10-Q: Belpointe PREP, LLC Reports Third Quarter 2024 Results, Cites Progress in Development Projects

Belpointe PREP, LLC reported a net loss for the third quarter of 2024, while highlighting progress in its real estate development projects and increased rental revenue.

Summary

• Belpointe PREP, LLC, a publicly traded qualified opportunity fund, released its financial results for the third quarter of 2024, showing a net loss of $6.92 million, or $1.90 per Class A unit.
• The company's total revenue for the quarter was $860,000, with rental revenue contributing the majority of this amount.
• Total expenses for the quarter were $7.8 million, including property expenses, general and administrative costs, interest expense, depreciation and amortization, and impairment of real estate.
• For the nine months ended September 30, 2024, the company reported a net loss of $15.63 million, or $4.30 per Class A unit.
• The company's total revenue for the nine-month period was $1.58 million, with rental revenue being the primary source.
• Total expenses for the nine-month period were $17.37 million, including property expenses, general and administrative costs, interest expense, depreciation and amortization, and impairment of real estate.
• The company's real estate assets include land, buildings, improvements, furniture, fixtures, equipment, intangible assets, and real estate under construction.
• As of September 30, 2024, the company's total assets were $495.68 million, and total liabilities were $184.71 million.
• The company has issued 3,647,093 Class A units, 100,000 Class B units, and one Class M unit as of September 30, 2024.
• The company is focused on identifying, acquiring, developing, or redeveloping and managing commercial real estate located within qualified opportunity zones.

Sentiment

Score: 4

Explanation: The document presents mixed results. While there is progress in development projects and increased rental revenue, the company is still reporting significant net losses and has increased its debt. The future outlook is uncertain, and the company is subject to various risks. The sentiment is therefore cautiously negative.

Positives

• Rental revenue increased by 84% in the third quarter of 2024 compared to the same period in 2023, primarily due to the lease-up of Aster & Links.
• The company has made significant progress in its real estate development projects, with the completion of construction and commencement of lease-up at Aster & Links.
• The company has secured financing for its development projects through construction loans and mezzanine loans.
• The company has entered into interest rate cap agreements to mitigate exposure to increases in the one-month SOFR.
• The company's total assets have increased significantly from $382.12 million at the end of 2023 to $495.68 million as of September 30, 2024.

Negatives

• The company reported a net loss of $6.92 million for the third quarter of 2024 and a net loss of $15.63 million for the nine months ended September 30, 2024.
• Total expenses for the third quarter of 2024 were $7.8 million, significantly higher than the $3.78 million in the same period of 2023.
• The company's debt, net has increased significantly to $144.14 million as of September 30, 2024.
• The company has an unfunded capital commitment of $83.8 million under two development projects as of September 30, 2024.
• The company recorded an impairment charge of $0.8 million for the nine months ended September 30, 2024.

Risks

• The company's future performance is subject to various risks, including construction delays, delays in lease-up, changes in borrowing costs, inflation, and fluctuations in occupancy rates and market rents.
• The company's ability to access potential sources of liquidity may be adversely impacted by economic uncertainty, fluctuating interest rates, and volatility in the real estate markets.
• The company is dependent on its Manager and its affiliates for essential services, and any disruption in these services could negatively impact the company.
• The company is subject to various financial and operational covenants, including maintaining liquid assets of no less than $20.0 million and a net worth of no less than $130.0 million.
• The company's development projects are subject to risks associated with construction, including cost overruns and delays.

Future Outlook

The company's future performance is subject to various uncertainties, including market conditions, interest rates, and the success of its development projects. The company believes that its cash on-hand, the anticipated net proceeds from its Public Offerings, the projected cash flows from its real estate assets and its current and anticipated financing activities will be sufficient to meet its liquidity and capital resource requirements for the next 12 months.

Management Comments

• Our Manager continuously reviews our investment and financing strategies for optimization and to reduce our risk in the face of the fluidity of these and other factors.
• We believe that careful use of conservatively structured leverage will help us to achieve our diversification goals and potentially enhance the returns on our investments.

Industry Context

The company operates in the real estate industry, specifically focusing on multifamily and mixed-use rental properties within qualified opportunity zones. The market conditions for these types of properties have remained strong, but are subject to uncertainty due to various factors such as construction delays, interest rates, and economic conditions. The company is the only publicly traded qualified opportunity fund listed on a national securities exchange.

Comparison to Industry Standards

• The company's financial performance is compared to its own prior periods, but no specific industry benchmarks are provided in the document.
• The company's leverage policy targets aggregate property-level leverage between 50-70% of the greater of the cost or fair market value of its assets, which is a common practice in the real estate industry.
• The company's development projects are compared to similar projects in their respective geographic markets, but no specific comparable companies or projects are listed.
• The company's management fees are based on a percentage of its NAV, which is a common practice in the real estate investment industry.

Related Party Transactions

• The company has entered into various related party transactions, including loans from affiliates, management fees, development fees, and insurance brokerage services.
• The company has a management agreement with Belpointe PREP Manager, LLC, an affiliate of its sponsor, Belpointe, LLC.
• The company reimburses its Manager, Sponsor, and their respective affiliates for expenses incurred on its behalf.
• Certain family members of the Chief Executive Officer hold a non-controlling beneficial interest in Belpointe Specialty Insurance, LLC, which acts as the company's insurance broker.

Stakeholder Impact

• Shareholders are impacted by the company's financial performance, including net losses and changes in unit value.
• Employees of the company's Manager and its affiliates are impacted by the company's reimbursement of expenses and management fees.
• Tenants of the company's properties are impacted by the company's development and management of its real estate assets.
• Lenders are impacted by the company's debt obligations and compliance with loan covenants.
• The company's suppliers and contractors are impacted by the company's development projects and payment of invoices.

Next Steps

• The company will continue to develop its real estate projects, including Aster & Links and Viv.
• The company will continue to lease up its properties and generate rental revenue.
• The company will continue to monitor market conditions and adjust its investment and financing strategies as needed.
• The company will continue to seek additional capital through its public offerings and other financing activities.

Key Dates

Keywords

Real Estate, Opportunity Zones, Development, Multifamily, Construction, Rental Revenue, Debt, Interest Rates, Financial Results, Belpointe PREP