LIGHTSTONE VALUE PLUS REIT III, INC. You should read the following discussion and analysis together with our consolidated financial statements and notes thereto included in this Annual Report on Form 10-K. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see "Special Note Regarding Forward-Looking Statements" above for a description of these risks and uncertainties. Dollar amounts are presented in whole numbers, except per share data and where indicated in millions.
Overview
Lightstone Value Plus REIT III, Inc. ("Lightstone REIT III"), which was formerly known asLightstone Value Plus Real Estate Investment Trust III, Inc. beforeSeptember 16, 2021 , together with theOperating Partnership (as defined below), the "Company", also referred to as "we", "our" or "us" herein) has and expects to continue to acquire and operate or develop in the future, hospitality, residential and/or commercial properties and/or make real estate-related investments, principally inthe United States . Our acquisitions and investments are, principally conducted through theOperating Partnership , and may include both portfolios and individual properties. As ofDecember 31, 2021 , our portfolio of properties consisted of ten hospitality properties (eight consolidated and two unconsolidated). Our real estate investments have been and are expected to continue to be held by us alone or jointly with other parties. We do not have employees. We entered into an advisory agreement withLightstone Value Plus REIT III LLC , aDelaware limited liability company, which we refer to as the "Advisor," pursuant to which the Advisor supervises and manages our day-to-day operations and selects our real estate and real estate related investments, subject to oversight by our Board of Directors. We pay the Advisor fees for services related to the investment and management of our assets, and we will reimburse the Advisor for certain expenses incurred on our behalf.
To qualify or maintain our qualification as a REIT, we engage in certain
activities through a wholly-owned taxable REIT subsidiary ("TRS"). As such, we
are subject to
Acquisitions and Investment Strategy
We have made and intend to continue to make direct or indirect real estate investments that will satisfy our primary investment objectives of preserving capital, making cash distributions as necessary to maintain our status as a REIT and achieving appreciation of our assets over the long term. The ability of our Advisor to identify and execute investment opportunities directly impacts our financial performance. We will continue to seek to acquire and operate hotels and other commercial real estate assets, residential properties and make other real estate-related investments primarily located inthe United States . We may acquire and operate all such properties alone or jointly with another party.
Current Environment
Our operating results are substantially impacted by the overall health of local,U.S. national and global economies and may be influenced by market and other challenges. Additionally, our business and financial performance may be adversely affected by current and future economic and other conditions; including, but not limited to, availability or terms of financings, financial markets volatility, political upheaval or uncertainty, natural and man-made disasters, terrorism and acts of war, unfavorable changes in laws and regulations, outbreaks of contagious diseases, cybercrime, loss of key relationships, and recession. These and other market and economic challenges could materially affect (i) the value and performance of our investments, (ii) our ability to pay future distributions, if any, (iii) the availability or terms of financings, (iv) our ability to make scheduled principal and interest payments, and (v) our ability to refinance any outstanding debt when contractually due. 19
COVID-19 Pandemic Operations and Liquidity Update
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, including booster shots, 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.
The extent to which our business may be affected by the ongoing COVID-19 pandemic will largely depend on both current and future developments, all of which are highly uncertain and cannot be reasonably predicted.
Furthermore, as a result of the COVID-19 pandemic, room demand and rental rates for our consolidated and unconsolidated hotels significantly declined starting inMarch 2020 at the onset of the pandemic; and while these metrics have improved since then (late 2020 and continuing throughout 2021); room demand and rental rates remain below their pre-pandemic historical levels. Accordingly, the COVID-19 pandemic has negatively impacted our operations, financial position and cash flow; and while the severity of the impact has lessened, we currently expect we will continue to experience a negative impact for the foreseeable future. We cannot currently estimate if and when room demand and rental rates will return to historical pre-pandemic levels for our hotels.
In light of the past, present and potential future impact of the COVID-19 pandemic on the operating results of its hotels, we have taken various actions to preserve our liquidity, including the following:
? We implemented cost reduction strategies for all of our hotels, leading to
reductions in certain operating expenses and capital expenditures.
? Amendments to Revolving Credit Facility -
OnJune 2, 2020 , our revolving credit facility (the "Revolving Credit Facility") was amended to provide for (i) the deferral of the six monthly debt service payments aggregating$0.8 million for the period fromApril 1, 2020 throughSeptember 30, 2020 untilJuly 13, 2022 ; (ii) a 100 bps reduction in the interest rate spread to LIBOR + 2.15%, subject to a 3.00% floor, for the six-month period fromSeptember 1, 2020 throughFebruary 28, 2021 ; (iii) our pre-funding$0.8 million into a cash collateral reserve account to cover the six monthly debt service payments due fromOctober 1, 2020 throughMarch 1, 2021 ; and (iv) a waiver of all financial covenants for quarter-end periods beforeJune 30, 2021 . Additionally, a principal paydown of$0.6 million , which was previously due onApril 1, 2020 was bifurcated into two separate principal paydowns, of$0.3 million , which were made inJune 2020 andSeptember 2020 . Subsequently, onMarch 31, 2021 , the Revolving Credit Facility was further amended providing for (i) us to make another principal paydown of$3.8 million , (ii) us to fund an additional$0.7 million into the cash collateral reserve account; (iii) a waiver of all financial covenants for quarter-end periods throughSeptember 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods beginningDecember 31, 2021 throughMarch 31, 2023 ; (iv) two one-year extension options at the lender's sole discretion (v) certain limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.
See Note 5 of the Notes to Consolidated Financial Statements for additional information.
? In
aggregate of
under the federal Paycheck Protection Program ("PPP Loans"). Through December
31, 2021, we received notice from the
"SBA") that aggregate of
interest have been legally forgiven. See Note 6 of the Notes to Consolidated
Financial Statements for additional information.
20
? On
regular monthly distributions and, as a result, have not declared any
distributions on our Common Shares since the suspension. Additionally, on
redemptions under our shareholder repurchase program (the "SRP"). Subsequently
on
subject to various conditions, for redemptions submitted in connection with a
stockholder's death or hardship. See Note 7 of the Notes to Consolidated Financial Statements for additional information.
?
non-recourse mortgage loan secured by the
City. See Note 3 of the Notes to Consolidated Financial Statements for
additional information.
We believe that these actions, along with our available cash on hand and
marketable securities, as well as our intention to seek to extend the Revolving
Credit Facility to July 13, 2023 pursuant to the lender's first extension
option, as discussed in Note 5 of the Notes to Consolidated Financial
Statements, will provide us with sufficient liquidity to meet our obligations
for at least 12 months from the date of issuance of these consolidated financial
statements.
We are not currently aware of any other material trends or uncertainties,
favorable or unfavorable, that may be reasonably anticipated to have a material
impact on either capital resources or the revenues or income to be derived from
our operations, other than those referred to above or throughout this Form 10-K.
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America ("GAAP") requires our
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities and
the reported amounts of revenues and expenses during a reporting period.
Critical Accounting Estimates and Policies
General
Our consolidated financial statements included in this annual report include our accounts and theOperating Partnership (over which we exercise financial and operating control). All inter-company balances and transactions have been eliminated in consolidation. The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and judgments about the effects of matters or future events that are inherently uncertain. These estimates and judgments may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including contingencies and litigation. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable in the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. To assist in understanding our results of operations and financial position, we have identified our critical accounting policies and discussed them below. These accounting policies are most important to the portrayal of our results and financial position, either because of the significance of the financial statement items to which they relate or because they require management's most difficult, subjective or complex judgments. 21 Investments in Real Estate Carrying Value of Assets The amounts to be capitalized as a result of periodic improvements and additions to real estate property, when applicable, and the periods over which the assets will be depreciated or amortized, are determined based on the application of accounting standards that may require estimates as to fair value and the allocation of various costs to the individual assets. Differences in the amount attributed to the assets may be significant based upon the assumptions made in calculating these estimates.
Impairment Evaluation
We evaluate our investments in real estate assets for potential impairment whenever events or changes in circumstances indicate that the undiscounted projected cash flows are less than the carrying amount for a particular property. We evaluate the recoverability of our investments in real estate assets at the lowest identifiable level, the individual property level. No single indicator would necessarily result in us preparing an estimate to determine if an individual property's future undiscounted cash flows are less than its carrying value. We use judgment to determine if the severity of any single indicator, or the fact there are a number of indicators of less severity that when combined, would result in an indication that a property requires an estimate of the undiscounted cash flows to determine if an impairment has occurred. Relevant facts and circumstances include, among others, significant underperformance relative to historical or projected future operating results and significant negative industry or economic trends. The estimated cash flows used for the impairment analysis are subjective and require us to use our judgment and the determination of estimated fair value are based on our plans for the respective assets and our views of market and economic conditions. The estimates consider matters such as future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition, and recent sales data for comparable properties. An impairment loss is recognized only if the carrying amount of a property is not recoverable
and exceeds its fair value. Depreciation and Amortization
Depreciation expense is computed based on the straight-line method over the estimated useful life of the applicable real estate asset. We generally use estimated useful lives of up to 39 years for buildings and improvements and 5 to 10 years for furniture and fixtures. Maintenance and repairs will be charged to expense as incurred.
Investments in Unconsolidated Entities
We evaluate all investments in other entities for consolidation. We consider our
percentage interest in the joint venture, evaluation of control and whether a
variable interest entity exists when determining whether or not the investment
qualifies for consolidation or if it should be accounted for as an
unconsolidated investment under the equity method of accounting.
If an investment qualifies for the equity method of accounting, our investment
is recorded initially at cost, and subsequently adjusted for equity in net
income or loss and cash contributions and distributions. The net income or loss
of an unconsolidated investment is allocated to its investors in accordance with
the provisions of the operating agreement of the entity. The allocation
provisions in these agreements may differ from the ownership interest held by
each investor. Differences, if any, between the carrying amount of our
investment in the respective joint venture and our share of the underlying
equity of such unconsolidated entity are amortized over the respective lives of
the underlying assets as applicable. These items are reported as a single line
item in the statements of operations as income or loss from investments in
unconsolidated affiliated entities.
We review investments for impairment in value whenever events or changes in
circumstances indicate that the carrying amount of such investment may not be
recoverable. An investment is impaired only if management's estimate of the fair
value of the investment is less than the carrying value of the investment, and
such decline in value is deemed to be other than temporary. The ultimate
realization of our investment in partially owned entities is dependent on a
number of factors including the performance of that entity and market
conditions. If we determine that a decline in the value of a partially owned
entity is other than temporary, we will record an impairment charge.
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Revenue Recognition
Our revenues are comprised primarily of revenues from the operations of hotels.
Room revenue is generated through contracts with customers whereby the customers agree to pay a daily rate for right to use a hotel room. Our contractual performance obligations are fulfilled at the end of the day that the customer is provided the room and revenue is recognized daily at the contract rate. Payment from the customer is secured at the end of the contract upon check-out by the customer from our hotel. We participate in frequent guest programs sponsored by the brand owners of our hotels whereby the brand owner allows guests to earn loyalty points during their hotel stay. We recognize revenue at the amount earned that it will receive from the brand owner when a guest redeems their loyalty points by staying at one of our hotels. Revenue from food, beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a hotel room and revenue is recognized when these goods or services are provided to the customer and our contractual performance obligations have been fulfilled. Some contracts for rooms, food, beverage or other services require an upfront deposit which is recorded as deferred revenues (or contract liabilities) and recognized once the performance obligations are satisfied. The contractual liabilities are not significant.
We note no significant judgments regarding the recognition of room, food and beverage or other revenues.
Treatment of Management Compensation, Expense Reimbursements
Management of our operations is outsourced to our Advisor and certain other affiliates of our Sponsor. Fees related to each of these services are accounted for based on the nature of such service and the relevant accounting literature. Such fees include acquisition fees associated with the purchase of interests in real estate entities; asset management fees paid to our Advisor and property management fees paid to affiliates of our Advisor. These fees are expensed or capitalized to the basis of acquired assets, as appropriate. Affiliates of our Advisor may also perform fee-based construction management services for both our development and redevelopment activities and tenant construction projects. These fees will be considered incremental to the construction effort and will be capitalized to the associated real estate project as incurred. Costs incurred for tenant construction will be depreciated over the shorter of their useful life or the term of the related lease. Costs related to development and redevelopment activities will be depreciated over the estimated useful life of the associated project.
Leasing activity at our properties may be outsourced to affiliates of our Advisor. Any corresponding leasing fees we pay will be capitalized and amortized over the life of the related lease.
Expense reimbursements made to both our Advisor and affiliates of our Advisor are expensed or capitalized to the basis of acquired assets, as appropriate.
Income Taxes
We elected to qualify and be taxed as a REIT forU.S. federal income tax purposes beginning with the taxable year endedDecember 31, 2015 . As a REIT, we generally are not subject toU.S. federal income tax on our net taxable income that we distribute currently to our stockholders. To maintain our REIT qualification under the Internal Revenue Code of 1986, as amended (the "Code") we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income (which does not equal net income, as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If we fail to remain qualified for taxation as a REIT in any subsequent year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify as a REIT. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. 23 We engage in certain activities through taxable REIT subsidiaries TRSs. When we purchase a hotel we establish a TRS and enter into an operating lease agreement for the hotel. As such, we are subject toU.S. federal and state income taxes and franchise taxes from these activities. As ofDecember 31, 2021 and 2020, we had no material uncertain income tax positions. Additionally, even if we continue to qualify as a REIT forU.S. federal income tax purposes, we may still be subject to someU.S. federal, state and local taxes on our income and property and toU.S. federal income taxes and excise taxes on our undistributed income.
Results of Operations
Disposition of an unconsolidated 22.5% membership interest in the Cove Joint Venture
OnFebruary 12, 2020 , we completed the disposition of an unconsolidated 22.5% membership interest in the Cove Joint Venture which resulted in the recognition of a gain on the disposition of unconsolidated affiliated real estate entity of$7.9 million during the first quarter of 2020. DuringAugust 2020 , we received$0.1 million of additional proceeds related to the redemption of our membership interest in the Cove Joint Venture and recognized a gain on the disposition of investment in unconsolidated affiliated real estate entity of$0.1 million during the third quarter of 2020. As a result, we recognized an aggregate gain on the disposition of investment in unconsolidated affiliated real estate entity of$8.0 million during the year endedDecember 31, 2020 . See Note 3 of the Notes to Consolidated Financial Statements for additional information
Comparison of the year ended
Consolidated
Our consolidated revenues, property operating expenses, real estate taxes, general and administrative expense and depreciation and amortization for the years endedDecember 31, 2021 and 2020 are attributable to our consolidated hospitality properties, all of which were owned by us during the entire periods presented. As a result of the COVID-19 pandemic, room demand and rental rates for our consolidated and unconsolidated hotels significantly declined starting inMarch 2020 at the onset of the pandemic; and while these metrics have improved since then (late 2020 and continuing throughout 2021); room demand and rental rates remain below their pre-pandemic historical levels. Overall, our consolidated hospitality portfolio experienced increases in (i) the percentage of rooms occupied from 49.0% to 68.1% for the year endedDecember 31, 2020 and 2021, respectively, (ii) revenue per available room ("RevPAR") from$42.75 to$66.51 for the year endedDecember 31, 2020 and 2021, respectively, and (iii) the average daily rate ("ADR") from$87.30 to$97.65 for the year endedDecember 31, 2020 and 2021, respectively. Revenues
Revenues increased by
Property operating expenses
Property operating expenses increased by$2.6 million to$13.8 million during the year endedDecember 31, 2021 compared to$11.2 million for the same period in 2020. This increase reflects the increased costs associated with higher occupancy during the 2021 period.
Real estate taxes
Real estate taxes decreased slightly by$0.1 million to$1.4 million during the year endedDecember 31, 2021 compared to$1.5 million for the same period in 2020. 24
General and administrative expense
General and administrative expenses was relatively unchanged at
Depreciation and amortization
Depreciation and amortization expense was relatively unchanged at
Interest expense
Interest expense slightly decreased by$0.1 million to$2.9 million during the year endedDecember 31, 2021 compared to$3.0 million for the same period in 2020. Interest expense is attributable to financings associated with our hotels and reflects both changes in market interest rates on our variable rate indebtedness and the weighted average principal outstanding during the periods.
Gain on forgiveness of debt
During the year endedDecember 31, 2021 , we received notices from the SBA that all of the PPP Loans received inApril 2020 totaling$1.5 million and their related accrued interest aggregating$19,311 had been legally forgiven and therefore, we recognized a gain on forgiveness of debt of$1.5 million in our consolidated statements of operations during the year endedDecember 31, 2021 .
Gain on disposition of unconsolidated affiliated real estate entity
OnFebruary 12, 2020 , we completed the disposition of our unconsolidated 22.5% membership interest in the Cove Joint Venture which resulted in the recognition of a gain on the disposition of unconsolidated affiliated real estate entity of$7.9 million during the first quarter of 2020. DuringAugust 2020 , we received$0.1 million of additional proceeds related to the redemption of our membership interest in the Cove Joint Venture and recognized a gain on disposition of investment in unconsolidated affiliated real estate entity of$0.1 million during the third quarter of 2020. As a result, we recognized an aggregate gain on the disposition of investment in unconsolidated affiliated real estate entity of$8.0 million during the year endedDecember 31, 2020 . Earnings from investments in unconsolidated affiliated real estate entities Our loss from investments in unconsolidated affiliated real estate entities was$0.3 million during the year endedDecember 31, 2021 compared to$2.1 million for the same period in 2020. Our earnings from investments in unconsolidated affiliated real estate entities are attributable to our unconsolidated 50.0% membership interest in the Hilton Garden Inn Joint Venture and our unconsolidated 22.5% membership interest in the Cove Joint Venture (through the date of the redemption of our membership interest onFebruary 12, 2020 ).The Williamsburg Moxy Hotel is currently under construction and expected to open during the fourth quarter of 2022. Therefore, theWilliamsburg Moxy Hotel Joint Venture had no operating results fromAugust 5, 2021 (date of acquisition) throughDecember 31, 2021 .
Financial Condition, Liquidity and Capital Resources
Overview:
Revenues, interest and dividend income, proceeds from the sale of marketable securities, cash on hand and borrowings are our principal sources of funds to pay operating expenses, scheduled debt service, capital expenditures (excluding non-recurring capital expenditures), contributions to our unconsolidated affiliated entities, redemptions and cancellations of shares of our common stock, if approved, and distributions, if any, required to maintain our status as a REIT. During the year endedDecember 31, 2021 , our primary sources of funds were cash flows from operations of$1.7 million , proceeds from the sales of marketable securities of$1.5 million , proceeds from PPP loans of$1.9 million and distributions from the Hilton Garden Inn Joint Venture of$0.5 million .
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We currently believe that these cash resources along with our available cash on
hand of $16.6 million and marketable securities of $1.8 million , all as of
December 31, 2021 , as well as our intention to seek to extend the Revolving
Credit Facility to July 13, 2023 pursuant to the lender's first extension
option, as discussed in Note 5 of the Notes to Consolidated Financial
Statements, will be sufficient to satisfy our cash requirements for the
foreseeable future, and we do not currently anticipate a need to raise funds
from other than these sources within the next 12 months. However, to the extent
that cash flow from operations and available cash on hand and marketable
securities are not sufficient to cover our cash needs or our lender does not
agree to the first extension option under the Revolving Credit Facility, we may
use proceeds from additional borrowings and/or selective asset sales to fund
such needs.
In light of the COVID-19 pandemic's impact on our operating performance, we have
successfully negotiated various changes to the terms of our Revolving Credit
Facility, including forbearance of scheduled debt service, reductions in
interest rates and waiver periods and modifications of financial covenants. See
"Contractual Mortgage Obligations" for additional information.
As of December 31, 2021 , we have $61.3 million of outstanding mortgage debt and
$1.9 million of PPP Loans (classified as notes payable on our consolidated
balance sheet). We have and intend to continue to limit our aggregate long-term
permanent borrowings to 75% of the aggregate fair market value of all properties
unless any excess borrowing is approved by a majority of the independent
directors and is disclosed to our stockholders. Market conditions will dictate
our overall leverage limit; as such our aggregate long-term permanent borrowings
may be less than 75% of aggregate fair market value of all properties. We may
also incur short-term indebtedness, having a maturity of two years or less.
Our charter provides that the aggregate amount of our borrowing, both secured
and unsecured, may not exceed 300% of net assets in the absence of a
satisfactory showing that a higher level is appropriate, the approval of our
Board of Directors and disclosure to stockholders. Net assets means our total
assets, other than intangibles, at cost before deducting depreciation or other
non-cash reserves less our total liabilities, calculated at least quarterly on a
basis consistently applied. Any excess in borrowing over such 300% of net assets
level must be approved by a majority of our independent directors and disclosed
to our stockholders in our next quarterly report to stockholders, along with
justification for such excess. Market conditions will dictate our overall
leverage limit; as such our aggregate borrowings may be less than 300% of net
assets. As of December 31, 2021 , our total borrowings were $63.2 million which
represented 59% of our net assets.
Our borrowings currently consist of mortgages cross-collateralized by a pool of
properties. Our mortgages typically provide for either interest-only payments
(generally for variable-rate indebtedness) or level payments (generally for
fixed-rate indebtedness) with "balloon" payments due at maturity.
Any future properties that we may acquire or develop may be funded through a
combination of borrowings and the proceeds received from the disposition of
certain of our assets. These borrowing may consist of single-property mortgages
as well as mortgages cross-collateralized by a pool of properties. Such
mortgages may be put in place either at the time we acquire a property or
subsequent to our purchasing a property for cash. In addition, we may acquire
properties that are subject to existing indebtedness where we choose to assume
the existing mortgages. Generally, though not exclusively, we intend to seek to
encumber our properties with non-recourse debt. This means that a lender's
rights on default will generally be limited to foreclosing on the property.
However, we may, at our discretion, secure recourse financing or provide a
guarantee to lenders if we believe this may result in more favorable terms. When
we give a guaranty for a property owning entity, we will be responsible to the
lender for the satisfaction of the indebtedness if it is not paid by the
property owning entity.
We may also obtain lines of credit to be used to acquire properties. If
obtained, these lines of credit will be at prevailing market terms and will be
repaid from proceeds from the sale or refinancing of properties, working capital
and/or permanent financing. Our Sponsor and/or its affiliates may guarantee our
lines of credit although they are not obligated to do so. We expect that such
properties may be purchased by our Sponsor's affiliates on our behalf, in our
name, in order to minimize the imposition of a transfer tax upon a transfer of
such properties to us.
In addition to meeting working capital needs and distributions, if any, made to
maintain our status as a REIT, our capital resources are used to make certain
payments to our Advisor, including payments related to asset acquisition fees
and asset management fees, the reimbursement of acquisition-related expenses to
our Advisor. We also reimburse our advisor for actual expenses it incurs for
administrative and other services provided to us. Additionally, the Operating
Partnership may be required to make distributions to Lightstone SLP III LLC , an
affiliate of the Advisor.
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We have agreements with the Advisor to pay certain fees in exchange for services
performed by the Advisor and/or its affiliated entities. Upon the liquidation of
assets, we may pay our Advisor or its affiliates a real estate disposition
commission. Additionally, our Operating Partnership may be required to make
distributions to Lightstone SLP III LLC , an affiliate of the Advisor.
The following table represents the fees incurred associated with the payments to the Advisor for the periods indicated:
For the
Year Ended
December 31,
2021 2020
Finance fees (1) $ 144,375 $ -Disposition fees (general and administrative costs) -
39,200
Asset management fees (general and administrative costs) 1,204,422
1,256,459
Total $ 1,348,797 $ 1,295,659 (1) A finance fee of
the
and included in investment in unconsolidated affiliated real estate entities
on the consolidated balance sheets.
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/(used in) operating activities $ 1,662,560 $ (3,765,414 )
Cash flows (used in)/provided by investing activities (12,050,995 ) 20,600,226
Cash flows used in financing activities (2,943,807 ) (406,759 )
Net change in cash, cash equivalents and restricted cash (13,332,242 ) 16,428,053
Cash, cash equivalents and restricted cash, beginning of year 29,971,246 13,543,193
Cash, cash equivalents and restricted cash, end of year $ 16,639,004 $ 29,971,246
Operating activities
The net cash provided by operating activities of $1.7 million during the year
ended December 31, 2021 consisted of our net loss of $2.7 million and a gain on
forgiveness of debt of $1.5 million adjusted for depreciation and amortization,
loss from investments in unconsolidated affiliated real estate entities,
amortization of deferred financing costs and other non-cash items aggregating
$5.6 million and net changes in operating assets and liabilities of $0.2
million .
Investing activities
The net cash used in investing activities of$12.1 million during the year endedDecember 31, 2021 primarily consisted of$7.9 million for the purchase of our 25% membership interest in theWilliamsburg Moxy Hotel Joint Venture and additional aggregate contributions of$4.3 million to theWilliamsburg Moxy Hotel Joint Venture ,$1.3 million of contributions made to the Hilton Garden Inn Joint Venture and capital expenditures of$0.3 million , partially offset by$1.5 million of proceeds received from the sale of marketable securities and distributions of$0.5 million received from the Hilton Garden Inn Joint Venture. 27 Financing activities
The cash used in financing activities of$2.9 million during the year endedDecember 31, 2021 consisted of payments on our mortgages payable of$30.4 million (including the repayment in full of the Home2 Suites Promissory Note and a$3.8 million paydown on our Revolving Credit Facility) and redemptions and cancellations of common shares of$0.6 million , partially offset by aggregate net proceeds received from new mortgage financings of$26.2 million and proceeds from PPP Loans of$1.9 million .
Distributions on Common Shares
OnJune 19, 2019 , our Board of Directors determined to suspend regular monthly distributions on our Common Shares and as a result, no distributions have been declared since the suspension. Previously, distributions on our Common Shares in an amount equal to a 6.0% annualized rate, based on a share price of$10.00 , were declared on a monthly basis beginning onJanuary 14, 2015 throughJune 30, 2019 and were paid on or about the 15th day following each month end. Future distributions declared on our Common Shares, if any, will be at the discretion of the Board of Directors based on their analysis of our performance over the previous periods and expectations of performance for future periods. The Board of Directors will consider various factors in its determination, including but not limited to, the sources and availability of capital, revenues and sources of income, operating and interest expenses and our ability to refinance near-term debt as well as theIRS's annual distribution requirement that REITs distribute no less than 90% of their taxable income. We cannot assure that any future distributions will be made or that we will maintain any particular level of distributions that we have previously established or may establish. Share Repurchase Program
Our share repurchase program (the "SRP") may provide eligible stockholders with limited, interim liquidity by enabling them to sell their Common Shares back to us, subject to restrictions and applicable law.
On
EffectiveMay 10, 2021 , the Board of Directors reopened the SRP to allow, subject to various conditions as set forth below, for redemptions submitted in connection with a stockholder's death or hardship and set the price for all such purchases to our current NAV per Share, as determined by the Board of Directors and reported by us from time to time.
Deaths that occurred subsequent to
On the above noted date, the Board of Directors established that on an annual basis, we would not redeem in excess of 0.5% of the number of shares outstanding as of the end of the preceding year for either death or hardship redemptions, respectively. Additionally, redemption requests generally would be processed on a quarterly basis and would be subject to pro ration if either type of redemption requests exceeded the annual limitation. For the period fromJanuary 1 through March 18, 2020 , we redeemed 80,436 shares of common stock at an average price per share of$9.92 . For the year endedDecember 31, 2021 we repurchased 77,678 shares of common stock, pursuant to our SRP at an average price per share of$8.05 . 28
Contractual Mortgage Obligations
The following is a summary of our estimated contractual mortgage obligations
outstanding over the next 5 years and thereafter as of
Contractual Mortgage Obligations 2022 2023 2024 2025 2026 Thereafter Total Principal maturities$ 34,573,333 $ 52,333 $ 657,787 $ 685,707 $ 25,354,173 $ -$ 61,323,333 Interest payments(1) 1,758,639 1,003,125 1,003,125 992,574 1,839,740 - 6,597,203 Total Contractual Mortgage Obligations$ 36,331,972 $ 1,055,458 $ 1,660,912 $ 1,678,281 $ 27,193,913 $ -$ 67,920,536
(1) These amounts represent future interest payments related to mortgage payable
obligations based on the fixed and variable interest rates specified in the
associated debt agreement. All variable rate debt agreements are based on the
one-month LIBOR rate. For purposes of calculating future interest amounts on
variable interest rate debt the one-month LIBOR rate as of
was used.
Revolving Credit Facility
We, through certain subsidiaries, have a non-recourse Revolving Credit Facility
with a financial institution. The Revolving Credit Facility provides us with a
line of credit of up to $60.0 million pursuant to which we may designate
properties as collateral that allow borrowings up to a 65.0% loan-to-value ratio
subject to also meeting certain financial covenants. The Revolving Credit
Facility provides for monthly interest-only payments and the entire principal
balance is due upon its expiration.
The Revolving Credit Facility, bears interest at LIBOR + 3.15%, subject to a
4.00% floor, and is currently scheduled to mature on July 13, 2022 , subject to
two, one-year extension options at the sole discretion of the lender.
On June 2, 2020 , our Revolving Credit Facility was amended to provide for (i)
the deferral of the six monthly debt service payments aggregating $0.8 million
for the period from April 1, 2020 through September 30, 2020 until July 13,
2022 ; (ii) a 100 bps reduction in the interest rate spread to LIBOR + 2.15%,
subject to a 3.00% floor, for the six-month period from September 1, 2020
through February 28, 2021 ; (iii) our pre-funding $0.8 million into a cash
collateral reserve account to cover the six monthly debt service payments due
from October 1, 2020 through March 1, 2021 ; and (iv) a waiver of all financial
covenants for quarter-end periods before June 30, 2021 . Additionally, a
principal paydown of $0.6 million , which was previously due on April 1, 2020 was
bifurcated into two separate principal paydowns, of $0.3 million , which were
made in June 2020 and September 2020 .
Subsequently, on March 31, 2021 , our Revolving Credit Facility was further
amended providing for (i) us to make another principal paydown of $3.8 million ,
(ii) us to fund an additional $0.7 million into the cash collateral reserve
account; (iii) a waiver of all financial covenants for quarter-end periods
through September 30, 2021 with a phased-in gradual return to the full financial
covenant requirements over the quarter-end periods beginning December 31, 2021
through March 31, 2023 ; (iv) two one-year extension options at the lender's sole
discretion; and (v) certain limitations and restrictions on asset sales and
additional borrowings related to the pledged collateral.
As of December 31, 2021 , the Revolving Credit Facility had an outstanding
principal balance of $34.6 million and six of our hotel properties were pledged
as collateral. Additionally, no additional borrowings were available under the
Revolving Credit Facility as of December 31, 2021 . We currently intend to seek
to extend the Revolving Credit Facility to July 13, 2023 pursuant to the
lender's first extension, however, there can be no assurances that we will be
successful in such endeavors.
Home2 Suites Financings
OnOctober 5, 2016 , we entered into a non-recourse promissory note (the "Home2 Suites Promissory Note") for$28.4 million . The Promissory Note had a term of 5 years and bore interest at 4.73%. The Home2 Suites Promissory Note was cross-collateralized by the Home2 Suites - Tukwila and the Home2 Suites -Salt Lake City . 29
OnDecember 6 , 2021,we entered into a non-recourse loan facility providing for up to$19.1 million (the "Home2 Suites - Tukwila Loan"). At closing, we initially received$16.2 million and the remaining$2.9 million is available afterDecember 31, 2022 , subject to satisfaction of certain conditions. The Home2 Suites - Tukwila Loan is scheduled to mature onDecember 6, 2026 , bears interest at LIBOR+3.50%, subject to a 3.75% floor, and requires monthly interest-only payments throughDecember 2023 and subsequently, monthly payments of interest and principal of$0.1 million through its maturity date. The Home2 Suites Tukwila Loan is cross-collateralized by the Home2 Suites - Tukwila and the Home2 Suites -Salt Lake City . OnDecember 6, 2021 , we entered into a non-recourse loan facility providing for up to$12.5 million (the "Home2 Suites - Salt Lake City Loan"). At closing we initially received$10.5 million , and the remaining$2.0 million is available afterDecember 31, 2022 subject to satisfaction of certain conditions. The Home2 Suites - Salt Lake City Loan scheduled to mature onDecember 6, 2026 , bears interest at LIBOR+3.50%, subject to a 3.75% floor, and requires monthly interest-only payments throughDecember 2023 and subsequently, monthly payments of interest and principal of$0.1 million through its maturity date. The Home2 Suites Salt Lake City Loan is cross-collateralized by the Home2 Suites -Salt Lake City and the Home2 Suites - Tukwila. OnDecember 6, 2021 , we repaid the Home2 Suites Promissory Note (outstanding principal balance of$26.0 million ) in full using the initial proceeds from the Home2 Suites - Tukwila Loan and the Home2 Suites - Salt Lake City Loan.
PPP Loans
InApril 2020 , we, through various subsidiaries (each such entity, a "Borrower" and collectively, the "Borrowers"), received aggregate funding of$1.5 million through loans (the "PPP Loans") originated under the federal Paycheck Protection Program, which was established under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and is administered by the SBA. During the first quarter of 2021, the Borrowers received an additional aggregate funding of$1.9 million of PPP Loans. The PPP Loans each have a term of five years and provide for an interest rate of 1.00%. The payment of principal and interest on the PPP loan is deferred until the day that the forgiven amount is remitted to the lender (approximately 5 months after the forgiveness application is submitted to the lender, unless the Borrower appeals a denial of forgiveness) or 10 months after the end of the Borrower's covered period, whichever is earlier. Pursuant to the terms of the CARES Act, the proceeds of the PPP Loans may be used for payroll costs, mortgage interest, rent or utility costs. The promissory note for each of the PPP Loans contains customary events of default relating to, among other things, payment defaults and breach of representations and warranties or of provisions of the relevant promissory note. Under the terms of the CARES Act, each Borrower can apply for and be granted forgiveness for all or a portion of the PPP Loans. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds in accordance with the terms of the CARES Act. Although we intend for each Borrower to apply for forgiveness, no assurance may be given that all of the Borrowers will ultimately obtain forgiveness under any relevant PPP Loan in whole or in part. In the event all or any portion of the PPP Loans is forgiven, the amount forgiven will be applied to outstanding principal and recorded as income. The PPP Loans are subject to audit by the SBA for up to six years after the date the loans are forgiven. During the year endedDecember 31, 2021 , we received notices from the SBA that all of the PPP Loans received inApril 2020 totaling$1.5 million and their related accrued interest aggregating$19,311 had been legally forgiven and therefore, we recognized a gain on forgiveness of debt of$1.5 million in its consolidated statements of operations. As ofDecember 31, 2021 and 2020, the PPP Loans had outstanding balances of$1.9 million and$1.5 million , respectively, and are classified as Notes Payable on the consolidated balance sheets.
LIBOR
The Revolving Credit Facility, PPP Loans and the Williamsburg Moxy Joint Venture's Moxy Construction Loan (See "Williamsburg Moxy Hotel Joint Venture and Moxy Construction Loan") 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.
30
Investments in Unconsolidated Affiliated Entities
Hilton Garden Inn Joint Venture
OnMarch 27, 2018 , we andLightstone Value Plus REIT II, Inc. ("Lightstone REIT II"), a REIT also sponsored by our Sponsor and a related party, acquired, throughLVP LIC Hotel JV LLC (the "Hilton Garden Inn Joint Venture"), a 183-room, limited-service hotel located at29-21 41st Avenue ,Long Island City, New York (the "Hilton Garden Inn -Long Island City ") from an unrelated third party, for aggregate consideration of$60.0 million , which consisted of$25.0 million of cash and$35.0 million of proceeds from a loan from a financial institution (the "Hilton Garden Inn Mortgage "), excluding closing and other related transaction costs. We and Lightstone II each have a 50.0% membership interest in the Hilton Garden Inn Joint Venture. We paid$12.9 million for a 50.0% membership interest in the Hilton Garden Inn Joint Venture. Our membership interest in the Hilton Garden Inn Joint Venture is a co-managing interest. We account for our membership interest in the Hilton Garden Inn Joint Venture in accordance with the equity method of accounting because we exert significant influence over but do not control the Hilton Garden Inn Joint Venture. All capital contributions and distributions of earnings from the Hilton Garden Inn Joint Venture are made on a pro rata basis in proportion to each member's equity interest percentage. Any distributions in excess of earnings from the Hilton Garden Inn Joint Venture are made to the members pursuant to the terms of the Hilton Garden Inn Joint Venture's operating agreement. We commenced recording our allocated portion of profit/loss and cash distributions beginning as ofMarch 27, 2018 with respect to our membership interest of 50.0% in the Hilton Garden Inn Joint Venture. In light of the impact of the COVID-19 pandemic on the operating results of theHilton Garden Inn -Long Island City , the Hilton Garden Inn Joint Venture has entered into certain amendments with respect to its non-recourse mortgage loan (theHilton Garden Inn Mortgage ") as discussed below. OnJune 2, 2020 , theHilton Garden Inn Mortgage was amended to provide for (i) the deferral of the six monthly debt service payments aggregating$0.9 million for the period fromApril 1, 2020 throughSeptember 30, 2020 untilMarch 27, 2023 ; (ii) a 100 bps reduction in the interest rate spread to LIBOR plus 2.15%, subject to a 4.03% floor, for the six-month period fromSeptember 1, 2020 throughFebruary 28, 2021 ; (iii) the Hilton Garden Inn Joint Venture pre-funding$1.2 million into a cash collateral reserve account to cover the six monthly debt service payments due fromOctober 1, 2020 throughMarch 1, 2021 ; and (iv) waiver of all financial covenants for quarter-end periods beforeJune 30, 2021 . Additionally, onApril 7, 2021 , the Hilton Garden Inn Joint Venture and the lender further amended the terms of theHilton Garden Inn Mortgage to provide for (i) the Hilton Garden Inn Joint Venture to make a principal paydown of$1.7 million ; (ii) the Hilton Garden Inn Joint Venture to fund an additional$0.7 million into the cash collateral reserve account; (iii) a waiver of all financial covenants for quarter-end periods throughSeptember 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods beginningDecember 31, 2021 throughDecember 31, 2022 ; (iv) a 11-month interest-only payment period fromMay 1, 2021 throughMarch 31, 2022 ; and (v) certain restrictions on distributions to the members of the Hilton Garden Inn Joint Venture during the interest-only payment period.
OnAugust 5, 2021 , we formed a joint venture withLightstone Value Plus REIT IV, Inc. ("Lightstone REIT IV"), a REIT also sponsored by the Sponsor and a related party, pursuant to which we acquired 25% of Lightstone REIT IV's membership interest in theBedford Avenue Holdings LLC (the "Williamsburg Moxy Hotel Joint Venture ") for aggregate consideration of$7.9 million . Subsequent to our initial acquisition, we made additional capital contributions to theWilliamsburg Moxy Hotel Joint Venture of$4.3 million throughDecember 31, 2021 .Bedford Avenue Holdings LLC previously acquired four adjacent parcels of land located at353-361 Bedford Avenue inBrooklyn, New York , on which it is developing and constructing a 210-room branded hotel (the "Williamsburg Moxy Hotel "). 31 As a result, we and Lightstone REIT IV have 25% and 75% membership interests, respectively, in theWilliamsburg Moxy Hotel Joint Venture . We account for our membership interest in theWilliamsburg Moxy Hotel Joint Venture in accordance with the equity method because we exert significant influence over but do not control theWilliamsburg Moxy Hotel Joint Venture . All capital contributions and distributions of earnings from theWilliamsburg Moxy Hotel Joint Venture are made on a pro rata basis in proportion to each member's equity interest percentage. Any distributions in excess of earnings from theWilliamsburg Moxy Hotel Joint Venture are made to the members pursuant to the terms of theWilliamsburg Moxy Hotel Joint Venture's operating agreement.The Williamsburg Moxy Hotel is currently under construction and expected to open during the fourth quarter of 2022. Therefore, theWilliamsburg Moxy Hotel Joint Venture had no operating results fromAugust 5, 2021 (date of acquisition) throughDecember 31, 2021 . Moxy Construction Loan
OnAugust 5, 2021 , theWilliamsburg Moxy Hotel Joint Venture entered into a recourse construction loan facility for up to$77.0 million (the "Moxy Construction Loan") scheduled to mature onFebruary 5, 2024 , with two, six-month extension options, subject to the satisfaction of certain conditions. The Moxy Construction Loan bears interest at LIBOR plus 9.00%, subject to a 9.50% floor, with monthly interest-only payments based on a rate of 7.50% with the accrued and unpaid interest added to the outstanding loan balance and due at maturity. The Moxy Construction Loan is collateralized by theWilliamsburg Moxy Hotel .The Williamsburg Moxy Hotel Joint Venture received initial proceeds of$16.0 million under the Moxy Construction Loan and repaid a previously outstanding mortgage loan of$16.0 million in full. As ofDecember 31, 2021 , the outstanding principal balance of the Moxy Construction Loan was$18.6 million (including$0.1 million of interest capitalized to principal) and the remaining availability under the facility was up to$58.6 million .
In connection with the Moxy Construction Loan, the
See Note 3 of the Notes to Consolidated Financial Statements for additional information.
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may be less informative. Because of these factors, theNational Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, has published a standardized measure of performance known as funds from operations ("FFO"), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT's operating performance. FFO is not equivalent to our net income or loss as determined under GAAP. We define FFO, a non-GAAP measure, consistent with the standards set forth in the White Paper on FFO approved by theBoard of Governors of NAREIT, as revised inFebruary 2004 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding gains or losses from sales of property and real estate related impairments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.
We believe that the use of FFO provides a more complete understanding of our performance to investors and to management, and reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.
Changes in the accounting and reporting promulgations under GAAP that were put
into effect in 2009 subsequent to the establishment of NAREIT's definition of
FFO, such as the change to expense as incurred rather than capitalize and
depreciate acquisition fees and expenses incurred for business combinations,
have prompted an increase in cash-settled expenses, specifically acquisition
fees and expenses, as items that are expensed under GAAP across all industries.
These changes had a particularly significant impact on publicly registered,
non-listed REITs, which typically have a significant amount of acquisition
activity in the early part of their existence, particularly during the period
when they are raising capital through ongoing initial public offerings.
32
Because of these factors, the Investment Program Association (the "IPA"), an
industry trade group, published a standardized measure of performance known as
modified funds from operations ("MFFO"), which the IPA has recommended as a
supplemental measure for publicly registered, non-listed REITs. MFFO is designed
to be reflective of the ongoing operating performance of publicly registered,
non-listed REITs by adjusting for those costs that are more reflective of
acquisitions and investment activity, along with other items the IPA believes
are not indicative of the ongoing operating performance of a publicly
registered, non-listed REIT, such as straight-lining of rents as required by
GAAP. We believe it is appropriate to use MFFO as a supplemental measure of
operating performance because we believe that both before and after we have
deployed all of our offering proceeds and are no longer incurring a significant
amount of acquisition fees or other related costs, it reflects the impact on our
operations from trends in occupancy rates, rental rates, operating costs,
general and administrative expenses, and interest costs, which may not be
immediately apparent from net income. MFFO is not equivalent to our net income
or loss as determined under GAAP.
We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01,
Supplemental Performance Measure for Publicly Registered, Non-Listed REITs:
Modified Funds from Operations (the "Practice Guideline") issued by the IPA in
November 2010 . The Practice Guideline defines MFFO as FFO further adjusted for
acquisition and transaction-related fees and expenses and other items. In
calculating MFFO, we follow the Practice Guideline and exclude acquisition and
transaction-related fees and expenses (which includes costs incurred in
connection with strategic alternatives), amounts relating to deferred rent
receivables and amortization of market lease and other intangibles, net (which
are adjusted in order to reflect such payments from a GAAP accrual basis to a
cash basis of disclosing the rent and lease payments), accretion of discounts
and amortization of premiums on debt investments and borrowings, mark-to-market
adjustments included in net income (including gains or losses incurred on assets
held for sale), gains or losses included in net income from the extinguishment
or sale of debt, hedges, foreign exchange, derivatives or securities holdings
where trading of such holdings is not a fundamental attribute of the business
plan, unrealized gains or losses resulting from consolidation from, or
deconsolidation to, equity accounting, and after adjustments for consolidated
and unconsolidated partnerships and joint ventures, with such adjustments
calculated to reflect MFFO on the same basis. Certain of the above adjustments
are also made to reconcile net income (loss) to net cash provided by (used in)
operating activities, such as for the amortization of a premium and accretion of
a discount on debt and securities investments, amortization of fees, any
unrealized gains (losses) on derivatives, securities or other investments, as
well as other adjustments.
MFFO excludes non-recurring impairment of real estate-related investments. We
assess the credit quality of our investments and adequacy of reserves on a
quarterly basis, or more frequently as necessary. Significant judgment is
required in this analysis. We consider the estimated net recoverable value of a
loan as well as other factors, including but not limited to the fair value of
any collateral, the amount and the status of any senior debt, the prospects for
the borrower and the competitive situation of the region where the borrower does
business.
We believe that, because MFFO excludes costs that we consider more reflective of
acquisition activities and other non-operating items, MFFO can provide, on a
going-forward basis, an indication of the sustainability (that is, the capacity
to continue to be maintained) of our operating performance after the period in
which we are acquiring properties and once our portfolio is stabilized. We also
believe that MFFO is a recognized measure of sustainable operating performance
by the non-listed REIT industry and allows for an evaluation of our performance
against other publicly registered, non-listed REITs.
Not all REITs, including publicly registered, non-listed REITs, calculate FFO
and MFFO the same way. Accordingly, comparisons with other REITs, including
publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO
and MFFO are not indicative of cash flow available to fund cash needs and should
not be considered as an alternative to net income (loss) or income (loss) from
continuing operations as determined under GAAP as an indication of our
performance, as an alternative to cash flows from operations as an indication of
our liquidity, or indicative of funds available to fund our cash needs including
our ability to make distributions to our stockholders. FFO and MFFO should be
reviewed in conjunction with other GAAP measurements as an indication of our
performance. FFO and MFFO should not be construed to be more relevant or
accurate than the current GAAP methodology in calculating net income or in its
applicability in evaluating our operating performance. The methods utilized to
evaluate the performance of a publicly registered, non-listed REIT under GAAP
should be construed as more relevant measures of operational performance and
considered more prominently than the non-GAAP measures, FFO and MFFO, and the
adjustments to GAAP in calculating FFO and MFFO.
Neither 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.
33
The below table illustrates the items deducted from or added to net loss in the
calculation of FFO and MFFO during the periods presented. The table discloses
MFFO in the IPA recommended format and MFFO without the straight-line rent
adjustment which management also uses as a performance measure. Items are
presented net of non-controlling interest portions where applicable.
For the
Year Ended
December 31,
2021 2020
Net loss $ (2,733,289 ) $ (2,886,775 )
FFO adjustments:
Adjustments to equity earnings from unconsolidated entities,
net 1,248,1631,484,152
Depreciation and amortization of real estate assets 5,113,576
5,101,313
Gain on disposition of unconsolidated affiliated real estate entity - (7,996,967 ) FFO 3,628,450 (4,298,277 ) MFFO adjustments:
Loss on sale of marketable securities(1) 22,505
18,666
Acquisition and other transaction related costs expensed - 2,113 Unrealized loss/(gain) on marketable equity securities(2) 9,188 (265 )
Adjustments to equity earnings from unconsolidated affiliated real estate entities
(190,708 ) -
Gain on forgiveness of debt(1) (1,469,541) - MFFO 1,999,894 (4,277,763 ) Straight-line rent(3) - -
MFFO - IPA recommended format$ 1,999,894
Net loss$ (2,733,289 ) $ (2,886,775 ) Less: net loss attributable to noncontrolling interests 28 30 Net loss applicable to Company's common shares$ (2,733,261 ) $ (2,886,745 ) Net loss per common share, basic and diluted $ (0.21
)
FFO$ 3,628,450 $ (4,298,277 ) Less: FFO attributable to noncontrolling interests (68 ) 53 FFO attributable to Company's common shares$ 3,628,382 $ (4,298,224 ) FFO per common share, basic and diluted$ 0.27
MFFO - IPA recommended format$ 1,999,894 $ (4,277,763 ) Less: MFFO attributable to noncontrolling interests (43 ) 51 MFFO attributable to Company's common shares$ 1,999,851
Weighted average number of common shares outstanding, basic and diluted 13,215,471 13,233,527
(1) Management believes that adjusting for gains or losses related to
extinguishment/sale of debt, derivatives or securities holdings is
appropriate because they are items that may not be reflective of ongoing
operations. By excluding these items, management believes that MFFO provides
supplemental information related to sustainable operations that will be more
comparable between other reporting periods.
(2) Management believes that adjusting for mark-to-market adjustments is
appropriate because they are nonrecurring items that may not be reflective of
ongoing operations and reflects unrealized impacts on value based only on
then current market conditions, although they may be based upon current
operational issues related to an individual property or industry or general
market conditions. Mark-to-market adjustments are made for items such as
ineffective derivative instruments, certain marketable securities and any
other items that GAAP requires we make a mark-to-market adjustment for. The
need to reflect mark-to-market adjustments is a continuous process and is
analyzed on a quarterly and/or annual basis in accordance with GAAP.
(3) Under GAAP, rental receipts are allocated to periods using various
methodologies. This may result in income recognition that is significantly
different than underlying contract terms. By adjusting for these items (to
reflect such payments from a GAAP accrual basis to a cash basis of disclosing
the rent and lease payments), MFFO provides useful supplemental information
on the realized economic impact of lease terms and debt investments,
providing insight on the contractual cash flows of such lease terms and debt
investments, and aligns results with management's analysis of operating
performance.
34
The table below presents our cumulative distributions declared and cumulative
FFO:
For the period
October 5, 2012
(date of inception)
through
December 31,
2021 FFO attributable to Company's common shares $ 15,246,549 Cumulative distributions declared
$ 25,876,082
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