UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _________ to _____________
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 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 Securities Exchange Act of 1934).
YES X NO
--- ---
BELCREST CAPITAL FUND LLC
Index to Form 10-Q
Page
PART I FINANCIAL INFORMATION.............................................. 3
Item 1. Condensed Consolidated Financial Statements....................... 3
Condensed Consolidated Statements of Assets and
Liabilities as of March 31, 2004 (Unaudited) and
December 31, 2003................................................. 3
Condensed Consolidated Statements of Operations
(Unaudited) for the Three Months Ended
March 31, 2004 and 2003........................................... 4
Condensed Consolidated Statements of Changes in Net
Assets for the Three Months Ended March 31, 2004
(Unaudited) and the Year Ended December 31, 2003.................. 6
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Three Months Ended
March 31, 2004 and 2003........................................... 7
Financial Highlights (Unaudited) for the Three Months
Ended March 31, 2004.............................................. 9
Notes to Condensed Consolidated Financial Statements
as of March 31, 2004 (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........ 21
Item 4. Controls and Procedures........................................... 24
PART II OTHER INFORMATION................................................. 24
Item 1. Legal Proceedings................................................. 24
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities.............................................. 24
Item 3. Defaults Upon Senior Securities................................... 25
Item 4. Submission of Matters to a Vote of Security Holders............... 25
Item 5. Other Information................................................. 25
Item 6. Exhibits and Reports on Form 8-K.................................. 25
SIGNATURES................................................................ 26
EXHIBIT INDEX............................................................. 27
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Assets and Liabilities
March 31, 2004 December 31,
(Unaudited) 2003
--------------- ------------
Assets:
Investment in Belvedere Capital Fund Company LLC
(Belvedere Company) $2,809,547,176 $2,801,412,510
Investment in Partnership Preference Units 537,346,788 458,160,352
Investment in other real estate 457,896,613 613,004,358
Short-term investments 39,746,000 48,059,348
--------------- ---------------
Total investments $3,844,536,577 $3,920,636,568
Cash 10,790,513 5,842,185
Escrow deposits - restricted 4,864,419 10,925,963
Open interest rate swap agreements, at value - 3,006,128
Distributions and interest receivable 2,523,987 676,240
Other assets 5,314,887 7,425,731
--------------- ---------------
Total assets $3,868,030,383 $3,948,512,815
--------------- ---------------
Liabilities:
Loan payable - Credit Facility $ 720,000,000 $ 652,000,000
Mortgages payable 397,120,010 513,988,494
Payable for Fund Shares redeemed 98,834 -
Distributions payable to minority shareholders - 16,800
Special Distributions payable - 1,059
Open interest rate swap agreements, at value 5,687,108 -
Security deposits 1,747,151 2,017,195
Due to bank - cash overdraft - 6,723,986
Swap interest payable 401,788 397,212
Accrued expenses:
Interest expense 2,897,947 3,552,170
Property taxes 2,167,920 8,998,462
Other expenses and liabilities 5,398,617 8,629,435
Minority interests in controlled subsidiaries 15,991,138 23,003,410
--------------- ---------------
Total liabilities $1,151,510,513 $1,219,328,223
--------------- ---------------
Net assets $2,716,519,870 $2,729,184,592
--------------- ---------------
Shareholders' Capital $2,716,519,870 $2,729,184,592
--------------- ---------------
Shares outstanding 25,580,642 26,024,771
--------------- ---------------
Net asset value and redemption price per Share $ 106.19 $ 104.87
--------------- ---------------
See notes to unaudited condensed consolidated financial statements
3
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
-------------- --------------
Investment Income:
Dividends allocated from Belvedere Company
(net of foreign taxes of $116,448 and $106,401, respectively) $ 9,764,448 $ 8,736,786
Interest allocated from Belvedere Company 47,419 174,381
Expenses allocated from Belvedere Company (4,235,876) (3,564,995)
-------------- --------------
Net investment income allocated from Belvedere Company $ 5,575,991 $ 5,346,172
Distributions from Partnership Preference Units 13,509,652 13,821,632
Rental income 24,591,229 28,255,238
Interest 188,409 130,477
-------------- --------------
Total investment income $ 43,865,281 $ 47,553,519
-------------- --------------
Expenses:
Investment advisory and administrative fees $ 2,629,213 $ 2,532,153
Property management fees 939,373 1,082,976
Distribution and servicing fees 1,002,601 788,949
Interest expense on mortgages 9,645,194 10,348,506
Interest expense on Credit Facility 2,472,752 3,622,027
Property and maintenance expenses 9,292,127 8,989,832
Property taxes and insurance 3,318,940 3,854,036
Miscellaneous 321,303 287,060
-------------- --------------
Total expenses $ 29,621,503 $ 31,505,539
Deduct-
Reduction of investment advisory and administrative fees 683,198 546,845
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Net expenses $ 28,938,305 $ 30,958,694
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Net investment income before minority interests in
net income of controlled subsidiaries $ 14,926,976 $ 16,594,825
Minority interests in net income of controlled subsidiaries (245,705) (957,405)
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Net investment income $ 14,681,271 $ 15,637,420
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See notes to unaudited condensed consolidated financial statements
4
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited) (Continued)
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
--------------- ----------------
Realized and Unrealized Gain (Loss)
Net realized gain (loss) -
Investment transactions from Belvedere Company (identified cost basis) $ 10,298,643 $ (10,452,878)
Investment transactions in Partnership Preference Units (identified cost basis) 1,094,376 624,980
Investment transactions in other real estate (14,221,385) -
Interest rate swap agreements (1) (4,928,667) (12,290,495)
--------------- ----------------
Net realized loss $ (7,757,033) $ (22,118,393)
--------------- ----------------
Change in unrealized appreciation (depreciation) -
Investment in Belvedere Company (identified cost basis) $ 42,849,016 $(107,493,190)
Investments in Partnership Preference Units (identified cost basis) (6,938,524) 32,788,723
Investments in other real estate (net of minority interests in
unrealized gain (loss) of controlled subsidiaries of $6,125,636,
and $(4,167,143), respectively) 11,084,297 (24,604,397)
Interest rate swap agreements (8,693,236) 8,935,053
--------------- ----------------
Net change in unrealized appreciation (depreciation) $ 38,301,553 $ (90,373,811)
--------------- ----------------
Net realized and unrealized gain (loss) $ 30,544,520 $(112,492,204)
--------------- ----------------
Net increase (decrease) in net assets from operations $ 45,225,791 $ (96,854,784)
=============== ================
(1) Amount represents periodic payments made in connection with interest rate
swap agreements. (Note 4)
See notes to unaudited condensed consolidated financial statements
5
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Changes in Net Assets
Three Months
Ended Year Ended
March 31, 2004 December 31,
(Unaudited) 2003
--------------- ---------------
Increase (Decrease) in Net Assets:
Net investment income $ 14,681,271 $ 56,327,694
Net realized loss from investment transactions (7,757,033) (36,317,202)
Net change in unrealized appreciation (depreciation) of investments 38,301,553 575,006,241
--------------- ---------------
Net increase in net assets from operations $ 45,225,791 $ 595,016,733
--------------- ---------------
Transactions in Fund Shares -
Net asset value of Fund Shares issued to Shareholders in payment of
distributions declared $ 4,033,847 $ 4,796,611
Net asset value of Fund Shares redeemed (51,785,798) (158,225,543)
--------------- ---------------
Net decrease in net assets from Fund Share transactions $ (47,751,951) $ (153,428,932)
--------------- ---------------
Distributions -
Distributions to Shareholders $ (10,138,562) $ (11,893,682)
Special Distributions to Shareholders - (1,059)
--------------- ---------------
Total distributions $ (10,138,562) $ (11,894,741)
--------------- ---------------
Net (decrease) increase in net assets $ (12,664,722) $ 429,693,060
Net assets:
At beginning of period $2,729,184,592 $2,299,491,532
--------------- ---------------
At end of period $2,716,519,870 $2,729,184,592
=============== ===============
See notes to unaudited condensed consolidated financial statements
6
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
--------------- ---------------
Cash Flows From (For) Operating Activities -
Net increase (decrease) in net assets from operations $ 45,225,791 $ (96,854,784)
Adjustments to reconcile net increase (decrease) in net assets from operations
to net cash flows (for) from operating activities -
Net investment income allocated from Belvedere Company (5,575,991) (5,346,172)
Decrease in escrow deposits 4,139,943 3,349,941
Decrease in receivable for investments sold - 73,554,369
Increase in interest receivable from other real estate investments (69,871) (39,237)
Decrease in other assets 1,212,236 865,947
(Increase) decrease in distributions and interest receivable (1,847,747) 1,258,413
Increase in interest payable for open swap agreements 4,576 54,164
Increase in security deposits, accrued interest and accrued other expenses
and liabilities 134,101 414,175
Decrease in due to bank - cash overdraft (6,723,986) -
Decrease in accrued property taxes (6,343,270) (6,203,867)
Purchases of Partnership Preference Units (139,065,289) -
Proceeds from sales of Partnership Preference Units 54,034,705 -
Proceeds from sale of investment in other real estate 28,699,431 -
Improvements to rental property (923,454) (840,675)
Decrease in cash due to sale of majority interest in controlled subsidiary (983,616) -
Net increase in investment in Belvedere Company - (23,700,000)
Interest incurred on interest rate swap agreements (4,928,667) (12,290,495)
Decrease (increase) in short-term investments 8,313,348 (2,570,089)
Minority interests in net income of controlled subsidiaries 245,705 957,405
Net realized loss from investment transactions 7,757,033 22,118,393
Net change in unrealized (appreciation) depreciation of investments (38,301,553) 90,373,811
--------------- ---------------
Net cash flows (for) from operating activities $ (54,996,575) $ 45,101,299
--------------- ---------------
Cash Flows From (For) Financing Activities -
Proceeds from (Repayment of) Credit Facility $ 68,000,000 $ (42,200,000)
Repayments on mortgages (1,308,981) (1,201,829)
Payments for Fund Shares redeemed (1,097,980) (710,585)
Distributions paid to Shareholders (6,105,774) (7,097,071)
Distributions paid to minority shareholders (16,800) (1,465)
Capital contributed to controlled subsidiaries 474,438 -
--------------- ---------------
Net cash flows from (for) financing activities $ 59,944,903 $ (51,210,950)
--------------- ---------------
Net increase (decrease) in cash $ 4,948,328 $ (6,109,651)
Cash at beginning of period $ 5,842,185 $ 12,216,034
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Cash at end of period $ 10,790,513 $ 6,106,383
=============== ===============
See notes to unaudited condensed consolidated financial statements
7
BELCREST CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
--------------- ---------------
Supplemental Disclosure and Non-cash Investing and Financing Activities -
Interest paid on loan - Credit Facility $ 2,408,034 $ 3,685,091
Interest paid on mortgages $ 10,193,147 $ 10,212,387
Interest paid on swap agreements $ 4,924,091 $ 12,067,939
Market value of securities distributed in payment of redemptions $ 50,588,984 $ 39,804,648
Market value of real property and other assets, net of current liabilities,
disposed of in conjunction with sale of other real estate $ 155,855,342 $ -
Mortgage disposed of in conjunction with sale of other real estate $ 120,901,649 $ -
Partnership Preference Units exchanged for an equity investment in real estate
companies and an investment in note receivable $ - $ (6,440,043)
Market value of an equity investment in real estate companies $ - $ 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 March 31, 2004
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial Highlights (Unaudited)
For the Three Months Ended March 31, 2004
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value - Beginning of period $ 104.870
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Income (loss) from operations
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Net investment income (6) $ 0.568
Net realized and unrealized gain 1.142
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Total income from operations $ 1.710
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Distributions
- -----------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders $ (0.390)
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Total distributions $ (0.390)
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Net asset value - End of period $ 106.190
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return (1) 1.64%
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) 1.09% (9) 0.79% (9)
Operating expenses (7) 1.50% (9) 1.08% (9)
Belcrest Capital Fund LLC Expenses
Interest and other borrowing costs (4)(8) 0.36% (9) 0.27% (9)
Investment advisory and administrative fees,
servicing fees and other Fund operating expenses (3)(4) 1.08% (9) 0.78% (9)
-------------------------------------------------
Total expenses 4.03% (9) 2.92% (9)
Net investment income 2.15% (9) 1.56% (9)
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 2,716,520
Portfolio turnover of Tax-Managed Growth Portfolio (the Portfolio) 0.61%
- -----------------------------------------------------------------------------------------------------------------------------------
(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) Ratios do not include interest incurred in connection with interest rate
swap agreements. Had such amounts been included, ratios would be higher.
(9) Annualized.
See notes to unaudited condensed consolidated financial statements
9
BELCREST CAPITAL FUND LLC as of March 31, 2004
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, 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 as of 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, 2003 has been derived from the December 31,
2003 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 three
months ended March 31, 2004 and March 31, 2003:
Three Months Ended Three Months Ended
Investment Transaction March 31, 2004 March 31, 2003
- ------------------------------------------------------------------------------------------------
Increases in investment in Belvedere Company $ - $ 23,700,000
Decreases in investment in Belvedere Company $ 50,588,984 $ 39,804,648
Purchases of Partnership Preference Units (1) $ 139,065,289 $ -
Sales of Partnership Preference Units (2) $ 54,034,705 $ -
Sales of other real estate (3) $ 28,699,431 $ -
- ------------------------------------------------------------------------------------------------
(1) Purchases of Partnership Preference Units during the three months ended
March 31, 2004 represent Partnership Preference Units purchased from other
investment funds advised by Boston Management and Research (Boston
Management).
(2) Sales of Partnership Preference Units for the three months ended March 31,
2004 include Partnership Preference Units sold to other investment funds
advised by Boston Management for which a gain of $159,204 was recognized.
(3) During the three months ended March 31, 2004, Belcrest Realty Corporation
(Belcrest Realty) sold its majority interest in Casco Property Trust, LLC
(Casco) to another investment fund advised by Boston Management, for which
a loss of $14,221,385 was recognized.
During the three months ended March 31, 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 $3,663,758
as of March 31, 2004 and $3,391,673 as of March 31, 2003) earns interest of 8%
per annum and matures in February 2013 or on demand.
10
3 Indirect Investment in the Portfolio
The following table summarizes the Fund's investment in Tax-Managed Growth
Portfolio (the Portfolio) through Belvedere Capital Fund Company LLC (Belvedere
Company), for the three months ended March 31, 2004 and March 31, 2003,
including allocations of income, expenses and net realized and unrealized gains
(losses) for the respective periods then ended:
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
- -----------------------------------------------------------------------------------------------------------------------
Belvedere Company's interest in the Portfolio (1) $11,520,846,141 $ 8,400,349,853
The Fund's investment in Belvedere Company (2) $ 2,809,547,176 $ 2,294,359,439
Income allocated to Belvedere Company from the Portfolio $ 39,365,471 $ 32,398,573
Income allocated to the Fund from Belvedere Company $ 9,811,867 $ 8,911,167
Expenses allocated to Belvedere Company from the Portfolio $ 12,634,511 $ 9,667,954
Expenses allocated to the Fund from Belvedere Company $ 4,235,876 $ 3,564,995
Net realized gain (loss) allocated to Belvedere Company from the Portfolio $ 41,048,575 $ (37,772,155)
Net realized gain (loss) allocated to the Fund from Belvedere Company $ 10,298,643 $ (10,452,878)
Change in unrealized appreciation (depreciation) allocated to Belvedere
Company from the Portfolio $ 163,577,445 $ (389,828,192)
Change in unrealized appreciation (depreciation) allocated to the Fund
from Belvedere Company $ 42,849,016 $ (107,493,190)
- -----------------------------------------------------------------------------------------------------------------------
(1) As of March 31, 2004 and 2003, the value of Belvedere Company's interest in
the Portfolio represents 63.9% and 61.1% of the Portfolio's net assets,
respectively.
(2) As of March 31, 2004 and 2003, the Fund's investment in Belvedere Company
represents 24.4% and 27.3% of Belvedere Company's net assets, respectively.
A summary of the Portfolio's Statement of Assets and Liabilities at March 31,
2004, December 31, 2003 and March 31, 2003 and its operations for the three
months ended March 31, 2004, for the year ended December 31, 2003 and for the
three months ended March 31, 2003 follows:
March 31, December 31, March 31,
2004 2003 2003
--------------------------------------------------------------------
Investments, at value $ 18,003,359,532 $ 17,584,390,762 $ 13,797,517,752
Other assets 25,944,066 25,462,745 24,535,362
- ---------------------------------------------------------------------------------------------------------
Total assets $ 18,029,303,598 $ 17,609,853,507 $ 13,822,053,114
Total liabilities 254,697 264,502 73,659,303
- ---------------------------------------------------------------------------------------------------------
Net assets $ 18,029,048,901 $ 17,609,589,005 $ 13,748,393,811
=========================================================================================================
Dividends and interest $ 62,101,320 $ 232,925,912 $ 53,431,732
- ---------------------------------------------------------------------------------------------------------
Investment adviser fee $ 19,348,796 $ 67,584,543 $ 15,490,999
Other expenses 598,921 2,295,653 477,083
- ---------------------------------------------------------------------------------------------------------
Total expenses $ 19,947,717 $ 69,880,196 $ 15,968,082
- ---------------------------------------------------------------------------------------------------------
Net investment income $ 42,153,603 $ 163,045,716 $ 37,463,650
Net realized gain (loss) 64,894,806 70,909,770 (62,969,970)
Net change in unrealized
appreciation (depreciation) 261,922,214 3,174,709,110 (649,928,537)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations $ 368,970,623 $ 3,408,664,596 $ (675,434,857)
- ---------------------------------------------------------------------------------------------------------
11
4 Interest Rate Swap Agreements
Belcrest Capital has entered into interest rate swap agreements with Merrill
Lynch Capital Services, Inc. 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.
Interest rate swap agreements open at March 31, 2004 and December 31, 2003, are
listed below.
Notional Initial Unrealized Unrealized
Amount Optional Final Depreciation Appreciation
Effective (000's Fixed Floating Termination Termination at March 31, at December 31,
Date omitted) Rate Rate Date Date 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
02/04 $ 78,620 5.00% LIBOR + 0.30% 08/04 06/10 $ (610,880) $ -
10/03 78,620 5.05% LIBOR + 0.30% 02/04 06/10 -* 197,524
10/03 128,116 4.865% LIBOR + 0.30% 07/04 06/10 (585,103) 451,953
10/03 170,000 4.795% LIBOR + 0.30% 09/04 06/10 (944,938) 695,087
10/03 63,526 4.69% LIBOR + 0.30% 02/05 06/10 (456,632) 305,966
10/03 55,375 4.665% LIBOR + 0.30% 03/05 06/10 (429,986) 272,239
10/03 80,965 4.145% LIBOR + 0.30% 03/10 06/10 (1,789,703) 527,521
10/03 47,253 4.045% LIBOR + 0.30% - 06/10 (828,636) 544,812
06/10 3,870 6.29% LIBOR + 0.30% - 07/15 (41,230) 11,026
- -----------------------------------------------------------------------------------------------------------------------------------
$ (5,687,108) $3,006,128
- -----------------------------------------------------------------------------------------------------------------------------------
* Agreement was terminated on the Initial Optional Termination Date.
5 Debt
A Credit Facility - On March 16, 2004, Belcrest Capital amended its credit
agreement with DrKW Holdings, Inc. to establish a borrowing limit of
$720,000,000 under that agreement. Borrowings under this credit arrangement
accrue interest at a rate of one-month LIBOR plus 0.30% per annum. As of March
31, 2004, outstanding borrowings under this credit arrangement totaled
$720,000,000.
B Mortgages - In February 2004, in conjunction with the sale of Belcrest
Realty's majority interest in Casco (Note 2), the mortgage payable by Casco was
disposed of. At the time of the transaction, the loan balance was $120,901,649.
Rental property held by Belcrest Realty's controlled subsidiaries is financed
through mortgages issued to the controlled subsidiaries. The mortgages are
secured by a rental property or properties. The mortgages are generally without
recourse to Belcrest Realty and Belcrest Capital, except, in the case of Casco
(for the period from January 1, 2004 to February 24, 2004), for certain
liabilities associated with fraud, misrepresentation, misappropriation of funds,
or breach of material covenants, and liabilities arising from environmental
conditions involving or affecting the rental property subject to the mortgages.
Belcrest Capital and Belcrest Realty have received indemnification from the
Casco Minority Shareholder for certain of such potential liabilities. In
addition, Belcrest Realty has indemnified the Bel Alliance Minority Shareholder
from certain losses arising from the Bel Alliance Minority Shareholder's
guaranty of certain exceptions to the generally non-recourse nature of Bel
Alliance Properties LLC's (Bel Alliance) mortgages (which exceptions are
substantially the same as those described for the Casco mortgages, but only to
the extent that such losses are caused by Belcrest Realty.) The mortgage debt
obligation of Bel Santa Ana LLC (Bel Santa Ana) is generally without recourse to
Belcrest Realty, Belcrest Capital and Shareholders. Belcrest Capital and
Belcrest Realty may, however, be directly or indirectly responsible for certain
liabilities constituting exceptions to the generally non-recourse nature of the
mortgage indebtedness, including liabilities associated with fraud,
misrepresentation, misappropriation of funds, or breach of material covenants.
12
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 loan. At March
31, 2004, this covenant was not met for certain mortgage agreements, of which
the aggregate principal balance at March 31, 2004 totals $167.1 million, or 42%
of the total mortgages outstanding. The mortgage agreements provide for a cure
period of 30 days after written notification from the lenders, with a further
extension of up to 60 additional days. As of March 31, 2004 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
lenders pursue enforcement and a mutually acceptable arrangement with the
lenders 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 and the related mortgages. 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.
During the three months ended March 31, 2004, Bel Alliance chose not to commit
additional equity to rental properties operating at deficits for payment of
principal and interest due on certain mortgages related to rental properties
operating at deficits. The rental properties are the only source of security for
these mortgages. As a result, Bel Alliance has reduced the carrying value of
certain mortgages notes by $17,090,168 as of March 31, 2004 and $22,432,314 as
of December 31, 2003 to the estimated fair value of the underlying real estate.
6 Segment Information
Belcrest Capital pursues its investment objective primarily by investing
indirectly in the Portfolio through Belvedere Company. 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 Company, Belcrest Capital invests in real estate assets
through its subsidiary, Belcrest Realty. As of March 31, 2004, Belcrest Realty
invested directly and indirectly in Partnership Preference Units, debt and
equity investments in private real estate companies and in real property through
controlled subsidiaries, BSA and Bel Alliance. Management services for the real
property held by Bel Alliance are provided by an affiliate of its minority
shareholder. The management agreement provides for a management fee and allows
for reimbursement of payroll and other direct expenses incurred by the manager
in conjunction with managing properties. Belcrest Realty is currently disputing
certain expenditures, allocations and reimbursements by the property manager
under the management agreement. For the period from January 1, 2004 to February
24, 2004, Belcrest Realty also invested in Casco.
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 the Fund on a consolidated basis.
No reportable segments have been aggregated. Reportable information by segment
is as follows:
13
Tax-Managed
For the Three Months Ended Growth Real
March 31, 2004 Portfolio* Estate Total
- --------------------------------------------------------------------------------------------------------------------
Revenue $ 5,575,991 $ 38,188,142 $ 43,764,133
Interest expense on mortgages - (9,645,194) (9,645,194)
Interest expense on Credit Facility - (2,373,842) (2,373,842)
Operating expenses (552,025) (15,193,961) (15,745,986)
Minority interest in net income of
controlled subsidiaries - (245,705) (245,705)
- --------------------------------------------------------------------------------------------------------------------
Net investment income $ 5,023,966 $ 10,729,440 $ 15,753,406
Net realized gain (loss) 10,298,643 (18,055,676) (7,757,033)
Change in unrealized appreciation (depreciation) 42,849,016 (4,547,463) 38,301,553
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations of reportable segments $ 58,171,625 $(11,873,699) $ 46,297,926
- --------------------------------------------------------------------------------------------------------------------
Tax-Managed
For the Three Months Ended Growth Real
March 31, 2003 Portfolio* Estate Total
- --------------------------------------------------------------------------------------------------------------------
Revenue $ 5,346,172 $ 42,090,566 $ 47,436,738
Interest expense on mortgages - (10,348,506) (10,348,506)
Interest expense on Credit Facility - (3,549,586) (3,549,586)
Operating expenses (349,789) (15,795,837) (16,145,626)
Minority interest in net income of
controlled subsidiaries - (957,405) (957,405)
- --------------------------------------------------------------------------------------------------------------------
Net investment income $ 4,996,383 $ 11,439,232 $ 16,435,615
Net realized loss (10,452,878) (11,665,515) (22,118,393)
Change in unrealized appreciation (depreciation) (107,493,190) 17,119,379 (90,373,811)
- --------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets from
operations of reportable segments $ (112,949,685) $ 16,893,096 $ (96,056,589)
- --------------------------------------------------------------------------------------------------------------------
Tax-Managed
Growth Real
At March 31, 2004 Portfolio* Estate Total
- --------------------------------------------------------------------------------------------------------------------
Segment assets $ 2,809,547,176 $ 1,011,668,268 $ 3,821,215,444
Segment liabilities 98,834 1,128,846,935 1,128,945,769
- --------------------------------------------------------------------------------------------------------------------
Net assets (liabilities) of reportable segments $ 2,809,448,342 $ (117,178,667) $ 2,692,269,675
- --------------------------------------------------------------------------------------------------------------------
At December 31, 2003
- --------------------------------------------------------------------------------------------------------------------
Segment assets $ 2,801,412,510 $ 1,099,020,956 $ 3,900,433,466
Segment liabilities 1,059 1,197,408,196 1,197,409,255
- --------------------------------------------------------------------------------------------------------------------
Net assets (liabilities) of reportable segments $ 2,801,411,451 $ (98,387,240) $ 2,703,024,211
- --------------------------------------------------------------------------------------------------------------------
* Belcrest Capital invests indirectly in Tax-Managed Growth Portfolio through
Belvedere Company.
The following tables reconcile the reported segment information to the condensed
consolidated financial statements for the periods indicated:
14
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
---------------- ----------------
Revenue:
Revenue from reportable segments $ 43,764,133 $ 47,436,738
Unallocated amounts:
Interest earned on cash not invested in the Portfolio or in subsidiaries 101,148 116,781
---------------- ----------------
Total revenue $ 43,865,281 $ 47,553,519
---------------- ----------------
Net increase (decrease) in net assets from operations:
Net increase (decrease) in net assets from operations of reportable segments $ 46,297,926 $(96,056,589)
Unallocated amounts:
Interest earned on cash not invested in the Portfolio or in subsidiaries 101,148 116,781
Unallocated amounts (1):
Distribution and servicing fees (1,002,601) (788,949)
Interest expense on Credit Facility (98,910) (72,441)
Audit, tax and legal fees (53,304) (32,125)
Other operating expenses (18,468) (21,461)
---------------- ----------------
Total net increase (decrease) in net assets from operations $ 45,225,791 $(96,854,784)
---------------- ----------------
March 31, 2004 December 31, 2003
---------------- -------------------
Net assets:
Net assets of reportable segments $2,692,269,675 $2,703,024,211
Unallocated cash (2) 7,068,939 20,001
Short-term investments(2) 39,746,000 48,059,348
Loan payable-Credit Facility(3) (22,444,861) (14,989,056)
Other liabilities (119,883) (6,929,912)
---------------- -------------------
Total net assets $2,716,519,870 $2,729,184,592
---------------- -------------------
(1) Unallocated amounts represent expenses incurred that pertain to the overall
operation of Belcrest Capital, and do not pertain to either operating
segment.
(2) Unallocated cash and short-term investments represents cash and cash
equivalents not invested in the Portfolio or real estate assets.
(3) Unallocated amount of loan payable - Credit Facility represents borrowings
not specifically used to fund real estate investments. Such borrowings are
generally used to pay selling commissions, organization expenses and other
liquidity needs of the Fund.
7 Subsequent Events
On May 3, 2004, Belcrest Realty entered into an agreement to establish and
acquire a majority interest in a controlled subsidiary. This controlled
subsidiary will indirectly own certain industrial properties with an estimated
value of approximately $461,000,000 at acquisition. Belcrest Realty is expected
to own an 80% interest in the controlled subsidiary and a minority shareholder
will own the remaining interest. Based on the terms of the current agreements,
Belcrest Realty expects to acquire the investment in the third quarter of 2004.
The minority shareholder of the controlled subsidiary, or an affiliate thereof,
will manage the real property.
It is expected that the real property will be financed through first mortgage
loans secured by the properties and an assignment of certain leases and rents.
The loans are expected to be without recourse to Belcrest Capital and Belcrest
Realty. No financing agreement has been entered into at this time.
15
On May 3, 2004, Belcrest Capital entered into a forward interest rate swap
agreement with Merrill Lynch Capital Services, Inc. in anticipation of its
future investment in the controlled subsidiary for the purpose of hedging the
interest rate of substantially all of the expected fixed-rate mortgage financing
of the real property over an expected 8-year term. Under such agreement,
Belcrest Capital has agreed to made periodic payments at fixed rates in exchange
for payments at floating rates. The notional amount of the contract is
$248,800,000, which approximates Belcrest Capital's expected 80% interest in the
anticipated secured debt of the controlled subsidiary. The floating interest
rate to be received by Belcrest Capital is three-month LIBOR and the fixed
interest rate to be paid by Belcrest Capital is 4.875%. The swap agreement
entered into by Belcrest Capital is effective in June 2004 and terminates in
June 2012.
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 March 31, 2004 Compared to the
Quarter Ended March 31, 2003
(a) Results of Operations.
Increases and decreases in the Fund's net asset value per share are derived from
net investment income or loss, and realized and unrealized gains and losses on
investments. The Fund's net investment income (or loss) is determined by
subtracting the Fund's total expenses from its investment income and then
deducting the minority interest in net income of the controlled subsidiaries of
Belcrest Realty Corporation (Belcrest Realty). The Fund's investment income
includes the net investment income allocated to the Fund from Belvedere Capital
Fund Company LLC (Belvedere Company), rental income from the properties owned by
Belcrest Realty's controlled subsidiaries, partnership income allocated to the
income-producing preferred equity interests in real estate operating
partnerships (Partnership Preference Units) owned by Belcrest Realty and
interest earned on the Fund's short-term investments (if any). The net
investment income of Belvedere Company allocated to the Fund includes dividends,
interest and expenses allocated to Belvedere Company by Tax-Managed Growth
Portfolio (the Portfolio) less the expenses of Belvedere Company allocated to
the Fund. The Fund's total expenses include the Fund's investment advisory and
administrative fees, distribution and servicing fees, interest expense from
mortgages on properties owned by Belcrest Realty's controlled subsidiaries,
interest expense on the Fund's credit arrangements (the Credit Facility),
property management fees, property taxes, insurance, maintenance and other
expenses relating to the properties owned by Belcrest Realty's controlled
subsidiaries, and other miscellaneous expenses. The Fund's realized and
unrealized gains and losses are the result of transactions in, or changes in
value of, security investments held through the Fund's indirect interest
(through Belvedere Company) in the Portfolio, real estate investments held
through Belcrest Realty, the Fund's interest rate swap agreements and any other
direct investments of the Fund, as well as periodic payments made by the Fund
pursuant to interest rate swap agreements.
Realized and unrealized gains and losses on investments have the most
significant impact on the Fund's net asset value per share and result primarily
from sales of such investments and changes in their underlying value. The
investments of the Portfolio consist primarily of common stocks of domestic and
foreign growth companies that are considered to be high in quality and
attractive in their long-term investment prospects. Because the securities
holdings of the Portfolio are broadly diversified, the performance of the
Portfolio cannot be attributed to one particular stock or one particular
industry or market sector. The performance of the Portfolio and the Fund are
substantially influenced by the overall performance of the U.S. stock market, as
well as by the relative performance versus the overall market of specific stocks
and classes of stocks in which the Portfolio maintains large positions.
Performance of the Fund.(1) The Fund's investment objective is to achieve
long-term, after-tax returns for Shareholders. Eaton Vance Management (Eaton
Vance), as the Fund's manager, measures the Fund's success in achieving its
objective based on the investment returns of the Fund, using the Standard &
Poor's 500 Composite Index (the S&P 500) as the Fund's primary performance
benchmark. The S&P 500 is a broad-based unmanaged index of common stocks widely
used as a measure of U.S. stock market performance. Eaton Vance's primary focus
in pursuing total return is on the Fund's common stock portfolio, which consists
of its indirect interest in the Portfolio. In measuring the performance of the
Fund's real estate investments held through Belcrest Realty, Eaton Vance
considers whether, through current returns and changes in valuation, the real
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. Returns are calculated by
determining the percentage change in net asset value with all distributions
reinvested. The Portfolio's total return for the period reflects the total
return of another fund that invests in the Portfolio, adjusted for certain
fund expenses. Performance is for the stated time period only and is not
annualized; due to market volatility, the Fund's current performance may be
lower or higher. The performance of the Fund and the Portfolio is compared
to that of their benchmark, the S&P 500. It is not possible to invest
directly in an Index.
17
estate investments achieve returns that over the long-term exceed the cost of
the borrowing incurred to acquire such investments and thereby add to Fund
returns. The Fund has entered into interest rate swap agreements to fix the cost
of its borrowings under the Credit Facility used to acquire Belcrest Realty's
equity in its real estate investments and to mitigate in part the impact of
interest rate changes on the Fund's net asset value.
The Fund's total return was 1.64% for the quarter ended March 31, 2004. This
return reflects an increase in the Fund's net asset value per share from $104.87
to $106.19 and a distribution of $0.39 per share during the period. For
comparison, the S&P 500 had a total return of 1.69% over the same period. The
performance of the Fund trailed that of the Portfolio by approximately 0.48%
during the period. Last year, the Fund's total return was -4.26% for the quarter
ended March 31, 2003 . This return reflected a decrease in the Fund's net asset
value per share from $82.94 to $79.01 and a distribution of $0.43 per share
during the period. For comparison, the S&P 500 had a total return of -3.15% over
the same period . The performance of the Fund exceeded that of the Portfolio by
approximately 0.45% during th at period.
Performance of the Portfolio. For the quarter ended March 31, 2004, the
Portfolio's total return was 2.12%, compared to -4.71% for the quarter ended
March 31, 2003. International unrest coupled with weak employment, a struggling
dollar and surging oil prices pressured domestic markets in the first quarter of
2004. Like the quarter ended March 31, 2003, volatility was high during the
first quarter of 2004. However, unlike the first quarter of 2003, major indices
experienced positive returns in 2004 as fiscal and monetary stimuli supported
robust corporate earnings and productivity growth. During the first quarter of
2004, companies on average reported better than expected sales trends, increased
dividends and initiated sizeable share buybacks reflecting a steady global
economic recovery. While large capitalization stocks outperformed smaller
capitalization stocks during the first quarter of 2003, small capitalization
stocks outperformed large-cap companies during the later months of 2003, and
continued to do so in the first quarter of 2004. In addition, during the first
quarter of 2004 higher quality stocks regained performance leadership over last
year's prevailing higher volatility stocks.
During the quarter ended March 31, 2004, the Portfolio's sector allocation
remained similar to its allocation at March 31, 2003. The Portfolio's stronger
quarterly performance relative to the S&P 500 during the first quarter of 2004
resulted from its diversified industry exposure and positive stock selection
decisions. During the quarter ended March 31, 2004, the Portfolio remained
underweight in the information technology sector, the market's weakest
performing sector. Stock selection by the Portfolio's investment adviser, Boston
Management and Research ( Boston Management ), in the computer peripherals and
electronic equipment industries was particularly beneficial to the Portfolio's
performance during the first quarter of 2004. Similar to the first quarter of
2003, valuation concerns prompted a de-emphasis of the telecommunication sector
during the first quarter of 2004. However, telecommunication services stocks
generally performed well during the first quarter of 2004. Similar to the first
quarter of 2003, the Portfolio was overweight the industrials sector. During the
first quarter of 2004, attractive valuations and positive secular business
trends helped machinery, building products and airfreight stocks of the
aforementioned sector advance higher.
In the first quarter of 2003, Boston Management began increasing the Portfolio's
exposure to the energy sector, a change from its previous underweight stance
versus the S&P 500. This allocation shift has aided performance, as oil
exploration and other energy equipment and service names benefited from rising
oil prices. Although the Portfolio's relative overweight of the financials
sector contributed to its positive return during the quarter ended March 31,
2004 , the sub-par performance of its commercial bank and capital market stocks
hindered returns during the quarter . While Boston Management remained
optimistic on the consumer, it slightly trimmed the Portfolio's relative
overweight in the consumer discretionary and staples sectors. Portfolio holdings
in leisure, retail, and personal products benefited from continued consumer
spending driven by tax refunds, strong refinancing activity and increases in
wages and salaries. The Portfolio maintained an underweight of the healthcare
sector relative to the S&P 500 during the quarter ended March 31, 2004, but
added to holdings of stronger quarterly performers such as healthcare equipment
and service companies.
Performance of Real Estate Investments. The Fund's real estate investments are
held through Belcrest Realty . As of March 31, 2004, real estate investments
included a majority interest in a real estate joint venture (the Real Estate
Joint Venture), a portfolio of Partnership Preference Units that generally are
affiliated with publicly traded and private real estate investment trusts
(REITs), and a property subject to a long-term triple net lease (Net Leased
Property). As of March 31, 2004 , the estimated fair value of the Fund's real
estate investments represented 25.7% of the Fund's total assets. Adjusting for
the minority interest of the real estate operating company that is the principal
minority investor in the Real Estate Joint Venture as of March 31, 2004, the
Fund's real estate investments represented 32.8% of the Fund's net assets.
During the quarter ended March 31, 2004, Belcrest Realty sold its interest in a
Real Estate Joint Venture, Casco Property Trust LLC ( Casco ), for approximately
18
$28.7 million to another investment fund advised by Boston Management. Belcrest
Realty recognized a loss of $14.2 million on the sale. The loss represented the
realization, as a result of the sale, of previously recorded unrealized
depreciation of the real estate investment value.
Like the quarter ended March 31, 2003, the operations of Belcrest Realty's Real
Estate Joint Ventures were impacted by weak multifamily market fundamentals
during the quarter ended March 31, 2004. Rental income from real estate
operations fell to $24.6 million for the quarter ended March 31, 2004 from $28.3
million for the quarter ended March 31, 2003, a decrease of $3.7 million or 13%.
The decrease in rental income was due to the sale of Casco during the quarter
ended March 31, 2004 and lower rental revenue at the properties owned by
Belcrest Realty's remaining Real Estate Joint Venture. During the quarter ended
March 31, 2004, rental revenue was affected by reduced apartment rental rates,
increased rent concessions and lower occupancy levels at properties owned by the
Real Estate Joint Venture, trends that continued from 2003.
Property operating expenses for Belcrest Realty's Real Estate Joint Ventures
decreased to approximately $13.6 million for the quarter ended March 31, 2004
from approximately $13.9 million for the quarter ended March 31, 2003, a
decrease of $0.3 million or 2% (property operating expenses are before certain
operating expenses of Belcrest Realty of approximately $1.6 million for the
quarter ended March 31, 2004 and approximately $1.9 million for the quarter
ended March 31, 2003). This decrease in expenses was primarily due to the sale
of Casco, offset in part by increases in operating expenses at the properties
owned by Belcrest Realty's remaining Real Estate Joint Venture. The Real Estate
Joint Venture's 3% property operating expense increase was comprised of a 6%
increase in property and maintenance expenses, offset somewhat by an 8% decline
in taxes and insurance expenses. The near-term outlook for multifamily property
operations continues to be weak. While anticipated economic and employment
growth is expected to lead to improvements over the longer term, significant
employment growth has not yet occurred in most markets and low interest rates
have contributed to continued apartment move-outs due to new home purchases and
increased competition for new residents from ongoing development of new
multifamily properties. As a result, Boston Management, Belcrest Realty's
manager, expects that real estate operating results in 2004 will continue to be
similar to 2003's results. Under the net lease agreement, the tenant of the Net
Leased Property owned by Belcrest Realty pays all property operating expenses.
As a result, Belcrest Realty does not record operating expenses for the Net
Leased Property.
At March 31, 2004, the estimated fair value of the real properties held through
Belcrest Realty was $451.1 million compared to $623.8 million at March 31, 2003,
a decrease of $172.7 million or 28%. The decrease was due to the sale of
Belcrest Realty's interest in Casco and lower values for the properties held by
Belcrest Realty's remaining Real Estate Joint Venture. Despite weak market
conditions, declines in asset values for multifamily properties have generally
been modest as lower near-term property earnings expectations have been offset
in part by lower capitalization rates. The Fund saw net unrealized appreciation
of the estimated fair value in its other real estate investments (which includes
Belcrest Realty's Net Leased Property and its majority interest in the Real
Estate Joint Venture) of approximately $11.1 million during the quarter ended
March 31, 2004 compared to unrealized depreciation of approximately $24.6
million for the quarter ended March 31, 2003. Net unrealized appreciation of
$11.1 million for the quarter ended March 31, 2004 consisted of approximately
$3.9 million of unrealized depreciation in the value of Belcrest Realty's
remaining Real Estate Joint Venture offset by the reclassification of previously
recorded unrealized depreciation as realized losses in the amount of $15.0
million due to the sale during the quarter of Casco. During the quarter ended
March 31, 2003, Belcrest Realty experienced modest decreases in property values
resulting from declines in near-term earnings expectations and the economic
downturn. However, declines in asset values for multifamily properties during
the quarter ended March 31, 2003 were generally modest as decreases in
capitalization rates largely offset declining income levels.
During the quarter ended March 31, 2004, certain rental properties that are
owned by Belcrest Realty's remaining Real Estate Joint Venture and which secure
certain mortgage notes payable continued to operate at deficits, and it is
expected that no financial resources will be provided by the Real Estate Joint
Venture to fund such deficits. As of December 31, 2003, the related mortgage
notes payable balances reported on the Fund's financial statements were reduced
by $22.4 million to the estimated amount at which they could have been settled
in a then current transaction (which amount equaled the estimated fair value of
such rental properties). The adjustment was reported as unrealized appreciation
of real estate investments for the quarter ended December 31, 2003. Subsequent
net increases to the estimated fair value of such rental properties and
corresponding increases to the estimated amount at which the mortgage notes
payable balances could be settled of approximately $5.3 million have been
reported on the Fund's unaudited financial statements for the quarter ended
March 31, 2004 included in Item 1 above as unrealized appreciation and
depreciation, respectively, of real estate investments.
19
On May 3, 2004, Belcrest Realty entered into agreements to establish Allagash
Property Trust (Allagash), form ProLogis Six Rivers Limited Partnership (in
association with subsidiaries of other investment funds advised by Boston
Management and ProLogis, a publicly-held REIT) (Six Rivers) and merge Six Rivers
with Keystone Property Trust, a publicly-held REIT (Keystone). It is expected
that the merger will be consummated during the third quarter of 2004, subject to
the satisfaction of certain conditions precedent. Upon the ultimate consummation
of the transactions, Belcrest Realty will own an 80% interest in Allagash and
ProLogis will own a 20% interest in Allagash. Allagash will own a partnership
interest in Six Rivers through which it will own 100% of the economic interest
in certain industrial properties acquired through the merger of Six Rivers and
Keystone and valued at approximately $461 million at the date of acquisition.
Prologis, or an affiliate thereof, will manage the properties. It is anticipated
that Keystone's existing direct fixed-rate obligations will be retired after the
merger date. It is anticipated that first mortgage financing estimated to be
60-65% of the property value will be obtained in connection with the acquisition
and will be secured by the properties. There can be no assurance that the
conditions precedent to the consummation of the transactions described above
will be satisfied or that the financing required to acquire the properties will
be obtained.
During the quarter ended March 31, 2004, Belcrest Realty sold (or experienced
scheduled redemptions of) certain of its Partnership Preference Units totaling
approximately $54.0 million (including sales to other investment funds advised
by Boston Management), recognizing gains of approximately $1.1 million on the
transactions. During the quarter ended March 31, 2004, Belcrest Realty also
acquired interests in additional Partnership Preference Units from other
investment funds advised by Boston Management totaling approximately $139.1
million. At March 31, 2004, the estimated fair value of Belcrest Realty's
Partnership Preference Units totaled $537.3 million compared to $574.9 million
at March 31, 2003, a decrease of $37.6 million or 7%. The decrease was due to
fewer Partnership Preference Units held at March 31, 2004 and to decreases in
the per unit values of the Partnership Preference Units held at March 31, 2004
due to their lower average coupon rates. In the current low interest rate
environment, many issuers have been redeeming Partnership Preference Units as
Belcrest Realty's call protections expire or restructuring the terms of
outstanding Partnership Preference Units in advance of their call dates. As a
result, many of the higher-yielding Partnership Preference Units held by
Belcrest Realty during the quarter ended March 31, 2003 were no longer held at
March 31, 2004. Boston Management expects this trend to continue through 2004.
The Fund saw unrealized depreciation of the estimated fair value in its
Partnership Preference Units of approximately $6.9 million during the quarter
ended March 31, 2004 compared to unrealized appreciation of approximately $32.8
million for the quarter ended March 31, 2003. For the quarter ended March 31,
2004, net unrealized depreciation of $6.9 million consisted of approximately
$5.5 million of unrealized depreciation as a result of decreases in per unit
values of the Partnership Preference Units held by Belcrest Realty at March 31,
2004 (as described above), and approximately $1.4 million of unrealized
depreciation resulting from the reclassification of previously recorded
unrealized appreciation as realized gains due to sales of Partnership Preference
Units during the quarter ended March 31, 2004. During the quarter ended March
31, 2003, Partnership Preference Units generally benefited from declining
interest rates and tightening spreads in income-oriented securities,
particularly in real estate-related securities.
Distributions from Partnership Preference Units for the quarter ended March 31,
2004 totaled $13.5 million compared to $13.8 million for the quarter ended March
31, 2003, a decrease of $0.3 million or 2%. The decrease was principally due to
fewer Partnership Preference Units held on average, as well as to lower average
yields for the Partnership Preference Units held during the quarter ended March
31, 2004.
Performance of Interest Rate Swap Agreements. For the quarter ended March 31,
2004, net realized and unrealized losses on the Fund's interest rate swap
agreements totaled approximately $13.6 million, compared to approximately $3.4
million of net realized and unrealized losses for the quarter ended March 31,
2003. Net realized and unrealized losses on swap agreements for the quarter
ended March 31, 2004 consisted of $8.7 million of unrealized depreciation due to
changes in swap agreement valuations and $4.9 million of periodic payments made
pursuant to outstanding swap agreements (and classified as net realized losses
on interest rate swap agreements). For the quarter ended March 31, 2003, the
Fund had unrealized appreciation of $8.9 million due to swap agreement valuation
changes, offset by $12.3 million of swap agreement periodic payments. The
negative impact on Fund performance for the quarter ended March 31, 2004 from
changes in swap agreement valuations was attributable to a decline in swap rates
during the period. The positive contribution to Fund performance from changes in
swap valuations for the quarter ended March 31, 2003 was due to the Fund's swap
agreements approaching optional termination dates, as relevant swap rates were
substantially unchanged.
20
(b) Liquidity and Capital Resources.
Outstanding Borrowings. The Fund has entered into credit arrangements with DrKW
Holdings, Inc. and Merrill Lynch Mortgage Capital, Inc. (collectively, the
Credit Facility) primarily to finance the Fund's equity in its real estate
investments and will continue to use the Credit Facility for such purpose in the
future. The Credit Facility may also be used for other purposes, including any
short-term liquidity needs of the Fund. In the future, the Fund may increase the
size of the Credit Facility (subject to lender consent) and the amount of
outstanding borrowings thereunder. As of March 31, 2004, the Fund had
outstanding borrowings of $720.0 million and unused loan commitments of $138.0
million under the Credit Facility. During the quarter ended March 31, 2004, the
Fund amended its loan agreement with DrKW Holdings, Inc. to establish a
borrowing limit of $860 million under that agreement.
On May 3, 2004, Belcrest Realty entered an agreement to establish and acquire a
majority interest in a Real Estate Joint Venture, Allagash. Belcrest Realty's
acquisition of its interest in Allagash is expected to occur in the third
quarter of 2004. Allagash is expected to indirectly own industrial properties
with a value of approximately $461 million at acquisition. Belcrest Realty will
own 80% of the interests in Allagash. The amount of Belcrest Realty's net
investment in Allagash will depend in part on the terms of the anticipated
mortgage financing to be obtained for the real estate assets, closing costs and
other consideration. The Fund plans to increase its borrowings under the
existing Credit Facility to fund its equity in Allagash and has begun
discussions with DrKW Holdings, Inc. and Merrill Lynch Mortgage Capital, Inc. in
anticipation of its investment in Allagash.
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 one-month
LIBOR. During the terms of the outstanding interest rate swap agreements,
changes in the underlying values of the agreements are recorded as unrealized
appreciation or depreciation. As of March 31, 2004, the unrealized depreciation
related to the interest rate swap agreements was approximately $5.7 million. As
of March 31, 2003, the unrealized depreciation related to the interest rate swap
agreements was approximately $52.8 million.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate 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 Venture and Net Leased
Property. Partnership Preference Units are fixed rate instruments whose values
will generally decrease when interest rates rise and increase when interest
rates fall. The interest rates on borrowings under the Fund's Credit Facility
are reset at regular intervals based on one-month LIBOR. The Fund has entered
into interest rate swap agreements to fix the cost of its borrowings under the
Credit Facility used to acquire Belcrest Realty's equity in its real estate
investments and to mitigate in part the impact of interest rate changes on the
Fund's net asset value. Under the terms of the interest rate swap agreements,
the Fund makes cash payments at fixed rates in exchange for floating rate
payments that fluctuate with one-month LIBOR. The Fund's interest rate swap
agreements will generally increase in value when interest rates rise and
decrease in value when interest rates fall. 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 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 and Callable Date
for the Twelve Months Ended March 31,*
Estimated
2005 2006-2008 2009 Thereafter Total Fair Value
- ----------------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
- ----------------------------------
Long-term debt:
- ----------------------------------
21
Estimated
2005 2006-2008 2009 Thereafter Total Fair Value
- ----------------------------------------------------------------------------------------------------------------------------
Fixed-rate mortgages $90,081,831 $324,128,348 $414,210,179 $419,700,000
Average interest rate 7.22% 7.94% 7.78%
- ----------------------------------
Variable-rate Credit Facility $720,000,000 $720,000,000 $720,000,000
Average interest rate 1.39% 1.39%
- ----------------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative
financial instruments:
- ----------------------------------
Pay fixed/receive variable
interest rate swap agreements $627,725,000 $627,725,000 $ (5,687,108)
Average pay rate 4.68% 4.68%
Average receive rate 1.39% 1.39%
- ----------------------------------------------------------------------------------------------------------------------------
Rate sensitive investments:
- ----------------------------------
Fixed-rate Partnership
Preference Units:
- ----------------------------------
Cabot Industrial Properties,
L.P., 8.625% Series B Cumulative
Redeemable Preferred Units,
Callable 4/29/04,
Current Yield: 8.30% $15,569,810 $ 15,569,810 $ 15,071,300
Camden Operating, L.P.,
7% Series B Cumulative
Redeemable Perpetual
Preferred Units, Callable
12/2/08, Current Yield: 8.63% $65,626,653 $ 65,626,653 $ 64,776,900
Colonial Realty Limited
Partnership, 7.25% Series B
Cumulative Redeemable
Perpetual Preferred Units,
Callable 2/24/09, Current
Yield: 7.39% $39,244,840 $ 39,244,840 $ 39,232,000
Essex Portfolio, L.P., 7.875%
Series B Cumulative
Redeemable Preferred Units,
Callable 12/31/09, Current
Yield: 7.58% $ 9,313,677 $ 9,313,677 $ 9,609,289
Liberty Property L.P., 9.25%
Series B Cumulative
Redeemable Preferred Units,
Callable 7/28/04, Current
Yield: 9.06% $46,625,000 $ 46,625,000 $ 47,613,450
22
Estimated
2005 2006-2008 2009 Thereafter Total Fair Value
- ---------------------------------------------------------------------------------------------------------------------------------
MHC Operating Limited
Partnership, 9% Series D
Cumulative Redeemable
Perpetual Preference Units,
Callable 9/29/04, Current
Yield: 8.86% $55,000,000 $ 55,000,000 $ 55,880,000
National Golf Operating
Partnership, L.P., 9.30%
Series A Cumulative
Redeemable Preferred Units,
Callable 2/6/03, Current
Yield: 9.26% $27,877,518 $ 27,877,518 $ 31,692,552
National Golf Operating
Partnership, L.P., 9.30%
Series B Cumulative
Redeemable Preferred Units,
Callable 2/6/03, Current
Yield: 9.26% $29,833,200 $ 29,833,200 $ 30,120,000
PSA Institutional Partners,
L.P., 6.40% Series NN
Cumulative Redeemable
Perpetual Preferred Units,
Callable 3/17/10, Current
Yield: 6.90% $ 55,375,000 $ 55,375,000 $ 51,343,700
Price Development Company,
L.P., 8.95% Series B
Cumulative Redeemable
Preferred Partnership Units,
Callable 7/28/04, Current
Yield: 8.86% $44,089,925 $ 44,089,925 $ 44,818,750
Regency Centers, L.P., 9.125%
Series D Cumulative Redeemable
Preferred Units, Callable
9/29/04, Current Yield: 8.90% $50,598,110 $ 50,598,110 $ 51,245,000
Sun Communities Operating
L.P., 8.875% Series A
Cumulative Redeemable
Perpetual Preferred Units,
Callable 9/ 29/04, Current
Yield: 8.71% $20,942,560 $ 20,942,560 $ 20,368,000
Urban Shopping Centers, L.P.,
9.45% Series D Cumulative
Redeemable Perpetual
Preferred Units, Callable
10/1/04, Current Yield: 9.20% $60,000,000 $ 60,000,000 $ 61,662,480
23
Estimated
2005 2006-2008 2009 Thereafter Total Fair Value
- ---------------------------------------------------------------------------------------------------------------------------------
Vornado Realty, L.P.,
7% Series D-10 Cumulative
Redeemable Preferred Units,
Callable 11/17/08, Current
Yield: 7.04%(1) $13,766,505 $ 13,766,505 $ 13,913,367
- ----------------------------------
Note Receivable:
- ----------------------------------
Fixed-rate note receivable, 8% $ 3,352,436 $ 3,352,436 $ 3,663,758
* The investments listed reflect holdings as of March 31, 2004. The Fund's
current holdings may differ.
(1) Belcrest Realty's interest in these Partnership Preference Units is held
through Bel Holdings LLC.
Item 4. Controls and Procedures.
Eaton Vance, as the Fund's manager, conducted an evaluation of the effectiveness
of the Fund's disclosure controls and procedures (as defined by Rule 13a-15(e)
of the 1934 Act) as of the end of the period covered by this report, with the
participation of the Fund's Chief Executive Officer and Chief Financial Officer.
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 quarter ended March 31, 2004 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 Chief Executive Officer and
Chief Financial Officer intend to report to the Board of Directors of Eaton
Vance, Inc. (the sole trustee of 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, Use of Proceeds and Issuer Purchases of Equity
Securities.
As described in the Fund's Annual Report on Form 10-K for the year ended
December 31, 2003, shares of the Fund may be redeemed by Shareholders on any
business day. Redemptions are met at the net asset value per share of the Fund
(less any applicable redemption fee). The right to redeem is available to all
Shareholders and all outstanding Fund shares are eligible. During each month in
24
the quarter ended March 31, 2004, the total number of shares redeemed and the
average price paid per share were as follows:
Total No. of Shares Average Price Paid Per
Month Ended Redeemed(1) Share
- ------------------------------------------------------------------------------
January 31, 2004 67,098.824 $105.76
- ------------------------------------------------------------------------------
February 29, 2004 302,846.727 $107.37
- ------------------------------------------------------------------------------
March 31, 2004 112,710.809 $104.96
- ------------------------------------------------------------------------------
Total 482,656.360 $105.47
- ------------------------------------------------------------------------------
(1) All shares redeemed during the periods were redeemed at the option of
Shareholders pursuant to the Fund's redemption policy. The Fund has not
announced any plans or programs to repurchase shares other than at the
option of Shareholders.
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 March 31, 2004.
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(a) Amendment No. 1 dated March 16, 2004 to the Loan and Security
Agreement between Belcrest Capital Fund LLC and DrKW Holdings, Inc.
4.2(a) Amendment No. 1 dated March 16, 2004 to the Loan and Security
Agreement between Belcrest Capital Fund LLC, Merrill Lynch Mortgage
Capital, Inc., the Lenders referred to therein and Merrill Lynch
Capital Services, Inc.
21 List of Subsidiaries
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 May 10, 2004.
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(a) Amendment No. 1 dated March 16, 2004 to the Loan and Security
Agreement between Belcrest Capital Fund LLC and DrKW Holdings, Inc.
4.2(a) Amendment No. 1 dated March 16, 2004 to the Loan and Security
Agreement between Belcrest Capital Fund LLC, Merrill Lynch Mortgage
Capital, Inc., the Lenders referred to therein and Merrill Lynch
Capital Services, Inc.
21 List of Subsidiaries
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