Bluerock Residential Growth REIT, Inc.
Q1 2018 Earnings Call Transcript

Published: 12 May 2018

[Operator:]

Good morning, ladies and gentlemen, and welcome to Bluerock Residential Growth REIT’s First Quarter 2018 Earnings Conference Call. All participants will be in 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 first quarter 2018 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 Investor Relations tab. In addition, we anticipate filing our 10-Q this week. Following the conclusion of our remarks, we’ll be pleased to answer any questions you may have. Before we begin, please note that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. There are a variety of risk and uncertainties associated with forward-looking statements, and actual results may differ from those set forth in such statements. For a discussion of these risk and uncertainties, you should review the forward-looking statements disclosure in the earnings press release as well as our SEC filings. With respect to non-GAAP measures we use on this call, including pro forma measures, please refer to our earnings supplement for a reconciliation to GAAP, the reasons management uses these non-GAAP measures and the assumptions used with any respect -- with respect to any pro forma measures in their inherent limitations. And with that, I’ll turn the call over to Ramin Kamfar, Chairman and CEO of Bluerock Residential Growth REIT, for his remarks.

[Ramin Kamfar:]

Thank you, Chris, and good morning, everyone. In addition to Chris, with me today are several key members of our executive team. We have Jordan Ruddy, our President and Chief Operating Officer; Jim Babb, our Chief Investment Officer; and Ryan MacDonald, our Chief Acquisitions Officer. I’ll focus my remarks on key strategic accomplishments, some financial highlights from the quarter and close with some capital markets commentary. After, I will ask Ryan to provide you with additional operational, transactional and balance sheet detail. We began 2018 by delivering a solid quarter from an operational perspective while continuing to advance each of our strategic objectives in terms of portfolio growth, ongoing balance sheet enhancements and disciplined capital allocation. To start with our GAAP numbers. Net loss attributable to common stockholders for the quarter was $0.40 a share as compared to our net loss of $0.20 a share for the prior year quarter, and this net loss was caused primarily by noncash items, which were $0.59 a share in the 2018 quarter. To switch to operating numbers on a per-share basis, we delivered AFFO of $0.18, which allowed us to achieve a key milestone of fully covering our $0.16 quarterly dividend on a current basis. This reflects a 21% growth in our AFFO year-over-year to $5.6 million. The quarter also had significant growth on the revenue front. Our top line revenue for the first quarter was $41.9 million, which is a 49% increase from $28.2 million in the prior year quarter, largely as a result of our significant investment activity in the second half of 2017. Moving on to property level numbers. Property NOI grew to $21 million in the quarter, which is a 31% increase from $16 million in the prior year quarter. Same-store revenue and NOI grew 5.4% and 3.5%, respectively, for this quarter versus the prior quarter. Ryan is going to provide you with additional detail. Our asset base continues to grow. Our gross assets are over $1.8 billion, which is up 31% on a year-over-year basis and 4% on a quarter-to-quarter basis. On the acquisition front, during the first quarter we closed on one 264-unit operating property for $22 million in equity and one follow-on investment in an existing development mezzanine loan for $21 million in equity. Following the quarter end, we increased our ownership in 2 assets to 100% by buying out our partner’s minority interest with a $9 million investment and made one additional 264-unit acquisition for $18 million in equity. Again, Ryan is going to provide additional detail for you. Shifting to capital markets. During the first quarter, we raised $18.5 million with sales of our Series B 6% preferred shares. This preferred offering is an important part of our growth strategy as it continues to offer us access to cost-effective capital, while at the same time minimizing potential dilution, because it is unlike -- a standard preferred, it is convertible as a common stock. Not based on our current stock price on the issue date, but based on a future stock price at the time of conversion. We expect that the quarterly run rate will reaccelerate back to a steady state level in the $45 million to $50 million range in the next several -- over the next several quarters. As I mentioned, one of our key strategic objectives is to enhance our balance sheet to ensure we have the necessary liquidity and flexibility to support our ongoing growth. So during the quarter, we closed on a $50 million junior revolving credit facility, which along with our senior revolver, will enable us to deploy our capital more efficiently and provide capital structure flexibility as we grow the business. Lastly, in the first quarter, the company repurchased approximately $4.2 million worth of shares at an average price of $7.92. The share repurchases are an important component of our capital allocation plan, and are accretive both from an NAV and AFFO point of view and underscore our conviction in the value of the equity and our commitment to creating shareholder value. We intend to continue utilizing the program opportunistically and with consideration of several factors, including our stock price, prudently managing our leverage and other available investment opportunities. With that I’m going to take the -- I’m going to turn the call over to Ryan. Ryan?

[Ryan MacDonald:]

Thank you, Ramin, and good morning, everyone. I’d like to start off by noting that the operating portfolio performance began to reaccelerate in the first quarter across all assets, but with particular outperformance in our Florida market, fueled by continued, robust job growth. Portfolio-wide across BRG’s assets, average occupancy for the first quarter of 2018 was 93.5% and 94.2% as of the end of April. Same-store revenue increased 5.4% over the prior year period, driven by a 4.8% increase in average rental rates versus the prior-year period, and a 20-basis point decrease in occupancy. All 16 of the properties in the pool recognized increases in average rental rates in the quarter versus the prior year period. On the expense front, same-store expenses increased by 8.2%, primarily resulting from an approximate $400,000 increase in real estate taxes due to higher valuations by municipality and a negative Q1 2017 tax true-up. Excluding the Q1 2017 negative tax true-up, same-store expenses increased 5.7%. Same-store NOI for the quarter increased 3.5% on a year-over-year basis. Excluding the Q1 ‘17 negative tax true-up, NOI increased 5.1%. On the operational margin front, we experienced a 290-basis point decline in our margin to 57.3%. This decline is primarily attributable to our 2017 disposition and reinvestment activity as well as the negative Q1 ‘17 tax true-up. On the disposition front, we exited mature cash flowing asset and recycled the capital into higher growth opportunities that typically can take several quarters to stabilize into a steady operational state. And as we bring these assets on to our operational platform, we usually incur onetime upfront expenses that can disproportionately distort margin in the near-term. Shifting to the investment front. We continue to remain active but disappointed in terms of acquisitions and investments. In the quarter, we closed on one operating property acquisition in suburban Denver, totaling 264 units and approximately $61 million in gross asset value. The business plan is consistent with our focus on executing Core+ renovation strategies, whereby targeting capital improvements to the interior units and amenity areas will migrate the asset to our standard, highly amenitized, live/work/play lifestyle product. BRG funded the purchase with approximately $22 million in equity for 88% ownership, and the venture capitalized the deal with a $40 million fixed rate loan from Freddie Mac at 4.31%. The asset is projected to yield a year 1 cap rate of approximately 5% and grow to a stabilized cap rate of approximately 6.4% versus market cap rates ranging from 4.75% to 5.25%. Following the end of the quarter, we closed on one additional off-market purchase of an operating property in Daytona Beach, Florida, for approximately $46 million. The opportunity was sourced from a seller we previously transacted with and contracting for the deal during lease-up provided assurance to the developer so they could repatriate the proceed into a new project with a tight closing time frame. As a result, we believe our year 1 cap rate and projected stabilized yield of 5.4% and 6% is 20 basis points and 80 basis points above prevailing market cap rates. To fund the purchase, we utilized approximately $18 million in equity and $29 million from our senior line of credit. In addition to the acquisitions, post quarter-end, we closed on the buyout of minority ownership interest in ARIUM Gulf shore and ARIUM Palmer Ranch, totaling $9 million in BRG equity. The buyout, which took our ownership to 100%, was funded through refinancing both existing loans. ARIUM Gulf shore was added to the senior line of credit with an amount totaling $41 million, and ARIUM Palmer Ranch was funded with a fixed-rate agency loan in the amount of $41 million as well. Following the buyout and refinance of the existing loans, $12 million in equity was returned to the company. In terms of the development commitment. In the first quarter, BRG funded an additional $21 million of equity into the existing Fragler mezzanine loan. The total BRG investment and development preferred equity and mezzanine loans at the end of the first quarter was $234 million. Moving on to the balance sheet. Following the quarter end, we refinanced ARIUM MetroWest and Outlook at Greystone off the senior line of credit and into fixed-rate agency loans with combined proceeds of $87 million and an average interest rate of 4.4%. In total, these transactions repaid $79 million in senior line of credit borrowing base, yielding the company $5 million in incremental equity proceeds. Following the post quarter transactions and reconfiguration of the secure senior line of credit borrowing base, the senior and junior line of credit balances as of the close of business on May 4, stood at $69 million and $16 million, respectively. And today, BRG has approximately $42 million available for investment through a combination of cash and availability on our junior line of credit. Plus we continue to have capacity through our Series B offering. Lastly, on the balance sheet. We have worked to reduce the floating rate exposure at the company, and as a result of the recent transactions, since the end of the fourth quarter, our floating rate exposure on permanent financing has been reduced to 33% from 43%. We will continue to manage that exposure down throughout 2018, and expect the percentage to normalize around 25%. The modest remaining projected floating exposure will continue to give the company prepayment flexibility as we manage our capital allocation. In closing, I will note that our first quarter performance exceeded our expectations. But we are not budgeting that outperformance going forward. Additionally, our guidance includes an incremental impact from rising rates of about $0.01 going forward. Having said that, we are comfortable with and are reiterating our full year AFFO guidance of $0.65 to $0.70 per share. And with that, I will now return the call to Ramin to conclude.

[Ramin Kamfar:]

Thank you, Ryan. And that’s the end of our prepared remarks. And with that, I am happy to open it up to Q&A.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Drew Babin of Robert W. Baird. Please go ahead.

[Drew Babin:]

Quick question on the build up to the 5.4% same-store revenue growth. I noticed that was 4.8% rate growth with 20 basis points lower occupancy. And I guess it appears to me there is some kind of other property income tailwind in that overall revenue growth number. So maybe talk about other property revenues if there is any specific initiatives or any items that are sort of driving that tailwind.

[Ryan MacDonald:]

Sure, Drew, this is Ryan. We did implement a valley trash program across our properties throughout ‘17. So we are starting to see the benefits of that. And that was the largest tailwind in the other income piece this quarter. It should moderate over the course of the year, but we are seeing some benefits this year.

[Drew Babin:]

Okay. And then a question on property tax expenses. Obviously, with properties in your portfolio may not be fully assessed yet, you had sort of a lumpy payment in the first quarter. Might we expect any lumpy expense growth for the remainder of the year or anything we should be aware of as far as timing is concerned?

[Ryan MacDonald:]

Drew, I don’t think so. This was a change of the methodology going back to ‘16 taxes versus ‘17. We changed it in ‘17. So they, it shouldn’t be as lumpy going forward, the comps going forward in ‘18.

[Drew Babin:]

Okay. And then just one more question on your Links at Plum Creek acquisition. Looking at the current rents, looking at occupancy. Looks like the initial yield on the deal is maybe around 4% or so on a trailing basis. And I was just curious whether that’s kind of a value-add opportunity type project, or if there is something I’m missing in terms of the growth opportunity near term?

[Ryan MacDonald:]

Sure. I think I said in the prepared remarks. It’s about a 5% yield on the first year. There is some occupancy buildup as we stabilize the property. Currently, the existing owner was running at about 500 basis points. So that 5% does not include the occupancy gains that we think we’ll gain over the next, call it, 12 to 18 months. And then there is some Core plus renovation strategy to build up to that 6.4% stabilized yield over time as well, but the initial going-in yield on in-place income with the produced occupancy is about 5%.

[Operator:]

Our next question comes from Jim Lykins of D.A. Davidson. Please go ahead.

[Jim Lykins:]

Hey, good morning guys. First of all, could you talk a little bit about what -- if any acquisition pipeline right now, and how we should be -- to think -- any color on how we should be thinking about that throughout the rest of 2018?

[Ryan MacDonald:]

Sure, Jim, it’s Ryan. Our pipeline continues to remain robust. Certainly, our pipeline exceeds our access to available capital at this point. We are somewhat limited with capital availability. I think we raised about $18.5 million on the B this quarter. So we have a few more acquisitions in the pipeline. I think we’ve got $40 million of availability today. We have a couple of deals in the hopper. But beyond that, it’s subject to capital availability.

[Ramin Kamfar:]

Yes, I -- Jim, I think it depends on the Series B raise. It remain -- obviously, given where the stock price is and the market is, we’re not going out for common equity. And we -- so the Series B raise was $18.5 million. As you know, we guided up to about $45 million to $50 million a quarter in 2017, and then we had to -- that offering ran out and we’re in the process of bringing online a new offering. So the first quarter was $18.5 million. I think this quarter is probably going to be closer to $30 million. And over the next couple of quarters after that, I think we’re hoping to get to $50 million and even beyond. And that’s what’s going to be driving our acquisitions. We see plenty of opportunities to go out and buy the Core plus value-add stuff that we like to buy, that gives us an opportunity to get an -- increase our cap rates by 100 -- and increase the cap rates by 100 basis points and drive value. So the commitment of that capital -- the investment of that capital is not an issue for us. It’s going to be very efficient.

[Jim Lykins:]

Okay. So you mentioned a couple of deals in the hopper, I’m also wondering if your guidance assumes any acquisitions or no?

[Ramin Kamfar:]

Our guidance does -- throughout the year, does assume some additional acquisitions, and some buildup of the Series B capital raise throughout the year.

[Jim Lykins:]

Could you tell us what you assume for acquisitions in guidance?

[Ramin Kamfar:]

Sure. The total invested capital that we assumed in our 2018 guidance on a gross basis is about $350 million. So it assumes Series B capital raise of about $124 million of equity.

[Jim Lykins:]

Okay, that’s very helpful. And then lastly, the share buybacks. Is that - great to see you guys out buying some shares? So that continued into Q2? How should we be thinking about that for the rest of year as well?

[Ramin Kamfar:]

Well, so we would have loved to - we wanted to buy more in Q1, because it’s obviously very accretive. But we ran into our blackout period before we could put a 1501 in place that would have allowed us to continue to buy back. So I think you’ll see us back in the market. It all depends on the Series B raise rate, depends on acquisition opportunities and depends on our stock price. I really don’t want to give away the stock price that we’re going to be buying at. Let’s just say that our guidance doesn’t assume any buybacks. So if we’re doing a buyback, it’s going to be flat to accretive to that.

[Operator:]

Our next question comes from Paul Penney of Northland Securities. Please go ahead.

[Greg Gibas:]

Good morning, guys. This is Greg on for Paul. Thanks for taking my questions. Congrats on the dividend coverage by the way. I was just wondering how are you thinking about your full year guidance after this strength in Q1. And particularly other than the rising rates that you mentioned earlier, are there any other reasons why you are not forecasting similar performance over the following quarters?

[Ramin Kamfar:]

Well, Paul - and thank you for the congratulations. We’re happy to have got to dividend coverage, and we expect dividend coverage to continue, but we tend to be conservative in terms of our budgeting. I’m sorry, it’s - sorry, Greg, I just looked online and it said Paul. So thank you, Greg. So we tend to be conservative in terms of our budgeting, we were - for the internal budgeting for the guidance. So we beat our internal budget for the guidance in the first quarter. And - but our budget doesn’t assume that we’ll continue to beat it. Orlando in particular, for example, is a very strong market and above our projections. But I don’t want to assume that, that’s going to continue in perpetuity going forward. I’d rather have our assumptions revert back to our baseline budget and be sitting here 3 months from now meeting that number or beating it than basically taking us above market performance and projecting it and then have $0.01 miss on the balance. So no other issues. I mean the $0.01 increase in rates is already in our guidance number. So that’s not a surprise. And we don’t see any other reasons other than we want to be good in terms of the guidance we put up.

[Greg Gibas:]

Got it, appreciate the detail. And then second, given the current strength in the Orlando market. I was just wondering if you’re planning to expand your property base there? Or do you think you’re comfortable with your positioning in that market? And then I guess also maybe if you can provide an update on the supply-demand characteristics in that market?

[Ramin Kamfar:]

So I think Orlando is a tremendous market. I just spent - we just spent 2 days touring the market, and tremendously impressive. If you think about what is happening in terms of the U.S. economy as we move from an industrial to a knowledge and experiential economy, Orlando is an irreplaceable next-generation market. What is happening there with Disney World and Universal Studios and SeaWorld, and all of those, and Margaritaville’s et cetera, et cetera. All of the stuff that’s going on is irreplaceable in the United States, there is tremendous health care on top of that et cetera, et cetera, but, so it’s a huge growth market, it’s got long, big blue horizons, again as we continue to migrate into this knowledge/experience economy and we like Orlando and over time would like to, we will buy additional assets. Obviously, you need to balance that with diversification across other markets that we like. So that’s the answer. You will see us, as we grow, you will see us increase our exposure to Orlando. And I think that market is going to remain strong for a significant period of time. I mean all of Florida is obviously quite attractive with in-migration on top of the jobs growth, on top of what recently happened with taxes that makes our core southern, and particularly Florida and Texas markets more attractive over time.

[Christopher Vohs:]

And on the supply-demand side, I mean, we’ve, you’re forecasting in ‘18, going into ‘18 about 40,000 jobs and 7,000 new units, so that’s above the kind of 5

[Operator:]

[Operator Instructions] Our next question comes from John Benda of National Securities Corp. Please go ahead.

[John Benda:]

So just quickly. Just on your comments that you just mentioned about Florida. Could you elaborate a little more on why the decision was made to go into Colorado as an entirely new market versus you know building up an existing footprint? And maybe what some of the demographics are out there?

[Ryan MacDonald:]

Sure, John. This is Ryan. And I’ll take a first stab and then I’ll let Ramin fill in. We’ve been looking at Denver for quite a while now. And we’ve pursued some opportunities. As you recall with our network of operators, we’re able to stifle in and out of markets more efficiently than our competitor peer set who have to establish large infrastructures in the market. So we saw a specific opportunity in, on the south of Denver in a place called Castle Rock that we think has incredibly attractive schooling and incredibly attractive barriers to entry. And feeds not only from the Denver MSA but also pulls from Colorado Springs. So you have certainly a burgeoning tax sector and significant in-migration from the West Coast, Denver, that we’re seeing currently. So I think it fits within our knowledge economy both market footprint. But again, we’re waiting for the right opportunity to execute on versus establishing a beachhead and then trying to buy multiple assets [indiscernible] the right [indiscernible] if it’s the right strategy in the right part of town for us with the right economics.

[Ramin Kamfar:]

I think, Denver -- we’re obviously -- as we grow, we’re going to continue to increase, continue to open selective new markets that have the long-term knowledge economy demographics in terms of job growth and population and creation of intellectual capital, et cetera, et cetera, that we want. We’ve had our eyes on Denver for a significant period of time. And this was the right opportunity for us to enter that market. I think you see that Denver, obviously, and it’s validated by the fact that you’ve got some of the larger REITs that don’t focus on -- or that don’t have our strategy, are now entering -- have recently entered Denver. Jim, do you want to add anything to Denver.

[Jim Babb:]

No, I think both you and Ryan hit on it. I mean, John, the idea is we need to grow in -- grow our footprint in markets that fit the long-term fundamentals that we believe in. Florida has been very good to us, but the knowledge-based economies are -- we find very attractive in that part of the world. And I think you’ll probably see us try to migrate into some new markets over the course of the next 12 to 24 months.

[John Benda:]

Okay, great. And then quickly, what is the analysis performed when you decide to increase an owner’s position in the existing property versus investing in a new one?

[Ramin Kamfar:]

Well, I think you’re looking at it from a number of factors. One is obviously a financial analysis. What’s the return on the additional capital investment. You’re underwriting kind of the future performance of the asset, how much value creation is there left as part of that analysis. Part of it is an asset that we want to have wholly owned, because we’re migrating. Now we have 31% of our asset bases one of the knocks against us has been -- well, you don’t own any assets that are 100%. And are now -- 31% of our assets are wholly-owned, which gives us financial flexibility with respect to our line of credit, because they have a line of credit, and due all these financings, you need to have wholly-owned assets. So -- and then a combination of what our partner -- what our operator or partner’s investment horizon is, because they may be -- they have different investment. They may and do have different investors and [indiscernible]. So when the opportunity comes up, if it’s an attractive investment financially. If it’s an asset that we want to hold long term and in this case, these 2 assets are continually -- we believe, continue to have tremendous upside both at the market level and at the asset level. So we decided to increase it.

[John Benda:]

Okay. And then just real quick for our last question. On the development portfolio, are you seeing any problems there? Is everything going to schedule in terms of completion, how stable the operation is, et cetera?

[Ryan MacDonald:]

John, this is Ryan. I think we’ve generally been on schedule across the board with our projects.

[Ramin Kamfar:]

There are no major issues on the development side. Obviously, Houston lease-up has been slower or had been slower before the hurricane. The hurricane gave us a nice boost in terms of that market and -- but after the hurricane is gone, but some of those rentals are temporary, are going to revert back to housing, so you’re going to have to backfill those. So, outside of the slowdown in Houston, I looked down at our list of average, kind of, leasing per month for our - we’ve got 4 deals that are in lease-up, and it’s 23 a month, 17 a month, 15 a month and 21 a month. And you want to be in the 20-ish - in the high-teens or 20 number, so they are all on - they are pretty much all on track. And we expect a strong leasing season coming up. Obviously, we’re going into the leasing season now.

[John Benda:]

Great. Thank you very much.

[Ramin Kamfar:]

Thank you, John.

[Christopher Vohs:]

Thanks, John.

[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:]

I want to thank everyone for giving us the time today. And look forward to continuing to report to you on our progress. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.