Third Quarter 2021 Earnings Transcript

Bluerock Residential Growth REIT, Inc.

Third Quarter 2021 Earnings Conference Call

Thursday, November 4, 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

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PRESENTATION

Operator

Good morning, ladies and gentlemen, and welcome to the Bluerock Residential Growth REIT's Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there'll 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, Mr. 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 Third 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 10Q next 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 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.

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, Head of Transactions.

To give you an overview, our third quarter results reflect the benefits of our strategic positioning in owning highly amenitized live-work-play communities in knowledge economy growth markets. New lease rate growth continued strong month-over-month acceleration including the record setting September at 25.8%. We're active in terms of investments, particularly in the back half of the quarter, deploying approximately $132 million in BRG equity.

As we look ahead, we're 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 a full cycle environment.

Bluerock Residential Growth REIT, Inc. Thursday, November 4, 2021, 11:00 AM Eastern

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

And finally, before handing the call over to Ryan, I want to thank all of our employees for their hard work over the last two years through the pandemic, which has allowed us to deliver top quartile rent growth and has positioned us well heading into the end of the year and beyond.

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

Ryan MacDonald

Thank you, Ramin.

Starting with our results, during the quarter, our GAAP net income to common stockholders was 45 cents per diluted share compared to a net loss of 71 cents per diluted share in the prior year quarter. We achieved 15 cents of core FFO versus 16 cents in the prior year period. FFO was impacted by a large average cash balance in the quarter, and we do expect core FFO to expand significantly in the fourth quarter as we get a dual benefit from positive rent growth earn-in and strong earnings contributions from our robust capital investment through our large pipeline of closings in the back half of the quarter.

Moving on to the balance sheet, during the quarter, we invested $83 million in operating assets across multiple tranches of the capital structure, $33 million of preferred equity into unconsolidated operating properties, and committed $68 million of preferred equity investments into four new development properties, of which $8 million have been funded. Lastly, during the quarter, we funded $8 million into seven existing preferred equity and mezzanine loan investments. And following quarter end, to date, we've invested $28 million of BRG equity into five transactions.

On the dispositions front, we sold two consolidated assets during the quarter at gross sales prices totaling $195 million and had one preferred equity investment redeemed - together the sales netted BRG $100 million in equity proceeds, and the three dispositions were sold at an average in place economic cap rate of 3%.

On the capital raising front, during the quarter, we raised $115 million in our series T preferred offering, which will reach the end of its offering period this month. Also, during the early part of the quarter, we repurchased $34 million of common shares at an average price of $11.34.

Following our investments and capital markets activities, as of the end of October, BRG had approximately $272 million available for investment through a combination of cash and availability on our revolving credit facility, and we expect to significantly reduce this balance as we deploy capital into our committed pipeline through year end.

And with that, I'd like to turn the call over to Mike. Mike?

Mike DiFranco

Thank you, Ryan, and good morning, everyone.

I am pleased to report that we had a strong third quarter operationally. Our team delivered consistently strong occupancy throughout the quarter averaging 95.8% while accelerating average and new lease rate growth each month of the quarter. For the third quarter, average

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lease-over-lease growth finished at 16.5% with new lease growth leading the way at 24.3%. As mentioned, both average and new lease trade outs built sequentially month over month throughout the quarter with September finishing at 17.9% and 25.8%, respectively. Renewals were up 153 basis points on a quarter over quarter basis at 8.0% and like new and average leases, accelerated month over month to finished September at 9.0%. We believe there is additional opportunity to converge our renewal rate growth with our outsized new lease growth in the coming months and quarters.

Moving onto our same community results, same store NOI increased 9.2% on a year over year basis for the quarter and was driven by revenue growth of 7.7% with expense increases of 5.5%. Our 7.7% year over year revenue growth was driven by a 30-basis point increase in occupancy and a 7.1% improvement in rental rates. For the quarter, 12 of our 15 same-store MSAs and 21 of our 25 same store communities posted revenue growth exceeding 4%. We continue to be well positioned heading into the shoulder months with availability today sitting at around 6%.

On the expense front, year-over-year same store expenses increased 5.5% or approximately $800,000 for the quarter, with taxes and insurance together accounting for the largest increase. Controllable expenses were up 5.0% versus the prior year and included COVID related eviction costs, a few one-time maintenance and administrative costs, and additional marketing expense from our Smart Home technology rollout which has a corresponding revenue increase that will earn in over the next 12 months. We expect the controllable expense growth rate to normalize at a lower level going forward.

Finally, on the value-add front, during the quarter, we accelerated our cadence on a quarter- over-quarter basis above pre-COVID levels, completing 368 units at an average ROI of 21%.

At this time, I would like to thank our team for a job well done in taking care of our residents, our assets and our business throughout the entire COVID impacted period.

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

Steven Siptrott

Thank you, Mike.

In terms of capital allocation and consistent with full year guidance, we were active on the disposition and reinvestment front during the quarter in order to strategically recycle capital into assets and markets with a higher growth profile on a go-forward basis. The majority of our dispositions occurred in the beginning of July with our acquisition volume more heavily weighted towards the back end of the quarter. During the quarter, we invested $132 million in BRG equity with the majority allocated to operating properties totaling $83 million in equity. Additional preferred equity investments were made into both unconsolidated operating properties and new development projects which was a strategic area of focus for us this year given the strong risk adjusted returns in earnings profile. While we will continue to look for additional mezzanine and preferred equity investments, the majority of our investment pipeline heading into the end of the year are consolidated operating properties with a value-add focus. Our active investment cadence has continued post quarter end including the closing of additional investments totaling $28 million in BRG equity commitments and we expect a significant amount of additional equity capital to be invested through year end given the robust pipeline of opportunities in house under diligence.

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In terms of dispositions during the quarter, we sold three assets at a weighted average economic cap rate of 3% based on $300 dollar-per-unit replacement reserve and the buyer's year one real estate tax estimates. The opportunistic dispositions allowed us to exit core assets at attractive pricing and reallocate capital to assets with a value-add focus.

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. Asset types include both multi and single-family rental opportunities that offer solid risk-adjusted returns and our focus will continue to primarily be in our core knowledge economy growth 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 for Q&A. Operator?

QUESTION AND ANSWER

Operator

At this time, we'll begin the question and answer session. To ask a question, you may press "*" then "1" 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 "*" then "2."

At this time, we will pause momentarily to assemble our roster.

And as a reminder, if you have a question, please press star, then one.

At this time, it appears that we do not have any questions. I would now like to turn the call back over to Ramin Kamfar for any closing remarks

CONCLUSION

Ramin Kamfar

Thank you, operator, and thank you, everyone, for giving us your time today. We look forward to continuing to report to you on our continued progress in the coming quarters. Take care, and good bye.

Operator

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

Bluerock Residential Growth REIT, Inc. Thursday, November 4, 2021, 11:00 AM Eastern