Belpointe PREP, LLC — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; filed November 14, 2023. Amounts below are in U.S. dollars. Financial statements are unaudited.
Business context
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 development-stage multifamily and mixed-use properties. The company reported 3,579,511 Class A units outstanding at September 30, 2023.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $468,000 | $338,000 | $1.743 million | $979,000 |
| Net loss | $(3.302) million | $(1.330) million | $(10.180) million | $(5.271) million |
| Net loss attributable to Belpointe PREP | $(3.284) million | $(1.045) million | $(10.174) million | $(4.947) million |
| Loss per Class A unit | $(0.92) | $(0.30) | $(2.87) | $(1.45) |
| Operating cash flow | Not presented quarterly | $(5.243) million | $(4.483) million |
Revenue remains modest relative to expenses, so a positive operating margin is not reported. Q3 expenses rose 79% to $3.782 million; nine-month expenses rose 60% to $12.142 million. The nine-month results included $2.961 million of real estate impairment, versus none in 2022.
At September 30, total assets were $361.227 million, including $313.209 million of net real estate, of which $250.432 million was under construction. Total liabilities were $34.973 million and members’ capital was $326.254 million. Reported debt was approximately $1,000; the $130 million 1991 Main construction facility had less than $100,000 drawn at quarter-end. Cash and cash equivalents were $15.743 million; restricted cash was $23.939 million, for combined cash and restricted cash of $39.682 million. Combined cash declined $105.285 million during the first nine months.
Changes versus prior comparable periods
- Nine-month revenue increased 78% to $1.743 million, primarily reflecting acquired properties and accelerated recognition of below-market lease intangibles after tenants vacated 901–909 Central Avenue.
- Nine-month net loss attributable to the company more than doubled to $10.174 million. The increase reflected higher general and administrative costs, depreciation and amortization, and the $2.961 million impairment; lower interest income also contributed. Prior-year interest income included income from loans repaid during 2022.
- Investing cash outflow increased to $101.231 million from $62.950 million, primarily due to development spending. Real estate under construction increased from $133.898 million at year-end 2022 to $250.432 million.
- Cash and restricted cash fell from $144.967 million at year-end 2022. The quarter-end cash figure includes $20 million restricted to meet a construction-loan liquidity covenant.
- The company acquired a Sarasota land parcel for $4.9 million in August and obtained 100% indirect ownership of CMC Storrs after a partner forfeited its interest.
Outlook, risks and unusual items
- Development plans: Management expected initial occupancy at Aster & Links in the first half of 2024 and construction completion by year-end 2024. It estimated at least $119 million of remaining construction and soft costs for 1991 Main. For Viv, it estimated at least $151.6 million of remaining funding needs. These are estimates, not guarantees.
- Funding and commitments: Two development projects had $116 million of aggregate unfunded construction commitments; $20.8 million, including $9.3 million of retainage, was outstanding and payable. Management stated available capital resources were expected to cover anticipated working capital and capital expenditures for the next 12 months and beyond, while identifying offerings, financing and operating cash flow as funding sources.
- Interest-rate exposure: The 1991 Main facility bears interest at one-month SOFR plus 3.45%, with a minimum all-in rate of 8.51%, and matures in May 2027 with a conditional one-year extension. A required interest-rate cap had a 5.07% strike and July 2024 maturity. The company reported compliance with the guaranty covenants at quarter-end, including minimum liquid assets of $20 million and net worth of $130 million.
- Post-quarter financing: On October 30, the company borrowed $1.5 million from an entity with family ties to the CEO, under an unsecured note bearing 4.5% interest and maturing March 31, 2024. On November 8, it drew $12 million on the 1991 Main facility.
- Impairment and project risk: A Nashville asset was written down by $3 million after estimated fair value fell below carrying value. Development schedules, costs, property values and leasing remain subject to economic conditions, inflation, interest rates, credit availability, insurance costs, supply-chain disruptions and labor shortages. The 1700 Main project remains on hold pending Sarasota rezoning.
- Related parties: The Manager and affiliates provide management, development and other services. Nine-month management fees were $2.0 million; $7.5 million of development fees and $1.2 million of employee reimbursements were payable to affiliates at quarter-end. The filing also describes development arrangements involving entities in which immediate family members of the CEO have passive minority interests.
- Other disclosures: No material litigation was reported, and management reported effective disclosure controls. The filing states that risk factors had not materially changed from the 2022 Form 10-K. No formal earnings guidance was provided.
Important facts for investors to verify
- Construction progress, remaining cost estimates, project commitments and the timing of expected occupancy and completion.
- Available unrestricted liquidity after excluding restricted cash, and compliance with the $20 million liquidity covenant and $130 million net-worth covenant.
- Actual borrowing and interest costs under the variable-rate 1991 Main facility, including the effect of SOFR and the interest-rate cap’s expiration.
- Assumptions and valuation supporting the Nashville impairment, and whether additional impairment indicators arise.
- Terms, balances and governance of related-party fees, development agreements and the post-quarter $1.5 million affiliate loan.
- Public offering progress: the follow-on offering had no sales through September 30, 2023, and $517.7 million remained unsold under the primary offering.