Belpointe PREP, LLC — Q2 2023 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2023. The company is an externally managed qualified opportunity fund focused on acquiring, developing, redeveloping and managing commercial real estate in qualified opportunity zones. Financial statement amounts below are in U.S. dollars; figures are rounded to millions unless noted.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Rental revenue | $0.778m | $0.312m | $1.275m | $0.641m |
| Net loss | $(4.071)m | $(1.932)m | $(6.878)m | $(3.941)m |
| Net loss attributable to Belpointe PREP | $(4.080)m | $(1.886)m | $(6.890)m | $(3.902)m |
| Loss per Class A unit | $(1.16) | $(0.56) | $(1.95) | $(1.15) |
| Cash used in operating activities | — | $(3.422)m | $(2.954)m | |
| Cash used in investing activities | — | $(51.637)m | $(52.867)m |
At June 30, total assets were $368.3m, including $263.9m of net real estate and $63.5m of cash and cash equivalents. Restricted cash was $26.6m, including $20.0m reserved for a loan-guaranty liquidity covenant; cash and restricted cash totaled $90.1m. Total liabilities were $39.7m, including $6.6m of lease liabilities and $8.6m due to affiliates. Reported debt was approximately $1,000; the new construction facility had drawn less than $0.1m. Members’ capital totaled $328.6m.
Rental revenue is not a measure of property-level operating margin: reported revenue includes lease-related intangible amortization. Disclosed lease revenues, excluding lease intangible amortization, were $0.333m in Q2 2023 versus $0.265m in Q2 2022, and $0.680m versus $0.546m for the six-month periods. The filing does not provide a clear consolidated operating-margin measure.
Material changes versus prior periods
- Revenue increased 149% in Q2 and 99% for the first half, primarily from acquisitions made in 2022 and accelerated recognition of below-market lease intangibles after tenants vacated 901–909 Central Avenue.
- Net loss attributable to the company widened to $4.1m in Q2 and $6.9m for the first half. The first-half increase included a $2.2m real estate impairment and higher depreciation and amortization; lower interest income also contributed, as loans generating interest in 2022 had been repaid.
- Cash and restricted cash declined by $54.9m during the first half, chiefly reflecting development spending. Real estate under construction rose to $200.7m from $133.9m at year-end 2022.
- In May, a subsidiary entered into a Bank OZK construction loan facility of up to $130m for 1991 Main in Sarasota. Its floating rate is one-month SOFR plus 3.45%, with an 8.51% minimum; initial maturity is May 2027, with a conditional one-year extension. The company recorded a $0.2m unrealized gain on the related interest-rate cap.
- A CMC joint-venture partner forfeited its 29.8% interest after misappropriating cash from the other partner’s account; Belpointe consequently obtained 100% indirect ownership of CMC.
Outlook, risks and unusual items
- Management expects available capital resources, offering proceeds, potential borrowings and operating cash flows to be sufficient for anticipated working-capital and capital-expenditure needs over the next 12 months and beyond. This is an expectation, not quantified earnings or occupancy guidance.
- Development requires substantial additional funding. The filing estimates minimum remaining construction and soft costs of $155.5m for 1991 Main and approximately $156.7m for 1000 First in St. Petersburg. Aggregate unfunded commitments under two development agreements were $158.0m; $22.1m, including $6.1m of retainage, was outstanding and payable at quarter-end.
- 1991 Main, planned as Aster & Links, is expected to begin initial occupancies in the first half of 2024, with construction completion expected by year-end 2024. The filing describes these as estimates. 1700 Main in Sarasota remains on hold pending city rezoning.
- The company cites uncertainty from rising interest rates and inflation, insurance availability and cost, banking-system instability, credit availability, market volatility, supply-chain disruption and labor shortages. It says these factors could affect costs, financing and investment values, and it cannot estimate their future impact.
- The $2.2m impairment reduced the carrying value of a Nashville real estate asset to estimated fair value. The company reported no material litigation and no material changes to previously disclosed risk factors.
- Related-party exposure merits attention: the Manager and Sponsor receive management fees, reimbursements and development fees. Certain Nashville development-management agreements involve entities beneficially owned by immediate family members of the CEO. An insurance brokerage with family members’ passive indirect ownership also placed coverage for the company.
- The company’s public offerings include a continuous best-efforts offering; commissions to selling-group members may range from 0.25% to 4.50%. Its disclosed NAV was $99.82 per Class A unit as of May 31, 2023. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Updated construction budgets, funding sources and timelines for 1991 Main and 1000 First, including whether development spending or commitments have changed since June 30.
- Liquidity available after excluding restricted cash, compliance with the $20m liquidity and $130m net-worth guaranty covenants, and the timing and terms of further Bank OZK loan draws.
- The valuation assumptions behind the Nashville impairment and any subsequent changes in project plans or property values.
- Occupancy, leasing and cash-rent performance underlying revenue growth, distinguishing recurring rental income from accelerated lease-intangible recognition.
- Offering proceeds, issuance costs and dilution, as well as fees and transactions involving the Manager, Sponsor and other related parties.