Bluerock Residential Growth REIT (NYSE: BRG) is reportedly exploring its strategic options. Bloomberg reported that the residential REIT (real estate investment trust) is working with an advisor to weigh its options, including selling itself or completing a recapitalization. The move comes at a time when apartment buildings -- especially those in the Sun Belt region, where Bluerock focuses -- are in high demand by renters and investors.
Here's a closer look at the company and why it's considering its options.
What Bluerock brings to the bargaining table
Bluerock has investments in about 17,000 apartments, primarily in fast-growing cities like many across the Sun Belt region. The company focuses on high-quality (Class A- and Class B+) suburban garden apartments. Its operating portfolio had 11,426 units. In addition, the REIT made preferred equity and mezzanine debt investments in another 5,347 units, split between those under construction and stabilized/recently completed communities.
The company has an interesting investment strategy. Its operating portfolio generates growing income from rising rents due to population growth and value-add investments as it renovates units. Meanwhile, the preferred/mezz portfolio provides high-yielding income and a built-in pipeline of acquisition opportunities.
The company's strategy is working. Its same-store NOI grew 6.5% in the second quarter, driven by 10.3% rent growth. One factor driving this growth is its renovation projects. The company delivered nearly 250 unit upgrades in the second quarter, generating an average return on investment of 24.4% because of an average monthly rent premium of $144 per unit.
Why is Bluerock considering its options?
This portfolio and strategy are right in the sweet spot these days. Investors are paying a premium for apartments in fast-growing Sun Belt cities because they're benefitting from above-average rent growth. We're seeing apartment REIT giants like Equity Residential (NYSE: EQR) shift their investing strategy from major coastal gateway cities to fast-growing Sun Belt markets like Atlanta and Austin, Texas. And several other REITs are all moving in that same direction. This seems like an excellent opportunity for Bluerock to cash in on its portfolio.
That's especially true when considering its valuation relative to other apartment REIT peers. Before news broke that it's exploring its options, Bluerock traded at just 14 times its 2021 funds from operations (FFO) estimate, the second-lowest among apartment REITs. For comparisons' sake, most rivals sell at more than 25 times their FFO, with Equity Residential currently at 28.5 times.
One reason for that low valuation is the company's financing strategy. It has financed its portfolio with 51% secured debt and 49% equity. However, more than 70% of that equity is preferred stock, a debt-like instrument. That heavily financed balance sheet is also one of the reasons why it's exploring a recapitalization. Such a move could see it redeem some of its preferred stock for equity, possibly through the sale of its preferred/mezz portfolio or other assets.
On the one hand, Bluerock's portfolio makeup (significant preferred and mezz investments) and capital structure (heavy usage of preferred equity financing) could complicate a potential sale. However, other REITs or institutional investors might overlook that because they highly value its operating portfolio, since it would allow them to bulk up their presence in the Sun Belt region.
An interesting situation to watch
Bluerock is looking to cash in on investor demand for Sun Belt apartments. It could either sell for a premium or secure investors to recapitalize its operations, either of which could unlock shareholder value. That makes it an intriguing REIT to watch.