Bluerock Residential Growth REIT's (BRG) CEO Ramin Kamfar On Q3 2017 Results - Earnings Call Transcript

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About: Bluerock Residential Growth REIT, Inc. (BRG)
by: SA Transcripts

Bluerock Residential Growth REIT, Inc. (NYSEMKT:BRG) Q3 2017 Results Earnings Conference Call November 7, 2017 11:00 AM ET

Executives

Christopher Vohs - Chief Accounting Officer

Ramin Kamfar - Chairman and CEO

Ryan MacDonald - Chief Acquisitions Officer

Analysts

Rob Stevenson - Janney

Craig Kucera - B. Riley FBR

Greg Baufield - Northland Securities

Operator

Good morning, ladies and gentlemen. And welcome to Bluerock Residential Growth REIT's Third Quarter 2017 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 would now like to introduce your host for today's call, Christopher Vohs, Chief Accounting Officer of Bluerock Residential. Mr. Vohs, please go ahead.

Christopher Vohs

Thank you, and welcome to Bluerock Residential Growth REIT's third quarter 2017 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 Investor Relations 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, including pro forma measures please refer to our earnings supplement for a reconciliation to GAAP, the reasons management uses these non-GAAP measures and the assumptions used with respect to any pro forma measures and their inherent limitations.

And with that, I'll turn the call over to Ramin Kamfar, Chairman and CEO of Bluerock Residential Growth REIT, for his remarks.

Ramin Kamfar

Thank you, Chris. Good morning, everyone. In addition to Chris with me today, I have several additional key members of our executive team, Jordan Ruddy, our President and Chief Operating Officer; Jim Babb, our Chief Investment Officer; and Ryan MacDonald, our Chief Acquisitions Officer. I will focus my remarks on key financial highlights from the quarter and close with some internalization and capital markets commentary. Afterwards, I'll ask Ryan to provide you with additional operational and transactional detail.

Let me start with our financial highlights. On the revenue front, we're continuing to achieve significant growth. Our top line revenue for the third quarter was $30.1 million, which is a 46% increase from $20.6 million in the prior year quarter, largely as a result of our significant investment activity since then. I will note that our revenue growth was impacted by our asset sales in the second quarter of this year and expected reinvestment of those proceeds to occur through the end of the year and reflect in our revenue numbers.

Net loss attributable to common stockholders for the quarter was $0.45 per share, as compared to our net loss of $0.12 per share for the prior year quarter. For the quarter, our adjusted funds from operations attributable to common stockholders or AFFO for short, was $3.4 million compared to $4.3 million in the prior year quarter. On a per share basis, AFFO came in at $0.13, which significantly exceeded our guidance of negative $0.02 to negative $0.03. Our AFFO was impacted temporarily by the asset sales that I noted above and also by a onetime $0.02 charge resulting from about $600,000 in costs across eight properties in Florida and Georgia, which were slightly impacted by Hurricane Irma.

Our pro forma AFFO, which assumes that our investible cash was fully invested as of the beginning of the third quarter was $0.37 per share versus our guidance range of $0.25 to $0.27. The detail for the pro forma average we indicate, which we include to show our earnings power on a fully invested basis, is available in our earnings supplement for your review.

For the 10th consecutive quarter, BRG's Board determined to pay the full amount of our management fee in LTIPs in lieu of cash, with the goal of continuing to signal the confidence of management in executing our business plan and the underlying value of our shares. The payment of the fees in LTIPs favorably impacted our AFFO and our pro forma AFFO per share numbers by $0.11 and by $0.10, respectively.

Moving on to property operations; property NOI dollars grew to $16 million in the quarter, which is a 26% increase from $12.7 million in the prior year quarter. Same-store NOI was down 60 basis points for the quarter versus the prior year. This was impacted by operational volatility at two of our assets and the Dallas Fort Worth MSA and Ryan is going to provide additional detail for you.

Our asset base continues to grow; our gross assets are over $1.5 billion as of the end of the quarter, which is up 7% on a quarter-to-quarter basis and up 59% on a year-over-year basis. On the acquisition front, during the quarter we closed on two operating properties totaling 720 units for approximately $96 million.

Shifting to the capital market side, our Series B 6% preferred offering continues to offer us access to cost effective capital. Third quarter sales totaled $42.4 million and we expect the quarterly run rate through 2018 to maintain around the $45 million to $50 million level.

Additionally post quarter end, we closed a $150 million revolving credit facility which will enable us deploy our capital more efficiently and provide capital structure flexibility as we grow the business. Initially, two assets were added to the borrowing base giving us revolver capacity of about $72 million to start and our goal is to increase the borrowing base to max capacity through the first half of 2018.

Moving on to the internalization; on October 31st, following the approval of stockholders at our annual meeting, we closed the internalization of external management function previously performed by our manager. The consideration was $41.2 million, calculated pursuant to a formula that was established in the management agreement at the time of our IPO. To further align the interests of our management team with those of our stockholders, 99.9% of the consideration was paid in equity.

We estimate the internalization will be accretive to AFFO by approximately $3.8 million on a run rate basis based on our current numbers with the benefit significantly growing over time. For example, at $1.5 billion in equity size we estimate the savings would be about $10 million per year.

During the third quarter, we also announced the Board has undertaken a review of the common stock dividend policy and also announced that we estimated that the 2018 dividend would be between, $0.65 to $0.75. We're currently refining our 2018 budget and expect to be in a position to announce the dividend sometime in the December timeframe.

Finally, before handing the call over to Ryan, I'd like to note that our AFFO per share guidance for the fourth quarter is $0.03 to $0.06 per share. We expect this number to grow significantly as we move through 2018 and complete investing the substantial cash that was on our balance sheet at the end of the third quarter. Ryan?

Ryan MacDonald

Thank you, Ramin, and good morning, everyone. I'd like to start off by noting that from a same store perspective like the previous quarter this quarter continued to be a transitionary period for us as we finished our targeted disposition efforts and began the progress of reinvesting the capital into growth oriented assets, whose performance will not be captured in the same store pool for some time. Portfolio wide, across BRG's assets average occupancy for the third quarter of '17 was 94%. Occupancy held firm in October as well finishing the month at 94%.

Same store NOI in the quarter decreased by 60 basis points from the prior year period in the prior year, with a 90 basis points increase in same store property revenues driven by a 1.6% increase in average rental rates versus the prior year period and a 70 basis points decrease in occupancy. Same store expenses increased by 3.3% primarily attributable to an increase in R&M, turnover cost, and increased real estate tax assessments.

I want to note that our same store performance was disproportionately impacted this quarter by a negative performance from two assets in the DFW MSA, particularly our Frisco asset which remains challenged with new supply and where we expect the operational volatility to persist through 2018. Excluding the two DFW assets, year-over-year same store revenue and NOI increased 3.4% and 4%, respectively.

On the margin front, our margin decline is primarily attributable to our recent disposition and reinvestment activity. We exited mature cash flowing assets and recycled the capital into higher growth opportunities that typically take a couple of quarters to stabilize into a steady operational state. Takeover volatility and onetime upfront expenses can further disproportionately distort margins during a period of high investment activity.

Shifting to the investment front; in the third quarter, we closed on two investments totaling 720 units and $96 million in gross asset value and $29 million in BRG equity, for an 89% ownership interest. The business plans focused on executing our core+ renovation strategy which includes targeted capital improvements to be met in the area and select interior unit floor plans, so that we can migrate both assets to our standard highly amenitized live, work, play lifestyle product. The assets are projected to yield a pro forma year one cap rate of 5.7% and are projected to grow to a stabilized cap rate of approximately 7% versus market cap rates ranging from 5% to 5.5%.

Subsequent to the quarter end we closed three investments totaling 1,342 units and $220 million in gross asset value and purchased the minority interest in our ARIUM Grandewood property for approximately $3 million. BRG invested $103 million for 100% ownership across the four properties. The average initial going in cap rate for the assets is approximately 5.3% with opportunity to drive the blended stabilized cap rate to approximately 6.5% through our core+ renovation strategy. Two of the investments were partially funded with [jobs] from our new line of credit totaling $54 million. Our Hunter's Creek purchase was funded with $72 million fixed rate loan from Freddie Mac at 3.65%.

In terms of pending transactions we are under contract to purchase one additional 304 asset in Greenville, South Carolina for a total purchase price of approximately $40 million. BRG is projected to invest approximately $50 million in equity for a 100% ownership in the asset. The investment is subject to customary closing conditions and risks typically associated with multifamily real estate investment.

In terms of remaining commitments, by year end we are projecting to convert three existing common equity development investments to mezzanine loans earning 15% annualized AFFO. To-date, we have spent $24 million in common equity for investments in Crescent Perimeter and Vickers Village in Atlanta, Georgia. As part of the conversion to a mezzanine investment, we are estimating $7 million of additional investment across the two developments for a total combined projected mezzanine investment approximating $31 million.

The remaining mezzanine investment is a to-be-built development in Flagler Village in Fort Lauderdale, Florida. To-date $25 million of common equity has been invested and we expect to convert this amount and invest additional capital for a total mezzanine investment of $50 million. Following the conversion of existing development common equity, any additional investment in the three projects outlined the total BRG investment in development preferred equity and mezzanine loans is projected to be approximately $208 million.

And following the remaining acquisition and additional in the three of the mezzanine development opportunities, we are projecting to finish the year with approximately $20 million of cash on hand inclusive of our estimated fourth quarter Series B preferred raise. Finally, our pipeline continues to be very robust and we look forward to reporting additional feedback on our continued investment activity in the coming quarters.

And with that, I will now return the call to Ramin to conclude.

Ramin Kamfar

Thank you, Ryan. That's the end of our prepared remarks and I'm happy to open it up to Q&A operator.

Question-and-Answer Session

Operator

Thank you, Mr. Kamfar. We will now begin the question-and-answer session [Operator Instructions] Thank you. And our first question this morning will come from Rob Stevenson of Janney. Please go ahead.

Rob Stevenson

Good morning, guys. Ryan, you indicated that the -- what the change in the same-store occupancy was. What was the same-store occupancy in the third quarter?

Ryan MacDonald

It was 94%.

Rob Stevenson

Okay. And then do you guys have a sequential same-store revenue growth for the quarter?

Ryan MacDonald

We do, including the two Dallas assets it was 3.4%.

Rob Stevenson

Okay. Now I think that was year-over-year though wasn't it?

Ramin Kamfar

Definitely, year-over-year.

Ryan MacDonald

Excuse me, it was 0.6%, excluding the two Dallas assets it was 1.2%.

Rob Stevenson

Okay. Perfect. And then can you guys talk about how leasing is currently going at the four properties that had initial -- those development assets that had initial occupancy over the last few months CityCentre, Helios, Southside place and [Boone Trail]?

Ramin Kamfar

Sure. CityCentre we are currently as of 9/30 we are about 60% leased and I think today we're about 65% leased. We were doing about 10 to 15 units pre-Harvey. I think we did about 100 units, post-Harvey. So, we're on track I think if you average out over the course of that timeframe, its north of 30. But we're back to the normal I think 10 to 15 units albeit there is no concessions on the post-Harvey units. On Helios, we are about 28% leased as of 9/30 which is averaging 16 to 20 units of month on pro forma. Leigh House we have actually had a pretty good start there as well, we are about almost 25% leased at quarter end averaging about 20 units a month with rents on pro forma. And then finally our other deals Alexan Southside by the medical center in Houston again we've had -- we actually just opened units there, Rob, in October and we are about 12% leased there and we expect that to accelerate in the coming months.

Rob Stevenson

Are you seeing -- in the Houston asset are you seeing people disaffected by the hurricane sort of running in and are you sort of -- is it a staggered completion there or most of your units are going to wind up being delivered already?

Ramin Kamfar

With respect to Southside it's a staggered completion, CityCentre we've have actually delivered the substantial majority of the units.

Rob Stevenson

Okay. And then how significant has preferred B raise been thus far in the fourth quarter, you guys did a pretty decent amount of 40 some million in the third quarter, I mean you anticipating that the fourth quarter is going to be equal to that or greater at this point?

Ramin Kamfar

That would be a good estimate which is where we will be at the same level or maybe a tad higher. It's hard to tell to project to the last million because you've got Thanksgiving and the holidays coming up, but outside of that our run rate remains to be robust as far as we can look out.

Rob Stevenson

Okay. And then just lastly Ramin on the -- as the Board contemplates any changes to the dividend policy, what's the key two or three things that you guys are still contemplating? It is not known now that if you guys are trying to ratchet down before you finalize that decision?

Ramin Kamfar

Well, we announced that the number is going to be -- we estimated back in August when we announced that the number is going to be in the 65 to 75 range and I repeated that in my remarks. So we are comfortable with that range. So I think what we are trying to do is just finalizing the budgets because we want to make sure that we cover the number. We are comfortable today where we said, but obviously we have significant cash that we are continuing to invest. We have invested a significant part of it this quarter end. We've got some additional investment to do and given our size it's sensitive to -- the numbers are sensitive to timing. But where we sit today we are comfortable with it. Obviously people don't really announce and so it's really a call on what our 2018 number is going to be, which as you know our peers don't do until they announce Q4 in February, so we are making an early -- we need to make an earlier call on that and we are comfortable that we are going to get -- we are going to be able to do that in December as we promised.

Rob Stevenson

Okay. Thanks guys.

Ramin Kamfar

Thank you.

Operator

The next question will come from Craig Kucera of B. Riley FBR. Please go ahead.

Craig Kucera

Hey, good morning guys. I would like to circle to the Whetstone asset which looks like it's still on accrual. I know that you guys had anticipated operations will improve there. How are things going at that asset and how are you feeling about the market right now?

Ryan MacDonald

Sure, hi, Craig. The market obviously still continues to be impacted. The little micro market of Durham continues to be impacted by immediate supply in the sub-market. Let's say operationally at the asset we are starting to see the right trend versus the last couple of quarters, but it's going to take some work to kind of work through the supply -- immediate supply in that sub-market over the coming quarters.

Ramin Kamfar

But obviously, hi Craig, it's Ramin. Again but obviously that's the benefit of preferred which is you can -- you're not dependent on -- as you are off pro forma because of market issues or anything unexpected, the preferred provide some protection there.

Craig Kucera

You anticipate selling the asset then to recoup your investment or you think it will eventually improve operations to be then cash flowing?

Ryan MacDonald

I think we absolutely think that the market will improve certainly throughout '18 and into '19 and we're not looking to sell the asset in '18?

Craig Kucera

Okay. You re-classified a couple of things out of NOI, I think tenant reimbursements -- I'm sorry utility reimbursements and property management fees. I guess, what was the thought process there and should we expect that going forward?

Ramin Kamfar

The answer is that yes, you should expect it going forward. In terms of the utility reimbursements, the accountants came to us and said that we can -- they need to be classified as revenues as opposed to expenses based on a series of tests that we have to go through. That tells you whether you're a principal as a -- an agent. And it's our -- Chris can go through in detail with you if you'd like to walk through those tests. But that's a direction from the accountants and that's what you'll see in our numbers going forward. It does have an impact obviously of reducing our margins a bit just because of the way the numerator and the denominator work. We broke our property management fees because when we looked at what our peers were doing we thought that that was a more comfortable way to represent the numbers and provided a better sense to people of what our true operating margins are and yes, so you should expect that going forward. So it's all done -- so the first one was done because of accounting guidance and the second one is done to provide additional clarity and visibility and transparency to the investors.

Craig Kucera

Okay. You had some weather related losses you expensed during the quarter. Can you give us some color on what the -- why that was expensed?

Ramin Kamfar

Chris, do you want to take that?

Christopher Vohs

Sure yeah. So from -- we incurred approximately $925,000 in damages across eight properties and one of the properties reached their insurance claim limitation, so, which was about $250,000 and that was our Gulfshore property in Naples which took a direct hit from Irma. And so those are the expected losses on those specific properties [less] our expected amount from the insurance proceeds.

Craig Kucera

Okay. Thanks I'll jump back in queue.

Operator

And the next question will come from Paul Penny of Northland Securities. Please go ahead.

Greg Baufield

Hi, guys. This is Greg on for Paul. Thanks for taking my questions. First, how many employees will be in the REIT post internalization and are there any areas that you expect for needing additional personnel?

Ramin Kamfar

I think the number is around 40. I think that there is -- so you've got -- I think the team is pretty fully staffed there. There is a administrative support agreement with Bluerock that provides some non-core functions such as Investor Relations and Marketing and Human Resources and so on and so forth that is more cost efficient for us at our size to source from Bluerock than it is to have in-house. We're just not big enough to have a HR team for example. But the contract is cancellable at our option, it's renewable at our option and the idea is that as we get bigger and it becomes cost efficient to bring it in-house we're -- we'll do that which should happen as we continue on our normal growth path and/or if we find a cheaper vendor. We're getting these services at a cost. We're not tied into the contract. If we get the services from another third party at a cheaper price we have the flexibility to switch over.

Greg Baufield

Make sense. Thanks. And then secondly, I know you've talked a little bit about the damages from hurricanes. But, I was wondering, are there any intermediate term supply and demand dynamics that you expect to benefit from in the Houston and Florida markets following the hurricanes?

Ramin Kamfar

Well, I think Houston -- you have probably heard it from Camden and others what's happened in Houston, is that, a lot of stock got taken out and the overhang that we had in that market that we expected is going to take a year to eat through, got basically eaten through by the hurricane. So, as Ryan mentioned in response to an earlier question that leases -- that we took a 100 leases immediately after the hurricane which kind of ramped up our average per month number. That rate has obviously slowed down, but now post hurricane leasing, the concessions have gone away and we had up to a couple of months of concessions beforehand. And I think property today. Our property is more valuable today in Houston -- our properties are more valuable in Houston than they are pre-hurricane.

And we saw the same thing in -- across our markets in Florida where supply has tightened up and you're going to see it and higher occupancy numbers and then over time in higher rental numbers and in higher property values. Anecdotally I can tell you that people who are -- we know of cases where sellers had their property out to market had accepted or were close to accepting an offer and they've pulled their property off with the view that they're going to re-market it, take it back to the market at a higher price post Irma. So, on that front it's been a -- notwithstanding obviously all of that horrible suffering that hurricanes cause from a property value and performance point of view, the impact for us has been positive.

Greg Baufield

Got it. Thank you.

Operator

[Operator Instructions] And we do have a follow-up question from Paul Penny of Northland Securities. Please go ahead.

Greg Baufield

Yeah, just one more thing that came to mind. I noticed consensus had Q4 AFFO of $0.14, a little bit higher than the guide and I was wondering, what do you think is the main cause for the difference that the Street's maybe not modeling in?

Ramin Kamfar

I think the Street may not be -- we've had a delta between our guidance and what we actually report because of -- we've been taking -- the Board has been giving us our management fee in LTIPs and that difference has been about $0.10 to $0.11 per share. Now about LTIP, the ability to pay us in LTIPs goes away after the internalization. So you are going to see that for about a month. I would think that's probably about $0.03 a share in Q4, but you're not going to see the rest of that impact. So that maybe one of the things that that is changing the delta, that as -- if historically look at our guidance and what we've reported we are then not only at the top end or exceeding the guidance organically, but we've had $0.10 to $0.11 delta on top of it. So I'm guessing that that's the issue.

But it also has to do with the fact that we've had a couple of noisy quarters. Q2 we had a number of asset sales. We've had costs related to the internalization. We've had costs related this quarter to the hurricane. Next quarter, you are going to see again internalization costs and we're continuing to deploy the cash that we have. So our goal is, this has been the internalization, has been a big milestone for us. We're happy to have that behind this. The line of credit is another, although we didn't emphasize and didn't talk about it on this call, so another big milestone for us that's going to help us be a lot more efficient in terms of cash management.

So, our goal going in through 2018 is to have a lot less noise and be a lot more fully invested so people can really get a good sense of the tremendous portfolio that we've built and we're continuing to build and the value that we're creating at the property level and let that come through and put all this noise behind us.

Greg Baufield

Understood. Thanks again.

Ramin Kamfar

That's a good question.

Operator

Thank you. And I'm showing no additional questions at this time. We will conclude the question-and-answer session. I would like to hand the conference back over to Ramin Kamfar for his closing remarks.

Ramin Kamfar

Thank you, operator. As I said, it's been a couple of noisy quarters. We've had some big milestones. We've been working on the internalization for a year as of today actually. We're happy to put that behind us and we are going to bring the team in-house and look forward to continuing to build a first class portfolio, delivering shareholder value, build a first class team, increase our equity sponsorship and deliver great returns to our shareholders. Thank you everyone for your support. Look forward to reporting on our continuing progress to you in the coming quarters.

Operator

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time you may disconnect your lines. And once again, the conference has concluded. You may disconnect your lines.