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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. 000-30509
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Belcrest Capital Fund LLC
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3453080
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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)
Registrant's telephone number: 617-482-8260
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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 [X] NO [ ]
BELCREST 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 June 30, 2002 4
Condensed Consolidated Statements of Changes in Net Assets
(Unaudited) for the Six Months Ended June 30, 2003 and
June 30, 2002 6
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 2003 and 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 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
EXHIBIT INDEX 26
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
--------------------------------------------
BELCREST 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) $2,584,612,221 $2,423,063,983
Investment in Partnership Preference Units 578,045,965 547,878,187
Investment in other real estate 631,461,332 651,756,818
Short-term investments 1,548,059 2,564,911
-------------- --------------
Total investments $3,795,667,577 $3,625,263,899
Cash 11,276,491 12,216,034
Receivable for investments sold - 73,554,369
Escrow deposits - restricted 12,038,441 13,475,591
Dividends and interest receivable 6,019,994 7,835,775
Other assets 5,844,687 6,867,545
-------------- --------------
Total assets $3,830,847,190 $3,739,213,213
-------------- --------------
Liabilities:
Loan payable on Credit Facility $ 742,150,000 $ 779,350,000
Mortgages payable 538,728,354 541,017,537
Payable for Fund Shares redeemed 300,000 3,952,191
Special Distributions payable 932 -
Open interest rate swap contracts, at value 42,469,385 61,716,527
Security deposits 2,218,339 2,231,784
Swap interest payable 4,696,409 5,089,784
Accrued expenses:
Interest expense 4,648,497 4,815,222
Property taxes 5,843,814 9,169,540
Other expenses and liabilities 7,915,420 6,282,930
Minority interests in controlled subsidiaries 23,405,821 26,096,166
-------------- -------------
Total liabilities $1,372,376,971 $1,439,721,681
-------------- --------------
Net assets $2,458,470,219 $2,299,491,532
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Shareholders' Capital $2,458,470,219 $2,299,491,532
-------------- --------------
Shares Outstanding 27,117,858 27,724,437
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Net asset value and redemption price per Share $ 90.66 $ 82.94
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See notes to unaudited condensed consolidated financial statements
3
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2003 2002 2003 2003
-------------- -------------- -------------- --------------
Investment Income:
Dividends allocated from Belvedere Capital
(net of foreign taxes of $164,063, $175,236,
$270,464 and $222,037, respectively) $ 9,017,540 $ 9,793,322 $17,754,326 $ 18,476,643
Interest allocated from Belvedere Capital 270,744 229,820 445,125 519,889
Expenses allocated from Belvedere Capital (3,779,091) (4,782,131) (7,344,086) (9,803,409)
------------ ------------ ------------ -------------
Net investment income allocated from
Belvedere Capital $ 5,509,193 $ 5,241,011 $10,855,365 $ 9,193,123
Dividends from Partnership Preference Units 13,761,364 13,092,134 27,582,996 26,202,643
Rental Income 27,829,915 34,114,119 56,085,153 71,813,523
Interest 102,235 53,798 232,712 112,075
------------ ------------- ------------ --------------
Total investment income $47,202,707 $52,501,062 $94,756,226 $107,321,364
------------ ------------- ------------ --------------
Expenses:
Investment advisory and administrative fees $ 2,543,883 $ 3,062,846 $ 5,076,036 $ 6,316,866
Property management fees 1,047,140 1,318,051 2,130,116 2,792,961
Distribution and servicing fees 841,720 1,048,403 1,630,669 2,187,824
Interest expense on mortgages 10,460,223 12,808,459 20,808,729 27,076,060
Interest expense on Credit Facility 3,358,045 5,048,003 6,980,072 10,437,424
Interest expense on swap contracts 12,211,185 11,142,552 24,501,680 21,970,127
Property and maintenance expenses 9,803,574 10,726,610 18,793,406 21,529,300
Property taxes and insurance 3,966,456 4,497,073 7,820,492 9,262,353
Miscellaneous 445,721 334,506 732,781 859,987
------------ ------------ ------------ -------------
Total expenses $44,677,947 $49,986,503 $88,473,981 $102,432,902
Deduct-
Reduction of investment advisory
and administrative fees 591,171 747,368 1,138,016 1,534,162
------------ ------------ ------------ -------------
Net expenses $44,086,776 $49,239,135 $87,335,965 $100,898,740
------------ ------------ ------------ -------------
Net investment income before
minority interests in net income of
controlled subsidiaries $ 3,115,931 $ 3,261,927 $ 7,420,261 $ 6,422,624
Minority interests in net income
of controlled subsidiaries (593,558) (971,962) (1,550,963) (2,457,349)
------------ ------------ ------------ -------------
Net investment income $ 2,522,373 $ 2,289,965 $ 5,869,298 $ 3,965,275
------------ ------------ ------------ -------------
See notes to unaudited condensed consolidated financial statements
4
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited) (Continued)
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2003 2002 2003 2003
-------------- -------------- -------------- --------------
Realized and Unrealized Gain (Loss)
Net realized gain (loss) -
Investment transactions from Belvedere
Capital (identified cost basis) $ 5,373,336 $(128,764,690) $ (5,079,542) $(148,880,691)
Investment transactions in Partnership
Preference Units (identified cost) - - 624,980 374,360
Investment transactions in other real
estate - - - (1,532,128)
------------- -------------- ------------- --------------
Net realized gain (loss) $ 5,373,336 $(128,764,690) $ (4,454,562) $(150,038,459)
------------- -------------- ------------- --------------
Change in unrealized appreciation
(depreciation) -
Investment in Belvedere Capital
(identified cost basis) $296,363,723 $(267,781,085) $188,870,533 $(227,572,171)
Investments in Partnership Preference
Units (identified cost basis) 3,194,118 17,144,028 35,982,841 15,049,410
Investments in other real estate
(net of minority interests in
unrealized gain (loss) of controlled
subsidiaries of $(74,162),
$(6,527,754), $(4,241,305)
and $(35,442,357), respectively) (287,912) (12,804,182) (24,892,309) (38,986,760)
Interest rate swap contracts 10,312,089 (16,502,065) 19,247,142 (5,185,509)
------------- -------------- ------------- --------------
Net change in unrealized appreciation
(depreciation) $309,582,018 $(279,943,304) $219,208,207 $(256,695,030)
------------- --------------- ------------- --------------
Net realized and unrealized gain (loss) $314,955,354 $(408,707,994) $214,753,645 $(406,733,489)
------------- -------------- ------------- --------------
Net increase (decrease) in net assets
from operations $317,477,727 $(406,418,029) $220,622,943 $(402,768,214)
============= ============== ============= ==============
See notes to unaudited condensed consolidated financial statements
5
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Changes in Net Assets (Unaudited)
Six Months Six Months
Ended June 30, Ended June 30,
2003 2002
-------------- --------------
Increase (Decrease) in Net Assets:
Net investment income $ 5,869,298 $ 3,965,275
Net realized loss from investment transactions (4,454,562) (150,038,459)
Net change in unrealized appreciation
(depreciation) of investments 219,208,207 (256,695,030)
--------------- ---------------
Net increase (decrease) in net assets from
operations $ 220,622,943 $ (402,768,214)
--------------- ---------------
Transactions in Fund Shares -
Net asset value of Fund Shares issued to
Shareholders in payment of distributions
declared $ 4,796,611 $ -
Net asset value of Fund Shares redeemed (54,546,253) (139,221,648)
--------------- ---------------
Net decrease in net assets from Fund Share
transactions $ (49,749,642) $ (139,221,648)
--------------- ---------------
Distributions -
Distributions to Shareholders $ (11,893,682) $ -
Special Distributions to Shareholders (932) -
-------------- ---------------
Total distributions $ (11,894,614) $ -
--------------- ---------------
Net increase (decrease) in net assets $ 158,978,687 $ (541,989,862)
Net assets:
At beginning of period $2,299,491,532 $3,253,990,369
--------------- ---------------
At end of period $2,458,470,219 $2,712,000,507
=============== ===============
See notes to unaudited condensed consolidated financial statements
6
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Six Months
Ended June 30, Ended June 30,
2003 2002
-------------- --------------
Cash Flows From (For) Operating Activities -
Net increase (decrease) in net assets from operations $ 220,622,943 $(402,768,214)
Adjustments to reconcile net increase (decrease) in net assets from operations
to net cash flows from operating activities -
Amortization of debt issuance costs 273,824 404,250
Net investment income allocated from Belvedere Capital (10,855,365) (9,193,123)
Decrease in escrow deposits 1,437,150 2,439,019
Decrease in receivable for investments sold 73,554,369 -
Increase in interest receivable from other real estate (105,359) -
Decrease in other assets 749,034 1,594,754
Decrease (increase) in dividends and interest receivable 1,815,781 (5,785,044)
(Decrease) increase in interest payable for open swap contracts (393,375) 262,328
Increase (decrease) in security deposits, accrued interest and accrued
other expenses and liabilities 1,452,320 (1,149,937)
Decrease in accrued property taxes (3,325,726) (3,116,484)
Proceeds from sales of Partnership Preference Units - 35,374,360
Proceeds from sale of investment in other real estate - 31,588,186
Improvements to rental property (2,292,729) (3,477,557)
Decrease in cash due to sale of majority interest in
controlled subsidiary - (1,195,835)
Net increase in investment in Belvedere Capital (23,700,000) (2,344,772)
Decrease in short-term investments 1,016,852 5,719,717
Minority interests in net income of controlled subsidiaries 1,550,963 2,457,349
Net realized loss from investment transactions 4,454,562 150,038,459
Net change in unrealized (appreciation) depreciation of
investments (219,208,207) 256,695,030
-------------- -------------
Net cash flows from operating activities $ 47,047,037 $ 57,542,486
-------------- -------------
Cash Flows From (For) Financing Activities -
Repayment of Credit Facility $ (37,200,000) $(52,982,112)
Payments on mortgages (2,289,183) (2,123,266)
Payments for Fund Shares redeemed (1,400,326) (3,041,096)
Distributions paid to Shareholders (7,097,071) -
Distributions paid to minority shareholders - (1,921,453)
-------------- -------------
Net cash flows for financing activities $ (47,986,580) $(60,067,927)
-------------- -------------
Net decrease in cash $ (939,543) $ (2,525,441)
Cash at beginning of period $ 12,216,034 $ 12,170,155
--------------- -------------
Cash at end of period $ 11,276,491 $ 9,644,714
=============== =============
See notes to unaudited condensed consolidated financial statements
7
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
Six Months Six Months
Ended June 30, Ended June 30,
2003 2002
-------------- --------------
Supplemental Disclosure and Non-cash Investing and
Financing Activities -
Interest paid on loan - Credit Facility $ 6,954,019 $ 10,894,432
Interest paid on mortgages $20,539,336 $ 26,757,718
Interest paid on swap contracts $24,895,055 $ 21,707,799
Market value of securities distributed in payment of
redemptions $56,798,118 $137,575,552
Market value of real property and other assets, net
of current liabilities, disposed of in conjunction with
sale of other real estate $ - $148,197,322
Mortgage disposed of in conjunction with sale of
other real estate $ - $107,369,483
Partnership Preference Units exchanged for a real estate
equity investment and an investment in note receivable $(6,440,043) $ -
Market value of real estate equity investment $ 3,087,607 $ -
Investment in note receivable $ 3,352,436 $ -
See notes to unaudited condensed consolidated financial statements
8
BELCREST 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 $ 82.940
- --------------------------------------------------------------------------------
Income (loss) from operations
- --------------------------------------------------------------------------------
Net investment income (6) $ 0.214
Net realized and unrealized gain 7.936
- --------------------------------------------------------------------------------
Total income from operations $ 8.150
- --------------------------------------------------------------------------------
Distributions
- --------------------------------------------------------------------------------
Distributions to Shareholders $ (0.430)
Special Distributions to Shareholders (9) (0.000)
- --------------------------------------------------------------------------------
Total distributions $ (0.430)
- --------------------------------------------------------------------------------
Net asset value - End of period $ 90.660
- --------------------------------------------------------------------------------
Total Return (1) 9.86%
As a Percentage As a Percentage
of Average Net of Average Gross
Ratios Assets(5) Assets (2)(5)
- --------------------------------------------------------------------------------
Expenses of Consolidated Real Property
Subsidiaries
Interest and other borrowing costs(7) 1.39%(8) 0.92%(8)
Operating expenses(7) 1.88%(8) 1.25%(8)
Belcrest Capital Fund LLC Expenses
Interest and other borrowing costs(4) 2.77%(8) 1.83%(8)
Investment advisory and administrative fees,
servicing fees and other Fund operating
expenses(3)(4) 1.18%(8) 0.78%(8)
--------------------------
Total expenses 7.22%(8) 4.78%(8)
Net investment income 0.52%(8) 0.34%(8)
- --------------------------------------------------------------------------------
Supplemental Data
- --------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $2,458,470
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 Belcrest Capital Fund LLC (Belcrest Capital) (not including its
investment in Belcrest Realty Corporation (Belcrest Realty)) plus all
assets of Belcrest Realty minus the sum of each entity's liabilities other
than the principal amount of money borrowed. For this purpose, the assets
and liabilities of Belcrest Realty's controlled subsidiaries are reduced by
the proportionate interests therein of investors other than Belcrest
Realty.
(3) Includes Belcrest Capital's share of Belvedere Capital Fund Company LLC's
allocated expenses, including those expenses allocated from the Portfolio.
(4) Includes the expenses of Belcrest Capital and Belcrest Realty. Does not
include expenses of the real estate subsidiaries majority-owned by Belcrest
Realty.
(5) For the purpose of calculating ratios, the income and expenses of Belcrest
Realty's controlled subsidiaries are reduced by the proportionate interests
therein of investors other than Belcrest Realty.
(6) Calculated using average shares outstanding.
(7) Includes Belcrest Realty's proportional shares of expenses incurred by its
majority-owned subsidiaries.
(8) Annualized.
(9) Special distributions amount to less than $0.001 per share.
See notes to unaudited condensed consolidated financial statements
9
BELCREST 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 Belcrest Capital Fund
LLC (Belcrest 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 latest annual report on Form 10-K. 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 Investment Transactions
The following table summarizes the Fund's investment transactions for the six
months ended June 30, 2003 and June 30, 2002:
Six Months Ended Six Months Ended
Investment Transaction June 30, 2003 June 30, 2002
- --------------------------------------------------------------------------------
Increases in investment in Belvedere Capital $ 23,700,000 $ 94,227,892
Decreases in investment in Belvedere Capital $ 56,798,118 $229,458,673
Sales of Partnership Preference Units $ - $ 35,374,360
Sales of other real estate (1) $ - $ 31,588,186
- --------------------------------------------------------------------------------
(1) During the six months ended June 30, 2002, Belcrest Realty Corporation
(Belcrest Realty) sold its majority interest in Bel Apartment Properties
Trust (Bel Apartment) to another fund sponsored by Eaton Vance Management,
for which a loss of $1,532,128 was recognized.
During the six months ended June 30, 2003, the Fund exchanged Partnership
Preference Units in the amount of $6,440,043 for an equity investment in two
private real estate companies affiliated with the issuer of such formerly held
Partnership Preference Units and a note receivable in the amounts of $3,087,607
and $3,352,436 respectively. The secured note receivable earns interest of 8%
per annum and matures in February 2013 or on demand.
10
3 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 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) $2,584,612,221 $2,915,254,500
Income allocated to Belvedere Capital from the Portfolio $ 66,798,353 $ 59,178,086
Income allocated to the Fund from Belvedere Capital $ 18,199,451 $ 18,996,532
Expenses allocated to Belvedere Capital from the Portfolio $ 20,113,419 $ 22,716,704
Expenses allocated to the Fund from Belvedere Capital $ 7,344,086 $ 9,803,409
- -------------------------------------------------------------------------------------------------
(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 26.9% and 31.0% 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 year ended December 31, 2002 and for the six months
ended 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)
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)
- --------------------------------------------------------------------------------
4 Cancelable Interest Rate Swap Agreements
Belcrest Capital has entered into cancelable interest rate swap agreements in
connection with its real estate investments and the associated borrowings. Under
such agreements, Belcrest 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, Belcrest Capital has entered into cancelable
interest rate swap agreements with Merrill Lynch Capital Services, Inc., as
listed below.
11
Notional Initial Unrealized Unrealized
Amount Optional Final Depreciation Depreciation
(000's Fixed Floating Termination Termination at June 30, at December 31,
omitted) Rate Rate Date Date 2003 2002
- ---------------------------------------------------------------------------------------------------------------
$ 68,750 6.225% LIBOR + 0.45% 11/03 11/05 $ 1,220,485 $ 2,631,954
24,528 6.295% LIBOR + 0.45% 05/03 11/05 - * 524,357
41,368 6.310% LIBOR + 0.45% 02/03 11/05 - * 552,915
9,030 6.505% LIBOR + 0.45% 03/03 11/05 - * 72,358
21,996 6.497% LIBOR + 0.45% 04/03 11/05 - * 306,283
20,018 6.439% LIBOR + 0.45% 11/03 11/05 372,055 806,266
111,000 6.4068% LIBOR + 0.45% 02/04 11/05 3,357,116 5,541,030
80,000 6.555% LIBOR + 0.45% 04/04 11/05 3,199,020 4,704,347
16,468 6.7195% LIBOR + 0.45% 02/03 11/05 - * 73,907
12,671 6.6176% LIBOR + 0.45% 11/03 11/05 244,272 531,221
15,105 6.5903% LIBOR + 0.45% 02/04 11/05 474,399 786,970
26,516 7.308% LIBOR + 0.45% 11/03 11/05 581,973 1,277,816
40,193 7.301% LIBOR + 0.45% 02/04 11/05 1,442,874 2,427,007
10,109 7.237% LIBOR + 0.45% 04/04 11/05 461,690 689,195
155,000 7.231% LIBOR + 0.45% 07/04 11/05 9,129,273 12,202,144
17,674 7.700% LIBOR + 0.45% 02/04 11/05 679,090 1,148,226
9,833 7.635% LIBOR + 0.45% 07/04 11/05 621,247 837,224
43,000 7.6525% LIBOR + 0.45% 09/04 11/05 3,052,619 3,931,451
35,024 7.644% LIBOR + 0.45% 07/04 11/05 2,216,079 2,986,988
212,000 7.6224% LIBOR + 0.45% 09/04 11/05 15,324,761 19,546,084
1,907 7.58% LIBOR + 0.45% 04/04 11/05 92,432 138,784
- ---------------------------------------------------------------------------------------------------------------
$42,469,385 $61,716,527
- ---------------------------------------------------------------------------------------------------------------
*Agreement was terminated on the Initial Optional Termination Date.
5 Debt
A Credit Facility - Effective on July 15, 2003, Belcrest Capital refinanced
the existing Credit Facility with Merrill Lynch International Bank Limited with
two new credit arrangements (collectively, the New Credit Facility) totaling
$860,000,000. The New Credit Facility has a seven-year maturity and will expire
on June 25, 2010. Belcrest Capital's obligations under the New Credit Facility
are secured by a pledge of its assets, excluding the assets of Bel Santa Ana LLC
(Bel Santa Ana), Bel Alliance Properties, LLC (Bel Alliance) and Casco Property
Trust, LLC (Casco).
B The credit arrangement with DrKW Holdings, Inc. is for $722,000,000. 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 $722,000,000.
The credit arrangement with Merrill Lynch Mortgage Capital is for $138,000,000,
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. Belcrest Capital pays all fees associated with issuing the letters of
credit. As of July 15, 2003, outstanding borrowings under this credit
arrangement totaled $20,150,000 and there were no letters of credit issued.
Mortgages - Rental property held by real estate joint ventures is financed
through a series of non-recourse mortgages. The mortgages are secured by a
rental property or properties, mortgage loan deposit accounts, including all
subaccounts thereunder, and an assignment of certain leases and rents.
The mortgage agreements relating to the rental properties held by Bel Alliance
include a covenant that trade payables and accrued expenses incurred in the
ordinary course of business in the aggregate will not exceed 1% of the
outstanding principal balance of the loan. At June 30, 2003, this covenant was
not met for certain mortgage agreements, of which the aggregate principal
balance at June 30, 2003 totals $176.2 million, or 33% of the total mortgages
outstanding. Bel Alliance may choose not to commit additional equity to cure
certain of these technical defaults. It is uncertain as to whether the lenders
will seek to enforce these provisions of the mortgage agreements. If the lender
pursues enforcement and a mutually acceptable arrangement with the lender cannot
be reached, the result could be a foreclosure on some or all of those investment
properties that secure such mortgages. Moreover, the Fund's net investment in
Bel Alliance would not be negatively impacted if a foreclosure on some or all of
those investment properties that secure such mortgages were to occur, based on
the current valuations of the affected properties. The eventual outcome of this
matter cannot be determined at this time. The mortgages are without recourse to
the other assets of Bel Alliance, Belcrest Capital and Belcrest Realty. The
technical default of certain mortgage agreements does not affect Belcrest
Capital's liquidity.
6 Segment Information
Belcrest 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, Belcrest Capital invests in real estate assets
through its subsidiary Belcrest Realty. Belcrest Realty invests directly in
Partnership Preference Units and debt and equity investments in private real
estate companies, and indirectly in investments in real property through
controlled subsidiaries, Bel Santa Ana, Bel Alliance and Casco. In the first
12
half of 2002, Belcrest Realty's controlled subsidiaries also included Bel
Apartment (for the period from January 1, 2002 to March 19, 2002) and Bel
Communities Property Trust for the entire period.
Belcrest 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 Belcrest Capital on a consolidated basis. No reportable
segments have been aggregated. Reportable information by segment is as follows:
For the Three Months Ended Tax Managed Real
June 30, 2003 Growth Portfolio* Estate Total
- --------------------------------------------------------------------------------
Revenue $ 5,509,193 $ 41,665,584 $ 47,174,777
Interest expense on mortgages - (10,460,223) (10,460,223)
Interest expense on Credit Facility - (3,290,885) (3,290,885)
Interest expense on swap contracts - (12,211,185) (12,211,185)
Operating expenses (344,123) (16,753,045) (17,097,168)
Minority interest in net income of
controlled subsidiaries - (593,558) (593,558)
- --------------------------------------------------------------------------------
Net investment income (loss) $ 5,165,070 $ (1,643,312) $ 3,521,758
Net realized gain 5,373,336 - 5,373,336
Change in unrealized gain (loss) 296,363,723 13,218,295 309,582,018
- --------------------------------------------------------------------------------
Net increase in net assets from
operations of reportable segments $ 306,902,129 $ 1,574,983 $ 318,477,112
- --------------------------------------------------------------------------------
For the Three Months Ended Tax Managed Real
June 30, 2002 Growth Portfolio* Estate Total
- --------------------------------------------------------------------------------
Revenue $ 5,241,011 $ 47,234,595 $ 52,475,606
Interest expense on mortgages - (12,808,459) (12,808,459)
Interest expense on Credit Facility - (5,054,831) (5,054,831)
Interest expense on swap contracts - (11,142,552) (11,142,552)
Operating expenses (501,364) (18,553,615) (19,054,979)
Minority interest in net income of
controlled subsidiaries - (971,692) (971,692)
- --------------------------------------------------------------------------------
Net investment income (loss) $ 4,739,647 $ (1,296,824) $ 3,442,823
Net realized loss (128,764,690) - (128,764,690)
Change in unrealized gain (loss) (267,781,085) (12,162,219) (279,943,304)
- --------------------------------------------------------------------------------
Net decrease in net assets from
operations of reportable segments $(391,806,128) $(13,459,043) $(405,265,171)
- --------------------------------------------------------------------------------
For the Six Months Ended Tax Managed Real
June 30, 2003 Growth Portfolio* Estate Total
- --------------------------------------------------------------------------------
Revenue $ 10,855,365 $ 83,795,387 $ 94,650,752
Interest expense on mortgages - (20,808,729) (20,808,729)
Interest expense on Credit Facility - (6,840,471) (6,840,471)
Interest expense on swap contracts - (24,501,680) (24,501,680)
Operating expenses (693,912) (32,548,882) (33,242,794)
Minority interest in net income of
controlled subsidiaries - (1,550,963) (1,550,963)
- --------------------------------------------------------------------------------
Net investment income (loss) $ 10,161,453 $ (2,455,338) $ 7,706,115
Net realized gain (loss) (5,079,542) 624,980 (4,454,562)
Change in unrealized gain (loss) 188,870,533 30,337,674 219,208,207
- --------------------------------------------------------------------------------
Net increase in net assets from
operations of reportable segments $ 193,952,444 $ 28,507,316 $ 222,459,760
- --------------------------------------------------------------------------------
13
For the Six Months Ended Tax Managed Real
June 30, 2002 Growth Portfolio* Estate Total
- --------------------------------------------------------------------------------
Revenue $ 9,193,123 $ 98,092,922 $ 107,286,045
Interest expense on mortgages - (27,076,060) (27,076,060)
Interest expense on Credit Facility - (10,228,676) (10,228,676)
Interest expense on swap contracts - (21,970,127) (21,970,127)
Operating expenses (1,025,936) (37,989,072) (39,015,008)
Minority interest in net income of
controlled subsidiaries - (2,457,349) (2,457,349)
- --------------------------------------------------------------------------------
Net investment income (loss) $ 8,167,187 $ (1,628,362) $ 6,538,825
Net realized loss (148,880,691) (1,157,768) (150,038,459)
Change in unrealized gain (loss) (227,572,171) (29,122,859) (256,695,030)
- --------------------------------------------------------------------------------
Net decrease in net assets from
operations of reportable segments $(368,285,675) $ (31,908,989) $(400,194,664)
- --------------------------------------------------------------------------------
Tax-Managed Real
At June 30, 2003 Growth Portfolio* Estate Total
- --------------------------------------------------------------------------------
Segment assets $2,584,612,221 $1,238,456,810 $3,823,069,031
Segment liabilities 300,932 1,357,060,092 1,357,361,024
- --------------------------------------------------------------------------------
Net assets of reportable segments $2,584,311,289 $ (118,603,282)$2,465,708,007
- --------------------------------------------------------------------------------
At December 31, 2002
- --------------------------------------------------------------------------------
Segment assets $2,496,618,352 $1,232,168,876 $3,728,787,228
Segment liabilities 3,952,503 1,420,074,228 1,424,026,731
- --------------------------------------------------------------------------------
Net assets of reportable segments $2,492,665,849 $ (187,905,352)$2,304,760,497
- --------------------------------------------------------------------------------
* Belcrest Capital invests indirectly in Tax-Managed Growth Portfolio through
Belvedere Capital.
The following tables reconcile the reported segment information to the condensed
consolidated financial statements for the periods indicated:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- --------------
Revenue:
Revenue from reportable segments $ 47,174,777 $ 52,475,606 $ 94,650,752 $ 107,286,045
Unallocated revenue 27,930 25,456 105,474 35,319
-------------- -------------- -------------- --------------
Total revenue $ 47,202,707 $ 52,501,062 $ 94,756,226 $ 107,321,364
-------------- -------------- -------------- --------------
Net increase (decrease) in net assets
from operations:
Net increase (decrease) in net assets
from operations of reportable segments
$ 318,477,112 $(405,265,171) $ 222,459,760 $(400,194,664)
Unallocated revenue 27,930 25,456 105,474 35,319
Unallocated expenses ** (1,027,315) (1,178,314) (1,942,291) (2,608,869)
-------------- -------------- -------------- --------------
Total net increase (decrease) in net
assets from operations $ 317,477,727 $(406,418,029) $ 220,622,943 $(402,768,214)
-------------- -------------- ------ ------- --------------
14
** Unallocated expenses include costs of Belcrest Capital to operate the Fund
such as servicing and distribution fees, as well as other miscellaneous
administrative costs of Belcrest Capital.
June 30,2003 December 31, 2002
------------ -----------------
Net assets:
Net assets of reportable segments $ 2,465,708,007 $ 2,304,760,497
Unallocated cash 6,230,100 7,861,074
Short-term investments 1,548,059 2,564,911
Loan payable-Credit Facility (14,843,000) (15,587,000)
Other liabilities (172,947) (107,950)
---------------- ----------------
Total net assets $ 2,458,470,219 $ 2,299,491,532
---------------- ----------------
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 Belcrest 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 14.75% for the quarter
ended June 30, 2003. This return reflects an increase in the Fund's net asset
value per share from $79.01 to $90.66 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
1.21% during the period. Last year, the Fund had a total return performance of
- -12.87% for the quarter ended June 30, 2002. This return reflected a decrease in
the Fund's net asset value per share from $107.12 to $93.33 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 1.23%
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
- ----------------------
(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
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.
PERFORMANCE OF REAL ESTATE INVESTMENTS. The Fund's real estate operations are
conducted primarily through Real Estate Joint Ventures and Net Leased Properties
that are majority-owned or wholly-owned by Belcrest Realty Corporation (Belcrest
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. The Fund's sale of its interest in Bel Communities Property Trust (Bel
Communities) in October 2002 reduced the scope of the Fund's real estate
activities for the quarter ended June 30, 2003 as compared to the quarter ended
June 30, 2002.
Rental income from real estate operations decreased to $27.8 million for the
quarter ended June 30, 2003 from $34.1 million for the quarter ended June 30,
2002, a decrease of $6.3 million or 18%. While this decrease in rental income
principally resulted from the sale of the Fund's interest in Bel Communities in
October 2002, rental income was also affected by increased rent concessions or
reduced apartment rental rates and lower occupancy levels at properties owned by
the Fund's remaining Real Estate Joint Ventures, a trend that continued from
2002.
Property operating expenses decreased to $14.8 million for the quarter ended
June 30, 2003 from $16.5 million for the quarter ended June 30, 2002, a decrease
of $1.7 million or 10% (property operating expenses are before debt service and
certain operating expenses of Belcrest Realty of approximately $1.9 million for
the quarter ended June 30, 2003 and approximately $2.0 million for the quarter
ended June 30, 2002). This decrease in operating expenses was principally due to
fewer Real Estate Joint Ventures held as a result of the sale of the Fund's
interest in Bel Communities. The decrease was partially offset by modest
increases in property and maintenance, taxes and insurance expenses of the
Fund's remaining Real Estate Joint Ventures and Net Leased Properties. Given the
continued uncertain outlook for the U.S. economy as a whole, Boston Management,
Belcrest Realty's manager, expects that real estate operating results for the
Fund's remaining Real Estate Joint Ventures in 2003 will continue to be modestly
below the levels of 2002.
Because the number of Real Estate Joint Ventures held by Belcrest Realty was
reduced during 2002, the total estimated fair value of the real properties held
through Belcrest Realty was lower at the end of the second quarter of 2003
compared to the second quarter of 2002. At June 30, 2003, the estimated fair
value of the real properties held through Belcrest Realty was $624.9 million
compared to $821.7 million at June 30, 2002, a decrease of $196.8 million or
24%. The decrease was also due, in part, to modest decreases in property values
resulting from declines in near-term earnings expectations and the economic
downturn. The Fund saw unrealized depreciation of the estimated fair value in
its other real estate investments (which includes the Fund's Real Estate Joint
Ventures and Net Leased Properties) of approximately $0.3 million during the
quarter ended June 30, 2003 compared to approximately $12.8 million for the
quarter ended June 30, 2002. Despite weaker market conditions, declines in asset
values for multifamily properties have generally been modest as decreases in
capitalization rates have continued to significantly offset declining income
level expectations.
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. At June 30, 2003, the estimated fair value of the
Fund's Partnership Preference Units totaled $578.1 million compared to $550.8
million at June 30, 2002, an increase of $27.3 million or 5%. The Fund saw
unrealized appreciation of the estimated fair value in its Partnership
Preference Units of approximately $3.2 million during the quarter ended June 30,
2003 compared to approximately $17.1 million for the quarter ended June 30,
2002. Dividends received from Partnership Preference Units for the quarter ended
June 30, 2003 totaled $13.8 million compared to $13.1 million for the quarter
ended June 30, 2002, an increase of $0.7 million or 5%.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the quarter ended June 30,
2003, interest rate swap agreement values appreciated by $10.3 million, due to
the exercise of early termination options on a number of swap agreements and the
remaining agreements approaching their initial optional termination dates. The
appreciation was offset by a slight decline in swap rates. For the quarter ended
June 30, 2002, the value of interest rate swap agreements decreased by $16.5
million due to a decline in swap rates. Approximately 47% of the notional amount
of the Fund's existing swap agreements will reach their initial optional
17
termination dates over the next four quarters and the remaining agreements reach
their initial optional termination dates on or before September 28, 2004.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 2002
- --------------------------------------------------------------------------------
PERFORMANCE OF THE FUND. The Fund's total return was 9.86% for the six months
ended June 30, 2003. This return reflects an increase in the Fund's net asset
value per share from $82.94 to $90.66 and a distribution of $0.43 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 1.67% during the period. Last year, the Fund had a total return
performance of -12.76% for the six months ended June 30, 2002. This return
reflected a decrease in the Fund's net asset value per share from $106.98 to
$93.33. For comparison, the S&P 500 had a total return of -13.15% over the same
period. The performance of the Fund trailed that of the Portfolio by
approximately 1.82% for the six months ended 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. Rental income for the six months ended
June 30, 2003 declined to $56.1 million from $71.8 million for the six months
ended June 30, 2002, a decrease of $15.7 million or 22%. Property operating
expenses decreased to $28.7 million for the six months ended June 30, 2003 from
$33.6 million for the six months ended June 30, 2002, a decrease of $4.9 million
or 15% (property operating expenses are before debt service and certain
operating expenses of Belcrest Realty of approximately $3.8 million for the six
months ended June 30, 2003 and approximately $4.4 million for the six months
ended June 30, 2002). While these decreases were principally due to the sale of
the Fund's interest in Bel Communities in October 2002 and its interest in Bel
Apartment Properties Trust in March 2002, weaker multifamily market fundamentals
in most regions combined with lower occupancy levels and increased rent
concessions also impacted results during the period, as did modest increases in
operating expenses.
Because the number of Real Estate Joint Ventures held by Belcrest Realty was
reduced during 2002, the estimated fair value of the real properties held
through Belcrest Realty was lower at June 30, 2003 compared to June 30, 2002. At
18
June 30, 2003, the estimated fair value of the real properties held through
Belcrest Realty was $624.9 million compared to $821.7 million at June 30, 2002,
a decrease of $196.8 million or 24%. The decrease was also due, in part, to
modest decreases in property values resulting from declines in near-term
earnings expectations and the economic downturn. The Fund saw unrealized
depreciation of the estimated fair value in its other real estate investments of
approximately $24.9 million during the six months ended June 30, 2003, compared
to approximately $39.0 million for the six months ended June 30, 2002. Declines
in asset values for multifamily properties during the period have generally been
modest as decreases in capitalization rates have largely offset declining income
level expectations.
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. At June 30, 2003, the estimated fair value of the
Fund's Partnership Preference Units totaled $578.1 million compared to $550.8
million at June 30, 2002, an increase of $27.3 million or 5%. The Fund saw
unrealized appreciation of the estimated fair value in its Partnership
Preference Units of approximately $36.0 million during the six months ended June
30, 2003, compared to approximately $15.1 million for the six months ended June
30, 2002. Dividends received from Partnership Preference Units for the six
months ended June 30, 2003 totaled $27.6 million compared to $26.2 million for
the six months ended June 30, 2002, an increase of $1.4 million or 5%. During
the six month periods ended June 30, 2003 and June 30, 2002, the fund sold or
exchanged certain of its Partnership Preference Units and recognized gains of
$0.6 million and $0.4 million, respectively, on the transactions.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the six months ended June 30,
2003, interest rate swap agreement values appreciated by approximately $19.2
million compared to depreciation of approximately $5.2 million for the six
months ended June 30, 2002. The appreciation during the first half of 2003 is
primarily due to the exercise of early termination options on a number of swap
agreements and many of the remaining swap agreements approaching their initial
optional termination dates. Swap rates declined during the period, offsetting
some of the appreciation from approaching early termination dates. The
depreciation for the six months ended June 30, 2002 was caused by declines in
swap rates during the period.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Effective July 15, 2003, the Fund refinanced its Credit Facility with Merrill
Lynch International Bank 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 $860 million. The
New Credit Facility is secured by a pledge of the Fund's assets, excluding the
assets of Bel Santa Ana LLC, Bel Alliance Properties, LLC and Casco Property
Trust, LLC, 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 $722 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 $722 million.
The Fund has a $138 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 $20.2
million. There were no amounts outstanding under letters of credit at June 30,
2003. The unused loan commitment amount totaled approximately $117.8. 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.
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 quarterly payments to the counterparty at predetermined fixed rates, in
19
exchange for floating-rate payments at a predetermined spread to three-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 $42.5 million and $55.0 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 Belcrest 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 Belcrest 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 and Net Leased Properties. 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 three-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 4 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
2004-2005 2006 2007-2008 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
- -----------------------------------
Long-term debt:
- -----------------------------------
Fixed-rate mortgages $ 11,528,425 $527,199,929 $538,728,354 $590,000,000
Average interest rate 6.90% 7.57% 7.55%
- -----------------------------------
Variable-rate Credit Facility $742,150,000 $742,150,000 $742,150,000
Average interest rate 1.57% 1.57%
- -----------------------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative
financial instruments:
- -----------------------------------
Pay fixed/
Receive variable interest rate
swap contracts $858,800,000 $858,800,000 $(42,469,385)
Average pay rate 7.10% 7.10%
Average receive rate 1.57% 1.57%
- -----------------------------------------------------------------------------------------------------------------------------------
Rate sensitive investments:
- -----------------------------------
Fixed-rate Partnership Preference
Units:
- -----------------------------------
21
Bradley Operating Limited
Partnership, 8.875% Series B
Cumulative Redeemable Perpetual
Preferred Units, Callable 2/23/04,
Current Yield: 8.82% $ 23,799,036 $ 23,799,036 $ 24,571,457
Camden Operating, L.P., 8.50% Series
B Cumulative Redeemable Perpetual
Preferred Units, Callable 2/23/04,
Current Yield: 8.34% $ 4,076,090 $ 4,076,090 $ 4,333,300
Colonial Realty Limited Partnership,
8.875% Series B Cumulative
Redeemable Perpetual Preferred
Units, Callable 2/23/04, Current
Yield: 8.71% $ 50,744,840 $ 50,744,840 $ 52,468,200
Essex Portfolio, L.P., 9.125% Series
C Cumulative Redeemable Preferred
Unites, Callable 11/24/03, Current
Yield: 8.92% $ 21,000,000 $ 21,000,000 $ 21,478,926
Liberty Property L.P., 9.25% Series
B Cumulative Redeemable Preferred
Units, Callable 7/28/04, Current
Yield: 8.91% $ 64,025,574 $ 64,025,574 $ 66,587,400
MHC Operating Limited Partnership,
9% Series D Cumulative Redeemable
Perpetual Preference Units, Callable
9/29/04, Current Yield: 8.95% $ 75,000,000 $ 75,000,000 $ 75,390,000
National Golf Operating Partnership,
L.P., 9.30% Series A Cumulative
Redeemable Preferred Units, Callable
3/4/03, Current Yield: 9.89% $ 27,877,518 $ 27,877,518 $ 29,672,712
National Golf Operating Partnership,
L.P., 9.30% Series B Cumulative
Redeemable Preferred Units, Callable
7/28/04, Current Yield: 9.89% $ 29,833,200 $ 29,833,200 $ 28,200,000
PSA Institutional Partners, L.P.,
9.50% Series N Cumulative Redeemable
Perpetual Preferred Units, Callable
3/17/05, Current Yield: 8.99% $ 55,375,000 $ 55,375,000 $ 58,520,300
22
Price Development Company, L.P.,
8.95% Series B Cumulative Redeemable
Preferred Partnership Units,
Callable 7/28/04, Current Yield:
9.27% $ 64,089,925 $ 64,089,925 $ 62,160,500
Regency Centers, L.P., 9.125% Series
D Cumulative Redeemable Preferred
Units, Callable 9/29/04, Current
Yield: 8.79% $ 35,000,000 $ 35,000,000 $ 36,323,000
Summit Properties Partnership, L.P.,
8.95% Series B Cumulative Redeemable
Perpetual Preferred Units, Callable
4/29/04, Current Yield: 8.85% $ 55,108,570 $ 55,108,570 $ 55,973,050
Urban Shopping Centers, L.P., 9.45%
Series D Cumulative Redeemable
Perpetual Preferred Units, Callable $ 60,000,000 $ 60,000,000 $ 62,367,120
10/01/04, Current Yield: 9.09%
- --------------------------------------
Note Receivable:
- --------------------------------------
Fixed-rate note receivable, 8%
$ 3,457,795 $ 3,457,795 $ 3,457,795
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, Belcrest Realty and
Belcrest 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.
23
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
- ---------------------------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- -----------------------------------------
None.
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.
24
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.
BELCREST CAPITAL FUND LLC
/s/ Michelle A. Alexander
-------------------------
Michelle A. Alexander
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
25
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
26