UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2003
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Commission File No. 000-50258
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Belrose Capital Fund LLC
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(Exact name of registrant as specified in its charter)
Delaware 04-3613468
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(State of organization) (I.R.S. Employer Identification No.)
The Eaton Vance Building
255 State Street
Boston, Massachusetts 02109
--------------------- -----
(Address of principal executive
offices) (Zip Code)
617-482-8260
Registrant's telephone number: ------------
None
----
(Former Name, Former Address and Former Fiscal Year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
--- ---
BELROSE CAPITAL FUND LLC
Index to Form 10-Q
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements.........................3
Condensed Consolidated Statements of Assets and Liabilities
as of June 30, 2003 (Unaudited) and December 31, 2002...............3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months Ended June 30, 2003 and 2002 and for the
Six Months Ended June 30, 2003 and the Period Ended
June 30, 2002.......................................................4
Condensed Consolidated Statements of Changes in Net Assets
(Unaudited) for the Six Months Ended June 30, 2003 and the
Period Ended June 30, 2002..........................................6
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 2003 and for the Period
Ended June 30, 2002.................................................7
Financial Highlights (Unaudited) for the Six Months Ended
June 30, 2003.......................................................9
Notes to Condensed Consolidated Financial Statements as of
June 30, 2003 (Unaudited)...........................................10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........21
Item 4. Controls and Procedures.............................................22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................22
Item 2. Changes in Securities and Use of Proceeds...........................22
Item 3. Defaults Upon Senior Securities.....................................22
Item 4. Submission of Matters to a Vote of Security Holders.................23
Item 5. Other Information...................................................23
Item 6. Exhibits and Reports on Form 8-K....................................23
SIGNATURES....................................................................24
EXHIBIT INDEX.................................................................25
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
- ----------------------------------------------------
BELROSE CAPITAL FUND LLC
Condensed Consolidated Statements of Assets and Liabilities
June 30, 2003 December 31,
(Unaudited) 2002
Assets:
Investment in Belvedere Capital Fund Company LLC
(Belvedere Capital) $1,450,899,286 $1,264,314,536
Investment in Partnership Preference Units 57,054,894 41,849,305
Investment in other real estate 471,767,831 470,597,295
Investment in short-term 1,402,053 -
-------------- --------------
Total investments $1,981,124,064 $1,776,761,136
Cash 7,414,830 7,214,141
Escrow deposits - restricted 2,636,428 3,239,060
Dividends and interest receivable 400,957 440,053
Other assets 3,328,997 3,553,337
-------------- --------------
Total assets $1,994,905,276 $1,791,207,727
-------------- --------------
Liabilities:
Loan payable - Credit Facility $ 168,300,000 $ 155,300,000
Mortgages payable 344,219,483 344,219,483
Open interest rate swap contracts, at value 16,495,158 11,552,842
Security deposits 1,023,412 1,012,016
Swap interest payable 157,674 129,883
Accrued expenses:
Interest expense 2,469,519 2,438,911
Property taxes 2,678,578 2,575,189
Other expenses and liabilities 2,023,774 2,546,403
Minority interests in controlled subsidiaries 25,862,569 29,431,345
-------------- --------------
Total liabilities $ 563,230,167 $ 549,206,072
-------------- --------------
Net assets $1,431,675,109 $1,242,001,655
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Shareholders' Capital $1,431,675,109 $1,242,001,655
-------------- --------------
Shares Outstanding 17,159,761 16,160,271
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Net asset value and redemption price per Share $ 83.43 $ 76.86
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See notes to unaudited condensed consolidated financial statements
3
BELROSE CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Three Months Six Months
Ended June 30, Ended June 30, Ended June 30, Period Ended
2003 2003 2003 June 30, 2002*
-------------- -------------- -------------- --------------
Investment Income:
Dividends allocated from Belvedere Capital
(net of foreign taxes of $92,084, $18,831,
$151,447 and $20,270, respectively) $ 5,063,208 $1,291,504 $ 9,806,609 $ 1,361,486
Interest allocated from Belvedere Capital 158,393 30,739 246,968 32,515
Expenses allocated from Belvedere Capital (2,128,086) (617,205) (4,044,132) (677,714)
-------------- -------------- -------------- --------------
Net investment income allocated from
Belvedere Capital $ 3,093,515 $ 705,038 $ 6,009,445 $ 716,287
Rental income 16,086,495 9,078,119 32,420,280 10,882,832
Dividends from Partnership Preference Units 1,198,457 87,050 2,195,038 124,881
Interest 26,591 15,886 46,376 23,996
-------------- -------------- -------------- --------------
Total investment income $20,405,058 $ 9,886,093 $40,671,139 $11,747,996
-------------- -------------- -------------- --------------
Expenses:
Investment advisory and administrative fees $ 1,234,123 $ 421,815 $ 2,368,839 $ 462,828
Property management fees 649,248 366,756 1,301,734 438,944
Distribution and servicing fees 684,681 196,723 1,296,752 215,451
Interest expense on mortgages 6,579,443 3,584,061 13,158,882 4,339,276
Interest expense on Credit Facility 748,300 367,308 1,480,592 408,328
Interest expense on swap contracts 1,131,355 414,122 2,182,638 453,709
Property and maintenance expenses 4,471,340 2,311,955 8,728,038 2,738,384
Property taxes and insurance 2,126,971 1,154,520 4,316,313 1,362,901
Organizational expenses - (13,474) - 668,356
Miscellaneous 313,876 252,400 585,711 342,971
-------------- -------------- -------------- --------------
Total expenses 17,939,337 $ 9,056,186 $35,419,499 $11,431,148
Deduct-
Reduction of investment advisory and
administrative fees 344,919 99,996 650,361 109,304
-------------- -------------- -------------- --------------
Net expenses $17,594,418 $ 8,956,190 $34,769,138 $11,321,844
-------------- -------------- -------------- --------------
Net investment income before minority
interests in net income of controlled
subsidiaries $ 2,810,640 $ 929,903 $ 5,902,001 $ 426,152
Minority interests in net income of
controlled subsidiaries (458,996) (369,566) (973,697) (439,222)
-------------- -------------- -------------- --------------
Net investment income (loss) $ 2,351,644 $ 560,337 $ 4,928,304 $ (13,070)
-------------- -------------- -------------- --------------
* For the period from start of business, March 19, 2002, to June 30, 2002.
See notes to unaudited condensed consolidated financial statements
4
BELROSE CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited) (Continued)
Three Months Three Months Six Months
Ended June 30, Ended June 30, Ended June 30, Period Ended
2003 2003 2003 June 30, 2002*
-------------- -------------- -------------- --------------
Realized and Unrealized Gain (Loss)
Net realized gain (loss) -
Investment transactions from Belvedere
Capital (identified cost basis) $ 2,425,286 $ (2,043,241) $ (2,920,634) $ (2,018,261)
-------------- -------------- -------------- --------------
Net realized gain (loss) $ 2,425,286 $ (2,043,241) $ (2,920,634) $ (2,018,261)
-------------- -------------- -------------- --------------
Change in unrealized appreciation
(depreciation) -
Investment in Belvedere Capital
(identified cost basis) $166,965,607 $(59,171,661) $109,175,976 $(62,139,774)
Investments in Partnership Preference Units
(identified cost basis) 2,211,391 143,081 7,171,989 104,770
Investments in other real estate
(net of minority interests in unrealized
gain (loss) of controlled subsidiaries of
$86,763, $(293,643), $(4,648,190)
and $189,811, respectively) 3,138,098 (333,263) 3,947,885 (1,988,148)
Interest rate swap contracts (4,300,825) (2,634,124) (4,942,316) (2,705,772)
-------------- ------------- -------------- --------------
Net change in unrealized appreciation
(depreciation) $168,014,271 $(61,995,967) $115,353,534 $(66,728,924)
-------------- ------------- -------------- --------------
Net realized and unrealized gain (loss) $170,439,557 $(64,039,208) $112,432,900 $(68,747,185)
-------------- ------------- -------------- --------------
Net increase (decrease) in net assets from
operations $172,791,201 $(63,478,871) $117,361,204 $(68,760,255)
============== ============= ============== ==============
* For the period from start of business, March 19, 2002, to June 30, 2002.
See notes to unaudited condensed consolidated financial statements
5
BELROSE CAPITAL FUND LLC
Condensed Consolidated Statements of Changes in Net Assets (Unaudited)
Six Months
Ended June 30, Period Ended
2003 June 30, 2002*
-------------- --------------
Increase (Decrease) in Net Assets:
Net investment income (loss) $ 4,928,304 $ (13,070)
Net realized loss from investment transactions (2,920,634) (2,018,261)
Net change in unrealized appreciation (deprectiaion)
of investments 115,353,534 (66,728,924)
-------------- --------------
Net increase (decrease) in net assets from operations $ 117,361,204 $(68,760,255)
-------------- --------------
Transactions in Fund Shares -
Investment securities contributeded $ 95,047,136 $620,414,330
Less - Selling commissions (325,083) (3,008,539)
-------------- --------------
Net contributions $ 94,722,053 $617,405,791
Net asset value of Fund Shares issued to Shareholders in
payment of distributions declared $ 348,050 $ -
Net asset value of Fund Shares redeemed (21,949,839) (413,395)
-------------- --------------
Net increase in net assets from Fund Share transactions $ 73,120,264 $616,992,396
-------------- --------------
Distributions -
Distributions to Shareholders $ (808,014) $ -
-------------- --------------
Total distributions $ (808,014) $ -
-------------- --------------
Net increase in net assets $ 189,673,454 $548,232,141
Net assets:
At beginning of period $1,242,001,655 $ -
-------------- --------------
At end of period $1,431,675,109 $548,232,141
============== ==============
* For the period from start of business, March 19, 2002, to June 30, 2002.
See notes to unaudited condensed consolidated financial statements
6
BELROSE CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months
Ended June 30, Period Ended
2003 June 30, 2002*
-------------- --------------
Cash Flows From (For) Operating Activities -
Net increase (decrease) in net assets from operations $117,361,204 $(68,760,255)
Adjustments to reconcile net increase (decrease) in net assets from operations
to net cash flows for operating activities -
Amortization of debt issuance costs 206,617 51,774
Net investment income allocated from Belvedere Capital (6,009,445) (716,287)
Decrease in escrow deposits 602,632 883,869
Decrease in other assets 17,723 7,594
Decrease (increase) in dividends and interest receivable 39,096 (38,138)
Increase in interest payable for open swap contracts 27,791 71,804
(Decrease) increase in security deposits, accrued interest and
other expenses and liabilities (480,625) 263,006
Increase in accrued property taxes 103,389 733,374
Purchases of Partnership Preference Units (8,033,600) (3,547,905)
Payments for investments in other real estate - (64,553,951)
Cash assumed in connection with acquisition of other real estate - 3,625,569
Improvements to rental property (1,870,841) (513,245)
Increase in short-term investments (1,402,053) -
Net decrease (increase) in investment in Belvedere Capital 1,651,420 (312,357)
Increase in minority interest - 210,000
Minority interests in net income of controlled subsidiaries 973,697 439,222
Net realized loss from investment transactions 2,920,634 2,018,261
Net change in unrealized (appreciation) depreciation of investments (115,353,534) 66,728,924
-------------- --------------
Net cash flows for operating activities $ (9,245,895) $(63,408,741)
Cash Flows From (For) Financing Activities -
Proceeds from Credit Facility $ 13,000,000 $ 73,000,000
Cash contribution from Investment Adviser - 10,000
Payments on behalf of investors (selling commissions) (325,083) (3,008,539)
Payments for Fund Shares redeemed (2,874,086) (413,395)
Payment of distributions to minority shareholders - (19,572)
Distributions paid to Shareholders (459,964) -
Capital contributed to controlled subsidiaries 105,717 -
-------------- --------------
Net cash flows from financing activities $ 9,446,584 $ 69,568,494
Net increase in cash $ 200,689 $ 6,159,753
Cash at beginning of period $ 7,214,141 $ -
-------------- --------------
Cash at end of period $ 7,414,830 $ 6,159,753
============== ==============
* For the period from start of business, March 19, 2002, to June 30, 2002.
See notes to unaudited condensed consolidated financial statements
7
BELROSE CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
Six Months
Ended June 30, Period Ended
2003 June 30, 2002*
-------------- --------------
Supplemental Disclosure and Non-cash Investing and
Financing Activities -
Securities contributed by Shareholders, invested in Belvedere Capital $ 95,047,136 $620,414,330
Interest paid on loan - Credit Facility $ 1,389,862 $ 206,246
Interest paid on mortgages $ 12,952,265 $ 2,889,075
Interest paid on swap contracts $ 2,154,847 $ 381,905
Market value of securities distributed in payment of redemptions $ 19,075,753 $ -
Market value of real property and other assets, net of current
liabilities, assumed in conjunction with acquisition of other
real estate $ - $317,807,773
Mortgage assumed in conjunction with acquisition of other real estate $ - $223,219,483
* For the period from start of business, March 19, 2002, to June 30, 2002.
See notes to unaudited condensed consolidated financial statements
8
BELROSE CAPITAL FUND LLC as of June 30, 2003
Condensed Consolidated Financial Statements (Continued)
Financial Highlights (Unaudited)
For the Six Months Ended June 30, 2003
- --------------------------------------------------------------------------------
Net asset value - Beginning of period $ 76.860
- --------------------------------------------------------------------------------
Income (loss) from operations
- --------------------------------------------------------------------------------
Net investment income (6) $ 0.291
Net realized and unrealized gain 6.329
- --------------------------------------------------------------------------------
Total income from operations $ 6.620
- --------------------------------------------------------------------------------
Distributions
- --------------------------------------------------------------------------------
Distributions to Shareholders $ (0.050)
- --------------------------------------------------------------------------------
Total distributions $ (0.050)
- --------------------------------------------------------------------------------
Net asset value - End of period $ 83.430
- --------------------------------------------------------------------------------
Total Return (1) 8.62%
- --------------------------------------------------------------------------------
As a Percentage As a Percentage
of Average Net of Average Gross
Assets(5) Assets (2)(5)
- -----------------------------------------------------------------------------------------------------------------------
Expenses of Consolidated Real Property Subsidiaries
Interest and other borrowing costs (7) 1.64% (8) 1.21% (8)
Operating expenses (7) 1.80% (8) 1.33% (8)
Belrose Capital Fund LLC Expenses
Interest and other borrowing costs (4) 0.56% (8) 0.42% (8)
Investment advisory and administrative fees, servicing fees
and other Fund operating expenses (3)(4) 1.15% (8) 0.86% (8)
-----------------------------------------
Total expenses 5.15% (8) 3.82% (8)
Net investment income 0.76% (8) 0.56% (8)
- -----------------------------------------------------------------------------------------------------------------------
Supplemental Data
Net assets, end of period (000's omitted) $ 1,431,675
Portfolio Turnover of Tax-Managed Growth Portfolio (the Portfolio) 11%
- -----------------------------------------------------------------------------------------------------------------------
(1) Returns are calculated by determining the percentage change in net asset
value with all distributions reinvested. Total return is not computed on an
annualized basis.
(2) Average Gross Assets is defined as the average daily amount of all assets
of Belrose Capital Fund LLC (Belrose Capital) (including Belrose Capital's
interest in Belvedere Capital Fund Company LLC (Belvedere Capital) and
Belrose Capital's ratable share of the assets of its directly and
indirectly controlled subsidiaries), without reduction by any liabilities.
For this purpose, the assets of Belrose Realty Corporation's (Belrose
Realty) controlled subsidiaries are reduced by the proportionate interests
therein of investors other than Belrose Realty.
(3) Includes Belrose Capital's share of Belvedere Capital's allocated expenses,
including those expenses allocated from the Portfolio.
(4) Includes the expenses of Belrose Capital and Belrose Realty. Does not
include expenses of the real estate subsidiaries majority-owned by Belrose
Realty.
(5) For the purpose of calculating ratios, the income and expenses of Belrose
Realty's controlled subsidiaries are reduced by the proportionate interest
therein of investors other than Belrose Realty.
(6) Calculated using average shares outstanding.
(7) Includes Belrose Realty's proportional share of expenses incurred by its
majority-owned subsidiaries.
(8) Annualized.
See notes to unaudited condensed consolidated financial statements
9
BELROSE CAPITAL FUND LLC as of June 30, 2003 Notes to Condensed Consolidated
Financial Statements (Unaudited)
1 Basis of Presentation
The condensed consolidated interim financial statements of Belrose Capital Fund
LLC (Belrose Capital) and its subsidiaries (collectively, the Fund) have been
prepared by the Fund, without audit, in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally included
in annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted as permitted by such rules and regulations. All adjustments, consisting
of normal recurring adjustments, have been included. Management believes that
the disclosures are adequate to present fairly the financial position, results
of operations, cash flows and financial highlights at the dates and for the
periods presented. It is suggested that these interim financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Fund's registration statement on Form 10. Results for interim periods are
not necessarily indicative of those to be expected for the full fiscal year.
The balance sheet at December 31, 2002 has been derived from the December 31,
2002 audited financial statements but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements as permitted by the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Certain amounts in the prior period's condensed consolidated financial
statements have been reclassified to conform with the current period
presentation.
2 Estate Freeze
Shareholders in Belrose Capital are entitled to restructure their Fund Share
interests under what is termed an Estate Freeze Election. Under this election,
Fund Shares are divided into Preferred Shares and Common Shares. Preferred
Shares have a preferential right over the corresponding Common Shares equal to
(i) 95% of the original capital contribution made in respect of the undivided
Shares from which the Preferred Shares and Common Shares were derived, plus (ii)
an annuity priority return equal to 7.75% of the Preferred Shares' preferential
interest in the original capital contribution of the undivided Fund Shares. The
associated Common Shares are entitled to the remaining 5% of the original
capital contribution in respect of the undivided Shares, plus any returns
thereon in excess of the fixed annual priority of the Preferred Shares. The
existence of restructured Fund Shares does not adversely affect Shareholders who
do not make an election nor do the restructured Fund Shares have preferential
rights to Fund Shares that have not been restructured. Shareholders who
subdivide Fund Shares under this election sacrifice certain rights and
privileges that they would otherwise have with respect to the Fund Shares so
divided, including redemption rights and voting and consent rights. Upon the
twentieth anniversary of the issuance of the associated undivided Fund Shares to
the original holders thereof, Preferred and Common Shares will automatically
convert into full and fractional undivided Fund Shares. The allocation of
Belrose Capital's net asset value per Share of $83.43 as of June 30, 2003,
between Preferred and Common shares that have been restructured is as follows:
Per Share Value At
June 30, 2003
----------------------------------------------
----------------------------------------------
Preferred Common
Date of Contribution Shares Shares
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
February 19, 2003 $ 72.06 $ 11.37
10
3 Investment Transactions
The following table summarizes the Fund's investment transactions for the six
months ended June 30, 2003 and the period from the start of business, March 19,
2002, to June 30, 2002:
Six Months Ended Period Ended
Investment Transaction June 30, 2003 June 30, 2002
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Increases in investment in Belvedere Capital $ 95,047,136 $ 625,682,005
Decreases in investment in Belvedere Capital $ 20,727,173 $ 4,965,318
Purchases of Partnership Preference Units $ 8,033,600 $ 3,547,905
Acquisitions of other real estate $ - $ 64,553,951
Purchases of Partnership Preference Units during the six months ended June 30,
2003 and the period from the start of business, March 19, 2002, to June 30,
2002, represent Partnership Preference Units purchased from other funds
sponsored by Eaton Vance Management (Eaton Vance). Acquisitions of other real
estate investments represent Real Estate Joint Ventures purchased from other
funds sponsored by Eaton Vance for the period from the start of business, March
19, 2002, to June 30, 2002.
4 Indirect Investment in Portfolio
The following table summarizes the Fund's investment in Tax-Managed Growth
Portfolio (the Portfolio) through Belvedere Capital Fund Company LLC (Belvedere
Capital), for the six months ended June 30, 2003 and for the period from the
start of business, March 19, 2002, to June 30, 2002, including allocations of
income and expenses for the respective periods then ended:
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Belvedere Capital's interest in the Portfolio (1) $9,599,217,401 $9,414,074,868
The Fund's investment in Belvedere Capital (2) $1,450,899,286 $ 557,274,939
Income allocated to Belvedere Capital from the Portfolio $ 66,798,353 $ 34,543,981
Income allocated to the Fund from Belvedere Capital $ 10,053,577 $ 1,394,001
Expenses allocated to Belvedere Capital from the Portfolio $ 20,113,419 $ 12,969,381
Expenses allocated to the Fund from Belvedere Capital $ 4,044,132 $ 677,714
- -----------------------------------------------------------------------------------------------------------------------
(1) As of June 30, 2003 and 2002, the value of Belvedere Capital's interest in
the Portfolio represents 61.7% and 57.0% of the Portfolio's net assets,
respectively.
(2) As of June 30, 2003 and 2002, the Fund's investment in Belvedere Capital
represents 15.1% and 5.9% of Belvedere Capital's net assets, respectively.
A summary of the Portfolio's Statement of Assets and Liabilities at June 30,
2003, December 31, 2002 and June 30, 2002 and its operations for the six months
ended June 30, 2003, for the period from the Fund's start of business, March 19,
2002, to December 31, 2002 and for the period from the Fund's start of business,
March 19, 2002, to June 30, 2002 follows:
June 30, December 31, June 30,
2003 2002 2002
-------------------------------------------------------------------
Investments, at value $15,616,951,272 $ 14,544,149,182 $ 16,438,266,069
Other assets 26,660,614 70,073,039 258,245,026
- -------------------------------------------------------------------------------------------------------
Total assets $15,643,611,886 $ 14,614,222,221 $ 16,696,511,095
Total liabilities 93,843,137 42,700,633 171,302,142
- -------------------------------------------------------------------------------------------------------
Net assets $15,549,768,749 $ 14,571,521,588 $ 16,525,208,953
=======================================================================================================
Dividends and interest $ 109,393,140 $ 213,292,082 $ 104,789,317
- -------------------------------------------------------------------------------------------------------
Investment adviser fee $ 31,979,032 $ 71,564,552 $ 38,983,369
Other expenses 985,298 2,577,489 1,249,484
- -------------------------------------------------------------------------------------------------------
Total expenses $ 32,964,330 $ 74,142,041 $ 40,232,853
- -------------------------------------------------------------------------------------------------------
Net investment income $ 76,428,810 $ 139,150,041 $ 64,556,464
Net realized losses (29,306,399) (459,996,840) (198,388,599)
11
Net change in unrealized
appreciation (depreciation) 1,126,151,279 $(3,312,547,564) (1,921,047,828)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations $ 1,173,273,690 $(3,633,394,363) $(2,054,879,963)
- -------------------------------------------------------------------------------------------------------
5 Interest Rate Swap Agreements
Belrose Capital has entered into current and forward interest rate swap
agreements in connection with its real estate investments and the associated
borrowings. Under such agreements, Belrose Capital has agreed to make periodic
payments at fixed rates in exchange for payments at floating rates. The notional
or contractual amounts of these instruments may not necessarily represent the
amounts potentially subject to risk. The measurement of the risks associated
with these investments is meaningful only when considered in conjunction with
all related assets, liabilities and agreements. As of June 30, 2003 and December
31, 2002, Belrose Capital has entered into interest rate swap agreements with
Merrill Lynch Capital Services, Inc., as listed below.
Notional Unrealized Unrealized
Amount Depreciation Depreciation
Effective (000's Fixed Floating Termination at June 30, at December 31,
Date omitted) Rate Rate Date 2003 2002
- -----------------------------------------------------------------------------------------------------------------
03/02 $ 35,136 5.660% LIBOR + 0.38% 03/07 $3,925,182 $ 3,478,871
03/07 31,588 7.140% LIBOR + 0.38% 07/09 1,595,537 1,134,349
05/02 32,966 5.159% LIBOR + 0.38% 03/07 3,080,475 2,591,755
03/07 32,966 6.874% LIBOR + 0.38% 11/10 1,997,092 1,309,376
07/02 29,588 4.540% LIBOR + 0.38% 03/07 2,096,975 1,580,735
03/07 29,588 6.500% LIBOR + 0.38% 07/09 1,097,528 683,659
10/02 36,631 3.550% LIBOR + 0.38% 03/07 1,273,768 480,992
03/07 36,631 5.480% LIBOR + 0.38% 11/09 599,002 67,648
12/02 7,865 3.685% LIBOR + 0.38% 03/07 312,194 146,897
03/07 7,865 5.727% LIBOR + 0.38% 07/09 179,209 78,560
02/03 8,034 3.320% LIBOR + 0.38% 03/07 211,970 -
03/07 8,034 5.480% LIBOR + 0.38% 07/09 126,226 -
- -----------------------------------------------------------------------------------------------------------------
Total $ 16,495,158 $ 11,552,842
- -----------------------------------------------------------------------------------------------------------------
6 Debt
Credit Facility - Effective on July 15, 2003, Belrose Capital refinanced the
existing Credit Facility with Merrill Lynch Mortgage Capital, Inc. with two new
credit arrangements (collectively, the New Credit Facility) totaling
$225,000,000. The New Credit Facility has a seven-year maturity and will expire
on June 25, 2010. Belrose Capital's obligations under the New Credit Facility
are secured by a pledge of its assets, excluding the assets of Bel Apartment
Properties Trust (Bel Apartment), Katahdin Property Trust, LLC (Katahdin) and
Bel Communities Property Trust (Bel Communities).
The credit arrangement with DrKW Holdings, Inc. is for $168,000,000. This credit
arrangement accrues interest at a rate of one-month LIBOR + 0.30% per annum. As
of July 15, 2003, outstanding borrowings under this credit arrangement totaled
$168,000,000.
The credit arrangement with Merrill Lynch Mortgage Capital is for $57,000,000,
and includes the ability to issue letters of credit up to $10,000,000. This
credit arrangement accrues interest at a rate of one-month LIBOR + 0.38% per
annum. A commitment fee of 0.10% per annum is paid on the unused commitment
amount. Belrose Capital pays all fees associated with issuing the letters of
credit. As of July 15, 2003, outstanding borrowings under this credit
arrangement totaled $300,000, as well as letters of credit outstanding for
$2,667,011. The letters of credit were issued as a substitute for funding
certain mortgage escrow accounts required by the lender of Bel Communities and
Bel Apartment. The letters of credit expire in 2004 and automatically extend for
one-year periods not to extend beyond June 15, 2010. Fees paid or accrued under
the terms of the letter of credit issued under the existing Credit Facility
totaled $12,961 for the six months ended June 30, 2003.
12
7 Segment Information
Belrose Capital pursues its investment objective primarily by investing
indirectly in the Portfolio through Belvedere Capital. The Portfolio is a
diversified investment company that emphasizes investments in common stocks of
domestic and foreign growth companies that are considered to be high in quality
and attractive in their long-term investment prospects. Separate from its
investment in Belvedere Capital, Belrose Capital invests in real estate assets
through its subsidiary Belrose Realty Corporation (Belrose Realty). Belrose
Realty invests directly in Partnership Preference Units and indirectly in real
property through controlled subsidiaries, Bel Apartment , Katahdin and Bel
Communities . Belrose Realty did not hold an investment in controlled subsidiary
Bel Communities for the period from the start of business, March 19, 2002, to
June 30, 2002.
Belrose Capital evaluates performance of the reportable segments based on the
net increase (decrease) in net assets from operations of the respective segment,
which includes net investment income (loss), net realized gain (loss) and
unrealized gain (loss). The accounting policies of the reportable segments are
the same as those for Belrose Capital on a consolidated basis. No reportable
segments have been aggregated. Reportable information by segment is as follows:
Tax-Managed
For the Three Months Ended Growth Real
June 30, 2003 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------------------
Revenue $ 3,093,515 $ 17,306,971 $ 20,400,486
Interest expense on mortgages - (6,579,443) (6,579,443)
Interest expense on Credit Facility - (710,885) (710,885)
Interest expense on swap contracts - (1,131,355) (1,131,355)
Operating expenses (223,639) (8,070,975) (8,294,614)
Minority interest in net income of controlled
subsidiaries - (458,996) (458,996)
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 2,869,876 $ 355,317 $ 3,225,193
Net realized gain 2,425,286 - 2,425,286
Change in unrealized gain (loss) 166,965,607 1,048,664 168,014,271
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations of
reportable segments $172,260,769 $ 1,403,981 $ 173,664,750
- ----------------------------------------------------------------------------------------------------------------------
Tax-Managed
For the Three Months Ended Growth Real
June 30, 2002 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------------------
Revenue $ 705,038 $ 9,179,952 $ 9,884,990
Interest expense on mortgages - (3,584,061) (3,584,061)
Interest expense on Credit Facility - (349,353) (349,353)
Interest expense on swap contracts - (414,122) (414,122)
Operating expenses (66,362) (4,201,054) (4,267,416)
Minority interest in net income of controlled
subsidiaries - (369,566) (369,566)
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 638,676 $ 261,796 $ 900,472
Net realized loss (2,043,241) - (2,043,241)
Change in unrealized gain (loss) (59,171,661) (2,824,306) (61,995,967)
- ----------------------------------------------------------------------------------------------------------------------
Net decrease in net assets from operations of
reportable segments $(60,576,226) $(2,562,510) $(63,138,736)
- ----------------------------------------------------------------------------------------------------------------------
13
Tax-Managed
For the Six Months Ended Growth Real
June 30, 2003 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------------------
Revenue $ 6,009,445 $ 34,653,882 $ 40,663,327
Interest expense on mortgages - (13,158,882) (13,158,882)
Interest expense on Credit Facility - (1,406,562) (1,406,562)
Interest expense on swap contracts - (2,182,638) (2,182,638)
Operating expenses (419,053) (15,964,270) (16,383,323)
Minority interest in net income of controlled
subsidiaries - (973,697) (973,697)
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 5,590,392 $ 967,833 $ 6,558,225
Net realized loss (2,920,634) - (2,920,634)
Change in unrealized gain (loss) 109,175,976 6,177,558 115,353,534
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations of
reportable segments $111,845,734 $ 7,145,391 $118,991,125
- ----------------------------------------------------------------------------------------------------------------------
Tax-Managed
For the Period Ended Growth Real
June 30, 2002(1) Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------------------
Revenue $ 716,287 $11,030,606 $ 11,746,893
Interest expense on mortgages - (4,339,276) (4,339,276)
Interest expense on Credit Facility - (387,912) (387,912)
Interest expense on swap contracts - (453,709) (453,709)
Operating expenses (73,937) (5,022,475) (5,096,412)
Minority interest in net income of controlled
subsidiaries - (439,222) (439,222)
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 642,350 $ 388,012 $ 1,043,912
Net realized loss (2,018,261) - (2,018,261)
Change in unrealized gain (loss) (62,139,774) (4,589,150) (66,728,924)
- ----------------------------------------------------------------------------------------------------------------------
Net decrease in net assets from operations of
reportable segments $( 63,515,685) $(4,201,138) $(67,716,823)
- ----------------------------------------------------------------------------------------------------------------------
*Belrose Capital invests indirectly in Tax-Managed Growth Portfolio through
Belvedere Capital.
(1) For the period from the start of business, March 19, 2002, to June 30,
2002.
The following tables reconcile the reported segment information to the condensed
consolidated financial statements for the periods indicated:
Three Months Three Months
Ended Ended Six Months Ended Period Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002 (1)
----------------------------------------------------------------------------
Revenue:
Revenue from reportable segments $ 20,400,486 $ 9,884,990 $ 40,663,327 $ 11,746,893
Unallocated revenue 4,572 1,103 7,812 1,103
----------------------------------------------------------------------------
Total revenue $ 20,405,058 $ 9,886,093 $ 40,671,139 $ 11,747,996
----------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations:
Net increase (decrease) in net assets
from operations of reportable segments
$173,664,750 $(63,138,736) $118,991,125 $(67,716,823)
Unallocated revenue 4,572 1,103 7,812 1,103
Unallocated expenses ** (878,121) (341,238) (1,637,733) (1,044,535)
----------------------------------------------------------------------------
Total net increase (decrease) in net
assets from operations $172,791,201 $(63,478,871) $117,361,204 $(68,760,255)
----------------------------------------------------------------------------
** Unallocated expenses include costs of Belrose Capital to operate the Fund
such as servicing and distribution fees as well as other miscellaneous
administrative costs of Belrose Capital.
(1) For the period from the start of business, March 19, 2002, to June 30, 2002.
14
Tax-Managed Growth Real
June 30, 2003 Portfolio* Estate Total
- -------------------------------------------------------------------------------------------------------------------------
Segment assets $1,450,899,286 $541,691,505 $1,992,590,791
Segment liabilities - 551,344,722 551,344,722
- -------------------------------------------------------------------------------------------------------------------------
Net assets of reportable segments $1,450,899,286 $ (9,653,217) $1,441,246,069
- -------------------------------------------------------------------------------------------------------------------------
At December 31, 2002
- -------------------------------------------------------------------------------------------------------------------------
Segment assets $1,264,314,536 $524,810,142 $1,789,124,678
Segment liabilities - 541,343,349 541,343,349
- -------------------------------------------------------------------------------------------------------------------------
Net assets of reportable segments $1,264,314,536 $(16,533,207) $1,247,781,329
- -------------------------------------------------------------------------------------------------------------------------
*Belrose Capital invests indirectly in Tax-Managed Growth Portfolio through
Belvedere Capital.
Period Ended
June 30, 2003 December 31,
2002 (2)
--------------------------------------
Net assets:
Net assets of reportable segments $1,441,246,069 $1,241,781,329
Unallocated cash 912,432 2,083,049
Short-term investments 1,402,053 -
Other assets - -
Loan payable - Credit Facility (11,781,000) (7,765,000)
Other liabilities (104,445) (97,723)
--------------------------------------
Total net assets $1,431,675,109 $1,242,001,655
--------------------------------------
(2) For the period from the start of business, March 19, 2002, to December 31,
2002.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information in this report contains forward-looking statements within the
meaning of the federal securities laws. Forward-looking statements typically are
identified by use of terms such as "may," "will," "should," "might," "expect,"
"anticipate," "estimate," and similar words, although some forward-looking
statements are expressed differently. The actual results of Belrose Capital Fund
LLC (the Fund) could differ materially from those contained in the
forward-looking statements due to a number of factors. The Fund undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events, or otherwise, except as required by
applicable law. Factors that could affect the Fund's performance include a
decline in the U.S. stock markets or in general economic conditions, adverse
developments affecting the real estate industry, or fluctuations in interest
rates.
The following discussion should be read in conjunction with the Fund's unaudited
condensed consolidated financial statements and related notes in Item 1 above.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2003 COMPARED TO THE
QUARTER ENDED JUNE 30, 2002
PERFORMANCE OF THE FUND.(1) The Fund's total return was 13.63% for the quarter
ended June 30, 2003. This return reflects an increase in the Fund's net asset
value per share from $73.42 to $83.43 during the period. For comparison, the
Standard & Poor's 500 Index (the S&P 500), an unmanaged index of large
capitalization stocks commonly used as a benchmark for the U.S. equity market,
had a total return of 15.39% over the same period. The performance of the Fund
exceeded that of Tax-Managed Growth Portfolio (the Portfolio) by approximately
0.09% during the period. Last year, the Fund had a total return performance of
- -12.44% for the quarter ended June 30, 2002. This return reflected a decrease in
the Fund's net asset value per share from $98.16 to $85.95 during the period.
For comparison, the S&P 500 had a total return of -13.39% over the same period.
The performance of the Fund trailed that of the Portfolio by approximately 0.80%
during that period.
PERFORMANCE OF THE PORTFOLIO. The total return of the Portfolio for the quarter
ended June 30, 2003 was 13.54% compared to the 15.39% return achieved by the S&P
500 over the same period. The S&P 500 enjoyed a strong rally in the quarter,
posting its best quarterly return since the fourth quarter of 1998. Encouraging
fiscal and monetary policies, resilient consumer spending and positive earnings
momentum contributed to the market's strength during the period. In general,
small capitalization stocks outperformed large capitalization holdings during
the quarter and value investing outperformed growth, a continuing theme from the
same period last year. The total return of the Portfolio for the quarter ended
June 30, 2002 was -11.64%.
The performance of the Portfolio trailed the performance of the S&P 500 during
the quarter ended June 30, 2003 primarily due to the Portfolio's relatively more
defensive tilt and its de-emphasis of stocks considered by the Portfolio's
investment adviser, Boston Management and Research (Boston Management), to be of
lower quality. Higher volatility, lower quality stocks exhibited strong momentum
across most industry groups during the period.
The Portfolio's sector allocation during the quarter remained very similar to
its positioning relative to the S&P 500 during the year ended December 31, 2002,
with no major sector or industry shifts. The Portfolio's exposure to
pharmaceuticals in the health care sector and media investments in the consumer
discretionary sector was particularly beneficial to the Portfolio's performance
during the quarter.
Boston Management remained cautious in the technology and telecommunications
sectors during the quarter, maintaining an underweight allocation comparable to
the same period a year ago. The Portfolio continued its de-emphasis of stocks in
the semiconductor equipment, peripherals, and wireless telecommunication
industries. This posture has added to performance over longer time periods and
during the same period a year ago, but hindered the Portfolio's performance
during the second quarter of 2003.
The Portfolio's overweight of the industrials sector in the areas of airfreight
logistics and aerospace and defense, another continuing theme from last year,
detracted from quarterly results, but has positively contributed to the
Portfolio's longer-term returns. The Portfolio's continued de-emphasis of the
utilities and materials sectors and the quality of its stock selection in those
sectors was beneficial to performance during the quarter.
(1)Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that Shares, when redeemed, may be worth more
or less than their original cost. Comparison to the S&P 500 is for reference
only. It is not possible to invest directly in an index.
16
PERFORMANCE OF REAL ESTATE INVESTMENTS. The Fund's real estate operations are
conducted primarily through Real Estate Joint Ventures that are majority-owned
by Belrose Realty Corporation (Belrose Realty), a controlled subsidiary of the
Fund. During the quarter ended June 30, 2003, the Fund's real estate operations
continued to be impacted by weaker multifamily market fundamentals, as well as
the uncertain outlook for the U.S. economy. In addition, the Fund's acquisition
of interests in additional Real Estate Joint Ventures in 2002 increased the
number of properties held by the Fund through Real Estate Joint Ventures during
the quarter ended June 30, 2003 as compared to the quarter ended June 30, 2002.
Rental income from real estate operations increased to $16.1 million for the
quarter ended June 30, 2003 compared to $9.1 million for the quarter ended June
30, 2002, an increase of $7.0 million or 77%. This increase is principally
attributable to the greater number of properties held through Real Estate Joint
Ventures for the quarter ended June 30, 2003. Rental income was negatively
affected by increased rent concessions or reduced apartment rental rates and
lower occupancy levels at properties owned by the Fund's Real Estate Joint
Ventures during the quarter.
Property operating expenses totaled $7.3 million for the quarter ended June 30,
2003 compared to $3.8 million for the quarter ended June 30, 2002, an increase
of $3.5 million or 92% (property operating expenses are before debt service and
certain operating expenses of Belrose Realty of approximately $0.8 million for
the quarter ended June 30, 2003 and approximately $0.4 million for the quarter
ended June 30, 2002). The increase in operating expenses was principally due to
the greater number of Real Estate Joint Ventures held during the quarter ended
June 30, 2003. Given the continued uncertain outlook for the U.S. economy as a
whole, Boston Management, Belrose Realty's manager, expects that real estate
operating results in 2003 for each of the Real Estate Joint Ventures will
continue to be modestly below the levels of 2002.
At June 30, 2003, the estimated fair value of the real properties held through
Belrose Realty was $471.8 million compared to $299.6 million at June 30, 2002,
an increase of $172.2 million or 57%. The increase in real property value was
primarily due to the greater number of Real Estate Joint Ventures held during
the quarter ended June 30, 2003. Estimated real property values also increased
modestly at June 30, 2003 as the result of declines in capitalization rates in a
lower-return environment. Declines in capitalization rates more than offset the
impact on property values of lower income level expectations. The Fund saw
unrealized appreciation in the estimated fair value of its other real estate
investments (which includes Real Estate Joint Ventures) of approximately $3.1
million during the quarter ended June 30, 2003 compared to approximately $0.3
million in unrealized depreciation during the quarter ended June 30, 2002.
For the quarter ended June 30, 2003, the Fund's investments in Partnership
Preference Units continued to benefit from declining interest rates and
tightening spreads in income-oriented securities, particularly in real
estate-related securities. In addition, because the Fund acquired additional
Partnership Preference Units over the past twelve months, the estimated fair
value of the Fund's Partnership Preference Units has increased. At June 30,
2003, the estimated fair value of the Fund's Partnership Preference Units
totaled $57.1 million compared to $3.7 million at June 30, 2002, an increase of
$53.4 million. The increase in value, due principally to the greater number of
Partnership Preference Units held at June 30, 2003, also reflects increases in
the per unit value of the Partnership Preference Units held by the Fund. The
Fund saw unrealized appreciation in the estimated fair value of its Partnership
Preference Units of approximately $2.2 million during the quarter ended June 30,
2003 compared to unrealized appreciation of approximately $0.1 million during
the quarter ended June 30, 2002. Dividends received from Partnership Preference
Units for the quarter ended June 30, 2003 totaled $1.2 million compared to $0.1
million for the quarter ended June 30, 2002, an increase of $1.1 million. The
increase was due to a larger number of Partnership Preference Units being held
during the quarter ended June 30, 2003.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the quarter ended June 30,
2003, interest rate swap agreement values depreciated by $4.3 million, compared
to a decline for the three months ended June 30, 2002 of $2.6 million. The
depreciation was caused by declines in swap rates during the periods. The
increased size of the Fund's swap agreement portfolio contributed to the higher
depreciation during the period ended June 30, 2003.
17
RESULTS OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 2003 COMPARED TO THE PERIOD
ENDED JUNE 30, 2002
PERFORMANCE OF THE FUND. The Fund's total return was 8.62% for the six months
ended June 30, 2003. This return reflects an increase in the Fund's net asset
value per share from $76.86 to $83.43 and a distribution of $0.05 per share
during the period. For comparison, the S&P 500 had a total return of 11.75% over
the same period. The performance of the Fund exceeded that of the Portfolio by
approximately 0.43% during the period. Last year, the Fund had a total return
performance of -14.05% for the period from the start of business, March 19,
2002, to June 30, 2002. This return reflected a decrease in the Fund's net asset
value per share from $100.00 to $85.95. For comparison, the S&P 500 had a total
return of -14.67% over the same period. The performance of the Fund trailed that
of the Portfolio by approximately 1.14% for the period from the start of
business, March 19, 2002, to June 30, 2002.
PERFORMANCE OF THE PORTFOLIO. The total return of the Portfolio for the six
months ended June 30, 2003 was 8.19% compared to the 11.75% return achieved by
the S&P 500 over the same period. Market performance during the first six months
of 2003 remained volatile, but markets proved resilient, achieving impressive
returns and positively concluding the first half of the year. War angst,
questionable economic recovery, and the SARS outbreak were just a few of the
factors contributing to increased volatility and unsettled investor sentiment
during the period. During the second quarter of 2003, an easing of geopolitical
concerns, positive consumer data, a strong housing market, and a low interest
rate environment provided significant support and a boost to the equity markets.
The Portfolio's total return for the quarter ended June 30, 2002 was -10.94%.
The Portfolio's performance trailed the S&P 500 in the first six months of 2003,
mostly due to its lower exposure to higher volatility, lower quality stocks,
which were the strongest price performers during the first six months of 2003.
Despite this short-term performance, the Portfolio is committed to its
investment strategy of seeking quality stocks that are reasonably priced in
relation to their fundamental value.
Boston Management continued to de-emphasize health care investments during the
period, a directional move initiated last year that has been positive for the
Portfolio's relative returns. Boston Management continued to emphasize
industrial company investments, especially in the airfreight logistics and
aerospace and defense areas, which has helped the Portfolio's longer-term
record, but detracted from first half results. The Portfolio also maintained an
overweight stance in the consumer discretionary and consumer staples sectors
during the period, as it did in the first half of 2002.
Lack of earning visibility during the period reinforced the Portfolio's cautious
weighting in the telecommunications and information technology sectors. Both of
the aforementioned sectors were de-emphasized last year as well. The Portfolio's
underweight of diversified telecommunication service and software holdings
relative to the S&P 500 was particularly beneficial to relative performance in
the first half of 2003. Boston Management also continued to underweight the
Portfolio's exposure to the materials and utilities sectors, a similar stance to
last year's allocation.
PERFORMANCE OF REAL ESTATE INVESTMENTS. For the six months ended June 30, 2003,
rental income from real estate operations increased to $32.4 million compared to
$10.9 million for the period from the start of business, March 19, 2002, to June
30, 2002, an increase of $21.5 million or 197%. Property operating expenses
totaled $14.3 million for the six months ended June 30, 2003 compared to $4.5
million for the period from the start of business, March 19, 2002, to June 30,
2002, an increase of $9.8 million or 218% (property operating expenses are
before debt service and certain operating expenses of Belrose Realty of
approximately $1.6 million for the six months ended June 30, 2003 and
approximately $0.5 million for the period from the start of business, March 19,
2002, to June 30, 2002).
The increases in rental income and operating expenses during the period were
principally due to the greater number of Real Estate Joint Ventures held through
Belrose Realty (and the longer period of time for which investments in such
Joint Ventures were held) during the six months ended June 30, 2003 compared to
during the period from the start of business, March 19, 2002, to June 30, 2002.
As in 2002, Real Estate Joint Venture operations during the period ended June
30, 2003 were affected by weaker multifamily market fundamentals in most regions
with lower occupancy levels and increased rent concessions.
18
At June 30, 2003, the estimated fair value of the real properties held through
Belrose Realty was $471.8 million compared to $299.6 million at June 30, 2002,
an increase of $172.2 million or 57%. The increase in real property value was
primarily due to the greater number of Real Estate Joint Ventures held at June
30, 2003. Estimated real property values also increased modestly at June 30,
2003 as the result of declines in capitalization rates in a lower-return
environment. Declines in capitalization rates more than offset the impact on
property values of lower income level expectations. The Fund saw unrealized
appreciation in the estimated fair value of its other real estate investments of
approximately $3.9 million during the six months ended June 30, 2003 compared to
unrealized depreciation of approximately $2.0 million during the period from the
start of business, March 19, 2002, to June 30, 2002.
For the six months ended June 30, 2003, the Fund's investments in Partnership
Preference Units continued to benefit from declining interest rates and
tightening spreads in income-oriented securities, particularly in real
estate-related securities. Because the Fund acquired Partnership Preference
Units over the past year, the estimated fair value of the Fund's Partnership
Preference Units has increased. At June 30, 2003, the estimated fair value of
the Fund's Partnership Preference Units totaled $57.1 million compared to $3.7
million at June 30, 2002, an increase of $53.4 million. The increase in value,
due principally to the greater number of Partnership Preference Units held at
June 30, 2003, was also a result of increases in values per unit of the
Partnership Preference Units held by the Fund during the period. The Fund saw
unrealized appreciation in the estimated fair value of its Partnership
Preference Units of approximately $7.2 million during the six months ended June
30, 2003 compared to unrealized appreciation of approximately $0.1 million for
the period from the start of business, March 19, 2002, to June 30, 2002.
Dividends received from Partnership Preference Units for the six months ended
June 30, 2003 totaled $2.2 million compared to $0.1 million for the period from
the start of business, March 19, 2002, to June 30, 2002, an increase of $2.1
million. The increase was primarily due to a larger number of Partnership
Preference Units held during the first half of 2003.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the six months ended June 30,
2003, interest rate swap agreement values depreciated by approximately $4.9
million due to a decline in swap rates during the period. For the period from
the start of business, March 19, 2002, to June 30, 2002, valuations of interest
rate swap agreements depreciated by approximately $2.7 million, also due to swap
rate declines.
LIQUIDITY AND CAPITAL RESOURCES
Effective July 15, 2003, the Fund refinanced its Credit Facility with Merrill
Lynch Mortgage Capital, Inc. by entering into new credit arrangements with DrKW
Holdings, Inc. (DrKW) and Merrill Lynch Mortgage Capital, Inc. (MLMC)
(collectively, the New Credit Facility), which together total $225 million. The
New Credit Facility is secured by a pledge of the Fund's assets, excluding the
assets of Bel Apartment Properties Trust, Katahdin Property Trust, LLC and Bel
Communities Property Trust, and has a seven-year maturity. The New Credit
Facility will expire in June 2010.
The New Credit Facility is primarily used to fund the Fund's equity in real
estate investments and will continue to be used for such purpose in the future.
The New Credit Facility also provides for selling commissions, organizational
expenses and any short-term liquidity needs of the Fund. Under certain
circumstances, the Fund may increase the size of the New Credit Facility and the
amount of outstanding borrowings thereunder for these purposes.
The Fund has a $168 million credit arrangement with DrKW. Borrowings under the
DrKW credit arrangement accrue interest at a rate of one-month LIBOR plus 0.30%
per annum. As of July 15, 2003, outstanding borrowings under the DrKW credit
arrangement totaled $168 million.
The Fund has a $57 million credit arrangement with MLMC, including up to $10
million under letters of credit. Borrowings under the MLMC credit arrangement
accrue interest at a rate of one-month LIBOR plus 0.38% per annum. As of July
15, 2003, outstanding borrowings under the MLMC credit arrangement totaled $0.3
million, with an additional $2.7 million outstanding under a letter of credit.
The unused loan commitment amount totaled approximately $54 million. A
commitment fee of 0.10% per annum is paid on the unused commitment amount. The
Fund pays all fees associated with issuing the letters of credit.
19
The Fund has entered into interest rate swap agreements with respect to its
borrowings and real estate investments. Pursuant to these agreements, the Fund
makes periodic payments to the counterparty at predetermined fixed rates, in
exchange for floating-rate payments that fluctuate with one-month LIBOR. During
the terms of the outstanding swap agreements, changes in the underlying values
of the swaps are recorded as unrealized gains or losses.
As of June 30, 2003 and June 30, 2002, the unrealized depreciation related to
the interest rate swap agreements was $16.5 and $2.7 million, respectively.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Fund's discussion and analysis of its financial condition and results of
operations are based upon its unaudited condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires the Fund to make estimates, judgments and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. The Fund bases these estimates, judgments and assumptions on
historical experience and on other various factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
The Fund's critical accounting policies affect the Fund's more significant
estimates and assumptions used in valuing the Fund's real estate investments and
interest rate swap agreements. Prices are not readily available for these types
of investments and therefore they are valued on an ongoing basis by Boston
Management, in its capacity as manager of Belrose Realty, in the case of the
real estate investments, and in its capacity as the Fund's investment adviser,
in the case of the interest rate swap agreements.
In estimating the value of the Fund's investments in real estate, Boston
Management takes into account relevant factors, data and information, including,
with respect to investments in Partnership Preference Units, information from
dealers and similar firms with knowledge of such issues and the prices of
comparable preferred equity securities and other fixed or adjustable rate
instruments having similar investment characteristics. Real estate investments
other than Partnership Preference Units are generally stated at estimated fair
values, which represent the amount at which the investments could be sold in a
current transaction between willing parties, that is, other than in a forced or
liquidation sale. Detailed investment valuations are performed at least annually
and reviewed periodically. Interim valuations reflect results of operations and
distributions, and may be adjusted if there has been a significant change in
economic circumstances since the most recent independent valuation. Given that
such valuations include many assumptions, including but not limited to the
assumption that the investment could be sold in a transaction between willing
parties, values may differ from amounts ultimately realized. Boston Management,
as the Fund's investment adviser, determines the value of interest rate swaps,
and, in doing so, may consider among other things, dealer and counter-party
quotes and pricing models.
The policies for valuing real estate investments involve significant judgments
that are based upon, without limitation, general economic conditions, the supply
and demand for different types of real properties, the financial health of
tenants, the timing of lease expirations and terminations, fluctuations in
rental rates and operating costs, exposure to adverse environmental conditions
and losses from casualty or condemnation, interest rates, availability of
financing, managerial performance and government rules and regulations. The
valuations of Partnership Preference Units held by the Fund through its
investment in Belrose Realty fluctuate over time to reflect, among other
factors, changes in interest rates, changes in perceived riskiness of such units
(including call risk), changes in the perceived riskiness of comparable or
similar securities trading in the public market and the relationship between
supply and demand for comparable or similar securities trading in the public
market.
The value of interest rate swaps may be subject to wide swings in valuation
caused principally by changes in interest rates. Interest rate swaps may be
difficult to value since such instruments may be considered illiquid.
Fluctuations in the value of Partnership Preference Units derived from changes
in general interest rates can be expected to be offset in part (but not
entirely) by changes in the value of interest rate swap agreements or other
interest rate hedges entered into by the Fund with respect to its borrowings.
Fluctuations in the value of real estate investments derived from other factors
besides general interest rate movements (including issuer-specific and
sector-specific credit concerns, property-specific concerns and changes in
interest rate spread relationships) will not be offset by changes in the value
of interest rate swap agreements or other interest rate hedges entered into by
20
the Fund. Changes in the valuation of Partnership Preference Units not offset by
changes in the valuation of interest rate swap agreements or other interest rate
hedges entered into by the Fund and changes in the value of other real estate
investments will cause the performance of the Fund to deviate from the
performance of the Portfolio.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Fund's primary exposure to interest rate risk arises from its real estate
investments that are financed by the Fund with floating rate borrowings under
the Fund's Credit Facility and by fixed-rate secured mortgage debt obligations
of the Real Estate Joint Ventures. The interest rates on borrowings under the
Fund's Credit Facility are reset at regular intervals based on a fixed and
predetermined premium to LIBOR for short-term extensions of credit. The Fund
utilizes cancelable interest rate swap agreements to fix the cost of its
borrowings under the Credit Facility and to mitigate the impact of interest rate
changes on the Fund's net asset value. Under the terms of the interest rate swap
agreements, the Fund makes cash payments at fixed rates in exchange for floating
rate payments that fluctuate with one-month LIBOR. In the future, the Fund may
use other interest rate hedging arrangements (such as caps, floors and collars)
to fix or limit borrowing costs. The use of interest rate hedging arrangements
is a specialized activity that can expose the Fund to significant loss.
The value of Partnership Preference Units and, to a lesser degree, other real
estate investments is sensitive to interest rate risk. Increases in interest
rates generally will have an adverse affect on the value of Partnership
Preference Units and other real estate investments.
The following table summarizes the contractual maturities and weighted-average
interest rates associated with the Fund's significant non-trading financial
instruments. The Fund has no market risk sensitive instruments held for trading
purposes. This information should be read in conjunction with Note 5 to the
Fund's unaudited condensed consolidated financial statements in Item 1 above.
Interest Rate Sensitivity
Cost, Principal (Notional) Amount by Contractual Maturity
For the Twelve Months Ended June 30,
Estimated
2004-2006 2007 2008 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
- ----------------------------------------
Long-term debt:
- ----------------------------------------
Fixed-rate mortgages $344,219,483 $344,219,483 $390,000,000
Average interest rate 7.53% 7.53%
- ----------------------------------------
Variable-rate Credit Facility $168,300,000 $168,300,000 $168,300,000
Average interest rate 1.50% 1.50%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative financial
instruments:
- ----------------------------------------
Pay fixed/receive variable interest rate
swap contracts $150,220,000 $146,672,000 $296,892,000 $(16,495,158)
Average pay rate 4.59% 6.37% 5.47%
Average receive rate 1.50% 1.50% 1.50%
- ------------------------------------------------------------------------------------------------------------------------------------
21
Estimated
2004-2006 2007 2008 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive investments:
- ------------------------------------------
Fixed-rate Partnership Preference Units:
- ------------------------------------------
Essex Portfolio, L.P., 7.875% Series B
Cumulative Redeemable Preferred Units,
Callable 2/6/03, Current Yield: 8.03% $ 16,616,170 $ 16,616,170 $ 19,608,880
Kilroy Realty, L.P., 8.075% Series A
Cumulative Redeemable Preferred Units,
Callable 2/06/03, Current Yield: 8.79% $ 15,898,220 $ 15,898,220 $ 18,377,880
Prentiss Properties Acquisition
Partners, L.P., 8.30% Series B
Cumulative Redeemable Perpetual
Preferred Units, Callable 6/25/03,
Current Yield: 8.41% $ 16,519,510 $ 16,519,510 $ 19,068,134
ITEM 4. CONTROLS AND PROCEDURES.
Eaton Vance Management (Eaton Vance), as the Fund's manager, with the
participation of the Fund's Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of the Fund's disclosure controls
and procedures (as defined by Rule 13a-15(e) of the Securities Exchange Act of
1934, as amended) as of the end of the period covered by this report. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Fund's disclosure controls and procedures were effective.
There were no changes in the Fund's internal control over financial reporting
that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, the Fund's internal
control over financial reporting.
As the Fund's manager, the complete and entire management, control and operation
of the Fund are vested in Eaton Vance. The Fund's organizational structure does
not provide for a board of directors or a board audit committee. As such, the
Fund's Chief Executive Officer and Chief Financial Officer intend to report to
Eaton Vance any significant deficiency in the design or operation of internal
control over financial reporting which could adversely affect the Fund's ability
to record, process, summarize and report financial data, and any fraud, whether
or not material, that involves management or other employees who have a
significant role in the Fund's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Although in the ordinary course of business, the Fund, Belrose Realty and
Belrose Realty's controlled subsidiaries may become involved in legal
proceedings, the Fund is not aware of any material pending legal proceedings to
which any of them is subject.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the three months
ended June 30, 2003.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) The following is a list of all exhibits filed as part of this Form
10-Q:
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
None.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer on August 14, 2003.
BELROSE CAPITAL FUND LLC
/s/ Michelle A. Alexander
------------------------
Michelle A. Alexander
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
24
EXHIBIT INDEX
-------------
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
25