Q2 2020 Bluerock Residential Growth REIT Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to the Bluerock residential growth Threed second quarter 2020 earnings conference call. All participants will be in listen only mode. So do you need assistance. Please say no corporate specialist by pressing the star key followed by zero after today's presentation European opportunity to ask questions to ask a question.

You mean press Star then one all your Touchtone phone withdraw your question. Please press Star then too. Please note that this event is being recorded I would now like to introduce you to your host for today's call Christopher boats, Chief Financial Officer of Bluerock residential Mr. Boes. Please go ahead.

Thank you and welcome to Bluerock residential growth Threed second quarter 2020, <unk> earnings Conference call. This morning prior to market open we issued our earnings press release, we supplement the press release can be found on our website at black residential dot com under the investors tab.

In addition, we anticipate filing our 10-Q later today.

Following the conclusion of my remarks, we'll be pleased to answer any questions. You may have before we begin. Please note that this call may contain forward looking statement. They are defined under the private Securities Litigation Reform Act of 1995.

Our variety the risk and uncertainties associated with forward looking statements and actual results may differ from those set forth in such statements for 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 their FCC filing.

With respect to non-GAAP measures, we use this call. Please refer to our earnings up on that for a reconciliation to GAAP and the reason management uses these non-GAAP measures and with that I'll turn the call over to remain campfire, chairman and CEO rack residential growth rate for his remarks.

Thank you, Chris and good morning, everyone.

In addition to Chris with me to remotely today are several key members of our executive team, including.

Jordan Ruddy, our president and Chief operating Officer, Bryan Mcdonald, our Chief acquisitions Officer, Jim BAF, Our Chief investment Officer Am I to Franco our VP of operations before getting into our results.

Given that.

Continuation of the Cobot pandemic I want to express our sincere wish that everyone, saying well unhealthy.

And also to thank all of our employees for their hard work during these challenging comps on the portfolio fraud.

We believe our differentiated strategy of investing in classmate affordable properties and knowledge economy growth markets allowed us to realized strong rates and occupancy growth.

On a year over year basis during what wasn't challenging corner strategy was enhanced by pre cobot technology platform and boss, Matt that facilitated a seamless transition has been entirely bear virtual leasing execution in the quarter and when coupled with access to our unique capital source, we believe workers.

And well to capture accelerated growth has economic recovery takes right.

Moving onto results I'm pleased to report that are operational performance showed positive sequential trends.

Last quarter.

[laughter] excuse me.

Based what slowed your international I break up the virus spot gain stress in early may.

Which continued throughout the rest of the corner and actually we implemented an occupancy focused strategy in exchange for some rental rate increases and then quickly pivoted, they're more offensive strategy has leased space accelerated throughout the second half of the quarter. As a result, we saw sequential rate growth improvement throughout the quarter.

And it which continued into July.

Shifting to the revenue front during the quarter, we generated 53 million revenue, which is up 1% on a year up or basis.

Which was driven by investment activity during 2019 and offset by five dispositions in the first half that's true.

On a GAAP basis net income to common stockholders was 61 cents per share compared to net loss of 50 cents a share for the prior year quarter.

Sure if that's all.

Which is married up that's all with the add back of certain noncash non operating items was 15 cents per share versus 22 cents per share for the prior period and this was.

Actually impacted by our strategic decision to slow our investment cadence and hold onto a much larger cash balance throughout the quarter.

Moving onto property level results, we grew property I know why 6% to 29.1 million in the quarter.

We delivered positive year over year growth and the same store average rental rate.

1.6% and an occupancy of 90 basis points. However, this was offset by approximately 700000 of collection loss and massive fad was driven unfortunately by the eviction moratorium and approximately 300000 dollar reduction in fee income.

Due to cope with 19, so same store revenue I know not an ally came in at a negative 40 basis points on the negative 1.1%, respectively compared to the prior year period collections, how consistently strong each month and ended the quarter at 96%, which includes 1% payment plan.

We continue to grow our asset base gross assets are up 17% for the quarter from the prior year period to over 2.6 billion, which puts us at the larger anda for small cap multifamily peers. We're also very active on the capital allocation front through April and completing three this dispositions at the beginning of the order for it.

Total.

$160 million, we're able to realize very strong post cobot 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 only $272 million dispositions were executed at cap rates averaging 4.3%.

And be RG realize the blended 16% IR and 1.8 times multiple on invested capital well, netting 103 million of course.

During the quarter, we invested 20 million or preferred equity and mezzanine loans, including one new operating preferred investment one partner buyouts in additional scheduled fundings for six Devolvement in Boston.

With respect to our value add program, we took a conservative posture and yes covered my team has slowed the pace of renovations.

At the beginning of the quarter, Yeah, we completed 39 units and continue to deliver significantly above trend returns with average ROI of 23%. We continue to believe there's 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 economic.

Landscape.

Shifting to capital markets, even and Ah Ah depressed economic environment with on certain see uncertainties of the pandemic. We raised 43 million up our series C preferred during the quarter and since that are running at a number exceeding the 200 million dollar annual pace.

This liquidity provides us great flexibility they review of potential opportunities overtime as we've noted before the series team.

For FERC provides a distinctive advantage for be RG, because it allows us to raise capital d. coupled from the volatility of more common equity price in markets like today, when you have small caps and multifamily trading at significant discounts inherent value, yeah and a T.

Provides us then the flexibility to converted into common equity at our option.

Out of future date that are choosing and I'd future common stock.

While our second quarter performance was impacted from the initial lock down South Dakota 19 pandemic, we believe our knowledge economy class say affordable strategy positions us well continue to deliver shareholder value throughout the full cycle environment for a number reasons, including.

Yeah, So our assemblage of well located first Frank 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 cobot driven job losses, and the downturn and allow us to reaccelerate rent growth more quickly on the other side as economic recovery that is.

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 2800 units with an average ROI of 24%.

We have more than 4500 units identified for future upgrades, which provide us a meaningful embedded growth opportunity and based on our experience today would grow both <unk> and a b and C. AFFO per share significantly over time third we're able to generate accretive capital through the issuance of our C. we see.

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 prudence and accretive capital allocation decisions for the company, including dispositions are very attractive cap rates that are well inside our market implied and consensus.

Third party NAV cap rate us.

As we look ahead, we're confident in being well positioned navigate through the challenges of co that will leave the quality of our portfolio and balance sheet flexibility sets us up to outperform further we believe overtime there could be potential for structural operating expense savings from the large shifts the virtual that we've experienced which should serve as additional law.

And Tom catalyst for our business.

Finally, I'd like to again note that management has significantly an IDE aligned with shareholders. That's continue to increase its equity holdings in the company and now owns approximately 29% of DRG is fully diluted equity would that I'd like to turn the call over through life right.

Thank you remain and good morning, everyone.

The operating portfolio showed resiliency in the second quarter with occupancy growth across the portfolio.

And 24 of our <unk> 20 over 24 same store portfolio properties posting positive rental rate growth.

Particular strength at our properties in Atlanta, Austin, and Houston and revenue resurgence in our Colorado assets.

Portfolio lie.

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 finish June and 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 a positive, 1.6% and 90 basis points respectively.

But this was offset by an increase of approximately 700000 pad that.

And a reduction of 300000 and fee income in the quarter versus the prior year period.

Excluding the bad debt and lawsuit fee income.

No I would have grown 3.5% on a year over year basis.

During the quarter, we collected a strong 97% reds, including 1% payment plans.

Unlike prior pre cobot quarters, we expect to recognize additional collections post month at 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 and our current quarter numbers.

The normal cadence realizing collections post month end quarter end could have a positive impact on financials in the future quarters.

August collections at this point are tracking ahead of the for previous code that impacted months by approximately 100 to 200 basis points through last Friday.

And I'll point out this is despite the cares act unemployment insurance stimulus expiring at the end of July.

Moving onto rate growth.

During the quarter lease rate growth average negative 70 basis points with renewals remaining positive at 1.6%.

A 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 sequentially state, we saw a large positive two to 300 basis point movement and 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 Atlanta.

On the expense dropped 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 arent EM and turnover Corp cost.

As we communicated in the past utilizing technology to drive both topline revenue growth and controllable expense savings is their strategic area of focus for us.

And we are beginning to see a modest benefit of that investment in our result.

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

Well 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 realize healthy our allies of 23% across the 36 leased units in the quarter.

To date, we've completed approximately 2800 unit renovations at an average cost of roughly 5800 per unit.

I think 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 BR G 61 million net proceeds.

The three dispositions were executed at an economic cap rate of 4.7% based on 400 dollar per unit replacement reserves and the buyers year one tax estimates.

Which was inline with our portfolio sale last year and substantially below our consensus and they'd be cap rate estimates.

Moving onto 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 and be RG equity with an annual yield of 10 and one half percent.

We also completed the buyout of our partner and Austin, Texas operating asset for 4 million, which allowed us to continue to grow our wholly owned portfolio and our core knowledge economy market footprint.

Turning to the balance sheet.

During the quarter DRG made investments totaling 20 million into new and existing preferred equity and mezzanine loans and one partner buyout.

The rgs investment and 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 DRG, approximately 14 million and that proceeds and borrowed an additional 14 million on our Fannie Mae credit facility.

With the corresponding net proceeds being returns of the company.

Two refinancings reduced our cost of capital by approximately 70 basis points.

From a liquidity perspective due to the uncertainties presented by the code that dynamic we took a number of measures to increase our liquidity.

As of the end of July PR, GE 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 days through a series G preferred offering.

Although we intend to be prudent in view of further covert 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're pleased with our second quarter and July operational results and continue to actively manage our portfolio in capital in view of the covert pandemics.

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'll open it up the acuity operator.

Thank you we will now begin the question and answer session.

Ask a question you May press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble roster.

And our first question will come from Roth Mehta with National Securities. Please go ahead.

Yeah, Thanks, and good morning.

First question I have is on capital allocation you guys. Obviously that was strong liquidity position as of July.

I was wondering if you could talk about how you should think about.

Capital deployment, and what kind of trends that you're seeing in transaction market.

Hi, Rob it's running.

We're looking to where our position was that we wanted to be defensive or going into the going into the downturn. So we slowed down the pace of investment built up our cash position as the market has a stabilized a we're looking at you know we are.

Obviously, [laughter] <unk> don't need a 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.

Hi out there so I think you'll see US you know and and we have some internal opportunities with respect to that obviously that R series, a preferred that's coming up for redemption et cetera et cetera. So I think going forward, you'll see you know you will see and lower cash balance from us but still.

Yeah, lower compared to what we fell significantly lower compared to what we've held in the past quarter, but I still above what we would keep normally a given that there continues to be uncertainty in the market. We are going into a that there's Ah Ah.

The physical support stimulus and that 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 would be plans and so on the so force I think when for married up additional uncertainty, we're still waiting for the vaccine hands on and so forth our cash position will be a little higher than.

Obviously to be conservative, but we're looking to invest for the rest on the investment front I'm not I'll, let Brian a you know add then but we've looked at opportunities out there and you know a and the that it's where we're expecting significantly more opportunities this quarter than last quarter right.

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

No and I agree that the the pace and cadence of opportunities is accelerating out there I think it's a combination of operating assets. A you know I would say during the the initial stages of covered it was extremely bear all though.

We were excited to potentially a capture an opportunity that we're looking forward to closing in Threeq you here during the initial stages of the pandemic with really really good pricing.

But we're also looking at opportunities on the on the mezzanine and preferred equity front, where are we saying you know returns have I've certainly widen to our advantage. So I would say that you know 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 catch.

Sure at significant discount to market pricing, but.

I would say that there's certainly more volume today than there was even 60 days ago.

Okay, Great and second question has is on on the CV that adoption.

And on the past you have talked about probably doing dot over the course of a couple of quarters is that still yet or not I'm going to talk for a notion submitted done over a couple of quarters. As you may look to Monday night in pool to talk you Tony.

Well, where we're getting we'd like to obviously, it's a you know it's it's a very expensive piece of paper and that's accretive for us and we'd like to redeem at quickly L. B that that is balanced by what opportunities are out there.

In terms of acquisition. So we have money coming in every two weeks from our series team.

That could be a use of proceeds for it we have significant cash on hand, we have availability on our lot of credit which is much more which is much less expensive much more cost effective. So it's gonna be a balance of all that if we don't have acquisition opportunities out there and we'll go out that that return higher at that deliver high returns that's going.

To be our first yeah first use of proceeds.

So I think it's going to be a next given what we're seeing out there.

Okay. Thank you got seller hub.

Again, if you have a question. Please press Star then one.

Again that Star then one to ask a question.

This concludes our question and answer session I will like to turn the conference back over to remain Kamfar for closing remarks. Please go ahead Sir.

Well I want to thank everyone for giving us the time today and wish everyone a safe rest of the summer and fall on we look forward to continuing to.

Report to you on our progress over the coming quarters.

Yes.

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

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