© 2018 REIT Stream — a product of 454 CreativeWe provide web development and media streaming solutions for leading companies across the globe.
REITWeek 2015 webcasts brought to you by Nareit.
Bluerock Residential Growth REIT, Inc. (“BRG”) acquires well-located, institutional-quality apartment properties in demographically attractive growth markets across the United States.
We aim to maximize long-term stockholder value by investing in properties that show a clear potential for us to drive substantial growth.
BRG partners as majority owners with leading regional owner/operators, to improve properties and operations. Working together, we seek to grow funds from operations (FFO) and net asset value (NAV). Our focus on local owner/operator partners allows BRG access to critical local market knowledge, relationship capital, and operational infrastructure while making sure that the interests of our on-sight managers are aligned with those of our investors.
Ms. Melissa Shrimpton
Bluerock Real Estate, LLC
27777 Franklin Road, Suite 900
Southfield, MI 48034
Ramin: Good afternoon everyone and thank you for joining us today at our presentation. I'm Ramin Kamfar, Chairman and CEO of Bluerock Residential Growth REIT. With me I have some members of our senior management here that I'm going to introduce. To my immediate right is Jim Babb, our chief investment officer; Jordan Ruddy who's our president and chief operating officer; and Ryan MacDonald SVP of Investments.
Let me tell you a little about our REIT. We have a differentiated value creation strategy, so it's a little different in that its growth REIT. There are three legs to the strategy:
The first leg is that we're building a Class-A portfolio in growth markets that's tailored towards the renter by choice…generally, the echo boomers or the millennials.
The reason we're doing that, the reason for those elements, the reason we're focusing on growth markets is because there's a very high correlation between employment growth and apartment demand – it’s about 80%. We're looking for markets that are delivering employment growth within specific industries that generate high disposable incomes and are going to continue to do so over the next decade or two, specifically: healthcare, education, technology, finance, trade, energy, high value-add manufacturing, entertainment.
We're looking for high growth markets but also high quality-of-life markets because the employment growth is going to bring in the renters but the quality-of-life of the market is going to be important in terms of retention.
We're building a Class-A portfolio because that's what our target audience is looking for, especially the millennial and the echo boomer. They're looking for newer product, more efficient units, not necessarily the largest units -- smaller units -- but in a highly amenitized environment -- an environment that's live, work, play and socialize. That's what we're either building or we are buying and creating -- that type of environment.
If you look at our portfolio, it is one of the most productive in our markets versus our peers. When I say in ‘our markets’ we’re in the top 30 primary markets outside of the coastal six. We're not in Boston, New York, Washington, L.A., San Francisco and Seattle because we're not buyers at a three cap rate. We're generally six cap rate or plus buyers.
Our average rent per unit on a pro forma basis for the deals we have in pipeline is about $1,300, which gives you a sense of the quality and productivity of our portfolio, and our average age is about 12 years on pro forma basis. That's leg one of the strategy.
The second leg of the strategy is how we execute.
Real estate, at the end of the day, is a local business and we want to be best in class operators in every market that we're in across the multiple strategies that we have. At our size, the way we do that, is we use a private equity model which is we team up with the best local, private local, or regional, private owner-operators in each of the markets that we're in and we leverage the infrastructure that they have in place.
These are firms some of you have heard of. For example, if we're doing development in Texas we're teaming up with Trammell Crow, arguably the best developer, the most experienced developer in the country. They've built some of the largest REITS out very successfully. They are building the Alexan brand. We've teamed up with them on a number of deals and we're building a couple of Alexans.
It could be Archstone. When Archstone was bankrupt and they needed a capital partner we were their capital partner on a very successful deal in Texas, where their brand name is very valuable. We leveraged that, we leveraged their development infrastructure, we leveraged their management infrastructure.
Or it could be someone who's private. You may or may not have heard of Bell Partners. Bell Partners is a top 10 apartment owner-operator. They've got 70,000 units. They've got an infrastructure that's public-ready. They could go public tomorrow if they wanted. Steve Bell has been doing this for 40 years, he's got a 10-state footprint and he is a tremendous operator especially for Core Plus. So we'll team up with Steve Bell on a deal.
That does a number of things for us. One is it allows us to focus on the big value creation items. What are those? Which markets, which asset, what's the business plan to create value, execute it and then exit if necessary? What we don't do is with the low margin stuff, dealing daily with tenants' trash and toilets, the basics of property management. That's a very low margin business. It's 3% of revenues. It's maybe 50 basis points or 30 basis points on the bottom line if you've got critical mass. We leave that our local operators. That is a very human capital intensive business. By not focusing on that it allows us to be strategic and tactical in terms of going after deals in markets where we don't have an infrastructure and otherwise, we wouldn't be able to pursue it.
We just bought a tremendous deal in Austin. We knew the seller, a financial firm. They were exiting the market. It was their last asset. Extended sales process, the deal had fallen out of bed and rents were trimmed down by about 15% in the market. That's actually very strong. We were able to pick it up at a tremendous price and we didn't have to worry about having an operating infrastructure in place because you can't go into a market as the large REITs. You can't go into the market with one asset. You need to have three to five assets to justify your structure.
We were able to go in. We went to Steve Bell who has three assets in the submarket that are competitive and we said, "Our thesis is that rents are 15% below market." He looked at it and said, "Absolutely. I can validate that based on this asset, this asset and this asset that I have in my portfolio. By the way, I'll write you a check for 8% of the equity in the deal."
So it gives us the flexibility to rifle shot tremendously attractive deals across our markets and across our strategy but always have best in class execution in those markets.
So A, it makes at local sharpshooters and B, the other advantage it gives us is sourcing. We have our sourcing network, obviously, from doing this for 25 years but our partners also have tremendous sourcing capabilities.
Last year our top five guys did over $3 billion worth of transactions. We're continuously mining this pipeline for attractive deals, the nuggets that meet our risk-return hurdles that we can execute on. We have a very robust pipeline, a lot of it off-market because that's the only way we buy it. We're buying off-market, relationship-based deals. We're not buyers of fully stabilized deals that go to auction. That's how we create value.
That's what the local operator network does for us. They'll co-invest alongside us so that we know that they're in it, not for the management fee but they're in it for creating value on the equity the same as we're in it for our investors. That's the second leg of the pipeline.
Then the third leg of the pipeline is value creation.
We're value guys by nature. We have a private equity background so, as I said, we're not buying stabilized deals fully priced at auction. What we are buying is complicated deals that need us to roll up our sleeves and create value.
There's generally two elements to that. One is it's a discount purchase element. We're solving somebody's problem and we're getting a discount for it on the way going in. What is that problem? Someone needs to sell quickly or quietly or it's a broken capital structure or there's some sort of other pressure. For example, this deal in Austin that we picked up, as I mentioned, that that financial firm had a number of assets in Austin. They announced they're exiting the market and harvesting that portfolio. They'd sold their other assets. This one was the last one. What happens when you're exiting the market? The first thing that happens is your competitors pick off your best operators and that's why operations had started to run down.
We solved the problem for them when we went to them, when we saw the deal fell out of bed. We went to them and we said, "We can execute on it quickly and you know we're handshake guys because we've transacted before. We've got documents but we'll do it at our price or you can take it back out to market for another three to six months and take your chances, but we'll buy it at our price." They decided to hit our price and we got the deal. Its rents are 15% below market so that translates to about 100 basis points below market in terms of our purchase price.
We're either doing that, getting a discount on the exit, or there's a value creation plan post-purchase and that could be as simple as your traditional light value add. Light unit upgrades on the interiors, amenity upgrades in pushing rents or it could be re-tenanting, re-positioning, re-development.
Generally, there's an element of both in terms of the discount purchase and the value creation and we generally try to create somewhere between 100 and 200 basis points of value creation. That's generally a 50% to 100% return on our equity in terms of our deals. We've delivered that on the deals that we've sold and we've sold four deals recently. We've averaged, I think, about 50% IRRs.
The third leg of value creation is obviously development. We also do that. Again, we utilize our partner network. The sourcing goes both ways. Sometimes we source the deal and bring in our partners. Sometimes, in the case of the Trammell deal we did recently it took them three years to assemble the site where there was no multi-family land available. Well there's tremendous value creation in that and we came in at the last minute when it was assembled and titled, zoned. The designs were in place. The guaranteed max price contract was in place. Financing was in place. Trammell was providing the completion guarantees and the bank guarantees. We came in at their cost basis. There's tremendous value in that and we're leveraging off their Alexan brand.
They'll get a promote on the back-end after we get our money back and a return. They should get paid for all the work they've done but it's all success-based. That's the power of our structure, which is a force multiplier for us in terms of execution and in terms of source.
Those are three legs of the stool. It's all made possible, obviously, by a management team that has a combined 100+ years of experience doing this.
Just to give you some backgrounds on us, I started my career on 1988 at Lehman as a private equity banker. I left in mid '90s to start my own private equity shop and have built and sold two companies prior to this.
I started Bluerock Real Estate, which is the sponsor of this entity, in 2002 with Jordan Ruddy. At the private equity firm we've done about 15 million square feet of transactions, about two-thirds of them in the multi-family space and we've delivered mid 30s IRRs with a relatively low octane strategy. We're not doing heavy value add. We're not doing opportunistic deals. We're very focused on cash flow and we're not max leverage guys. Similar strategy to what we're delivering in the REIT.
Jordan Ruddy has been on the business about 25 years also. Wharton MBA like myself, got a start at JP Morgan Chase in the late '80s underwriting deals in the aftermath of the RTC and the tax law changes and the SNL crisis. He has seen the dark side and is forever the more conservative for it. Then a REIT investment banker at Salomon Smith Barney and Bank of America Merrill, banking some of the biggest names that you see around in the rooms today.
Jim and Jordan know each other for a couple of decades through family relationships. Jim started his career at Trammell Crow and then left in '91 to join a guy by the name of Barry Sternlicht who had just gotten a $10-million allocation from the Ziff family to start a little shop, to do a start-up called Starwood Capital. Jim went out to the RTC. Jim was one of the five guys on the ground. Started to buy multi-family out of the RTC. Put together a very sexy portfolio that in 18 months they had flipped to Sam Zell and took back 22% of Equity Residential as part of the IPO for a triple on that fund. That helped get them on the map. Jim was there for a dozen years, helped build them from $10 million to $10 billion in assets, helped run office and residential there.
Gary Kachadurian, who's not here, is another senior team member. Gary has been doing this for about 35 years. Ran RREEF's apartment business for a dozen years and prior to that developed the Midwest for Lincoln Properties which is obviously a big developer. Ryan is one of our rising stars. SVP of acquisitions, about 10 years in the business, more than half of working with Jim and myself.
I mentioned experience because it's important that you know that we've seen and invested successfully on the up-leg and the down-leg of a number of cycles, three to four, depending on who you talk about. It's important because real estate is a cycle. It's like a movie that gets a sequel every 7 to 10 years. You've seen the movie and sequel is enough. You know the common themes that are going to play up and you should be able to take advantage of that.
That's an overview. We've made a lot of progress since we went public. We went public April 2nd of last year. We've been public less than 18 months and if you look at we've done since the IPO, pre-IPO we went public as a nano-cap. We were $25 million pre-IPO capital. We did a $50 million IPO and we were still a nano-cap last time I was here last year, and today we're over $250 million market cap.
What we've done with that money is we've successfully invested it faster and at better metrics than we've promised so if you look at our revenues…and our numbers show that. If you look at our income statement, our revenues have tripled from three million before Q1 of 2014, which was our last quarter pre-IPO, to the last quarter, when we reported $9 million in revenues. Our average occupancy is up to 260 basis points, our same store NOI has been strongly positive -- last quarter we reported 19%. G&A as a percent of revenue, has come down from about 16% to about 5%. Tremendous economies in that as we grow the business. And our AFFO per share, which basically boils everything down to our performance, was negative 48¢ per share in Q1 of last year and it was +13¢ in the Q1 of this year, but if you adjust it for the cash drag with respect to the offering that we did in Q1, it was 29¢ a share. We've come a long way from -48 to +29. By the way, at +29, that number covers our dividend. On a pro forma basis we're recording that to adjust for the cash drags so people can see our performance.
We've come a long way. I think we've bought a tremendous number of high quality assets in some very attractive markets in Atlanta, Orlando, Durham, Charlotte, Austin, Tampa. We have a number of very attractive deals under contract, again, in those markets, Charlotte, Raleigh and Jacksonville, Florida and with tremendous value creation.
Last but not the least, we are just getting out and starting to build our sponsorship. As I said, we were nano-cap when we went out so we had very little sponsorship, no institutions in our IPO. I'll contrast that with the deal that we just did. We just did a follow on about three weeks ago, it was an overnight. It was our first overnight.
We launched it Monday after the close and priced it Tuesday morning before the open. We went out with a small deal, $50 million, because we figured we wanted to execute it in May so that we can get on the Russell. By the way, Russell announces end of this week and we fully expect to be included in the Russell 2000, which obviously would be a nice milestone for us.
We went out for $50 million overnight. The firms on the cover were Wunderlich, Compass Point, Janney Montgomery Scott, Oppenheimer and D.A. Davidson. Within a couple of hours we had a $120 million in orders and that's after shutting down the retail systems after an hour, because they put in orders for 900,000 each and we had about 375,000 to give them.
We had 45 institutions in the deal. Some very nice names like Wells Fargo, even CALPERs, I think is in the deal in a very small amount, obviously, and a bunch of attractive names. I don't remember all of them off the top of my head. Ardsley, Forward, Deutsche Bank, Cardinal Vanguard, Nicholas and BlackRock and so on and so on and so forth.
We had done a non-deal road show a couple of months before and met with 31 accounts and I will tell you that out of 31, 31 liked the story. Only 15 of them, when we tied up the numbers, invested in the follow on. But the ones that didn’t invest were the Fidelities and the Nuveen’s of the world were size was an issue. We asked them, they said under 250 market cap it's very difficult. Over 500 it's much easier.
We're going out, we're educating people and we're getting good sponsorship. We now have four pieces of research out on us from Compass Point, Wunderlich, with D.A. Davidson and OpCo and we expect, hopefully, Janney is going to pick us up at some point, not in the too distant future.
We put up great numbers versus our comps. If you look at the small cap and mid cap comps: on the small cap you've got Independence Realty Trust and Trade Street, which are merging, and then on the mid cap guys you've got MidAmerica, Associated Estates. Associated is obviously being developed by Brookfield Post and Camden.
We have one of the youngest portfolios in the market with an average age of 14 and getting younger. But as we're selling two of our oldest assets, we have the one of the highest average rents per unit about $1,300 pro forma the deals that I just talked about and that's second only to Post which is at $1,439 and ahead of associated and Camden. I'm only comparing, obviously, to guys that are in our market. If you look at the larger REITs in the coastal cities they have much higher average rents but you'd expect that.
We've recorded the best in class, same store NOI growth. From performance basis we're delivering. We expect to continue to do so. From a trading point of view we're trading at a significant discount to our peers and it has to do with the sponsorship, which is why we're here talking to everyone and why we're going to be on another non-deal road show shortly. We're focused on investment banking coverage and research coverage and getting institutions in our deals.
If you put all the names that I talked about and spread their multiples, you'll see that they trade anywhere from a 24 multiple for Associated, which is getting bought out, the next one is 22 for Post. Obviously, these numbers are a couple of days old, I think. There's been a downdraft in the REIT market so the multiple may be down a little bit.
Camden's at 19, Trade Street's at 19, MidAmerica is at 16 and Independence is at 13 and we're at 12 and a half. Independence is a really good comp for us because Independence is in tertiary markets, they have a 24-year average age and they only get $800 a unit, whereas we get, as we said, $1,300 a unit and we're about 14 years old which puts us up right up top with Associated and Post.
We should be trading at a significantly higher multiple. Part of it is size, part of it is getting out and telling our story and getting sponsorship. Both of those are something that we work on. Today our dividend, where our current stock price is trading is a very attractive 8 and a half to 9%. That's why I think the institutions are liking the story as we tell it. That, on top of the management team, the quality of the management, the quality of the assets and the execution today.
Our goal is to solve this significant discount that we're trading at over the next 12 to 18 months as we get larger -- hopefully significantly larger -- over that period of time, and as we execute our business plan and as we become internalized…we're probably going to get internalized somewhere. We're externally managed today and there's a clear path to internalization. We've committed to people, we'll internalize management as soon as accretive.
Currently, the management for our peers runs about $7.5 million and our asset management today is about one and a half percent. Our management fee last year was $800,000. This year it will be somewhere between $2 million - $3 million. We're funding that from the private equity firm, about $4 million to $5 million a year. We're as anxious as anybody else is to reduce that down to zero, make internalization accretive and internalize the management.
That's my story, that's our story. We've got about seven minutes for any questions so I'm going to stop talking at this point.
Speaker 2: Right now you said that you're using local partners to manage the properties. Are they under the Bluerock name or are they under a local name?
Ramin: That's a good question. They're not under the Bluerock name. They are under the name of the local partner. That makes sense for a couple of reasons. One is when we're building in Texas, Trammell Crow's brand, Alexan, is worth a lot more in the mind of the consumer than Bluerock is. Or when we did a deal with Archstone. The reason we went and we got Archstone in Austin was because the Archstone name meant something. Bell Partners has 70,000 units. That means something to the ultimate consumer and we're leveraging off of that for free. Bluerock name doesn't mean anything.
So A, we get the name for free and B, what it allows us to do is to do deals that other public REITs can do, because Equity Residential can't go and do that deal with Trammell because Equity wants Equity's name on the door. Whereas we're agnostic in the terms of the name because the local name will carry more value than our name today.
Speaker 2: Will that ever change? Do you have a plan to eventually manage everything?
Ramin: Sure. Our strategy it works 'til you get to about $2 and a half billion in size in terms of market cap because our sweet spot, if you think about, it is $20 million to $50 million deals and these primary markets number 7 down to number 37. That's a sweet spot because, as I said, the larger REITs are focused on the coastal markets and much larger deal numbers. When you're a $20 billion, it doesn't make sense to do a $50 million dollar dealt just doesn’t move your needle. You want to do larger deals in Manhattan and so on and so forth.
If you're thinking about pockets of capital we compete with, the public REITs -- we're too small for them. You've got institutional private capital or individual private capital. Institutional private capital is the Brookfields or Blackstones of the world. They're looking to put $100 million checks. We just met with Blackstone, they said, "We'd love to co-invest with you." We said, "What's the size?" They said, "$100 million." We said, "Great, but we're good up to $50 to $75, $100 is too big." They said, "No. We're talking $100 million in equity." We said, "Okay, it'll be a while until we co-invest together.'
The deals that we do are under their radar and they're too big for the individual country club money locally, so it's a sweet spot for us. But once you get to $2 and a half billion in equity, you've got $5 billion in assets, assuming 2:1 leverage. The deal size needs to be large enough to move the needle. So yes, the strategy will evolve overtime.
Speaker 3: Are your development partners investing in the assets?
Ramin: Absolutely. They're putting up Trammell's, putting up 10% of the equity and actually, that came from Crow Family Holding, so their own capital, not somebody else's. They were 90-10 and then they get a promote at the end based on the return. We get our money back, we get a 10% hurdle or whatever the right hurdle is and then they'll have a bigger stake at the back-end profit.
Speaker 3: [inaudible]
Ramin: We're getting at the end. The exit is either a sale or a market to market and at that point in time, there's a waterfall in terms of the returns. The way the waterfall works is that first our capital comes back 90-10 to everybody, then there's a preferred hurdle of let's say 10% per year that comes back to everybody and if the project is delivering a 20% or a 30% return, then after the 10% IRR the returns will split. They will get an extra 10% on the back-end or 20%.
Speaker 3: [inaudible].
Ramin: It would be a merchant building except we're building to own, we're not building to sell. It's a development.
Speaker 3: [inaudible].
Ramin: Yes, we're buying it. I have two and a half minutes. Any other questions?
Speaker 4: Can you talk a little bit about your dividend policy?
Ramin: Sure. Dividend is 29¢ a quarter, it has been – so it’s $1.16. We're covering that on a pro forma basis and our goal today is to grow that coverage from one to one to something significantly above that and we hope that's going to happen through the end of 2016 and at that point, we'll revisit it. Until then, I wouldn't expect any increase in dividends. I wouldn't expect a decrease either.
Speaker 4: What is the process for buying the management company is it a purchase or dividend?
Ramin: It's already fixed in the management contract. Very good question. We looked around to see what the best mechanism is out there and there's a termination. First of all, the board has a right to do it unilaterally, which is termination of the contract and it's three times exit fee.
It's three times our management fee over the prior 12 months and the reason for the exit fee is the fact that I mentioned, we're spending $4 to $5 million a year to support this out-of-pocket because the sponsor firm is paying all of these expenses and so it allows us to recoup some of that. By the way, we're taking it all in stock. If the management fee has been $5 million, there'll be a $15 million payment in stock coming back to us.
I've got one minute.
Just to follow up on that, someone said, "Are you guys investing in the company and the company's equity?" I said, well, we're not buying shares but that's our investment. We're spending $5 million plus a year on the management, paying for the management infrastructure and then eventually we'll get it back at the internalization in equity so we are effectively investing in this spot.
We've discussed that with all of the institutions that we meet and they understand. The only reason that we have an external management, by the way, is the fact that we're too small to support. The suite is too small, $250 million in equity market cap, to pay the $7 and a half million it cost to run it and still pays its dividend.
Thirty seconds. Any other questions? Well, I want to thank everyone for joining us today.