Belpointe REIT (BELP) – Premium To NAV Elimination – 20% Upside

Current Price: $130

Target Price: $105

Upside: 20%

Expiration Date: TBD

This idea was shared by Gino.

 

This is an unusual short trading idea with a near-term catalyst. Liquidity is low and bid/ask spread is wide. I am not entirely sure if I understand the technical risks correctly, so any additional insight is appreciated. Aside from that, the idea is set to generate a 20%+ return in a few weeks/month.

Externally managed opportunity zone fund Belpointe REIT is undergoing a structural reorganization and will be merged into its affiliate Belpointe PREP with each BELP share exchanged into 1.05 new Belpointe PREP Class A units. Both companies are already intertwined. The catalyst here comes in the form of planned continuous issuance of $750m (vs $114m NAV) units at $100 – this will bring BELP price from the current $148/share to around $105 (accounting for the merger premium). Prior to this reorganization, BELP had been raising capital and doing similar offerings for several years, also at $100/share. Naturally, shares used to always trade around that price. Mysteriously, since June BELP shares have lost the gravitational pull and steadily increased to $180 last week and now stand at $148. No matter the reason, once the new offering hits off, the price of shares/units is expected to promptly drop close to the $100 level once again. 8k+ shortable shares ($1m in total) are available on IB at 2%+ rate.

BELP currently trades on the OTC, while the new entity will be listed on NYSE American with the ticker “OZ”. According to the company, this is a 3 step merger. The first one was tender offer that expired in June. Since then the closing had been delayed by S-4 effectiveness designation required from SEC. The consent was granted this Monday so the “first step” should close promptly. After that the company will complete the sale of certain BELP assets (Sarasota property) in order for the holding company to remain qualified for opportunity zone investments, convert BELP from Maryland Corp into LLC and proceed with the merger. All BELP shares will be exchanged into 1.05 new Class A units of the combined company. The Sarasota property is a 5.3-acre site with an 808 parking garage and 250k sqft former mall acquired in Nov’19 for $20.7m. The information on the current stage of the sale is limited and there might potentially be some delays here, however, I don’t think that this will be a major issue ultimately as Belpointe managers should be highly incentivized to proceed with the merger/NYSE uplisting/new offering as soon as possible.

It’s not really clear why did BELP shares have appreciated so much since January. The company is illiquid (~$90k daily trading volume, but only about 1 trade per day). With this size and liquidity, the company is completely under the radar to most investors, even the retail (SA has absolutely 0 coverage). Additionally, my understanding is that a large part of the shares is currently locked in the tender significantly reducing the float. This, coupled with the suspended public offering at $100/unit, which helped to keep the price close to NAV, could be at least partially explain this price appreciation. Lastly, there might be some truly uninformed buyers out there who are simply playing the upcoming NYSE uplisting etc – on the other hand, this ‘uplisting’ theme clearly adds additional risks in the meme stock trading world.

A quote from the prospectus: clarifying the upcoming continuous capital raise at $100/share:

Concurrently with the offer, conversion and merger Belpointe PREP is offering on a continuous basis up to $750,000,000 of Belpointe PREP Class A units in a primary offering at an initial price equal to $100.00 per unit. […] We set our initial Offering price at $100.00 per Class A unit. No later than the first quarter following the December 31, 2022 year end, and every quarter thereafter, we plan to calculate our net asset value (“NAV”) within approximately 60 days of the last day of each quarter (the “Determination Date”). If our NAV increases above or decreases below the price per Class A unit as stated in our prospectus, we will adjust the Offering price, effective as of the first business day following its public announcement.

The combined company will use the offering proceeds (S-11 filing):

to identify, acquire, develop or redevelop and manage a diversified portfolio of commercial real estate properties located throughout the United States” and “acquiring other real estate-related assets, including, but not limited to, commercial real estate loans and mortgages, and debt and equity securities issued by other real estate-related companies, as well as make private equity acquisitions and investments, and opportunistic acquisitions of other qualified opportunity funds and qualified opportunity zone businesses.

On a fundamental basis there does not seem to be any reasons why BELP should trade at 1.5x or at any premium now or after the merger. At the moment most of the balance sheet is in cash and intercompany loans. No hidden assets of value that I can think of and management agrees by marking NAV at $100/unit. The combined company will have indeed have some favorable aspects – it intends to operate as a REIT and qualify as an opportunity zone fund. So aside from the REIT tax benefits for the company itself, the opportunity zone stamp will also allow its shareholders to defer or decrease capital gain taxes on the unit price appreciation. This sounds good, but there are certain conditions that limit the attractiveness of the proposition (mostly reinvestment requirement and long holding time, see more on this below. The company will also have lower management fees (0.75% vs usual 1.5%-2%) and carried interest than its peers. However, despite all that, this will still be basically a cash shell + a few minor land properties in Sarasota, Florida with very heavy future capital investment requirements to develop these and other to-be-acquired properties.

The track record of the management is unknown. The whole thing is orchestrated by Belpointe Family Office, which operates several private businesses, including asset management ($1bn+ AUM). They claim to have significant experience in property development in opportunity zones, however, the site offers only some photos with no further details to be found.  So overall, at the current price BELP is definitely overvalued and when the new $750m offering at $100/unit hits off (and they say “promptly” after the merger closing), the unit price will revert back to historical levels of $100/unit.

 

Risks

There are two major caveats both related to holding the short position. The first one is of course the potential short squeeze due to the very low trading liquidity and low float. The counter to this is that $1m shortable shares are available as of now and given how “off the radar” this company is, there is a chance that the borrow won’t disappear that quickly.

A more prominent risk is the mechanics of how short positions will be treated during conversion in this BELP/PREP merger. It somewhat makes sense to think that short BELP positions will simply see a ticker change and an increased share count by 1.05x. Another scenario, which I am not able to discount 100% is that all short positions will be forced to close-out before the conversion, potentially creating a short squeeze and forcing buy-ins at much larger prices. I cannot recall the name of a company, but there was a case where management burned shorts by simply changing tickers and cusips of their stocks and forcing all shorts to buy-in. No idea whether that is a risk here as well so any input from other members is appreciated.

One more caveat (but not a direct risk to the short thesis) is that the whole intercompany structure, intercompany transactions and rationale of the merger seem blurry. It is even stranger given recent affiliate transactions ongoing between BELP and Belpointe PREP (the buyer). Apparently, BELP has lent Belpointe PREP about $79m out of its own offering proceeds at a 0.14% rate. $35m was lent in Oct’20, $24m in Feb’21, and a further $15m in May’21 (after the merger announcement). The buyer has apparently used some of these loans for certain asset purchases. Aside from that, Belpointe PREP has no member’s capital. At the moment BELP has about $74m of cash due from affiliates with the same amount of liabilities on the Belpointe PREP balance sheet. I find it strange as to why BELP would not buy the properties itself and rather lend it to some other private fund.

 

Belpointe PREP holdings

  • 1700 Main Street – Sarasota – 1.3-acre site, consisting of a former gas station, a three-story office building with parking lot with a one-story retail building. Cost – $6.9m funded from BELP loan (as well all other acquisitions), acquired in Oct’20.
  • 1701-1710 Ringling Boulevard – Sarasota, Florida. – 1.62-acre site, consisting of a six-story office building with parking lot. Cost $6.7m, acquired in Oct’20.
  • 902-1020 First Avenue North – St. Petersburg, Florida. 1.6-acres of land for $12m acquired in Oct’20. Additional parcel was bought for $2.4m in March’21.
  • 1900 Fruitville Road – Sarasota Florida. 1900 Fruitville Road – Sarasota Florida. Purchased for $4.6m in May’20.
  • 900 8th Avenue South – Nashville, Tennessee. 3.17-acre land assemblage, consisting of a few small buildings, parking lots and open lots. Purchased in May’21 for $19.6m.
  • 16 Dr. Martin Luther King Jr. Street North – St. Petersburg, Florida. A fully leased single-story retail/office building consisting of 4 units. Acquired in June’21 for $2.5m.

 

Opportunity zone

Opportunity Zone benefits:

A bit more background on the legislation and Belpointe – here.

Published on: September 15, 2021  •  Published by:
Category: M&A  •  Other
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15 COMMENTS

  1. mcg

    I suspect this was because people were looking for a low friction way to defer capital gains taxes and invest in a QOZ fund by the 9/11 deadline but I agree with the rationale for this trade

    1
  2. snowball

    Belpointe is a family office founded by Brandon E. Lacoff (LinkedIn profile: https://www.linkedin.com/in/lacoff/ ), likely in his mid-40s.

    He went to Syracuse for collage, and then Hofstra for both JD and MBA degrees.

    Then started first jobs at Arthur Andersen and Ernst & Young from 2001-2004 in junior and non-auditor roles (Analyst and Associate in Transaction Advisory area).

    After that, beginning 2003/2004, he started leading this “family office”, as CEO of Belpointe and Senior MD of Greenwich Legal (their inhouse law firm).

    This career path seems to suggest generational wealth vs self-made. Maybe parents were real estate developers in the CT-NY-NJ tristate area?

    The websites of the Belpointe companies seem to suggest that it is more a multi-family office (vs. single family office) actively marketing services to others.

    Some more info about Lacoff and Belpointe: http://beaconhill2ofgreenwich.com/team.html

    “Founded by the Lacoff family more than a decade ago, the name Belpointe includes the initials of the founding partner, Brandon E. Lacoff. Mr. Lacoff, who is the chief executive officer of the Belpointe companies, is also a lifelong resident of Greenwich, CT.

    The Belpointe companies operate together as a multi-family office by making private investments and offering a wide range of wealth management, legal and real estate services. Belray, a wholly owned subsidiary of Belpointe, built and sold all 8 luxury townhouse units in its iconic development called Beacon Hill of Greenwich.

    Belpointe’s real estate group is a fully integrated real estate company specializing in multifamily investment strategies in the CT-NY-NJ tristate area. Led by a team of former AvalonBay divisional and operational leaders who each have 20+ years track record developing and building over a billion dollars of multifamily projects.”

  3. Gino

    Re property sale condition before the merger can be completed – seems that this is just a formality (internal transaction within the group) and I have explained it incorrectly in the post. After the recent SEC effectiveness, the merger should close promptly – by the end of Q3 was previously communicated timeline.

    “Sale of the Sarasota Property

    Promptly after consummation of the Offer, as a condition to Belpointe PREP’s obligation to effect the Merger, we will sell BPOZ 1991 Main, LLC, a Delaware limited liability company (“BPOZ 1991 Main”), and indirect majority-owned subsidiary of our Operating Partnership, to Belpointe Investment Holdings, LLC, a Delaware limited liability company and affiliate of our Sponsor (the “QOZB Sale”). BPOZ 1991 Main is the holding company for our Sarasota Property (as hereinafter defined). The purpose of the QOZB Sale is to preserve the status of BPOZ 1991 Main as qualified opportunity zone property. The terms of the QOZB Sale will be no less favorable to us than obtainable in a comparable arms-length transaction with an independent third party.”

    “We currently anticipate that the Offer and Merger will close during the third quarter of 2021.”

    https://www.sec.gov/Archives/edgar/data/0001749817/000101054921000175/belpreit1sa.htm

  4. snowball

    Is the continuous issuance of “up to $750m” just an upper limit (and an ambitious target, and can be spread over many years), or what they actually expect to raise in one single transaction “promptly after” the merger?

    If it were just an upper limit, theoretically they could just offer $10 million (or even less) in the first transaction, and then similar amount every year or so. Then the impact on stock price could be much smaller.

    Does Belpointe has a track record of being able to raise such large amount of capital for a listed vehicle similar to a blank-check company (but without redemption rights as in SPAC)?

    1. Gino

      If I’m reading the documents correctly, they will just keep issuing units until the target is reached. Not sure how long it will take, but the management should be incentivized to scale up their management fees, etc. Definitely not that much, but Belpointe REIT managed to raise $120m in the last few years. The new combined entity will be listed on NYSE, so I guess the process should be smoother. Belpointe’s asset management division has over $1.5bn AUM, so I guess, overall, they do have some track record.

      Most importantly, the liquidity is small and shouldn’t matter how many shares they will manage to issue initially – the spread will close immediately as soon as the ATM program is launched. Arbitrageurs will take care of that.

      1. snowball

        Do you know how we can participate in the ATM program?

        Acquiring units at $100/unit via the ATM program must be the most reliable way to close out our short positions?

  5. dt

    I have received the below response from BELP investor relations regarding the expected timeline:

    “Our S-4 was made effective on the 13th. On the 17th, brokers received allocations for all shareholders that tendered to the offer.

    Waiting for the S-11 to be made effective which should happen shortly and then the merger takes place and moves over all the shareholders who did not tender.

    Then we trade as OZ on the NYSE American. Estimating between October 7th and October 15th.”

    2
  6. sogoodesospecial

    Per 8-K out after the close, merger is closed. “on October 14, 2021, pursuant to the terms of the Merger Agreement and in accordance with §4A-702 of the Maryland Limited Liability Company Act and §18-209 of the Delaware Limited Liability Company Act, BREIT merged with and into BREIT Merger, with BREIT Merger surviving. In the Merger, each Interest that was issued and outstanding immediately prior to the effective time of the Merger was converted into the right to receive the Transaction Consideration”
    https://www.sec.gov/Archives/edgar/data/0001807046/000149315221025468/form8-k.htm

  7. dt

    OZ (i.e. BELP) trading started. As expected prices hover around $100/share. Non-tendered BELP stock still has not converted into OZ, that will probably take another couple of days.

    2
  8. dt

    BELP was probably my favorite arbitrage play this year – Gino, thanks for sharing.

    The case was so straightforward and simple that I could hardly believe the spread existed at all, and here we had a staggering 30% spread almost right to the last day of delisting. I was constantly thinking that I might be missing something as there seemed to be no explanation why the situation still exists or who might want to buy BELP at anything higher than $105/share.
    – Borrow costs were negligible and stayed negligible and borrow was available till the last day of trading – short squeeze was one of the risks I was concerned about.
    – Liquidity was not that low either – on average 1000 shares traded a day between Sep 15th and Oct 15th – that’s $150k average daily volume
    – Importantly since the write to there was almost always a bid in the market at $150/share – so literally anyone could have participated in this arb.
    – Even after OZ listing was confirmed and OZ filled a prospectus clearly stating the continuous $750m unit issuance at $100/share, the spread still persisted for another two weeks.

    Wish I had sized this higher, but due to points above and persistently high market price, I could not help thinking that I am missing something.

    As this is no longer actionable we are removing the case from active ideas with 20% gain in one and a half months. Worth noting that the price in the write-up was the low point and BELP shot right up and stayed at much higher levels since – most who entered this arbitrage realized gains of 30%+.

    There is still a matter of BELP conversion into OZ but it should clear in the coming days. This is what received from IB regarding the matter:

    “Interactive Brokers is awaiting final details of this acquisition. Once the details have been confirmed we will move forward with processing.”

    3
    1. snowball

      This play is my favorite too.

      The unknown risk I worried the most was mentioned by @Gino:

      “I cannot recall the name of a company, but there was a case where management burned shorts by simply changing tickers and cusips of their stocks and forcing all shorts to buy-in. ”

      I think we need to dig deeper into this kind of “operational” risk, so that next time we will be more comfortable in entering a larger position.

      I think Munger was quoted as saying: “”When the opportunity presents itself use a shovel not a spoon”. I hope next time I can use a shovel.

      P.S., The IR response @dt obtained from BELP investor relations was very helpful too.

      2
  9. sogoodesospecial

    Interactive Brokers appears to have processed the change of BELP to OZ so this is 100% done finally. Thanks everyone who commented and big thanks to the OP.

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