Bluerock Residential Growth REIT Announces Third Quarter 2017 Results

NEW YORK, Nov. 7, 2017 /PRNewswire/ -- Bluerock Residential Growth REIT, Inc. (NYSE MKT: BRG) ("the Company") announced today its financial results for the quarter ended September 30, 2017.

Highlights

• Total revenues grew 46% to $30.1 million for the quarter from $20.6 million for the prior year quarter primarily as a result of significant investment activity in the past year, offset by the sales of four properties in 2017 and one in 2016.
• Net loss attributable to common stockholders for the third quarter of 2017 was ($0.45) per share, as compared to net loss attributable to common stockholders of ($0.12) per share in the prior year period.  Net loss attributable to common stockholders included non-cash expenses of $0.56 per share in the third quarter of 2017 compared to $0.43 per share for the prior year period.
• Adjusted funds from operations attributable to common stockholders ("AFFO") was $3.4 million for the quarter compared to $4.3 million for the prior year quarter. 
• AFFO per share is $0.13 for the third quarter of 2017 as compared to $0.21 for the third quarter of 2016, and exceeded guidance of ($0.03) – ($0.02).
• Pro forma AFFO per share of $0.37 for the third quarter exceeded pro forma guidance of $0.25 to $0.27 per share.
• The Company paid the full amount of the third quarter's base management fees in LTIP Units in lieu of cash payment.  This favorably impacted AFFO per share and pro forma AFFO per share by $0.11 and $0.10, respectively.
• Property Net Operating Income (NOI) grew 26% to $16.0 million for the quarter, from $12.7 million in the prior year quarter.
• Property NOI margins were 57.2% of revenue for the quarter, compared to 61.6% of revenue in the prior year quarter.  Property NOI margins were impacted by the sales of more stabilized assets with proceeds being recycled into replacement properties with higher growth opportunities, which require time to realize margin improvement.
• Same store NOI decreased 0.6% for the quarter, as compared to the prior year quarter.  Same store NOI was impacted by two properties in suburban Dallas which were temporarily negatively impacted.  Excluding the two assets, same store NOI increased 4.0%.
• Consolidated real estate investments, at cost, increased 20% to $1.2 billion at September 30, 2017 from $1.0 billion at December 31, 2016.
• The Company invested in two operating properties totaling 720 units for a total purchase price of approximately $96.0 million during the third quarter.
• The Company declared monthly dividends for the fourth quarter of 2017 equal to a quarterly rate of $0.29 per share on the Company's Class A common stock.
• The Company sold 42,416 shares of Series B preferred stock with associated warrants at a public offering price of $1,000 per unit, for gross proceeds of approximately $42.4 million during the third quarter.

Management Commentary

"We continue to successfully execute on our strategy as we expand our portfolio of high quality multi-family communities and position our platform for long-term growth," said Ramin Kamfar, the Company's Chairman and CEO. "We maintain a robust pipeline of opportunities, and including transactions completed subsequent to the quarter-end, we added five operating properties totaling 2,062 units for approximately $315 million. We also further enhanced our balance sheet and liquidity position with continued momentum in the Series B preferred continuous offering raise with third quarter gross proceeds of over $40 million, and the closing of a senior secured credit facility. Finally, we are pleased to have completed the internalization of our management function. We are committed to being a best-in-class organization, which includes having a truly aligned management structure and platform to support ongoing growth." 

Third Quarter Acquisition Activity

• On September 8, 2017, the Company acquired an 80% investment in a 384-unit apartment community located in Houston, Texas, known as Villages at Cypress Creek, at a total purchase price of approximately $40.7 million.
• On September 28, 2017, the Company acquired a 96.8% investment in a 336-unit apartment community located in Orlando, Florida, known as Citrus Tower, at a total purchase price of approximately $55.3 million.

Pending Investments at September 30, 2017

• On October 19, 2017, the Company acquired a 100% interest in a 300-unit apartment community located in Birmingham, Alabama, known as Springs at Greystone, which will be rebranded as Outlook at Greystone.  The total purchase price was approximately $36.3 million, funded in part with the Company's senior secured credit facility.
• On October 30, 2017, the Company acquired a 100% interest in two properties, ARIUM Hunter's Creek, a 532-unit apartment community, and ARIUM Metrowest, a 510-unit apartment community, both located in Orlando, Florida.  The total purchase price was approximately $182.9 million, funded in part with a $72.3 million mortgage loan on ARIUM Hunter's Creek and in part with the Company's senior secured credit facility.
• The Company has an agreement which entitles the Company to purchase a 304-unit apartment community located in Greenville, South Carolina, known as The Mills, subject to certain conditions. The total purchase price is expected to be approximately $40.3 million.

Third Quarter 2017 Financial Results

Net loss attributable to common stockholders for the third quarter of 2017 was $12.0 million, compared to a net loss of $2.6 million in the prior year period.

AFFO for the third quarter of 2017 was $3.4 million, or $0.13 per diluted share, compared to $4.3 million, or $0.21 per share in the prior year period.  AFFO was primarily impacted by increases in property NOI of $3.3 million arising from significant investment activity offset by sales of properties, interest income of $2.1 million and offset by interest expense of $2.3 million, lower income from preferred returns and equity in income from unconsolidated real estate joint ventures of $0.6 million, and an increase in preferred stock dividends of $3.1 million.

Same Store Portfolio Performance

Same store NOI for the third quarter of 2017 decreased 0.6% or $0.05 million compared to the same period in the prior year. Same store property revenues increased by 0.9% compared to the same prior year period, primarily attributable to a 1.6% increase in average rental rates offset by a 66 basis point decrease in average occupancy.  Same store expenses increased 3.3% primarily the result of an approximate $0.025 million increase in each of the categories: general and administrative, repair and maintenance, turnover, landscaping, and taxes. The same store results were disproportionately impacted by performance of two assets in the Dallas Fort Worth MSA, particularly our Frisco asset which remains challenged from new supply.  Excluding the two assets, year-over-year same store revenue and NOI increased 3.4% and 4.0%, respectively. 

Senior Secured Credit Facility

On October 4, 2017, the Company, through its operating partnership, entered into a credit agreement (the "Senior Credit Facility") with KeyBank National Association and other lenders.  The Senior Credit Facility provides for an initial loan commitment amount of $150 million, with an accordion feature up to $250 million.  The availability will be based on the value of a pool of collateral properties and compliance with various ratios related to those properties.

The Senior Credit Facility matures on October 4, 2020, with a one-year extension option, subject to certain conditions and the payment of an extension fee.  Borrowings under the Senior Credit Facility bear interest, at the Company's option, at LIBOR plus 1.80% to 2.45%, or the base rate plus 0.80% to 1.45%, depending on the Company's leverage ratio.  The Senior Credit Facility contains certain financial and operating covenants, including a maximum leverage ratio, minimum liquidity, minimum debt service coverage ratio, and minimum tangible net worth.  The Company has guaranteed the obligations under the Senior Credit Facility.

Management Internalization

On August 4, 2017, the Company announced that it had entered into definitive agreements providing for the Company's internalization of the external management function provided by the Manager and the direct employment of the Manager's existing management team and certain other employees.  The internalization transaction was unanimously approved by the Special Committee of independent directors, the Company's full board of directors, and the issuances of equity were approved by a majority of disinterested stockholders voting at the Company's annual meeting of stockholders on October 26, 2017.  The internalization consideration was calculated pursuant to a formula established in the Management Agreement at the time of the Company's initial public offering in April 2014.  The internalization consideration amounted to approximately $41.2 million.  To further align the interests of the Company's management team with those of the Company's stockholders, 99.9% of the consideration was paid in equity, comprised of 3,753,593 units of limited partnership interest ("OP Units") in the Company's operating partnership, and 76,603 shares of Class C Common Stock, which were issued to provide the recipients with a voting franchise commensurate with their economic interest in the OP Units.  Upon closing of the internalization, on October 31, 2017, the Company became a self-managed real estate investment trust. 

Dividend Details

On October 13, 2017, the board of directors authorized, and the Company declared, monthly dividends for the fourth quarter of 2017 equal to a quarterly rate of $0.29 per share on its Class A common stock, payable to the stockholders of record as of October 25, 2017, which was paid in cash on November 3, 2017, and as of November 24, 2017 and December 22, 2017, which will be paid in cash on December 5, 2017 and January 5, 2018, respectively. Holders of OP and LTIP Units are entitled to receive "distribution equivalents" at the same time as dividends are paid to holders of our Class A common stock.

The declared dividends equal a monthly dividend on the Class A common stock as follows: $0.096666 per share for the dividend paid to stockholders of record as of October 25, 2017, and $0.096667 per share for the dividend which will be paid to stockholders of record as of November 24, 2017, and December 22, 2017. A portion of each dividend may constitute a return of capital for tax purposes. There is no assurance that we will continue to declare dividends or at this rate.

As previously announced, the board of directors is conducting a review of the appropriate Company's dividend policy for the Company's Class A Common stock, and anticipates a potential annual dividend range for the Class A Common Stock of between $0.65 and $0.75 per Class A common share.  The board's evaluation will consider factors including, but not limited to, achieving a sustainable dividend covered by current recurring AFFO, multifamily and small cap peer ratios, providing financial flexibility for the Company, and achieving an appropriate balance between the retention of capital to invest and grow net asset value, and the importance of current distributions.  The board is expected to complete its review of the dividend policy for the Company's Class A Common Stock in December 2017.

On October 13, 2017, the board of directors authorized, and the Company declared, a monthly dividend of $5.00 per share of Series B preferred stock, payable to the stockholders of record as of October 25, 2017, which was paid in cash on November 3, 2017, and as of November 24, 2017, and December 22, 2017, which will be paid in cash on December 5, 2017 and January 5, 2018, respectively.

The board's review of dividend policy will address the dividend policy for the Company's Class A Common Stock only.  The terms of each series of the Company's issued and outstanding preferred stock provide for fixed annual dividend rates, and are not subject to adjustment at the board's discretion.

Q4 2017 Outlook

For the fourth quarter of 2017, the Company anticipates AFFO in the range of $0.03 to $0.06 per share. For assumptions underlying earnings guidance, please see page 29 of Company's Q3 2017 Earnings Supplement available under Investor Relations on the Company's website (www.bluerockresidential.com).  

Conference Call

All interested parties can listen to the live conference call at 11:00 AM ET on Tuesday, November 7, 2017 by dialing +1 (866) 843-0890 within the U.S., or +1 (412) 317-6597, and requesting the "Bluerock Residential Conference."

For those who are not available to listen to the live call, the conference call will be available for replay on the Company's website two hours after the call concludes, and will remain available until December 7, 2017 at http://services.choruscall.com/links/brg171107.html, as well as by dialing +1 (877) 344-7529 in the U.S., or +1 (412) 317-0088 internationally, and requesting conference number 10114017.

The full text of this Earnings Release and additional Supplemental Information is available in the Investor Relations section on the Company's website at http://www.bluerockresidential.com.

About Bluerock Residential Growth REIT, Inc.

Bluerock Residential Growth REIT, Inc. (NYSE MKT: BRG) is a real estate investment trust that focuses on acquiring a diversified portfolio of Class A institutional-quality apartment properties in demographically attractive growth markets to appeal to the renter by choice. The Company's objective is to generate value through off-market/relationship-based transactions and, at the asset level, through improvements to operations and properties.  BRG generally invests with strategic regional partners, including some of the best-regarded private owner-operators in the United States, making it possible to operate as a local sharpshooter in each of its markets while enhancing off-market sourcing capabilities. The Company is included in the Russell 2000 and Russell 3000 Indexes.  BRG has elected to be taxed as a real estate investment trust (REIT) for U.S. federal income tax purposes. 

For more information, please visit the Company's website at www.bluerockresidential.com.

Forward Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements are based upon the Company's present expectations, but these statements are not guaranteed to occur.  Furthermore, the Company disclaims any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. Investors should not place undue reliance upon forward-looking statements. For further discussion of the factors that could affect outcomes, please refer to the risk factors set forth in Item 1A of the Company's Annual Report on Form 10-K filed by the Company with the U.S. Securities and Exchange Commission ("SEC") on February 22, 2017, and subsequent filings by the Company with the SEC. We claim the safe harbor protection for forward looking statements contained in the Private Securities Litigation Reform Act of 1995.

Portfolio Summary

The following is a summary of our operating real estate and development properties as of September 30, 2017:

 

 

 

 

 

Non-GAAP Financial Measures

The foregoing supplemental financial data includes certain non-GAAP financial measures that we believe are helpful in understanding our business and performance, as further described below. Our definition and calculation of these non-GAAP financial measures may differ from those of other REITs, and may, therefore, not be comparable.

Funds from Operations and Adjusted Funds from Operations

Funds from operations attributable to common stockholders ("FFO") is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. We consider FFO to be an appropriate supplemental measure of our operating performance as it is based on a net income analysis of property portfolio performance that excludes non-cash items such as depreciation. The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time. Since real estate values historically rise and fall with market conditions, presentations of operating results for a REIT, using historical accounting for depreciation, could be less informative. We define FFO, consistent with the National Association of Real Estate Investment Trusts, or ("NAREIT's") definition, as net income, computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus depreciation and amortization of real estate assets, plus impairment write-downs of depreciable real estate, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis.

In addition to FFO, we use adjusted funds from operations attributable to common stockholders ("AFFO"). AFFO is a computation made by analysts and investors to measure a real estate company's operating performance by removing the effect of items that do not reflect ongoing property operations. To calculate AFFO, we further adjust FFO by adding back certain items that are not added to net income in NAREIT's definition of FFO, such as acquisition and pursuit costs, equity based compensation expenses, and any other non-recurring or non-cash expenses, which are costs that do not relate to the operating performance of our properties, and subtracting recurring capital expenditures (and when calculating the quarterly incentive fee payable to our Manager only, we further adjust FFO to include any realized gains or losses on our real estate investments).

Our calculation of AFFO differs from the methodology used for calculating AFFO by certain other REITs and, accordingly, our AFFO may not be comparable to AFFO reported by other REITs. Our management utilizes FFO and AFFO as measures of our operating performance after adjustment for certain non-cash items, such as depreciation and amortization expenses, and acquisition and pursuit costs that are required by GAAP to be expensed but may not necessarily be indicative of current operating performance and that may not accurately compare our operating performance between periods. Furthermore, although FFO, AFFO and other supplemental performance measures are defined in various ways throughout the REIT industry, we also believe that FFO and AFFO may provide us and our stockholders with an additional useful measure to compare our financial performance to certain other REITs. We also use AFFO for purposes of determining the quarterly incentive fee, if any, payable to our Manager.

Neither FFO nor AFFO is equivalent to net income, including net income attributable to common stockholders, or cash generated from operating activities determined in accordance with GAAP. Furthermore, FFO and AFFO do not represent amounts available for management's discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Neither FFO nor AFFO should be considered as an alternative to net income, including net income attributable to common stockholders, as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity.

We have acquired interests in thirteen additional operating properties and three development investments and sold five properties subsequent to September 30, 2016. The results presented in the table below are not directly comparable and should not be considered an indication of our future operating performance.

 

 

The pro forma guidance is being presented solely for purposes of illustrating the potential impact of these pipeline transactions, as well as future investments to be made with funds we have available for investment, as if they had occurred at July 1, 2017, based on information currently available to management and assumptions management has made with respect to our future pipeline.

The Company is providing no assurances that any of the above transactions are probable, or that they will close or that management will identify or acquire investments consistent with our pipeline assumptions, and the failure to do so would significantly impact pro forma guidance. The actual timing of these investments, if and when made, will vary materially from the assumed timing reflected in the pro forma guidance, and actual quarterly results will differ significantly from the pro forma guidance shown above. Investors should not rely on pro forma guidance as a forecast of the actual performance of the Company.

Earnings Before Interest, Income Taxes, Depreciation and Amortization ("EBITDA")

EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, calculated on a consolidated basis. We consider EBITDA to be an appropriate supplemental measure of our performance because it eliminates depreciation and amortization, income taxes, interest and non-recurring items, which permits investors to view income from operations unobscured by non-cash items such as depreciation, amortization, the cost of debt or non-recurring items. Below is a reconciliation of net (loss) income attributable to common stockholders to EBITDA (unaudited and dollars in thousands).

 

 

Recurring Capital Expenditures

We define recurring capital expenditures as expenditures that are incurred at every property and exclude development, investment, revenue enhancing and non-recurring capital expenditures.

Non-Recurring Capital Expenditures

We define non-recurring capital expenditures as expenditures for significant projects that upgrade units or common areas and projects that are revenue enhancing.

Same Store Properties

Same store properties are conventional multifamily residential apartments which were owned and operational for the entire periods presented, including each comparative period.

Property Net Operating Income ("Property NOI")

We believe that net operating income, or NOI, is a useful measure of our operating performance. We define NOI as total property revenues less total property operating expenses, excluding depreciation and amortization and interest. Other REITs may use different methodologies for calculating NOI, and accordingly, our NOI may not be comparable to other REITs. We believe that this measure provides an operating perspective not immediately apparent from GAAP operating income or net income. We use NOI to evaluate our performance on a same store and non-same store basis because NOI measures the core operations of property performance by excluding corporate level expenses and other items not related to property operating performance and captures trends in rental housing and property operating expenses. However, NOI should only be used as an alternative measure of our financial performance.

Certain amounts in prior periods, related to tenant reimbursements for utility expenses amounting to $1.0 million and $2.7 million for the three months and nine months ended September 30, 2016, have been reclassified to other property revenues from property operating expenses, to conform to the current period presentation which includes tenant reimbursements for utility expenses amounting to $1.6 million and $4.6 million for the three months and nine months ended September 30, 2017.  In addition, property management fees have been reclassified from property operating expenses.

The following table reflects net (loss) income attributable to common stockholders together with a reconciliation to NOI and to same store and non-same store contributions to consolidated NOI, as computed in accordance with GAAP for the periods presented (unaudited and amounts in thousands):

 

 

 

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SOURCE Bluerock Residential Growth REIT, Inc.