Bluerock Residential Growth REIT, Inc.
Q1 2021 Earnings Call Transcript

Published: 10 May 2021

[Operator:]

Good morning ladies and gentlemen. And welcome to the Bluerock Residential Growth REIT’s First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to introduce your host for today's call, Christopher Vohs, Chief Financial Officer of Bluerock Residential. Mr. Vohs, please go ahead.

[Christopher Vohs:]

Thank you. And welcome to Bluerock Residential Growth REIT's first quarter 2021 earnings conference call. This morning, prior to market open, we issued our earnings press release and supplement. The press release can be found on our website at bluerockresidential.com under the Investors tab. In addition, we anticipate filing our 10-Q later today.

[Ramin Kamfar:]

Thank you, Chris. And good morning everyone. In addition to Chris, with me today are several key members of our executive team, including Jordan Ruddy, our President and Chief Operating Officer; Ryan MacDonald, our Chief Investment Officer; and Jim Babb, our Chief Strategy Officer. I’m also pleased to introduce to you two additional Bluerock team members who will be participating on these calls going forward, Mike DiFranco, our EVP of Operations, who will discuss our operational performance; and Steven Siptrott, our Managing Director and Head of Transactions, who will provide transactional commentary. We are encouraged by the underlying fundamentals in our portfolio as we see the positive impact of continued rollout of the vaccine, declining COVID rates and an accelerated economic recovery over the coming quarters. On the operating front, our core strategy, which is fundamentally about having the right Class A affordable first ranked suburban assets in the right markets allowed us to demonstrate resilience throughout the challenges of the COVID pandemic and is generating top quartile rent growth out-performance as we progress through the recovery. We grew occupancies throughout the pandemic, which set the table for robust acceleration of rent growth since the beginning of the year. And we are optimistic these positive trends will continue throughout the busy leasing season. We're also excited about upside from two operating initiatives to enhance our above trend organic rent growth. One is our new smart home technology platform, which is in the early stages of being rolled out and the other is our existing unit renovation program, which we slowed down during the pandemic last year, but will be reaccelerating this year, and we expect will continue to achieve pure leading results.

[Ryan MacDonald:]

Thank you, Ramin. Let me echo your last comments. I want to thank our BRG team and property staff for their tremendous efforts over the last 12 months. We couldn't have delivered our solid operating results without them. Moving on to our results, during the first quarter of 2021, on a GAAP basis, net income to common stockholders was $1 per share, compared to a net loss of $0.70 per share in the first quarter of 2020. We achieved $0.16 of core FFO, which is NAREIT FFO with the add back of certain non-cash non-operating items. On a year-over-year basis, this was down from $0.22 in the prior year quarter, and was negatively impacted by $0.05 from a strategic increase in our cash balance through nine opportunistic and accretive dispositions over the last 12 months, and a tactical decision to slower investment cadence during the pandemic.

[Mike DiFranco:]

Thank you, Ryan. And good morning, everyone. The operating portfolio continue to build strong momentum as the month progressed throughout the quarter, led by continued strength and renewals and a resurgence in new lease rates. We came into the quarter with a strong occupancy base of 95.4% and maintain that strength while building raise sequentially throughout the quarter. During the quarter, we saw our average rate growth for the consolidated portfolio, improved 300 basis points on a sequential quarter-over-quarter basis to positive 3.5%. Rates accelerated aggressively on a sequential month-over-month basis throughout the quarter, finishing March at positive 5.8% and continued throughout April, finishing the month at 7.7%. Renewals were consistently strong throughout the first quarter, but it was new lease rates earning positive in February that really drove the significant acceleration in average growth on a sequential month-over-month basis. From a market perspective, the out-performance was broad-based with 11 of our 17 MSAs at or above 3.5% rate growth for the quarter and six MSAs posting growth exceeding 6% on average. Additionally, with strong occupancy and availability close to 96% and 7%, respectively. At the end of the quarter, we are well positioned going into the summer leasing season. Moving on to our quarterly results. Our 2% year-over-year increase in same-store revenue was driven by a 1.2% expansion in occupancy and a 1% improvement in rental rates. However, this was partially offset by approximately $300,000 in collection loss due to the impact of COVID-19. For the quarter, 13 of our 15 same-store MSAs posted positive revenue growth with almost 50% of our MSAs exceeding 3%. Collectively, our Sunbelt knowledge economy market suburban footprint continues to outperform our urban and coastal-focused peers as we continue to benefit from positive migration trends, affordable rent levels and outsized employment growth. On the expense front, year-over-year same-store expenses increased 4.4% for the quarter with taxes and insurance together accounting for approximately 70% of the increase. Controllable expenses were up 2.3% and included additional expense for the adoption of our smart home technology package rollout.

[Steven Siptrott:]

Thank you, Mike. In terms of capital allocation, we continue to be active on the disposition and reinvestment front as we seek to strategically recycle capital and to assets and markets with a higher growth profile on a go-forward basis. While our new investment activity in the quarter was light, we have a robust pipeline of accretive opportunities and due diligence totally north of $120 million in BRG equity that we expect to close and fund in the back half of the year. In terms of dispositions, our six accretive dispositions were executed at an economic cap rate of 4% based on $300 per unit replacement reserves in the buyer's year one tax estimates. The recent dispositions allowed for us to exit non-core markets, including Tyler, Texas, and Lake Jackson, Texas, while reinvesting the capital into markets such as Raleigh, Phoenix, and Austin. Post disposition and reinvestment, Atlanta and Phoenix now represent our two largest operating portfolio markets by concentration with approximately 30% share by unit count. Given the robust bid for our assets and markets, we expect to execute opportunistic dispositions throughout the remainder of the year that will be accretive both on an NAV and earnings basis. With respect to new investment pipeline, we continue to generate relationship and off market opportunities at cap rates that are more attractive than fully marketed deals. From a portfolio allocation standpoint, we will continue to invest in both operating assets with substantial NOI upside potential and preferred equity investments that offer stable and attractive risk adjusted returns.

[Ramin Kamfar:]

Thank you, Steven. I want to reiterate that we're very encouraged by our early year rental rate growth numbers, and we expect them to continue right through the busy part of the leasing season at least, and that with run rate earnings upside potential from a favorable underlying secular market trends, given our positioning and our attractive footprint, along with capital and reinvestment opportunities from the opportunistic dispositions that we're doing. We're quite optimistic about our growth profile in the coming years. And with that, we'll open it up to Q&A operator.

[Operator:]

Our first question comes from Gaurav Mehta with National Securities. Please go ahead.

[Gaurav Mehta:]

Thanks. Good morning. First question on the investment activities that you are expecting, you talked about $120 million in commitment in BRG equity is providing, I was wondering if you could provide some more color on what kind of pricing and cap rates you're expecting on that capital that you're planning to deploy?

[Ryan MacDonald:]

Good afternoon, Gaurav. It's Ryan here. So that's $120 million is really bifurcated between about $75 million of it is preferred equity and investible capital with a cost or rate around 12.5% on that piece. And then on the operating investments, which represents called another $45 million, the average cap rates actually north of almost 4.5 on those two deals. One is a loan assumption from a seller that we bought from last year off market deal. And then one is actually a buyout of an existing preferred equity investment that we made a couple of years ago. So a good attractive cap rates on the operating deals and then a very healthy interest rates on the preferred equity?

[Gaurav Mehta:]

Okay. Second question on your preferred equity investment that you made in April in single family housing. Can you really talk about why you guys decided to invest in a single family housing platform to preferred equity investment? And we expect more of that going forward?

[Ryan MacDonald:]

Sure. Again, Gaurav, its Ryan here. So a couple of things. One is we certainly believe that scattered home single family residential is a natural extension of the multifamily business. And so we've had success with some of our three-bedroom townhome investments. And we found an opportunity here with an operator and a portfolio that we thought made sense to recap, at least from a preferred equity perspective. So it's no different the underwriting than some of the other preferred equity deals we've done. The assets here are primarily in Texas. We know the markets well and then the cost of capital and the detachment point of around 80% LTV again. Good credit underwriting. So we thought it made sense to dip our toes in the water. Obviously, the single family residential space is having a pretty attractive growth profile. And I wouldn't be surprised to see us do a few more investments like this within our preferred equity platform going forward.

[Gaurav Mehta:]

Okay. And lastly on your Series B redemption and you guys did $70 million of Series B redemption in 1Q. Do you expect that kind of run rate going forward? And then secondly, you issued common shares for redeem that $11.12 and had a common share pricing much lower than that. Are you still using common shares to redeem what you did in April? Or are you guys using cash to redeem for now?

[Ramin Kamfar:]

I think, hi Gaurav. It’s Ramin. As you know, we're – we've got a number of the strategic plan with a preferred has been to – it has been to use it to grow when we have periods like last year where our stock price was significantly below $9 or $11 for most of the year. And then to redeem it as a stock price becomes more attractive, because and that – and the reason for that is over time, we need to get – one of the feedback that we've gotten from our analysts such as yourself and from an institutional investor is what do you plan to do with the outstanding preferred. Well, you saw us redeem the Series A, you'll see us redeem the Series C and D over time, and those are all cash redemptions. The Series B will be a combination of stock and cash redemptions, depending on where the stock price is. If it's attractive or it's not, and we have the flexibility and we have the plan to use both of those. So we can't time it – we can't price it exactly, because you give a redemption notice out several weeks in advance, especially as you're going through the quiet period and so on and so forth. But we're very fully aware of potential pressure on the stock as we do redemption. But we also have our goal on – eye on the goal, which is to get into RMZ inclusion where short by a very small dollar amount on a percentage basis in terms of our market cap. I think we're closing the inclusion before COVID hit. And so the goal is to expand our equity base to be able to get on the RMZ that expands our institutional ownership, provides additional demand for the stock. It provides additional support for the stock and allows us to provide and makes the redemptions much more efficient. So it's a balancing act. We are aware that we're not looking to just – we're not looking to step on the stock buy, on the common buy by just redeeming large amounts of the B, it's a balance between the stock price and reducing and getting on the RMZ through expanding our flow. And so we want to be very thoughtful and measured with that. You also know – you also, I'm sure, have seen that we have a buyback in the market that provides support for the stock. So, I wouldn't be surprised if you saw us redeem part of the B in cash. I wouldn't be surprised if we take a break from redeeming the B to allow the stock – the common to absorb and recover. We own north of 30% of the equity common equity here as management. So we're very sensitive to the stock price, making sure that we deliver value for the shareholders. But we think over time getting on the RMZ and reducing our leverage, our perceived leverage, including the preferred will be significantly accretive for us in terms of expanding our amount.

[Gaurav Mehta:]

Okay, thank you. That’s all I had.

[Operator:]

The next question comes from Craig Kucera with B. Riley Securities. Please go ahead.

[Craig Kucera:]

Hey, good morning guys. I just want to follow-up on the single-family preferred investment. Are the returns comparable to you for that relative to multifamily?

[Ryan MacDonald:]

Craig it’s Ryan again. Yes, they are. I think it was a 10.5% rate. But in part, because a little bit lower than maybe some of our development deals, which are in the 12% to 14% range, but the detachment point A was an operating portfolio, and then B the detachment point was a little bit lower. So, from a credit underwriting standpoint, yes, the returns are generally similar for that mezzanine price book on single-family.

[Craig Kucera:]

Got it. And I may have missed this, but is it structured such that you have an option to buy the portfolio at some point, are you really looking to primarily keep that investment as a source of interest income?

[Ryan MacDonald:]

We don't have an option to buy this portfolio. We really looked at it as a credit investment. But, I think, it does a couple of things for us, it helps get us educated on the space and the more data we have, obviously the better we can be as we look at other opportunities, so.

[Craig Kucera:]

Got it. So that makes sense. More of a housekeeping item. What is the game plan for the mortgage at District at Scottsdale? I think it matures in about a month, and I know you've got cash, and you've got line of credit capacity, but just some color there on what you thinking of doing there.

[Ryan MacDonald:]

Sure. What I will say without saying it is that Phoenix has an extremely attractive bid. If you recall, we bought that deal as a lease up deal, we thought way below market. And we believe that there will be ultimately an attractive opportunity to potentially recycle that capital at significantly higher returns in the near future. So that's plan A. If for some odd reason that that doesn't go through as planned, we have an ability and actually have an extension from our lender at basically no cost to take us through next year.

[Craig Kucera:]

Got it. And just one more for me. Just with the increase in lease rate growth throughout this quarter, I'd be curious, are you seeing any trends in demand broadly speaking, maybe between your suburban and infill properties in similar markets, or is it pretty much just broad demand across individual markets driving that to lease rate growth?

[Ryan MacDonald:]

Sure. Hey, it's Ryan again. What, I would say it's generally broad based. I think in Mike's prepared remarks, he talked about the depth across MSA of growth. What I will say is there are certainly certain markets that are outperforming. And then on the urban versus suburban, I mean, 90%-ish of our portfolio is suburban first-ranked suburban, so the majority – there's really not much urban to compare it against. But from a market perspective, I think, if you look at the Phoenix’s of the world, the Atlanta’s, the Raleigh, Durham's, actually, the Las Vegas’ of the world are really, really showing out performance on a relative basis. But generally speaking, we've got a lot of markets that our trending above, what I would call, average growth at 3% kind of threshold. We've got a lot of markets that are better trending above that, I love. Even Orlando, the interesting thing on Orlando that actually turned positive from a new lease perspective. So, it's been positive on a blended basis because of renewals since February. But in March, you actually had new leases turn positive and then accelerate into April. So, markets that were probably thought of as less growth, certainly with the pandemic are actually coming out and have really good trends.

[Craig Kucera:]

Okay. Thanks.

[Ramin Kamfar:]

Thank you, Craig.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Ramin Kamfar for any closing remarks.

[Ramin Kamfar:]

Thank you, operator. And thank you everyone for joining us today, look forward to continuing to report on our progress in coming quarters. Take care.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.