Q3 2020 Bluerock Residential Growth REIT Inc Earnings Call

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Good morning, ladies and gentlemen, and welcome to Bluerock residential growth rates third quarter 2020 earnings conference call.

Today, all participants will be in a listen only mode. After.

After todays presentation, there will be an opportunity to ask questions.

Please note that today's event is being recorded.

I now would like to introduce you to the host for today's call Christopher evokes Chief Financial Officer of Bluerock residential Mr. Bose. Please go ahead.

Thank you and welcome to Bluerock residential growth <unk> 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 web site at <unk> residential dotcom 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.

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.

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 FCC filing with.

With respect to non-GAAP measures, we use on 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 roaming Kamfar, chairman and CEO of rock residential growth rate for his remarks.

Thank you, Chris and good morning, everyone.

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, Mike did fine art easy P operations before getting into our results given the continuity Shannon the cobot pandemic I want to express our sincere when she is that everyone is saying well and healthy and to thank all of our employees for their hard work during these challenging times we.

We continue to believe that DRG focus on affordable class a assets and for spring suburban locations and knowledge economy growth markets, primarily in the Sun belt and the sundial will lead to relative outperformance.

Its differentiated strategy has allowed us to realize positive rental rates and strong occupancy growth on a year over year basis, and another challenging quarter as we'll report to you and we believe it positions us well to capture accelerated growth as the economic recovery next year.

Moving onto 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 falloff in the middle of September.

Our strategy, which initially focus on maintaining occupancy at the outside 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 the new lease trade outs during.

During the quarter we generated.

$55 million in revenue, which was up 2% on a year over year basis.

I 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 71 cents per diluted share compared to net income of 75 cents per diluted share for the prior year quarter.

Core FFO, which is named reader FFO with add back of certain non cash non operating items was 16 cents per share versus 19 cents per share for the prior year period, our solid operating results were impacted by an estimated three cents by our strategic decision to slow our investment cadence and hold the larger cash balance throughout the quarter and then.

Risk prudently.

The Muslim activity starting to pick up and we expect to carry foreign less capital on the balance sheet as we move into 2021 airline will provide additional detail in his remarks.

Moving onto 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 within Hawaiian negative, 1.3% compared to the prior year period again line will walk through the.

Additional detailed.

We continue to grow our asset base gross assets are 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 of gross purchase price and invested $29 million in preferred equity mezzanine loans and a ground lease.

Which include one new mezzanine mezzanine loan commitment and additional.

Scheduled fundings for 10 existing investor.

Subsequent to quarter end, we sold one asset for approximately $38 million and then 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 D 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 leads were under significant pressure.

As we've noted before the series C provides a distinctive advantage for be RG, because it allows us to raise preferred capital to grow a creatively with the ability to convert the preferred into common at our option at a future date and the future common stock price, which has the ability to allow us to limited.

Solution.

Finally on capital allocation post quarter end, we redeemed approximately $35 million of our series, 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 for us.

He's a quarter percent in the coming quarters by asset sales and door our series the capital rates, 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 are confident in being well positioned to navigate through the challenges of cobot and believe the quality of our port.

Folio are favorable footprint and our balance sheet flexibility sets us up.

Sets us up to outperform further we believe that over time, there could be essential.

Has the potential for structural operating expense savings from the large shift to virtual that we've experienced which should serve as an additional long term catalyst businesses.

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 VR. He is fully diluted equity.

With that I'd like to turn the call over to thrive Brian.

Thank you remain 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 straight 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 300000 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 revenue was positively impacted an increase from 97% to 98% via post second quarter and collection.

It's also important to note that our collections and payment plan rates remain consistent throughout the quarter and post quarter end.

With little variability, even following the elimination of the federal 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 borrowing barring evictions through December 30, Onest and some local eviction moratoriums.

From a market perspective, our sunbelt knowledge economy footprint continues to outperform relative to the coastal markets as our portfolio benefits from positive migration trends.

An outsized employment growth.

In particular, the majority of our markets posted positive revenue growth in the quarter with Houston, leading the way at plus 8%. So.

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 average positive 40 basis points with renewals at 2.3% and new lease rate 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 rate 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 in Birmingham led the way at plus eight 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 do it just to drive both top line revenue growth and controllable expense savings is a strategic area of focus for us and.

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 non institutional 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 and Austin sub 4%.

Also during the quarter, we made two mezzanine loan commitments on ground up apartment development and Latta and Orlando.

Drilling $22 million.

Both investments will yield a 12% interest rate and have last dollar DRG 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 and one half percent.

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 buyers year, one taxes and a $250 per unit reserves.

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 <unk> had approximately 169 million available for investment through a combination of cash and availability on a revolving credit facility and.

And we expect to continue to grow our capital base through our series cheap preferred offering.

Although we intend to be prudent and view of further covid developments, we'd like to note that our pipeline is very robust including opportunities moving further along through did 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 in October operational results and continue to actively manage our portfolio and capital in view of the Covid pandemic we've.

We believe the quality of our multifamily portfolio an investment strategy will continue to provide outperformance in all parts of the cycle.

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

We will now begin the question and answer session.

To ask a question you May press star than one on your Touchtone phone if.

If you are using a speaker phone please pick up your handset before pressing the keys.

If you would like to withdraw your question. Please press Star then too at this time, we will pause momentarily to assemble our roster.

Today's first question comes from.

Barack doesn't matter with National Security. So let me go ahead Sir.

Hey, guys good morning.

I'm, sorry, if I missed asthma.

Can you hear me for like some some color on what's your.

And the transaction market in terms of volume then alright, and maybe you can provide some color on the accident you. So at 3.3 with some kind of grid.

Sure <unk> good morning, it's Ryan here, so the asset we sold in in Boca Raton, Florida was a 90 unit townhome project with substantially higher rents and the rest of our portfolio. So there's a little bit of an outlier we developed it.

Generate a very solid return and had a had a company that actually on the adjacent property to us come to Austin and offer what we thought was certainly an above market price. So we executed on the on the opportunity, but but what I can tell you is that you know 3.3 per cent cap rate is very strong relative.

I have to what the consensus niv so.

We're happy with with the disposition, there and reinvesting the capital on the on the transaction market in particular, I would say, it's getting better generally speaking our pipeline is certainly increasing substantially we looking forward to posting some closings in the fourth quarter that.

That should reduce the the capital we have on our balance sheet and and provide significant N. A V in earnings growth for us heading into 2021, but but generally speaking I would say that the markets are opening up and and valuations are are very very strong across the board.

I guess I'm no longer along the same same lines of nope upgrade controlling valuation.

Does it make make it even more competitive for you guys to go through acquisitions mm mm mm mm, maybe Ottoman can disclose the the cat paid that you paid on the answer that you acquired in the corner.

Sure first off it it's always been difficult there's no doubt that there's I would say more capital flows under the Sun belt relative to the the preceding years that being said I think we've always done a good job of of finding opportunities that cap rates that that are far significantly higher.

Then where the market is trading just like this recent example in Austin, we paid almost a five tab for a deal in north Central Austin, a distressed seller found an opportunity we moved on it quickly in fact that came through one of our partners shoes that actually the largest owner and manager of apartments.

In Austin.

<unk> moved on it quickly and I would tell you that that that deal today trade sub for cat. So the 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 alone.

Options. So so we've been able to to find opportunities that don't fit I'd say the you know.

The traditional fully marketed stabilized type deals that are that are generating you know very very low cap rates like our disposition today.

In today's environment.

Okay. Thank you that's all I had.

As a reminder, if you do have a question. Please press star than one on your Touchtone phone.

At this time there are no further questionnaires Q. His concludes our question and answer session I would now like to turn the conference back over to remain calm for for any closing remarks.

Thank you operator, I want to thank everyone for giving us our time today, we look forward to continuing to a report on our progress throughout the.

Rest of the rest of this pandemic and on the recovery on the other side on the other side as we get into the recovery, where we think are as as we mentioned are are positioning in our markets will continue to outperform.

Thank you everyone.

Goodbye.

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

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