Today we will be looking at Bluerock Residential Growth REIT (NYSE:BRG). As its name suggests, the company invests in residential properties under the value - add, opportunistic and buy and hold scopes. The company focuses mostly on Class A apartment properties that are located in prime areas with favourable demographics. They also prefer garden properties located in 1st ring suburban areas.
At the end of 2020, the company's portfolio was comprised of 59 properties scattered in various States.
Source: BRG January 2021 Investor Presentation
As we can see in the map presented above, the majority of the properties the company owns and operates are located in the south and south east, the so called "sunbelt zone". The map also shows that these areas have high net migration figures as compared with the rest of the country. In our opinion net migration is a useful figure but itself alone is not enough. It is the combination of net migration with economic growth, as expressed by job growth or GDP growth, that makes sense. And the "sunbelt" area has seen tremendous increase both in jobs and GDP. However, population influx at these areas doesn't happen only for economic reasons. The sunbelt area is also a popular destination for retirees who seek milder climate conditions to spend their lives.
The company also generates revenues from mezzanine and preferred equity investments that represent 10% - 30% of its total portfolio. More specifically, Bluerock Residential Growth REIT has 22 properties held through preferred equity, mezzanine loan and ground lease investments, five of which are under development, three are in lease-up and fourteen properties are stabilized. At the end of 2020, 29% of the company's portfolio was held under mezzanine loan, preferred equity and ground lease investments, on a unit basis.
Revenues
The company reported $220 million in revenues for the full year 2020, representing a 4.9% increase from 2019. For comparison, the annual increase in revenues relative to 2018 was 14%. On a compounded basis, revenues have increased by 34.3% during the last 5 years, which is impressive considering the sector median of 6%. On a peer comparison basis, the company's 5 year compounded annual revenue growth is only matched by that of Preferred Apartment Communities (APTS). The company operates at a 95% occupancy rate and showed a 97% rent collection rate during the time of the COVID19 pandemic. It is estimated that revenues are expected to decline by 4.9% at the end of Q1 2021, on a YoY basis, while for the full year 2021, a revenue increase of 2.3% is anticipated.
Source: Company
Funds From Operations
In fact we will be looking at Core FFO, to exclude among others any acquisition costs. After a small decline during the 2018-2019 period, CFFO rose by 6.6% in 2020 as compared to 2019. The company disposed a total of 10 properties in 2020 for $26.4 million. The CFFO attributable to common shareholders was $0.72/share at the end of 2020, following a 12.2% decrease from 2019 levels. The above figures lead to an estimation of a 15.1x P/FFO multiple. According to NAREIT, residential REIT valuations are expected to be at 17.7x P/CFFO multiple in 2021, meaning that at these levels Bluerock Residential Growth REIT is trading at a discount. However, in our opinion, the average estimated P/CFFO multiple quoted by NAREIT is somewhat optimistic. As we saw in the last few days, the market responded aggressively on rate increase speculation. We believe that the average P/CFFO will decrease to 15x multiple area.
Debt
As of December 31st 2020, the company had $1.8 billion in debt, the majority of which were mortgages. The company's maturity schedule is well distributed in time, as only $87 million of mortgage debt matures in 2021. That figure, contains a $76 million loan that offers the possibility of two 3 - month extensions. According to the company's latest annual financial statement, it has a debt ratio of 72.3%. Comparing this figure to other apartment REITs we can see that the company is significantly more leveraged that its peers, which form an average of 47%. For 2021, the company has a weighted average interest rate of 2.07%, which in 2022 will become 3.46% , using today's assumptions. Based on these data, the company anticipates that a 100 basis point increase in interest rates would increase future interest expense by approximately $4.3 million on an annual basis. By using that figure into the calculations we end up with a new CFFO figure of $0.59, representing a 18% decrease on an annual basis, ceteris paribus, which further translates into a P/CFFO multiple of 18.5x based on a share price of $10.80.
Source: TIKR
At the end of 2020, the company had an FFO interest coverage of 1.33x and FFO to total debt was 0.05x. These figures are quite low as, for reference, Equity Residential (EQR) had an interest coverage multiple of 3.38x, Camden Property Trust (CPT) had 5.7x and for Independence Realty Trust (IRT) the figure was 2.05x. In other words, we are looking at a company that for now can repay its interests, but a combination of a rate increase along with the anticipated revenue decrease in Q1 2021, can change that completely.
At the end of 2020, the company had the highest Debt to Equity ratio as compared to the other three companies mentioned above, reaching 180%, while EQR, CPT and IRT have D/E figures of 75%, 90% and 137% respectively. However, in terms of short term liquidity, BRG is in better position, with a current ratio of 11.59x, as compared to 0.17x, 1.40x and 0.34x of EQR, CPT and IRT respectively.
Dividend
In 2020, the company paid an annual dividend of $0.65 per share, yielding 6.07%. During the same period, as we wrote above, the company's CFFO was $0.72 per share. This shows a 90% CFFO payout ratio. If the scenario mentioned in the previous paragraph becomes reality, the company will no longer be in position to cover its present dividend and will be forced to cut it, or to preform dispositions at a more extended scale.
Institutional Ownership
20% of the total company's outstanding shares are held by three investment funds, namely Blackrock Institutional Trust Company (7.87%), Alliance Bernstein L.P. (7.09%) and Vanguard (5.33%). To what is worth, the biggest increase in long positions of these funds was made by Alliance Bernstein, which added 767 thousand shares on December 31, 2020.
Conclusions
Within the context of this article, we conducted a NAV valuation based on the full year 2020 data adjusted accordingly using forward estimates. According to the company's CEO, "we achieved very robust pricing with cap rates averaging 4%". Given that 30% of the company's portfolio is in preferred equity and mezzanine investments, we used a cap rate of 6% in our calculation. We ended up with a NAV/share of $12.40, a 12% upside from today's level. The company is also located in strategically chosen markets, providing some cushion against market risks. However, the total geographical diversification in terms of NOI contribution per market could be better. In 2020, the company generated 31%, 18% of their total rental revenue from Florida and Texas properties respectively which signifies increased geographical concentration risk. So, at the bottom line, based on CFFO, total debt and current share price, dividend amount in relation to CFFO and the current market conditions, we believe that the risks associated with an investment in this company outweigh the possible returns, at least for now.
