Bluerock Residential Growth REIT : Second Quarter 2021 Earnings Transcript

Bluerock Residential Growth REIT, Inc.

Second Quarter 2021 Earnings Conference

Call

Thursday, August 5, 2021, 11:00 AM Eastern

CORPORATE PARTICIPANTS

Ramin Kamfar - Chairman and Chief Executive Officer

Christopher Vohs - Chief Financial Officer

Ryan MacDonald - Chief Investment Officer

Jordan Ruddy, President and Chief Operating Officer

Jim Babb, Chief Strategy Officer

Mike DiFranco - Executive Vice President-Operations

Steven Siptrott - Managing Director and Head of Transactions

PRESENTATION

Operator

Good morning, ladies, and gentlemen, and welcome to Bluerock Residential Growth REIT's Second Quarter 2021 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 now would like to introduce your host for today's call, Christopher Vohs, Chief Financial Officer of Bluerock Residential. Over to you, sir.

Christopher Vohs

Thank you, and welcome to Bluerock Residential Growth REIT's second 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 this week.

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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 disclosed during 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, 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, including Jordan Ruddy, our President and Chief Operating Officer, Ryan MacDonald, our Chief Investment Officer, Jim Babb, our Chief Strategy Officer, Mike DiFranco, our EVP of Operations and Steven Siptrott, our Managing Director and Head of Transactions.

Our second quarter results reflect the benefits of our strategic positioning in owning highly amenitized live, work, play communities in knowledge economy growth markets. We are very encouraged by our very strong rent growth, the reacceleration of our renovation program, and our ongoing accretive investment activity.

The main headline for us this period is sequential top quartile rent growth build throughout the quarter, as we finish the quarter at plus 10%, with June increasing to 12%.

On the capital allocation front, we're continuing to increase our value-add interior renovation cadence back to pre-COVID levels and have additional upside through our new Smart home technology platform which is in the early stages of being rolled out and should deliver a positive impact to run rate NOI throughout 2022.

On the capital markets front, during the quarter we continued to execute on our stated strategy of expanding our common equity base through redemptions of our preferred stock into our common equity. Our continuous offering of non-traded preferred stock was also very robust with our highest quarterly capital rate since inception and an accelerating trend throughout the quarter.

As we look ahead, we are confident our strategy of focusing on a suburban knowledge economy footprint will continue to deliver peer-leading top line growth as we progress throughout the remainder of the year and position us well to deliver shareholder value throughout the full cycle environment.

I'd like to again note that management is significantly aligned with shareholders through its substantial ownership of BRG's equity.

Bluerock Residential Growth REIT, Inc. Thursday, August 5, 2021, 11:00 AM Eastern

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And finally, before handing the call over to Ryan, I want to thank all of our employees and partners for their hard work over the last year, resulting in our strong operational and balance sheet position which we expect will allow us to capitalize on continuing positive trends in '21 and beyond.

With that, I'm going to turn the call over to Ryan.

Ryan MacDonald

Thank you, Ramin. Let me echo your last comments, I want to thank our BRG team and property staff for their hard work over the last 18 months. We certainly couldn't have delivered these top quartile operating results without your efforts.

Starting with our results, during the second quarter of 2021, our GAAP net loss to common stockholders was 21 cents per share compared to a net income of 61 cents per share in the prior year quarter. We achieved 16 cents of core FFO which was up 7% year-over-year from 15 cents in the prior year quarter. We expect this number to continue to expand as we progress throughout the year and get positive earnings contributions from our significant first half rental revenue growth and benefit from substantial capital investment through our large pipeline of opportunities in house.

Operationally, year-over-year same store-NOI increased 7% for the quarter including revenue growth of 6%, which was offset by expense increases of 6%. Mike will provide additional detail on the same-store numbers but it's important to note that our strong lease trade outs in the beginning of the year have positioned us well against our 2021 annual same-store guidance. As we mentioned last quarter, we expect same-store revenue to build throughout the year as we see strong sequential rental rate growth.

Shifting to our quarterly capital markets activity, we raised $119 million of our Series T preferred during the quarter, which is our highest quarter ever, and provides unique access to attractive cost of capital. Also, we continued redemptions of our 6% Series B redeemable preferred equity into our common equity. In total, during the quarter we redeemed $80 million of Series B preferred for common equity at a per-share price of $9.72. This was offset with buybacks of our common stock totaling $45 million, which in turn, expanded our common equity by 3.6 million shares which represents a 14% increase in float since the beginning of the quarter.

Turning to the balance sheet, during the quarter, we made three new operating investments and three preferred equity investments into operating assets totaling $40 million and $26 million in equity, respectively. An additional $8 million was funded during the quarter into existing preferred equity and mezzanine loans. And subsequent to quarter end, we invested $26 million in BRG equity into four transactions. On the disposition front, we sold four assets during the quarter with gross sales prices totaling $174 million and another two post-quarter-end for $195 million. The second quarter sales netted BRG $39 million in equity proceeds and following quarter end our sales netted BRG $94 million. The six dispositions were sold at an average in- place economic cap rate of 3.7% and would have been lower if not for the above market in- place debt needing to be assumed.

As of the end of July, BRG had approximately $278 million available for investment through a combination of cash and availability on our revolving credit facilities, and we expect to reduce this balance as we invest the capital into our committed pipeline of investments totaling north of $100 million in BRG equity.

Bluerock Residential Growth REIT, Inc. Thursday, August 5, 2021, 11:00 AM Eastern

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And with that, let me turn the call over to Mike. Mike?

Michael DiFranco

Thank you, Ryan, and good morning, everyone.

The operating portfolio continued to build significant momentum as the months progressed throughout the quarter, led by continued strength in occupancy, renewals, and acceleration of new lease rate growth. We came into the quarter with a strong occupancy base of 95.8% and maintained that strength while building rate sequentially throughout the quarter. During the quarter, for the consolidated portfolio, we grew average lease rate by 10.3% to improve by almost 700 basis points on a sequential quarter-over-quarter basis. Average rates accelerated on a sequential month-over-month basis throughout the quarter finishing June at positive 12.0%, and continued throughout July finishing the month at 15.3%. Renewals were consistently strong throughout the second quarter but it was aggressive new lease rate expansion that really drove the significant acceleration in average rate growth with April at 9.5%, May 13.8%, June at 17.9%, and continuing into July at 22.6%. From a market perspective, the outperformance was broad based, with all 16 of our MSAs at or above 6.0% average rate growth for the quarter and 9 of 16 MSAs posting growth exceeding 10.0% on average. Additionally, with strong occupancy and availability to end the quarter north of 96% and below 7%, respectively, we are well positioned for the remainder of the summer leasing season.

Moving on to our quarterly results, our 6.4% year over year increase in same-store revenue was driven by an 80-basis point increase in occupancy and a 300-basis point improvement in rental rates. For the quarter, 13 of our 15 same store MSAs and 18 of our 25 same store communities posted revenue growth exceeding 5%.

Collectively, our suburban sunbelt knowledge economy market footprint continues to outperform urban and coastal-focused peers as we benefit from positive migration trends, affordable rent levels and outsized employment growth.

On the expense front, year-over-yearsame-store expenses increased 6.3%for the quarter, with taxes and insurance together accounting for approximately 50%of the increase. Controllable expenses were up 5% from prior year, with most of that increase coming from term and discretionary maintenance projects that were delayed last year due to the onset of the pandemic. In addition, we experienced an increase in administrative and digital marketing expenses, along with a corresponding increase associated with the roll-out and adoption of our Smart home technology package. We project a corresponding revenue increase over the next twelve months as we expect to capture additional fee income with each lease rollover. As we've communicated in prior quarters, utilizing technology to drive both top line revenue growth and controllable expense savings is a strategic area focus, and we expect to see the continuing benefit of that investment in our results.

Finally, on the value-add front, during the quarter we accelerated our cadence on a quarter- over-quarter basis tracking back to pre-COVID levels, completing 248 units at an average ROI of 24%.

And with that, I will now hand it over to Steven Siptrott. Steven?

Bluerock Residential Growth REIT, Inc. Thursday, August 5, 2021, 11:00 AM Eastern

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Steven Siptrott

Thank you, Mike. In terms of capital allocation, we have been active on the disposition and reinvestment front as we seek to strategically recycle capital into assets and markets with a higher growth profile on a go-forward basis. Consistent with our full-year guidance expectations, our investment activity began to accelerate in the second quarter, closing nine new investments totaling $108 million in BRG equity commitments. The three operating acquisitions consisted of two stabilized, build for rent properties and one value-add multifamily acquisition in Raleigh, North Carolina. All three investments possess strong market rent growth characteristics, management upside, and operational efficiencies creating better-than-market stabilized investment yield opportunities. The six preferred equity investments include two build-for-rent development projects, one stabilized, single-family operating portfolio, two multifamily operating assets, and one multifamily development project - in all cases each deal provides for solid double-digit risk adjusted returns at lower leverage detachment points with significant common equity investments from the respective sponsors. Also, subsequent to the second quarter, we closed on five additional investments representing a total of $57 million in BRG equity commitments. In addition, we had a robust pipeline of accretive opportunities and due diligence in both the traditional multifamily and single-family rental space totaling north of $100 million in BRG equity that we expect to close and fund in the back half of the year.

In terms of dispositions since the end of the first quarter, our four accretive dispositions were executed at an economic cap rate of 3.7%, based on $300 per unit replacement reserves and the buyer's year one real estate tax estimates. The recent dispositions allowed for the exit of non-core markets such as Lake Jackson, Texas as well as assets where our value-add business plan was complete such as Palmer Ranch in Sarasota, FL. Following the execution of the two post-quarter dispositions, we expect to pause dispositions for the remainder of the year.

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. As mentioned on our previous call, we will also continue to seek attractive single-family rental opportunities with our expanding partner network that offers solid risk-adjusted returns. To conclude, we continue to focus on core markets such as Raleigh, Phoenix, Austin and Atlanta to name a few, all of which display tremendous demand side tailwinds that we believe will drive relative rental rate growth outperformance.

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

Operator

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two.

At this time, we will pause momentarily to assemble our roster. To ask a question, please press star, then one. The first question comes from Gennedy from Bluefin. Please go ahead.

Gennedy Zavildac

Hi. Thank you, guys. Wondering if you could tell me a little bit about your thinking or logic behind the redemption of the series--I guess it was Series--sorry, Series B that was redeemed

Bluerock Residential Growth REIT, Inc. Thursday, August 5, 2021, 11:00 AM Eastern