross
investment property | |
| 420,073 | | |
| 418,749 | |
Less
accumulated depreciation | |
| (62,715 | ) | |
| (59,274 | ) |
Net
investment property | |
| 357,358 | | |
| 359,475 | |
| |
| | | |
| | |
Cash
and cash equivalents | |
| 58,805 | | |
| 59,625 | |
Marketable
securities, available for sale | |
| 3,561 | | |
| 3,455 | |
Restricted
cash | |
| 4,535 | | |
| 5,126 | |
Note
receivable, net | |
| 4,616 | | |
| 3,771 | |
Prepaid
expenses and other assets | |
| 3,223 | | |
| 3,256 | |
Total
Assets | |
$ | 432,098 | | |
$ | 434,708 | |
| |
| | | |
| | |
Liabilities
and Stockholders’ Equity | |
| | | |
| | |
| |
| | | |
| | |
Notes
payable, net | |
$ | 290,404 | | |
$ | 290,289 | |
Accounts
payable and accrued and other liabilities | |
| 7,897 | | |
| 8,515 | |
Total
liabilities | |
| 298,301 | | |
| 298,804 | |
| |
| | | |
| | |
Commitments
and Contingencies | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’
Equity: | |
| | | |
| | |
Company’s
stockholders’ equity: | |
| | | |
| | |
Preferred
stock, $.0001 par value per share; 50.0 million shares authorized, none issued and outstanding | |
| - | | |
| - | |
Convertible
stock, $.0001 par value per share; 1,000 shares authorized, issued and outstanding | |
| - | | |
| - | |
Common
stock, $.0001 par value per share; 350.0 million shares authorized,
20.0 million shares issued and outstanding | |
| 2 | | |
| 2 | |
Additional
paid-in-capital | |
| 169,846 | | |
| 169,996 | |
Accumulated
other comprehensive loss | |
| (190 | ) | |
| (220 | ) |
Accumulated
deficit | |
| (35,861 | ) | |
| (33,874 | ) |
Total
Stockholders’ Equity | |
| 133,797 | | |
| 135,904 | |
Total
Liabilities and Stockholders’ Equity | |
$ | 432,098 | | |
$ | 434,708 | |
See
Notes to Consolidated Financial Statements.
Lightstone
Value Plus REIT V, Inc.
Consolidated
Statements of Operations and Comprehensive Income
(dollars
and shares in thousands, except per share amounts)
(unaudited)
| |
| | | |
| | |
| |
For
the
Three Months Ended
March 31, | |
| |
2023 | | |
2022 | |
Rental
revenues | |
$ | 12,313 | | |
$ | 11,206 | |
| |
| | | |
| | |
Expenses | |
| | | |
| | |
Property
operating expenses | |
| 3,900 | | |
| 3,247 | |
Real
estate taxes | |
| 1,874 | | |
| 1,728 | |
General
and administrative | |
| 1,863 | | |
| 1,818 | |
Depreciation
and amortization | |
| 3,440 | | |
| 4,919 | |
Total
expenses | |
| 11,077 | | |
| 11,712 | |
| |
| | | |
| | |
Interest
expense, net | |
| (3,598 | ) | |
| (3,114 | ) |
Interest
income | |
| 639 | | |
| 509 | |
Income
tax benefit | |
| - | | |
| 776 | |
Mark
to market adjustment on derivative financial instruments | |
| (526 | ) | |
| 618 | |
Other
income, net | |
| 262 | | |
| 338 | |
Net
loss | |
| (1,987 | ) | |
| (1,379 | ) |
| |
| | | |
| | |
Weighted
average shares outstanding: | |
| | | |
| | |
Basic
and diluted | |
| 20,036 | | |
| 20,110 | |
| |
| | | |
| | |
Basic
and diluted loss per share | |
$ | (0.10 | ) | |
$ | (0.07 | ) |
| |
| | | |
| | |
Comprehensive
loss: | |
| | | |
| | |
Net
loss | |
$ | (1,987 | ) | |
$ | (1,379 | ) |
Other
comprehensive income/(loss): | |
| | | |
| | |
Holding
gain/(loss) on marketable securities, available for sale | |
| 28 | | |
| (123 | ) |
Reclassification
adjustment for loss/(gain) on sale of marketable securities included in net loss | |
| 2 | | |
| (4 | ) |
Total
other comprehensive income/(loss) | |
| 30 | | |
| (127 | ) |
Comprehensive
loss | |
$ | (1,957 | ) | |
$ | (1,506 | ) |
See
Notes to Consolidated Financial Statements.
Lightstone
Value Plus REIT V, Inc.
Consolidated
Statements of Stockholders’ Equity
(dollars
and shares in thousands)
(unaudited)
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
Convertible
Stock | | |
Common
Stock |
| |
Additional
Paid-In | | |
Accumulated
Other Comprehensive | | |
Accumulated | | |
Total
Stockholders’ | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Loss | | |
Deficit | | |
Equity | |
BALANCE,
December 31, 2021 | |
| 1 | | |
$ | - | | |
| 20,128 | | |
$ | 2 | | |
$ | 171,079 | | |
$ | 13 | | |
$ | (25,224 | ) | |
$ | 145,870 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,379 | ) | |
| (1,379 | ) |
Redemption
and cancellation of common stock | |
| - | | |
| - | | |
| (24 | ) | |
| - | | |
| (315 | ) | |
| - | | |
| - | | |
| (315 | ) |
Other
comprehensive loss: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Holding
loss on marketable securities, available for sale | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (123 | ) | |
| - | | |
| (123 | ) |
Reclassification
adjustment for gain on sale of marketable securities included in net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (4 | ) | |
| - | | |
| (4 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
BALANCE,
March 31, 2022 | |
| 1 | | |
$ | - | | |
| 20,104 | | |
$ | 2 | | |
$ | 170,764 | | |
$ | (114 | ) | |
$ | (26,603 | ) | |
$ | 144,049 | |
| |
Convertible
Stock | | |
Common
Stock | | |
Additional
Paid-In | | |
Accumulated
Other Comprehensive | | |
Accumulated | | |
Total
Stockholders’ | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Loss | | |
Deficit | | |
Equity | |
BALANCE,
December 31, 2022 | |
| 1 | | |
$ | - | | |
| 20,044 | | |
$ | 2 | | |
$ | 169,996 | | |
$ | (220 | ) | |
$ | (33,874 | ) | |
$ | 135,904 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,987 | ) | |
| (1,987 | ) |
Redemption
and cancellation of common stock | |
| - | | |
| - | | |
| (10 | ) | |
| - | | |
| (150 | ) | |
| - | | |
| - | | |
| (150 | ) |
Other
comprehensive loss: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Holding
gain on marketable securities, available for sale | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 28 | | |
| - | | |
| 28 | |
Reclassification
adjustment for loss on sale of marketable securities included in net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 2 | | |
| - | | |
| 2 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
BALANCE,
March 31, 2023 | |
| 1 | | |
$ | - | | |
| 20,034 | | |
$ | 2 | | |
$ | 169,846 | | |
$ | (190 | ) | |
$ | (35,861 | ) | |
$ | 133,797 | |
See
Notes to Consolidated Financial Statements.
Lightstone
Value Plus REIT V, Inc.
Consolidated
Statements of Cash Flows
(dollars
in thousands)
(unaudited)
| |
| | | |
| | |
| |
For
the
Three Months Ended
March 31, | |
| |
2023 | | |
2022 | |
CASH
FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| | |
Net
loss | |
$ | (1,987 | ) | |
$ | (1,379 | ) |
Adjustments
to reconcile net loss to net cash provided by operating activities: | |
| | | |
| | |
Depreciation
and amortization | |
| 3,440 | | |
| 4,919 | |
Amortization
of deferred financing fees | |
| 356 | | |
| 352 | |
Mark
to market adjustment on derivative financial instruments | |
| 526 | | |
| (618 | ) |
Non-cash
interest income | |
| (43 | ) | |
| (192 | ) |
Other
non-cash adjustments | |
| (134 | ) | |
| (4 | ) |
Changes
in operating assets and liabilities: | |
| | | |
| | |
(Increase)/decrease
in prepaid expenses and other assets | |
| (368 | ) | |
| 5 | |
Decrease
in accounts payable and accrued and other liabilities | |
| (553 | ) | |
| (671 | ) |
Net
cash provided by operating activities | |
| 1,237 | | |
| 2,412 | |
| |
| | | |
| | |
CASH
FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Purchase
of investment property | |
| (1,410 | ) | |
| (1,822 | ) |
Purchases
of marketable securities | |
| (419 | ) | |
| (457 | ) |
Proceeds
from sale of marketable securities | |
| 342 | | |
| 489 | |
Funding
of note receivable, net | |
| (781 | ) | |
| - | |
Proceeds
from repayment of note receivable | |
| - | | |
| 1,552 | |
Net
cash used in investing activities | |
| (2,268 | ) | |
| (238 | ) |
| |
| | | |
| | |
CASH
FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
Proceeds
from notes payable | |
| 230 | | |
| 11,186 | |
Payments
on notes payable | |
| (460 | ) | |
| (442 | ) |
Payment
of loan fees and expenses | |
| - | | |
| (13 | ) |
Redemption
and cancellation of common stock | |
| (150 | ) | |
| (315 | ) |
Net
cash (used in)/provided by financing activities | |
| (380 | ) | |
| 10,416 | |
| |
| | | |
| | |
Change
in cash, cash equivalents and restricted cash | |
| (1,411 | ) | |
| 12,590 | |
Cash,
cash equivalents and restricted cash, beginning of year | |
| 64,751 | | |
| 45,239 | |
Cash,
cash equivalents and restricted cash, end of period | |
$ | 63,340 | | |
$ | 57,829 | |
| |
| | | |
| | |
Supplemental
cash flow information for the periods indicated is as follows: | |
| | | |
| | |
Cash
paid for interest | |
$ | 4,147 | | |
$ | 3,080 | |
Capital
expenditures for investment property in accounts payable and accrued and other liabilities | |
$ | 82 | | |
$ | 95 | |
Holding
gain/loss on marketable securities, available for sale | |
$ | 30 | | |
$ | 127 | |
| |
| | | |
| | |
The
following is a summary of the Company’s cash, cash equivalents,
and restricted cash total as presented in our statements of cash flows for the periods presented: | |
| | | |
| | |
Cash | |
$ | 58,805 | | |
$ | 37,775 | |
Restricted
cash | |
| 4,535 | | |
| 20,054 | |
Total
cash and restricted cash | |
$ | 63,340 | | |
$ | 57,829 | |
See
Notes to Consolidated Financial Statements.
Lightstone
Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data and
where indicated in millions)
Lightstone
Value Plus REIT V, Inc. which was formerly known as Lightstone Value Plus Real Estate Investment Trust V, Inc. before August 31,
2021 (which may be referred to as the “Company,” “we,” “us,” or “our”), was organized
as a Maryland corporation on January 9, 2007 and has elected to be taxed, and currently qualifies, as a real estate investment trust
(“REIT”) for federal income tax purposes.
The
Company was formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add
basis. In particular, the Company has focused generally on acquiring commercial properties with significant possibilities for capital
appreciation, such as those requiring development, redevelopment, or repositioning, those located in markets and submarkets with high
growth potential, and those available from sellers who are distressed or face time-sensitive deadlines. The Company has acquired a wide
variety of commercial properties, including office, industrial, retail, hospitality, multifamily and student housing. The Company has
purchased existing, income-producing properties, and newly-constructed properties. The Company has also invested in other real estate-related
investments such as mortgage and mezzanine loans. The Company intends to hold the various real properties in which it has invested until
such time as its board of directors determines that a sale or other disposition appears to be advantageous to achieve the Company’s
investment objectives or until it appears that the objectives will not be met. The Company currently has one operating segment. As of
March 31, 2023, the Company had eight wholly owned real estate investments (multifamily properties) and one real estate-related
investment (note receivable).
Substantially
all of the Company’s business is conducted through Lightstone REIT V OP LP, a limited partnership organized in Delaware (the “Operating
Partnership”). As of March 31, 2023, the Company’s wholly-owned subsidiary, BHO II, Inc., a Delaware corporation, owned
a 0.1% partnership interest in the Operating Partnership as its sole general partner. As of March 31, 2023, the Company’s
wholly-owned subsidiary, BHO Business Trust II, a Maryland business trust, was the sole limited partner of the Operating Partnership
and owned the remaining 99.9% interest in the Operating Partnership.
The
Company’s business is externally managed by LSG Development Advisor LLC (the “Advisor”), an affiliate of the Lightstone
Group LLC (“Lightstone”) which provides advisory services to the Company and the Company has no employees. Lightstone is
majority owned by the chairman emeritus of the Company’s board of directors, David Lichtenstein. Pursuant to the terms of an advisory
agreement and subject to the oversight of the Company’s board of directors, the Advisor is responsible for managing the Company’s
day-to-day affairs and for services related to the management of the Company’s assets.
Organization
In
connection with the Company’s initial capitalization, the Company issued 22,500 shares of its common stock and 1,000 shares of
its convertible stock to the Company’s previous advisor on January 19, 2007. The 1,000 shares of convertible stock were transferred
to an affiliate of Lightstone on February 10, 2017 and remain outstanding. As of March 31, 2023, the Company had 20.0 million
shares of common stock outstanding.
The
Company’s common stock is not currently listed on a national securities exchange. The timing of a liquidity event for the Company’s
stockholders will depend upon then prevailing market conditions and the Company’s board of directors’ assessment of the Company’s
investment objectives and liquidity options for the Company’s stockholders. Currently, the Company’s board of directors has
targeted June 30, 2028 for the commencement of a liquidity event. However, the Company can provide no assurances as to the actual
timing of the commencement of a liquidity event for its stockholders or the ultimate liquidation of the Company. Furthermore, the Company
will seek stockholder approval prior to liquidating its entire portfolio.
Lightstone
Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data and
where indicated in millions)
| 2. | Summary
of Significant Accounting Policies |
Interim
Unaudited Financial Information
The
accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited consolidated
financial statements and related notes as contained in the Company’s Annual Report on Form 10-K for the year ended December 31,
2022, which was filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2023. The unaudited interim
consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) and accruals necessary in
the judgment of management for a fair presentation of the results for the periods presented. The accompanying unaudited consolidated
financial statements of Lightstone Value Plus REIT V, Inc. have been prepared in accordance with generally accepted accounting principles
in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and
Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial
statements.
Principles
of Consolidation and Basis of Presentation
Our
consolidated financial statements include our accounts and the accounts of other subsidiaries over which the Company has control. All
inter-company transactions, balances, and profits have been eliminated in consolidation. In addition, interests in entities acquired
are evaluated based on applicable GAAP, and entities deemed to be variable interest entities (“VIE”) in which the Company
is the primary beneficiary are also consolidated. If the interest in the entity is determined not to be a VIE, then the entity is evaluated
for consolidation based on legal form, economic substance, and the extent to which the Company has control, substantive participating
rights or both under the respective ownership agreement. For entities in which the Company has less than a controlling interest or entities
which we are not deemed to be the primary beneficiary, it accounts for the investment using the equity method of accounting.
The
consolidated balance sheet as of December 31, 2022 included herein has been derived from the consolidated balance sheet included
in the Company’s Annual Report on Form 10-K.
The
unaudited consolidated statements of operations for interim periods are not necessarily indicative of results for the full year or any
other period.
Earnings
per Share
The
Company had no potentially dilutive securities outstanding during the periods presented. Accordingly, basic and diluted earnings per
share is calculated by dividing net income/(loss) by the weighted-average number of shares of common stock outstanding during the applicable
period.
Income
Taxes
The
Company has elected to be taxed as a REIT commencing with the taxable year ended December 31, 2008. If the Company qualifies as
a REIT, it generally will not be subject to U.S. federal income tax on its taxable income or capital gain that it distributes to its
stockholders. To maintain its REIT qualification, the Company must meet a number of organizational and operational requirements, including
a requirement that it annually distribute to its stockholders at least 90% of its 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 the Company fails to remain qualified for taxation as a REIT in any subsequent year and does not qualify for certain statutory relief
provisions, its income for that year will be taxed at the regular corporate rate, and it may be precluded from qualifying for treatment
as a REIT for the four-year period following its failure to qualify as a REIT. Such an event could materially adversely affect the Company’s
net income and net cash available for distribution to stockholders.
During
2015, the Company recorded an aggregate provision for income tax of $2.7 million representing estimated foreign income tax due as a result
of the sale of two foreign investments, Alte Jakobstraße and Holstenplatz. During the first quarter of 2022, the Company recorded
an income tax benefit of $0.8 million representing a partial refund of the foreign income tax paid.
Lightstone
Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data and
where indicated in millions)
Recently Adopted Accounting Standards
In
June 2016, the Financial Accounting Standards Board issued an accounting standards
update, “Financial Instruments-Credit Losses-Measurement of Credit Losses on Financial Instruments,”
which changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair
value through net income. The updated standard introduces an impairment model that is based on expected credit losses, rather
than incurred losses, to estimate credit losses for financial instruments measured at amortized cost. For other receivables and held-to-maturity
debt instruments, entities are required to use a new forward looking expected loss model that generally will result in an earlier recognition
of allowances for losses. Financial instruments with similar risk characteristics may be grouped together when estimating expected credit
losses. The update was effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
The Company adopted the new standard, as of January 1, 2023, and it did not have a material impact on the consolidated financial statements.
Adverse
Developments Affecting the Financial Services Industry and Concentration of Credit Risk
As
of March 31, 2023 and December 31, 2022, the Company had cash deposited in certain financial institutions in excess of federally
insured levels. The Company regularly monitors the financial stability of these financial institutions and believes that it is not exposed
to any significant credit risk in cash and cash equivalents or restricted cash. However, in March and April 2023, certain U.S. government
banking regulators took steps to intervene in the operations of certain financial institutions due to liquidity concerns, which caused
general heightened uncertainties in financial markets. While these events have not had a material direct impact on the Company’s
operations, if further liquidity and financial stability concerns arise with respect to banks and financial institutions, either nationally
or in specific regions, the Company’s ability to access cash or enter into new financing arrangements may be threatened, which
could have a material adverse effect on its business, financial condition and results of operations.
Current
Environment
The
Company’s 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, the Company’s 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, inflation and recession.
The
Company’s 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,
and developments related to the COVID-19 pandemic, and other changes in economic conditions, may adversely affect the Company’s
results of operations and financial performance.
On
February 28, 2019, the Company, as the lender, and an unrelated third party (the “Loan Borrower”), as the borrower,
entered into a loan promissory note (the “Mezzanine Loan”), pursuant to which the Company funded an aggregate $12.0 million
of mezzanine financing collateralized by the ownership interests of the Loan Borrower in a condominium project (the “Park House”)
located at 500 West 22nd Street in the West Chelsea neighborhood of New York City.
The
Mezzanine Loan bore interest at a rate of LIBOR plus 11.0% per annum with a floor of 13.493% (17.885% as of December 31, 2022) and
had a maturity date of March 1, 2023. Additionally, the Mezzanine Loan provided for monthly interest-only payments at a rate of
8% with the additional interest above the 8% threshold added to the outstanding principal balance and due at maturity.
The
Loan Borrower developed and constructed Park House, which contains ten residential units and ground floor retail space. The Park House
was substantially completed in July 2022, and during the year ended December 31, 2022, the Loan Borrower repaid $10.6 million
of the Mezzanine Loan with proceeds from the sale of condominium units. As of December 31, 2022, the remaining outstanding principal
balance of the Mezzanine Loan was $3.8 million, including $2.4 million of additional interest due at maturity, which was classified as
note receivable, net on the consolidated balance sheet.
During
the first quarter of 2023, the Company and Loan Borrower refinanced the Mezzanine Loan resulting in a $5.0 million senior loan (the “Senior
Loan”) secured by the Loan Borrower’s ownership interest in Park House, consisting of the remaining unsold condominium units
and the ground floor retail space. The Senior Loan bears interest at a rate of SOFR plus 5.50% per annum with a floor of 10.0% (10.03%
as of March 31, 2023) and has a term of twelve-months with one six-month extension option, subject to the satisfaction of certain
conditions. As of March 31, 2023, the carrying amount of the Senior Loan was $4.6 million, consisting of outstanding principal of
$5.0 million less interest reserves of $0.4 million, which is classified as notes receivable, net on the consolidated balance sheet.
Lightstone
Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data and
where indicated in millions)
The
Company determined the following disclosure of estimated fair values using available market information and appropriate valuation methodologies.
However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value. The use of different
market assumptions or only estimation methodologies may have a material effect on the estimated fair value amounts.
As
of March 31, 2023 and December 31, 2022, management estimated that the carrying value of cash and cash equivalents, restricted
cash, note receivable, prepaid expenses and other assets (exclusive of interest rate cap contracts - see Note 6) and accounts payable
and accrued and other liabilities were at amounts that reasonably approximated their fair value based on their highly-liquid nature and/or
short-term maturities.
The
fair value of the notes payable is categorized as a Level 2 in the fair value hierarchy. The fair value was estimated using a discounted
cash flow analysis valuation on the estimated borrowing rates currently available for loans with similar terms and maturities. The fair
value of the notes payable was determined by discounting the future contractual interest and principal payments by a market rate. Disclosure
about fair value of financial instruments is based on pertinent information available to management as of March 31, 2023 and December 31,
2022. Carrying amounts of our notes payable and the related estimated fair value is summarized as follows:
Schedule of notes payable and the related estimated fair value | |
| | |
| | |
| | |
| |
| |
As
of
March 31,
2023 | | |
As
of
December 31,
2022 | |
| |
Carrying
Amount | | |
Estimated
Fair Value | | |
Carrying
Amount | | |
Estimated
Fair Value | |
Notes
payable | |
$ | 293,464 | | |
$ | 291,521 | | |
$ | 293,695 | | |
$ | 288,222 | |
The
following table presents certain information about the Company’s wholly owned and consolidated multifamily real estate properties
as of March 31, 2023:
Schedule of real estate properties |
|
|
|
|
Property
Name |
|
Location |
|
Date
Acquired |
Arbors
Harbor Town |
|
Memphis,
Tennessee |
|
December 20,
2011 |
Parkside
Apartments (“Parkside”) |
|
Sugar
Land, Texas |
|
August 8,
2013 |
Flats
at Fishers |
|
Fishers,
Indiana |
|
November 30,
2017 |
Axis
at Westmont |
|
Westmont,
Illinois |
|
November 27,
2018 |
Valley
Ranch Apartments |
|
Ann
Arbor, Michigan |
|
February 14,
2019 |
Autumn
Breeze Apartments |
|
Noblesville,
Indiana |
|
March 17,
2020 |
BayVue
Apartments |
|
Tampa,
Florida |
|
July 7,
2021 |
Citadel
Apartments |
|
Houston,
Texas |
|
October 6,
2021 |
Lightstone
Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data and
where indicated in millions)
| 6. | Marketable
Securities, Derivative Financial Instruments and Fair Value Measurements |
Marketable
Securities
The
following is a summary of the Company’s available for sale securities as of the dates indicated:
Schedule of available-for-sale securities reconciliation | |
| | |
| | |
| | |
| |
| |
As
of March 31, 2023 | |
Debt
securities: | |
Adjusted
Cost | | |
Gross
Unrealized
Gains | | |
Gross
Unrealized
Losses | | |
Fair
Value | |
Corporate
and Government Bonds | |
$ | 3,752 | | |
$ | 8 | | |
$ | (199 | ) | |
$ | 3,561 | |
| |
As
of December 31, 2022 | |
Debt
securities: | |
Adjusted
Cost | | |
Gross
Unrealized
Gains | | |
Gross
Unrealized
Losses | | |
Fair
Value | |
Corporate
and Government Bonds | |
$ | 3,675 | | |
$ | - | | |
$ | (220 | ) | |
$ | 3,455 | |
The
Company may be exposed to credit losses through its available-for-sale debt securities. Unrealized losses or impairments resulting
from the amortized cost basis of any available-for-sale debt security exceeding its fair value are evaluated for identification of
credit and non-credit related factors. Any difference between the fair value of the debt security and the amortized cost basis not
attributable to credit related factors are reported in other comprehensive income. A credit-related impairment is recognized as an
allowance on the balance sheet with a corresponding adjustment to earnings. When evaluating the investments for impairment at each
reporting period, the Company reviews factors such as the extent of the unrealized loss, current and future economic market
conditions and the economic and financial condition of the issuer and any changes thereto. As of March 31, 2023, the Company
has not recognized an allowance for expected credit losses related to available-for-sale debt securities as the Company has not
identified any unrealized losses for these investments attributable to credit factors. The Company's unrealized loss on investments in corporate bonds was primarily caused by recent rising interest
rates. The Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell
the investment before recovery of its amortized cost basis.
The
following table summarizes the estimated fair value of our investments in marketable debt securities with stated contractual maturity
dates, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities:
Summary of the estimated fair value of our investments in marketable debt securities with stated contractual maturity dates | |
| | |
| |
As
of
March 31,
2023 | |
Due
in 1 year | |
$ | 504 | |
Due
in 1 year through 5 years | |
| 2,961 | |
Due
in 5 years through 10 years | |
| 96 | |
Due
after 10 years | |
| - | |
Total | |
$ | 3,561 | |
Derivative
Financial Instruments
The
Company has entered into two interest rate cap contracts with unrelated financial institutions in order to reduce the effect of interest
rate fluctuations or risk of certain real estate investment’s interest expense on its variable rate debt. The Company is exposed
to credit risk in the event of non-performance by the counterparty to these financial instruments. Management believes the risk of loss
due to non-performance to be minimal.
Lightstone
Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data and
where indicated in millions)
The
Company is accounting for the interest rate cap contracts as economic hedges, marking these contracts to market, taking into account
present interest rates compared to the contracted fixed rate over the life of the contract and recording the unrealized gain or loss
on the interest rate cap contracts in the consolidated statements of operations.
For
the three months ended March 31, 2023 and 2022, the Company recorded unrealized losses of $0.5 million and unrealized gains of $0.6
million, respectively, in the consolidated statements of operations representing the change in the fair value of these economic hedges
during such periods.
The
interest rate cap contracts have notional amounts of $52.2 million and $49.0 million, respectively, mature on July 15, 2023 and
October 11, 2023, respectively, and effectively cap LIBOR at 2.50% and 2.00%, respectively. The aggregate fair value of the interest
rate cap contracts was $1.3 million and $1.8 million as of March 31, 2023 and December 31, 2022, respectively, and is included
in prepaid expenses and other assets on the consolidated balance sheets. During the three months ended March 31, 2023 the Company
earned $0.6 million from the interest rate cap contracts which is recorded in interest expense, net on the consolidated statements of
operations.
Fair
Value Measurements
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The
standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last
unobservable, that may be used to measure fair value:
|
● |
Level
1 – Quoted prices in active markets for identical assets or liabilities. |
|
|
|
|
● |
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities. |
|
|
|
|
● |
Level
3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities. |
The
fair values of the Company’s investments in debt securities are measured using quoted prices for these investments; however, the
markets for these assets are not active. The fair values of the Company’s interest rate cap contracts are measured using other
inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
As of March 31, 2023 and December 31, 2022, all of the Company’s debt securities and interest rate cap contracts were
classified as Level 2 assets and there were no transfers between the level classifications during the three months ended March 31,
2023 and 2022.
Lightstone
Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data and
where indicated in millions)
Notes
payable consists of the following:
Schedule of information on notes payable | |
| |
| |
| |
| | | |
| | | |
| | |
Property | |
Interest
Rate | |
Weighted
Average
Interest Rate for the
Three Months Ended
March 31,
2023 | |
Maturity
Date | |
Amount
Due
at Maturity | | |
As
of March 31,
2023 | | |
As
of December 31,
2022 | |
Arbors
Harbor Town | |
4.53% | |
4.53% | |
January 1, 2026 | |
$ | 29,000 | | |
$ | 29,000 | | |
$ | 29,000 | |
Arbors
Harbor Town Supplemental | |
3.52% | |
3.52% | |
January 1, 2026 | |
| 5,379 | | |
| 5,704 | | |
| 5,732 | |
Parkside
Apartments | |
4.45% | |
4.45% | |
June 1, 2025 | |
| 15,782 | | |
| 16,556 | | |
| 16,644 | |
Axis
at Westmont | |
4.39% | |
4.39% | |
February 1, 2026 | |
| 34,343 | | |
| 36,317 | | |
| 36,483 | |
Valley
Ranch Apartments | |
4.16% | |
4.16% | |
March 1, 2026 | |
| 43,414 | | |
| 43,414 | | |
| 43,414 | |
Flats
at Fishers | |
3.78% | |
3.78% | |
July 1, 2026 | |
| 26,090 | | |
| 27,936 | | |
| 28,072 | |
Flats
at Fishers Supplemental | |
3.85% | |
3.85% | |
July 1, 2026 | |
| 8,366 | | |
| 8,944 | | |
| 8,987 | |
Autumn
Breeze Apartments | |
3.39% | |
3.39% | |
April 1, 2030 | |
| 25,518 | | |
| 29,920 | | |
| 29,920 | |
BayVue
Apartments | |
LIBOR + 3.00%
(floor 3.10%) | |
7.67% | |
July 9, 2024 | |
| 46,673 | | |
| 46,673 | | |
| 46,443 | |
Citadel
Apartments Senior | |
LIBOR + 1.50%
(floor 1.60%) | |
6.18% | |
October 11, 2024 | |
| 39,200 | | |
| 39,200 | | |
| 39,200 | |
Citadel
Apartments Junior | |
LIBOR + 8.75%
(floor 8.85%) | |
13.53% | |
October
11, 2024 | |
| 9,800 | | |
| 9,800 | | |
| 9,800 | |
| |
| |
| |
| |
| | | |
| | | |
| | |
Total
notes payable | |
| |
5.25% | |
| |
$ | 283,565 | | |
| 293,464 | | |
| 293,695 | |
| |
| |
| |
| |
| | | |
| | | |
| | |
Less:
Deferred financing costs | |
| |
| |
| |
| | | |
| (3,060 | ) | |
| (3,406 | ) |
| |
| |
| |
| |
| | | |
| | | |
| | |
Total
notes payable, net | |
| |
| |
| |
| | | |
$ | 290,404 | | |
$ | 290,289 | |
LIBOR
as of March 31, 2023 and December 31, 2022 was 4.86% and 4.39%, respectively. The Company’s loans are secured by the
indicated real estate and are non-recourse to the Company, unless otherwise indicated.
The
following table provides information with respect to the contractual maturities and scheduled principal repayments of the Company’s
indebtedness as of March 31, 2023.
Schedule of contractual obligations for principal payments | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
2023 | | |
2024 | | |
2025 | | |
2026 | | |
2027 | | |
Thereafter | | |
Total | |
Principal
maturities | |
$ | 1,730 | | |
$ | 98,134 | | |
$ | 18,138 | | |
$ | 147,729 | | |
$ | 654 | | |
$ | 27,079 | | |
$ | 293,464 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Less:
deferred financing costs | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (3,060 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total
notes payable, net | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | 290,404 | |
As
of March 31, 2023, the Company was in compliance with all of its financial debt covenants.
Lightstone
Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data and
where indicated in millions)
Citadel
Apartments
On
October 6, 2021, the Company entered into a non-recourse mortgage loan facility for up to $39.2 million (the “Citadel Apartments
Senior Mortgage”). Simultaneously, on October 6, 2021, the Company also entered into a non-recourse mortgage loan facility
for up to $9.8 million (the “Citadel Apartments Junior Mortgage” and together with the Citadel Apartments Senior Mortgage,
the “Citadel Apartments Mortgages”). The Citadel Apartments Mortgages provide for a replacement benchmark rate in connection
with the phase-out of LIBOR, which is expected to be for periods after June 30, 2023.
The
Citadel Apartments Mortgages initially mature on October 11, 2024, with two one-year extension options, subject to the satisfaction
of certain conditions, and are collateralized by the Citadel Apartments, while the Citadel Apartments Junior Mortgage is subordinate
to the Citadel Apartments Senior Mortgage.
Pursuant
to the terms of the Citadel Apartments Mortgages, the Company is required to enter into one or more interest rate cap agreements in the
notional amount of $49.0 million for as long as the Citadel Apartments Mortgages remain outstanding. In connection with the Citadel Apartments
Mortgages, the Company has entered into an interest rate cap agreement with a notional amount of $49.0 million pursuant to which the
LIBOR rate is capped at 2.00% through October 11, 2023.
BayVue
Apartments
On
July 7, 2021, the Company entered into a non-recourse mortgage loan facility for up to $52.2 million (the “BayVue Apartments
Mortgage”) scheduled to initially mature on July 9, 2024, with two, one-year extension options, subject to the satisfaction
of certain conditions. The BayVue Apartments Mortgage provides for a replacement benchmark rate in connection with the phase-out of LIBOR,
which is expected to be for periods after June 30, 2023. As of March 31, 2023, the outstanding principal balance and remaining
availability under the BayVue Apartments Mortgage was $46.7 million and $5.5 million, respectively. The remaining availability may be
drawn for certain capital improvements to the property pursuant to the loan agreement.
Pursuant
to the terms of the BayVue Apartments Mortgage, the Company is required to enter into one or more interest rate cap agreements in the
notional amount of $52.2 million for as long as the BayVue Apartments Mortgage remains outstanding. In connection with the BayVue Apartments
Mortgage, the Company has entered into an interest rate cap agreement with a notional amount of $52.2 million pursuant to which the LIBOR
rate is capped at 2.50% through July 15, 2023.
Lightstone
Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data and
where indicated in millions)
Share
Redemption Program
The
Company’s board of directors has adopted a share redemption program (the “SRP”) that permits stockholders to sell their
shares back to the Company, subject to the significant conditions and limitations of the program. The Company’s board of directors
can amend the provisions of the SRP at any time without the approval of its stockholders.
Effective
March 25, 2021, the Company’s Board of Directors reopened the SRP, which had been suspended since December 13, 2019,
solely for redemptions submitted in connection with a stockholder’s death and set the price for all such purchases to the Company’s
current NAV per Share, as determined by its board of directors and reported by the Company from
time to time.
On
November 10, 2022, the Company’s board
of directors adopted a Seventh Amended and Restated Share Redemption Program (the “Amended SRP”), which became effective
on January 1, 2023. Under the terms of the Amended SRP, any stockholder may request redemption of their shares, subject to
the significant conditions and limitations of the program. Redemption requests will no longer be
limited to requests upon the death of a qualifying stockholder, as had been the case under the SRP through December 31, 2022. Additionally,
under the terms of the Amended SRP, the Company will redeem shares at 85% of the NAV per
Share as of the date the request for redemption is approved.
Pursuant
to the terms of the Amended SRP, any shares approved for redemption are redeemed on a periodic basis as determined by the Company’s
board of directors, generally expected to be at the end of each quarterly period. However, the
Company will not redeem, during any calendar year, more than 5% of the number of shares outstanding
on last day of the previous calendar year (the “5% Limitation”). The cash available for redemption of shares will be set
by the Company’s board of directors not less often than annually (the “Funding
Limitation” and, together with the 5% Limitation, the “Redemption Limitations”). The Company’s board
of directors has set the amount of cash available for redemption of shares for the year ended December 31, 2023 at $8.0 million,
which is generally to be allocated $2.0 million for each quarterly period. The Company may change the amount of the Redemption Limitations
upon 10 business days’ notice to its stockholders and will provide notice of any change to the Redemption Limitations by including
such information in (a) a Current Report on Form 8-K or in its annual or quarterly reports, all publicly filed with the United States
Securities and Exchange Commission or (b) a separate mailing to its stockholders.
Redemption
requests will be honored pro rata among all requests received subject to the Redemption Limitations and will not be honored on a first
come, first served basis.
The
Company’s board of directors reserves the right in its sole discretion at any time and from
time to time, subject to any notice requirements described in our SRP, to (1) reject any request for redemption of shares, (2) change
the purchase price for redemption of shares, (3) limit the funds to be used for redemption of shares under the SRP or otherwise change
the Redemption Limitations, or (4) amend, suspend (in whole or in part) or terminate the SRP.
For
the three months ended March 31, 2023, the Company repurchased 10,161 shares of common stock, pursuant to its SRP at a weighted
average price per share of $14.75 per share. For the three months ended March 31, 2022, the Company repurchased 24,419 shares of
common stock, pursuant to its SRP at a weighted average price per share of $12.91 per share.
Distributions
The
Company did not make any distributions to its stockholders during the three months ended March 31, 2023 and 2022.
Lightstone
Value Plus REIT V, Inc.
Notes to Consolidated Financial Statements (unaudited)
(Dollar amounts in thousands, except per share data and
where indicated in millions)
| 9. | Related
Party Transactions |
The
Company has agreements with the Advisor and its affiliates to pay certain fees and reimburse certain expenses in connection with services
performed and costs incurred by these entities and other related parties. The Company is dependent on the Advisor and its affiliates
for certain services that are essential to it, including investment decisions, asset disposition decisions, property management and leasing
services, financing services, and other general administrative responsibilities. In the event that these entities are unable to provide
the Company with their respective services, the Company would be required to obtain such services from other sources.
The
advisory agreement has a one-year term and is renewable annually upon the mutual consent of the Advisor and the Company’s independent
directors.
The
following table represents the fees incurred associated with the payments to the Company’s Advisor and its affiliates for the periods
indicated:
Schedule of related party transactions | |
| | | |
| | |
| |
For
the
Three Months Ended
March 31, | |
| |
2023 | | |
2022 | |
Acquisition
fees and acquisition expense reimbursement(1) | |
$ | 21 | | |
$ | - | |
Property
management fees (property operating expenses) | |
| 135 | | |
| 117 | |
Administrative
services reimbursement (general and administrative costs) | |
| 376 | | |
| 347 | |
Asset
management fees (general and administrative costs) | |
| 906 | | |
| 868 | |
Total | |
$ | 1,438 | | |
$ | 1,332 | |
| (1) | Capitalized
to the corresponding asset and amortized over its estimated useful life. |
| 10. | Commitments
and Contingencies |
Legal
Proceedings
From
time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes.
As
of the date hereof, the Company is not a party to any material pending legal proceedings of which the outcome is probable or reasonably
possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure
of the contingency and possible range of loss.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The
following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the notes
thereto.
Forward-Looking
Statements
Certain
statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A
of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”). These forward-looking statements include discussion and analysis of the financial condition
of Lightstone Value Plus REIT V, Inc. and our subsidiaries (which may be referred to herein as the “Company,” “we,”
“us” or “our”), including our ability to make accretive real estate or real estate-related investments, rent
space on favorable terms, to address our debt maturities and to fund our liquidity requirements, to sell our assets when we believe advantageous
to achieve our investment objectives, our anticipated capital expenditures, the amount and timing of anticipated future cash distributions
to our stockholders, the estimated net asset value per share of our common stock (“NAV per Share”), and other matters. Words
such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,”
“seeks,” “estimates,” “would,” “could,” “should” and variations of these
words and similar expressions are intended to identify forward-looking statements.
These
forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on
their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees
of future performance, and we caution stockholders not to place undue reliance on forward-looking statements. Actual results may differ
materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors,
including but not limited to the factors described below:
|
● |
market
and economic challenges experienced by the U.S. and global economies or real estate industry as a whole and the local economic conditions
in the markets in which our investments are located. Additionally, our business and financial performance may be adversely affected
by current and future economic and other conditions; such as inflation, recession, political upheaval or uncertainty, terrorism and
acts of war, natural and man-made disasters, cybercrime, and outbreaks of contagious diseases; |
|
|
|
|
● |
the
availability of cash flow from operating activities for distributions, if required to maintain our status as a real estate investment
trust, or REIT; |
|
|
|
|
● |
conflicts
of interest arising out of our relationships with our advisor and its affiliates; |
|
|
|
|
● |
our
ability to retain our executive officers and other key individuals who provide advisory and property management services to us; |
|
|
|
|
● |
our
level of debt and the terms and limitations imposed on us by our debt agreements; |
|
|
|
|
● |
the
availability of credit generally, and any failure to obtain debt financing at favorable terms or a failure to satisfy the conditions
and requirements of that debt; |
|
|
|
|
● |
our
ability to make accretive investments; |
|
|
|
|
● |
our
ability to diversify our portfolio of assets; |
|
|
|
|
● |
changes
in market factors that could impact our rental rates and operating costs; |
|
|
|
|
● |
our
ability to secure leases at favorable rental rates; |
|
● |
our
ability to sell our assets at a price and on a timeline consistent with our investment objectives; |
|
|
|
|
● |
impairment
charges; |
|
|
|
|
● |
unfavorable
changes in laws or regulations impacting our business, our assets or our key relationships; and |
|
|
|
|
● |
factors
that could affect our ability to qualify as a real estate investment trust. |
Forward-looking
statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Report, and may
ultimately prove to be incorrect. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions,
the occurrence of unanticipated events or changes to future operating results, except as required by applicable law. We intend for these
forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and
Section 21E of the Exchange Act.
Cautionary
Note
The
representations, warranties, and covenants made by us in any agreement filed as an exhibit to this Quarterly Report on Form 10-Q
are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the
parties to the agreement, and should not be deemed to be representations, warranties, or covenants to or with any other parties. Moreover,
these representations, warranties, or covenants should not be relied upon as accurately describing or reflecting the current state of
our affairs.
Executive
Overview
We
were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add
basis. In particular, we have focused generally on acquiring commercial properties with significant possibilities for capital appreciation,
such as those requiring development, redevelopment or repositioning, those located in markets and submarkets with high growth potential,
and those available from sellers who were distressed or faced time-sensitive deadlines. In addition, our opportunistic and value-add
investment strategy has included investments in real estate-related assets that present opportunities for higher current income. Since
inception, we have acquired a wide variety of commercial properties, including office, industrial, retail, hospitality, multifamily and
student housing. We have purchased existing, income-producing properties and newly constructed properties. We have also invested in mortgage
and mezzanine loans. We have made our investments in or in respect of real estate assets located in the United States and other countries
based on our view of existing market conditions. All of our current investments are located in the United States. We currently intend
to hold our various real properties until such time as our board of directors determines that a sale or other disposition appears to
be advantageous to achieve our investment objectives or until it appears that the objectives will not be met. We
currently have one operating segment. As of March 31, 2023, our investments included eight wholly owned real estate investments
(multifamily properties) and one real estate-related investment (note receivable).
Adverse
Developments Affecting the Financial Services Industry and Concentration of Credit Risk
As
of March 31, 2023 and December 31, 2022, we had cash deposited in certain financial institutions in excess of federally insured
levels. We regularly monitor the financial stability of these financial institutions and believe that we are not exposed to any significant
credit risk in cash and cash equivalents or restricted cash. However, in March 2023, certain U.S. government banking regulators
took steps to intervene in the operations of certain financial institutions due to liquidity concerns, which caused general heightened
uncertainties in financial markets. While these events have not had a material direct impact on our operations, if further liquidity
and financial stability concerns arise with respect to banks and financial institutions, either nationally or in specific regions, our
ability to access cash or enter into new financing arrangements may be threatened, which could have a material adverse effect on our
business, financial condition and results of operations.
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, 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, and developments
related to the COVID-19 pandemic, and other changes in economic conditions, may adversely affect our results of operations and financial
performance.
Liquidity
and Capital Resources
We
had cash and cash equivalents of $58.8 million, marketable securities, available for sale of $3.6 million and restricted cash of $4.5
million as of March 31, 2023. Our principal demands for funds going forward are expected to be for the payment of (a) operating
expenses, including capital expenditures, and (b) scheduled debt service on our outstanding indebtedness, including any required interest
rate cap agreements. We also may, at our discretion, use funds for (a) tender offers and/or redemptions of shares of our common stock,
(b) distributions, if any, to our shareholders, and (c) selective acquisitions and/or real estate-related investments. Generally, we
expect to meet our cash needs with our cash and cash equivalents on hand along with our cash flow from operations, the release of certain
funds held in restricted cash, the remaining availability on certain of our mortgage loans and the repayment of our outstanding note
receivable. However, to the extent that these sources are not sufficient to cover our cash needs for at least twelve months from the
date of filing this report, we may also use proceeds from additional borrowings and/or selective asset sales to fund such needs.
We
have borrowed money to acquire properties and make other investments. Under our charter, the maximum amount of our indebtedness is limited
to 300% of our “net assets” (as defined by our charter) as of the date of any borrowing; however, we may exceed that limit
if approved by a majority of our independent directors. In addition to our charter limitation, our board of directors has adopted a policy
to generally limit our aggregate borrowings to 75% of the aggregate value of our assets unless substantial justification exists that
borrowing a greater amount is in our best interests. Our policy limitation, however, does not apply to individual real estate assets.
Results
of Operations
We
currently have one operating segment. As of March 31, 2023, we had eight wholly owned real estate investments (multifamily properties)
and one real estate-related investment (note receivable).
The
tables below reflect occupancy and effective monthly rental rates for our operating properties owned as of the dates indicated:
| |
Occupancy | | |
Effective
Monthly
Rent per Unit(1) | |
| |
As
of
March 31, | | |
As
of
March 31, | |
Property | |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Arbors
Harbor Town | |
| 90 | % | |
| 95 | % | |
$ | 1,667 | | |
$ | 1,519 | |
Parkside | |
| 95 | % | |
| 97 | % | |
$ | 1,416 | | |
$ | 1,307 | |
Flats
at Fishers | |
| 94 | % | |
| 94 | % | |
$ | 1,505 | | |
$ | 1,391 | |
Axis
at Westmont | |
| 95 | % | |
| 93 | % | |
$ | 1,476 | | |
$ | 1,325 | |
Valley
Ranch Apartments | |
| 96 | % | |
| 94 | % | |
$ | 1,700 | | |
$ | 1,541 | |
Autumn
Breeze Apartments | |
| 95 | % | |
| 94 | % | |
$ | 1,385 | | |
$ | 1,249 | |
BayVue
Apartments | |
| 95 | % | |
| 95 | % | |
$ | 1,492 | | |
$ | 1,196 | |
Citadel
Apartments | |
| 94 | % | |
| 94 | % | |
$ | 1,681 | | |
$ | 1,631 | |
| (1) | Effective
monthly rent is calculated as in-place contracted monthly rental revenue, including any premiums
due for short-term or month-to-month leases, less any concessions or discounts. |
Three
months ended March 31, 2023 as compared to the three months ended March 31, 2022.
Our
operating results for the three months ended March 31, 2023 and 2022 are attributable to our eight wholly owned investment properties,
all of which were owned by us during the entire periods presented. The following table provides summary information about our results
of operations (dollars in thousands):
| |
Three Months
Ended | | |
| | |
| |
| |
March 31, | | |
Increase/ | | |
Percentage | |
| |
2023 | | |
2022 | | |
(Decrease) | | |
Change | |
Rental
revenues | |
$ | 12,313 | | |
$ | 11,206 | | |
$ | 1,107 | | |
| 10.0 | % |
Property
operating expenses | |
| 3,900 | | |
| 3,247 | | |
| 653 | | |
| 20.0 | % |
Real
estate taxes | |
| 1,874 | | |
| 1,728 | | |
| 146 | | |
| 8.0 | % |
General
and administrative | |
| 1,863 | | |
| 1,818 | | |
| 45 | | |
| 2.0 | % |
Depreciation
and amortization | |
| 3,440 | | |
| 4,919 | | |
| (1,479 | ) | |
| (30.0 | %) |
Interest
expense, net | |
| 3,598 | | |
| 3,114 | | |
| 484 | | |
| 16.0 | % |
Revenues
Rental revenues for the three months ended March 31, 2023 were $12.3 million, an increase of $1.1 million, compared to $11.2
million for the same period in 2022. Our rental revenues increased during the 2023 period as a result of higher average monthly rent
per unit, partially offset by slightly lower overall portfolio occupancy.
Property
Operating Expenses Property operating expenses for the three months ended March 31, 2023 were $3.9 million, an increase of $0.7
million, compared to $3.2 million for the same period in 2022. Our property operating expenses increased primarily
as a result of higher utilities and insurance costs.
Real
Estate Taxes Real estate taxes for the three months ended March 31, 2023 were $1.9 million, an increase of $0.2 million,
compared to $1.7 million for the same period in 2022.
General
and Administrative Expenses General and administrative expenses for the three months ended March 31, 2023 were $1.9 million,
a slight increase of $0.1 million, compared to $1.8 million for the same period in 2022.
Depreciation
and Amortization Depreciation and amortization expense for the three months ended March 31, 2023 was $3.4 million,
a decrease of $1.5 million, compared to $4.9 million for the same period in 2022. Our depreciation and amortization expenses decreased
$1.6 million as a result of a decreased amortization expense resulting from in-place lease intangibles becoming fully amortized during
2022.
Interest
Expense, Net Interest expense, net for the three months ended March 31, 2023 was $3.6 million, an increase
of $0.5 million, compared to $3.1 million for the same period in 2022. Interest expense is primarily attributable to financings associated
with our multifamily properties and reflects both changes in market interest rates on our variable rate indebtedness and the weighted
average principal outstanding during the periods. Additionally, during the three months ended March 31, 2023, we earned $0.6 million
from the interest rate cap contracts which is recorded in interest expense, net.
Mark
to Market Adjustment on Derivative Financial Instruments During the three
months ended March 31, 2023 and 2022, we recorded a negative mark to market adjustment of
$0.5 million and a positive mark to market adjustment of $0.6 million, respectively. These mark to market adjustments represented the
change in the fair value of our interest rate cap contracts during the applicable period.
Income
Tax Benefit During 2015, we recorded an aggregate provision for income tax of $2.7 million representing estimated foreign income
tax due as a result of the sale of two foreign investments, Alte Jakobstraße and Holstenplatz. During the first quarter of 2022,
we recorded an income tax benefit of $0.8 million representing a partial refund of the foreign income tax paid.
Related
Party Transactions
Our
business is externally managed by LSG Development Advisor LLC (the “Advisor”), an affiliate of the Lightstone Group LLC (“Lightstone”)
which provides advisory services to us and we have no employees. Lightstone is majority owned by the chairman emeritus of our board of
directors, David Lichtenstein. Pursuant to the terms of an advisory agreement and subject to the oversight of our board of directors,
the Advisor is responsible for managing our day-to-day affairs and for services related to the management of our assets.
We
have agreements with the Advisor and its affiliates to pay certain fees and reimburse certain expenses in connection with services performed
and costs incurred by these entities and other related parties. We are dependent on the Advisor and its affiliates for certain services
that are essential to us, including investment decisions, asset disposition decisions, property management and leasing services, financing
services, and other general administrative responsibilities. In the event that these entities are unable to provide us with their respective
services, we would be required to obtain such services from other sources.
The
advisory agreement has a one-year term and is renewable annually upon the mutual consent of our Advisor and our independent directors.
The
following table represents the fees incurred associated with the payments to our Advisor and its affiliates for the periods indicated
(dollars in thousands):
| |
For
the
Three Months Ended
March 31, | |
| |
2023 | | |
2022 | |
Acquisition
fees and acquisition expense reimbursement(1) | |
$ | 21 | | |
$ | - | |
Property
management fees (property operating expenses) | |
| 135 | | |
| 117 | |
Administrative
services reimbursement (general and administrative costs) | |
| 376 | | |
| 347 | |
Asset
management fees (general and administrative costs) | |
| 906 | | |
| 868 | |
Total | |
$ | 1,438 | | |
$ | 1,332 | |
| (1) | Capitalized
to the corresponding asset and amortized over its estimated useful life. |
Summary
of Cash Flows
Operating
activities
The
net cash provided by operating activities of $1.2 million for the three months ended March 31, 2023 consisted primarily of our net
loss of $2.0 million less the net change in operating assets and liabilities of $0.9 million plus the negative
mark to market adjustments on derivative financial instruments of $0.5 million, depreciation and amortization of $3.4 million
and amortization of deferred financing costs of $0.4 million.
Investing
activities
The
net cash used in investing activities of $2.3 million for the three months ended March 31, 2023 consisted primarily of the following:
| ● | capital
expenditures of $1.4 million; |
| ● | funding
of note receivable of $0.8 million; and |
| ● | net
purchases of marketable securities of $0.1 million. |
Financing
activities
The
net cash used in financing activities of $0.4 million for the three months ended March 31, 2023 consisted primarily of the following:
| ● | proceeds
from notes payable of $0.2 million; |
| ● | principal
payments of notes payable of $0.5 million; and |
| ● | redemptions
and cancellation of common stock of $0.1 million. |
Debt
Financings
From
time to time, we have obtained mortgage, bridge, or mezzanine loans for acquisitions and investments, as well as property development,
redevelopment and renovations. In the future, we may obtain new financings for such activities or to refinance our existing real estate
assets, depending on multiple factors.
Our
aggregate notes payable balance was $290.4 million, net of deferred financing fees of $3.1 million, and had a weighted average interest
rate of 5.25% as of March 31, 2023. Our aggregate notes payable balance was $290.3 million, net of deferred financing fees of $3.4
million, and had a weighted average interest rate of 4.33% as of December 31, 2022.
Derivative
Financial Instruments
We
have entered into two interest rate cap contracts with unrelated financial institutions in order to reduce the effect of interest rate
fluctuations or risk of certain real estate investment’s interest expense on our variable rate debt. We are exposed to credit risk
in the event of non-performance by the counterparty to these financial instruments. Management believes the risk of loss due to non-performance
to be minimal.
We
are accounting for the interest rate cap contracts as economic hedges, marking these contracts to market, taking into account present
interest rates compared to the contracted fixed rate over the life of the contract and recording the unrealized gain or loss on the interest
rate cap contracts in the consolidated statements of operations.
For
the three months ended March 31, 2023 and 2022, we recorded unrealized losses of $0.5 million and unrealized gains of $0.6 million,
respectively, in the consolidated statements of operations representing the change in the fair value of these economic hedges during
such periods.
The
interest rate cap contracts, which were entered into in connection with the BayVue Apartments Mortgages and Citadel Apartments Mortgage,
have notional amounts of $52.2 million and $49.0 million, respectively, mature on July 15, 2023 and October 11, 2023, respectively,
and effectively cap LIBOR at 2.50% and 2.00%, respectively. The aggregate fair value of the interest rate cap contracts was $1.3 million
and $1.8 million as of March 31, 2023 and December 31, 2022, respectively, and is included in prepaid expenses and other assets
on the consolidated balance sheets. Furthermore, pursuant to the terms of the Citadel Apartments Mortgages and Citadel Apartments Mortgage,
we are required to enter into one or more additional interest rate cap agreements with the same notional amounts and at substantially
similar strike rates for as long as these mortgage remain outstanding.
Contractual
Obligations
One
of our principal short-term and long-term liquidity requirements includes the debt service payments on our outstanding notes payable.
The following table provides information with respect to the contractual maturities and scheduled principal repayments of our indebtedness
as of March 31, 2023 (dollars in thousands).
Contractual
Obligations | |
2023 | | |
2024 | | |
2025 | | |
2026 | | |
2027 | | |
Thereafter | | |
Total | |
Mortgage
Payable | |
$ | 1,730 | | |
$ | 98,134 | | |
$ | 18,138 | | |
$ | 147,729 | | |
$ | 654 | | |
$ | 27,079 | | |
$ | 293,464 | |
Interest
Payments(1) | |
| 11,861 | | |
| 13,497 | | |
| 7,609 | | |
| 2,698 | | |
| 943 | | |
| 2,111 | | |
| 38,719 | |
Total
Contractual Obligations | |
$ | 13,591 | | |
$ | 111,631 | | |
$ | 25,747 | | |
$ | 150,427 | | |
$ | 1,597 | | |
$ | 29,190 | | |
$ | 332,183 | |
| (1) | These
amounts represent future interest payments related to notes 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 March 31,
2023 was used. |
As
of March 31, 2023, we were in compliance with all of our financial debt covenants.
Funds
from Operations and Modified Funds from Operations
The
historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements and straight-line
amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because
real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business
cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for
depreciation and certain other items may be less informative.
Because
of these factors, the National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has published
a standardized measure of performance known as funds from operations (“FFO”), which is used in the REIT industry as a supplemental
performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate
supplemental measure of a REIT’s operating performance. FFO is not equivalent to our net income or loss as determined under generally
accepted accounting principles in the United States of America (“GAAP”).
We
calculate FFO, a non-GAAP measure, consistent with the standards established over time by the Board of Governors of NAREIT, as restated
in a White Paper approved by the Board of Governors of NAREIT effective in December 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, the Investment Program Association (the “IPA”), an industry trade group, published a standardized measure
of performance known as modified funds from operations (“MFFO”), which the IPA has recommended as a supplemental measure
for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered,
non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items
the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining
of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we
believe that both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of
acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating
costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent
to our net income or loss as determined under GAAP.
We
define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered,
Non-Listed REITs: Modified Funds from Operations (the “Practice Guideline”) issued by the IPA in November 2010. The
Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction-related fees and expenses and other items. In
calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses (which includes
costs incurred in connection with strategic alternatives), amounts relating to deferred rent receivables and amortization of market lease
and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing
the rent and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market
adjustments included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income
from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings
is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation
to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments
calculated to reflect MFFO on the same basis.
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
the SEC, 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 the SEC 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.
Our
calculations of FFO and MFFO are presented below (dollars and shares in thousands, except per share amounts):
| |
For
the
Three Months Ended
March 31, | |
Description | |
2023 | | |
2022 | |
Net
loss | |
$ | (1,987 | ) | |
$ | (1,379 | ) |
FFO
adjustments: | |
| | | |
| | |
Depreciation
and amortization of real estate assets | |
| 3,440 | | |
| 4,919 | |
FFO | |
| 1,453 | | |
| 3,540 | |
MFFO
adjustments: | |
| | | |
| | |
Other
adjustments: | |
| | | |
| | |
Mark
to market adjustments(1) | |
| 526 | | |
| (618 | ) |
Non-recurring
loss/(gain) from extinguishment/sale of debt, derivatives or securities holdings(2) | |
| 2 | | |
| (4 | ) |
MFFO
before straight-line rent | |
| 1,981 | | |
| 2,918 | |
Straight-line
rent(3) | |
| - | | |
| - | |
MFFO
- IPA recommended format | |
$ | 1,981 | | |
$ | 2,918 | |
| |
| | | |
| | |
Net
loss | |
$ | (1,987 | ) | |
$ | (1,379 | ) |
Net
loss per common share, basic and diluted | |
$ | (0.10 | ) | |
$ | (0.07 | ) |
| |
| | | |
| | |
FFO | |
$ | 1,453 | | |
$ | 3,540 | |
FFO
per common share, basic and diluted | |
$ | 0.07 | | |
$ | 0.18 | |
| |
| | | |
| | |
Weighted
average number of common shares outstanding, basic and diluted | |
| 20,036 | | |
| 20,110 | |
| 1) | Management
believes that adjusting for mark-to-market adjustments is appropriate because they are nonrecurring
items that may not be reflective of ongoing operations and reflects unrealized impacts on
value based only on then current market conditions, although they may be based upon current
operational issues related to an individual property or industry or general market conditions.
Mark-to-market adjustments are made for items such as ineffective derivative instruments,
certain marketable equity securities and any other items that GAAP requires we make a mark-to-market
adjustment for. The need to reflect mark-to-market adjustments is a continuous process and
is analyzed on a quarterly and/or annual basis in accordance with GAAP. |
| 2) | 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. |
| 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. |
Share
Redemption Program
Our
board of directors has adopted a share redemption program (the “SRP”) that permits stockholders to sell their shares back
to us, subject to the significant conditions and limitations of the program. Our board of directors can amend the provisions of the SRP
at any time without the approval of its stockholders.
Effective
March 25, 2021, our Board of Directors reopened the SRP, which had been suspended since December 13, 2019, solely for redemptions
submitted in connection with a stockholder’s death and set the price for all such purchases to our current
NAV per Share, as determined by its board of directors and reported by us from time to time.
On
November 10, 2022, our board
of directors adopted a Seventh Amended and Restated Share Redemption Program (the “Amended SRP”), which became effective
on January 1, 2023. Under the terms of the Amended SRP, any stockholder may request redemption of their shares, subject to
the significant conditions and limitations of the program. Redemption requests will no longer be
limited to requests upon the death of a qualifying stockholder, as had been the case under the SRP through December 31, 2022. Additionally,
under the terms of the Amended SRP, we will redeem shares at 85% of the NAV per Share as of the date the request for redemption is approved.
Pursuant
to the terms of the Amended SRP, any shares approved for redemption are redeemed on a periodic basis as determined by our board of directors,
generally expected to be at the end of each quarterly period. However, we
will not redeem, during any calendar year, more than 5% of the number of shares outstanding on
last day of the previous calendar year (the “5% Limitation”). The cash available for redemption of shares will be set by
our board of directors not less often than annually (the “Funding Limitation”
and, together with the 5% Limitation, the “Redemption Limitations”). Our board of directors has set the amount of cash available
for redemption of shares for the year ended December 31, 2023 at $8.0 million, which is generally to be allocated $2.0 million for
each quarterly period. We may change the amount of the Redemption Limitations upon 10 business days’ notice to our stockholders
and will provide notice of any change to the Redemption Limitations by including such information in (a) a Current Report on Form 8-K
or in our annual or quarterly reports, all publicly filed with the Securities and Exchange Commission or (b) a separate mailing to its
stockholders.
Redemption
requests will be honored pro rata among all requests received subject to the Redemption Limitations and will not be honored on a first
come, first served basis.
Our
board of directors reserves the right in its sole discretion at any time and from time to time,
subject to any notice requirements described in our SRP, to (1) reject any request for redemption of shares, (2) change the purchase
price for redemption of shares, (3) limit the funds to be used for redemption of shares under the SRP or otherwise change the Redemption
Limitations, or (4) amend, suspend (in whole or in part) or terminate the SRP.
For
the three months ended March 31, 2023, we repurchased 10,161 shares of common stock, pursuant to our SRP at a weighted average price
per share of $14.75 per share. For the three months ended March 31, 2022, we repurchased 24,419 shares of common stock, pursuant
to our SRP at a weighted average price per share of $12.91 per share.
Distributions
We
made an election to qualify as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2008.
U.S. federal tax law requires a REIT to distribute at least 90% of its annual REIT taxable income (which does not equal net income, as
calculated in accordance with generally accepted accounting principles, or GAAP) determined without regard to the deduction for dividends
paid and excluding any net capital gain. In order to continue to qualify for REIT status, we may be required to make distributions in
excess of cash available. Distributions, if any, are authorized at the discretion of our board of directors based on their analysis of
our performance over the previous periods and expectations of performance for future periods. Such analyses may include actual and anticipated
operating cash flow, capital expenditure needs, general financial and market conditions, proceeds from asset sales and other factors
that our board of directors deems relevant. Our board of directors’ decisions will be substantially influenced by their obligation
to ensure that we maintain our federal tax status as a REIT. We cannot provide assurance that we will pay distributions at any particular
level, or at all.
We
did not make any distributions to our stockholders during the three months ended March 31, 2023 and 2022.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Critical
Accounting Policies and Estimates
Management’s
discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have
been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On a regular basis, we
evaluate these estimates, including investment impairment. These estimates include such items as impairment of long-lived assets, depreciation
and amortization, and allowance for doubtful accounts. Actual results could differ from those estimates.
Our
critical accounting policies and estimates have not changed significantly from the discussion found in the Management Discussion and
Analysis and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022 which was filed with
the Securities and Exchange Commission on March 28, 2023.