Current Price: $130
Target Price: $105
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.
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 benefits:
A bit more background on the legislation and Belpointe – here.