Belpointe PREP, LLC — Q1 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2023, with comparisons to Q1 2022. Belpointe PREP is an externally managed qualified opportunity fund focused on acquiring, developing and managing commercial real estate in qualified opportunity zones. Its portfolio is primarily in development, limiting current rental income. Financial amounts below are in U.S. dollars; figures are rounded to millions unless otherwise noted.
Key financial metrics
| Metric | Q1 2023 / March 31, 2023 | Comparable period / December 31, 2022 |
|---|---|---|
| Rental and total revenue | $0.497 million | $0.329 million in Q1 2022; up 51% |
| Total expenses | $3.301 million | $2.832 million in Q1 2022; up 17% |
| Net loss | $2.807 million | $2.009 million in Q1 2022 |
| Net loss attributable to Belpointe PREP | $2.810 million; $0.80 per Class A unit | $2.016 million; $0.60 per unit |
| Cash and cash equivalents | $115.676 million | $143.467 million |
| Cash, cash equivalents and restricted cash | $122.271 million | $144.967 million |
| Total assets | $352.769 million | $353.995 million |
| Total liabilities | $24.006 million | $21.343 million |
| Lease liabilities | $7.041 million | $7.126 million |
| Members’ capital | $328.763 million | $332.652 million |
Margins and cash flow. Revenue did not cover operating expenses; the filing does not present a separate margin measure. Net cash used in operating activities was $1.386 million, investing activities used $21.169 million, and financing activities used $0.141 million. Cash and restricted cash decreased $22.696 million during the quarter. The filing reports no interest paid during either comparative quarter.
Material changes versus Q1 2022
- Rental revenue increased $168,000, primarily reflecting a fuller period of activity from properties acquired in 2022, partly offset by the departure of the sole tenant at 1900 Fruitville.
- Expenses rose $469,000: property expenses increased $111,000, general and administrative expenses increased $130,000, and depreciation and amortization increased $228,000.
- Interest income fell from $501,000 to zero because the company’s loans were repaid during 2022. The resulting reduction in other income contributed to the wider net loss.
- Investing cash outflows were lower than in Q1 2022 ($21.169 million versus $39.128 million), when the company also funded loans receivable. Q1 2023 development of real estate used $21.094 million.
Outlook, risks and unusual items
- Liquidity and development funding: Management expects available capital, offering proceeds, potential construction or other loans, and operating cash flows to meet anticipated working capital and capital expenditure needs over the next 12 months and beyond. The company had a $128.8 million unfunded commitment under the 1991 Main construction agreement as of March 31, 2023; management estimated at least $189.3 million of remaining construction and soft costs for that project, inclusive of that commitment. The commitment is expected to be incurred over approximately 15 months.
- Subsequent financing: In May 2023, a subsidiary entered into a $130 million variable-rate construction loan for 1991 Main. The rate is one-month Term SOFR plus 345 basis points, subject to an 8.51% minimum, with a four-year initial term and one-year extension option. The company purchased an interest-rate cap with a 5.07% strike price. This financing occurred after quarter-end.
- Other development plans: In April 2023, the company entered a construction management agreement for 902-1020 First Avenue North with a $48.6 million guaranteed maximum price. For 1991 Main, initial occupancy is expected in the first half of 2024 and construction completion by year-end 2024; management estimates an unlevered yield above 6%. These are forward-looking estimates, not assurances.
- Economic and real estate risks: Management cited rising interest rates, inflation, banking-system instability, credit availability, market volatility, supply-chain disruption and labor shortages as sources of uncertainty that could affect operating costs, financing, investment values and results. It said it could not estimate their future impact. Development, leasing, zoning and construction execution also affect the portfolio’s plans.
- Related parties and governance: The company depends on its Manager and affiliates for essential management and administrative services and incurs management, development and reimbursement costs with them. The filing also describes a prior $30 million loan to an affiliate of the CEO, repaid in 2022. A CMC joint-venture partner forfeited a $1.0 million noncontrolling interest after misappropriating cash from another partner’s account; the company consequently obtained 100% indirect ownership of CMC in March 2023.
- Offering and dilution: On May 9, 2023, the SEC declared effective a follow-on registration statement for up to $750 million of Class A units, in addition to the ongoing primary offering. The company reported $522.7 million remaining unsold in the primary offering as of that date. Selling-group commissions may range from 0.25% to 4.50%; additional unit issuance may dilute existing investors.
- Contingencies and controls: The company reported no material litigation as of March 31, 2023 and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm progress, total cost, remaining funding needs and completion schedule for 1991 Main, including the terms and actual borrowing cost of the post-quarter $130 million construction loan and effectiveness of its interest-rate cap.
- Track cash available for development after distinguishing unrestricted cash from restricted cash, and assess whether projected offering proceeds and financing are sufficient for commitments and planned projects.
- Review leasing, occupancy and rent generation against development assumptions; Q1 revenue was $0.497 million while the company recorded a $2.807 million net loss.
- Assess the effects of potential Class A unit issuance, offering commissions, NAV-based pricing and related-party fees on existing unit holders.
- Monitor exposure to interest rates, construction costs, labor and materials, zoning approvals, and any changes to management’s project timelines or return estimates.