Bluerock Residential Growth REIT, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Feb 2021

[Operator:]

Good morning, ladies and gentlemen and welcome to the Bluerock Residential Growth REIT Fourth Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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 fourth quarter 2020 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-K later this month.

[Ramin Kamfar:]

Thank you, Chris, and good morning, everyone. In addition to Chris, with me remotely today are several key members of our executive team including Jordan Ruddy, our President and Chief Operating Officer; Ryan MacDonald, our Chief Investment Officer; Jim Babb, our Chief Strategy Officer; and Mike DiFranco, our EVP of Operations. Before getting into our results given the continuation of the COVID pandemic, I want to express our sincere wishes that everyone is staying healthy, and to thank all of our employees for their hard work and dedication during this challenging past year. Coming into 2020, we had positioned BRG to take advantage of secular changes and domestic migratory patterns, employment growth, affordability, and market lifestyle characteristics. BRG’s strategic focus on Class A affordable first ring suburban apartments and knowledge economy growth markets had benefited throughout the year as there was a significant acceleration of positive migration to our markets in suburban locations. I'm pleased to report BRG delivered strong operational performance, and also finished the year, number one in total shareholder return amongst its multi-family peers. Recapping 2020, we continue to remain active on the capital allocation front, executing on 930 million of transactions during the year, opportunistic dispositions totaled 525 million across nine assets. And we achieved very robust pricing with cap rates averaging 4% well inside published third-party NAV cap rates for us of approximately 5%. Our disposition and reinvestment strategy will continue into 2021 with the focus on selling lower growth profile assets at attractive cap rates. And we investing the proceeds accretively into markets and assets with a higher growth profile and potential value-add opportunities. The proceeds from these dispositions may impact our near-term CFFO, but will become accretive on a run rate basis. As we reinvest the equity throughout the first half of the year.

[Ryan MacDonald:]

Thank you, Ramin, and good morning, everyone. The operating portfolio continued to build momentum as the quarters progressed throughout the year, led by continued strength in renewables, coupled with a sequential quarter-over-quarter improvement in new lease rates. This was all made possible by our strategic decision in the early stages of the pandemic to focus on building a strong occupancy base, which culminated in a fourth quarter average occupancy of 94.9%, 130 basis points above prior year quarter. Occupancy was consistent throughout the quarter ending at 95.4% and we've been able to maintain strength through the end of January, finishing at 95.6% and 7.4% availability. Our positive 60 basis points year-over-year increase in the same-store fourth quarter revenue was driven by a 1.4% expansion in occupancy and a 20 basis point improvement in rental rates. However, this was offset by approximately 300,000 of collection loss and lower fee income due to COVID-19 impacts. Rent collections have remained consistently strong throughout the pendency of the pandemic at 97%, even following the elimination of the federal CARES Act fiscal stimulus in July. Approximately two-thirds of our markets posted positive revenue growth in the quarter with Birmingham, Denver, Greenville and Las Vegas, all exceeding three and one half percent. Collectively are Sunbelt knowledge economy market suburban footprint continues to outperform our urban and coastal focus peers, as we continue to benefit from positive migration trends, affordable rent levels and outsized employment growth. Moving on to rate growth. During the quarter, lease rate growth, averaged positive 1%, which is up to 60 basis points on a sequential quarter-over-quarter basis, both renewals and new leases accelerated sequentially with renewals coming in at 3.1% and new leases at negative 30 basis points. Leading the way in average rate growth for the quarter where the Tri-Cities and Birmingham at 8% to 10% and Phoenix and Las Vegas at 4% to 5%. Sequential positive rate growth continued into January, up 40 basis points to 1.4%, which is very strong number on a relative basis. Renewals improved to 4.4% with new leases coming in at negative 1% in a seasonally weak part of the calendar. Birmingham, Phoenix and Las Vegas all continued their positive momentum with rate growth exceeding 5% on average. On the expense front year-over-year same-store expenses increased 1.1% in the quarter. On a year-to-date basis, expenses were up 1.9% year-over-year with the majority of the increase coming from taxes and insurance. Taxes and insurance were up a combined 6.4% with taxes up 4% and insurance negatively impacted by 27%.

[Operator:]

And our first question today will come from Gaurav Mehta with National Securities. Please go ahead.

[Gaurav Mehta:]

No, thanks, good morning. First question on your guidance for 2021 for investments. What's the split between acquisitions and preferred equity investments in the 2021 number that you have?

[Christopher Vohs:]

Sure. It's about a 75-25 split across acquisitions to preferred equity investments.

[Gaurav Mehta:]

Okay. And I guess, what kind of cap rates are you assuming for the acquisitions – with 4Q?

[Christopher Vohs:]

I think it's a fair assessment that we've been able to buy cap rates that are above market, market today for a core deal – core plus deal is around 4%, we've been able to achieve cap rates in the north of the 4.5% range. And I think we'll continue to deliver on that. And that's what's in our number.

[Ramin Kamfar:]

Obviously, – Gaurav, this is Ramin, hello. Obviously we're looking for acquisitions that we're buying in 4.5% and can grow to a 6%-ish overtop.

[Gaurav Mehta:]

Okay. And you guys are growing that through renovations.

[Ramin Kamfar:]

Yes. We're looking for assets that have opportunities they're under rented. So that could be a number of things, it could be an operational issue, it could be that the assets are little dated and needs a touch up. And we're looking at their peers and seeing where we have headroom for a $100, $150, $200 in rent. And that's how we grow it over time through improved operations, improved rental methodologies, and through upgrades, re-tenanting, repositioning all of the above.

[Christopher Vohs:]

And if you look at our history and kind of our ability to source deals with cap rates above market cap rates, I think we've done it fairly consistently since we've gone public. So I don't think it's any different this year. Albeit it's certainly very hard, but if you recall, we have a sourcing network with our partner network that creates a force multiplier effect and allows us to see a lot more off-marketing and relationship deals than a typical firm.

[Gaurav Mehta:]

Okay. And lastly, I think in the prepared remarks, you also mentioned that couple of other redeemable preferred used. Are redeemable this year – how does that look in terms of capital allocation towards redeeming that preferred stock versus deploying towards acquisitions?

[Ramin Kamfar:]

We're going to – we're continuously – we'd like to redeem those. So there are expensive cost of capital and as we sat with a Series A, which is when it came – when it became unlock, we would look to redeem it. Our viewpoint is the same, obviously the timing may shift depending on what opportunities we're saying in terms of preferred or acquisitions. But my sense is that just based on looking at what we have available in front of us today, it'll be a matter of quarters rather than a matter of years, where that’ll be redeemed.

[Gaurav Mehta:]

Okay. Thank you.

[Ramin Kamfar:]

Thank you, Gaurav.

[Operator:]

And our next question will come from Barry Oxford with DA Davidson. Please go ahead.

[Barry Oxford:]

Great. Thanks. Thanks guys. Ramin, just kind of following on that line of questioning. When you look at the dispositions, is the dispositions and the cap rates that you're getting there versus the acquisitions. And do you not see that growth potential in that asset? Is that what causes that disposition and what causes that acquisition to be accretive versus – causes that acquisition to be accretive versus that disposition to give you the same return.

[Ramin Kamfar:]

Hi, Barry. That’s exactly…

[Barry Oxford:]

Does that make sense for me, that I explained that, right. Okay.

[Ramin Kamfar:]

Absolutely. We’re looking for an asset that where you look at the submarket, where it's ranked amongst its peers. We look at say, okay, the new product in the market is getting X and that's a number of data points, and the asset that we're looking at, which is 10 or 15 years old is getting X-minus-500. So we're never going to be able to get X-minus-500 to our acquisition to get to X with us. But it's not new, but with some reasonable touch up 5,000 to 10,000 unit, we're not – there is just some light value add, I should call it actually core-plus, mostly decorative stuff, kitchens’ lighting fixtures, furnishing, so on and so forth and common areas, you can get it up $200 or $250, et cetera, et cetera. And these are all custom design based on the specific asset. And so we have a business plan in mind when we do it. And as we – and that business plan includes how much room we have to grow through a value-add and what that market looks like in terms of opportunity to grow, to grow rents organically. And we continuously – we visit that underwriting with respect to opportunities that we see – when we went into COVID, we said, okay, let's take this opportunity, we want to be defensive going into it, but this really is going to have three legs to it, it's a down leg, we want to be defensive, let's slow down, let's build up cash, let's slow down our upgrades, let’s be defensive on occupancy, then you've got the recovery, which we're in now, let's invest that cash, let's do more upgrades, and let's start to push rents. And then there is a third phase which is the growth, and that was the more strategic piece. Where do we want to be positioned in terms of markets and assets and coming out and we've – and that's why this rounds of disposition and acquisitions are, what you're saying, which has, okay, where do we want to be? We strategically positioned ourselves in these knowledge economy markets, we've done well with these assets, but markets are – we have the advantage. We're not a big behemoth, we have the advantage of being able to shift our footprint, particularly with our partner network. Where do we want to be coming out? This is what we asked ourselves last year, this side, where do we want to be two years from now in terms of what are going to be the next generation of markets that are going to drive growth for us, let's find the right assets in those markets.

[Christopher Vohs:]

Yes. And a great example of that, Barry is our capital allocation moves in Orlando. So we overweighted Orlando three or four years ago with the expectation of significant out-performance on market rent growth. And we sold a couple assets this year at 3.2 times average multiples, which was the kind of realization of that move to kind of front run the market rent growth in Orlando, it doesn't mean we don't like Orlando, it just means that, if we took chips off the table after we realized significant growth, and we're reallocating that capital to different markets that we think may have a little bit more upside opportunity, either organically or specifically at certain assets.

[Ramin Kamfar:]

And in fact, we'd been working to reduce our exposure to Orlando, even before the pandemic. So that was part of the plan. We realized value and into markets like Phoenix and Austin, and Atlanta, where we're seeing opportunities.

[Barry Oxford:]

That's great. I know you guys were doing that, that's good. Switching gears a little bit, when I'm looking at capital allocation as far as monies to work, I know you've got cash on the balance sheet, so that's going to carry you, but will the Series T give you enough equity or would you guys be looking for some JV money kind of down the road? I know right now, you're a little bit flushed by what about down the road?

[Ramin Kamfar:]

We're not looking for JV, we get approached all the time, but the way the JVs work is that these JV partners want all the upside. And we do a lot of hard work to create upside in terms of value creation and we want to keep it for investors. So we get approach on a regular basis and we start discussions, and once you get – once you – it sounds good on the surface, but the devil is in the details, you drill down into the details and as – okay, I'm giving up all my upside for what, we want to keep that upside for investors, so not looking at any changes.

[Barry Oxford:]

Is the Series T enough?

[Ramin Kamfar:]

Series T is planning, I think we've got – the last year, I think we have 42% of that market and we're raising to get out, we did $248 million January, we did 30. So we're running at a higher rate than that. So seriously, it gives us plenty of firepower, not only to redeem our more expensive preferred, but also to grow the – to drive external growth.

[Barry Oxford:]

Okay. Thanks guys for the color. Appreciate it.

[Ramin Kamfar:]

Thank you.

[Barry Oxford:]

Yes.

[Operator:]

And our next question will come from Craig Kucera with B. Riley Securities. Please go ahead.

[Craig Kucera:]

Hey, good morning, guys. Want to circle to your guidance for a bit, your expectations for interest income from preferred and JV interest of about $29 million is down from, I think the $35 million you did this year and in 2019. Are you looking at this more of a long-term strategy, you kind of gradually reducing your exposure there, or I guess, just any sort of color there would be helpful.

[Ryan MacDonald:]

Sure. Hey Craig, it's Ryan. More specifically on kind of the reduction, it's a couple of different factors. One is, we had – I think we had novel perimeter and our low transactions payoff and return our capital. And then we have a couple of pending dispositions in 2021. So I think when we started out as a smaller entity, the development was north of 30% of our capital base. That's obviously come down significantly. I think, right now our pipeline, we see opportunities to build back up that preferred equity book. So I don't know if it's going to get back to call it the $35 million run rate, certainly this year or early next year, but one of our focuses is to allocate capital to that book and build it up from the 10% of the total capital base.

[Craig Kucera:]

Okay. That's helpful. Also want to touch on your share count expectations. I know you bought back a lot of stock in the fourth quarter. You had the Series B convert here in the first quarter. But I guess, kind of what gets you from kind of the current 35 million, call it shares to the 39? Is that just the expectation of more Series B converting or just some color that'd be helpful?

[Ramin Kamfar:]

Well, as you know, Craig, one of our expectations, one of our goals, which we actually started executing on last year, pre-COVID, then it got halted and March was to grow our common equity base because we are on the costs as we were last year this time off getting into the RMZ and being eligible for all the RMZ index funds and so on and so forth, which has been a huge driver of kind of stock pricing for our peers that I got to that milestone. So and that could be a combination of an issue – of an common issuance, additional Series B conversions, as you could tell that we issued B last year, when our stock was – even when our stock was in the high 3s, which we took a hit and like March, all the way through the recovery and are now at a much – as we get to a much more attractive stock price. We turn on the redemption feature, the conversion feature, which allows us to – flip off a switch increase our common equity base. So we have that tool at our disposal. We also have the ability obviously to go out to do a common offering. It's all going to be stock price sensitive. Obviously, if you're doing a common offering, you're paying fee to the investment bank, and there's going to be a discount. And that discount range for people in our size 10% to 20% last year. So it can be expensive depending on the price, the advantage of the B redemption as you flip a switch and it's done effectively, it's like an aftermarket with no discounts and no fee being paid. So we're going to use those two – we're going to use those two tools to and we expect that our common base is going to grow. Does that answer your question?

[Craig Kucera:]

Yes, it does. I just want to circle back, you took the provision for credit loss on Alexan Southside, a couple of questions surrounding that, A, sort of some color on what you're seeing in that sub-market? And B, I know that Alexan CityCentre has actually seen rent declines pretty significantly from last year as well. And sort of, I know that some color on, is that loan still cash flowing and performing and sort of your expectations there?

[Ryan MacDonald:]

Sure. Hi Craig, it's Ryan. So the Southside provision was purely, I would say capital allocation – opportunistic capital allocation related. The submarket, proximity is effectively on, almost on campus with the Texas Medical Center. And I would say that the medical center with COVID took substantial hits with procedures down significantly. So the sub-market was certainly impacted. We had an offer that came to the table and we made a decision to move forward with that offer because we've got more immediate opportunities with significantly higher upside versus waiting on that asset value to rebound, which it will over time. But it was again strictly capital allocation related on rate of growth with the opportunity set in front of us. With respect to CityCentre, yes, that market has been impacted by supply which has had negative impact on rent. That loan-to-value when it was done was very low. I think it was in the – I want to say the 70% loan-to-value, typical mez and pref, LTVs are upwards of anywhere from 85% to 90% of cost. We did that deal at 70%-ish LTV or loan to cost at the time. So we still feel really good about value there. In fact, there's actually been some trades within that little micro market – CityCentre micro market that make us feel exceptionally good about value – relative value, not only for the asset and our mezzanine equity position, but also kind of the – I would say that the common equity position as well.

[Ramin Kamfar:]

Right. If I could just add to that, the Southside was – to add to Ryan's comments, Southside was an isolated incident. We obviously look at all our mez and pref on a regular basis in terms of valuation and see if there's any impairment. This has been – this was one case, the thesis was Texas Medical Center and somewhat counterintuitively, that was a weak market because of COVID, you'd think it'd be a strong market because it's a medical center. But TMC had big growth plans that got put on hold and employment actually declined because I'll follow the elective surgeries that drive that. So we decided to – when we looked at , we realized we needed to do the write down. But when you look at our loan book in general, this is we've had I think 11% IRR and 1.4 multiple. And it continues to be very helpful.

[Ryan MacDonald:]

Inclusive of the Southside…

[Ramin Kamfar:]

Inclusive – that's right, net effect write down. And obviously, we took against that write down, we had – I don't know, $59 million in gains if I remember the number correctly for the year, which were cash gains obviously.

[Ryan MacDonald:]

The other kind of note, of return note is that I think we've got seven pending dispositions, including the write down on Southside, our projected IRRs and whole dollar profit multiples on the seven or call it north of 15% and almost two times equity multiple. So the portfolio has performed exceptionally well, in spite of this one isolating incident.

[Craig Kucera:]

Okay. Thanks for the color. Appreciate it.

[Operator:]

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Ramin for any closing remarks.

[Ramin Kamfar:]

Thank you, operator, and thank you everyone for joining us today. We look forward to continuing to report to you on our progress in the coming quarters and wish you a safe and healthy 2021. Good bye.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.