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 September 30, 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. 000-49775
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Belport Capital Fund LLC
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(Exact name of registrant as specified in its charter)
Delaware 04-3551830
-------- ----------
(State of organization) (I.R.S. Employer Identification No.)
The Eaton Vance Building
255 State Street
Boston, Massachusetts 02109
--------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 617-482-8260
------------
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
--- ----
BELPORT CAPITAL FUND LLC
Index to Form 10-Q
PART I FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Statements of Assets
and Liabilities as of September 30, 2004 (Unaudited)
and December 31, 2003 3
Condensed Consolidated Statements of Operations
(Unaudited) for the Three Months Ended September 30, 2004
and 2003 and for the Nine Months Ended September 30, 2004
and 2003 4
Condensed Consolidated Statements of Changes in
Net Assets for the Nine Months Ended September 30, 2004
(Unaudited) and the Year Ended December 31, 2003 6
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Nine Months Ended
September 30, 2004 and 2003 7
Financial Highlights (Unaudited) for the Nine Months
Ended September 30, 2004 9
Notes to Condensed Consolidated Financial Statements
as of September 30, 2004 (Unaudited) 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 23
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
EXHIBIT INDEX 26
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
BELPORT CAPITAL FUND LLC
Condensed Consolidated Statements of Assets and Liabilities
September 30, 2004 December 31,
(Unaudited) 2003
------------------ ----------------
Assets:
Investment in Belvedere Capital Fund
Company LLC (Belvedere Company) $ 1,583,004,294 $ 1,611,769,203
Investment in Partnership Preference Units 117,579,147 93,277,111
Investment in other real estate 490,151,151 484,704,890
Short-term investments 7,170,000 4,821,135
------------------ ----------------
Total investments $ 2,197,904,592 $ 2,194,572,339
Cash 12,687,474 6,522,994
Escrow deposits - restricted 4,810,828 2,764,808
Open interest swap agreements, at value 979,341 1,763,670
Distributions and interest receivable 306,702 404,628
Other assets 2,828,687 2,358,005
------------------ ----------------
Total assets $ 2,219,517,624 $ 2,208,386,444
------------------ ----------------
Liabilities:
Loan payable - Credit Facility $ 270,900,000 $ 230,500,000
Mortgages payable 361,107,500 361,107,500
Payable for Fund Shares redeemed 962,696 -
Distributions payable to minority shareholders - 16,800
Special Distributions payable - 17
Security deposits 878,771 863,503
Swap interest payable 78,800 118,147
Accrued expenses:
Interest expense 2,107,583 2,141,722
Property taxes 5,416,123 2,212,615
Other expenses and liabilities 2,124,519 2,224,975
Minority interests in controlled subsidiaries 26,283,226 24,347,753
------------------ ----------------
Total liabilities $ 669,859,218 $ 623,533,032
------------------ ----------------
Net assets $ 1,549,658,406 $ 1,584,853,412
------------------ ----------------
Shareholders' Capital $ 1,549,658,406 $ 1,584,853,412
------------------ ----------------
Shares outstanding 16,217,971 16,697,292
------------------ ----------------
Net asset value and redemption price per
Share $ 95.55 $ 94.92
------------------ ----------------
See notes to unaudited condensed consolidated financial statements
3
BELPORT CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 2004 September 30,2003 September 30, 2004 September 30, 2003
------------------ ----------------- ------------------ ------------------
Investment Income:
Dividends allocated from Belvedere Company
(net of foreign taxes of $66,327, $44,380,
$269,559 and $196,029, respectively) $ 5,968,963 $ 5,295,899 $ 17,849,428 $ 15,217,949
Interest allocated from Belvedere Company 10,118 43,854 56,324 292,876
Expenses allocated from Belvedere Company (2,393,853) (2,265,990) (7,264,802) (6,363,447)
------------------ ----------------- ------------------ ------------------
Net investment income allocated from
Belvedere Company $ 3,585,228 $ 3,073,763 $ 10,640,950 $ 9,147,378
Rental income 16,068,245 16,226,618 46,518,588 49,420,335
Distributions from Partnership Preference Units 2,002,344 2,203,828 5,452,170 6,611,484
Interest 64,345 20,118 274,559 122,185
------------------ ----------------- ------------------ ------------------
Total investment income $ 21,720,162 $ 21,524,327 $ 62,886,267 $ 65,301,382
------------------ ----------------- ------------------ ------------------
Expenses:
Investment advisory and administrative fees $ 1,435,242 $ 1,359,990 $ 4,277,969 $ 4,038,850
Property management fees 640,521 649,639 1,863,487 1,964,258
Distribution and servicing fees 758,512 695,626 2,317,692 1,978,503
Interest expense on mortgages 6,285,822 6,259,976 18,836,356 19,133,807
Interest expense on Credit Facility 1,121,445 776,631 2,638,300 2,729,725
Property and maintenance expenses 4,566,306 4,483,495 12,816,539 12,974,512
Property taxes and insurance 1,934,688 1,656,809 5,968,416 5,922,799
Miscellaneous 481,167 171,115 772,218 1,009,392
------------------ ----------------- ------------------ ------------------
Total expenses $ 17,223,703 $ 16,053,281 $ 49,490,977 $ 49,751,846
Deduct-
Reduction of investment advisory
and administrative fees $ 386,317 361,133 $ 1,179,415 $ 1,011,203
------------------ ----------------- ------------------ ------------------
Net expenses $ 16,837,386 $ 15,692,148 $ 48,311,562 $ 48,740,643
------------------ ----------------- ------------------ ------------------
Net investment income before
minority interests in net income of
controlled subsidiaries $ 4,882,776 $ 5,832,179 $ 14,574,705 $ 16,560,739
Minority interests in net income
of controlled subsidiaries (455,411) (642,577) (1,285,406) (1,845,742)
------------------ ----------------- ------------------ ------------------
Net investment income $ 4,427,365 $ 5,189,602 $ 13,289,299 $ 14,714,997
------------------ ----------------- ------------------ ------------------
See notes to unaudited condensed consolidated financial statements
4
BELPORT CAPITAL FUND LLC
Condensed Consolidated Statements of Operations (Unaudited) (Continued)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
------------------ ------------------ ------------------ ------------------
Realized and Unrealized Gain (Loss)
Net realized gain (loss) -
Investment transactions and foreign
currency transactions allocated from
Belvedere Company (identified cost basis) $ 4,950 $ 1,052,602 $ 8,676,322 $ (2,153,990)
Investment transactions in Partnership
Preference Units (identified cost basis) (288,879) - 3,285,775 -
Investment transactions in other real estate
(net of minority interests in realized gain
(loss) of controlled subsidiaries of $33,073,
$0, $1,304,340, $0, respectively) 111,352 - 4,391,466 323,384
Interest rate swap agreements(1) (1,192,010) (2,366,173) (3,807,010) (6,838,894)
------------------ ------------------ ------------------ ------------------
Net realized gain (loss) $ (1,364,587) $ (1,313,571) $ 12,546,553 $ (8,669,500)
------------------ ------------------ ------------------ ------------------
Change in unrealized appreciation (depreciation) -
Investments and foreign currency allocated
from Belvedere Company (identified cost basis) $ (38,494,617) $ 30,013,572 $ 179,234 $138,258,490
Investments in Partnership Preference Units
(identified cost basis) 2,319,789 (1,126,750) (4,340,182) 6,747,650
Investments in other real estate (net of minority
interests in unrealized gain (loss) of controlled
subsidiaries of $2,026,786, $(512,237) $(654,273)
and $(8,578,672), respectively) 5,880,607 (1,195,070) 2,425,196 (13,453,015)
Interest rate swap agreements (5,022,985) 6,479,551 (784,329) 939,395
------------------ ------------------ ------------------ ------------------
Net change in unrealized (depreciation)
appreciation $ (35,317,206) $ 34,171,303 $ (2,520,081) $132,492,520
------------------ ------------------ ------------------ ------------------
Net realized and unrealized gain (loss) $ (36,681,793) $ 32,857,732 $ 10,026,472 $123,823,020
------------------ ------------------ ------------------ ------------------
Net (decrease) increase in net assets
from operations $ (32,254,428) $ 38,047,334 $ 23,315,771 $138,538,017
================== ================== ================== ==================
(1) Amounts include periodic payments made in connection with interest rate
swap agreements of $1,192,010, $2,366,173, $3,807,010 and $6,838,894,
respectively (Note 5).
See notes to unaudited condensed consolidated financial statements
5
BELPORT CAPITAL FUND LLC
Condensed Consolidated Statements of Changes in Net Assets
Nine Months
Ended
September 30, 2004 Year Ended
(Unaudited) December 31, 2003
------------------ -----------------
Increase (Decrease) in Net Assets:
Net investment income $ 13,289,299 $ 19,648,844
Net realized gain (loss) from investment
transactions, foreign currency
transactions and interest rate swap
agreements 12,546,553 (10,022,550)
Net change in unrealized (depreciation)
appreciation of investments, foreign
currency and interest rate swap agreements (2,520,081) 309,086,814
------------------ -----------------
Net increase in net assets from operations $ 23,315,771 $ 318,713,108
------------------ -----------------
Transactions in Fund Shares -
Net asset value of Fund Shares issued to
Shareholders in payment of distributions
declared $ 6,341,090 $ 6,479,733
Net asset value of Fund Shares redeemed (52,162,076) (52,613,896)
------------------ -----------------
Net decrease in net assets from Fund Share
transactions $ (45,820,986) $ (46,134,163)
------------------ -----------------
Distributions -
Distributions to Shareholders $ (12,689,791) $ (12,367,580)
Special Distributions to Shareholders - (17)
------------------ -----------------
Total distributions $ (12,689,791) $ (12,367,597)
------------------ -----------------
Net (decrease) increase in net assets $ (35,195,006) $ 260,211,348
Net assets:
At beginning of period $1,584,853,412 $1,324,642,064
------------------ -----------------
At end of period $1,549,658,406 $1,584,853,412
================== =================
See notes to unaudited condensed consolidated financial statements
6
BELPORT CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Nine Months
Ended Ended
September 30, 2004 September 30, 2003
------------------ ------------------
Cash Flows From (For) Operating Activities -
Net increase in net assets from operations $ 23,315,771 $ 138,538,017
Adjustments to reconcile net increase in net assets from operations
to net cash flows (for) from operating activities -
Net investment income allocated from Belvedere Company (10,640,950) (9,147,378)
Increase in escrow deposits (2,046,020) (3,178,986)
Decrease in receivable for investments sold - 50,221,589
(Increase) decrease in other assets (470,682) 202,354
Decrease in distributions and interest receivable 97,926 43
(Decrease) increase in interest payable for open swap agreements (39,347) 14,880
Decrease in security deposits, accrued interest and
accrued other expenses and liabilities (119,327) (1,427,870)
Increase in accrued property taxes 3,203,508 3,602,090
Purchases of Partnership Preference Units (54,518,164) -
Proceeds from sales of Partnership Preference Units 29,161,721 -
Proceeds from sale of investment in other real estate 41,336,126 5,356,755
Payments for investments in other real estate (36,157,244) (5,026,960)
Improvements to rental property (3,158,414) (3,202,700)
Net increase in investment in Belvedere Company - (41,000,000)
Net interest incurred on interest rate swap agreements (3,807,010) (6,838,894)
Increase in short-term investments (2,348,865) (2,030,109)
Minority interests in net income of controlled subsidiaries 1,285,406 1,845,742
Net realized (gain) loss from investment transactions, foreign
currency transactions and interest rate swap agreements (12,546,553) 8,669,500
Net change in unrealized (appreciation) depreciation of investments,
foreign currency and interest rate swap agreements 2,520,081 (132,492,520)
------------------ ------------------
Net cash flows (for) from operating activities $ (24,932,037) $ 4,105,553
------------------ ------------------
Cash Flows From (For) Financing Activities -
Repayment of mortgage $ - $ (6,411)
Proceeds from Credit Facility 40,400,000 4,500,000
Distributions paid to Shareholders (6,348,718) (5,887,847)
Payments for Fund Shares redeemed (2,937,965) (3,143,412)
Distributions paid to minority shareholders (16,800) (612,529)
------------------ ------------------
Net cash flows from (for) financing activities $ 31,096,517 $ (5,150,199)
------------------ ------------------
Net increase (decrease) in cash $ 6,164,480 $ (1,044,646)
Cash at beginning of period $ 6,522,994 $ 7,452,296
------------------ ------------------
Cash at end of period $ 12,687,474 $ 6,407,650
================== ==================
See notes to unaudited condensed consolidated financial statements
7
BELPORT CAPITAL FUND LLC
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
Nine Months Nine Months
Ended Ended
September 30, 2004 September 30, 2003
------------------ ------------------
Supplemental Disclosure and Non-cash Investing and
Financing Activities -
Interest paid on loan - Credit Facility $ 2,586,235 $ 2,480,614
Interest paid on mortgages $ 18,645,464 $ 18,968,446
Interest paid on swap agreements $ 3,846,357 $ 6,824,014
Market value of securities distributed in payment of
redemptions $ 48,261,415 $ 36,366,118
Market value of real property and other assets, net
of current liabilities, assumed in conjunction with
acquisition of other real estate $ - $ 64,628,785
Mortgage assumed in conjunction with acquisition of
other real estate $ - $ 59,601,825
Market value of real property and other assets, net
of current liabilities, disposed of in conjunction with
sale of other real estate $ - $ 64,713,609
Mortgage disposed of in conjunction with sale of
other real estate $ - $ 59,595,415
See notes to unaudited condensed consolidated financial statements
8
BELPORT CAPITAL FUND LLC as of September 30, 2004
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial Highlights (Unaudited)
For the Nine Months Ended September 30, 2004
- --------------------------------------------------------------------------------
Net asset value - Beginning of period $ 94.920
- --------------------------------------------------------------------------------
Income (loss) from operations
- --------------------------------------------------------------------------------
Net investment income(6) $ 0.804
Net realized and unrealized gain 0.586
- --------------------------------------------------------------------------------
Total income from operations $ 1.390
- --------------------------------------------------------------------------------
Distributions
- --------------------------------------------------------------------------------
Distributions to Shareholders $ (0.760)
- --------------------------------------------------------------------------------
Total distributions $ (0.760)
- --------------------------------------------------------------------------------
Net asset value - End of period $ 95.550
- --------------------------------------------------------------------------------
Total Return(1) 1.47%
- --------------------------------------------------------------------------------
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) 1.30%(9) 0.97%(9)
Operating expenses(7) 1.45%(9) 1.08%(9)
Belport Capital Fund LLC Expenses
Interest and other borrowing costs(4)(8) 0.22%(9) 0.17%(9)
Investment advisory and administrative
fees, servicing fees and other Fund
operating expenses(3)(4) 1.10%(9) 0.82%(9)
- --------------------------------------------------------------------------------
Total expenses 4.07%(9) 3.04%(9)
Net investment income 1.13%(9) 0.84%(9)
- --------------------------------------------------------------------------------
Supplemental Data
- --------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 1,549,658
Portfolio turnover of Tax-Managed Growth Portfolio (the Portfolio) 2.41%
- --------------------------------------------------------------------------------
(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 Belport Capital Fund LLC (Belport Capital) (including Belport Capital's
interest in Belvedere Capital Fund Company LLC (Belvedere Company) and
Belport Capital's ratable share of the assets of its directly and
indirectly controlled subsidiaries), without reduction by any liabilities.
For this purpose, the assets of Belport Realty Corporation's (Belport
Realty) controlled subsidiaries are reduced by the proportionate interests
therein of investors other than Belport Realty.
(3) Includes Belport Capital's share of Belvedere Company's allocated expenses,
including those expenses allocated from the Portfolio.
(4) Includes the expenses of Belport Capital and Belport Realty. Does not
include expenses of the real estate subsidiaries majority-owned by Belport
Realty.
(5) For the purpose of calculating ratios, the income and expenses of Belport
Realty's controlled subsidiaries are reduced by the proportionate interest
therein of investors other than Belport Realty.
(6) Calculated using average shares outstanding.
(7) Includes Belport Realty's proportional share of expenses incurred by its
majority-owned subsidiaries.
(8) Ratios do not include interest incurred in connection with the interest
rate swap agreements. Had such amounts been included, ratios would be
higher.
(9) Annualized.
See notes to unaudited condensed consolidated financial statements
9
BELPORT CAPITAL FUND LLC as of September 30, 2004
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The condensed consolidated interim financial statements of Belport Capital Fund
LLC (Belport 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 and the statement of changes in net
assets for the year then ended have been derived from the December 31, 2003
audited financial statements but do 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 periods' condensed consolidated financial
statements have been reclassified to conform with the current period
presentation.
2. Estate Freeze
Shareholders in Belport Capital are entitled to restructure their Fund Share
interests under what is termed an Estate Freeze Election. Under this election,
Fund Shares are divided into Preferred Shares and Common Shares. Preferred
Shares have a preferential right over the corresponding Common Shares equal to
(i) 95% of the original capital contribution made in respect of the undivided
Shares from which the Preferred Shares and Common Shares were derived, plus (ii)
an annuity priority return equal to 8.5% of the Preferred Shares' preferential
interest in the original capital contribution of the undivided Fund Shares. The
associated Common Shares are entitled to the remaining 5% of the original
capital contribution in respect of the undivided Shares, plus any returns
thereon in excess of the fixed annual priority of the Preferred Shares. The
existence of restructured Fund Shares does not adversely affect Shareholders who
do not make an election nor do the restructured Fund Shares have preferential
rights to Fund Shares that have not been restructured. Shareholders who
subdivide Fund Shares under this election sacrifice certain rights and
privileges that they would otherwise have with respect to the Fund Shares so
divided, including redemption rights and voting and consent rights. Upon the
twentieth anniversary of the issuance of the associated undivided Fund Shares to
the original holders thereof, Preferred and Common Shares will automatically
convert into full and fractional undivided Fund Shares.
The allocation of Belport Capital's net asset value per Share at September 30,
2004 and December 31, 2003, between Preferred and Common Shares that have been
restructured is as follows:
10
Per Share Value At Per Share Value At
September 30, 2004 December 31, 2003
-----------------------------------------------------
Preferred Common Preferred Common
Date of Contribution Shares Shares Shares Shares
- --------------------------------------------------------------------------------
May 23, 2001 $95.55 $ - $94.92 $ -
July 26, 2001 $94.71 $0.84 $94.71 $0.21
December 18, 2001 $91.87 $3.68 $91.87 $3.05
3. Investment Transactions
The following table summarizes the Fund's investment transactions for the nine
months ended September 30, 2004 and September 30, 2003:
Nine Months Ended Nine Months Ended
Investment Transaction September 30, 2004 September 30, 2003
- -----------------------------------------------------------------------------------------
Increases in investment in Belvedere Company $ - $ 41,000,000
Decreases in investment in Belvedere Company $ 48,261,415 $ 36,366,118
Sales of other real estate(1)(4) $ 41,336,126 $ 5,356,755
Acquisitions of other real estate(1)(4) $ 36,157,244 $ 5,026,960
Purchases of Partnership Preference Units(2) $ 54,518,164 $ -
Sales of Partnership Preference Units(3) $ 29,161,721 $ -
- -----------------------------------------------------------------------------------------
(1) In March 2003, Bel Oakbrook LLC (Bel Oakbrook), a wholly-owned subsidiary
of Belport Realty Corporation (Belport Realty), acquired a 100% ownership
interest in an office building. In May 2003, Belport Realty sold its
interest in Bel Oakbrook to another investment fund advised by Boston
Management and Research (Boston Management). A gain of $323,384 was
recognized on the transaction.
(2) Purchases of Partnership Preference Units during the nine months ended
September 30, 2004 represent Partnership Preference Units purchased from
other investment funds advised by Boston Management. There were no
purchases for the nine months ended September 30, 2003.
(3) Sales of Partnership Preference Units for the nine months ended September
30, 2004 include Partnership Preference Units sold to other investment
funds advised by Boston Management for which a loss of $374,307 was
recognized.
(4) In January 2004, a multifamily residential property owned by Monadnock
Property Trust, LLC (Monadnock) was sold to a third party. Belport Realty
recognized a gain of $4,391,466 on the transaction. In June 2004, Monadnock
then acquired a replacement multifamily residential property with the
proceeds from that sale.
4. 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 nine months ended September 30, 2004 and September 30, 2003,
including allocations of income, expenses and net realized and unrealized gains
(losses) for the respective periods then ended:
Nine Months Nine Months
Ended Ended
September 30, September 30,
2004 2003
- -------------------------------------------------------------------------------------------------------------------
Belvedere Company's interest in the Portfolio(1) $11,744,785,646 $ 9,775,572,306
The Fund's investment in Belvedere Company(2) $ 1,583,004,294 $ 1,472,011,971
Income allocated to Belvedere Company from the Portfolio $ 127,279,355 $ 102,346,416
Income allocated to the Fund from Belvedere Company $ 17,905,752 $ 15,510,825
Expenses allocated to Belvedere Company from the Portfolio $ 38,377,075 $ 31,352,609
Expenses allocated to the Fund from Belvedere Company $ 7,264,802 $ 6,363,447
Net realized gain (loss) from investment transactions and foreign currency
transactions allocated to Belvedere Company from the portfolio $ 72,613,080 $ (10,803,952)
Net realized gain (loss) from investment transactions and foreign
currency transactions allocated to the Fund from Belvedere Company $ 8,676,322 $ (2,153,990)
Net change in unrealized (depreciation) appreciation of investments and
foreign currency allocated to Belvedere Company from the Portfolio $ (18,939,820) $ 898,392,188
Net change in unrealized (depreciation) appreciation of investments and
foreign currency allocated to the Fund from Belvedere Company $ 179,234 $ 138,258,490
- -------------------------------------------------------------------------------------------------------------------
11
(1) As of September 30, 2004 and 2003, the value of Belvedere Company's
interest in the Portfolio represents 65.9% and 62.1% of the Portfolio's net
assets, respectively.
(2) As of September 30, 2004 and 2003, the Fund's investment in Belvedere
Company represents 13.5% and 15.1% of Belvedere Company's net assets,
respectively.
A summary of the Portfolio's Statement of Assets and Liabilities, at September
30, 2004, December 31, 2003 and September 30, 2003 and its operations for the
nine months ended September 30, 2004, for the year ended December 31, 2003 and
for the nine months ended September 30, 2003 follows:
September 30, December 31, September 30,
2004 2003 2003
----------------------------------------------------
Investments, at value $17,792,133,580 $17,584,390,762 $15,720,495,292
Other assets 38,445,443 25,462,745 22,166,551
- --------------------------------------------------------------------------------
Total assets $17,830,579,023 $17,609,853,507 $15,742,661,843
Loan Payable -
Line of Credit 15,200,000 - -
Other liabilities 218,380 264,502 241,245
- --------------------------------------------------------------------------------
Total liabilities $ 15,418,380 $ 264,502 $ 241,245
- --------------------------------------------------------------------------------
Net assets $17,815,160,643 $17,609,589,005 $15,742,420,598
================================================================================
Dividends and interest $ 197,869,361 $ 232,925,912 $ 166,725,898
- --------------------------------------------------------------------------------
Investment adviser fee $ 57,812,972 $ 67,584,543 $ 49,370,631
Other expenses 1,911,200 2,295,653 1,730,334
- --------------------------------------------------------------------------------
Total expenses $ 59,724,172 $ 69,880,196 $ 51,100,965
- --------------------------------------------------------------------------------
Net investment income $ 138,145,189 $ 163,045,716 $ 115,624,933
Net realized gain (loss)
from investment
transactions and foreign
currency transactions 118,172,446 70,909,770 (17,942,587)
Net change in unrealized
appreciation (depreciation)
of investments and foreign
currency (29,473,230) 3,174,709,110 1,449,036,078
- --------------------------------------------------------------------------------
Net increase in net assets
from operations $ 226,844,405 $ 3,408,664,596 $ 1,546,718,424
- --------------------------------------------------------------------------------
5. Interest Rate Swap Agreements
Belport 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, Belport 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 September 30, 2004 and December 31, 2003
are listed below.
12
Notional Initial
Amount Optional Final Unrealized Unrealized
Effective (000's Fixed Floating Termination Termination Appreciation at Appreciation at
Date omitted) Rate Rate Date Date September 30, 2004 December 31, 2003
- ------------------------------------------------------------------------------------------------------------------
$ 34,905 4.565% LIBOR + 0.20% 3/05 6/10 $ 200,315 $ 170,784
46,160 4.045% LIBOR + 0.20% 2/10 6/10 115,815 326,668
109,822 3.945% LIBOR + 0.20% - 6/10 663,211 1,266,218
- ------------------------------------------------------------------------------------------------------------------
Total $ 979,341 $1,763,670
- ------------------------------------------------------------------------------------------------------------------
6. Segment Information
Belport 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, Belport Capital invests in real estate assets
through its subsidiary, Belport Realty. Belport Realty invests directly and
indirectly in Partnership Preference Units and indirectly in real property
through controlled subsidiaries, Bel Multifamily Property Trust, Monadnock and
Bel Oakbrook (for the period from March 19, 2003, to May 13, 2003).
Belport 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:
Tax-Managed
For the Three Months Ended Growth Real
September 30, 2004 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------------
Revenue $ 3,585,228 $ 18,100,886 $ 21,686,114
Interest expense on mortgages - (6,285,822) (6,285,822)
Interest expense on Credit Facility (78,501) (953,228) (1,031,729)
Operating expenses (288,087) (8,312,770) (8,600,857)
Minority interest in net income of controlled
subsidiaries - (455,411) (455,411)
- ----------------------------------------------------------------------------------------------------------------
Net investment income $ 3,218,640 $ 2,093,655 $ 5,312,295
Net realized gain (loss) 4,950 (1,369,537) (1,364,587)
Net change in unrealized appreciation (depreciation) (38,494,617) 3,177,412 (35,317,205)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets from
operations of reportable segments $ (35,271,027) $ 3,901,530 $ (31,369,497)
- ----------------------------------------------------------------------------------------------------------------
Tax-Managed
For the Three Months Ended Growth Real
September 30, 2003 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------------
Revenue $ 3,073,763 $ 18,446,362 $ 21,520,125
Interest expense on mortgages - (6,259,976) (6,259,976)
Interest expense on Credit Facility (66,129) (679,437) (745,566)
Operating expenses (247,516) (7,640,351) (7,887,867)
Minority interest in net income of controlled
subsidiaries - (642,577) (642,577)
- ----------------------------------------------------------------------------------------------------------------
Net investment income $ 2,760,118 $ 3,224,021 $ 5,984,139
Net realized gain (loss) 1,052,602 (2,366,173) (1,313,571)
Net change in unrealized appreciation (depreciation) 30,013,572 4,157,731 34,171,303
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations of
reportable segments $ 33,826,292 $ 5,015,579 $ 38,841,871
- ----------------------------------------------------------------------------------------------------------------
13
Tax-Managed
For the Nine Months Ended Growth Real
September 30, 2004 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------------
Revenue $ 10,640,950 $ 52,173,774 $ 62,814,724
Interest expense on mortgages - (18,836,356) (18,836,356)
Interest expense on Credit Facility (184,681) (2,242,555) (2,427,236)
Operating expenses (889,395) (23,418,222) (24,307,617)
Minority interest in net income of controlled
subsidiaries - (1,285,406) (1,285,406)
- ----------------------------------------------------------------------------------------------------------------
Net investment income $ 9,566,874 $ 6,391,235 $ 15,958,109
Net realized gain 8,676,322 3,870,231 12,546,553
Net change in unrealized appreciation (depreciation) 179,234 (2,699,315) (2,520,081)
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations of
reportable segments $ 18,422,430 $ 7,562,151 $ 25,984,581
- ----------------------------------------------------------------------------------------------------------------
Tax-Managed
For the Nine Months Ended Growth Real
September 30, 2003 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------------
Revenue $ 9,147,378 $ 56,092,943 $ 65,240,321
Interest expense on mortgages - (19,133,807) (19,133,807)
Interest expense on Credit Facility (163,784) (2,456,753) (2,620,537)
Operating expenses (723,599) (23,918,452) (24,642,051)
Minority interest in net income of controlled
subsidiaries - (1,845,742) (1,845,742)
- ----------------------------------------------------------------------------------------------------------------
Net investment income $ 8,259,995 $ 8,738,189 $ 16,998,184
Net realized loss (2,153,990) (6,515,510) (8,669,500)
Net change in unrealized appreciation (depreciation) 138,258,490 (5,765,970) 132,492,520
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations of reportable segments $ 144,364,495 $ (3,543,291) $ 140,821,204
- ----------------------------------------------------------------------------------------------------------------
Tax-Managed Real
At September 30, 2004 Growth Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------------
Segment assets $1,583,004,294 $627,575,513 $2,210,579,807
Segment liabilities 17,563,849 629,383,532 646,947,381
- ----------------------------------------------------------------------------------------------------------------
Net assets (liabilities) of reportable segments $1,565,440,445 $ (1,808,019) $1,563,632,426
- ----------------------------------------------------------------------------------------------------------------
At December 31, 2003
- ----------------------------------------------------------------------------------------------------------------
Segment assets $1,611,769,203 $589,657,910 $2,201,427,113
Segment liabilities 16,596,400 598,192,300 614,788,700
- ----------------------------------------------------------------------------------------------------------------
Net assets (liabilities) of reportable segments $1,595,172,803 $ (8,534,390) $1,586,638,413
- ----------------------------------------------------------------------------------------------------------------
* Belport Capital invests indirectly in Tax-Managed Growth Portfolio through
Belvedere Company.
14
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,
2004 2003 2004 2003
----------------------------------------------------------------------------------
Revenue:
Revenue from reportable segments $ 21,686,114 $ 21,520,125 $ 62,814,724 $ 65,240,321
Unallocated amounts:
Interest earned on cash not invested in
the portfolio or in subsidiaries
34,048 4,202 71,543 61,061
----------------------------------------------------------------------------------
Total revenue $ 21,720,162 $ 21,524,327 $ 62,886,267 $ 65,301,382
----------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations:
Net (decrease) increase in net assets
from operations of reportable segments $(31,369,497) $38,841,871 $ 25,984,581 $140,821,204
Unallocated investment income:
Interest earned on cash not invested in
the portfolio or in subsidiaries 34,048 4,202 71,543 61,06
Unallocated expenses(1):
Distribution and servicing fees (758,512) (695,626) (2,317,692) (1,978,503)
Interest expense on Credit Facility (89,716) (31,065) (211,064) (109,188)
Audit, tax and legal fees (47,261) (48,505) (129,281) (163,967)
Other operating expenses (23,490) (23,543) (82,316) (92,590)
----------------------------------------------------------------------------------
Total net (decrease) increase in net assets
from operations $(32,254,428) $ 38,047,334 $ 23,315,771 $138,538,017
----------------------------------------------------------------------------------
Net assets: September 30, 2004 December 31, 2003
------------------ -----------------
Net assets of reportable segments $1,563,632,426 $1,586,638,413
Unallocated amounts:
Cash(2) 1,767,817 2,138,196
Short-term investments(2) 7,170,000 4,821,135
Loan payable-Credit Facility(3) (22,738,278) (8,568,222)
Other liabilities (173,559) (176,110)
------------------ -----------------
Total net assets $1,549,658,406 $1,584,853,412
------------------ -----------------
(1) Unallocated expenses represent costs incurred that pertain to the overall
operation of Belport Capital, and do not pertain to either operating
segment.
(2) Unallocated cash and short-term investments represent 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.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information in this report contains forward-looking statements within the
meaning of the federal securities laws. Forward-looking statements typically are
identified by use of terms such as "may," "will," "should," "might," "expect,"
"anticipate," "estimate," and similar words, although some forward-looking
statements are expressed differently. The actual results of Belport Capital Fund
(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, 2004 COMPARED TO THE
QUARTER ENDED SEPTEMBER 30, 2003
(a) RESULTS OF OPERATIONS.
Increases and decreases from operations 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 (or loss) of the
controlled subsidiaries of Belport Realty Corporation (Belport 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 Belport Realty's controlled subsidiaries,
partnership income allocated to the income-producing preferred equity interests
in real estate operating partnerships (Partnership Preference Units) owned by
Belport 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 Belport Realty's
controlled subsidiaries, interest expense on the Fund's Credit Facility
(described in Item 2(b) below), property management fees, property taxes,
insurance, maintenance and other expenses relating to the properties owned by
Belport 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 Belport 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 S&P 500 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
- -----------------------
1 Total returns are historical and are calculated by determining the
percentage change in net asset value with all distributions reinvested.
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. 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.
16
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 Belport Realty, Eaton Vance considers whether, through
current returns and changes in valuation, the real 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 borrowings under the
Credit Facility used to acquire Belport 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 -1.99% for the quarter ended September 30, 2004.
This return reflects a decrease in the Fund's net asset value per share from
$97.49 to $95.55 during the period. The total return of the S&P 500 was -1.87%
over the same period. The performance of the Fund exceeded that of the Portfolio
by approximately 0.05% during the period. Last year, the Fund had a total return
performance of 2.72% for the quarter ended September 30, 2003. This return
reflected an increase in the Fund's net asset value per share from $81.94 to
$84.17 during the period. The S&P 500 had a total return of 2.65% over the same
period. The performance of the Fund exceeded that of the Portfolio by
approximately 0.37% during that period.
PERFORMANCE OF THE PORTFOLIO. For the quarter ended September 30, 2004, the
Portfolio's total return was -2.04%, slightly lower than the S&P 500 Index,
which posted a -1.87% return during the quarter. The third quarter of 2004 was
disappointing for equity returns, as pre-election jitters and moderating
earnings growth expectations in the face of rising oil prices and higher
short-term interest rates weighed on the markets.
During the third quarter of 2004, value stocks generally outperformed growth
stocks. The Portfolio's modest underperformance during this period was
attributable in part to a relative underweight of the market's strongest
performing industries, specifically electric utilities, diversified telecom and
metals. Investor anxiety over higher short-term interest rates and the
unrelenting surge in oil prices pressured economically sensitive sectors,
particularly consumer discretionary and information technology stocks. The
Portfolio benefited from a decreased exposure to media, specialty retail and
semiconductor industries during the quarter ended September 30, 2004. The
Portfolio's ongoing emphasis of the energy sector was also beneficial, as energy
stocks advanced on record high oil prices. Within the financials sector,
recognizing increased interest rate risk, the Portfolio redeployed assets in
less interest-sensitive industries. The Portfolio's de-emphasis of
pharmaceuticals was also helpful, given political and company specific headwinds
faced by health care stocks in the third quarter of 2004.
For the quarter ended September 30, 2003, the Portfolio's total return was 2.35%
compared to the 2.65% total return achieved by the S&P 500. Favorable fiscal and
monetary policies, resilient consumer spending and positive earnings momentum
contributed to the market's strength during the third quarter of 2003. The
Portfolio's stock selection and underweighting of the telecommunication and
health care sectors were beneficial during the quarter ended September 30, 2003,
but not sufficient to offset the impact of the Portfolio's underweighting during
that quarter of the information technnology sector (the best performing sector
during the quarter).
PERFORMANCE OF REAL ESTATE INVESTMENTS. The Fund's real estate investments are
held through Belport Realty. As of September 30, 2004, real estate investments
included two real estate joint ventures that operate multifamily properties
(Real Estate Joint Ventures) and a portfolio of Partnership Preference Units
issued by partnerships affiliated with publicly traded real estate investment
trusts (REITs). As of September 30, 2004, the estimated fair value of the Fund's
real estate investments represented 27.4% of the Fund's total assets on a
consolidated basis. After adjusting for minority interests in the Real Estate
Joint Ventures, the Fund's real estate investments represented 33.3% of the
Fund's net assets as of September 30, 2004.
During the quarter ended September 30, 2004, rental income from real estate
operations was approximately $16.1 million compared to $16.2 million for the
quarter ended September 30, 2003, a decrease of $0.1 million or 1%. This
decrease in rental income resulted principally from fewer properties held during
the quarter by the Real Estate Joint Ventures as a result of the sale of a
property held by one Real Estate Joint Venture during the first quarter of 2004,
offset by the purchase of a replacement property in the second quarter of 2004.
The decrease also resulted from lower revenues from the remaining properties
held by the Real Estate Joint Ventures. Rental revenues were adversely affected
by lower apartment rental rates and increased rent concessions during the
quarter. For the quarter ended September 30, 2003, rental income decreased
primarily from increased rent concessions or reduced apartment rental rates and
lower occupancy levels at properties owned by the Real Estate Joint Ventures
during the quarter.
17
During the quarter ended September 30, 2004, property operating expenses were
approximately $7.1 million compared to approximately $6.8 million for the
quarter ended September 30, 2003, an increase of 5% (property operating expenses
are before certain operating expenses of Belport Realty of approximately $1.2
million for the quarter ended September 30, 2004 and $0.9 million for the
quarter ended September 30, 2003). The net increase in property operating
expenses was due to an 18% increase in property taxes and insurance expenses as
well as a 2% increase in property and maintenance expenses during the quarter.
The increase in property taxes and insurance expenses during the quarter ended
September 30, 2004 as compared to the quarter ended September 30, 2003 was
principally due to a one time insurance credit received in 2003. During the
quarter ended September 30, 2003, property operating expenses decreased
principally due to a 25% decrease in property taxes and insurance expense,
offset in part by a 7% increase in property and maintenance expenses. The
near-term outlook for multifamily property operations continues to be weak.
While the recent pick-up in economic and employment growth is expected to lead
to improved supply-demand balance in the apartment industry, oversupply
conditions continue to exist in most major markets. Boston Management expects
that multifamily real estate operating results for the remainder of 2004 will
continue to be similar to 2003.
At September 30, 2004, the estimated fair value of the real properties
indirectly held through Belport Realty was approximately $490.2 million compared
to approximately $475.1 million at September 30, 2003, a net increase of $15.1
million or 3%. The net increase in estimated real property values at September
30, 2004 as compared to September 30, 2003 was due to declines in capitalization
rates, offset in part by lower near term property earnings expectations. The
capitalization rate, a term commonly used in the real estate industry, is the
rate of return percentage applied to actual or projected income levels to
estimate the value of real estate investments. The decrease in estimated
property values at September 30, 2003 as compared to September 30, 2002 resulted
from declines in near term earnings expectations and the economic downturn.
Decreases in capitalization rates partially offset declining income level
expectations during the quarter.
During the quarter ended September 30, 2004, the Fund saw unrealized
appreciation of the estimated fair value of its other real estate investments
(which includes the Real Estate Joint Ventures) of approximately $5.9 million
compared to unrealized depreciation of approximately $1.2 million during the
quarter ended September 30, 2003. Unrealized appreciation during the quarter
ended September 30, 2004 consisted of approximately $5.9 million of unrealized
appreciation resulting from increases in estimated property values. Unrealized
depreciation during the quarter ended September 30, 2003 resulted from decreases
in estimated property values during the quarter.
During the quarter ended September 30, 2004, Belport Realty sold (or experienced
scheduled redemptions of) certain of its Partnership Preference Units totaling
approximately $3.8 million (including sales to other investment funds advised by
Boston Management), recognizing a loss of approximately $0.3 million on the
transactions. During the quarter ended September 30, 2004, Belport Realty also
acquired interests in additional Partnership Preference Units (including
acquisitions from other investment funds advised by Boston Management) totaling
approximately $54.5 million. At September 30, 2004, the estimated fair value of
Belport Realty's Partnership Preference Units totaled approximately $117.6
million compared to approximately $103.3 million at September 30, 2003, a net
increase of $14.3 million or 14%. The net increase in value was principally due
to the increase in the number of Partnership Preference Units held at September
30, 2004. At September 30, 2003, the estimated fair value of Partnership
Preference Units had increased due to low interest rates and tight spreads on
real estate securities as compared to September 30, 2002.
During the quarter ended September 30, 2004, the Fund saw unrealized
appreciation of the estimated fair value of its Partnership Preference Units of
approximately $2.3 million compared to unrealized depreciation of approximately
$1.1 million during the quarter ended September 30, 2003. The net unrealized
appreciation of approximately $2.3 million during the third quarter of 2004
consisted of approximately $1.9 million of unrealized appreciation resulting
from modest increases in per unit values of the Partnership Preference Units
held by Belport Realty at September 30, 2004, and approximately $0.4 million of
unrealized appreciation resulting from the recharacterization of previously
recorded unrealized depreciation to realized losses due to sales of Partnership
Preference Units during the quarter ended September 30, 2004.
Distributions from Partnership Preference Units for the quarter ended September
30, 2004 totaled approximately $2.0 million compared to approximately $2.2
million for the quarter ended September 30, 2003, a decrease of $0.2 million or
9%. The decrease was principally due to fewer Partnership Preference Units held
on average, as well as lower average distribution rates for the Partnership
Preference Units held during the quarter ended September 30, 2004. During the
quarter ended September 30, 2003, distributions from Partnership Preference
Units were unchanged compared to the same quarter in 2002.
18
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the quarter ended September
30, 2004, net realized and unrealized losses on the Fund's interest rate swap
agreements totaled approximately $6.2 million, compared to net realized and
unrealized gains of approximately $4.1 million for the quarter ended September
30, 2003. Net realized and unrealized losses on swap agreements for the quarter
ended September 30, 2004 consisted of $5.0 million of unrealized depreciation
due to changes in swap agreement valuations and $1.2 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
September 30, 2003, net realized and unrealized gains on swap agreements
consisted of unrealized appreciation of $6.5 million on swap agreement valuation
changes, offset in part by $2.4 million of swap agreement periodic payments. The
negative impact on Fund performance for the quarter ended September 30, 2004
from changes in swap agreement valuations was attributable to a decline in swap
rates during the period. The positive contribution to Fund performance for the
quarter ended September 30, 2003 from changes in swap agreement valuations was
attributable to an increase in swap rates during the period.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2003
PERFORMANCE OF THE FUND. The Fund's total return was 1.47% for the nine months
ended September 30, 2004. This return reflects an increase in the Fund's net
asset value per share from $94.92 to $95.55 and a distribution of $0.76 per
share during the period. The S&P 500 had a total return of 1.51% over the same
period. The performance of the Fund exceeded that of the Portfolio by
approximately 0.14% during the period. Last year, the Fund had a total return
performance of 10.68% for the nine months ended September 30, 2003. This return
reflected an increase in the Fund's net asset value per share from $76.75 to
$84.17 and a distribution of $0.72 per share. The S&P 500 had a total return of
14.71% over the same period. The performance of the Fund trailed that of the
Portfolio by 0.06% during that period.
PERFORMANCE OF THE PORTFOLIO. For the nine months ended September 30, 2004, the
Portfolio's total return was 1.33%, slightly lower than the S&P 500 Index, which
returned 1.51% for the period. U.S. equity markets remained range-bound during
the period, restrained by investor anxiety over higher short-term interest
rates, rising energy prices and moderating consumer spending. Geopolitical and
economic concerns were offset by low inflation levels, continued earnings
strength and attractive valuations. Investors returned to quality,
dividend-paying stocks, avoiding last year's high volatility, low quality
investments. During the first nine months of 2004, mid-cap stocks outperformed
large-caps and small-caps, and value stocks trounced growth investments.
The Portfolio's modest underperformance during this period was attributable in
part to adverse stock selection within the market's lagging sectors. Investments
within media, retail and health care service industries detracted from returns.
The Portfolio maintained an overweight of industrials stocks and benefited from
advances in airfreight, defense and machinery holdings. While the information
technology and consumer staples sectors lagged the market during the first nine
months of 2004, the Portfolio's allocation and investment selections within
computer peripherals and food products were beneficial. The Portfolio's ongoing
emphasis of the commodity-related investments in the energy and materials
sectors was also positive, as stocks advanced on higher commodity prices. During
the nine months ended September 30, 2004, the Portfolio continued to underweight
the utilities and telecom sectors.
For the nine months ended September 30, 2003, the Portfolio's total return was
10.74% compared to the 14.71% total return achieved by the S&P 500. In March of
2003, equity markets began a sharp rally coincident with U.S. military success
in Iraq and the development of stronger economic conditions domestically. The
Portfolio's relative underperformance during the period was attributable
primarily to its lower exposure to higher volatility, lower quality stocks that
were the strongest performers in the market rally.
PERFORMANCE OF REAL ESTATE INVESTMENTS. During the nine months ended September
30, 2004, one of Belport Realty's Real Estate Joint Ventures sold a property for
approximately $41.3 million recognizing a gain of $4.4 million on the
transaction. Pursuant to the Real Estate Joint Venture's loan agreement, the
proceeds from the sale must be reinvested in replacement assets in order to
maintain certain collateral levels. Accordingly, the Real Estate Joint Venture
acquired a replacement property for approximately $36.2 million. In September
2004, the Real Estate Joint Venture entered into an agreement to purchase a
second replacement property for approximately $12.7 million. The purchase will
be funded in part by the remaining sale proceeds and also by additional capital
contributions and is expected to close by the end of 2004.
During the nine months ended September 30, 2004, rental income from real estate
operations was approximately $46.5 million compared to approximately $49.4
million for the nine months ended September 30, 2003, a net decrease of $2.9
million or 6%. This decrease in rental income resulted principally from fewer
19
properties held by the Real Estate Joint Ventures for the full period as a
result of the property sale discussed above and lower revenues from the other
properties held by Belport Realty's Real Estate Joint Ventures. Rental revenues
were adversely affected by lower rent rates, increased rent concessions and
lower occupancy levels during the period. During the nine months ended September
30, 2003, rental income decreased primarily due to increased rent concessions or
reduced apartment rents and lower occupancy levels at properties owned by the
Real Estate Joint Ventures during the period.
During the nine months ended September 30, 2004, property operating expenses
were approximately $20.6 million compared to approximately $20.9 million for the
nine months ended September 30, 2003, a net decrease of $0.3 million or 1%
(property operating expenses are before certain operating expenses of Belport
Realty of approximately $2.8 million for the nine months ended September 30,
2004 and $3.0 million for the nine months ended September 30, 2003). The
decrease in property operating expenses during the nine months ended September
30, 2004 was due to a modest decrease in property and maintenance expenses.
During the nine months ended September 30, 2003, operating expenses increased
due to a 9% increase in property and maintenance expenses offset in part by a 3%
decrease in property taxes and insurance expense. The near term outlook for
multifamily property operations continues to be weak. As discussed above, while
the recent pick-up in economic and employment growth is expected to lead to
improved supply-demand balance in the apartment industry, oversupply conditions
continue to exist in most major markets.
The estimated fair value of the real properties indirectly held through Belport
Realty was approximately $490.2 million at September 30, 2004 compared to
approximately $475.1 million at September 30, 2003, a net increase of $15.1
million or 3%. The net increase in estimated real property values at September
30, 2004 as compared to September 30, 2003 was due to declines in capitalization
rates, offset in part by lower near term property earnings expectations. The
decrease in estimated property values at September 30, 2003 as compared to
September 30, 2002 resulted from declines in near term earnings expectations and
the economic downturn. Declines in estimated property values were generally
modest as decreases in capitalization rates partially offset declining income
level expectations.
During the nine months ended September 30, 2004, the Fund saw unrealized
depreciation in the estimated fair value of its other real estate investments
(which includes the Real Estate Joint Ventures) of approximately $2.4 million
compared to unrealized depreciation of approximately $13.5 million during the
nine months ended September 30, 2003. Net unrealized appreciation of $2.4
million for the nine months ended September 30, 2004 was due to modest increases
in estimated property values partially offset by the recharacterization of
previously unrealized appreciation to realized gains due to the January 2004
sale of a property owned by one of Belport Realty's Real Estate Joint Ventures.
Unrealized depreciation during the nine months ended September 30, 2003
primarily resulted from decreases in estimated property values during the
period.
During the nine months ended September 30, 2004, Belport Realty sold (or
experienced scheduled redemptions of) certain of its Partnership Preference
Units totaling approximately $29.2 million (including sales to other investment
funds advised by Boston Management), recognizing gains of approximately $3.3
million on the transactions. During the nine months ended September 30, 2004,
Belport Realty also acquired interests in additional Partnership Preference
Units from other investment funds advised by Boston Management totaling
approximately $54.5 million. At September 30, 2004, the estimated fair value of
Belport Realty's Partnership Preference Units totaled approximately $117.6
million compared to approximately $103.3 million at September 30, 2003, an
increase of $14.3 million or 14%. The decrease was principally due to fewer
Partnership Preference Units held on average, as well as lower average
distribution rates for the Partnership Preference Units held during the nine
months ended September 30, 2004. During the nine months ended September 30,
2004, Partnership Preference Unit values were negatively affected by the rising
trend in U.S. interest rates, partly offset by tighter spreads for
credit-sensitive income securities, including real estate-related securities. In
a rising interest rate environment, values of outstanding Partnership Preference
Units generally can be expected to decline. At September 30, 2003, the increase
in the estimated fair value of Partnership Preference Units was principally due
to low interest rates and tighter spreads on the real estate securities during
the nine months ended September 30, 2003.
The Fund saw net unrealized depreciation of the estimated fair value in its
Partnership Preference Units of approximately $4.3 million during the nine
months ended September 30, 2004 compared to unrealized appreciation of
approximately $6.7 million for the nine months ended September 30, 2003. The net
unrealized depreciation of approximately $4.3 million in the first nine months
of 2004 consisted of approximately $1.6 million of unrealized depreciation
resulting from decreases in per unit values of the Partnership Preference Units
held by Belport Realty during the period and approximately $2.7 million of
unrealized depreciation resulting from the recharacterization of previously
recorded unrealized appreciation to realized gains due to sales of Partnership
20
Preference Units during the nine months ended September 30, 2004. Unrealized
appreciation during the nine months ended September 30, 2003 resulted from
increases in per unit values of Partnership Preference Units during the period.
Distributions from Partnership Preference Units for the nine months ended
September 30, 2004 totaled approximately $5.5 million compared to approximately
$6.6 million for the nine months ended September 30, 2003, a decrease of $1.1
million or 17%. The decrease was principally due to fewer Partnership Preference
Units held on average and to lower average distribution rates on the Partnership
Preference Units held during the nine months ended September 30, 2004, partially
offset by a one-time special distribution from one issuer made in connection
with a restructuring of its Partnership Preference Units. During the nine months
ended September 30, 2003, distributions from Partnership Preference Units were
unchanged compared to the same period in 2002.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the nine months ended
September 30, 2004, net realized and unrealized losses on the Fund's interest
rate swap agreements totaled approximately $4.6 million, compared to net
realized and unrealized losses of approximately $5.9 million for the nine months
ended September 30, 2003. Net realized and unrealized losses on swap agreements
for the nine months ended September 30, 2004 consisted of $0.8 million of
unrealized depreciation due to changes in swap agreement valuations and $3.8
million of periodic payments made pursuant to outstanding swap agreements (and
classified as net realized losses on interest rate swap agreements). For the
nine months ended September 30, 2003, net realized and unrealized losses on swap
agreements consisted of unrealized appreciation of $0.9 million on swap
agreement valuation changes, offset by $6.8 million of swap agreement periodic
payments. The negative impact on Fund performance for the nine months ended
September 30, 2004 from changes in swap agreement valuations was attributable to
a decline in swap rates during the period. The positive contribution to Fund
performance for the nine months ended September 30, 2003 from changes in swap
valuations was attributable to a modest increase in swap rates during the
period.
(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 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 September 30, 2004, the Fund had outstanding
borrowings of $270.9 million and no unused loan commitments under the Credit
Facility.
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 that fluctuate with 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 September 30, 2004, the unrealized appreciation related
to the interest rate swap agreements was approximately $1.0 million. As of
September 30, 2003, the unrealized depreciation related to the interest rate
swap agreements was approximately $25.4 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 Ventures. 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 a substantial portion of its borrowings under the
Credit Facility used to acquire Belport 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.
21
The following table summarizes the contractual maturities and weighted-average
interest rates associated with the Fund's significant non-trading financial
instruments. The Fund has no market risk sensitive instruments held for trading
purposes. This information should be read in conjunction with Note 5 to the
Fund's unaudited condensed consolidated financial statements in Item 1 above.
Interest Rate Sensitivity
Cost, Principal (Notional) Amount
by Contractual Maturity and Callable Date
for the Twelve Months Ended September 30,*
Estimated
Fair Value
as of
2005-2008 2009 Thereafter Total September 30, 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
- ------------------------
Long-term debt:
- ------------------------
Fixed-rate mortgages $15,307,500 $345,800,000 $361,107,500 $401,000,000
Average interest rate 7.89% 6.73% 6.78%
- ------------------------
Variable-rate Credit Facility $270,900,000 $270,900,000 $270,900,000
Average interest rate 2.07% 2.07%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative
financial instruments:
- ------------------------
Pay fixed/receive variable interest rate
swap agreements $190,887,000 $190,887,000 $ 979,341
Average pay rate 4.08% 4.08%
Average receive rate 2.04% 2.04%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive investments:
- ------------------------
Fixed-rate Partnership Preference Units:
- ------------------------
Camden Operating, L.P., 7.0% Series B
Cumulative Redeemable Perpetual Preferred
Units, Callable 12/2/08, Current
Yield: 7.16% $16,916,830 $ 16,916,830 $ 17,115,000
Colonial Realty Limited Partnership, 7.25%
Series B Cumulative Redeemable Perpetual
Preferred Units, Callable 2/24/09, Current
Yield: 7.42% $19,274,040 $ 19,274,040 $ 19,532,000
Essex Portfolio, L.P., 7.875% Series B
Cumulative Redeemable Preferred Units,
Callable 12/31/09, Current Yield: 7.83% $ 17,908,335 $ 17,908,335 $ 22,626,990
PSA Institutional Partners, L.P., 6.4% Series
NN Cumulative Redeemable Perpetual
Preferred Units, Callable 3/17/10, Current
Yield: 6.82% $ 32,220,000 $ 32,220,000 $ 28,140,000
Regency Centers, L.P., 9.125% Series D
Cumulative Redeemable Preferred Units,
Callable 9/29/04, Current Yield: 9.02% $18,327,294 $ 18,327,294 $ 18,207,000
22
Vornado Realty, L.P., 7.0% Series D-10
Cumulative Redeemable Preferred Units,
Callable 11/17/08, Current Yield: 7.02%(1) $11,329,133 $ 11,329,133 $ 11,958,157
* The amounts listed reflect the Fund's positions as of September 30, 2004.
The Fund's current positions may differ.
(1) Belport 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 September 30, 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, Belport Realty and
Belport 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 Fund 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 (except for shares
subject to an estate freeze election as described in Item 5 of the Fund's Annual
Report on Form 10-K for the fiscal year ending December 31, 2003). During each
month in the quarter ended September 30, 2004, the total number of shares
redeemed and the average price paid per share were as follows:
23
Total No. of Shares Average Price Paid
Month Ended Redeemed(1) Per Share
- -----------------------------------------------------------------
July 31, 2004 68,863.232 $93.75
- -----------------------------------------------------------------
August 31, 2004 103,923.100 $93.24
- -----------------------------------------------------------------
September 30, 2004 40,257.619 $91.08
- -----------------------------------------------------------------
Total 213,043.950 $92.04
- -----------------------------------------------------------------
(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 September 30, 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:
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
None.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer on November 9, 2004.
BELPORT CAPITAL FUND LLC
/s/ Michelle A. Green
---------------------
Michelle A. Green
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
25
EXHIBIT INDEX
-------------
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
26