Belpointe PREP, LLC — 2023 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2023. The company is an externally managed, publicly traded qualified opportunity fund (NYSE American: OZ) focused on developing and managing commercial real estate in qualified opportunity zones. It reports as a partnership for U.S. federal tax purposes and states that at least 90% of its assets consist of qualified opportunity zone property. The financial statements received an unqualified audit opinion.
Financial performance and position
| Metric | 2023 | 2022 |
|---|---|---|
| Revenue, primarily rental | $2.254 million | $1.391 million |
| Total expenses | $16.641 million | $10.898 million |
| Net loss attributable to Belpointe PREP | $14.351 million | $7.683 million |
| Loss per Class A unit | $4.04 | $2.25 |
| Cash used in operating activities | $6.945 million | $6.651 million |
| Cash used in investing activities | $145.123 million | $63.530 million |
| Cash provided by financing activities | $30.686 million | $22.802 million |
| Cash, cash equivalents and restricted cash at year-end | $23.585 million | $144.967 million |
- Revenue increased 62%, but remained far below operating expenses. The filing attributes the increase mainly to lease-intangible amortization, including accelerated amortization after a tenant vacated, and a full year of amortization for a property acquired in late 2022.
- The net loss widened 74%. Expenses rose 53%, including a $4.060 million impairment on a Nashville asset, higher depreciation and amortization, and increased property and general and administrative expenses. Interest income fell from $1.850 million to $0.113 million as prior-year loans were repaid.
- At December 31, 2023, total assets were $382.117 million, including $353.541 million of net real estate; total liabilities were $57.053 million and members’ capital was $325.064 million. Real estate under construction increased to $291.130 million from $133.898 million.
- Reported year-end debt, net, was $19.678 million, and a $4.0 million affiliate short-term loan was outstanding. The company also reported $10.370 million due to affiliates and $12.584 million in accounts payable. The $130 million 1991 Main construction facility had $23.1 million drawn at year-end; the filing later says $17.0 million had been drawn through the filing date, a change that warrants reconciliation.
- No conventional profit margin is meaningful given the operating loss and development-stage portfolio; revenue was not sufficient to cover property and corporate expenses.
Material changes and business developments
- The company issued 98,950 Class A units in 2023 and raised $7.5 million in net offering proceeds. Its December 31, 2023 NAV was $100.88 per Class A unit. Aggregate gross offering cash proceeds, including predecessor offerings, were reported as $354.3 million.
- Development spending drove the substantial increase in investing cash outflows and construction assets. The portfolio includes projects in Florida, Tennessee and Connecticut, with a concentration in Florida and multifamily and mixed-use development.
- At 1991 Main Street in Sarasota, the company is developing a 424-apartment project with retail space. Initial occupancy was expected in the first half of 2024, with completion expected by year-end 2024. The company estimated total construction and soft costs of at least $182.4 million and an unlevered yield above 6%.
- At 1000 First Avenue North (“Viv”) in St. Petersburg, the company is developing a 269-apartment project. Its construction management agreement has a $69 million guaranteed maximum price. Year-end unfunded capital commitments for the 1991 Main and 1000 First projects totaled $102.1 million; the filing also estimated remaining construction and soft-cost funding of at least $84.8 million and $119.2 million, respectively.
- A Nashville property impairment of $4.060 million was recorded after management concluded estimated fair value was below carrying value. Three tenants vacated a St. Petersburg property during 2023, triggering accelerated amortization of lease intangibles.
Outlook, risks and unusual items
- Management said multifamily and mixed-use market conditions had remained strong, but cited material uncertainty from interest rates, inflation, credit availability, banking-sector instability, construction costs, labor and supply-chain constraints, and general economic conditions. It could not estimate their future financial impact.
- Management expected available capital resources, offering proceeds, financing and operating cash flow to meet anticipated working-capital and capital-expenditure needs over the next 12 months and beyond. This outlook should be considered alongside the large development commitments, sharply reduced cash balance and need for further financing.
- The company does not expect to pay distributions until investments generate operating cash flow. It has no required minimum distribution; a 6%–8% annual distribution rate is a target to work toward, not a guarantee. Distributions, if any, are at management’s discretion, subject to Board oversight.
- On January 31, 2024, a subsidiary entered into a mezzanine loan facility of up to $56.4 million for 1991 Main at 13% annual interest. The filing reports $39.8 million in cash proceeds after $15.0 million of reserves and $1.6 million of closing costs. The loan is secured by the investment and includes completion and carveout guarantees and minimum liquidity and net-worth covenants of $20 million and $130 million. The company also reported repaying its $4.0 million affiliate loan in February 2024.
- The 1991 Main construction loan bears floating interest at one-month SOFR plus 3.45%, with a minimum all-in rate of 8.51%. An interest-rate cap had a 5.07% strike and a July 2024 maturity. The construction and mezzanine financing carry guarantees and covenant requirements.
- Related-party arrangements are significant: the Manager receives a 0.75% annualized management fee based on NAV; Sponsor affiliates receive development fees and reimbursements; and the Manager’s Class B units entitle it to 5% of specified gains or distributions, even before Class A holders recover capital. The company reported $2.693 million of management fees and $5.9 million of development fees in 2023.
- Key risks include development delays or cost overruns, refinancing and interest-rate exposure, illiquid real estate, geographic concentration, reliance on the Sponsor and Manager, conflicts of interest, difficulty raising or deploying capital, and maintaining partnership and qualified opportunity fund tax status. The company reported no material legal proceedings at year-end and no material off-balance-sheet arrangements. Management reported effective disclosure controls and internal control over financial reporting; the auditor was not engaged to audit internal controls.
Important facts for investors to verify
- Reconcile the construction-loan draw disclosures: $23.1 million at December 31, 2023 versus $17.0 million drawn through the filing date; confirm current debt balances, repayments and available commitments.
- Confirm the funding plan and sources for the stated project commitments and remaining construction and soft costs, including the terms and actual proceeds available from the 13% mezzanine loan.
- Review liquidity against the $20 million minimum-liquid-assets covenant. The filing reports $20.125 million of cash and cash equivalents at year-end, plus $3.460 million of restricted cash, and states covenant compliance.
- Assess the Nashville impairment, project valuations and the methodology and limitations of the company’s quarterly NAV; NAV is not a guarantee of realizable sale value or market trading price.
- Track construction progress, budgets, leasing and occupancy at 1991 Main and Viv, and confirm whether the disclosed 2024 timing and cost expectations were achieved.
- Review related-party fees, affiliate balances and the Manager’s 5% Class B economic interest, as well as the company’s distribution capacity and any future distribution funding sources.
- Consider the risks to qualified opportunity fund status and investor tax treatment, including investor-specific tax reporting and the December 31, 2026 recognition date for deferred gains described in the filing.