UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2003
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Commission File No. 000-49775
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Belport Capital Fund LLC
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(Exact name of registrant as specified in its charter)
Delaware 04-3551830
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(State of organization) ( I.R.S. Employer Identification No.)
The Eaton Vance Building
255 State Street
Boston, Massachusetts 02109
--------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 617-482-8260
------------
None
----
(Former Name, Former Address and Former Fiscal Year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
BELPORT CAPITAL FUND LLC
Index to Form 10-Q
Page
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Statements of Assets and Liabilities
as of September 30, 2003 (Unaudited) and December 31, 2002 3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months Ended September 30, 2003 and 2002 and for
the Nine Months Ended September 30, 2003 and 2002 4
Condensed Consolidated Statements of Changes in Net Assets
(Unaudited) for the Nine Months Ended September 30, 2003 and
2002 6
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 30, 2003 and 2002 7
Financial Highlights (Unaudited) for the Nine Months Ended
September 30, 2003 9
Notes to Condensed Consolidated Financial Statements as of
September 30, 2003 (Unaudited) 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
EXHIBIT INDEX 24
2
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
BELPORT CAPITAL FUND LLC
Condensed Consolidated Statements of Assets and Liabilities
September 30,
2003 December 31,
(Unaudited) 2002
------------- ------------
Assets:
Investment in Belvedere Capital Fund Company
LLC (Belvedere Capital) $1,472,011,971 $1,322,126,211
Investment in Partnership Preference Units 103,250,675 96,503,025
Investment in other real estate 475,121,520 493,950,506
Short-term investments 2,653,087 622,978
-------------- --------------
Total investments $2,053,037,253 $1,913,202,720
Cash 6,407,650 7,452,296
Escrow deposits - restricted 5,451,197 2,272,211
Receivable for investments sold - 50,221,589
Dividends and interest receivable 570,661 570,704
Other assets 2,478,068 2,680,422
-------------- --------------
Total assets $2,067,944,829 $1,976,399,942
-------------- --------------
Liabilities:
Loan payable - Credit Facility $ 230,500,000 $ 226,000,000
Mortgages payable 361,107,500 361,107,500
Open interest rate swap agreements, at value 25,446,120 26,385,515
Security deposits 885,514 798,511
Swap interest payable 204,334 189,454
Accrued expenses:
Interest expense 2,101,241 2,484,938
Property taxes 5,653,493 2,051,403
Other expenses and liabilities 1,668,109 2,799,285
Minority interests in controlled subsidiaries 22,595,814 29,941,272
-------------- --------------
Total liabilities $ 650,162,125 $ 651,757,878
-------------- --------------
Net assets $1,417,782,704 $1,324,642,064
-------------- --------------
Shareholders' Capital $1,417,782,704 $1,324,642,064
-------------- --------------
Shares outstanding 16,843,566 17,258,094
-------------- --------------
Net asset value and redemption price per Share $ 84.17 $ 76.75
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, September 30, September 30, September 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Investment Income:
Dividends allocated from Belvedere Capital
(net of foreign taxes of $44,380, $41,726,
$196,029 and $157,633, respectively) $ 5,295,899 $ 4,650,371 $ 15,217,949 $ 14,282,749
Interest allocated from Belvedere Capital 43,854 106,853 292,876 377,256
Expenses allocated from Belvedere Capital (2,265,990) (2,150,164) (6,363,447) (7,256,881)
----------- ------------ ------------- -------------
Net investment income allocated from
Belvedere Capital $ 3,073,763 $ 2,607,060 $ 9,147,378 $ 7,403,124
Rental income 16,226,618 16,739,175 49,420,335 50,830,877
Dividends from Partnership Preference Units 2,203,828 2,203,828 6,611,484 6,611,484
Interest 20,118 31,529 122,185 116,359
----------- ----------- ------------ ------------
Total investment income $21,524,327 $21,581,592 $ 65,301,382 $ 64,961,844
----------- ----------- ------------ ------------
Expenses:
Investment advisory and administrative fees $ 1,359,990 $ 1,301,705 $ 4,038,850 $ 4,216,757
Property management fees 649,639 671,594 1,964,258 2,043,903
Distribution and servicing fees 695,626 660,900 1,978,503 2,325,104
Interest expense on mortgages 6,259,976 6,259,455 19,133,807 18,667,374
Interest expense on Credit Facility 776,631 1,304,389 2,729,725 3,951,137
Interest expense on swap agreements 2,366,173 2,039,806 6,838,894 5,897,813
Property and maintenance expenses 4,483,495 4,181,159 12,974,512 11,905,536
Property taxes and insurance 1,656,809 2,194,962 5,922,799 6,110,974
Miscellaneous 171,115 129,962 1,009,392 740,107
----------- ----------- ------------ -----------
Total expenses $18,419,454 $18,743,932 $ 56,590,740 $55,858,705
Deduct-
Reduction of investment advisory
and administrative fees 361,133 341,941 1,011,203 1,175,044
----------- ----------- ------------ -----------
Net expenses $18,058,321 $18,401,991 $ 55,579,537 $54,683,661
----------- ----------- ------------ -----------
Net investment income before
minority interests in net income of
controlled subsidiaries $ 3,466,006 $ 3,179,601 $ 9,721,845 $10,278,183
Minority interests in net income
of controlled subsidiaries (642,577) (776,108) (1,845,742) (2,743,726)
------------ ------------ ------------- ------------
Net investment income $ 2,823,429 $ 2,403,493 $ 7,876,103 $ 7,534,457
------------ ------------ ------------- ------------
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, September 30, September 30, September 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Realized and Unrealized Gain (Loss)
Net realized gain (loss) -
Investment transactions from Belvedere
Capital (identified cost basis) $ 1,052,602 $ (25,127,027) $ (2,153,990) $ (42,193,324)
Investment transactions in other real estate - - 323,384 -
------------ ------------- ------------- -------------
Net realized gain (loss) $ 1,052,602 $ (25,127,027) $ (1,830,606) $ (42,193,324)
------------ -------------- -------------- --------------
Change in unrealized appreciation
(depreciation) -
Investment in Belvedere Capital
(identified cost basis) $ 30,013,572 $(207,683,986) $ 138,258,490 $(388,042,613)
Investments in Partnership Preference Units
(identified cost basis) (1,126,750) 1,594,900 6,747,650 4,203,925
Investments in other real estate
(net of minority interests in unrealized
gain (loss) of controlled subsidiaries of
$(512,237), $162, $(8,578,672)
and $(6,753,024), respectively) (1,195,070) (162) (13,453,015) (16,662,389)
Interest rate swap agreements 6,479,551 (16,471,889) 939,395 (23,608,655)
------------- -------------- -------------- --------------
Net change in unrealized appreciation
(depreciation) $ 34,171,303 $(222,561,137) $ 132,492,520 $(424,109,732)
------------- -------------- -------------- --------------
Net realized and unrealized gain (loss) $ 35,223,905 $(247,688,164) $ 130,661,914 $(466,303,056)
------------- -------------- -------------- --------------
Net increase (decrease) in net assets
from operations $ 38,047,334 $(245,284,671) $ 138,538,017 $(458,768,599)
============= ============== ============== ==============
See notes to unaudited condensed consolidated financial statements
5
BELPORT CAPITAL FUND LLC
Condensed Consolidated Statements of Changes in Net Assets (Unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2003 2002
----------- ---------------
Increase (Decrease) in Net Assets:
Net investment income $ 7,876,103 $ 7,534,457
Net realized loss from investment
transactions (1,830,606) (42,193,324)
Net change in unrealized appreciation
(depreciation) of investments 132,492,520 (424,109,732)
--------------- ----------------
Net increase (decrease) in net assets from
operations $ 138,538,017 $ (458,768,599)
--------------- ----------------
Transactions in Fund Shares -
Net asset value of Fund Shares issued to
Shareholders in payment of distributions
declared $ 6,479,733 $ -
Net asset value of Fund Shares redeemed (39,509,530) (38,472,829)
--------------- ----------------
Net decrease in net assets from Fund Share
transactions $ (33,029,797) $ (38,472,829)
--------------- ----------------
Distributions -
Distributions to Shareholders $ (12,367,580) $ -
--------------- ----------------
Total distributions $ (12,367,580) $ -
--------------- ----------------
Net increase (decrease) in net assets $ 93,140,640 $ (497,241,428)
Net assets:
At beginning of period $1,324,642,064 $ 1,749,157,864
--------------- ----------------
At end of period $1,417,782,704 $ 1,251,916,436
=============== ================
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, September 30,
2003 2002
------------- -------------
Cash Flows From (For) Operating Activities -
Net increase (decrease) in net assets from operations $ 138,538,017 $(458,768,599)
Adjustments to reconcile net increase (decrease) in net assets from operations
to net cash flows from operating activities -
Net investment income allocated from Belvedere Capital (9,147,378) (7,403,124)
Increase in escrow deposits (3,178,986) (3,645,649)
Decrease in receivable for investments sold 50,221,589 -
Decrease in other assets 202,354 421,123
Decrease (increase) in dividends and interest receivable 43 (86)
Increase in interest payable for open swap agreements 14,880 22,460
(Decrease) increase in security deposits, accrued interest and
accrued other expenses and liabilities (1,427,870) 746,503
Increase in accrued property taxes 3,602,090 3,969,359
Payments for investments in other real estate (5,026,960) -
Proceeds from sale of investment in
other real estate 5,356,755 -
Improvements to rental property (3,202,700) (2,624,541)
Net (increase) decrease in investment in Belvedere Capital (41,000,000) 8,959,900
(Increase) decrease in short-term investments (2,030,109) 1,705,915
Minority interests in net income of controlled subsidiaries 1,845,742 2,743,726
Net realized loss from investment transactions 1,830,606 42,193,324
Net change in unrealized (appreciation) depreciation of
investments (132,492,520) 424,109,732
-------------- --------------
Net cash flows from operating activities $ 4,105,553 $ 12,430,043
-------------- --------------
Cash Flows From (For) Financing Activities -
Repayment of mortgage $ (6,411) $ -
Proceeds from (repayment of) Credit Facility 4,500,000 (5,000,000)
Distributions paid to Shareholders (5,887,847) -
Payments for Fund Shares redeemed (3,143,412) (4,688,748)
Distributions paid to minority shareholders (612,529) (2,772,802)
-------------- --------------
Net cash flows for financing activities $ (5,150,199) $(12,461,550)
-------------- -------------
Net decrease in cash $ (1,044,646) $ (31,507)
Cash at beginning of period $ 7,452,296 $ 10,001,955
-------------- -------------
Cash at end of period $ 6,407,650 $ 9,970,448
============== =============
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, September 30,
2003 2002
------------- -------------
Supplemental Disclosure and Non-cash Investing and
Financing Activities -
Interest paid on loan - Credit Facility $ 2,480,614 $ 3,261,526
Interest paid on mortgages $ 18,968,446 $ 18,539,364
Interest paid on swap agreements $ 6,824,014 $ 5,875,353
Market value of securities distributed in payment of
redemptions $ 36,366,118 $ 33,092,031
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 $ 59,595,414 $ -
See notes to unaudited condensed consolidated financial statements
8
BELPORT CAPITAL FUND LLC as of September 30, 2003
Condensed Consolidated Financial Statements (Continued)
FINANCIAL HIGHLIGHTS (UNAUDITED)
For the Nine Months Ended September 30, 2003
- --------------------------------------------------------------------------------
Net asset value - Beginning of period $ 76.750
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
- --------------------------------------------------------------------------------
Net investment income (6) $ 0.462
Net realized and unrealized gain 7.678
- --------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS $ 8.140
- --------------------------------------------------------------------------------
DISTRIBUTIONS
- --------------------------------------------------------------------------------
Distributions to Shareholders $ (0.720)
- --------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS $ (0.720)
- --------------------------------------------------------------------------------
NET ASSET VALUE - END OF PERIOD $ 84.170
- -------------------------------------------------------------------------------
TOTAL RETURN (1) 10.68%
- -------------------------------------------------------------------------------
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 (4) 1.54% (3) 1.09% (3)
Operating expenses (4) 1.68% (3) 1.18% (3)
Belport Capital Fund LLC Expenses
Interest and other borrowing costs (7) 0.95% (3) 0.67% (3)
Investment advisory and administrative fees,
servicing fees and other Fund operating
expenses (7)(8) 1.21% (3) 0.85% (3)
--------- ---------
Total expenses 5.38% (3) 3.79% (3)
Net investment income 0.78% (3) 0.55% (3)
- --------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $1,417,783
Portfolio Turnover of Tax-Managed Growth Portfolio
(the Portfolio) 14%
- --------------------------------------------------------------------------------
(1) Returns are calculated by determining the percentage change in net asset
value with all distributions reinvested. Total return is not computed on an
annualized basis.
(2) Average Gross Assets is defined as the average daily amount of all assets
of Belport Capital Fund LLC (Belport Capital) (including Belport Capital's
interest in Belvedere Capital Fund Company LLC (Belvedere Capital) 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) Annualized.
(4) Includes Belport Realty's proportional share of expenses incurred by its
majority-owned subsidiaries.
(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 the expenses of Belport Capital and Belport Realty. Does not
include expenses of the real estate subsidiaries majority-owned by Belport
Realty.
(8) Includes Belport Capitals share of Belvedere Capital's allocated expenses,
including those expenses allocated from the Portfolio.
See notes to unaudited condensed consolidated financial statements
9
BELPORT CAPITAL FUND LLC as of September 30, 2003
Notes to Condensed Consolidated Financial Statements (Unaudited)
1 Basis of Presentation
The condensed consolidated interim financial statements of Belport Capital Fund
LLC (Belport Capital) and its subsidiaries (collectively, the Fund) have been
prepared by the Fund, without audit, in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally included
in annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted as permitted by such rules and regulations. All adjustments, consisting
of normal recurring adjustments, have been included. Management believes that
the disclosures are adequate to present fairly the financial position, results
of operations, cash flows and financial highlights at the dates and for the
periods presented. It is suggested that these interim financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Fund's latest annual report on Form 10-K. Results for interim periods are
not necessarily indicative of those to be expected for the full fiscal year.
The balance sheet at December 31, 2002 has been derived from the December 31,
2002 audited financial statements but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements as permitted by the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Certain amounts in the prior period's condensed consolidated financial
statements have been reclassified to conform with the current period
presentation.
2 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. At
September 30, 2003 and December 31, 2002, the Preferred Shares were valued at
$84.17 and $76.75, respectively, and the Common Shares had no value. 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.
10
3 Investment Transactions
The following table summarizes the Fund's investment transactions for the nine
months ended September 30, 2003 and September 30, 2002:
Nine Months Nine Months
Ended Ended
September 30, September 30,
Investment Transaction 2003 2002
- --------------------------------------------------------------------------------
Increases in investment in Belvedere Capital $ 41,000,000 $ 16,786,220
Decreases in investment in Belvedere Capital $ 36,366,118 $ 58,838,152
Acquisitions of other real estate (1) $ 5,026,960 $ -
Sales of other real estate (1) $ 5,356,755 $ -
- --------------------------------------------------------------------------------
(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 CRIC Oakbrook 2, LLC (CRIC Oakbrook). In May 2003, Belport
Realty sold its interest in Bel Oakbrook to another fund sponsored by Eaton
Vance Management. A gain of approximately $300,000 was recognized on the
transaction.
4 Indirect Investment in Portfolio
The following table summarizes the Fund's investment in Tax-Managed Growth
Portfolio (the Portfolio) through Belvedere Capital Fund Company LLC (Belvedere
Capital), for the nine months ended September 30, 2003 and September 30, 2002,
including allocations of income and expenses for the respective periods then
ended:
Nine Months Nine Months
Ended Ended
September 30, September 30,
2003 2002
- -------------------------------------------------------------------------------------------------------------------
Belvedere Capital's interest in the Portfolio (1) $ 9,775,572,306 $ 8,043,904,602
The Fund's investment in Belvedere Capital (2) $ 1,472,011,971 $ 1,297,737,552
Income allocated to Belvedere Capital from the Portfolio $ 102,346,416 $ 88,799,143
Income allocated to the Fund from Belvedere Capital $ 15,510,825 $ 14,660,005
Expenses allocated to Belvedere Capital from the Portfolio $ 31,352,609 $ 32,657,939
Expenses allocated to the Fund from Belvedere Capital $ 6,363,447 $ 7,256,881
Realized loss allocated to Belvedere Capital from the Portfolio $ (10,803,952) $ (613,666,720)
Realized loss allocated to the Fund from Belvedere Capital $ (2,153,990) $ (42,193,324)
Change in unrealized appreciation (depreciation) allocated to Belvedere
Capital from the Portfolio $ 898,392,188 $(2,038,582,077)
Change in unrealized appreciation (depreciation) allocated to the Fund
from Belvedere Capital $ 138,258,490 $ (388,042,613)
- -------------------------------------------------------------------------------------------------------------------
(1) As of September 30, 2003 and 2002, the value of Belvedere Capital's
interest in the Portfolio represents 62.1% and 58.6% of the Portfolio's net
assets, respectively.
(2) As of September 30, 2003 and 2002, the Fund's investment in Belvedere
Capital represents 15.1% and 16.1% of Belvedere Capital's net assets,
respectively.
11
A summary of the Portfolio's Statement of Assets and Liabilities, at September
30, 2003, December 31, 2002 and September 30, 2002 and its operations for the
nine months ended September 30, 2003, for the year ended December 31, 2002 and
for the nine months ended September 30, 2002 follows:
September 30, December 31, September 30,
2003 2002 2002
--------------- --------------- ----------------
Investments, at value $15,720,495,292 $14,544,149,182 $13,713,440,772
Other assets 22,166,551 70,073,039 59,906,476
- ----------------------------------------------------------------------------------------------------
Total assets $15,742,661,843 $14,614,222,221 $13,773,347,248
Total liabilities 241,245 42,700,633 35,785,860
- ----------------------------------------------------------------------------------------------------
Net assets $15,742,420,598 $14,571,521,588 $13,737,561,388
====================================================================================================
Dividends and interest $ 166,725,898 $ 213,292,082 $ 155,639,717
- ----------------------------------------------------------------------------------------------------
Investment adviser fee $ 49,370,631 $ 71,564,552 $ 55,373,624
Other expenses 1,730,334 2,577,489 1,956,361
- ----------------------------------------------------------------------------------------------------
Total expenses $ 51,100,965 74,142,041 $ 57,329,985
- ----------------------------------------------------------------------------------------------------
Net investment income $ 115,624,933 139,150,041 $ 98,309,732
Net realized losses (17,942,587) (459,996,840) (503,906,340)
Net change in unrealized
appreciation (depreciation) 1,449,036,078 (3,312,547,564) $(4,125,048,140)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations $ 1,546,718,424 $(3,633,394,363) $(4,530,644,748)
- ----------------------------------------------------------------------------------------------------
5 Interest Rate Swap Agreements
Belport Capital has entered into current and forward interest rate swap
agreements in connection with its real estate investments and the associated
borrowings. Under such agreements, 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. As of December 31, 2002, Belport
Capital had entered into interest rate swap agreements with Citibank, N.A.
(Citibank) and Merrill Lynch Capital Services, Inc. (MLCS). Effective June 30,
2003, MLCS assumed all swap agreements previously entered into with Citibank
(See Note 6).
Notional Unrealized Unrealized
Amount Depreciation Depreciation
Effective (000's Fixed Floating Termination at September 30, at December 31,
Date omitted) Rate Rate Date 2003 2002
- -------------------------------------------------------------------------------------------------------------------
03/01 $49,080 5.8075% LIBOR + 0.40% 3/08 $ 5,126,013 $ 529,706
05/01 73,980 5.79% LIBOR + 0.40% 3/08 7,708,556 8,088,686
07/01 34,905 5.995% LIBOR + 0.40% 3/08 3,943,906 4,169,274
12/01 57,509 5.841% LIBOR + 0.40% 3/08 6,125,005 6,440,259
03/08 49,080 6.45% LIBOR + 0.40% 2/10 645,322 5,416,263
03/08 73,980 6.92% LIBOR + 0.40% 9/10 1,897,318 1,741,327
- --------------------------------------------------------------------------------------- ---------------------------
Total $ 25,446,120 $ 26,385,515
- -------------------------------------------------------------------------------------------------------------------
On October 1, 2003, new interest rate swap agreements were entered into to fix
the cost of a portion of Belport Capital's borrowings under the Credit Facility
(as defined in Note 6 below) established on June 30, 2003. At the same time, all
interest rate swap agreements outstanding on September 30, 2003 were terminated,
resulting in realized losses of $25,390,804. The table below identifies the
terms of the interest rate swap agreements effective on October 1, 2003.
Notional Initial
Amount Optional Final
Effective (000's Fixed Floating Termination Termination
Date omitted) Rate Rate Date Date
- --------------------------------------------------------------------------------
10/03 $ 34,905 4.565% LIBOR + 0.20% 3/05 6/10
10/03 46,160 4.045% LIBOR + 0.20% 2/10 6/10
10/03 109,822 3.945% LIBOR + 0.20% - 6/10
12
6 Debt
Credit Facility - On June 30, 2003, Belport Capital refinanced its then existing
credit facility with Citicorp North America, Inc. with two new credit
arrangements (collectively, the Credit Facility) totaling $275,000,000. On
September 29, 2003, the Credit Facility was increased to $284,500,000. The
Credit Facility has a seven-year maturity and will expire on June 25, 2010.
Belport Capital's obligations under the Credit Facility are secured by a pledge
of its assets, excluding the assets of Bel Multifamily Property Trust (Bel
Multifamily) and Monadnock Property Trust LLC (Monadnock).
The credit arrangement with DrKW Holdings, Inc. is for $230,500,000. This credit
arrangement accrues interest at a rate of one-month LIBOR plus 0.20% per annum.
As of September 30, 2003, outstanding borrowings under this credit arrangement
totaled $230,500,000.
The credit arrangement with Merrill Lynch Mortgage Capital is for $54,000,000,
and includes the ability to issue letters of credit up to $10,000,000. This
credit arrangement accrues interest at a rate of one-month LIBOR plus 0.38% per
annum. A commitment fee of 0.10% per annum is paid on the unused commitment
amount. Belport Capital pays all fees associated with issuing the letters of
credit. As of September 30, 2003, there were no outstanding borrowings under
this credit arrangement. There was $1,584,000 outstanding under a letter of
credit at September 30, 2003. The letter of credit was issued as a substitute
for funding certain mortgage escrow accounts required by the lender of Bel
Multifamily. The letter of credit expires on June 30, 2004 and automatically
extends for one-year periods not to extend beyond June 15, 2010. Fees paid or
accrued under the terms of the letter of credit issued under the Credit Facility
totaled $7,247 for the nine months ended September 30, 2003.
7 Segment Information
Belport Capital pursues its investment objective primarily by investing
indirectly in the Portfolio through Belvedere Capital. The Portfolio is a
diversified investment company that emphasizes investments in common stocks of
domestic and foreign growth companies that are considered to be high in quality
and attractive in their long-term investment prospects. Separate from its
investment in Belvedere Capital, Belport Capital invests in real estate assets
through its subsidiary, Belport Realty. Belport Realty invests directly in
Partnership Preference Units and indirectly in real property through controlled
subsidiaries, Bel Multifamily, 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), realized gain (loss) and unrealized
appreciation (depreciation). The accounting policies of the reportable segments
are the same as those for Belport Capital on a consolidated basis. No reportable
segments have been aggregated. Reportable information by segment is as follows:
TAX-MANAGED
FOR THE THREE MONTHS ENDED GROWTH REAL
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 - (737,800) (737,800)
Interest expense on swap agreements - (2,366,173) (2,366,173)
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 $ 2,826,247 $799,485 $ 3,625,732
Net realized gain 1,052,602 - 1,052,602
Change in unrealized appreciation (depreciation) 30,013,572 4,157,731 34,171,303
- -------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS FROM OPERATIONS OF
REPORTABLE SEGMENTS $ 33,892,421 $ 4,957,216 $ 38,849,637
- -------------------------------------------------------------------------------------------------------------------
13
TAX-MANAGED
FOR THE THREE MONTHS ENDED GROWTH REAL
SEPTEMBER 30, 2002 PORTFOLIO* ESTATE TOTAL
- -------------------------------------------------------------------------------------------------------------------
Revenue $ 2,607,060 $ 18,973,018 $ 21,580,078
Interest expense on mortgages - (6,259,455) (6,259,455)
Interest expense on Credit Facility - (1,199,658) (1,199,658)
Interest expense on swap agreements - (2,039,806) (2,039,806)
Operating expenses (221,917) (7,846,520) (8,068,437)
Minority interest in net income of controlled
Subsidiaries - (776,108) (776,108)
- -------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 2,385,143 $ 851,471 $ 3,236,614
Net realized loss (25,127,027) - (25,127,027)
Change in unrealized appreciation (depreciation) (207,683,986) (14,877,151) (222,561,137)
- -------------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS FROM OPERATIONS OF
REPORTABLE SEGMENTS $(230,425,870) $ (14,025,680) $(244,451,550)
- -------------------------------------------------------------------------------------------------------------------
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 - (2,593,239) (2,593,239)
Interest expense on swap agreements - (6,838,894) (6,838,894)
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 $ 8,423,779 $ 1,762,809 $ 10,186,588
Net realized gain (loss) (2,153,990) 323,384 (1,830,606)
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 $ 144,528,279 $ (3,679,777) $ 140,848,502
- -------------------------------------------------------------------------------------------------------------------
TAX-MANAGED
FOR THE NINE MONTHS ENDED GROWTH REAL
SEPTEMBER 30, 2002 PORTFOLIO* ESTATE TOTAL
- -------------------------------------------------------------------------------------------------------------------
Revenue $ 7,403,124 $ 57,540,481 $ 64,943,605
Interest expense on mortgages - (18,667,374) (18,667,374)
Interest expense on Credit Facility - (3,714,069) (3,714,069)
Interest expense on swap agreements - (5,897,813) (5,897,813)
Operating expenses (814,773) (22,686,715) (23,501,488)
Minority interest in net income of controlled
Subsidiaries - (2,743,726) (2,743,726)
- -------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 6,588,351 $ 3,830,784 $ 10,419,135
Net realized loss (42,193,324) - (42,193,324)
Change in unrealized appreciation (depreciation) (388,042,613) (36,067,119) (424,109,732)
- -------------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS FROM
OPERATIONS OF REPORTABLE SEGMENTS $(423,647,586) $(32,236,335) $(455,883,921)
- -------------------------------------------------------------------------------------------------------------------
* Belport Capital invests indirectly in Tax-Managed Growth Portfolio through
Belvedere Capital.
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,
2003 2002 2003 2002
--------------- ------------- ------------- --------------
Revenue:
Revenue from reportable segments $ 21,520,125 $ 21,580,078 $ 65,240,321 $ 64,943,605
Unallocated revenue 4,202 1,514 61,061 18,239
--------------- ------------- ------------- --------------
TOTAL REVENUE $ 21,524,327 $ 21,581,592 $ 65,301,382 $ 64,961,844
--------------- ------------- ------------- --------------
Net increase (decrease) in net assets
from operations:
Net increase (decrease) in net assets
from operations of reportable segments $ 38,849,637 $(244,451,550) $ 140,848,502 $(455,883,921)
Unallocated revenue 4,202 1,514 61,061 18,239
Unallocated expenses ** (806,505) (834,635) (2,371,546) (2,902,917)
--------------- -------------- -------------- --------------
TOTAL NET INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 38,047,334 $(245,284,671) $ 138,538,017 $(458,768,599)
--------------- -------------- -------------- --------------
** Unallocated expenses include costs of Belport Capital to operate the Fund
such as servicing and distribution fees, as well as other miscellaneous and
administrative costs of Belport Capital.
TAX-MANAGED GROWTH REAL
AT SEPTEMBER 30, 2003 PORTFOLIO* ESTATE TOTAL
- ----------------------------------------------------------------------------------------------------------------------
Segment assets $ 1,472,011,971 $591,687,553 $2,063,699,524
Segment liabilities - 634,543,187 634,543,187
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS OF REPORTABLE SEGMENTS $1,472,011,971 $(42,855,634) $1,429,156,337
- ----------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2002
- ----------------------------------------------------------------------------------------------------------------------
Segment assets $ 1,372,347,800 $601,083,507 $1,973,431,307
Segment liabilities - 641,015,249 641,015,249
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS OF REPORTABLE SEGMENTS $ 1,372,347,800 $(39,931,742) $1,332,416,058
- ----------------------------------------------------------------------------------------------------------------------
* Belport Capital invests indirectly in Tax-Managed Growth Portfolio through
Belvedere Capital.
September 30, 2003 December 31, 2002
------------------- -----------------
Net assets:
Net assets of reportable segments $1,429,156,337 $1,332,416,058
Unallocated cash 1,592,218 2,345,657
Short-term investments 2,653,087 622,978
Loan payable- Credit Facility (15,484,463) (10,654,668)
Other liabilities (134,475) (87,961)
------------------ ----------------
TOTAL NET ASSETS $1,417,782,704 $1,324,642,064
------------------ ----------------
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
LLC (the Fund) could differ materially from those contained in the
forward-looking statements due to a number of factors. The Fund undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events, or otherwise, except as required by
applicable law. Factors that could affect the Fund's performance include a
decline in the U.S. stock markets or in general economic conditions, adverse
developments affecting the real estate industry, or fluctuations in interest
rates.
The following discussion should be read in conjunction with the Fund's unaudited
condensed consolidated financial statements and related notes in Item 1 above.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2003 COMPARED TO THE
QUARTER ENDED SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------
PERFORMANCE OF THE FUND.(1) The Fund's total return was 2.72% for the quarter
ended September 30, 2003. This return reflects an increase in the Fund's net
asset value per share from $81.94 to $84.17 during the period. For comparison,
the Standard & Poor's 500 Index (the S&P 500), an unmanaged index of large
capitalization stocks commonly used as a benchmark for the U.S. equity market,
had a total return of 2.65% over the same period. The performance of the Fund
exceeded that of Tax-Managed Growth Portfolio (the Portfolio) by approximately
0.4% during the period. Last year, the Fund had a total return performance of
- -16.33% for the quarter ended September 30, 2002. This return reflected a
decrease in the Fund's net asset value per share from $86.26 to $72.17 during
the period. For comparison, the S&P 500 had a total return of -17.27% over the
same period. The performance of the Fund trailed that of the Portfolio by
approximately 1.2% during that period.
PERFORMANCE OF THE PORTFOLIO. The total return of the Portfolio for the quarter
ended September 30, 2003 was 2.35% compared to the 2.65% return achieved by the
S&P 500 over the same period. The modest gain posted by the S&P 500 during the
quarter is in sharp contrast to the worst broad market quarterly decline in this
decade that was experienced in the quarter ended September 30, 2002. The
Portfolio's total return for the quarter ended September 30, 2002 was -15.11%.
The encouraging fiscal and monetary policies, resilient consumer spending and
positive earnings momentum experienced through the first half of 2003 continued
during the third quarter and contributed to the market's strength during the
quarter, extending its gains for the year.
The performance of the Portfolio slightly trailed the performance of the S&P 500
during the quarter ended September 30, 2003 primarily due to the Portfolio's
relatively more defensive tilt and its continued underweighting of the
information technology sector. Unlike a year ago when it was the worst
performing sector, information technology was by far the best performing sector
of the market during the quarter ended September 30, 2003.
During the quarter ended September 30, 2003, the Portfolio's sector allocation
remained very similar to last year's positioning relative to the market, with no
major sector or industry shifts. Near the end of the quarter there was some
pause in the strong momentum of higher beta stocks, helping the Portfolio's
relative performance.
The Portfolio's stock selection and underweighting of the telecommunication and
health care sectors were particularly beneficial during the quarter ended
September 30, 2003, but were not sufficient to offset the impact of the
Portfolio's underweighting of information technology stocks. Boston Management
and Research (Boston Management), the Portfolio's investment adviser, remained
cautious in the information technology and telecommunications sectors, a
comparable underweight allocation from the same period a year ago.
PERFORMANCE OF REAL ESTATE INVESTMENTS. The Fund's real estate investments are
held through Belport Realty Corporation (Belport Realty), a controlled
subsidiary of the Fund. Real Estate investments include interests in real estate
joint ventures (the Real Estate Joint Ventures) that are majority-owned by
Belport Realty and a portfolio of income-producing preferred equity interests in
operating partnerships (the Partnership Preference Units) that are affiliated
with real estate investment trusts. During the quarter ended September 30, 2003,
operations of the Real Estate Joint Ventures in which the Fund has invested
- ------------------
(1) Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that Fund shares, when redeemed, may be
worth more or less than their original cost. Comparison to the S&P 500 is
for reference only. It is not possible to invest directly in an Index.
16
continued to be impacted by weak multifamily market fundamentals. Rental income
from real estate operations decreased to $16.2 million for the quarter ended
September 30, 2003 from $16.7 million for the quarter ended September 30, 2002,
a decline of $0.5 million or 3%. This decrease in rental income resulted
primarily from increased rent concessions or reduced apartment rental rates and
lower occupancy levels at properties owned by Belport Realty's Real Estate Joint
Ventures, a trend that has continued from 2002.
Property operating expenses decreased to $6.8 million for the quarter ended
September 30, 2003 from $7.0 million for the quarter ended September 30, 2002, a
decrease of $0.2 million or 3% (property operating expenses are before certain
operating expenses of Belport Realty of approximately $0.8 million for the
quarter ended September 30, 2003 and approximately $0.8 million for the quarter
ended September 30, 2002). The decrease was principally due to a 25% decrease in
property taxes and insurance expense, offset in part by a 7% increase in
property and maintenance expenses for the period.
Even though the U.S. economy showed signs of improvement during the quarter
ended September 30, 2003, significant employment growth has not occurred in most
markets and low interest rates have contributed to continued development of new
properties. As a result, Boston Management, Belport Realty's manager, expects
that real estate operating results in 2003 will continue to be modestly below
the levels of 2002.
At September 30, 2003, the estimated fair value of the real properties held
through Belport Realty was $475.1 million compared to $497.8 million at
September 30, 2002, a decrease of $22.7 million or 5%. The decrease in real
property value resulted from declines in near-term earnings expectations and the
economic downturn. The Fund saw unrealized depreciation in the estimated fair
value of its other real estate investments (which includes Belport Realty's Real
Estate Joint Ventures) of approximately $1.2 million during the quarter ended
September 30, 2003 compared to approximately $16.2 million in unrealized
depreciation for the quarter ended September 30, 2002. Despite weak market
conditions, declines in asset values for multifamily properties have generally
been modest as decreases in capitalization rates during the period since
September 30, 2002 have continued to partially offset declining income level
expectations.
At September 30, 2003, the estimated fair value of Partnership Preference Units
held by Belport Realty totaled $103.3 million compared to $96.7 million at
September 30, 2002, an increase of $6.6 million or 7%. While the estimated fair
value of Partnership Preference Units at September 30, 2003 increased as
compared to September 30, 2002, the Fund saw unrealized depreciation in the
estimated fair value of its Partnership Preference Units of approximately $1.1
million during the quarter ended September 30, 2003. The Fund saw unrealized
appreciation of approximately $1.6 million for the quarter ended September 30,
2002. Dividends received from Partnership Preference Units totaled $2.2 million
for the quarters ended September 30, 2003 and 2002.
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the quarter ended September
30, 2003, interest rate swap agreement values appreciated by approximately $6.5
million, compared to a decline for the three months ended September 30, 2002 of
approximately $16.5 million. Swap rates increased slightly during the quarter
ended September 30, 2003 and declined during the quarter ended September 30,
2002.
On October 1, 2003, new interest rate swap agreements were entered into to fix
the cost of a portion of Fund borrowings under the Credit Facility established
on June 30, 2003. At the same time, the Fund made payments of approximately
$25.4 million to terminate all interest rate swaps outstanding as of September
30, 2003, realizing a loss in that amount on the transactions. The realized loss
approximated the value of the positions on the books of the Fund. See "Liquidity
and Capital Resources" below for a description of the Credit Facility and the
Fund's interest rate swap agreements.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2002
- --------------------------------------------------------------------------------
PERFORMANCE OF THE FUND. The Fund's total return was 10.68% for the nine months
ended September 30, 2003. This return reflects 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 during the period. For comparison, the S&P 500 had a total return of
14.71% over the same period. The performance of the Fund trailed that of the
Portfolio by approximately 0.1% during the period. Last year, the Fund had a
total return performance of -26.63% for the nine months ended September 30,
2002. This return reflected a decrease in the Fund's net asset value per share
from $98.37 to $72.17. For comparison, the S&P 500 had a total return of -28.15%
over the same period. The performance of the Fund trailed that of the Portfolio
by approximately 2.2% for the nine months ended September 30, 2002.
17
PERFORMANCE OF THE PORTFOLIO. The total return of the Portfolio for the nine
months ended September 30, 2003 was 10.74% compared to the 14.71% return
achieved by the S&P 500 over the same period. The total return of the Portfolio
for the nine months ended September 30, 2002 was -24.40%.
The first nine months of 2003 remained volatile, but markets proved to be
resilient achieving impressive returns. War angst, a questionable economic
recovery and the SARS outbreak were just a few of the factors contributing to
increased volatility and unsettled investor sentiment during the period. While
the first nine months of 2003 also witnessed reduced geopolitical concerns,
higher consumer confidence and a strong housing market, concerns about inflation
and unemployment developed over the summer and early fall of 2003 and kept the
market and various sectors quite volatile.
The Portfolio's performance trailed the overall market in the first nine months
of 2003, mostly due to a lower exposure to higher beta and lower quality issues
that were the strongest price performers during this period. The Portfolio
maintained a pro-cyclical stance emphasizing the consumer discretionary and
consumer staples sectors, as it did in the first nine months of 2002. Boston
Management continued to de-emphasize health care investments, a directional move
initiated last year which was positive for the Portfolio's relative returns.
During the first nine months of 2003, Boston Management continued to emphasize
industrial company investments, especially in the airfreight logistics and
aerospace defense areas. Airfreight logistics and aerospace defense investments
have been helpful to the Portfolio's longer-term record, but detracted from
results during the nine months ended September 30, 2003.
Lack of earnings visibility reinforced the Portfolio's cautious weighting in the
telecommunications and information technology sectors. Both of the
aforementioned sectors were de-emphasized during the first nine months of last
year as well. The Portfolio's underweight of the telecommunication services
sector during the nine months ended September 30, 2003 continued to be positive
for the Portfolio. Boston Management continued to underweight the Portfolio's
investments in the materials and utilities sectors during the period, a similar
stance to last year's allocation.
PERFORMANCE OF REAL ESTATE INVESTMENTS. For the nine months ended September 30,
2003, rental income from properties owned by Belport Realty's Real Estate Joint
Ventures decreased to $49.4 million from $50.8 million for the nine months ended
September 30, 2002, a decline of $1.4 million or 3%. This decrease in rental
income resulted primarily from increased rent concessions or reduced apartment
rents and lower occupancy levels at properties owned by the Real Estate Joint
Ventures during the period.
While rental income decreased, property operating expenses increased to $20.9
million for the nine months ended September 30, 2003 from $20.1 million for the
nine months ended September 30, 2002, an increase of $0.8 million or 4%
(property operating expenses are before certain operating expenses of Belport
Realty of approximately $3.0 million for the nine months ended September 30,
2003 and approximately $2.6 million for the nine months ended September 30,
2002). The increase in property operating expenses was due to a 9% increase in
property and maintenance expenses offset in part by a 3% decrease in property
tax and insurance expense. As in 2002, real estate operations during the period
were affected by weak multifamily market fundamentals in most regions with lower
occupancy levels and increased rent concessions.
At September 30, 2003, the estimated fair value of the real properties held
through Belport Realty was $475.1 million compared to $497.8 million at
September 30, 2002, a decrease of $22.7 million or 5%. The decrease in real
property value resulted from declines in near-term earnings expectations and the
economic downturn. The Fund saw unrealized depreciation in the estimated fair
value of its other real estate investments of approximately $13.5 million during
the nine months ended September 30, 2003 compared to unrealized depreciation of
approximately $16.7 million for the nine months ended September 30, 2002.
Declines in asset values for multifamily properties have generally been modest
as decreases in capitalization rates during the period since September 30, 2002
have partially offset declining income level expectations. On May 13, 2003, the
Fund sold its investment in Bel Oakbrook LLC that was acquired in March 2003 to
another investment fund advised by Boston Management and recognized a gain of
$0.3 million on the transaction.
For the nine months ended September 30, 2003, investments in Partnership
Preference Units continued to benefit from low interest rates and tighter
spreads on real estate securities. At September 30, 2003, the estimated fair
value of the Fund's Partnership Preference Units totaled $103.3 million compared
to $96.7 million at September 30, 2002, an increase of $6.6 million or 7%. The
Fund saw unrealized appreciation in the estimated fair value of its Partnership
Preference Units of approximately $6.7 million during the nine months ended
September 30, 2003 compared to unrealized appreciation of approximately $4.2
million for the nine months ended September 30, 2002. Dividends received from
Partnership Preference Units totaled $6.6 million for the nine months ended
September 30, 2003 and 2002.
18
PERFORMANCE OF INTEREST RATE SWAP AGREEMENTS. For the nine months ended
September 30, 2003, interest rate swap agreement values appreciated by
approximately $0.9 million compared to depreciation of approximately $23.6
million for the nine months ended September 30, 2002. Swap rates appreciated
modestly during the nine months ended September 30, 2003 and declined during the
nine months ended September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Effective June 30, 2003, the Fund refinanced its then existing credit facility
with Citicorp North America by entering into new credit arrangements with DrKW
Holdings, Inc. (DrKW) and Merrill Lynch Mortgage Capital, Inc. (MLMC)
(collectively, the Credit Facility) which together total $275.0 million. The
total commitment amount was increased to $284.5 million as of September 29,
2003. The Credit Facility is secured by a pledge of the Fund's assets, excluding
the assets of Bel Multifamily Property Trust and Monadnock Property Trust LLC,
and has a seven-year maturity. The Credit Facility will expire in June 2010.
The Credit Facility is primarily used to finance the Fund's equity in real
estate investments and will continue to be used for such purpose in the future.
The Credit Facility also provides for selling commissions, organizational
expenses and any short-term liquidity needs of the Fund. Under certain
circumstances, the Fund may increase the size of the Credit Facility and the
amount of outstanding borrowings thereunder for these purposes.
The Credit Facility includes a $230.5 million credit arrangement with DrKW.
Borrowings under the DrKW credit arrangement accrue interest at a rate of
one-month LIBOR plus 0.20% per annum. As of September 30, 2003, outstanding
borrowings under the DrKW credit arrangement totaled $230.5 million.
The Credit Facility also includes a $54.0 million credit arrangement with MLMC,
including up to $10.0 million under letters of credit. Borrowings under the MLMC
credit arrangement accrue interest at a rate of one-month LIBOR plus 0.38% per
annum. As of September 30, 2003, there were no outstanding borrowings under the
MLMC credit arrangement. There was $1.6 million outstanding under letters of
credit at September 30, 2003. The unused loan commitment amount totaled
approximately $52.4 million. A commitment fee of 0.10% per annum is paid on the
unused commitment amount. The Fund pays all fees associated with issuing the
letters of credit.
The Fund has entered into interest rate swap agreements with respect to its real
estate investments and associated borrowings. Pursuant to these agreements, the
Fund makes periodic payments to the counterparty at predetermined fixed rates,
in exchange for floating-rate payments 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 gains or
losses. On October 1, 2003, new interest rate swap agreements were entered into
to fix the cost of Fund borrowings under the Credit Facility established on June
30, 2003. At the same time, all interest rate swap agreements outstanding on
September 30, 2003 were terminated. Under the new interest rate swap agreements
the Fund makes periodic payments to the counterparty at predetermined fixed
rates, in exchange for floating-rate payments at a predetermined spread plus
one-month LIBOR.
As of September 30, 2003 and September 30, 2002, the unrealized depreciation
related to the interest rate swap agreements was approximately $25.4 million and
$26.0 million, respectively.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
The Fund's discussion and analysis of its financial condition and results of
operations are based upon its unaudited condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires the Fund to make estimates, judgments and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. The Fund bases these estimates, judgments and assumptions on
historical experience and on other various factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
The Fund's critical accounting policies affect the Fund's more significant
estimates and assumptions used in valuing the Fund's real estate investments and
interest rate swap agreements. Prices are not readily available for these types
of investments and therefore they are fair valued on an ongoing basis by Boston
Management, in its capacity as manager of Belport Realty, in the case of the
real estate investments, and in its capacity as the Fund's investment adviser,
in the case of the interest rate swap agreements. The fair value of an
investment represents the amount at which Boston Management believes the
19
investment could be sold in a current transaction between willing parties, that
is, other than in a forced or liquidation sale.
In estimating the fair value of Belport Realty's investment in Partnership
Preference Units, Boston Management takes into account all relevant factors,
data and information, including information from dealers and similar firms with
knowledge of such issues and the prices of comparable preferred equity
securities and other fixed or adjustable rate instruments having similar
investment characteristics. With respect to Belport Realty's other real estate
investments, detailed investment valuations are based on independent valuations
that are performed at least annually and reviewed periodically. Interim
valuations reflect results of operations and distributions, and may be adjusted
if there has been a significant change in economic circumstances since the most
recent independent valuation. In determining the fair value of interest rate
swap agreements, Boston Management may consider, among other things, dealer and
counterparty quotes and pricing models. Given that the valuation of real estate
investments and interest rate swap agreements includes many assumptions,
including but not limited to the assumption that the investment could be sold in
a current transaction between willing parties, that is, other than in a forced
or liquidation sale, values may differ from amounts ultimately realized.
The policies for valuing real estate investments involve significant judgments
that are based upon, without limitation, general economic conditions, the supply
and demand for different types of real properties, the financial health of
tenants, the timing of lease expirations and terminations, fluctuations in
rental rates and operating costs, exposure to adverse environmental conditions
and losses from casualty or condemnation, interest rates, availability of
financing, managerial performance and government rules and regulations. The
valuations of Partnership Preference Units fluctuate over time to reflect, among
other factors, changes in interest rates, changes in perceived riskiness of such
units (including call risk), changes in the perceived riskiness of comparable or
similar securities trading in the public market and the relationship between
supply and demand for comparable or similar securities trading in the public
market.
The value of interest rate swap agreements may be subject to wide swings in
valuation caused principally by changes in interest rates. Interest rate swap
agreements may be difficult to value since such instruments may be considered
illiquid. Fluctuations in the value of Partnership Preference Units derived from
changes in general interest rates can be expected to be offset in part (but not
entirely) by changes in the value of interest rate swap agreements or other
interest rate hedges that may be entered into by the Fund with respect to its
borrowings. Fluctuations in the value of real estate investments derived from
other factors besides general interest rate movements (including issuer-specific
and sector-specific credit concerns, property-specific concerns and changes in
interest rate spread relationships) will not be offset by changes in the value
of interest rate swap agreements or other interest rate hedges that may be
entered into by the Fund. Changes in the valuation of Partnership Preference
Units not offset by changes in the valuation of interest rate swap agreements or
other interest rate hedges that may be entered into by the Fund and changes in
the value of other real estate investments will cause the performance of the
Fund to deviate from the performance of the Portfolio.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- -------------------------------------------------------------------
The Fund's primary exposure to interest rate risk arises from its real estate
investments that are financed by the Fund with floating rate borrowings under
the Fund's Credit Facility and by fixed-rate secured mortgage debt obligations
of the Real Estate Joint Ventures. The interest rates on borrowings under the
Fund's Credit Facility are reset at regular intervals based on a fixed and
predetermined premium to LIBOR for short-term extensions of credit. The Fund has
entered into interest rate swap agreements to fix the cost of its borrowings
under the Credit Facility and to attempt to mitigate the impact of interest rate
changes on the Fund's net asset value. Under the terms of the interest rate swap
agreements, the Fund makes cash payments at fixed rates in exchange for floating
rate payments that fluctuate with one-month LIBOR. In the future, the Fund may
use other interest rate hedging arrangements (such as caps, floors and collars)
to fix or limit borrowing costs. The use of interest rate hedging arrangements
is a specialized activity that can expose the Fund to significant loss.
The value of Partnership Preference Units and, to a lesser degree, other real
estate investments is sensitive to interest rate risk. Increases in interest
rates generally will have an adverse affect on the value of Partnership
Preference Units and other real estate investments.
The following table summarizes the contractual maturities and weighted-average
interest rates associated with the Fund's significant non-trading financial
instruments. The Fund has no market risk sensitive instruments held for trading
purposes. This information should be read in conjunction with Note 5 and Note 6
to the Fund's unaudited condensed consolidated financial statements in Item 1
above.
20
Interest Rate Sensitivity
Cost, Principal (Notional) Amount by Contractual Maturity
For the Twelve Months Ended September 30,
Estimated
2004-2007 2008 Thereafter Total Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
- -------------------------------------------
Long-term debt:
- -------------------------------------------
Fixed-rate mortgages $361,107,500 $361,107,500 $399,000,000
Average interest rate 6.78% 6.78%
- -------------------------------------------
Variable-rate Credit Facility $230,500,000 $230,500,000 $230,500,000
Average interest rate 1.32% 1.32%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative
financial instruments:
- -------------------------------------------
Pay fixed/receive variable interest rate
swap agreements(1) $190,887,000 $190,887,000 $ --
Average pay rate(1) 4.08% 4.08%
Average receive rate(1) 1.32% 1.32%
(1) The terms disclosed are those of the interest rate swap agreements entered
into that are effective on October 1, 2003. See Note 5 to the Fund's
unaudited condensed consolidated financial statements in Item 1 above for
the terms of the interest rate swap agreements in effect on September 30,
2003 and terminated on October 1, 2003 as well as the loss realized as a
result of such termination.
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive investments:
- -------------------------------------------
Fixed-rate Partnership Preference Units:
- -------------------------------------------
Essex Portfolio, L.P., 7.875% Series B
Cumulative Redeemable Preferred Units,
Callable 2/6/03, Current Yield: 8.15% $ 34,821,762 $ 34,821,762 $ 42,273,175
PSA Institutional Partners, L.P., 9.50% Series
N Cumulative Redeemable Perpetual
Preferred Units, Callable 3/17/05, Current
Yield: 9.09% $ 34,905,000 $ 34,905,000 $ 33,956,000
Prentiss Properties Acquisition Partners, L.P.,
8.30% Series B Cumulative Redeemable
Perpetual Preferred Units, Callable
6/25/03, Current Yield: 8.45% $ 22,687,060 $ 22,687,060 $ 27,021,500
ITEM 4. CONTROLS AND PROCEDURES.
- ---------------------------------
Eaton Vance Management (Eaton Vance), as the Fund's manager, with the
participation of the Fund's Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of the Fund's disclosure controls
and procedures (as defined by Rule 13a-15(e) of the Securities Exchange Act of
1934, as amended) as of the end of the period covered by this report. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Fund's disclosure controls and procedures were effective.
There were no changes in the Fund's internal control over financial reporting
that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, the Fund's internal
control over financial reporting.
21
As the Fund's manager, the complete and entire management, control and operation
of the Fund are vested in Eaton Vance. The Fund's organizational structure does
not provide for a board of directors or a board audit committee. As such, the
Fund's Chief Executive Officer and Chief Financial Officer intend to report to
Eaton Vance any significant deficiency in the design or operation of internal
control over financial reporting which could adversely affect the Fund's ability
to record, process, summarize and report financial data, and any fraud, whether
or not material, that involves management or other employees who have a
significant role in the Fund's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ---------------------------
Although in the ordinary course of business, the Fund, 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 AND USE OF PROCEEDS.
- ---------------------------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- -----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
No matters were submitted to a vote of security holders during the three months
ended September 30, 2003.
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 dated September 29, 2003 to Loan and Security Agreement
between Belport Capital Fund LLC and DrKW Holdings, Inc. as Lender
4.2(a) Amendment dated September 29, 2003 to Loan and Security Agreement among
Belport Capital Fund LLC, Merrill Lynch Mortgage Capital, Inc., as
Agent, the Lenders referred to therein and Merrill Lynch Capital
Services, Inc.
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
None.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer on November 10, 2003.
BELPORT CAPITAL FUND LLC
/s/ Michelle A. Alexander
-------------------------
Michelle A. Alexander
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
23
EXHIBIT INDEX
-------------
4.1(a) Amendment dated September 29, 2003 to Loan and Security Agreement
between Belport Capital Fund LLC and DrKW Holdings, Inc. as Lender
4.2(a) Amendment dated September 29, 2003 to Loan and Security Agreement
among Belport Capital Fund LLC, Merrill Lynch Mortgage Capital, Inc.,
as Agent, the Lenders referred to therein and Merrill Lynch Capital
Services, Inc.
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
24