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 September 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
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(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
Page
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Statements of Assets and Liabilities
as of September 30, 2003 (Unaudited) and December 31, 2002 3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months Ended September 30, 2003 and 2002 and
for the Nine Months Ended September 30, 2003 and 2002 4
Condensed Consolidated Statements of Changes in Net Assets
(Unaudited) for the Nine Months Ended September 30, 2003 and
2002 6
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 30, 2003 and 2002 7
Financial Highlights (Unaudited) for the Nine Months Ended
September 30, 2003 9
Notes to Condensed Consolidated Financial Statements
as of September 30, 2003 (Unaudited) 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings 24
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 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
EXHIBIT INDEX 27
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
- -------------------------------------------------------------------------------
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Assets and Liabilities
September 30,
2003 December 31,
(Unaudited) 2002
-------------- -------------
Assets:
Investment in Belvedere Capital Fund Company
LLC (Belvedere Capital) $2,576,595,863 $2,423,063,983
Investment in Partnership Preference Units 519,524,909 547,878,187
Investment in other real estate 623,136,257 651,756,818
Short-term investments 62,795,058 2,564,911
-------------- --------------
Total investments $3,782,052,087 $3,625,263,899
Cash 7,401,421 12,216,034
Receivable for investments sold - 73,554,369
Escrow deposits - restricted 14,598,481 13,475,591
Dividends and interest receivable 1,367,567 7,835,775
Other assets 5,511,083 6,867,545
-------------- --------------
Total assets $3,810,930,639 $3,739,213,213
-------------- --------------
Liabilities:
Loan payable on Credit Facility $ 745,650,000 $ 779,350,000
Mortgages payable 537,619,358 541,017,537
Payable for Fund Shares redeemed 3,529,657 3,952,191
Special Distributions payable 932 -
Open interest rate swap agreements, at value 31,204,459 61,716,527
Security deposits 2,152,726 2,231,784
Swap interest payable 4,823,321 5,089,784
Accrued expenses:
Interest expense 3,600,489 4,815,222
Property taxes 7,995,955 9,169,540
Other expenses and liabilities 8,994,884 6,282,930
Minority interests in controlled subsidiaries 19,229,886 26,096,166
-------------- --------------
Total liabilities $1,364,801,667 $1,439,721,681
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Net assets $2,446,128,972 $2,299,491,532
-------------- --------------
Shareholders' Capital $2,446,128,972 $2,299,491,532
-------------- --------------
Shares outstanding 26,339,106 27,724,437
-------------- --------------
Net asset value and redemption price per Share $ 92.87 $ 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 Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------------- ------------- ------------- ---------------
Investment Income:
Dividends allocated from Belvedere Capital
(net of foreign taxes of $78,362, $78,530,
$348,826 and $300,567, respectively) $ 9,332,679 $ 8,746,923 $ 27,087,005 $ 27,223,566
Interest allocated from Belvedere Capital 77,353 200,459 522,478 720,348
Expenses allocated from Belvedere Capital (3,992,143) (4,046,391) (11,336,229) (13,849,800)
------------- ------------- ------------- -------------
Net investment income allocated from
Belvedere Capital $ 5,417,889 $ 4,900,991 $ 16,273,254 $ 14,094,114
Dividends from Partnership Preference Units 11,826,889 13,092,134 39,409,885 39,294,777
Rental income 27,339,096 33,903,937 83,424,249 105,717,460
Interest 112,858 23,215 345,570 135,290
------------ ------------ ------------ ------------
Total investment income $ 44,696,732 $ 51,920,277 $139,452,958 $159,241,641
------------ ------------ ------------ ------------
Expenses:
Investment advisory and administrative fees $ 2,606,188 $ 2,765,589 $ 7,682,224 $ 9,082,455
Property management fees 1,043,782 1,304,217 3,173,898 4,097,178
Distribution and servicing fees 882,495 829,002 2,513,164 3,016,826
Interest expense on mortgages 10,442,120 12,863,705 31,250,849 39,939,765
Interest expense on Credit Facility 3,066,680 4,996,571 10,046,752 15,433,995
Interest expense on swap agreements 11,408,892 11,680,481 35,910,572 33,650,608
Property and maintenance expenses 9,965,594 11,188,827 28,759,000 32,718,127
Property taxes and insurance 3,527,929 4,531,834 11,348,421 13,794,187
Miscellaneous 675,984 330,422 1,408,765 1,190,409
------------ ------------ ------------ -------------
Total expenses $ 43,619,664 $ 50,490,648 $132,093,645 $ 152,923,550
Deduct-
Reduction of investment advisory
and administrative fees 626,999 610,857 1,765,015 2,145,019
------------ ------------ ------------ -------------
Net expenses $ 42,992,665 $ 49,879,791 $130,328,630 $ 150,778,531
------------ ------------ ------------ -------------
Net investment income before
minority interests in net income of
controlled subsidiaries $ 1,704,067 $ 2,040,486 $ 9,124,328 $ 8,463,110
Minority interests in net income
of controlled subsidiaries (360,764) (535,236) (1,911,727) (2,992,585)
------------- ------------- ------------- --------------
Net investment income $ 1,343,303 $ 1,505,250 $ 7,212,601 $ 5,470,525
------------- ------------- ------------- --------------
See notes to unaudited condensed consolidated financial statements
4
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited) (Continued)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------------- ------------- ------------- ---------------
Realized and Unrealized Gain (Loss)
Net realized gain (loss) -
Investment transactions from Belvedere
Capital (identified cost basis) $ 1,835,118 $ (54,420,240) $ (3,244,424) $(203,300,931)
Investment transactions in Partnership
Preference Units (identified cost) 1,810,778 - 2,435,758 374,360
Investment transactions in other real
estate - - - (1,532,128)
------------- -------------- ------------- --------------
Net realized gain (loss) $ 3,645,896 $ (54,420,240) $ (808,666) $(204,458,699)
------------- -------------- ------------- --------------
Change in unrealized appreciation
(depreciation) -
Investment in Belvedere Capital
(identified cost basis) $ 53,492,307 $(388,020,095) $242,362,840 $(615,592,266)
Investments in Partnership Preference
Units (identified cost basis) (3,412,486) 18,049,461 32,570,355 33,098,871
Investments in other real estate
(net of minority interests in
unrealized gain (loss) of controlled
subsidiaries of $(4,536,698),
$(5,548,478), $(8,778,003)
and $(41,445,190), respectively) (6,116,615) (1,769,838) (31,008,924) (40,756,598)
Interest rate swap agreements 11,264,926 (12,548,231) 30,512,068 (17,733,740)
-------------- -------------- ------------- --------------
Net change in unrealized appreciation
(depreciation) $ 55,228,132 $(384,288,703) $274,436,339 $(640,983,733)
------------- -------------- ------------ --------------
Net realized and unrealized gain (loss) $ 58,874,028 $(438,708,943) $273,627,673 $(845,442,432)
-------------- -------------- ------------ --------------
Net increase (decrease) in net assets
from operations $ 60,217,331 $(437,203,693) $280,840,274 $(839,971,907)
============== ============== ============= ==============
See notes to unaudited condensed consolidated financial statements
5
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Changes in Net Assets (Unaudited)
Nine Months Nine Months
Ended Ended
September 30, 2003 September 30, 2002
------------------ ------------------
Increase (Decrease) in Net Assets:
Net investment income $ 7,212,601 $ 5,470,525
Net realized loss from investment transactions (808,666) (204,458,699)
Net change in unrealized appreciation (depreciation)
of investments 274,436,339 (640,983,733)
--------------- ----------------
Net increase (decrease) in net assets from operations $ 280,840,274 $ (839,971,907)
--------------- ----------------
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 (127,104,831) (185,416,710)
--------------- -----------------
Net decrease in net assets from Fund Share transactions $ (122,308,220) $ (185,416,710)
--------------- -----------------
Distributions -
Distributions to Shareholders $ (11,893,682) $ -
Special Distributions to Shareholders (932) -
--------------- -----------------
Total distributions $ (11,894,614) $ -
--------------- -----------------
Net increase (decrease) in net assets $ 146,637,440 $ (1,025,388,617)
Net assets:
At beginning of period $ 2,299,491,532 $ 3,253,990,369
---------------- -----------------
At end of period $ 2,446,128,972 $ 2,228,601,752
================ =================
See notes to unaudited condensed consolidated financial statements
6
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2003 2002
------------- -------------
Cash Flows From (For) Operating Activities -
Net increase (decrease) in net assets from operations $ 280,840,274 $(839,971,907)
Adjustments to reconcile net increase (decrease) in net assets from operations
to net cash flows from operating activities -
Net investment income allocated from Belvedere Capital (16,273,254) (14,094,114)
Increase in escrow deposits (1,122,890) (528,515)
Decrease in receivable for investments sold 73,554,369 -
Increase in interest receivable from other real estate investments (173,113) -
Decrease in other assets 1,356,462 2,390,405
Decrease (increase) in dividends and interest receivable 6,468,208 (3,780,668)
(Decrease) increase in interest payable for open swap agreements (266,463) 368,796
Increase (decrease) in security deposits, accrued interest and accrued
other expenses and liabilities 1,418,163 (239,401)
Decrease in accrued property taxes (1,173,585) (851,580)
Proceeds from sales of Partnership Preference Units 56,919,348 35,374,360
Proceeds from sale of investment in other real estate - 31,588,186
Improvements to rental property (4,553,214) (5,788,406)
Decrease in cash due to sale of majority interest in
controlled subsidiary - (1,195,835)
Net (increase) decrease in investment in Belvedere Capital (23,700,000) 19,977,702
(Increase) decrease in short-term investments (60,230,147) 4,417,717
Minority interests in net income of controlled subsidiaries 1,911,727 2,992,585
Net realized loss from investment transactions 808,666 204,458,699
Net change in unrealized (appreciation) depreciation of
investments (274,436,339) 640,983,733
--------------- -----------------
Net cash flows from operating activities $ 41,348,212 $ 76,101,757
--------------- -----------------
Cash Flows From (For) Financing Activities -
Repayment of Credit Facility $ (33,700,000) $ (67,000,000)
Payments on mortgages (3,398,179) (3,146,138)
Payments for Fund Shares redeemed (1,967,575) (3,520,473)
Distributions paid to Shareholders (7,097,071) -
Distributions paid to minority shareholders - (1,946,213)
-------------- ----------------
Net cash flows for financing activities $ (46,162,825) $ (75,612,824)
-------------- ----------------
Net (decrease) increase in cash $ (4,814,613) $ 488,933
Cash at beginning of period $ 12,216,034 $ 12,170,155
--------------- ---------------
Cash at end of period $ 7,401,421 $ 12,659,088
=============== ===============
See notes to unaudited condensed consolidated financial statements
7
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2003 2002
------------- -------------
Supplemental Disclosure and Non-cash Investing and
Financing Activities -
Interest paid on loan - Credit Facility $ 10,951,833 $ 15,920,432
Interest paid on mortgages $ 30,845,363 $ 39,435,437
Interest paid on swap agreements $ 36,177,035 $ 33,281,812
Market value of securities distributed in payment of
redemptions $ 125,559,790 $ 172,660,387
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 September 30, 2003
Condensed Consolidated Financial Statements (Continued)
FINANCIAL HIGHLIGHTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
Net asset value - Beginning of period $ 82.940
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
- --------------------------------------------------------------------------------
Net investment income (6) $ 0.266
Net realized and unrealized gain 10.094
- --------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS $ 10.360
- --------------------------------------------------------------------------------
DISTRIBUTIONS
- --------------------------------------------------------------------------------
Distributions to Shareholders $ (0.430)
Special Distributions to Shareholders (9) (0.000)
- --------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS $ (0.430)
- --------------------------------------------------------------------------------
NET ASSET VALUE - END OF PERIOD $ 92.870
- --------------------------------------------------------------------------------
TOTAL RETURN (1) 12.54%
- --------------------------------------------------------------------------------
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) 1.38% (8) 0.92% (8)
Operating expenses (7) 1.89% (8) 1.26% (8)
Belcrest Capital Fund LLC Expenses
Interest and other borrowing costs (4) 2.60% (8) 1.75% (8)
Investment advisory and administrative fees,
servicing fees and other Fund operating expenses (3)(4) 1.17% (8) 0.78% (8)
-------------------------------------------------------
Total expenses 7.04% (8) 4.71% (8)
Net investment income 0.41% (8) 0.27% (8)
- --------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 2,446,129
Portfolio Turnover of Tax-Managed Growth Portfolio (the Portfolio) 14%
- --------------------------------------------------------------------------------------------------------------------------------
(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 September 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 nine
months ended September 30, 2003 and September 30, 2002:
Nine Months Ended Nine Months Ended
Investment Transaction September 30, 2003 September 30, 2002
- --------------------------------------------------------------------------------
Increases in investment in Belvedere Capital $ 23,700,000 $106,910,691
Decreases in investment in Belvedere Capital $125,559,790 $299,548,777
Sales of Partnership Preference Units $ 56,919,348 $ 35,374,360
Sales of other real estate (1) $ - $ 31,588,186
- --------------------------------------------------------------------------------
(1) During the nine months ended September 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 nine months ended September 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 (valued at $3,352,436
as of September 30, 2003) 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 nine months ended September 30, 2003 and September 30, 2002,
including allocations of income and expenses for the respective periods then
ended:
Nine Months Nine Months
Ended Ended
September 30, 2003 September 30, 2002
- -----------------------------------------------------------------------------------------------------------------------
Belvedere Capital's interest in the Portfolio (1) $9,775,572,306 $ 8,043,904,602
The Fund's investment in Belvedere Capital (2) $2,576,595,863 $ 2,420,307,851
Income allocated to Belvedere Capital from the Portfolio $ 102,346,416 $ 88,799,143
Income allocated to the Fund from Belvedere Capital $ 27,609,483 $ 27,943,914
Expenses allocated to Belvedere Capital from the Portfolio $ 31,352,609 $ 32,657,939
Expenses allocated to the Fund from Belvedere Capital $ 11,336,229 $ 13,849,800
Realized loss allocated to Belvedere Capital from the Portfolio $ (10,803,952) $ (613,666,720)
Realized loss allocated to Fund from Belvedere Capital $ (3,244,424) $ (203,300,931)
Change in unrealized appreciation (depreciation) allocated to Belvedere
Capital from the Portfolio $ 898,392,188 $(2,038,582,077)
Change in unrealized appreciation (depreciation) allocated to Fund from
Belvedere Capital $ 242,362,840 $ (615,592,266)
- -----------------------------------------------------------------------------------------------------------------------
(1) As of September 30, 2003 and 2002, the value of Belvedere Capital's
interest in the Portfolio represents 62.1% and 58.6% of the Portfolio's net
assets, respectively.
(2) As of September 30, 2003 and 2002, the Fund's investment in Belvedere
Capital represents 26.4% and 30.1% of Belvedere Capital's net assets,
respectively.
A summary of the Portfolio's Statement of Assets and Liabilities, at September
30, 2003, December 31, 2002 and September 30, 2002 and its operations for the
nine months ended September 30, 2003, for the year ended December 31, 2002 and
for the nine months ended September 30, 2002 follows:
September 30, December 31, September 30,
2003 2002 2002
------------------------------------------------------------
Investments, at value $15,720,495,292 $ 14,544,149,182 $13,713,440,772
Other assets 22,166,551 70,073,039 59,906,476
- ----------------------------------------------------------------------------------------------------------
Total assets $15,742,661,843 $ 14,614,222,221 $13,773,347,248
Total liabilities 241,245 42,700,633 35,785,860
- ----------------------------------------------------------------------------------------------------------
Net assets $15,742,420,598 $ 14,571,521,588 $13,737,561,388
==========================================================================================================
Dividends and interest $ 166,725,898 $ 213,292,082 $ 155,639,717
- ----------------------------------------------------------------------------------------------------------
Investment adviser fee $ 49,370,631 $ 71,564,552 $ 55,373,624
Other expenses 1,730,334 2,577,489 1,956,361
- ----------------------------------------------------------------------------------------------------------
Total expenses $ 51,100,965 $ 74,142,041 $ 57,329,985
- ----------------------------------------------------------------------------------------------------------
Net investment income $ 115,624,933 $ 139,150,041 $ 98,309,732
Net realized losses (17,942,587) (459,996,840) (503,906,340)
Net change in unrealized
appreciation (depreciation) 1,449,036,078 (3,312,547,564) (4,125,048,140)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets from operations $ 1,546,718,424 $ (3,633,394,363) $(4,530,644,748)
- ----------------------------------------------------------------------------------------------------------
11
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 September
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.
Notional Initial Unrealized Unrealized
Amount Optional Final Depreciation Depreciation
(000's Fixed Floating Termination Termination at September 30, at December 31,
omitted) Rate Rate Date Date 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
$68,750 6.225% LIBOR + 0.45% 11/03 11/05 $ 448,795 $ 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 11/05 139,425 806,266
111,000 6.4068% LIBOR + 0.45% 02/04 11/05 2,073,549 5,541,030
80,000 6.555% LIBOR + 0.45% 04/04 11/05 2,251,885 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 91,511 531,221
15,105 6.5903% LIBOR + 0.45% 02/04 11/05 292,996 786,970
26,516 7.308% LIBOR + 0.45% 11/03 11/05 213,657 1,277,816
40,193 7.301% LIBOR + 0.45% 02/04 11/05 884,672 2,427,007
10,109 7.237% LIBOR + 0.45% 04/04 11/05 323,803 689,195
155,000 7.231% LIBOR + 0.45% 07/04 11/05 7,053,495 12,202,144
17,674 7.700% LIBOR + 0.45% 02/04 11/05 416,326 1,148,226
9,833 7.635% LIBOR + 0.45% 07/04 11/05 479,879 837,224
43,000 7.6525% LIBOR + 0.45% 09/04 11/05 2,439,077 3,931,451
35,024 7.644% LIBOR + 0.45% 07/04 11/05 1,711,794 2,986,988
212,000 7.6224% LIBOR + 0.45% 09/04 11/05 12,318,778 19,546,084
1,907 7.58% LIBOR + 0.45% 04/04 11/05 64,817 138,784
- ----------------------------------------------------------------------------------------------------------------------
$31,204,459 $61,716,527
- ----------------------------------------------------------------------------------------------------------------------
* Agreement was terminated on the Initial Optional Termination Date.
On October 1, 2003, new current and forward interest rate swap agreements were
entered into to fix the cost of a portion of Belcrest Capital's borrowings under
the Credit Facility (as defined in Note 5 below) established on July 15, 2003.
At the same time, all interest rate swap agreements outstanding on September 30,
2003 were terminated, resulting in realized losses of $31,431,345. The table
below identifies the terms of the interest rate swap agreements effective on
October 1, 2003.
Notional Initial
Amount Optional Final
Effective (000's Fixed Floating Termination Termination
Date omitted) Rate Rate Date Date
- --------- -------- ------ ------------- ----------- --------------
10/03 $ 78,620 5.050% LIBOR + 0.30% 2/04 6/10
10/03 128,116 4.865% LIBOR + 0.30% 7/04 6/10
10/03 170,000 4.795% LIBOR + 0.30% 9/04 6/10
10/03 63,526 4.690% LIBOR + 0.30% 2/05 6/10
10/03 55,375 4.665% LIBOR + 0.30% 3/05 6/10
10/03 80,965 4.145% LIBOR + 0.30% 3/10 6/10
10/03 47,253 4.045% LIBOR + 0.30% - 6/10
6/10 3,870 6.290% LIBOR + 0.30% - 7/15
12
5 Debt
A Credit Facility - On July 15, 2003, Belcrest Capital refinanced its then
existing credit facility with Merrill Lynch International Bank Limited with two
new credit arrangements (collectively, the Credit Facility) totaling
$860,000,000. The Credit Facility has a seven-year maturity and will expire on
June 25, 2010. Belcrest Capital's obligations under the 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).
The credit arrangement with DrKW Holdings, Inc. is for $722,000,000. This credit
arrangement accrues interest at a rate of one-month LIBOR plus 0.30% per annum.
As of September 30, 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 plus 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 September 30, 2003, outstanding borrowings under this credit
arrangement totaled $23,650,000 and there were no letters of credit issued.
B Mortgages - Rental property held by real estate joint ventures is financed
through mortgages that are secured by a rental property or properties, mortgage
loan deposit accounts, including all subaccounts thereunder, and an assignment
of certain leases and rents and are generally without recourse to the other
assets of Belcrest Capital and Belcrest Realty.
The mortgage agreements relating to the rental properties held by Bel Alliance
require certain covenants be met, including 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 mortgage. At
September 30, 2003, this covenant was not met for certain mortgage agreements,
of which the aggregate principal balance at September 30, 2003 totals $241.3
million, or 45% of the total mortgages outstanding. The mortgage agreements
provide for a cure period of 30 days after written notification from the lender;
with a further extension of up to 60 additional days. As of September 30, 2003
the lenders had not provided such notice. It is uncertain as to whether the
lenders will seek to enforce the provisions of the mortgage agreements. Bel
Alliance may choose not to commit additional equity to cure certain of these
technical defaults. 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.
However, the Fund's current 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 generally 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. During the nine
months ended September 30, 2002, Belcrest Realty's controlled subsidiaries also
13
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 appreciation (depreciation). 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
SEPTEMBER 30, 2003 GROWTH PORTFOLIO* ESTATE TOTAL
--------------------------------------------------------------------------------------------------------------
Revenue $ 5,417,889 $ 39,245,095 $ 44,662,984
Interest expense on mortgages - (10,442,120) (10,442,120)
Interest expense on Credit Facility - (3,005,346) (3,005,346)
Interest expense on swap agreements - (11,408,892) (11,408,892)
Operating expenses (394,197) (16,725,721) (17,119,918)
Minority interest in net income of
controlled subsidiaries - (360,764) (360,764)
--------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) $ 5,023,692 $ (2,697,748) $ 2,325,944
Net realized gain 1,835,118 1,810,778 3,645,896
Change in unrealized appreciation
(depreciation) 53,492,307 1,735,825 55,228,132
--------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM
OPERATIONS OF REPORTABLE SEGMENTS $ 60,351,117 $ 848,855 $ 61,199,972
--------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED TAX MANAGED REAL
SEPTEMBER 30, 2002 GROWTH PORTFOLIO* ESTATE TOTAL
--------------------------------------------------------------------------------------------------------------
Revenue $ 4,900,991 $ 47,018,459 $ 51,919,450
Interest expense on mortgages - (12,863,705) (12,863,705)
Interest expense on Credit Facility - (4,742,299) (4,742,299)
Interest expense on swap agreements - (11,680,481) (11,680,481)
Operating expenses (342,025) (19,109,903) (19,451,928)
Minority interest in net income of
controlled subsidiaries - (535,236) (535,236)
--------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) $ 4,558,966 $ (1,913,165) $ 2,645,801
Net realized loss (54,420,240) - (54,420,240)
Change in unrealized appreciation
(depreciation) (388,020,095) 3,731,392 (384,288,703)
--------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN NET ASSETS FROM
OPERATIONS OF REPORTABLE SEGMENTS $(437,881,369) $ 1,818,227 $ (436,063,142)
--------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED TAX MANAGED REAL
SEPTEMBER 30, 2003 GROWTH PORTFOLIO* ESTATE TOTAL
--------------------------------------------------------------------------------------------------------------
Revenue $ 16,273,254 $ 123,040,482 $ 139,313,736
Interest expense on mortgages - (31,250,849) (31,250,849)
Interest expense on Credit Facility - (9,845,817) (9,845,817)
Interest expense on swap agreements - (35,910,572) (35,910,572)
Operating expenses (1,088,109) (49,274,603) (50,362,712)
Minority interest in net income of
controlled subsidiaries - (1,911,727) (1,911,727)
--------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) $ 15,185,145 $ (5,153,086) $ 10,032,059
Net realized gain (loss) (3,244,424) 2,435,758 (808,666)
Change in unrealized appreciation
(depreciation) 242,362,840 32,073,499 274,436,339
--------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM
OPERATIONS OF REPORTABLE SEGMENTS $ 254,303,561 $ 29,356,171 $ 283,659,732
--------------------------------------------------------------------------------------------------------------
14
FOR THE NINE MONTHS ENDED TAX MANAGED REAL
SEPTEMBER 30, 2002 GROWTH PORTFOLIO* ESTATE TOTAL
--------------------------------------------------------------------------------------------------------------
Revenue $ 14,094,114 $ 145,111,381 $ 159,205,495
Interest expense on mortgages - (39,939,765) (39,939,765)
Interest expense on Credit Facility - (14,970,975) (14,970,975)
Interest expense on swap agreements - (33,650,608) (33,650,608)
Operating expenses (1,367,961) (57,098,975) (58,466,936)
Minority interest in net income of
controlled subsidiaries - (2,992,585) (2,992,585)
--------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) $ 12,726,153 $ (3,541,527) $ 9,184,626
Net realized loss (203,300,931) (1,157,768) (204,458,699)
Change in unrealized appreciation
(depreciation) (615,592,266) (25,391,467) (640,983,733)
--------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS FROM OPERATIONS OF
REPORTABLE SEGMENTS $(806,167,044) $ (30,090,762) $ (836,257,806)
--------------------------------------------------------------------------------------------------------------
TAX-MANAGED GROWTH REAL
AT SEPTEMBER 30, 2003 PORTFOLIO* ESTATE TOTAL
- -----------------------------------------------------------------------------------------------------------------
Segment assets $2,576,595,863 $1,168,046,366 $3,744,642,229
Segment liabilities 3,530,589 1,320,309,507 1,323,840,096
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS OF REPORTABLE SEGMENTS $2,573,065,274 $ (152,263,141) $2,420,802,133
- -----------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2002
- -----------------------------------------------------------------------------------------------------------------
Segment assets $2,496,618,352 $1,232,168,876 $3,728,787,228
Segment liabilities 3,952,503 1,418,083,942 1,422,036,445
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS OF REPORTABLE SEGMENTS $2,492,665,849 $ (185,915,066) $2,306,750,783
- -----------------------------------------------------------------------------------------------------------------
* 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 Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
-----------------------------------------------------------------------
Revenue:
Revenue from reportable segments $ 44,662,984 $ 51,919,450 $139,313,736 $ 159,205,495
Unallocated revenue 33,748 827 139,222 36,146
-----------------------------------------------------------------------
Total revenue $ 44,696,732 $ 51,920,277 $139,452,958 $ 159,241,641
-----------------------------------------------------------------------
Net increase (decrease) in net assets
from operations:
Net increase (decrease) in net assets
from operations of reportable segments $61,199,972 $(436,063,142) $283,659,732 $(836,257,806)
Unallocated revenue 33,748 827 139,222 36,146
Unallocated expenses ** (1,016,389) (1,141,378) (2,958,680) (3,750,247)
-----------------------------------------------------------------------
Total net increase (decrease) in net
assets from operations $60,217,331 $(437,203,693) $280,840,274 $(839,971,907)
-----------------------------------------------------------------------
** Unallocated expenses include costs of Belcrest Capital to operate the Fund
such as servicing and distribution fees, as well as other miscellaneous and
administrative costs of Belcrest Capital.
15
September 30, 2003 December 31, 2002
------------------ -----------------
Net assets:
Net assets of reportable segments $2,420,802,133 $2,306,750,783
Unallocated cash 3,493,352 7,861,074
Short-term investments 62,795,058 (1) 2,564,911
Loan payable-Credit Facility (40,796,633) (1) (17,577,286)
Other liabilities (164,938) (107,950)
------------------ -----------------
Total net assets $2,446,128,972 $2,299,491,532
------------------ -----------------
(1) Short-term investments represent temporary investments of cash. Such
amounts may be used to finance the Fund's equity in real estate
investments, to reduce outstanding borrowings under the Credit Facility or
for the short-term liquidity needs of the Fund.
16
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 SEPTEMBER 30, 2003 COMPARED TO THE
QUARTER ENDED SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------
PERFORMANCE OF THE FUND.(1) The Fund's total return was 2.44% for the quarter
ended September 30, 2003. This return reflects an increase in the Fund's net
asset value per share from $90.66 to $92.87 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 2.65% over the same period. The performance of the Fund
exceeded that of Tax-Managed Growth Portfolio (the Portfolio) by approximately
0.1% during the period. Last year, the Fund had a total return performance of
- -16.18% for the quarter ended September 30, 2002. This return reflected a
decrease in the Fund's net asset value per share from $93.33 to $78.23 during
the period. For comparison, the S&P 500 had a total return of -17.27% over the
same period. The performance of the Fund trailed that of the Portfolio by
approximately 1.1% during that period.
PERFORMANCE OF THE PORTFOLIO. The total return of the Portfolio for the quarter
ended September 30, 2003 was 2.35% compared to the 2.65% return achieved by the
S&P 500 over the same period. The modest gain posted by the S&P 500 during the
quarter is in sharp contrast to the worst broad market quarterly decline in this
decade that was experienced in the quarter ended September 30, 2002. The
Portfolio's total return for the quarter ended September 30, 2002 was -15.11%.
The encouraging fiscal and monetary policies, resilient consumer spending and
positive earnings momentum experienced through the first half of 2003 continued
during the third quarter and contributed to the market's strength during the
quarter, extending its gains for the year.
The performance of the Portfolio slightly trailed the performance of the S&P 500
during the quarter ended September 30, 2003 primarily due to the Portfolio's
relatively more defensive tilt and its continued underweighting of the
information technology sector. Unlike a year ago when it was the worst
performing sector, information technology was by far the best performing sector
of the market during the quarter ended September 30, 2003.
During the quarter ended September 30, 2003, the Portfolio's sector allocation
remained very similar to last year's positioning relative to the market, with no
major sector or industry shifts. Near the end of the quarter there was some
pause in the strong momentum of higher beta stocks, helping the Portfolio's
relative performance.
The Portfolio's stock selection and underweighting of the telecommunication and
health care sectors were particularly beneficial during the quarter ended
September 30, 2003, but were not sufficient to offset the impact of the
Portfolio's underweighting of information technology stocks. Boston Management
and Research (Boston Management), the Portfolio's investment adviser, remained
cautious in the information technology and telecommunications sectors, a
comparable underweight allocation from the same period a year ago.
PERFORMANCE OF REAL ESTATE INVESTMENTS. The Fund's real estate investments are
held through Belcrest Realty Corporation (Belcrest Realty), a controlled
subsidiary of the Fund. Real estate investments include a portfolio of
income-producing preferred equity interests in operating partnerships (the
Partnership Preference Units) that are affiliated with real estate investment
trusts, interests in real estate joint ventures (the Real Estate Joint Ventures)
that are majority-owned by Belcrest Realty and a property that is subject to a
long-term triple net lease (the Net Leased Property) that is wholly-owned by
- -----------------
(1) Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that Fund 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.
17
Belcrest Realty. During the quarter ended September 30, 2003, real estate
operations continued to be impacted by weak multifamily market fundamentals. The
sale of Belcrest Realty's interest in Bel Communities Property Trust (Bel
Communities) in October 2002 reduced the scope of its real estate activities for
the quarter ended September 30, 2003 as compared to the quarter ended September
30, 2002.
Rental income from real estate operations fell to $27.3 million for the quarter
ended September 30, 2003 from $33.9 million for the quarter ended September 30,
2002, a decrease of $6.6 million or 19%. While this decrease in rental income
principally resulted from the sale of Belcrest Realty'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 Belcrest Realty's remaining Real Estate Joint Ventures, a
trend that has continued from 2002.
Property operating expenses decreased to $14.5 million for the quarter ended
September 30, 2003 from $17.0 million for the quarter ended September 30, 2002,
a decrease of $2.5 million or 15% (property operating expenses are before
certain operating expenses of Belcrest Realty of approximately $2.2 million for
the quarter ended September 30, 2003 and approximately $2.1 million for the
quarter ended September 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 expenses, as well as taxes and
insurance expenses of Belcrest Realty's remaining Real Estate Joint Ventures.
Even though the U.S. economy showed signs of improvement during the quarter
ended September 30, 2003, significant employment growth has not occurred in most
markets and low interest rates have contributed to the continued development of
new properties. As a result, Boston Management, Belcrest Realty's manager,
expects that real estate operating results for Belcrest Realty's 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 October 2002, the total estimated fair value of the real
properties held through Belcrest Realty was lower at the end of the third
quarter of 2003 compared to the third quarter of 2002. At September 30, 2003,
the estimated fair value of the real properties held through Belcrest Realty was
$616.5 million compared to $816.7 million at September 30, 2002, a decrease of
$200.2 million or 25%. 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 Belcrest
Realty's interests in Real Estate Joint Ventures and the Net Leased Property) of
approximately $6.1 million during the quarter ended September 30, 2003 compared
to approximately $1.8 million for the quarter ended September 30, 2002. Despite
weak market conditions, declines in asset values for multifamily properties have
generally been modest as declines in capitalization rates have partially offset
declining income level expectations.
During the quarter ended September 30, 2003, Belcrest Realty sold (or
experienced scheduled redemptions of) certain of its Partnership Preference
Units, recognizing gains of $1.8 million on the transactions. At September 30,
2003, the estimated fair value of the Fund's Partnership Preference Units
totaled $519.5 million compared to $568.8 million at September 30, 2002, a
decrease of $49.3 million or 9%. This decrease in value was principally due to
fewer Partnership Preference Units held at September 30, 2003. The per unit
value of the remaining Partnership Preference Units also declined slightly
during the quarter. The Fund saw unrealized depreciation of the estimated fair
value in its Partnership Preference Units of approximately $3.4 million during
the quarter ended September 30, 2003 compared to appreciation of approximately
$18.1 million for the quarter ended September 30, 2002.
Dividends received from Partnership Preference Units for the quarter ended
September 30, 2003 totaled $11.8 million compared to $13.0 million for the
quarter ended September 30, 2002, a decrease of $1.2 million or 9%.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the quarter ended September
30, 2003, interest rate swap agreement values appreciated by approximately $11.3
million, due to a slight increase in swap rates and a shortening of effective
maturities as the Fund's interest rate swap agreements approached their initial
optional termination dates. For the quarter ended September 30, 2002, the value
of interest rate swap agreements decreased by approximately $12.5 million due to
a decline in swap rates.
On October 1, 2003, new interest rate swap agreements were entered into to fix
the cost of a portion of Fund borrowings under the Credit Facility established
on July 15, 2003. At the same time, the Fund made payments of approximately
$21.4 million to terminate all interest rate swaps outstanding as of September
30, 2003, realizing a loss in that amount on the transactions. The realized loss
18
approximated the value of the positions on the books of the Fund. See "Liquidity
and Capital Resources" below for a description of the Credit Facility and the
Fund's interest rate swap agreements.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------
PERFORMANCE OF THE FUND. The Fund's total return was 12.54% for the nine months
ended September 30, 2003. This return reflects an increase in the Fund's net
asset value per share from $82.94 to $92.87 and a distribution of $0.43 per
share during the period. For comparison, the S&P 500 had a total return of
14.71% over the same period. The performance of the Fund exceeded that of the
Portfolio by approximately 1.8% during the period. Last year, the Fund had a
total return performance of -26.87% for the nine months ended September 30,
2002. This return reflected a decrease in the Fund's net asset value per share
from $106.98 to $78.23. For comparison, the S&P 500 had a total return of
- -28.15% over the same period. The performance of the Fund trailed that of the
Portfolio by approximately 2.5% for the nine months ended September 30, 2002.
PERFORMANCE OF THE PORTFOLIO. The total return of the Portfolio for the nine
months ended September 30, 2003 was 10.74% compared to the 14.71% return
achieved by the S&P 500 over the same period. The total return of the Portfolio
for the nine months ended September 30, 2002 was -24.40%.
The first nine months of 2003 remained volatile, but markets proved to be
resilient achieving impressive returns. War angst, a 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. While
the first nine months of 2003 also witnessed reduced geopolitical concerns,
higher consumer confidence and a strong housing market, concerns about inflation
and unemployment developed over the summer and early fall of 2003 and kept the
market and various sectors quite volatile.
The Portfolio's performance trailed the overall market in the first nine months
of 2003, mostly due to a lower exposure to higher beta and lower quality issues
that were the strongest price performers during this period. The Portfolio
maintained a pro-cyclical stance emphasizing the consumer discretionary and
consumer staples sectors, as it did in the first nine months of 2002. Boston
Management continued to de-emphasize health care investments, a directional move
initiated last year which was positive for the Portfolio's relative returns.
During the first nine months of 2003, Boston Management continued to emphasize
industrial company investments, especially in the airfreight logistics and
aerospace defense areas. Airfreight logistics and aerospace defense investments
have been helpful to the Portfolio's longer-term record, but detracted from
results during the nine months ended September 30, 2003.
Lack of earnings visibility reinforced the Portfolio's cautious weighting in the
telecommunications and information technology sectors. Both of the
aforementioned sectors were de-emphasized during the first nine months of last
year as well. The Portfolio's underweight of the telecommunication services
sector during the nine months ended September 30, 2003 continued to be positive
for the Portfolio. Boston Management continued to underweight the Portfolio's
investments in the materials and utilities sectors during the period, a similar
stance to last year's allocation.
PERFORMANCE OF REAL ESTATE INVESTMENTS. Rental income for the nine months ended
September 30, 2003 declined to $83.4 million from $105.7 million for the nine
months ended September 30, 2002, a decrease of $22.3 million or 21%. Property
operating expenses decreased to $43.3 million for the nine months ended
September 30, 2003 from $50.6 million for the nine months ended September 30,
2002, a decrease of $7.3 million or 14% (property operating expenses are before
certain operating expenses of Belcrest Realty of approximately $6.0 million for
the nine months ended September 30, 2003 and approximately $6.5 million for the
nine months ended September 30, 2002). While decreases in rental income and
property operating expenses were principally due to the sale of Belcrest
Realty's interest in Bel Communities in October 2002 and its interest in Bel
Apartment Properties Trust in March 2002, weak 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
property operating expenses of Belcrest Realty's remaining Real Estate Joint
Ventures.
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 September 30, 2003 compared to September
30, 2002. At September 30, 2003, the estimated fair value of the real properties
held through Belcrest Realty was $616.5 million compared to $816.7 million at
September 30, 2002, a decrease of $200.2 million or 25%. The decrease was also
due, in part, to modest decreases in property values resulting from declines in
near-term earnings expectations. The Fund saw unrealized depreciation of the
19
estimated fair value in its other real estate investments of approximately $31.0
million during the nine months ended September 30, 2003, compared to
approximately $40.8 million for the nine months ended September 30, 2002.
Declines in asset values for multifamily properties during the period have
generally been modest as decreases in capitalization rates have partially offset
declining income level expectations.
During the nine months ended September 30, 2003 and September 30, 2002, Belcrest
Realty sold (or experienced scheduled redemptions of) certain of its Partnership
Preference Units, recognizing gains of $2.4 million and $0.4 million,
respectively, on the transactions. At September 30, 2003, the estimated fair
value of the Fund's Partnership Preference Units totaled $519.5 million compared
to $568.8 million at September 30, 2002, a decrease of $49.3 million or 9%. The
decrease was principally due to fewer Partnership Preference Units held at
September 30, 2003, offset in part by increases in the per unit value of the
remaining Partnership Preference Units held by Belcrest Realty. This
appreciation in per unit value resulted from declines in interest rates and
tighter spreads on real estate securities during the nine months ended September
30, 2003. The Fund saw unrealized appreciation of the estimated fair value in
its Partnership Preference Units of approximately $32.6 million during the nine
months ended September 30, 2003, compared to approximately $33.1 million for the
nine months ended September 30, 2002.
Dividends received from Partnership Preference Units for the nine months ended
September 30, 2003 totaled $39.4 million compared to $39.3 million for the nine
months ended September 30, 2002, a decrease of $0.1 million or 0.3%.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the nine months ended
September 30, 2003, interest rate swap agreement values appreciated by
approximately $30.5 million compared to depreciation of approximately $17.7
million for the nine months ended September 30, 2002. The appreciation during
the first nine months of 2003 is primarily due to a shortening of effective
maturities as the Fund's interest rate swap agreements approached their initial
optional termination dates. Swap rates did not change significantly during the
nine months ended September 30, 2003. The depreciation for the nine months ended
September 30, 2002 was caused by declines in swap rates during the period.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Effective July 15, 2003, the Fund refinanced its then existing 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 Credit Facility) which together total $860.0 million. The
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 Credit Facility will expire in
June 2010.
The Credit Facility is primarily used to finance the Fund's equity in real
estate investments and will continue to be used for such purpose in the future.
The 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 Credit Facility and the
amount of outstanding borrowings thereunder for these purposes.
The Credit Facility includes a $722.0 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 September 30, 2003, outstanding
borrowings under the DrKW credit arrangement totaled $722.0 million.
The Credit Facility also includes a $138.0 million credit arrangement with MLMC,
including up to $10.0 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 September 30, 2003, outstanding borrowings under the MLMC credit
arrangement totaled $23.7 million. There were no amounts outstanding under
letters of credit at September 30, 2003. The unused loan commitment amount
totaled approximately $114.3 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.
The Fund has entered into interest rate swap agreements with respect to its real
estate investments and associated borrowings. Pursuant to these agreements, the
Fund makes periodic payments to the counterparty at predetermined fixed rates,
in exchange for floating-rate payments at a predetermined spread plus
three-month LIBOR. During the terms of the outstanding interest rate swap
agreements, changes in the underlying values of the agreements are recorded as
unrealized gains or losses. On October 1, 2003, new interest rate swap
agreements were entered into to fix the cost of Fund borrowings under the Credit
Facility established on July 15, 2003. At the same time, all interest rate swap
agreements outstanding on September 30, 2003 were terminated. Under the new
interest rate swap agreements the Fund makes periodic payments to the
20
counterparty at predetermined fixed rates, in exchange for floating-rate
payments at a predetermined spread plus one-month LIBOR.
As of September 30, 2003 and September 30, 2002, the unrealized depreciation
related to the interest rate swap agreements was approximately $31.2 million and
$67.6 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 fair 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. The fair value of an
investment represents the amount at which Boston Management believes the
investment could be sold in a current transaction between willing parties, that
is, other than in a forced or liquidation sale.
In estimating the fair value of Belcrest Realty's investment in Partnership
Preference Units, Boston Management takes into account all relevant factors,
data and information, including 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. With respect to Belcrest Realty's other real estate
investments, detailed investment valuations are based on independent valuations
that 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. In determining the fair value of interest rate
swap agreements, Boston Management may consider, among other things, dealer and
counterparty quotes and pricing models. Given that the valuation of real estate
investments and interest rate swap agreements includes many assumptions,
including but not limited to the assumption that the investment could be sold in
a current transaction between willing parties, that is, other than in a forced
or liquidation sale, values may differ from amounts ultimately realized.
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 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 swap agreements may be subject to wide swings in
valuation caused principally by changes in interest rates. Interest rate swap
agreements 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 that may be 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 that may be
entered into by 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 that may be 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.
21
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 has entered into cancelable interest rate swap agreements to
fix the cost of its borrowings under the Credit Facility and to attempt 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 short-term 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 and 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 September 30,
Estimated
2004-2005 2006 2007-2008 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
- ---------------------------------------
Long-term debt:
- ---------------------------------------
Fixed-rate mortgages $11,486,000 $526,133,358 $537,619,358 $585,000,000
Average interest rate 6.90% 7.57% 7.55%
- ---------------------------------------
Variable-rate Credit Facility $745,650,000 $745,650,000 $745,650,000
Average interest rate 1.42% 1.42%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative financial instruments:
- ---------------------------------------
Pay fixed/receive variable interest
rate swap agreements(1) $627,725,000 $627,725,000 $ --
Average pay rate(1) 4.69% 4.69%
Average receive rate(1) 1.42% 1.42%
(1) The terms disclosed are those of the interest rate swap agreements entered
into that are effective on October 1, 2003. See Note 4 to the Fund's
unaudited condensed consolidated financial statements in Item 1 above for
the terms of the interest rate swap agreements in effect on September 30,
2003 and terminated on October 1, 2003, as well as the loss realized as a
result of such termination.
- ------------------------------------------------------------------------------------------------------------------------------------
22
Estimated
2004-2005 2006 2007-2008 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive investments:
- ---------------------------------------
Fixed-rate Partnership Preference
Units:
- ---------------------------------------
Bradley Operating Limited
Partnership, 8.875% Series B
Cumulative Redeemable Perpetual
Preferred Units, Callable 2/23/04,
Current Yield: 8.83% $ 23,799,036 $ 23,799,036 $ 24,542,159
Camden Operating, L.P., 8.50% Series
B Cumulative Redeemable Perpetual
Preferred Units, Callable 2/23/04,
Current Yield: 8.39% $ 4,076,090 $ 4,076,090 $ 4,304,400
Colonial Realty Limited Partnership,
8.875% Series B Cumulative Redeemable
Perpetual Preferred Units, Callable
2/23/04, Current Yield: 8.76% $ 50,744,840 $ 50,744,840 $ 52,148,900
Essex Portfolio, L.P., 9.125% Series
C Cumulative Redeemable Preferred
Unites, Callable 11/24/03, Current
Yield: 8.98% $ 21,000,000 $ 21,000,000 $ 21,344,526
Liberty Property L.P., 9.25% Series B
Cumulative Redeemable Preferred
Units, Callable 7/28/04, Current
Yield: 8.99% $ 64,025,574 $ 64,025,574 $ 65,971,800
MHC Operating Limited Partnership, 9%
Series D Cumulative Redeemable
Perpetual Preference Units, Callable
9/29/04, Current Yield: 9.01% $ 75,000,000 $ 75,000,000 $ 74,880,000
National Golf Operating Partnership,
L.P., 9.30% Series A Cumulative
Redeemable Preferred Units, Callable
2/6/03, Current Yield: 9.80% $ 27,877,518 $ 27,877,518 $ 29,963,064
National Golf Operating Partnership,
L.P., 9.30% Series B Cumulative
Redeemable Preferred Units, Callable
2/6/03, Current Yield: 9.80% $ 29,833,200 $ 29,833,200 $ 28,476,000
PSA Institutional Partners, L.P.,
9.50% Series N Cumulative Redeemable
Perpetual Preferred Units, Callable
3/17/05, Current Yield: 9.09% $ 55,375,000 $ 55,375,000 $ 57,855,800
23
Estimated
2004-2005 2006 2007-2008 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
Price Development Company, L.P.,
8.95% Series B Cumulative Redeemable
Preferred Partnership Units, Callable
7/28/04, Current Yield: 9.25% $ 64,089,925 $ 64,089,925 $ 62,263,500
Regency Centers, L.P., 9.125% Series
D Cumulative Redeemable Preferred
Units, Callable 9/29/04, Current
Yield: 8.86% $ 35,000,000 $ 35,000,000 $ 36,029,000
Urban Shopping Centers, L.P., 9.45%
Series D Cumulative Redeemable
Perpetual Preferred Units, Callable $ 60,000,000 $ 60,000,000 $ 61,745,760
10/01/04, Current Yield: 9.18%
- ---------------------------------------
Note Receivable:
- ---------------------------------------
Fixed-rate note receivable, 8%
$ 3,352,436 $ 3,352,436 $ 3,352,436
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.
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 September 30, 2003.
24
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:
4.1 Loan and Security Agreement between Belcrest Capital Fund LLC and DrKW
Holdings, Inc., as Lender
4.2 Loan and Security Agreement among Belcrest Capital Fund LLC, Merrill Lynch
Mortgage Capital, Inc., as Agent, the Lenders referred to therein and
Merrill Lynch Capital Services, Inc.
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.
25
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 November 10, 2003.
BELCREST CAPITAL FUND LLC
/s/ Michelle A. Alexander
------------------------
Michelle A. Alexander
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
26
EXHIBIT INDEX
-------------
4.1 Loan and Security Agreement between Belcrest Capital Fund LLC and DrKW
Holdings, Inc., as Lender
4.2 Loan and Security Agreement among Belcrest Capital Fund LLC, Merrill Lynch
Mortgage Capital, Inc., as Agent, the Lenders referred to therein and
Merrill Lynch Capital Services, Inc.
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
27