Belpointe PREP, LLC — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unless otherwise noted, financial amounts below are in millions of dollars. The company is an externally managed qualified opportunity fund focused on acquiring, developing and managing commercial real estate in qualified opportunity zones.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue, all rental | $0.312 | $0.247 | $0.641 | $0.401 |
| Total expenses | $2.663 | $0.290 | $5.495 | $0.563 |
| Interest income | $0.549 | — | $1.050 | — |
| Net loss | $(1.932) | $(0.066) | $(3.941) | $(0.201) |
| Net loss attributable to Belpointe PREP | $(1.886) | $(0.066) | $(3.902) | $(0.194) |
| Loss per Class A unit | $(0.56) | $(660) | $(1.15) | $(1,940) |
The 2021 per-unit loss figures reflect the filing’s reported weighted-average denominator of 100 units; investors should verify the presentation and comparability of these figures. Rental revenue increased 26% for the quarter and 60% for the half year, mainly from acquired properties. Expenses rose substantially, driven by management fees, property costs, and higher general and administrative costs as the portfolio and operations expanded. Rental revenue remained well below expenses; interest income from loans partly offset the losses. The filing does not provide a meaningful operating margin measure.
- Balance sheet: Total assets were $337.2 at June 30, 2022, versus $341.4 at year-end 2021. Real estate, net, was $147.9, including $98.7 of real estate under construction.
- Liquidity: Cash and cash equivalents were $147.1; cash plus restricted cash was $148.5. Loans receivable totaled $35.0, including a $30.0 affiliate loan. Total liabilities were $11.4.
- Debt: No debt remained at June 30. The $10.8 acquisition loan was repaid in April 2022.
- Cash flow, first half: Operating activities used $3.0; investing activities used $52.9; financing activities provided $12.0. Cash and restricted cash decreased $43.8.
Material changes and notable transactions
- The company issued 31,300 Class A units during the first half, raising $2.8 net proceeds. It also received $20.3 of previously unsettled subscriptions.
- Investing outflows included $35.0 of loan funding, $16.7 of real estate development, and $6.1 of real estate acquisitions. The company acquired a 70.2% controlling interest in CMC Storrs SPV, LLC, which holds a 60-acre development site in Connecticut.
- The company made a $30.0, 5% first-mortgage loan to Norpointe, an affiliate of its CEO. On June 28, the original loan was repaid and restructured through a majority-owned subsidiary as a new $30.0 loan, due June 28, 2023, at 5%. The company also held a $5.0, 6% secured loan to Visco, due February 2023.
- The $3.5 CMC loan, bearing 12% interest, was repaid with accrued interest in June. The company reported $1.1 of interest income for the first half, with most attributed to the Norpointe, CMC and Visco loans.
- Construction and redevelopment activity increased. The 1991 Main Street Sarasota project was under construction; management anticipated beginning leasing in Q4 2023 and completion by Q2 2024. A separate Sarasota project, 1700 Main, was on hold pending rezoning.
Outlook, risks and contingencies
Management gave no specific earnings or revenue guidance and said it could not estimate the effects of uncertain economic conditions on future results. It expected available capital, offering proceeds, potential construction or other financing, and operating cash flows to be sufficient for anticipated working capital and capital expenditures over the next 12 months and beyond.
- The filing cites rising interest rates and inflation, supply-chain disruptions, labor shortages, COVID-19 effects, the Russia-Ukraine conflict, and general economic uncertainty as risks to costs, financing, investment values and demand for multifamily and mixed-use rentals.
- For the 1991 Main redevelopment, the filing reports a $158.9 unfunded capital commitment under the construction management agreement, excluding capitalized interest, development fees and indirect project costs; $2.5 was outstanding and payable. Management separately estimated at least $209.9 of remaining construction and soft-cost funding. These figures describe different reported measures and should be reconciled.
- Management reported no material litigation and no material change to the risk factors in the 2021 Form 10-K. It reported effective disclosure controls as of June 30, 2022, and no material change in internal control over financial reporting.
- Related-party exposure is notable: the CEO-affiliated Norpointe borrower received the $30.0 loan, while the Manager and Sponsor affiliates earn management fees and receive reimbursements. The company reported $1.3 of management fees for the first half and $3.2 due to affiliates at June 30.
Most important facts for investors to verify
- Reconcile the $158.9 contractual unfunded commitment, the $2.5 payable, and management’s estimate of at least $209.9 in remaining project funding; assess available financing and construction-cost risk.
- Review the terms, collateral, repayment capacity and related-party governance for the $30.0 Norpointe loan, as well as the $5.0 Visco loan.
- Assess whether rental income from the acquired and developing properties can grow sufficiently to cover operating costs, management fees and future project spending.
- Confirm the source and intended use of liquidity as cash declined by $43.8 in the first half, including the extent to which offering proceeds or new financing will be needed.
- Verify the reported 2021 loss-per-unit figures and the company’s planned quarterly NAV calculation and offering-price adjustments, which were expected to begin no later than the first quarter after year-end 2022.