Business Overview and History
Belpointe PREP, LLC (OZ) is the first and only publicly traded qualified opportunity fund listed on a national securities exchange. The company’s unique positioning as an opportunity zone-focused real estate investment trust has allowed it to strategically capitalize on the growing demand for commercial real estate development and redevelopment within designated opportunity zones across the United States.
Belpointe PREP, LLC was formed on January 24, 2020, as a Delaware limited liability company and has been treated as a partnership for U.S. federal income tax purposes since its 2020 tax year. The company is focused on identifying, acquiring, developing or redeveloping, and managing commercial real estate located within qualified opportunity zones.
In September 2021, the company’s registration statement for an initial public offering of up to $750 million of its Class A units was declared effective by the SEC. This allowed Belpointe PREP to raise capital through the sale of its units on a continuous best efforts basis. From October 2021 through December 2023, the company raised $233.5 million in net offering proceeds through this initial public offering.
In 2022, Belpointe PREP faced a challenge when it incurred a $4.1 million impairment charge on one of its real estate assets located in Nashville, Tennessee. This was due to the company’s conclusion that the estimated fair market value of the asset was lower than the carrying value. Despite this setback, Belpointe PREP continued to grow its portfolio of multifamily and mixed-use rental properties.
By the end of 2023, Belpointe PREP had raised total gross offering cash proceeds of $356 million across its initial public offering and subsequent follow-on offerings. The company deployed this capital into the acquisition and development of several commercial real estate projects in markets such as Sarasota, Florida, St. Petersburg, Florida, Nashville, Tennessee, and Storrs, Connecticut.
In May 2023, Belpointe PREP launched a $750 million continuous “at-the-market” follow-on offering, further bolstering its access to capital and ability to execute on its growth strategy.
Belpointe PREP’s investment portfolio currently consists of several multifamily and mixed-use rental properties located in opportunity zones across the Southeast and Northeast regions of the United States. Key projects include the $187.7 million Aster Links development in Sarasota, Florida, the $140 million Viv project in St. Petersburg, Florida, and the $19.7 million 900 8th Avenue South redevelopment in Nashville, Tennessee.
Financial Performance and Liquidity
For the fiscal year ended December 31, 2023, Belpointe PREP reported total revenue of $2.25 million and a net loss of $14.36 million. The company’s balance sheet as of the same date reflected total assets of $382.12 million, including $353.54 million in investment properties, and total liabilities of $57.05 million. Belpointe PREP’s cash and cash equivalents position stood at $20.12 million.
During the nine months ended September 30, 2024, the company generated $1.58 million in rental revenue but incurred a net loss of $15.62 million. As of September 30, 2024, Belpointe PREP had total assets of $495.68 million, including $463.82 million in real estate, net, and $23.99 million in cash and cash equivalents. Total liabilities stood at $184.71 million.
The company’s leverage ratio, as measured by total debt to total capitalization, was 0.296 as of December 31, 2023, and 0.322 as of September 30, 2024. Belpointe PREP’s interest coverage ratio was -1.77 for the nine months ended September 30, 2024.
In the most recent quarter ended September 30, 2024, Belpointe PREP reported revenue of $860,000 and a net loss of $6.93 million. The company’s operating cash flow (OCF) and free cash flow (FCF) for the quarter were both negative $3.33 million. Notably, the company’s revenue increased by 84% compared to the same quarter in the prior year, primarily due to the lease-up of certain residential units and retail spaces at the Aster Links development project. However, the net loss also increased by 110% year-over-year, mainly attributable to higher property expenses and interest expense.
The company’s debt-to-equity ratio as of September 30, 2024, was 0.475, indicating a moderate level of leverage. Belpointe PREP’s liquidity position included $23.99 million in cash and significant construction loan capacity, with $130 million available under the 1991 Main Construction Loan and $104 million under the 1000 First Construction Loan. The company’s current ratio and quick ratio both stood at 0.61, suggesting potential short-term liquidity challenges.
Opportunity Zone Focus and Investment Strategy
Belpointe PREP’s exclusive focus on opportunity zone real estate investments sets it apart from traditional real estate investment trusts. By directing at least 90% of its assets towards qualified opportunity zone properties, the company is able to provide its investors with the potential for favorable capital gains tax treatment on their investments.
The company’s investment strategy revolves around identifying underutilized or distressed commercial real estate assets within designated opportunity zones, acquiring these properties, and then either developing or redeveloping them into modern, high-quality multifamily and mixed-use rental properties. Belpointe PREP’s in-house development expertise, combined with its external management team’s deep industry knowledge, has allowed the company to effectively execute on this strategy.
Risks and Challenges
Belpointe PREP’s business model is not without its risks and challenges. The company’s heavy concentration in opportunity zone real estate exposes it to potential legislative changes that could impact the tax benefits associated with these investments. Additionally, the company’s reliance on external financing, including construction loans and mezzanine debt, makes it vulnerable to fluctuations in interest rates and credit market conditions.
The COVID-19 pandemic also had a significant impact on Belpointe PREP’s operations, leading to construction delays, lease-up challenges, and increased costs. While the company has weathered the storm, the potential for future disruptions remains a concern.
Outlook and Conclusion
Despite the challenges, Belpointe PREP’s unique positioning as the only publicly traded qualified opportunity fund, coupled with its strong pipeline of development projects, positions the company for potential long-term growth. The company’s focus on high-growth markets, such as Florida and Tennessee, and its ability to capitalize on the tax advantages of opportunity zone investments could provide a competitive edge.
As Belpointe PREP continues to execute on its strategic plan, investors will be closely watching the company’s ability to navigate the evolving real estate market, manage its leverage, and deliver consistent financial performance. The company’s future success will likely hinge on its ability to effectively execute on its opportunity zone investment strategy while mitigating the various risks and challenges that come with this specialized real estate approach.
The significant year-over-year revenue growth in the most recent quarter, driven by the lease-up of the Aster Links project, demonstrates the potential of Belpointe PREP’s development strategy. However, the concurrent increase in net loss highlights the ongoing challenges of managing expenses and interest costs in a growing real estate portfolio. The company’s substantial construction loan capacity provides flexibility for future development projects, but careful management of leverage and liquidity will be crucial as Belpointe PREP aims to achieve profitability and sustainable growth in the coming years.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.