LIGHTSTONE VALUE PLUS REIT V, INC. 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 ofLightstone Value Plus REIT V, Inc. and our subsidiaries (which may be referred to herein as the "Company," "we," "us" or "our"), which was formerly known asLightstone Value Plus Real Estate Investment Trust V, Inc. beforeAugust 31, 2021 , 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 any 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
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, competition, recession, supply
disruptions, labor shortages, political upheaval or uncertainty, terrorism and
acts of war, natural and man-made disasters, cybercrime, and outbreaks of
contagious diseases;
? uncertainties regarding the impact of the current COVID-19 pandemic, and
restrictions and other measures intended to prevent its spread on our business
and the economy generally;
? the availability of cash flow from operating activities for distributions, if
any;
? 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
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 in a diversified portfolio of
assets;
? future changes in market factors that could affect the ultimate performance of
any development or redevelopment projects, including but not limited to
construction costs, plan or design changes, availability of materials,
schedule delays, availability of construction financing, performance of
developers, contractors and consultants and growth in rental rates and
operating costs;
17
? 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;
? the ability of our tenants to pay their rent;
? the ability of our borrowers to make scheduled debt service;
? 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 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 sellerswho 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, and multifamily. 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 inthe United States and other countries based on our view of existing market conditions. As ofSeptember 30, 2022 , our investments included eight wholly owned multi-family apartment complexes and a note receivable (the "500 West 22nd Street Mezzanine Loan"). All of our current investments are located in theU.S. 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.
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, competition, inflation and recession. 18 COVID-19 Pandemic
OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a global pandemic and it remains highly unpredictable and dynamic and its ultimate 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, and the development, administration and ultimate effectiveness of vaccines, including booster shots. Accordingly, the ongoing COVID-19 pandemic may continue to have negative effects on theU.S. and global economies for the foreseeable future. As ofSeptember 30, 2022 , our consolidated portfolio of properties consisted of eight wholly owned multi-family apartment complexes, all of which are located in theU.S. Our multi-family properties have not been significantly impacted by the COVID-19 pandemic and their occupancy levels, rental rates and rental collection have remained stable since the onset of the COVID-19 pandemic. Additionally, our 500 West 22nd Street Mezzanine Loan is collateralized by a condominium development project located inNew York City (the "Condominium Project "), which is subject to risks related to the COVID-19 pandemic. To date, both theCondominium Project and our 500 West 22nd Street Mezzanine Loan have not been significantly impacted by the COVID-19 pandemic. We continue to closely monitor the overall extent as to which our business may be affected by the ongoing COVID-19 pandemic which will largely depend on both current and future developments, all of which are highly uncertain and cannot be reasonably predicted. If our properties and real estate-related investments are negatively impacted by the ongoing COVID-19 pandemic in future periods for an extended period because (i) tenants are unable to pay their rent, (ii) leasing demand falls causing declines in occupancy levels and/or rental rates, and (iii) the borrower is unable to pay scheduled debt service on the 500 West 22nd Street Mezzanine Loan; our business and financial results could be materially and adversely impacted.
Liquidity and Capital Resources
We had cash and cash equivalents of$59.1 million , marketable securities, available for sale of$3.5 million and restricted cash of$5.0 million as ofSeptember 30, 2022 . 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. 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, 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.
Acquisition and Disposition Activities
Disposition of the Lakes of
OnMarch 17, 2021 , we completed the disposition of a 280-unit multifamily property located inMargate, Florida (the "Lakes ofMargate ") for a contractual sales price of$50.8 million to an unrelated third party. In connection with the disposition of the Lakes ofMargate , we recognized a gain on the sale of investment property of$27.8 million during the first quarter of 2021. 19
Acquisition of the
OnJuly 7, 2021 , we completed the acquisition of a 368-unit multifamily property located inTampa, Florida (the "BayVue Apartments ") from an unrelated third party, for a contractual purchase price of$59.5 million , excluding closing and other related transaction costs.
Acquisition of the
On
Disposition of the
OnDecember 22, 2021 , we completed the disposition of theRiver Club Apartments and the Townhomes atRiver Club , two student housing complexes with a total of 1,134 beds (collectively, the "River Club Properties ") located inAthens, Georgia , for a contractual sales price of$77.3 million to an unrelated third party. In connection with the disposition of theRiver Club Properties , we recognized a gain on the sale of investment property of$55.0 million during the fourth quarter of 2021. Results of Operations
As of
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 As of
September 30, September 30,
Property 2022 2021 2022 2021
Arbors Harbor Town 92 % 96 % $ 1,680 $ 1,461
Parkside 95 % 98 % $ 1,376 $ 1,256
Flats at Fishers 94 % 97 % $ 1,519 $ 1,336
Axis at Westmont 93 % 95 % $ 1,438 $ 1,268
Valley Ranch Apartments 94 % 93 % $ 1,763 $ 1,582
Autumn Breeze Apartments 90 % 91 % $ 1,377 $ 1,193
BayVue Apartments (2) 91 % 96 % $ 1,411 $ 1,123
Citadel Apartments (3) 95 % N/A $ 1,660 N/A
(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.
(2)
(3)
On
The 2021 Dispositions did not qualify to be reported as discontinued operations
since they did not represent a strategic shift that had a major effect on our
operations and financial results. Accordingly, the operating results of the 2021
Dispositions are reflected in our results from continuing operations for all
periods presented through their dates of disposition.
20
Three months ended
The following table provides summary information about our results of operations (dollars in thousands):
Three Months Ended Change Change Change
September 30, Increase/ Percentage due to due to due to Same
2022 2021 (Decrease) Change Acquisitions(1) Dispositions(2) Store(3)
Rental revenues $ 12,006 $ 11,187 $ 819 7.0 % $ 1,593 $ (1,665 ) $ 891
Property operating expenses 3,861 4,097 (236 ) (6.0 %) 462 (895 ) 197
Real estate taxes 1,705 1,399 306 22.0 % 390 (168 ) 84
General and administrative 1,998 1,825 173 9.0 % 36 (12 ) 149Depreciation and amortization 4,248 3,925 323
8.0 % 612 (389 ) 100
Interest expense, net 3,628 2,735 893 33.0 % 958 (162 ) 97
Notes:(1) Represents the effect on our operating results for the periods indicated
resulting from the 2021 Acquisitions,.
(2) Represents the effect on our operating results for the periods indicated
resulting from the disposition of the
2021.
(3) Represents the change for the three months ended
to the same period in 2021 for real estate and real estate-related
investments owned by us during the entire periods presented ("Same Store").
Our results for Same Store properties for the three months ended
Fishers, Axis at Westmont, the
Apartments.
The following table reflects total rental revenues and total property operating
expenses for the three months ended September 30, 2022 and 2021 for: (i) our
Same Store properties, (ii) the 2021 Acquisitions and (iii) the disposition of
the River Club Properties on December 22, 2021 (dollars in thousands):
Three Months Ended
September 30,
Description 2022 2021 Change
Rental Revenues:
Same Store $ 8,967 $ 8,076 $ 891
2021 Acquisitions 3,039 1,446 1,593Disposition - River Club Properties - 1,665 (1,665
) Total rental revenues$ 12,006 $ 11,187 $ 819 Property operating expenses: Same Store$ 2,754 $ 2,557 $ 197 2021 Acquisitions 1,120 658 462 Disposition - River Club Properties (13 ) 882 (895 ) Total property expenses$ 3,861 $ 4,097 $ (236 ) 21
Revenues Rental revenues for the three months endedSeptember 30, 2022 were$12.0 million , an increase of$0.8 million , compared to$11.2 million for the same period in 2021. Excluding the effect of our acquisition and disposition activities, our rental revenues increased by$0.9 million for our Same Store properties during the 2022 period as a result of higher average monthly rent per unit partially offset by lower occupancy. Property Operating Expenses Property operating expenses for the three months endedSeptember 30, 2022 were$3.9 million , an decrease of$0.2 million , compared to$4.1 million for the same period in 2021. Excluding the effect of our acquisition and disposition activities, our property operating expenses, increased by$0.2 million for our Same Store properties. Real Estate Taxes Real estate taxes for the three months endedSeptember 30, 2022 were$1.7 million , an increase of$0.3 million , compared to$1.4 million for the same period in 2021. Excluding the effect of our acquisition and disposition activities, real estate taxes increased slightly by$0.1 million for our Same Store properties. General and Administrative Expenses General and administrative expenses for the three months endedSeptember 30, 2022 were$2.0 million , an increase of$0.2 million , compared to$1.8 million for the same period in 2021. Excluding the effect of our acquisition and disposition activities, our general and administrative expenses increased slightly by$0.1 million for our Same Store properties.
Depreciation and Amortization Depreciation and amortization expense for the
three months ended
Interest Expense, Net Interest expense, net for the three months endedSeptember 30, 2022 was$3.6 million , an increase of$0.9 million , compared to$2.7 million for the same period in 2021. Excluding the effect of our acquisition and disposition activities, interest expense, net increased slightly by$0.1 million for our Same Store properties. Mark to Market Adjustment on Derivative Financial Instruments During the three months endedSeptember 30, 2022 , we recorded positive mark to market adjustments on our derivative financial instruments of$0.8 million . These mark to market adjustments represented the change in the fair value of our interest rate cap contracts during the period. 22
Nine Months ended
The following table provides summary information about our results of operations
(dollars in thousands):
Nine Months Ended Change Change Change
September 30, Increase/ Percentage due to due to due to Same
2022 2021 (Decrease) Change Acquisitions(1) Dispositions(2) Store(3)
Rental revenues $ 34,824 $ 30,864 $ 3,960 13.0 % $ 7,393 $ (5,954 ) $ 2,521
Property operating expenses 11,138 10,336 802 8.0 % 2,572 (2,449 ) 679
Real estate taxes 5,079 4,228 851 20.0 % 1,464 (613 ) -
General and administrative 5,715 5,046 669 13.0 % 103 (87 ) 653Depreciation and amortization 14,120 9,590 4,530
47.0 % 5,577 (1,166 ) 119
Interest expense, net 10,049 7,403 2,646 36.0 % 3,000 (730 ) 376
Notes:(1) Represents the effect on our operating results for the periods indicated
resulting from the 2021 Acquisitions.
(2) Represents the effect on our operating results for the periods indicated
resulting from the 2021 Dispositions.
(3) Represents the change for the nine months ended
to the same period in 2021 for real estate and real estate-related
investments owned by us during the entire periods presented ("Same Store").
Our results for Same Store properties for the nine months ended
2022 and 2021 include
Westmont, the
The following table reflects total rental revenues and total property operating expenses for the nine months endedSeptember 30, 2022 and 2021 for: (i) our Same Store properties, (ii) the 2021 Acquisitions and (iii) the 2021 Dispositions (dollars in thousands): Nine Months Ended September 30, Description 2022 2021 Change Rental Revenues: Same Store$ 25,985 $ 23,464 $ 2,521 2021 Acquisitions 8,839 1,446 7,393 2021 Dispositions - 5,954 (5,954 ) Total rental revenues$ 34,824 $ 30,864 $ 3,960 Property operating expenses: Same Store$ 7,962 $ 7,283 $ 679 2021 Acquisitions 3,230 658 2,572 2021 Dispositions (54 ) 2,395 (2,449 ) Total property expenses$ 11,138 $ 10,336 $ 802 23
Revenues Rental revenues for the nine months endedSeptember 30, 2022 were$34.8 million , an increase of$3.9 million , compared to$30.9 million for the same period in 2021. Excluding the effect of our acquisition and disposition activities, our rental revenues increased by$2.5 million for our Same Store properties during the 2022 period as a result of higher average monthly rent per unit. Property Operating Expenses Property operating expenses for the nine months endedSeptember 30, 2022 were$11.1 million , an increase of$0.8 million , compared to$10.3 million for the same period in 2021. Excluding the effect of our acquisition and disposition activities, our property operating expenses increased by$0.7 million for our Same Store properties. The increase is principally attributable to a community association special assessment of$0.3 million forArbors Harbor Town during the second quarter of 2022 and an increase in insurance expense of$0.2 million . Real Estate Taxes Real estate taxes for the nine months endedSeptember 30, 2022 were$5.1 million , an increase of$0.9 million , compared to$4.2 million for the same period in 2021. Excluding the effect of our acquisition and disposition activities, real estate taxes were unchanged for our Same Store properties. General and Administrative Expenses General and administrative expenses for the nine months endedSeptember 30, 2022 were$5.7 million , an increase of$0.7 million , compared to$5.0 million for the same period in 2021. Excluding the effect of our acquisition and disposition activities, our general and administrative expenses increased by$0.7 million for our Same Store properties. The increase is principally attributable to higher asset management fees during the 2022 period resulting from our acquisition and investment activities. Depreciation and Amortization Depreciation and amortization expense for the nine months endedSeptember 30, 2022 was$14.1 million , an increase of$4.5 million , compared to$9.6 million for the same period in 2021. Excluding the effect of our acquisition and disposition activities, depreciation and amortization expense increased slightly by$0.1 million for our Same Store properties. Interest Expense, Net Interest expense, net for the nine months endedSeptember 30, 2022 was$10.0 million , an increase of$2.6 million , compared to$7.4 million for the same period in 2021. Excluding the effect of our acquisition and disposition activities, interest expense, net increased by$0.4 million for our Same Store properties.
Gain on Sale of Investment Property. During the first quarter of 2021, we
recognized a gain on the sale of Lakes of
Gain on Disposition of Unconsolidated Joint Venture. During the second quarter of 2021, we recognized a gain of$1.5 million for the settlement of our prior participation in the residual interests ofProspect Park . Mark to Market Adjustment on Derivative Financial Instruments During the nine months endedSeptember 30, 2022 , we recorded positive mark to market adjustments on our derivative financial instruments of$1.9 million . These mark to market adjustments represented the change in the fair value of our interest rate cap contracts during the 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. 24
Related Party Transactions
We have agreements with the Advisor and its affiliates to pay certain fees in exchange for services performed by these entities and other related parties. These agreements have one-year terms and currently extend throughJune 30, 2023 . We are dependent on the Advisor and its affiliates for certain services that are essential to us, including asset acquisition and 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 following table represents the fees incurred associated with the payments to our Advisor and its affiliates for the periods indicated:
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Acquisition fees and acquisition expense
reimbursement (1) $ - $ 1,041 $ - $ 1,041
Debt financing fees (2) - 448 - 448
Property management fees (property
operating expenses) 127 109 369 337
Administrative services reimbursement
(general and administrative costs) 376 347 1,069 1,012
Asset management fees (general and
administrative costs) 853 723 2,582 2,044
Total $ 1,356 $ 2,668 $ 4,020 $ 4,882 (1) Capitalized to the corresponding asset and amortized over its estimated
useful life.
(2) Capitalized upon the execution of the loan, presented in the consolidated
balance sheets as a direct deduction from the carrying value of the
corresponding loan and amortized over the initial term of the corresponding
loan.
Summary of Cash Flows
Operating activities
The net cash provided by operating activities of $7.1 million for the nine
months ended September 30, 2022 consisted primarily of our net loss of $6.6
million less (i) the positive mark to market adjustments on derivative financial
instruments of $1.9 million and non-cash interest income of $0.4 million plus
(i) the net change in operating assets and liabilities of $0.8 million (ii)
depreciation and amortization of $14.1 million and (iii) amortization of
deferred financing costs of $1.1 million .
Investing activities
The net cash provided by investing activities of
? proceeds from the repayment of note receivable of
? capital expenditures of
25
Financing activities
The net cash provided by financing activities of
? proceeds from notes payable of
? principal payments of notes payable of
? redemptions and cancellation of common stock of
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 ofSeptember 30, 2022 (dollars
in
thousands).
Remainder of
Contractual Obligations 2022 2023 2024 2025 2026 Thereafter Total
Principal $ 445 $ 2,191 $ 97,401 $ 18,138 $ 147,729 $ 27,732 $ 293,636
Interest Payments(1) 3,344 13,462 12,053 7,617 2,842 3,245 42,563
Total Contractual Obligations $ 3,789 $ 15,653 $ 109,454 $ 25,755 $ 150,571 $ 30,977 $ 336,199 (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
was used.
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, 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 generally accepted accounting principles inthe United States of America ("GAAP"). We calculate FFO, a non-GAAP measure, consistent with the standards established over time by theBoard of Governors of NAREIT, as restated in a White Paper approved by theBoard of Governors of NAREIT effective inDecember 2018 (the "White Paper"). The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Our FFO calculation complies with NAREIT's definition.
We believe that the use of FFO provides a more complete understanding of our performance to investors and to management and reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.
26
Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT's definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings. Because of these factors, theInvestment Program Association (the "IPA"), an industry trade group, published a standardized measure of performance known as modified funds from operations ("MFFO"), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that both before and after we have deployed all of our offering proceeds and are no longer incurring a significant amount of acquisition fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP. We define MFFO, a non-GAAP measure, consistent with the IPA's Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the "Practice Guideline") issued by the IPA inNovember 2010 . The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction-related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses (which includes costs incurred in connection with strategic alternatives), amounts relating to deferred rent receivables and amortization of market lease and other intangibles, net (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments and borrowings, mark-to-market adjustments included in net income (including gains or losses incurred on assets held for sale), gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs. Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. FFO and MFFO should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO. Neither theSEC , NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guidelines or theSEC or another regulatory body could standardize the allowable adjustments across the publicly registered, non-listed REIT industry, and we would have to adjust our calculation and characterization of FFO or MFFO accordingly. 27
Our calculations of FFO and MFFO are presented below (dollars and shares in thousands, except per share amounts):
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
Description 2022 2021 2022 2021
Net (loss)/income $ (2,110 ) $ (2,089 ) $ (6,605 ) $ 25,522
FFO adjustments:
Depreciation and amortization of real
estate assets 4,248 3,925 14,120 9,590
Gain on disposition of unconsolidated
joint venture - - - (1,457 )
Gain on sale of investment property - -
- (27,821 )
FFO 2,138 1,836 7,515 5,834
MFFO adjustments:
Other adjustments:
Acquisition and other transaction
related costs expensed(1) - - - -
Noncash adjustments:
Gain on on forgiveness of debt(3) - (128 ) - (128 )
Amortization of above or below market
leases and liabilities - - - -
Mark-to-market adjustments(2) (751 ) (7 ) (1,861 ) (9 )
Loss on sale of marketable securities(3) 2 159 - 152
MFFO before straight-line rent 1,389 1,860 5,654 5,849
Straight-line rent(4) - - -
MFFO - IPA recommended format$ 1,389 $ 1,860 $
5,654
Net (loss)/income$ (2,110 ) $ (2,089 ) $ (6,605 ) $ 25,522 Less: (income)/loss attributable to noncontrolling interests - (14 ) - (145 ) Net (loss)/income applicable to Company's common shares$ (2,110 ) $ (2,103 ) $ (6,605 ) $ 25,377 Net (loss)/income per common share, basic and diluted$ (0.11 ) $ (0.10 ) $ (0.33 ) $ 1.26 FFO$ 2,138 $ 1,836 $ 7,515 $ 5,834 Less: FFO attributable to noncontrolling interests - (97 ) - (385 ) FFO attributable to Company's common shares$ 2,138 $ 1,739 $ 7,515 $ 5,449 FFO per common share, basic and diluted$ 0.11 $ 0.09 $
0.37
MFFO - IPA recommended format$ 1,389 $ 1,860 $ 5,654 $ 5,849 Less: MFFO attributable to noncontrolling interests - (97 ) - (385 ) MFFO attributable to Company's common shares$ 1,389 $ 1,763 $
5,654
Weighted average number of common shares outstanding, basic and diluted 20,064 20,157
20,080 20,181
1) The purchase of properties, and the corresponding expenses associated with
that process, is a key operational feature of our business plan to generate
operational income and cash flows in order to make distributions to investors.
In evaluating investments in real estate, management differentiates the costs
to acquire the investment from the operations derived from the investment.
Such information would be comparable only for non-listed REITs that have
completed their acquisition activity and have other similar operating
characteristics. By excluding expensed acquisition costs, management believes
MFFO provides useful supplemental information that is comparable for each type
of real estate investment and is consistent with management's analysis of the
investing and operating performance of our properties. Acquisition fees and
expenses include payments to our advisor or third parties. Acquisition fees
and expenses under GAAP are considered operating expenses and as expenses
included in the determination of net income and income from continuing
operations, both of which are performance measures under GAAP. Such fees and
expenses are paid in cash, and therefore such funds will not be available to
distribute to investors. Such fees and expenses negatively impact our
operating performance during the period in which properties are being
acquired. Therefore, MFFO may not be an accurate indicator of our operating
performance, especially during periods in which properties are being acquired.
All paid and accrued acquisition fees and expenses will have negative effects
on returns to investors, the potential for future distributions, and cash
flows generated by us, unless earnings from operations or net sales proceeds
from the disposition of properties are generated to cover the purchase price
of the property, these fees and expenses and other costs related to the
property. Acquisition fees and expenses will not be paid or reimbursed, as
applicable, to our advisor even if there are no further proceeds from the sale
of shares in our offering, and therefore such fees and expenses would need to
be paid from either additional debt, operational earnings or cash flows, net
proceeds from the sale of properties or from ancillary cash flows.
28
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 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.
3) 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.
4) 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. Distributions We made an election to qualify as a REIT for federal income tax purposes commencing with our taxable year endedDecember 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.
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 filed with theSecurities and Exchange Commission onMarch 24, 2022 . 29
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