Belpointe PREP, LLC — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The company is an externally managed real estate investment firm focused on commercial property in qualified opportunity zones and intends to qualify as a partnership and qualified opportunity fund. Its interim financial statements are unaudited and, according to the filing, had not been reviewed.
Financial performance and position
Amounts below are in millions of dollars unless noted otherwise.
| Metric | Q3 2021 | Nine months 2021 | Prior comparable period |
|---|---|---|---|
| Revenue | $0.278 | $0.679 | No revenue reported in 2020 |
| Total expenses | $0.487 | $1.050 | No comparable expenses reported in 2020 |
| Net income (loss), consolidated | $0.133 | $(0.068) | No comparable income or loss reported in 2020 |
| Net income (loss) attributable to Belpointe PREP | $0.051 | $(0.143) | No comparable amount reported in 2020 |
| Basic and diluted income (loss) per Class A unit | $0.37 | $(3.06) | No comparable amount reported in 2020 |
- Q3 other income included a $0.251 million gain on redemption of an equity investment and $0.091 million of other income. The nine-month figures were $0.251 million and $0.052 million, respectively.
- At September 30, total assets were $119.928 million, including $64.017 million of net real estate, $23.879 million of cash, and $28.235 million in loans receivable. Total liabilities were $3.920 million; members’ capital, including noncontrolling interest, was $116.008 million.
- Cash flow for the nine months: $0.013 million provided by operations, $21.712 million used in investing, and $39.000 million provided by financing. Cash increased $17.301 million to $23.879 million.
- The balance sheet reported no short-term affiliate loans at quarter-end, versus $35.000 million at December 31, 2020. The company’s 0.14% secured affiliate notes were eliminated in consolidation after it obtained control of Belpointe REIT; the remaining notes were cancelled after quarter-end on October 12, 2021.
- No cash interest was reported as paid during the nine months. The filing does not provide a clear operating margin measure; the company’s portfolio and rental operations were at an early stage.
Material changes and developments
- In September, Belpointe PREP accepted shares tendered in its exchange offer for 795,008 Class A units and began consolidating Belpointe REIT. It recorded a noncontrolling interest because it did not own all of Belpointe REIT at September 30.
- Real estate, net rose from $30.252 million at year-end 2020 to $64.017 million. Real estate under construction increased to $41.705 million from $15.101 million.
- The portfolio comprised seven investments and two pending investments across Florida, Tennessee, and Connecticut. Projects included planned multifamily and mixed-use redevelopment, as well as leased retail and office properties.
- The primary offering of up to $750 million was declared effective September 30 at an initial price of $100 per Class A unit. The initial closing occurred October 7; by November 5, 131,302 units had been issued for approximately $13.130 million gross proceeds. Units began trading on NYSE American under “OZ” on October 18.
- After quarter-end, the company completed its merger with Belpointe REIT, cancelled the secured notes, and acquired the Nashville No. 2 site for approximately $20.825 million, excluding transaction costs. As of November 5, 1,381,094 Class A units were outstanding.
Outlook, risks, and unusual items
- The company depends on proceeds from its best-efforts public offering, affiliate expense advances, financing, and operating funds to support operations and investments. Failure to raise substantial offering proceeds could limit investment diversification and pressure income and distributions.
- Management targets aggregate property-level leverage of 50%–70% of the greater of cost or fair market value after a substantial stabilized portfolio is acquired; it may use greater leverage during acquisition and development. No debt was presented on the September 30 balance sheet, but future borrowing is part of the strategy.
- Management expects to begin quarterly NAV calculations no later than the first quarter after December 31, 2022, with offering-price adjustments if NAV differs from the current price. The board may choose to begin earlier. No earnings or distribution guidance was provided.
- COVID-19 and its variants, real estate market and financing conditions, interest rates, tenant demand, development and acquisition execution, offering proceeds, and compliance with qualified opportunity fund rules are cited risks. Real estate illiquidity and reliance on the Manager and Sponsor are also relevant.
- Related-party arrangements include affiliate loans and reimbursements, asset-management and development fees, and a $24.773 million, 5% secured loan to a Sponsor affiliate. The Manager holds Class B units entitled to 5% of certain gains and a Class M unit with substantial voting power but no distribution rights.
- The filing reports no material litigation or material off-balance-sheet arrangements. Management concluded disclosure controls were effective at the reasonable-assurance level. The cover page marks “No” for having filed all required reports during the preceding 12 months; investors may wish to clarify this status in light of the company’s recent formation and reporting history.
Most important facts for investors to verify
- Confirm the post-merger capital structure, unit count, and effect of the October offering and merger issuances.
- Review subsequent offering proceeds against the company’s funding needs, development commitments, and planned investment pipeline.
- Assess the status, costs, financing, and expected timelines of development projects, including Nashville No. 2 and the St. Petersburg properties.
- Examine related-party loan terms, fees, reimbursements, governance rights, and potential conflicts of interest.
- Confirm the cancellation and discharge of the secured notes and monitor any replacement or property-level debt.
- Consider that 2021 results are early-stage, comparisons with 2020 are limited, and the interim financial statements were unaudited and not reviewed.