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Bluerock Residential Growth REIT Inc (NYSEMKT:BRG)
Q2 2020 Earnings Call
Aug 10, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning ladies and gentlemen and welcome to the Bluerock Residential Growth REIT's Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded.

I would now like to introduce you to your host for today's call, Christopher Vohs, Chief Financial Officer of Bluerock Residential. Mr. Vohs, please go ahead.

Christopher J. Vohs -- Chief Financial Officer and Treasurer

Thank you and welcome to Bluerock Residential Growth REIT's second 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-Q later today. 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 risks and uncertainties associated with forward-looking statements and actual results may differ from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release we issued this morning as well as our SEC filings.

With respect to non-GAAP measures we use in this call, please refer to our earnings supplement for a reconciliation to GAAP and the reasons management uses these non-GAAP measures.

And with that, I'll turn the call over to Ramin Kamfar, Chairman and CEO of Bluerock Residential Growth REIT, for his remarks.

R. Ramin Kamfar -- Chief Executive Officer and Chairman of Board of Directors

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 Acquisitions Officer; Jim Babb, our Chief Investment 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 wish that everyone is staying well and healthy and also to thank all of our employees for their hard work during these challenging times.

On the portfolio front, we believe our differentiated strategy of investing in Class A affordable properties in knowledge economy growth markets allowed us to realize strong rates and occupancy growth on a year-over-year basis during what was a challenging quarter.

The strategy was enhanced by a pre-COVID technology platform investment that facilitated a seamless transition to an entirely virtual leasing execution in the quarter. And when coupled with access to our unique capital source, we believe we're positioned well to capture accelerated growth as the economic recovery takes shape.

Moving on to results, I'm pleased to report that our operational performance showed positive sequential trends throughout the quarter. Lease pace was slow during the initial outbreak of the virus but gained strength in early May, which continued throughout the rest of the quarter.

Initially, we implemented an occupancy-focused strategy in exchange for some rental rate increases and then quickly pivoted to a more offensive strategy as lease pace accelerated throughout the second half of the quarter. As a result, we saw sequential rate growth improvement throughout the quarter, which continued into July.

Shifting to the revenue front. During the quarter, we generated $53 million in revenue, which is up 1% on a year over basis, which was driven by investment activity during 2019 and offset by five dispositions in the first half of this year.

On a GAAP basis, net income to common stockholders was $0.61 per share compared to a net loss of $0.50 a share for the prior year quarter.

Core FFO which is NAREIT FFO with the add-back of certain non-cash, non-operating items, was $0.15 per share versus $0.22 per share for the prior period and this was partially impacted by our strategic decision to slow our investment cadence and hold on to a much larger cash balance throughout the quarter.

Moving on to property level results, we grew property NOI 6% to $29.1 million in the quarter. We delivered positive year-over-year growth in the same-store average rental rate of 1.6% and an occupancy of 90 basis points. However, this was offset by approximately $700,000 of collection loss and most of that was driven unfortunately by the eviction moratorium and approximately $300,000 reduction in fee income due to COVID-19. So, same-store revenue and NOI came in at a negative 40 basis points and a negative 1.1% respectively, compared to the prior year period. Collections held consistently strong each month and ended the quarter at 96%, which includes 1% payment plans.

We continue to grow our asset base. Gross assets were up 17% for the quarter from the prior year period to over $2.6 billion, which puts us at the larger of our small-cap multifamily peers. We're also very active on the capital allocation front through April and completing three dispositions at the beginning of the quarter for a total of $160 million.

We're able to realize very strong post-COVID values on these transactions, which further highlights the strength of our knowledge economy markets and the high-quality of our institutional portfolio.

Combined with our two dispositions in the first quarter, we completed five dispositions year-to-date, totaling $272 million. Dispositions were executed at cap rates averaging 4.3% and BRG realized a blended 16% IRR and 1.8 times multiple on invested capital, while netting $103 million in proceeds.

During the quarter, we invested $20 million in preferred equity and mezzanine loans, including one new operating preferred investment, one partner buyout and additional scheduled fundings for six development investments.

With respect to our value-add program, we took a conservative posture in view of COVID-19 and slowed the pace of renovations. At the beginning of the quarter, we completed 39 units and continued to deliver significantly above trend returns with average ROI of 23%. We continue to believe there is significant embedded value in our portfolio and we'll continue to evaluate the program at the market and property level as we have more visibility on the economic landscape.

Shifting to capital markets. Even in the depressed economic environment with uncertainties of the pandemic, we raised $43 million of our Series T Preferred during the quarter, and since then are running at a number exceeding the $200 million annual pace. This liquidity provides us great flexibility to review potential opportunities over time.

As we've noted before, the Series T Preferred provides a distinctive advantage for BRG because it allows us to raise capital decoupled from the volatility of our common equity price in markets like today. When you have small caps and multifamily trading at significant discounts to inherent value and the team provides us then the flexibility to convert it into common equity at our option, at a future date, at our choosing and at future common stock price.

While our second quarter performance was impacted from the initial lockdowns of the COVID-19 pandemic, we believe our knowledge economy Class A affordable strategy positions us well to continue to deliver shareholder value throughout the full cycle environment for a number of reasons, including that our assemblage of well-located first-ranked suburban highly amenitized live, work, play portfolio and knowledge economy growth markets, which targets a highly compensated, highly educated worker should help partially buffer us on the COVID-driven job losses in the downturn and allow us to reaccelerate rent growth more quickly on the other side as economic recovery advances.

Second, we continue to maintain solid growth through our value-add program, which is delivering very attractive returns from inception to-date. We've renovated over 2,800 units with an average ROI of 24%. We have more than 4,500 units identified for future upgrades, which provide us a meaningful embedded growth opportunity; and based on our experience to-date, would grow both our NAV and CFFO per share significantly over time.

Third, we're able to generate accretive capital through issuance of our Series T Preferred, which gives us balance sheet flexibility and the potential to take advantage of opportunities that will arise over time.

Fourth, we continue to demonstrate we proactively make prudent and accretive capital allocation decisions for the company, including dispositions of very attractive cap rates that are well inside our market-implied and consensus third-party NAV cap rate estimates.

As we look ahead, we're confident in being well-positioned to navigate through the challenges of COVID, believe the quality of our portfolio and balance sheet flexibility sets us up to outperform. Further, we believe, over time, there could be potential for structural operating expense savings from the large shift to virtual that we've experienced, which should serve as additional long-term catalysts for our business.

Finally, I'd like to again note that management is significantly aligned with shareholders and has continued to increase its equity holdings in the company and now is approximately 29% of BRG's fully diluted equity.

With that I'd like to turn the call over to Ryan. Ryan?

Ryan S. MacDonald -- Chief Acquisitions Officer

Thank you, Ramin, and good morning, everyone. The operating portfolio showed resiliency in the second quarter with occupancy growth across the portfolio and 20 of our 24 same-store portfolio properties posting positive rental rate growth. We saw particular strength at our properties in Atlanta, Austin, and Houston, and revenue resurgence in our Colorado asset.

Portfoliowide, average occupancy was 94.4% for the quarter, which was 60 basis points higher compared to the prior year period. Occupancy continued to improve throughout the quarter and finished June at 95.3%. And today, we sit in a solid position at approximately 95%, with availability -- which is a leading indicator for occupancy -- at 8.1%.

Overall, same-store revenue decreased 40 basis points over the prior year period. However, rental rate and occupancy growth were very strong at positive 1.6% and 90 basis points respectively, but this was offset by an increase of approximately $700,000 in bad debt and a reduction of $300,000 in fee income in the quarter versus the prior year period. Excluding the bad debt and loss of fee income, NOI would have grown 3.5% on a year-over-year basis.

During the quarter, we collected a strong 97% of rents, including 1% payment plans. And like prior pre-COVID quarters, we expect to recognize additional collections post-month and quarter-end, which would further improve upon the existing 97% number. We take a conservative approach to bad debt, writing off uncollectible rent after 30 days and don't assume any future collections in our current quarter numbers. The normal cadence of realizing collections post-month and quarter-end, could have a positive impact on financials in the future quarters.

August collections at this point are tracking ahead of the four previous COVID-impacted months by approximately 100 to 200 basis points through last Friday. And I will point out, this is despite the CARES Act unemployment insurance stimulus expiring at the end of July.

Moving on to rate growth. During the quarter, lease rate growth averaged negative 70 basis points with renewals remaining positive at 1.6% and new lease rate growth coming in at negative 2.7%. Our initial focus at the onset of the crisis was to create a strong base of occupancy and build off it as the quarter proceeded.

Execution was evident in our very strong year-over-year occupancy growth and it allowed us to build rate growth sequentially throughout the quarter and into July. Combining strong retention, up 180 basis points on a year-over-year basis, with accelerating sequential lease pace, we saw a large positive 200 to 300 basis point movement in new lease rates over the last 60 days from earlier in the quarter. This positive momentum is being led by Birmingham, Las Vegas, Phoenix, Austin and Atlanta.

On the expense front, year-over-year same-store expenses increased a modest 70 basis points during the quarter, despite significant pressure from taxes and insurance. To that end, controllable expenses declined across the board by 5% in the quarter, led by lower R&M and turnover costs.

As we've communicated in the past, utilizing technology to drive both top line revenue growth and controllable expense savings is a strategic area of focus for us and we are beginning to see a modest benefit of that investment in our results.

We expect to realize significant additional revenue lift in 2021 and early 2022, as we roll out a smart home technology package for residents in the next 12 months.

While the cadence of renovations in the second quarter was lower than typical, due to halting the majority of work as a precautionary measure, we did complete 39 units and realized healthy ROIs of 23% across the 36 lease units in the quarter. To-date, we have completed approximately 2,800 unit renovations at an average cost of roughly $5,800 per unit, yielding a 24% ROI.

In terms of capital allocation, during the quarter, we sold three assets totaling $160 million in gross asset value and the sales yielded BRG $61 million in net proceeds. The three dispositions were executed at an economic cap rate of 4.7% based on $400 per unit replacement reserves and the buyer's year one-tax estimates, which was in line with our portfolio sale last year and substantially below our consensus NAV cap rate estimates.

Moving on to investments. During the quarter, we added one preferred equity investment into an operating asset portfolio of five existing cross-collateralized assets for a total of $4 million in BRG equity with an annual yield of 10% and 1.5% [Phonetic]. We also completed the buyout of our partner in an Austin, Texas operating asset for $4 million, which allowed us to continue to grow our wholly owned portfolio in our core Knowledge Economy market footprint.

Turning to the balance sheet. During the quarter, BRG made investments totaling $20 million into new and existing preferred equity and mezzanine loans and one partner buyout. BRG's investment in preferred equity, mezzanine loans and ground leases stands at $286 million, which represents approximately 11% of our total asset base. And of the $286 million, north of 80% or $254 million is invested in operating assets, which have a lower risk profile than development assets under construction.

Also, during the quarter, we accretively refinanced two loans netting BRG approximately $14 million in net proceeds and borrowed an additional $14 million on our Fannie Mae credit facility with the corresponding net proceeds being returned to the company. The two refinancings reduced our cost of capital by approximately 70 basis points.

From a liquidity perspective, due to the uncertainties presented by the COVID pandemic, we took a number of measures to increase our liquidity. As of the end of July, BRG had approximately $205 million available for investment through a combination of cash and availability on our revolving credit facilities and we expect to continue to grow our capital base through our Series T preferred offering. Although, we intend to be prudent in view of further COVID developments, we believe we have sufficient liquidity to execute on potential new investment opportunities as they arise.

To conclude, I want to reiterate that we are pleased with our second quarter and July operational results and continue to actively manage our portfolio and capital in view of the COVID pandemic. We believe the quality of our multifamily portfolio and investment strategy will continue to provide outperformance in all parts of the cycle.

And with that, we will open it up to Q&A. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question will come from Gaurav Mehta with National Securities. Please go ahead.

Gaurav Mehta -- National Securities -- Analyst

Thanks. Good morning. The first question I have is on capital allocations. You guys -- obviously, you have a strong liquidity position as of July. I was wondering if you could talk about how should we think about the capital deployment and what kind of trends are you seeing in the transaction market?

R. Ramin Kamfar -- Chief Executive Officer and Chairman of Board of Directors

Hi, Gaurav. It's Ramin. We're looking to where -- our position was that we wanted to be defensive going into the downturn. So, we slowed down the pace of investment, built up our cash position. As the market has stabilized, we're looking at -- we, obviously, don't need the significant cash position that we carried through the quarter, so we're looking at investment opportunities out there. The market is slow. We are seeing some opportunities out there.

So, I think you'll see us -- and we have some internal opportunities with respect to the obviously the -- our Series A preferred that's coming up for redemption etc., etc. So, I think going forward, you'll see a lower cash balance from us, but still lower compared to what we've held, significantly lower compared to what we've held in the past quarter, but still above what we would keep normally given that there continues to be uncertainty in the market.

We are going into -- there is -- the fiscal support stimulus just ended. There's a new package under consideration. We are going through an election. There may be new people coming in in terms of the administration with new plans and so on and so forth. So, I think we're in for a period of additional uncertainty. We're still waiting for the vaccine and so on and so forth. So, our cash position will be a little higher than previously to be conservative, but we're looking to invest the rest.

On the investment front, I'll let Ryan add in. But we've looked at opportunities out there. And it's -- we're expecting significantly more opportunities this quarter than last quarter.

Ryan, feel free to add or subtract anywhere on what I said.

Ryan S. MacDonald -- Chief Acquisitions Officer

No. And I agree that the pace and cadence of opportunities is accelerating out there. I think it's a combination of operating assets. I would say during the initial stages of COVID, it was extremely bare, although we were excited to potentially capture an opportunity that we're looking forward to closing in 3Q here during the initial stages of the pandemic with really really good pricing. But we're also looking at opportunities on the mezzanine and preferred equity front where we think returns have certainly widened to our advantage.

So, I would say that we're excited about the opportunities that are in front of us today. It's certainly a lot of work to be able to capture the deals that we -- that we're trying to capture at significant discount to market pricing. But I would say that there's certainly more volume today than there was even 60 days ago.

Gaurav Mehta -- National Securities -- Analyst

Okay. Great. And second question I have is on the Series A redemption. I know in the past you have talked about probably doing that over the course of a couple of quarters. Is that still your thought that that when it's up for redemption, it may be done over a couple of quarters or you may look to redeem that in 40:20?

R. Ramin Kamfar -- Chief Executive Officer and Chairman of Board of Directors

Well, we're getting -- we'd like to -- obviously, it's a very expensive piece of paper and it's accretive for us and we'd like to redeem it quickly. It will be -- that is balanced by what the opportunities are out there in terms of acquisition. So, we have money coming in every two weeks from our Series T, that could be a use of proceeds for it. We have significant cash on hand. We have availability and a lot of credit, which is much more -- which is much less expensive, much more cost-effective. So, it's going to be a balance of all that.

If we don't have acquisition opportunities out there, we'll go out that return higher -- that deliver higher returns, that's going to be our first use of proceeds. So, I think it's going to be a mix given what we're seeing out there.

Gaurav Mehta -- National Securities -- Analyst

Okay. Thank you. That's all I had.

Operator

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Ramin Kamfar for closing remarks. Please go ahead, sir.

R. Ramin Kamfar -- Chief Executive Officer and Chairman of Board of Directors

Well, I want to thank everyone for giving us the time today and wish everyone a safe rest of the summer and fall and we look forward to -- continuing to look forward to you on our progress over the coming quarters. Thank you.

Operator

[Operator Closing Remarks]

Duration: 25 minutes

Call participants:

Christopher J. Vohs -- Chief Financial Officer and Treasurer

R. Ramin Kamfar -- Chief Executive Officer and Chairman of Board of Directors

Ryan S. MacDonald -- Chief Acquisitions Officer

Gaurav Mehta -- National Securities -- Analyst

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