Belpointe PREP, LLC — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. The comparative period is January 24, 2020 (formation) through December 31, 2020; it is not a full-year comparison. The company commenced principal operations on October 28, 2020.
Business context
Belpointe PREP is an externally managed, publicly traded qualified opportunity fund (NYSE American: OZ) focused on acquiring, developing, redeveloping and managing commercial real estate in qualified opportunity zones. It reported 12 investments across three states at year-end, with substantial development activity and a concentration of investments in Florida and Tennessee. The company stated that at least 90% of its assets consist of qualified opportunity zone property and that it intends to qualify as a partnership for federal tax purposes.
Key financial metrics
| Metric | 2021 | 2020 comparison |
|---|---|---|
| Revenue | $1.0 million, primarily rental revenue | $0.1 million |
| Total expenses | $4.7 million | $0.2 million |
| Net loss | $3.0 million consolidated; $3.1 million attributable to Belpointe PREP | $0.1 million |
| Loss per Class A unit | $7.64 | $1,120, based on only 100 weighted-average units |
| Operating cash flow | $(2.3) million | $(0.01) million |
| Investing cash flow | $(43.4) million | $(28.4) million |
| Financing cash flow | $231.4 million | $35.0 million |
| Cash and restricted cash at year-end | $192.3 million | $6.6 million |
Revenue growth reflects acquired properties and the differing length and scale of the comparison periods; the filing does not provide a meaningful comparable operating margin. At December 31, 2021, total assets were $341.4 million, including $124.3 million of net real estate and $192.1 million of cash and cash equivalents on the balance sheet. Total liabilities were $17.6 million and members’ capital was $323.9 million. Debt, net, was $10.8 million, principally a mortgage on the 1991 Main property.
Material changes and unusual items
- The $750 million continuous primary offering became effective in September 2021. From October 7 through year-end, the company issued 2,132,039 Class A units, raising $213.2 million gross and $212.6 million net. It also reported $332.2 million of aggregate gross offering proceeds including Belpointe REIT’s prior offerings.
- The October 2021 merger with Belpointe REIT involved issuing approximately 1.25 million Class A units in exchange for REIT interests. The merger also resulted in cancellation of $74 million of secured affiliate notes and accrued interest, eliminating the repayment obligation.
- Real estate under construction rose to $76.9 million from $15.1 million. The company reported $7.9 million of development spending during 2021, in addition to acquisitions and capitalized project costs.
- The year-end balance sheet included $20.3 million of unsettled unit subscriptions receivable; the filing states these amounts were collected before the report was filed.
- The company reported a non-material correction to its September 30, 2021 balance sheet concerning accumulated losses and a related-party loan associated with BPOZ 1991 Main.
Liquidity, debt and outlook
Management stated that available resources were expected to cover anticipated working capital and capital expenditure needs for the next 12 months. The company depends on offering proceeds, operating cash flow, affiliate advances and financing to fund investments and expenses. Operating cash flow was negative in 2021, while year-end cash was elevated by equity financing and merger-related transactions.
The $10.8 million 1991 Main mortgage carried a fixed 4.75% rate, was interest-only and matured May 6, 2022, with a balloon payment due. The filing does not state the eventual refinancing or repayment outcome. The company targets property-level leverage of 50%–70% after building a substantial stabilized portfolio, but may use higher leverage during development; no company-wide debt ceiling is specified.
The company did not expect to pay distributions until investments generated operating cash flow. It described a future target distribution rate of 6%–8% annually, but distributions are discretionary, no minimum is required, and the target is not a guarantee. No earnings guidance was provided. Management identified COVID-19, supply-chain disruption, construction costs and delays, inflation, interest rates, credit conditions and real estate market weakness as sources of uncertainty.
On January 3, 2022, the company made a $30 million, one-year, 5% mortgage loan to Norpointe, an affiliate of the CEO, secured by a first mortgage. Management characterized it as a short-term use of excess cash pending investment. The filing also describes related-party management, development and reimbursement arrangements, and potential conflicts of interest.
Principal risks and governance matters
- Limited operating history, uncertain ability to deploy offering proceeds into suitable investments, and no assurance of distributions or investment returns.
- Development execution risks, including cost overruns, permitting delays, supply constraints, vacancy and lease-up risk; one Sarasota tenant vacated in January 2022.
- Real estate concentration and illiquidity, including exposure to Florida weather and local market downturns; leverage could magnify losses and create refinancing or collateral needs.
- Dependence on the Sponsor and Manager, related-party fees and joint ventures, and management discretion over investments and NAV. The Manager receives a 0.75% annualized NAV-based fee and Class B units entitling it to 5% of specified gains or distributions, regardless of whether Class A holders have recovered capital.
- Risk of losing qualified opportunity fund or partnership tax status, with potentially adverse tax consequences. Investors may owe tax on allocated income without receiving matching cash distributions.
- The company stated that disclosure controls were effective as of year-end. It did not include an internal-control management assessment or auditor attestation, as permitted for a newly public emerging growth company. The financial statements received an unqualified audit opinion; the auditor did not opine on internal-control effectiveness.
- No material legal proceedings were reported at December 31, 2021; the filing reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the May 2022 balloon mortgage was repaid, refinanced or otherwise resolved, and the terms and covenants of any subsequent debt.
- How the $192.3 million year-end cash and restricted cash was deployed after year-end, including the $30 million related-party Norpointe loan and its collateral valuation and repayment.
- Development budgets, schedules, leasing assumptions and updated status of major projects, particularly given the $76.9 million construction balance and the Sarasota tenant departure.
- Actual operating cash generation and whether any distributions are funded by operations rather than new securities, asset sales or borrowing.
- Related-party fee calculations, joint-venture economics and conflict-management processes; the Manager calculates NAV and its fee is NAV-based.
- Current NAV methodology and values, qualified opportunity fund and partnership tax compliance, and the effect of tax rules or investor-specific tax obligations.