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. 000-25767
Belair Capital Fund LLC
-----------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3404037
------------- ----------
(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
--- ---
BELAIR 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 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 26
PART II OTHER INFORMATION 27
Item 1. Legal Proceedings 27
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 29
EXHIBIT INDEX 30
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
- --------------------------------------------------------------------------------
BELAIR 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) $ 1,555,202,369 $ 1,588,195,284
Investment in Partnership Preference
Units 271,166,335 318,042,995
Investment in other real estate 385,356,996 162,585,380
Short-term investments 2,270,000 11,765,330
---------------- ---------------
Total investments $ 2,213,995,700 $ 2,080,588,989
Cash 8,058,506 8,687,577
Escrow deposits - restricted 80,839 80,839
Open interest rate swap agreements,
at value 1,220,065 1,644,344
Distributions and interest receivable 126,645 694,054
Other assets 6,694,008 1,144,720
----------------- ---------------
Total assets $ 2,230,175,763 $ 2,092,840,523
---------------- ---------------
Liabilities:
Loan payable - Credit Facility $ 582,700,000 $ 447,000,000
Mortgage payable 112,630,517 112,630,517
Payable for Fund Shares redeemed - 1,180,000
Distributions payable to minority
shareholders - 16,800
Swap interest payable 163,689 243,920
Security deposits 827,585 372,900
Accrued expenses:
Interest expense 933,844 920,797
Property taxes 1,316,613 576,590
Other expenses and liabilities 2,981,995 669,458
Minority interests in controlled
subsidiaries 54,304,550 6,947,692
--------------- ---------------
Total liabilities $ 755,858,793 $ 570,558,674
--------------- ---------------
Net assets $ 1,474,316,970 $ 1,522,281,849
--------------- ---------------
Shareholders' Capital $ 1,474,316,970 $ 1,522,281,849
--------------- ---------------
Shares outstanding 12,364,272 12,728,157
--------------- ----------------
Net asset value and redemption price per
Share $ 119.24 $ 119.60
--------------- ----------------
See notes to unaudited condensed consolidated financial statements
3
BELAIR 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 $65,150, $43,881,
$264,802 and $195,924, respectively) $ 5,863,812 $ 5,242,711 $ 17,535,611 $ 15,215,372
Interest allocated from Belvedere Company 9,940 43,444 55,343 293,296
Expenses allocated from Belvedere Company (2,351,208) (2,243,700) (7,137,516) (6,368,209)
------------------ ------------------ ------------------ ------------------
Net investment income allocated from
Belvedere Company $ 3,522,544 $ 3,042,455 $ 10,453,438 $ 9,140,459
Distributions from Partnership Preference Units 5,448,470 7,776,686 20,942,014 27,085,587
Rental income 8,892,692 5,408,027 20,006,147 16,475,632
Interest 120,147 82,837 362,916 192,285
------------------ ------------------ ------------------- ------------------
Total investment income $ 17,983,853 $ 16,310,005 $ 51,764,515 $ 52,893,963
------------------ ------------------ ------------------- ------------------
Expenses:
Investment advisory and administrative fees $ 1,462,891 $ 1,371,845 $ 4,254,564 $ 4,008,918
Property management fees 276,863 216,118 718,744 660,784
Servicing fees 154,076 136,472 476,514 384,192
Interest expense on mortgages 2,386,112 2,386,112 7,158,334 7,158,334
Interest expense on Credit Facility 2,523,172 2,160,493 5,890,234 7,131,846
Property and maintenance expenses 1,938,895 1,677,834 5,196,167 4,795,594
Property taxes and insurance 1,111,430 611,626 2,505,797 2,118,180
Amortization of deferred expenses - - - 9,099
Miscellaneous 362,725 200,650 690,145 510,791
----------------- ----------------- ------------------ ------------------
Total expenses $ 10,216,164 $ 8,761,150 $ 26,890,499 $ 26,777,738
----------------- ----------------- ------------------ ------------------
Net investment income before
minority interests in net income of
controlled subsidiaries $ 7,767,689 $ 7,548,855 $ 24,874,016 $ 26,116,225
Minority interests in net income
of controlled subsidiaries (623,466) (3,159) (849,446) (324,910)
----------------- ----------------- ----------------- ------------------
Net investment income $ 7,144,223 $ 7,545,696 $ 24,024,570 $ 25,791,315
----------------- ----------------- ----------------- ------------------
See notes to unaudited condensed consolidated financial statements
4
BELAIR 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) $ 5,766 $ 1,035,691 $ 11,842,265 $ (1,155,495)
Investment transactions in Partnership
Preference Units (identified cost basis) 1,096,914 420,584 3,496,457 420,676
Interest rate swap agreements (1) (2,373,127) (2,444,721) (8,618,678) (14,429,097)
------------------ ------------------- ------------------ ------------------
Net realized gain (loss) $ (1,270,447) $ (988,446) $ 6,720,044 $(15,163,916)
------------------ ------------------- ------------------ ------------------
Change in unrealized appreciation (depreciation)
Investments and foreign currency
allocated from Belvedere Company
(identified cost basis) $(37,880,862) $ 29,558,954 $ (3,439,420) $134,301,886
Investment in Partnership Preference Units
(identified cost basis) 1,826,871 (1,256,112) (10,785,064) 25,882,600
Investment in other real estate (net of minority
interests in unrealized gain (loss) of controlled
subsidiaries of $(281,253), $(3,691,876),
$1,778,551 and $(3,521,856), respectively) (1,922,932) 3,755,474 (4,368,174) 3,992,468
Interest rate swap agreements (5,309,803) 2,407,883 (424,279) 12,864,023
------------------ ------------------ ------------------ ------------------
Net change in unrealized appreciation
(depreciation) $(43,286,726) $ 34,466,199 $(19,016,937) $177,040,977
------------------ ------------------ ------------------ ------------------
Net realized and unrealized gain (loss) $(44,557,173) $ 33,477,753 $(12,296,893) $161,877,061
------------------ ------------------ ------------------ ------------------
Net (decrease) increase in net assets from operations $(37,412,950) $ 41,023,449 $ 11,727,677 $187,668,376
================== ================== ================== ==================
(1) Amounts include periodic payments made in connection with interest rate
swap agreements of $2,909,625, $2,444,721, $9,155,176 and $14,429,097,
respectively (Note 4).
See notes to unaudited condensed consolidated financial statements
5
BELAIR 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 $ 24,024,570 $ 34,029,533
Net realized gain (loss) from investment
transactions, foreign currency
transactions and interest rate swap
agreements 6,720,044 (6,702,427)
Net change in unrealized appreciation (depreciation) of
investments, foreign currency and interest rate swap agreements (19,016,937) 335,001,122
----------------- ------------------
Net increase in net assets from operations $ 11,727,677 $ 362,328,228
----------------- ------------------
Transactions in Fund Shares -
Net asset value of Fund Shares issued to Shareholders in
payment of distributions declared $ 7,259,756 $ 2,956,829
Net asset value of Fund Shares redeemed (50,672,833) (82,202,891)
----------------- ------------------
Net decrease in net assets from Fund Share transactions $ (43,413,077) $ (79,246,062)
----------------- ------------------
Distributions -
Distributions to Shareholders $ (16,279,479) $ (6,607,973)
----------------- ------------------
Total distributions $ (16,279,479) $ (6,607,973)
----------------- ------------------
Net (decrease) increase in net assets $ (47,964,879) $ 276,474,193
Net assets:
At beginning of period $1,522,281,849 $1,245,807,656
----------------- ------------------
At end of period $1,474,316,970 $1,522,281,849
================= ==================
See notes to unaudited condensed consolidated financial statements
6
BELAIR 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 $ 11,727,677 $ 187,668,376
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 (10,453,438) (9,140,459)
Decrease in escrow deposits - 993,440
Decrease in receivable for investments sold - 4,952,435
Increase in interest receivable from other real estate investments (131,993) (106,923)
(Increase) decrease in other assets (4,896,184) 122,088
Decrease in distributions and interest receivable 567,409 3,540,567
Decrease in interest payable for open swap agreements (80,231) (3,611,900)
Increase (decrease) in security deposits, accrued interest and accrued
other expenses and liabilities 2,218,522 (1,063,252)
Increase in accrued property taxes 648,667 636,650
Purchases of Partnership Preference Units (67,498,333) -
Proceeds from sales of Partnership Preference Units 107,086,386 68,845,584
Payments for investments in other real estate (179,010,336) -
Improvements to rental property (1,472,450) (1,427,016)
Net increase in investment in Belvedere Company - (3,500,000)
Interest incurred on interest rate swap agreements (9,155,176) (14,429,097)
Payment received on termination of interest rate swap agreement 536,498 -
Decrease (increase) in short-term investments 9,495,330 (41,599,595)
Minority interests in net income of controlled subsidiaries 849,446 324,910
Net realized (gain) loss from investment transactions, foreign currency
transactions and interest rate swap agreements (6,720,044) 15,163,916
Net change in unrealized (appreciation) depreciation of investments,
foreign currency and interest rate swap agreements 19,016,937 (177,040,977)
------------------- ------------------
Net cash flows (for) from operating activities $(127,271,313) $ 30,328,747
------------------- ------------------
Net Cash Flows From (For) Financing Activities -
Proceeds from (repayment of) Credit Facility $ 135,700,000 $ (37,769,000)
Payments for Fund Shares redeemed (3,635) (2,526)
Distributions paid to Shareholders (9,019,723) (3,651,144)
Distributions paid to minority shareholders (34,400) (17,600)
------------------- ------------------
Net cash flows from (for) financing activities $ 126,642,242 $ (41,440,270)
------------------- ------------------
Net decrease in cash $ (629,071) $ (11,111,523)
Cash at beginning of period $ 8,687,577 $ 16,067,430
------------------- ------------------
Cash at end of period $ 8,058,506 $ 4,955,907
=================== ==================
See notes to unaudited condensed consolidated financial statements
7
BELAIR 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 $ 5,792,824 $ 7,780,719
Interest paid on swap agreements $ 9,235,407 $ 18,040,997
Interest paid on mortgage $ 7,036,592 $ 7,036,592
Market value of securities distributed in payment of
redemptions $ 51,849,198 $ 49,106,053
Market value of real property and other assets, net of
current liabilities, assumed in conjunction with the
acquisition of other real estate $ 223,732,316 $ -
Market value minority interests assumed in
conjunction with the acquisition of other real estate $ 44,746,462 $ -
Partnership Preference Units exchanged for an equity
investment in real estate companies and an investment
in note receivable $ - $ (3,977,592)
Market value of an equity investment in real estate companies $ - $ 1,907,012
Investment in note receivable $ - $ 2,070,580
See notes to unaudited condensed consolidated financial statements
8
BELAIR 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 $ 119.600
- --------------------------------------------------------------------------------
Income (loss) from operations
- --------------------------------------------------------------------------------
Net investment income(6) $ 1.908
Net realized and unrealized loss (0.988)
- --------------------------------------------------------------------------------
Total income from operations $ 0.920
- --------------------------------------------------------------------------------
Distributions
- --------------------------------------------------------------------------------
Distributions to Shareholders $ (1.280)
- --------------------------------------------------------------------------------
Total distributions $ (1.280)
- --------------------------------------------------------------------------------
Net asset value - End of period $ 119.240
- --------------------------------------------------------------------------------
Total Return(1) 0.78%
- --------------------------------------------------------------------------------
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) 0.52%(9) 0.37%(9)
Operating expenses(7) 0.61%(9) 0.44%(9)
Belair Capital Fund LLC Expenses
Interest and other borrowing costs(4)(8) 0.52%(9) 0.38%(9)
Investment advisory and administrative fees,
servicing fees and other Fund operating
expenses(3)(4) 1.11%(9) 0.80%(9)
----------------------------
Total expenses 2.76%(9) 1.99%(9)
Net investment income 2.13%(9) 1.54%(9)
- --------------------------------------------------------------------------------
Supplemental Da
- --------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 1,474,317
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 Belair Capital Fund LLC (Belair Capital) (not including its investment
in Belair Real Estate Corporation (Belair Real Estate)) plus all assets of
Belair Real Estate minus the sum of their liabilities other than the
principal amount of money borrowed. For this purpose, the assets of Belair
Real Estate's controlled subsidiaries are reduced by the proportionate
interests therein of investors other than Belair Real Estate.
(3) Includes Belair Capital's share of Belvedere Capital Fund Company LLC's
allocated expenses, including those expenses allocated from the Portfolio.
(4) Includes the expenses of Belair Capital and Belair Real Estate. Does not
include expenses of the real estate subsidiaries majority-owned by Belair
Real Estate.
(5) For the purpose of calculating ratios, the income and expenses of Belair
Real Estate's controlled subsidiaries are reduced by the proportionate
interests therein of investors other than Belair Real Estate.
(6) Calculated using average shares outstanding.
(7) Includes Belair Real Estate'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
BELAIR CAPITAL FUND LLC as of September 30, 2004
Notes To Condensed Consolidated Financial Statements (Unaudited)
1. Organization and Basis of Presentation
The condensed consolidated interim financial statements of Belair Capital Fund
LLC (Belair 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, 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.
During the nine months ended September 30, 2004, Belair Real Estate Corporation
(Belair Real Estate) made indirect investments in real property through a newly
established controlled subsidiary, Elkhorn Property Trust (Elkhorn), as
described below. The consolidated financial statements include the accounts of
Elkhorn and all material intercompany accounts and transactions have been
eliminated.
Subsidiary-
Elkhorn- On May 3, 2004, Belair Real Estate entered into an agreement to
establish and acquire a majority interest in a controlled subsidiary, Elkhorn.
On June 30, 2004, Elkhorn acquired a majority interest in five industrial
distribution properties located in four states (Texas, Tennessee, Ohio and
Georgia). On August 4, 2004, Elkhorn acquired an additional seventeen industrial
distribution properties located in five states (Florida, New Jersey, Ohio,
Pennsylvania and South Carolina). Belair Real Estate owns 100% of the Class A
Units of Elkhorn, representing 60% of the voting interests in Elkhorn and a
minority shareholder (the Elkhorn Minority Shareholder) owns 100% of the Class B
units, representing 40% of the voting interests in Elkhorn. The Class B equity
interest is recorded as a minority interest on the Consolidated Statements of
Assets and Liabilities. The primary distinctions between the two classes of
shares are the distribution priority and voting rights. Belair Real Estate has
priority in distributions and has greater voting rights than the holder of the
Class B units. From and after August 4, 2014, either Belair Real Estate or the
Elkhorn Minority Shareholder may cause a liquidation of Elkhorn and, if Belair
Real Estate makes that election, the Elkhorn Minority Shareholder has the right
either to purchase the shares of Elkhorn owned by Belair Real Estate or to
acquire the assets of Elkhorn, in either case at a price determined through an
appraisal of the assets of Elkhorn.
10
2. 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 $ - $ 4,000,000
Decreases in investment in Belvedere Company $ 51,849,198 49,606,053
Acquisition of other real property(1) $179,010,336 -
Purchases of Partnership Preference Units(2) $ 67,498,333 -
Sales of Partnership Preference Units(3) $107,086,386 $ 68,845,584
- -----------------------------------------------------------------------------------------
(1) On June 30, 2004 and August 4, 2004, Belair Real Estate purchased an
indirect investment in real property through a controlled subsidiary,
Elkhorn, for $17,686,317 and $161,324,019, respectively (Note 1).
(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 and Research (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 and 2003 include Partnership Preference Units sold to other
investment funds advised by Boston Management for which a loss of $113,968
and $771,250 was recognized, respectively.
On May 3, 2004, Belair Real Estate entered into an agreement to establish and
acquire a majority interest in a controlled subsidiary, Elkhorn. During the nine
months ended September 30, 2004, Elkhorn acquired a majority interest in
twenty-two industrial distribution properties. The seller retained a minority
interest in the properties and an affiliate of the Elkhorn Minority Shareholder
manages the properties. A portion of the Fund's indirect investment in Elkhorn
represents a partial interest in certain property management contracts. Other
interested parties to the property management contracts include an affiliate of
the Elkhorn Minority Shareholder. This partial interest provides for Elkhorn to
receive cash flows from management fees and certain other fees over the life of
the contracts in amounts that exceed certain preferred payments to other
interested parties. The estimated value of Elkhorn's interest in the management
contracts is approximately $1,600,000. Such value was estimated based upon
discounting expected cash flows over the terms of the agreements. The value of
such interests will be reviewed at least annually and may be adjusted if there
has been a significant change in economic circumstances since the most recent
valuation.
When Elkhorn acquired the real estate investment, a portion of the real estate's
purchase price was allocated to the estimated fair value of in-place leases in
accordance with Statement of Financial Accounting Standards 141. At September
30, 2004, the real estate investment balance includes the estimated fair value
of net unfavorable in-place leases totaling $456,651. The properties are leased
under fixed-term operating leases on a long-term basis. At September 30, 2004,
the minimum lease payments expected to be received by Elkhorn on leases with
lease periods greater than one year are as follows:
Twelve Months Ending September 30, Amount
------------------------------------------------------
2005 $ 13,036,458
2006 9,916,309
2007 8,288,725
2008 6,901,402
2009 4,527,141
Thereafter 15,563,850
During the nine months ended September 30, 2003, the Fund exchanged Partnership
Preference Units in the amount of $3,977,592 for an equity investment in two
private real estate companies affiliated with the issuer of such formerly held
Partnership Preference Units and a note receivable in the amounts of $1,907,012
and $2,070,580, respectively. The secured note receivable (valued at $2,351,705
as of September 30, 2004 and $2,177,503 as of September 30, 2003) earns interest
of 8% per annum and matures in February 2013 or on demand.
11
3. Indirect Investment in the Portfolio
The following table summarizes the Fund's investment in Tax-Managed Growth
Portfolio (the Portfolio) through Belvedere Capital Fund Company LLC (Belvedere
Company) for the 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) $ 1,555,202,369 $ 1,458,096,610
Income allocated to Belvedere Company from the Portfolio $ 127,279,355 $ 102,346,416
Income allocated to the Fund from Belvedere Company $ 17,590,954 $ 15,508,668
Expenses allocated to Belvedere Company from the Portfolio $ 38,377,075 $ 31,352,609
Expenses allocated to the Fund from Belvedere Company $ 7,137,516 $ 6,368,209
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 $ 11,842,265 $ (1,155,495)
Net change in unrealized appreciation (depreciation) of investments and
foreign currency allocated to Belvedere Company from the Portfolio $ (18,939,820) $ 898,392,188
Net change in unrealized appreciation (depreciation) of investments and
foreign currency allocated to the Fund from Belvedere Company $ (3,439,420) $ 134,301,886
- -------------------------------------------------------------------------------------------------------------------
(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 13.2% and 14.9% 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
- --------------------------------------------------------------------------------
12
4. Interest Rate Swap Agreements
Belair 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, Belair 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.
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
- ------------------------------------------------------------------------------------------------------------------
10/03 $20,000 4.045% LIBOR + 0.30% - 6/10 $ 120,779 $ 230,597
02/04 95,952 5.00% LIBOR + 0.30% 08/04 6/10 51,482 -
10/03 95,952 5.05% LIBOR + 0.30% 02/04 6/10 -* 218,976
10/03 61,500 4.865% LIBOR + 0.30% 07/04 6/10 161,501 212,857
10/03 75,000 4.795% LIBOR + 0.30% 09/04 6/10 264,382 304,067
10/03 42,000 4.69% LIBOR + 0.30% 02/05 6/10 233,127 201,570
10/03 49,000 4.665% LIBOR + 0.30% 03/05 6/10 283,194 240,892
10/03 35,330 4.18% LIBOR + 0.30% 07/09 6/10 105,600 235,385
06/04 104,176 4.875% LIBOR + 0.00% - 6/12 -** -
- ----------------------------------------------------------------------------------------------------------------------
$1,220,065 $1,644,344
- ----------------------------------------------------------------------------------------------------------------------
* Agreement was terminated on the Initial Optional Termination Date.
** On May 3, 2004, Belair Capital entered into a forward interest rate swap
agreement with Merrill Lynch Capital Services, Inc. in anticipation of its
future investment in a controlled subsidiary, Elkhorn, for the purpose of
hedging Belair Real Estate's proportionate share of the interest rate of
substantially all of the expected fixed-rate mortgage financing of the real
property over the expected 8-year term. Such agreement was terminated in
July 2004 and the Fund realized a gain of $536,498 upon termination.
5. Debt
In August 2004, Belair Capital made borrowings under its credit arrangement with
Merrill Lynch Mortgage Capital, Inc. (Merrill Lynch) in the amount of
$100,000,000. At that time, Belair Capital also increased the amount available
with Merrill Lynch under a temporary arrangement (the Temporary Arrangement) by
$13,000,000 and borrowed that amount. Belair Capital used the proceeds from
these borrowings to finance the Fund's investment in Elkhorn (Note 2). The
borrowing under the Temporary Arrangement accrues interest at a rate of
one-month LIBOR plus 0.90% and is for a term of sixty days, subject to a
thirty-day extension. Any unused amount of the increase pertaining to the
Temporary Arrangement is subject to a commitment fee of 0.10% per annum. The
assets of Belair Capital, excluding the assets of Bel Residential Properties
Trust (Bel Residential) and Elkhorn, secure all borrowings under the credit
arrangement with Merrill Lynch. On September 8, 2004, the Temporary Arrangement
was amended to increase the amount available from $13,000,000 to $23,000,000. As
of September 30, 2004, outstanding borrowings under the Temporary Arrangement
totaled $16,200,000.
On October 12, 2004, Elkhorn obtained first mortgage financing for its
investment in real properties in the amount of $135,000,000. The mortgage note,
which bears interest at a fixed rate of 5.67% per annum, is secured by all of
the Elkhorn properties and is without recourse to Belair Real Estate, Belair
Capital and its Shareholders. Pursuant to an agreement between Belair Real
Estate and the Elkhorn Minority Shareholder, Belair Real Estate may (but is not
obligated to) make loans to Elkhorn to fund certain items such as debt service,
insurance or property taxes. Interest payments are due monthly starting
December 1, 2004, with the unpaid principal due on November 12, 2012. The
proceeds from this financing were subsequently distributed to Belair Real Estate
and the Elkhorn Minority Shareholder in accordance with their equity interests.
The proceeds from this transaction along with other funds available were used to
repay Belair Capital's borrowings under the Temporary Arrangement as well as a
portion of other borrowings under the Credit Facility. Pursuant to its terms,
13
the Temporary Arrangement expired on October 29, 2004. As of November 9, 2004,
outstanding borrowings under the credit arrangement with DrKW totaled
$468,000,000 while there were no borrowings under the credit arrangement with
Merrill Lynch.
6. Segment Information
Belair 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, Belair Capital invests in real estate assets
through its subsidiary, Belair Real Estate. Belair Real Estate invests directly
and indirectly in Partnership Preference Units, debt and equity investments in
private real estate companies and in real property through controlled
subsidiaries, Bel Residential and Elkhorn (See Note 1).
Belair 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 Belair 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, 2004 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------------
Revenue $ 3,522,544 $ 14,395,076 $ 17,917,620
Interest expense on mortgage - (2,386,112) (2,386,112)
Interest expense on Credit Facility - (2,262,416) (2,262,416)
Operating expenses (659,794) (4,434,527) (5,094,321)
Minority interest in net income of controlled
subsidiaries - (623,466) (623,466)
- ----------------------------------------------------------------------------------------------------------------
Net investment income $ 2,862,750 $ 4,688,555 $ 7,551,305
Net realized gain (loss) 5,766 (1,276,213) (1,270,447)
Net change in unrealized appreciation (depreciation) (37,880,862) (5,405,864) (43,286,726)
- ----------------------------------------------------------------------------------------------------------------
Net decrease in net assets from operations of
reportable segments $(35,012,346) $ (1,993,522) $(37,005,868)
- ----------------------------------------------------------------------------------------------------------------
Tax-Managed
For the Three Months Ended Growth Real
September 30, 2003 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------------
Revenue $ 3,042,455 $ 13,235,387 $ 16,277,842
Interest expense on mortgage - (2,386,112) (2,386,112)
Interest expense on Credit Facility - (2,024,360) (2,024,360)
Operating expenses (601,236) (3,418,353) (4,019,589)
Minority interest in net income of controlled
subsidiary - (3,159) (3,159)
- ----------------------------------------------------------------------------------------------------------------
Net investment income $ 2,441,219 $ 5,403,403 $ 7,844,622
Net realized gain (loss) 1,035,691 (2,024,137) (988,446)
Net change in unrealized appreciation (depreciation) 29,558,954 4,907,245 34,466,199
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations of
reportable segments $ 33,035,864 $ 8,286,511 $ 41,322,375
- ----------------------------------------------------------------------------------------------------------------
14
Tax-Managed
For the Nine Months Ended Growth Real
September 30, 2004 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------------
Revenue $ 10,453,438 $ 41,107,491 $ 51,560,929
Interest expense on mortgage - (7,158,334) (7,158,334)
Interest expense on Credit Facility - (5,360,113) (5,360,113)
Operating expenses (2,083,276) (11,080,798) (13,164,074)
Minority interest in net income of controlled
subsidiaries - (849,446) (849,446)
- ----------------------------------------------------------------------------------------------------------------
Net investment income $ 8,370,162 $ 16,658,800 $ 25,028,962
Net realized gain (loss) 11,842,265 (5,122,221) 6,720,044
Net change in unrealized appreciation (depreciation) (3,439,420) (15,577,517) (19,016,937)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets from operations
of reportable segments $ 16,773,007 $ (4,040,938) $ 12,732,069
- ----------------------------------------------------------------------------------------------------------------
Tax-Managed
For the Nine Months Ended Growth Real
September 30, 2003 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------------
Revenue $ 9,140,459 $ 43,691,528 $ 52,831,987
Interest expense on mortgages - (7,158,334) (7,158,334)
Interest expense on Credit Facility - (6,846,572) (6,846,572)
Operating expenses (1,648,461) (10,243,614) (11,892,075)
Minority interest in net income of controlled
subsidiary - (324,910) (324,910)
- ----------------------------------------------------------------------------------------------------------------
Net investment income $ 7,491,998 $ 19,118,098 $ 26,610,096
Net realized loss (1,155,495) (14,008,421) (15,163,916)
Net change in unrealized appreciation (depreciation) 134,301,886 42,739,091 177,040,977
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets from operations of
reportable segments $140,638,389 $ 47,848,768 $188,487,157
- ----------------------------------------------------------------------------------------------------------------
Tax-Managed Growth Real
At September 30, 2004 Portfolio* Estate Total
- ----------------------------------------------------------------------------------------------------------------
Segment assets $1,555,202,369 $669,386,848 $2,224,589,217
Segment liabilities - 723,622,385 723,622,385
- ----------------------------------------------------------------------------------------------------------------
Net assets (liabilities) of reportable segments $1,555,202,369 $(54,235,537) $1,500,966,832
- ----------------------------------------------------------------------------------------------------------------
At December 31, 2003
- ----------------------------------------------------------------------------------------------------------------
Segment assets $1,588,195,284 $487,471,604 $2,075,666,888
Segment liabilities 1,180,000 544,629,124 545,809,124
- ----------------------------------------------------------------------------------------------------------------
Net assets (liabilities) of reportable segments $1,587,015,284 $(57,157,520) $1,529,857,764
- ----------------------------------------------------------------------------------------------------------------
* Belair Capital invests indirectly in Tax-Managed Growth Portfolio through
Belvedere Company.
The following tables reconcile the reported segment information to the condensed
consolidated financial statements for the periods indicated:
15
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 $ 17,917,620 $ 16,277,842 $ 51,560,929 $ 52,831,987
Unallocated amounts:
Interest earned on cash not invested in
the Portfolio or in subsidiaries 66,233 32,163 203,586 61,976
----------------------------------------------------------------------------------
Total revenue $ 17,983,853 $ 16,310,005 $ 51,764,515 $ 52,893,963
----------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations:
Net (decrease) increase in net assets from
operations of reportable segments $(37,005,868) $ 41,322,375 $ 12,732,069 $188,487,157
Unallocated investment income:
Interest earned on cash not invested in
the Portfolio or in subsidiaries 66,233 32,163 203,586 61,976
Unallocated expenses(1):
Servicing fees (154,076) (136,472) (476,514) (384,192)
Interest expense on Credit Facility (260,756) (136,133) (530,121) (285,274)
Audit, tax and legal fees (45,596) (45,596) (144,621) (135,885)
Other operating expenses (12,887) (12,888) (56,722) (75,406)
----------------------------------------------------------------------------------
Total net (decrease) increase in net assets
from operations $(37,412,950) $41,023,449 $11,727,677 $187,668,376
----------------------------------------------------------------------------------
September 30, 2004 December 31, 2003
------------------ -----------------
Net assets:
Net assets of reportable segments $1,500,966,832 $1,529,857,764
Unallocated amounts:
Cash(2) 3,316,546 5,408,305
Short-term investments(2) 2,270,000 11,765,330
Loan payable - Credit Facility(3) (32,051,083) (24,579,481)
Other liabilities (185,325) (170,069)
------------------ -----------------
Total net assets $1,474,316,970 $1,522,281,849
------------------ -----------------
(1) Unallocated expenses represent costs incurred that pertain to the overall
operation of Belair 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.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information in this report contains forward-looking statements within the
meaning of the federal securities laws. Forward-looking statements typically are
identified by use of terms such as "may," "will," "should," "might," "expect,"
"anticipate," "estimate," and similar words, although some forward-looking
statements are expressed differently. The actual results of Belair 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, 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 Belair Real Estate Corporation (Belair Real Estate).
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 Belair Real Estate's controlled subsidiaries,
partnership income allocated to the income-producing preferred equity interests
in real estate operating partnerships (Partnership Preference Units) owned by
Belair Real Estate 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, servicing fees, interest expense
from mortgages on properties owned by Belair Real Estate'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 Belair Real Estate'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 Belair Real Estate, 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
is on the Fund's common stock portfolio, which consists of its indirect interest
- -----------------
(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.
17
in the Portfolio. In measuring the performance of the Fund's real estate
investments held through Belair Real Estate, 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 Belair Real Estate'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 -2.42% for the quarter ended September 30, 2004.
This return reflects a decrease in the Fund's net asset value per share from
$122.20 to $119.24 during the period. The total return of the S&P 5 00 w as
- -1.87% over the same period. The performance of the Fund trailed that of the
Portfolio by approximately 0.38% during the period. Last year, the Fund had a
total return performance of 3.05% for the quarter ended September 30, 2003. This
return reflected an increase in the Fund's net asset value per share from
$102.92 to $106.06 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 0.70% during th at period.
PERFORMANCE OF THE PORTFOLIO. For the quarter ended September 30, 2004, the
Portfolio's total return was - experienced a loss of 2.04%, slightly lower worse
than the S&P 500 Index, which posted a -declined 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 correctly redeployed
assets in less interest-sensitive industries. The Portfolio's de-emphasis of the
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 13.54
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 Belair Real Estate. As of September 30, 2004, real estate
investments included two real estate joint ventures (Real Estate Joint Ventures)
and a portfolio of Partnership Preference Units issued by partnerships
affiliated with publicly traded and private real estate investment trusts
(REITs). The Real Estate Joint Ventures operate multifamily or industrial
distribution properties. As of September 30, 2004, the estimated fair value of
the Fund's real estate investments represented 29.4% 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 39.5% of
the Fund's net assets as of September 30, 2004.
On August 4, 2004, a Real Estate Joint Venture, Elkhorn Property Trust
(Elkhorn), through its interest in ProLogis Six Rivers Limited Partnership (Six
Rivers), participated in the merger of Six Rivers with Keystone Property Trust
(Keystone), a publicly-held REIT . As part of the Keystone transaction, Elkhorn
increased its ownership interest in the properties acquired during the quarter
ended June 30, 2004 to 100% and acquired a partnership interest in Six Rivers.
Through its interest in Six Rivers, Elkhorn acquired 100% of the economic
interest in certain industrial distribution properties for approximately $201.6
million. Belair Real Estate owns a majority interest in Elkhorn, ProLogis owns a
minority interest in Elkhorn and ProLogis or an affiliate thereof manages the
properties. Elkhorn obtained first mortgage financing of $135.0 million on
October 12, 2004, which is secured by the properties it owns and is without
recourse to Belair Real Estate, the Fund or its Shareholders. Pursuant to an
agreement between Belair Real Estate and ProLogis, Belair Real Estate may (but
is not obligated to) make loans to Elkhorn to fund certain items such as debt
service, insurance or property taxes.
18
During the quarter ended September 30, 2004, rental income from real estate
operations was approximately $8.9 million compared to approximately $5.4 million
for the quarter ended September 30, 2003, an increase of $3.5 million or 65%.
This was due to income from the industrial distribution properties acquired on
June 30 and August 4, 2004, and an increase in income from multifamily
properties due to modest increases in apartment rental rates net of concessions
during the quarter. For the quarter ended September 30, 2003, rental income
decreased principally due to increased rent concessions or reduced apartment
rental rates and lower occupancy levels at multifamily properties during the
quarter.
During the quarter ended September 30, 2004, property operating expenses were
approximately $3.3 million compared to approximately $2.5 million for the
quarter ended September 30, 2003, an increase of 32% (property operating
expenses are before certain operating expenses of Belair Real Estate of
approximately $1.1 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 principally due to expenses of the industrial
distribution properties acquired on June 30 and August 4, 2004, and due to a 5%
increase in multifamily property and maintenance expenses during the quarter.
During the quarter ended September 30, 2003, while overall property operating
expenses decreased slightly, property and maintenance expenses increased 6% and
property taxes and insurance expense decreased 26%.
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. In 2004, many industrial markets in the United
States began to experience increased demand for space after several years of
occupancy and rental rate declines. For many industrial distribution properties,
reduced rent levels are likely to continue over the near term as above-market
leases mature and space is released at current market rates. Boston Management
expects that improvements in multifamily and industrial distribution property
operating performance will occur over the longer term.
At September 30, 2004, the estimated fair value of the real properties
indirectly held through Belair Real Estate (including the interest in property
management contracts described in Note 2 to the Fund's unaudited condensed
consolidated financial statements in item 1 above) was approximately $381.1
million compared to approximately $159.4 million at September 30, 2003, a net
increase of $221.7 million or 139%. The net increase in estimated real property
values at September 30, 2004 as compared to September 30, 2003 resulted
principally from the properties acquired by Elkhorn and the impact of lower
capitalization rates on the estimated fair value of the multifamily properties,
which more than offset the negative impact of lower near term earnings
expectations on property values. 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 a real estate investment.
The modest increase in estimated property values at September 30, 2003 as
compared to September 30, 2002 resulted from declines in capitalization rates in
a lower-return environment. Declines in capitalization rates more than offset
the impact on property values of lower income level expectations during the
quarter.
During the quarter ended September 30, 2004, the Fund saw net unrealized
depreciation of the estimated fair value of its other real estate investments
(which includes the Real Estate Joint Ventures) of approximately $1.9 million
compared to unrealized appreciation of approximately $3.8 million during the
quarter ended September 30, 2003. Net unrealized depreciation during the quarter
ended September 30, 2004 consisted of approximately $1.0 million of unrealized
depreciation resulting from declines in estimated property values and
approximately $0.9 million of unrealized depreciation due to certain legal and
transaction costs associated with Elkhorn's acquisitions. Unrealized
appreciation during the quarter ended September 30, 2003 was due to modest
increases in estimated property values during the quarter.
During the quarter ended September 30, 2004, Belair Real Estate sold (or
experienced scheduled redemptions of) certain of its Partnership Preference
Units totaling approximately $56.4 million (including sales to another
investment fund advised by Boston Management), recognizing a gain of $1.1
million on the transactions. During the quarter ended September 30, 2004, Belair
Real Estate also acquired interests in additional Partnership Preference Units
(including acquisitions from another investment fund advised by Boston
Management) totaling approximately $18.8 million. At September 30, 2004, the
estimated fair value of Belair Real Estate's Partnership Preference Units
totaled approximately $271.2 million compared to approximately $344.7 million at
September 30, 2003, a net decrease of $73.5 million or 21%. While the net
decrease in value was principally due to fewer Partnership Preference Units held
at September 30, 2004, the net decrease also reflects lower per unit values of
the Partnership Preference Units held at September 30, 2004 due principally to
their lower average coupon rates. In the current low interest rate environment,
many issuers have been redeeming Partnership Preference Units as call
protections expire or restructuring the terms of outstanding Partnership
Preference Units in advance of their call dates. As a result, many of the
higher-yielding Partnership Preference Units held by Belair Real Estate during
the quarter ended September 30, 2003 were no longer held at September 30, 2004.
19
Boston Management expects this trend to continue through 2004. At September 30,
2003, the estimated fair value of Partnership Preference Units had decreased
principally due to fewer units held as compared to September 30, 2002. The per
unit value of the remaining Partnership Preference Units also declined slightly
during the quarter.
During the quarter ended September 30, 2004, the Fund saw unrealized
appreciation of the estimated fair value of its Partnership Preference Units of
approximately $1.8 million compared to unrealized depreciation of approximately
$1.3 million during the quarter ended September 30, 2003. The net unrealized
appreciation of approximately $1.8 million during the third quarter of 2004
consisted of approximately $2.4 million of unrealized appreciation resulting
from modest increases in per unit values of the Partnership Preference Units
held by Belair Real Estate at September 30, 2004 offset by approximately $0.6
million of unrealized depreciation resulting from the recharacterization of
previously recorded unrealized appreciation to realized gains 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 $5.4 million compared to approximately $7.8
million for the quarter ended September 30, 2003, a decrease of $2.4 million or
31%. 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 decreased due to fewer Partnership Preference Units held as compared to
the same quarter in 2002.
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 $7.7 million, compared to net realized and
unrealized losses of approximately $37,000 for the quarter ended September 30,
2003. Net realized and unrealized losses on swap agreements for the quarter
ended September 30, 2004 consisted of $5.3 million of unrealized depreciation
due to changes in swap agreement valuations and $2.9 million of periodic
payments made pursuant to outstanding swap agreements (and classified as net
realized losses on interest rate swap agreements), offset in part by $0.5
million of realized gains from termination of a swap agreement. For the quarter
ended September 30, 2003, unrealized appreciation of $2.4 million on swap
agreement valuation changes was offset 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 for the
quarter ended September 30, 2003 from changes in swap valuations was due to a
number of swap agreements approaching their initial optional termination dates
and 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 0.78% for the nine months
ended September 30, 2004. This return reflects a decrease in the Fund's net
asset value per share from $119.60 to $119.24 and a distribution of $1.28 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 trailed that of the Portfolio by
approximately 0.55% during the period. Last year, the Fund had a total return
performance of 15.40% for the nine months ended September 30, 2003. This return
reflected an increase in the Fund's net asset value per share from $92.38 to
$106.06 and a distribution of $0.49 per share. The S&P 500 had a total return of
14.71% over the same period. The performance of the Fund exceeded that of the
Portfolio by 4.66% 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.
20
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, Belair Real Estate purchased certain real estate investments. On June
30, 2004, Elkhorn acquired a majority interest in certain industrial
distribution properties from ProLogis for approximately $17.7 million. ProLogis
retained a minority interest in the properties. In May 2004, Belair Real Estate
entered into agreements with ProLogis to form Six Rivers (in association with
subsidiaries of other investment funds advised by Boston Management) and to
merge Six Rivers with Keystone. The transactions contemplated by these
agreements were consummated on August 4, 2004. As a result of the transactions,
Elkhorn acquired a partnership interest in Six Rivers. In addition, ProLogis
acquired a minority interest in Elkhorn. Through its interest in Six Rivers,
Elkhorn owns 100% of the economic interest in certain industrial distribution
properties acquired through the merger of Six Rivers and Keystone for
approximately $201.6 million. On October 12, 2004, Elkhorn obtained first
mortgage financing of $135.0 million secured by its properties. At the time of
acquisition, the Fund provided interim financing for Elkhorn.
Rental income from real estate operations was approximately $20.0 million for
the nine months ended September 30, 2004 compared to approximately $16.5 million
for the nine months ended September 30, 2003, an increase of $3.5 million or
21%. This increase was due to income from the industrial distribution properties
acquired on June 30 and August 4, 2004, as well as modest increases in apartment
rental rates net of concessions during the period. For the nine months ended
September 30, 2003, rental income decreased principally due the sale of a Real
Estate Joint Venture interest in May 2002, which reduced the scope of the Fund's
real estate activities. Weak multifamily market fundamentals in most regions
combined with lower occupancy levels and increased rent concessions also
impacted results during the period.
During the nine months ended September 30, 2004, property operating expenses
were approximately $8.4 million compared to approximately $7.6 million for the
nine months ended September 30, 2003, a net increase of 11% (property operating
expenses are before certain operating expenses of Belair Real Estate of
approximately $2.7 million for the nine months ended September 30, 2004 and
September 30, 2003). The increase in property operating expenses during the nine
months ended September 30, 2004 was principally due to the expenses of the
industrial distribution properties acquired on June 30 and August 4, 2004.
Property operating expenses decreased during the nine months ended September 30,
2003 principally due to the sale of a Real Estate Joint Venture interest in
2002, which reduced the scope of the Fund's real estate activities. This
decrease was offset by modest increases in operating expenses of the remaining
Real Estate Joint Venture. 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. Additionally, while conditions in many industrial markets
began to improve in 2004, reduced rental rates are likely to continue over the
near term.
At September 30, 2004, the estimated fair value of the real properties
indirectly held through Belair Real Estate was approximately $381.1 million
compared to approximately $159.4 million at September 30, 2003, a net increase
of $221.7 million or 139%. The net increase in estimated real property values at
September 30, 2004 as compared to September 30, 2003 resulted principally from
the properties acquired by Elkhorn and the impact of lower capitalization rates
on the estimated fair value of the multifamily properties, which more than
offset the negative impact of lower near term earnings expectations on property
values. Declines in capitalization rates more than offset the impact on property
values of lower income 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 $4.4 million
compared to approximately $4.0 million of unrealized appreciation during the
nine months ended September 30, 2003. Net unrealized depreciation of $4.4
million during the nine months ended September 30, 2004 consisted of $3.5
million of unrealized depreciation due to modest declines in estimated property
values and approximately $0.9 million of unrealized depreciation due to certain
legal and transaction costs associated with Elkhorn's acquisitions. Unrealized
appreciation during the nine months ended September 30, 2003 was due to modest
increases in estimated property values during the period.
During the nine months ended September 30, 2004, Belair Real Estate sold (or
experienced scheduled redemptions of) certain of its Partnership Preference
Units totaling approximately $107.1 million (including sales to another
investment fund advised by Boston Management), recognizing gains of
approximately $3.5 million on the transactions. During the nine months ended
September 30, 2004, Belair Real Estate also acquired interests in additional
Partnership Preference Units from other investment funds advised by Boston
21
Management totaling approximately $67.5 million. At September 30, 2004, the
estimated fair value of Belair Real Estate's Partnership Preference Units
totaled approximately $271.2 million compared to approximately $344.7 million at
September 30, 2003, a net decrease of $73.5 million or 21%. 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
Unit generally can be expected to decline. At September 30, 2003, the decrease
in the estimated fair value of Partnership Preference Units was principally due
to fewer Partnership Preference Units held at September 30, 2003, as compared to
September 30, 2002, offset in part by increases in the per unit value of the
remaining Partnership Preference Units held by Belair Real Estate. This
appreciation in per unit value resulted from declines in interest rates and
tighter spreads on the real estate securities during the nine months ended
September 30, 2003.
The Fund saw net unrealized depreciation in the estimated fair value in its
Partnership Preference Units of approximately $10.8 million during the nine
months ended September 30, 2004 compared to unrealized appreciation of
approximately $25.9 million for the nine months ended September 30, 2003. The
net unrealized depreciation of approximately $10.8 million in the first nine
months of 2004 consisted of approximately $6.5 million of unrealized
depreciation resulting from decreases in per unit values of the Partnership
Preference Units held by Belair Real Estate during the period and approximately
$4.3 million of unrealized depreciation resulting from the recharacterization of
previously recorded unrealized appreciation to realized gains due to sales of
Partnership 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 $20.9 million compared to approximately
$27.1 million for the nine months ended September 30, 2003, a decrease of $6.2
million or 23%. The decrease was principally due to fewer Partnership Preference
Units held on average and to lower average distribution rates for 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 decreased due to fewer Partnership Preference Units held during
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 $9.0 million, compared to net
realized and unrealized losses of approximately $1.6 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 $0.4 million of
unrealized depreciation due to changes in swap agreement valuations and $9.2
million of periodic payments made pursuant to outstanding swap agreements (and
classified as net realized losses on interest rate swap agreements), offset in
part by $0.5 million of realized gains from termination of a swap agreement. For
the nine months ended September 30, 2003, unrealized appreciation of $12.9
million on swap agreement valuation changes was offset by $14.4 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 primarily due to the exercise of early
termination options on a number of swap agreements and many of the remaining
swap agreements approaching their initial optional termination dates. Swap rates
did not change significantly during the nine months ended September 30, 2003.
(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 $582.7 million and unused loan commitments of $6.8 million under
the Credit Facility.
22
In August 2004, the Fund made borrowings under its credit arrangement with
Merrill Lynch Mortgage Capital, Inc. (Merrill Lynch) in the amount of $100.0
million. At that time, the Fund also temporarily increased the amount available
under its credit arrangement with Merrill Lynch by $13.0 million and borrowed
that amount. The Fund used the total proceeds from these borrowings to finance
the acquisitions by Elkhorn of interests in certain industrial distribution
properties. On September 8, 2004, the Fund temporarily increased the amount
available under the Merrill Lynch credit arrangement by an additional $10.0
million and borrowed $3.2 million of that amount on September 24, 2004. The
additional temporary borrowings were at a rate of LIBOR plus 0.90% and were to
be repaid no later than October 29, 2004. On October 12, 2004, Elkhorn obtained
first mortgage financing for its properties, the proceeds from which were used
to reduce the Merrill Lynch borrowings. On November 9, 2004, there were no
outstanding borrowings under the Merrill Lynch credit arrangement. There was a
$1.5 million letter of credit issued.
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 $1.2 million. As of
September 30, 2003, the unrealized depreciation related to the interest rate
swap agreements was approximately $8.5 million.
(c) CRITICAL ACCOUNTING ESTIMATES.
The Fund's critical accounting estimates are described in Item 7(e) of its
Annual Report on Form 10-K for the year ended December 31, 2003. The Fund's
critical accounting estimates as they relate to Real Estate Joint Ventures have
been updated to reflect the valuation of Belair Real Estate's interest in
Elkhorn. The following discussion replaces the discussion of such estimates
included in the Fund's Annual Report. The discussion of the Fund's critical
accounting estimates included in the Annual Report is otherwise unchanged.
REAL ESTATE JOINT VENTURES. Boston Management determines the estimated fair
value of the Fund's interest in each Real Estate Joint Venture based primarily
on annual appraisals of the properties owned by such Real Estate Joint Venture
(provided such appraisals are available) and an allocation of the equity value
of the Real Estate Joint Venture between the Fund and the Operating Partner.
Appraisals of Real Estate Joint Venture properties may be conducted more
frequently than once a year if Boston Management determines that significant
changes in economic circumstances that may materially impact estimated property
values have occurred since the most recent appraisal.
In deriving the estimated value of a property, an appraiser considers numerous
factors, including the expected future cash flows from the property, recent sale
prices for similar properties and, if applicable, the replacement cost of the
property in order to derive an indication of the amount that a prudent, informed
purchaser-investor would pay for the property. More specifically, the appraiser
considers the revenues and expenses of the property and the estimated future
growth or decline thereof, which may be based on tenant quality, property
condition, neighborhood change, market trends, interest rates, inflation rates
or other factors deemed relevant by the appraiser. The appraiser estimates
operating cash flows from the property and the sale proceeds of a hypothetical
transaction at the end of a hypothetical holding period. The cash flows are
discounted to their present values using a market-derived discount rate and are
added together to obtain a value indication. This value indication is compared
to the value indication that results from applying a market-derived
capitalization rate to a single years' stabilized net operating income for the
property. The assumed capitalization rate may be extracted from local market
transactions or, when transaction evidence is lacking, obtained from trade
sources. The appraiser considers the value indications derived by these two
methods, as well as the value indicated by recent market transactions involving
similar properties, in order to produce a final value estimate for the property.
Appraisals of properties owned by each Real Estate Joint Venture are conducted
by independent appraisers who are licensed in their respective states and not
affiliated with Eaton Vance or the Operating Partners. Each appraisal is
conducted in accordance with the Uniform Standards Board and the Code of
Professional Appraisal Practice of the Appraisal Institute (as well as other
relevant standards). Boston Management reviews the appraisal of each property
and generally relies on the assumptions and judgments made by the appraiser.
Property appraisals are inherently uncertain because they apply assumed discount
rates, capitalization rates, growth rates and inflation rates to the appraiser's
estimated stabilized cash flows, and due to the unique characteristics of a
property, which may affect its value but may not be taken into account. If the
assumptions and estimates used by the appraisers to determine the value of the
properties owned by the Real Estate Joint Ventures were to change, it may
materially impact the estimated fair value of the Real Estate Joint Ventures.
When a property owned by a Real Estate Joint Venture has not been appraised
(such as when the Real Estate Joint Venture recently acquired the property),
Boston Management determines the estimated fair value of the property based on
23
the transaction value of the property, which equals the total acquisition cost
of the property exclusive of certain legal and transaction costs. Once an
appraisal of that property has been conducted, Boston Management will base the
estimated fair value of the property on the estimated value as determined by the
appraiser. Appraisals of newly acquired properties are conducted throughout the
year following the acquisition. If the appraised value of the property differs
significantly from the transaction value of the property, it may materially
impact the estimated fair value of the Real Estate Joint Venture.
Boston Management determines the estimated fair value of the Fund's equity
interest in each Real Estate Joint Venture based on an estimate of the
allocation of equity interests between the Fund and the Operating Partner. This
allocation is calculated by a third party specialist, provided appraisals have
been conducted of all of the properties owned by the Real Estate Joint Venture.
The specialist uses a financial model that considers the (i) terms of the joint
venture agreement relating to allocation of distributable cash flow, (ii) the
duration of the joint venture; and (iii) the projected property values and cash
flows from the properties based on estimates made by the appraisers. The
estimated allocation of equity interests between the Fund and the Operating
Partner of each Real Estate Joint Venture is prepared quarterly and reviewed by
Boston Management. When the properties owned by a Real Estate Joint Venture have
not been appraised (such as when the Real Estate Joint Venture recently acquired
the properties), Boston Management allocates equity interests in the Real Estate
Joint Venture based on the contractual ownership interests of Belair Real Estate
and the Operating Partner. Once appraisals have been conducted of all of the
properties owned by the Real Estate Joint Venture, the estimated fair value of
the Fund's equity interest in the Real Estate Joint Venture will be determined
by the third party specialist using the financial model described above. Interim
valuations of Real Estate Joint Venture assets may be adjusted to reflect
significant changes in economic circumstances, and the results of operations and
distributions. If the estimate of the allocation of equity interests in the Real
Estate Joint Ventures were to change (because, for example, the appraisers'
estimate of property values or projected cash flows of the Real Estate Joint
Ventures changed), it may materially impact the estimated fair value of the Real
Estate Joint Ventures. As of September 30, 2004, all of the properties owned by
the Real Estate Joint Ventures have been appraised, except for those owned by
Elkhorn. The properties owned by Elkhorn were acquired on June 30, 2004 and
August 4, 2004.
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 Belair Real Estate's equity in its real estate
investments and to mitigate in part the impact of interest rate changes on the
Fund's net asset value. Under the terms of the interest rate swap agreements,
the Fund makes cash payments at fixed rates in exchange for floating rate
payments that fluctuate with one-month LIBOR. The Fund's interest rate swap
agreements will generally increase in value when interest rates rise and
decrease in value when interest rates fall. In the future, the Fund may use
other interest rate hedging arrangements (such as caps, floors and collars) to
fix or limit borrowing costs. The use of interest rate hedging arrangements is a
specialized activity that can expose the Fund to significant loss.
The following table summarizes the contractual maturities and weighted-average
interest rates associated with the Fund's significant non-trading financial
instruments. The Fund has no market risk sensitive instruments held for trading
purposes. This information should be read in conjunction with Note 4 and Note 5
to the Fund's unaudited condensed consolidated financial statements in Item 1
above.
24
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 2006-2008 2009 Thereafter Total September 30, 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
- -----------------------------
Long-term debt:
- -----------------------------
Fixed-rate mortgages $112,630,517 $112,630,517 $134,000,000
Average interest rate 8.33% 8.33%
- -----------------------------
Variable-rate Credit Facility $582,700,000 $582,700,000 $582,700,000
Average interest rate 2.17% 2.17%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive derivative
financial instruments:
- -----------------------------
Pay fixed/receive variable
interest rate swap agreements $378,782,000 $378,782,000 $ 1,220,065
Average pay rate 4.73% 4.73%
Average receive rate 2.14% 2.14%
- ------------------------------------------------------------------------------------------------------------------------------------
Rate sensitive investments:
- -----------------------------
Fixed-rate Partnership
Preference Units:
- -----------------------------
Cabot Industrial Properties,
L.P., 8.625% Series B
Cumulative Redeemable
Preferred Units, Callable
4/29/04, Current Yield: 8.37% $28,455,170 $ 28,455,170 $ 27,305,600
Colonial Realty Limited
Partnership, 7.25% Series B
Cumulative Redeemable
Perpetual Preferred Units,
Callable 2/24/09, Current
Yield: 7.42% $14,775,600 $ 14,775,600 $ 17,090,500
Kilroy Realty, L.P., 7.45%
Series A Cumulative
Redeemable Preferred
Units, Callable 9/30/09,
Current Yield: 7.91% $20,000,000 $ 20,000,000 $ 18,830,240
Liberty Property L.P., 9.25%
Series B Cumulative Redeemable
Preferred Units, Callable
7/28/04, Current Yield: 9.11% $38,002,560 $ 38,002,560 $ 38,323,800
MHC Operating Limited
Partnership, 9% Series
D Cumulative Redeemable
Perpetual Preference Units,
Callable 9/29/04, Current
Yield: 9.06% $50,000,000 $ 50,000,000 $ 49,660,000
25
Estimated Fair
Value as of
2005 2006-2008 2009 Thereafter Total September 30, 2004
- ------------------------------------------------------------------------------------------------------------------------------------
National Golf Operating
Partnership, L.P., 9.30%
Series A Cumulative
Redeemable Preferred
Units, Callable 2/6/03,
Current Yield: 9.39% $31,454,184 $ 31,454,184 $ 32,692,275
National Golf Operating
Partnership, L.P., 9.30%
Series B Cumulative
Redeemable Preferred
Units, Callable 2/6/03,
Current Yield: 9.39% $ 5,000,000 $ 5,000,000 $ 4,950,000
PSA Institutional Partners,
L.P., 6.4% Series NN
Cumulative Redeemable
Perpetual Preferred
Units, Callable 3/17/10,
Current Yield: 6.82% $ 48,250,000 $ 48,250,000 $ 45,258,500
Urban Shopping Centers,
L.P., 9.45% Series D
Cumulative Redeemable
Perpetual Preferred
Units, Callable 10/1/04,
Current Yield: 9:41% $25,000,000 $ 25,000,000 $ 25,097,400
Vornado Realty, L.P.,
7% Series D-10 Cumulative
Redeemable Preferred
Units, Callable 11/17/08,
Current Yield: 7.02%(1) $11,503,997 $ 11,503,997 $ 11,958,020
- -----------------------------
Note Receivable:
- -----------------------------
Fixed-rate note receivable 8% $ 2,070,580 $ 2,070,580 $ 2,351,705
* The amounts listed reflect the Fund's positions as of September 30, 2004.
The Fund's current positions may differ.
(1) On July 28, 2004, the coupon rate reset to 7.875%.
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. During the quarter the Fund adopted additional internal control
procedures as a result of the Elkhorn acquisitions. There were no other 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.
26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Although in the ordinary course of business, the Fund, Belair Real Estate and
Belair Real Estate'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. The right to redeem is available to all shareholders and all outstanding
Fund shares are eligible. 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:
- -----------------------------------------------------------------
Total No. of Shares Average Price Paid
Month Ended Redeemed(1) Per Share
- -----------------------------------------------------------------
July 31, 2004 48,196.701 $117.80
- -----------------------------------------------------------------
August 31, 2004 63,805.995 $115.41
- -----------------------------------------------------------------
September 30, 2004 47,540.745 $119.19
- -----------------------------------------------------------------
Total 159,543.441 $118.41
- -----------------------------------------------------------------
(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:
4.2(b) Amendment No. 2 dated August 3, 2004 to Loan and Security Agreement
among the Fund, Merrill Lynch Mortgage Capital, Inc., as Agent, the
Lenders referred to therein and Merrill Lynch Capital Services, Inc.
4.2(c) Waiver and Amendment No. 3 dated September 8, 2004 to Loan and
Security Agreement among the Fund, 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
27
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.
28
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.
BELAIR CAPITAL FUND LLC
/s/ Michelle A. Green
-----------------------------
Michelle A. Green
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
29
EXHIBIT INDEX
-------------
4.2(b) Amendment No. 2 dated August 3, 2004 to Loan and Security Agreement
among the Fund, Merrill Lynch Mortgage Capital, Inc., as Agent, the
Lenders referred to therein and Merrill Lynch Capital Services, Inc.
4.2(c) Waiver and Amendment No. 3 dated September 8, 2004 to Loan and
Security Agreement among the Fund, 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
30