Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Bluerock Residential Growth REIT Inc (NYSEMKT:BRG)
Q3 2020 Earnings Call
Nov 5, 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 Bluerock Residential Growth REIT's Third Quarter 2020 Earnings Conference Call. [Operator Instructions].

I now would like to introduce you to the 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 Third 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 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 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 the assumptions used with respect to our earnings guidance.

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 our 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 wishes that everyone is staying well and healthy, and to thank all of our employees for their hard work during this challenging time. We continue to believe that BRG's focus on affordable Class A assets in first-ranked suburban locations in knowledge economy growth markets, primarily in the Sunbelt, will lead to relative outperformance.

This differentiated strategy has allowed us to realize positive rental rate and strong occupancy growth on a year-over-year basis in another challenging quarter as we'll report to you, and we believe it positions us well to capture accelerated growth as the economic recovery takes shape. Moving on to our results. I'm pleased to report that our operational performance produced positive sequential trends on a quarter-over-quarter basis. Lease space was very strong throughout our typical busy months and extended for a few weeks beyond our typical seasonal fall off in the middle of September.

Our strategy, which initially focused on maintaining occupancy at the outset of the pandemic, allowed us to be more proactive on rate increases and realized positive rate growth in the quarter, led by strong renewal rates and improving new lease trade-outs. During the quarter, we generated $55 million in revenue, which was up 2% on a year-over-year basis and was driven by a significant investment activity during 2019, partially offset by five dispositions in the first half of this year.

On a GAAP basis, net loss to common stockholders was $0.71 per diluted share compared to the net income of $0.75 per diluted share for the prior year quarter. Core FFO, which is namely the FFO with the add-back of certain noncash nonoperating items, was $0.16 per share versus $0.19 per share for the prior year period. Our solid operating results were impacted by an estimated $0.03 by our strategic decision to slow our investment cadence and hold a larger cash balance throughout the quarter in the interest of prudency.

Investment activity is starting to pick up, and we expect to carry forward list capital on the balance sheet as we move into 2021, and Ryan will provide additional detail in his remarks. Moving on to property level results. We grew property NOI a strong 4% to $29.1 million in the quarter. Same-store revenue came in at positive 60 basis points with NOI negative 1.3% compared to the prior year period. Again, Ryan will walk through the additional details. We continue to grow our asset base.

Gross assets were up 18% for the quarter from the prior year period to over $2.6 billion, which puts us at the larger end of our small-cap multifamily peers. During the quarter, we completed one acquisition totaling $35 million in gross purchase price and invested $29 million in preferred equity, mezzanine loans and a ground lease, which include one new mezzanine loan commitment and additional scheduled fundings for 10 existing investments.

Subsequent to quarter end, we sold one asset for approximately $38 million and an in-place economic cap rate of 3.3%, which compares very favorably to third-party NAV estimates for us, which approached 5%. Shifting to capital markets. We raised $66 million of our Series T preferred during the quarter, which is our second-highest quarterly number ever and demonstrates the resiliency of our access to capital even during the depths of the pandemic when all multifamily REITs were under significant pressure.

As we've noted before, the Series T provides a distinctive advantage for BRG because it allows us to raise preferred capital to grow accretively with the ability to convert the preferred into common at our option at a future date and at the future common stock price, which has the ability to allow us to limit dilution. Finally, on capital allocation. Post quarter end, we redeemed approximately $35 million of our Series A, 8.25% preferred equity, as soon as the five year non-call period expired in October.

As we've stated in the past, we intend to redeem the remainder of our Series A, 8.25%, in the coming quarters via asset sales and/or our Series D capital raise, which will be accretive for us. While our third quarter performance was impacted by the COVID-19 pandemic, our platform displayed resilience, and we believe our knowledge economy Class A affordable strategy continues to position us to deliver shareholder value throughout a full cycle environment.

As we look ahead, we're confident in being well positioned to navigate through the challenges of COVID and believe the quality of our portfolio, our favorable footprint and our balance sheet flexibility sets us up to outperform. Further, we believe that, over time, there could be essential -- the potential for structural operating expense savings from the large shift to virtual that we've experienced, which should serve us an additional long-term catalyst through the business. Finally, I'd like to again note that management is significantly in line with shareholders and has continued to increase its equity holdings of the company and now owns 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 third quarter, with strong occupancy growth and more than half of our same-store properties posting positive rental rate growth. Our properties in Denver, Birmingham, Austin and suburban Houston saw particular strength. Portfolio wide, average occupancy was 95.1% for the quarter, which was 100 basis points higher compared to the prior year period.

Occupancy was consistent throughout the quarter, ending at 95%. And we've been able to maintain strength through the end of October, finishing at 95.4% occupancy and 7.9% availability. Our positive 60 basis point year-over-year increase in same-store revenue was driven by a 1.1% expansion in occupancy and a 40 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.

On a consolidated basis, this quarter, our bad debt was about half the amount recorded in the second quarter. Our third quarter cash collected as a percentage of rent was positively impacted, an increase from 97% to 98% via post second quarter end collection. It's also important to note that our collections and payment plan rates remained consistent throughout the quarter and post quarter end with little variability even following the elimination of the federal CARES Act fiscal stimulus in July.

While the CARES Act moratorium ended in July, our collections are still being moderately impacted from the President's Executive Order of barring evictions through December 31 and some local eviction moratoriums. From a market perspective, our Sunbelt knowledge economy footprint continues to outperform relative to the coastal market as our portfolio benefits from positive migration trends and outsized the employment growth. In particular, the majority of our markets posted positive revenue growth in the quarter, with Houston leading the way at plus 8%, followed by Birmingham and Greenville at 4% and Denver at 3%.

Las Vegas also held strong, posting a positive 2% year-over-year growth for the quarter. Moving on to rate growth. During the quarter, lease rate growth averaged positive 40 basis points, with renewals at 2.3% and new lease growth coming in at negative 1%. Our initial focus at the onset of the crisis was to create a strong base of occupancy and build off it as the quarters unfolded. Executing with strong year-over-year occupancy growth allowed us to build rates sequentially throughout the quarter and into October, where we finished the month with very strong relative performance delivering positive average rate growth of 1.2%.

Renewals averaged 3.1%, with new leases turning positive for the first time since the beginning of the pandemic at plus 10 basis points. Las Vegas and Birmingham led the way at plus 8% and 7%, respectively, followed by Houston, Austin, Greenville and the tri-cities, all north of 2%. On the expense front, year-over-year same-store expenses increased 3.4% in the quarter, with the substantial majority coming from taxes and insurance.

However, controllable expenses declined 20 basis points, led by payroll rationalization, a reduction in admin and more targeted Internet-focused marketing spend. 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. In terms of capital allocation, during July, we acquired one asset in Central Austin for $35 million.

The off-market acquisition from a noninstitutional owner offers immediate revenue upside opportunity for us to drive the in-place cap rate from 5% to north of 6.5% versus market cap rates in Austin sub 4%. Also during the quarter, we made two mezzanine loan commitments on ground-up apartment development in Atlanta and Orlando, totaling $22 million. Both investments will yield a 12% interest rate and have less dollar BRG detachment point at 85% LTV.

Following the quarter end, we added one preferred equity investment into an operating asset portfolio of six existing cross-collateralized properties for a total of $3 million with an annual yield of 10.5%. Also subsequent to the quarter end, we sold one asset in Boca Raton, Florida for $38 million. The disposition was executed at an in-place economic cap rate of 3.3%, adjusting for the buyer's year one taxes and a $250 per unit reserve. With respect to our value-add program, we continue to take a more conservative posture in view of COVID-19, and we have slowed the pace of renovations during this period.

During the quarter, we completed 86 units, which was up by more than double on a sequential quarterly basis and delivered meaningfully above-trend returns with an average ROI of 26%. In addition, we recently began to roll out a smart home technology package for residents, which should drive additional positive ROI on top of our value-add execution. Turning to the balance sheet. During the quarter, BRG made investments totaling $29 million into new and existing preferred equity, mezzanine loans and a ground lease.

BRG's investment in preferred equity, mezzanine loans and ground leases stands at $315 million, which represents approximately 13% of our total asset base. And of the $315 million, north of 80% or $257 million is invested in operating assets, which have a lower risk profile than development assets under construction. Following the quarter end, our late-October disposition activity netted $10 million in proceeds to BRG. Also during the same time period, on October 21, we accretively redeemed approximately $35 million of our Series A, 8.25% preferred equity tranche, and we expect to redeem additional tranches over the coming quarters.

From a liquidity perspective, due to the uncertainties presented by the COVID pandemic, we took a number of measures to increase our liquidity throughout the second and third quarters. As of the end of October, BRG had approximately $169 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'd like to note that our pipeline is very robust, including opportunities moving further along through due diligence. And our expectation heading into 2021 is that we will manage the business less cash on the balance sheet. To conclude, I want to reiterate that we are pleased with our third quarter and October 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 up to Q&A. Operator?

Questions and Answers:

Operator

[Operator Instructions] Today's first question comes from Gaurav Mehta with National Securities. Please go ahead, Sir.

Gaurav Mehta -- National Securities -- Analyst

Hi, guys. Good morning. I'm sorry if I missed this, but can you maybe provide some color on what you're using in the transaction market in terms of volumes and maybe provide some color on the asset that you sold at a 3.3% cap rate?

Ryan S. MacDonald -- Chief Acquisitions Officer

Sure, Gaurav. Good morning. It's Ryan here. So the asset we sold in Boca Raton, Florida was a 90-unit townhome project with substantially higher rents than the rest of our portfolio. So there's a little bit of an outlier. We developed it, generated very solid return and had a company that actually own the adjacent property to us come to us and offer what we thought was certainly an above-market price. So we executed on the opportunity. But what I can tell you is that 3.3% cap rate is very strong relative to what the consensus NAV is.

So we're happy with the disposition there and reinvesting the capital. On the transaction market, in particular, I would say it's getting better, generally speaking. Our pipeline is certainly increasing substantially. We're looking forward to posting some closings in the fourth quarter. That should reduce the capital we have on our balance sheet and provide significant NAV and earnings growth for us heading into 2021. But generally speaking, I would say that the markets are opening up and valuations are very, very strong across the board.

Gaurav Mehta -- National Securities -- Analyst

I guess along the same lines of low cap rates and strong valuation, does it make it even more competitive for you guys to go through acquisitions and maybe adamantly disclose the cap rate that you paid on the asset that you acquired in the quarter?

Ryan S. MacDonald -- Chief Acquisitions Officer

Sure. First off, it's always been difficult. There's no doubt that there's, I would say, more capital flows into the Sunbelt relative to the preceding years. That being said, I think we've always done a good job of finding opportunities at cap rates that are far significantly higher than where the market is trading, just like this recent example in Austin. We paid almost a five cap for a deal in North Central Austin. Distressed seller found an opportunity, we moved on it quickly.

In fact, it came through one of our partners who's actually the largest owner and manager of apartments in Austin, moved on it quickly. And I would tell you that, that deal today trades sub-4 cap. So the closing that you'll see next quarter, again, I think we're buying them all 50 to 75 basis points higher on a cap rate basis relative to where the market is trading. One's a recap. The others are loan assumptions. So we've been able to find opportunities that don't fit, I'd say, the traditional fully marketed, stabilized type deals that are generating very, very low cap rates, like our disposition today in today's environment.

Gaurav Mehta -- National Securities -- Analyst

Okay. Thank you for the call.

Operator

[Operator Instructions] At this time, there are no further questioners in the queue. And this concludes our question-and-answer session. I would now like to turn the conference back over to Ramin Kamfar for any closing remarks.

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

Thank you, operator. I want to thank everyone for giving us their time today. We look forward to continuing to report to you on our progress throughout the rest of this pandemic and on the recovery on the other side, as we get into the recovery, where we think our -- as we mentioned, our positioning in our markets will continue to outperform. Thank you, everyone. Goodbye.

Operator

[Operator Closing Remarks]

Duration: 22 minutes

Call participants:

Christopher J. Vohs -- Chief Financial Officer and Treasurer

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

Ryan S. MacDonald -- Chief Acquisitions Officer

Gaurav Mehta -- National Securities -- Analyst

More BRG analysis

All earnings call transcripts

AlphaStreet Logo

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.