Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of the historical results of operations and liquidity and capital resources of Bluerock Homes Trust, Inc. (“Bluerock Homes,” “the Company,” “we,” “us,” or “our”), which was incorporated as a Maryland corporation on December 16, 2021. Prior to October 6, 2022, Bluerock Home’s sole stockholder was Bluerock Residential Growth REIT, Inc, a Maryland corporation (“Bluerock Residential”). We have historically operated as part of Bluerock Residential and not as a stand-alone company. You should read the following discussion and analysis in conjunction with the accompanying financial statements of Bluerock Homes, and the notes thereto. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements.
The Separation and the Distribution
On December 20, 2021, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Bluerock Residential, Badger Parent and Badger Merger Sub LLC (“Merger Sub”). As contemplated by the Merger Agreement, on October 5, 2022, we entered into a Separation and Distribution Agreement with Bluerock Residential, Badger Parent, Badger Holdco LLC and the Operating Partnership, pursuant to which, among other things, Bluerock Residential contributed to us its single-family residential real estate business and certain other assets (the “Separation”). On October 6, 2022, following the Separation, Bluerock Residential completed the spin-off of Bluerock Homes by distributing all our outstanding shares of Class A common stock and Class C common stock to the holders of Bluerock Residential common stock (the “Distribution”) as of the record date, September 29, 2022 (the “Spin-Off”). Pursuant to the terms and conditions of the Merger Agreement, following the Separation, the Distribution and the Spin-Off, Bluerock Residential merged with and into Merger Sub, with Merger Sub continuing as the surviving company, and the separate existence of Bluerock Residential ceased. As a result of the Separation, the Distribution and the Spin-Off, Bluerock Homes became an independent, publicly traded company and our Class A common stock is listed under the symbol “BHM” on the NYSE American.
Financial statements representing the historical operations of Bluerock Residential’s residential rental business have been derived from Bluerock Residential’s historical accounting records and are presented on a carve-out basis. All revenues and costs as well as assets and liabilities directly associated with the business activity of Bluerock Homes are included in the financial statements. The financial statements also include allocations of certain general, administrative, sales and marketing expenses and operations from Bluerock Residential. However, amounts recognized by us are not necessarily representative of the amounts that would have been reflected in the financial statements had we operated independently of Bluerock Residential. All significant intercompany balances and transactions have been eliminated. Any references to “the Company,” “we,” “us,” or “our” for all periods ended October 6, 2022 and prior refer to Bluerock Homes as owned by Bluerock Residential, and for all periods subsequent to October 6, 2022 refer to Bluerock Homes as an independent, publicly traded company.
Forward-Looking Statements
All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws and may be identified by words such as “will,” “expect,” “believe,” “plan,” “anticipate,” “intend,” “goal,” “future,” “outlook,” “guidance,” “target,” “estimate” and similar words or expressions, including the negative version of such words and expressions. These forward-looking statements are based upon our present expectations, estimates and projections about the industry and markets in which we operate and beliefs of and assumptions made by our management, involve uncertainty that could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements and are not guaranteed to occur. Furthermore, we disclaim 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 these forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in these forward-looking statements due to numerous factors.
Additional factors that could have a material adverse effect on our operations and future prospects include, but are not limited to:
● The impact of epidemics, pandemics, or other outbreaks of illness, disease or virus (such as the outbreak of COVID-19 and its variants) and the actions taken by government authorities and other related thereto, including the ability of our company, our properties and our tenants to operate;
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● the factors included in this Quarterly Report on Form 10-Q, including those set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;
● use of proceeds of our securities offerings;
● changes in national, regional and local economic conditions, which may be negatively impacted by concerns about inflation, deflation, government deficits, high unemployment rates, decreased consumer confidence and liquidity concerns, particularly in markets in which we have a high concentration of properties;
● fluctuations and relative increases in interest rates, which could adversely affect our ability to obtain financing on favorable terms or at all;
● the inability of tenants to pay rent;
● the existence and quality of the competition, such as the attractiveness of our properties as compared to our competitors’ properties based on considerations such as convenience of location, rental rates and safety record;
● increased operating costs, including increased real property taxes, HOA fees, maintenance, insurance and utilities costs;
● weather conditions that may increase or decrease energy costs and other weather-related expenses;
● oversupply of single-family housing or a reduction in demand for real estate in the markets in which our properties are located;
● costs and time period required to convert acquisitions to rental homes;
● a favorable interest rate environment that may result in a significant number of potential residents of our properties deciding to purchase homes instead of renting;
● rules, regulations and/or policy initiatives by government and private actors, including HOAs, to discourage or deter the purchase of single-family properties by entities owned or controlled by institutional investors;
● our ability to lease newly acquired or newly constructed single-family properties;
● changes in, or increased costs of compliance with, laws and/or governmental regulations, including those governing usage, zoning, the environment and taxes;
● rent control or stabilization laws, or other laws regulating rental housing, which could prevent us from raising rents to offset increases in operating costs;
● the board of directors’ determination as to timing and payment of dividends, and our ability to pay future distributions at the dividend rates we have paid;
● our ability to maintain our qualification as a REIT; and
● litigation, including costs associated with prosecuting or defending claims and any adverse outcomes.
A discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Information Statement filed as Exhibit 99.1 to our Form 8-K filed on September 26, 2022, as well as risks, uncertainties and other factors discussed in this Quarterly Report on Form 10-Q and identified in other documents filed by us with the SEC. Any of the assumptions underlying forward-looking statements could be inaccurate. You are cautioned not to place undue reliance on any forward-looking statements included in this report. All forward-looking statements are made as of the date of this report and the risk that actual results will differ materially from the expectations expressed in this report will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this report, whether as a result of new information, future events, changed circumstances or any other reason.
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Basis of Presentation
We conduct our operations through Bluerock Residential Holdings, L.P., our operating partnership (the “Operating Partnership”), of which we are the sole general partner. Bluerock Homes consists of the combined financial statements of the Operating Partnership and Bluerock REIT Operator, LLC, as well as the following investments and certain related entities: Alexan Southside Place, ARIUM Grandewood, Ballast, Golden Pacific, ILE, James at South First, Marquis at The Cascades, Mira Vista, Navigator Villas, Peak (Axelrod, DFW 189, Granbury, Granbury 2.0, Indy, Lubbock, Lubbock 2.0, Lubbock 3.0, Lynnwood, Lynnwood 2.0, Peak Housing, Savannah 319, Springfield, Springtown, Springtown 2.0, Texarkana and Texas Portfolio 183), Park & Kingston, Plantation Park, The Conley, The Cottages at Myrtle Beach, The Cottages at Warner Robins, The Cottages of Port St. Lucie, The District at Scottsdale, The Hartley at Blue Hill, The Woods at Forest Hill, Thornton Flats, Vickers Historic Roswell, Wayford at Concord, Wayford at Innovation Park, Weatherford 185, Willow Park and Yauger Park Villas. The general and administrative expenses have been allocated to us based on relative unit count. These allocated expenses are for corporate office expenses and management including, but not limited to, executive oversight, asset management, treasury, finance, human resources, tax, accounting, financial reporting, information technology and investor relations.
Overview
We own and operate high-quality single-family properties located in attractive markets with a focus on the knowledge-economy and high-quality of life growth markets of the Sunbelt and Western United States. Our principal objective is to generate attractive risk-adjusted returns on investments where we believe we can drive growth in funds from operations and net asset value by acquiring pre-existing single-family residential homes, developing build-to-rent communities, and through Value-Add renovations. Our Value-Add strategy focuses on repositioning lower-quality, less current assets to drive rent growth and expand margins to increase net operating income and maximize our return on investment.
As of September 30, 2022, we held an aggregate of 3,963 residential units held through twenty-nine real estate investments, consisting of twenty-two consolidated operating investments and seven investments held through preferred equity investments. As of September 30, 2022, our consolidated operating investments were approximately 90.9% occupied.
We intend to elect to be taxed and to operate in a manner that will allow us to qualify as a real estate investment trust (“REIT”) for federal income tax purposes beginning with our taxable year ending December 31, 2022. As a REIT, we generally will not be subject to corporate-level income taxes. To qualify and maintain our REIT status, we will be required, among other requirements, to distribute annually at least 90% of our “REIT taxable income,” as defined by the Internal Revenue Code of 1986, as amended (the “Code”), to our stockholders. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate tax rates and we would not be permitted to qualify as a REIT for four years following the year in which our qualification is denied. Such an event could materially and adversely affect our net income and results of operations. We intend to organize and operate in such a manner where we would remain qualified as a REIT.
COVID-19
We continue to monitor the impact of the COVID-19 pandemic and any resulting macro-economic changes on all aspects of our business and single-family residential communities, including how it will impact our tenants and business partners. We cannot predict the future impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows due to the numerous uncertainties. These uncertainties include the scope, severity and duration of the pandemic (including as the pandemic evolves due to future mutations of the COVID-19 virus), the ongoing governmental, business and individual actions taken to contain the pandemic or mitigate its impact, the availability and adoption of COVID-19 vaccines, and the direct and indirect economic effects of the pandemic and containment measures, among others. The outbreak of COVID-19 across the globe, including the United States, has significantly and adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. Further, the impacts of potential worsening global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, consumer spending as well as other unanticipated consequences remain unknown.
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We believe our financial condition and liquidity are currently strong. Although there is uncertainty related to the impact of the COVID-19 pandemic on our future results, we believe the fundamentals of our business model will continue to allow us to effectively manage our business through such uncertainty. While occupancy remains strong at 90.9% as of September 30, 2022, in future periods, the Company may experience reduced levels of tenant retention, and reduced foot traffic and lease applications from prospective tenants, as a result of the impact of COVID-19. The extent to which the COVID-19 pandemic and any resulting macro-economic changes impact the Company’s operations and those of its tenants will depend on future developments, which are uncertain and cannot be predicted with confidence.
Other Significant Developments
Acquisition of and Investments in Real Estate
During the nine months ended September 30, 2022, we acquired an additional 537 single-family residential units through four new or existing joint ventures for total purchase prices of $137.9 million. Additionally, we increased our preferred equity investments in The Cottages at Myrtle Beach, The Cottages at Warner Robins, The Cottages of Port St. Lucie, The Woods at Forest Hill and Wayford at Innovation Park by an aggregate of approximately $43.4 million.
We entered into a mezzanine loan agreement with Weatherford 185 and provided loan funding of approximately $9.6 million, which was subsequently paid off in full in July 2022.
The following is a summary of our real estate investments made during the nine months ended September 30, 2022 ($ in millions):
Name – Operating
Market
Date of Investment (1)
Number of Units
Ownership Interest
Purchase Price
Granbury 2.0 (2)
Granbury, TX
March 11, 2022
34
80
%
$
7.7
Savannah 319
Savannah, GA
March 17, 2022
19
80
%
4.5
Golden Pacific
IN / KS / MO
1Q 2022
62
97
%
11.8
ILE
TX / SE US
1Q 2022
31
95
%
7.0
Ballast
AZ / CO / WA
2Q 2022
65
95
%
26.1
Golden Pacific
IN / KS / MO
2Q 2022
66
97
%
14.0
ILE
TX / SE US
2Q 2022
108
95
%
27.8
Savannah 319
Savannah, GA
2Q 2022
20
80
%
4.8
Ballast
AZ / CO / WA
3Q 2022
19
95
%
6.2
Golden Pacific
IN / KS / MO
3Q 2022
35
97
%
7.9
ILE
TX / SE US
3Q 2022
64
95
%
16.7
Savannah 319
Savannah, GA
3Q 2022
14
80
%
3.4
Total Operating
537
$
137.9
Name – Mezzanine Loan
Market
Date of Investment
Number of Units
Commitment Amount
Investment Amount
Weatherford 185 (3)
Weatherford, TX
February 15, 2022
185
$
9.6
$
9.6
Total Mezzanine Loan
185
$
9.6
Total
722
$
147.5
(1) For those acquisitions where the quarter is specified, we acquired additional units on various dates throughout that specified quarter. These additional units were added to the respective existing portfolios. For Ballast, the units acquired in the second quarter 2022 were the first of our acquisitions for that portfolio.
(2) At the time of closing, we made a common equity investment in Granbury 2.0 and provided a mezzanine loan to the portfolio owner. On April 1, 2022, our full mezzanine loan investment was converted into a common equity interest. Refer to Note 8 of our combined financial statements for further information.
(3) On July 22, 2022, the Weatherford 185 loan that we provided was paid off in full.
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Sale of Real Estate Assets and Loan Repayments
The following is a summary of our loan payoffs during the nine months ended September 30, 2022 ($ in millions):
Property
Location
Date of Sale or Repayment
Number of Units
Sale Price
Net Proceeds
Notes Receivable
The Hartley at Blue Hill
Chapel Hill, NC
February 28, 2022
414
$
114.2
$
39.4
(1)
Weatherford 185
Weatherford, TX
July 22, 2022
185
—
9.7
(2)
Total Notes Receivable
599
$
114.2
$
49.1
(1) On April 29, 2022, the senior loan that we provided, which was secured by a parcel of land adjacent to The Hartley at Blue Hill property, was paid off for $5.0 million. The senior loan payoff is included in the net proceeds amount.
(2) Net proceeds amount includes $0.3 million of principal payments made by the borrower prior to July 22, 2022.
Results of Operations
The following is a summary of our stabilized consolidated operating real estate investments as of September 30, 2022:
Name
Market
Number of Units
Average Year Built
Ownership Interest
Average Rent (1)
% Occupied (2)
Ballast
AZ / CO / WA
84
1998
95
%
$
2,233
83.8
%
Golden Pacific
IN / KS / MO
170
1976
97
%
1,622
74.8
%
ILE
TX / SE US
482
1991
95
%
1,743
85.3
%
Navigator Villas
Pasco, WA
176
2013
90
%
1,473
98.3
%
Peak
Axelrod
Garland, TX
22
1959
80
%
1,343
100.0
%
DFW 189
Dallas-Fort Worth, TX
189
1962
56
%
1,007
98.4
%
Granbury
Granbury, TX
36
2020-2021
80
%
1,629
100.0
%
Granbury 2.0
Granbury, TX
34
2021-2022
80
%
1,715
97.1
%
Indy
Indianapolis, IN
44
1958
60
%
898
97.7
%
Lubbock
Lubbock, TX
60
1955
80
%
931
83.3
%
Lubbock 2.0
Lubbock, TX
75
1972
80
%
1,231
93.1
%
Lubbock 3.0
Lubbock, TX
45
1945
80
%
943
69.0
%
Lynnwood
Lubbock, TX
20
2005
80
%
1,015
78.9
%
Lynnwood 2.0
Lubbock, TX
20
2003
80
%
1,025
90.0
%
Savannah 319
Savannah, GA
53
2022
80
%
1,649
94.3
%
Springfield
Springfield, MO
290
2004
60
%
1,188
96.2
%
Springtown
Springtown, TX
70
1991
80
%
1,278
88.6
%
Springtown 2.0
Springtown, TX
14
2018
80
%
1,499
92.9
%
Texarkana
Texarkana, TX
29
1967
80
%
1,035
100.0
%
Texas Portfolio 183
Various / TX
183
1975
80
%
1,365
91.5
%
Wayford at Concord
Concord, NC
150
2019
83
%
2,112
96.0
%
Yauger Park Villas
Olympia, WA
80
2010
95
%
2,331
97.5
%
Total Units / Average
2,326
$
1,483
90.9
%
(1) Represents the average of the ending average effective rent per occupied unit as of the last day of each month in the three months ended September 30, 2022.
(2) Percent occupied is calculated as (i) the number of units occupied as of September 30, 2022 divided by (ii) total number of units, expressed as a percentage. Percent occupied excludes an aggregate of 86 down units under renovation.
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The following is a summary of our consolidated operational results for the three and nine months ended September 30, 2022 and 2021 (dollars in thousands, except average rental rates):
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
Variance
2022
2021
Variance
Number of units at period end
2,326
935
149
%
2,326
935
149
%
Rental and other property revenues
$
8,608
$
2,643
226
%
$
23,136
$
4,704
392
%
Property operating expenses
$
4,440
$
802
454
%
$
10,994
$
1,544
612
%
Net operating income
$
4,168
$
1,841
126
%
$
12,142
$
3,160
284
%
Average occupancy percentage (1)
91.5
%
97.0
%
(550)
bps
92.0
%
97.4
%
(540)
bps
Average rental rate (2)
$
1,483
$
1,471
0.8
%
$
1,415
$
1,427
(0.8)
%
(1) Represents the average of the ending occupancy as of the last day of each month in the period presented.
(2) Represents the average of the ending average effective rent per occupied unit as of the last day of each month in the period presented.
The following is a summary of our preferred equity investments as of September 30, 2022:
Total Actual/
Actual/
Actual/
Actual/
Estimated
Estimated
Actual/
Estimated
Estimated
Planned
Construction
Cost to Date
Construction
Estimated
Construction
Average
Name
Location / Market
Number of Units
Cost (in millions)
(in millions)
Cost Per Unit
Initial Occupancy
Completion
Rent (1)
Lease-up Investment
Willow Park
Willow Park, TX
46
$
14.5
$
12.8
$
315,217
2Q 2022
2Q 2023
$
2,362
Total Lease-up Units
46
Development Investment
The Woods at Forest Hill
Forest Hill, TX
76
14.8
10.2
194,737
1Q 2023
3Q 2023
1,625
The Cottages at Myrtle Beach
Myrtle Beach, SC
294
63.2
33.7
214,966
2Q 2023
4Q 2023
1,743
The Cottages at Warner Robins
Warner Robins, GA
251
53.1
23.4
211,554
3Q 2023
4Q 2023
1,346
The Cottages of Port St. Lucie
Port St. Lucie, FL
286
69.6
29.5
243,357
2Q 2023
4Q 2023
2,133
Wayford at Innovation Park
Charlotte, NC
210
62.0
17.3
295,238
3Q 2023
3Q 2024
1,994
Total Development Units
1,117
Average
Operating Investment
Number of Units
Rent (1)
Peak Housing (2)
IN / MO / TX
474
$
945
Total Operating Units
474
Total Units/Average
1,637
$
1,563
(1) For lease-up and development investments, represents the average pro forma effective monthly rent per occupied unit for all expected occupied units upon stabilization. For operating investments, represents the average effective monthly rent per occupied unit for the three months ended September 30, 2022.
(2) Peak Housing is a stabilized operating portfolio and consists of our preferred equity investments in a private single-family home REIT (refer to Note 8 of our combined financial statements for further information). Unit count excludes units presented in the consolidated operating investments table above.
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The following is a summary of income earned on our preferred equity and loan investments for the three and nine months ended September 30, 2022 and 2021 (amounts in thousands):
Three Months Ended
Nine Months Ended
Property
September 30,
September 30,
Preferred Equity Investments
2022
2021
2022
2021
Mira Vista (1)
$
—
$
125
$
—
$
391
Peak Housing
476
340
1,412
574
The Conley (1)
—
—
—
405
The Cottages at Myrtle Beach
664
39
1,624
39
The Cottages at Warner Robins
448
—
660
—
The Cottages of Port St. Lucie
682
48
1,490
48
The Woods at Forest Hill
107
—
173
—
Thornton Flats (1)
—
109
—
315
Wayford at Concord (2)
—
—
—
364
Wayford at Innovation Park
152
—
192
—
Willow Park
84
—
250
—
Total preferred returns on unconsolidated joint ventures
$
2,613
$
661
$
5,801
$
2,136
Notes Receivable
Corpus (3)
$
—
$
109
$
—
$
109
Jolin (3)
—
33
—
33
The Hartley at Blue Hill (4)
—
1,046
784
3,104
Vickers Historic Roswell (5)
—
—
—
903
Weatherford 185 (6)
69
—
501
—
Total interest income on notes receivable
$
69
$
1,188
$
1,285
$
4,149
(1)
Our preferred equity investment was redeemed in 2021.
(2)
On June 4, 2021, we purchased the Wayford at Concord property from our unaffiliated joint venture partner, and as part of the transaction, our preferred equity investment was redeemed.
(3)
We recapitalized Corpus and Jolin on December 22, 2021 and received full payoffs of the bridge loans. As part of the recapitalization, both Corpus and Jolin, along with two portfolios of residential units previously owned by our joint venture partner, were combined into one consolidated operating portfolio known as Texas Portfolio 183.
(4)
In the first quarter 2022, The Hartley at Blue Hill property was sold. The mezzanine and senior loans that we provided were paid off in full as of September 30, 2022.
(5)
In the second quarter 2021, the Vickers Historic Roswell property was sold. The mezzanine loan that we provided was paid off in full upon the sale.
(6)
On July 22, 2022, the Weatherford 185 loan that we provided was paid off in full.
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Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
Revenue
Rental and other property revenues increased $6.0 million, or 226%, to $8.6 million for the three months ended September 30, 2022 as compared to $2.6 million for the same prior year period. This was due to a $5.8 million increase from the acquisition of 537 units (through three new and two existing investments) in 2022 and the full period impact of 1,383 units acquired in 2021 (through 16 new investments) and a $0.2 million increase from our same store properties.
From an operational perspective, our average rent per occupied unit increased $12 or 0.8% to $1,483 as compared to $1,471 during the prior year period. Average occupancy decreased 550 basis points from 97.0% to 91.5% on a year over year basis due to the following (i) during the 2021 period, average occupancy of 97.0% included only 935 units (over 9 investments) which were fully operational and stabilized during the period, and (ii) we acquired an additional 1,391 units since October 1, 2021 of which 1,324 units were scattered homes that typically have an operational value-enhancement strategy which includes increasing individual home occupancy levels over time; when acquiring scattered homes, the initial occupancy may be slightly lower as homes are often purchased from owner occupants which can create modest frictional vacancy for a brief period of time after acquisition.
Interest income from loan investments decreased $1.1 million, or 94%, to $0.1 million for the three months ended September 30, 2022 as compared to $1.2 million for the same prior year period due to the sale of one underlying investment and the redemption of three loans in 2022, partially offset by the acquisition of one investment in 2022.
Expenses
Property operating expenses increased $3.6 million, or 454%, to $4.4 million for the three months ended September 30, 2022 as compared to $0.8 million for the same prior year period. This was primarily due to a $3.5 million increase from the acquisition of investments in 2022 and 2021 and a $0.1 million increase from same store properties. Property operating expenses consist of controllable (payroll, repairs and maintenance, turnover, administrative, advertising, and utilities) and non-controllable (real estate taxes and insurance) expenses. Controllable expenses were $2.4 million and $0.5 million and non-controllable expenses were $2.0 million and $0.3 million for the three months ended September 30, 2022 and 2021, respectively.
Property management and asset management fees expense were $1.1 million for the three months ended September 30, 2022 as compared to $0.1 million in the same prior year period. This was primarily due to a $1.0 million increase from the acquisition of investments in 2022 and 2021. Property management fees are based on a stated percentage of property revenues and asset management fees are based on a stated percentage of capital contributions or assets under management, where applicable.
General and administrative expenses have been allocated to us from Bluerock Residential based on relative unit count. These allocated expenses are for corporate office expenses and management including, but not limited to, executive oversight, asset management, treasury, finance, human resources, tax, accounting, financial reporting, information technology and investor relations. Expense amounts recognized are not representative of the amounts that would have been reflected in the financial statements had we operated independently of Bluerock Residential. General and administrative expenses amounted to $1.8 million for the three months ended September 30, 2022 as compared to $1.1 million for the same prior year period. The $0.7 million increase is primarily due to an increase to the relative unit count allocation from Bluerock Residential due to the increase in size of the carve out portfolio since the prior year period.
Acquisition and pursuit costs amounted to $0.03 million for the three months ended September 30, 2022 as compared to $0.02 million for the same prior year period. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future periods.
Depreciation and amortization expenses were $3.6 million for the three months ended September 30, 2022 as compared to $1.7 million for the same prior year period. This was due to a $2.4 million increase from the acquisition of investments in 2022 and 2021 partially offset by a $0.5 million decrease from our same store properties.
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Other Income and Expense
Other income and expense amounted to income of $2.6 million for the three months ended September 30, 2022 compared to income of $0.1 million for the same prior year period. This was primarily due to an increase in preferred returns on unconsolidated real estate joint ventures of $2.0 million due to the acquisition of four investments and partially offset by the sale of two underlying investments during the period. Additionally, there was a net decrease in interest expense of $0.7 million primarily due to an increase in the value of our interest rate caps and swaps and partially offset by an increase in the outstanding debt to $153.6 million at September 30, 2022 as compared to $36.6 million at September 30, 2021. This was also partially offset by a decrease in other income of $0.2 million due to origination fees received from our joint venture partner in the prior year period.
Discontinued Operations
Income from discontinued operations amounted to income of $0.3 million for the three months ended September 30, 2022 as compared to income of $45.9 million for the same prior year period. In 2021, the discontinued operations were due to the sale of six multifamily operating properties and included a $49.0 million gain from sale of multifamily assets partially offset by a $3.1 million loss on extinguishment of debt. In 2022, the income is a result of the reversal of accruals for the sold properties.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
Revenue
Rental and other property revenues increased $18.4 million, or 392%, to $23.1 million for the nine months ended September 30, 2022 as compared to $4.7 million for the same prior year period. This was due to a $18.0 million increase from the acquisition of 537 units (through three new and two existing investments) in 2022 and the full period impact of 1,613 units acquired in 2021 (through 18 new investments) and a $0.4 million increase from our same store property, Navigator Villas.
From an operational perspective, our average rent per occupied unit decreased $12, or 0.8%, to $1,415 as compared to $1,427 during the prior year period. Average occupancy decreased 540 basis points from 97.4% to 92.0% on a year over year basis due to the following (i) during the 2021 period, average occupancy of 97.4% included only 935 units (over 9 investments) which were fully operational and stabilized during the period, and (ii) we acquired an additional 1,391 units since October 1, 2021 of which 1,324 units were scattered homes that typically have an operational value-enhancement strategy which includes increasing individual home occupancy levels over time; when acquiring scattered homes, the initial occupancy may be slightly lower as homes are often purchased from owner occupants which can create modest frictional vacancy for a brief period of time after acquisition.
Interest income from loan investments decreased $2.9 million, or 69%, to $1.3 million for the nine months ended September 30, 2022 as compared to $4.1 million for the same prior year period due to the sale of two underlying investments in 2022 and 2021 and the redemption of three loans in 2022, partially offset by the acquisition of one investment in 2022.
Expenses
Property operating expenses increased $9.5 million, or 612%, to $11.0 million for the nine months ended September 30, 2022 as compared to $1.5 million for the same prior year period. This was primarily due to a $9.4 million increase from the acquisition of investments in 2022 and 2021 and a $0.1 million increase from our same store property, Navigator Villas. Property operating expenses consist of controllable (payroll, repairs and maintenance, turnover, administrative, advertising, and utilities) and non-controllable (real estate taxes and insurance) expenses. Controllable expenses were $5.3 million and $0.9 million and non-controllable expenses were $5.7 million and $0.6 million for the nine months ended September 30, 2022 and 2021, respectively.
Property management and asset management fees expense were $2.6 million for the nine months ended September 30, 2022 as compared to $0.2 million in the same prior year period. This was primarily due to a $2.4 million increase from the acquisition of investments in 2022 and 2021. Property management fees are based on a stated percentage of property revenues and asset management fees are based on a stated percentage of capital contributions or assets under management, where applicable.
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General and administrative expenses have been allocated to us from Bluerock Residential based on relative unit count. These allocated expenses are for corporate office expenses and management including, but not limited to, executive oversight, asset management, treasury, finance, human resources, tax, accounting, financial reporting, information technology and investor relations. Expense amounts recognized are not representative of the amounts that would have been reflected in the financial statements had we operated independently of Bluerock Residential. General and administrative expenses amounted to $5.0 million for the nine months ended September 30, 2022 as compared to $3.1 million for the same prior year period. The $1.9 million increase is primarily due to an increase to the relative unit count allocation from Bluerock Residential due to the increase in size of the carve out portfolio since the prior year period.
Acquisition and pursuit costs amounted to $0.1 million for the nine months ended September 30, 2022 as compared to $0.02 million for the same prior year period. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future periods.
Depreciation and amortization expenses were $12.2 million for the nine months ended September 30, 2022 as compared to $3.0 million for the same prior year period. This was due to a $8.8 million increase from the acquisition of investments in 2022 and 2021 and a $0.4 million increase from our same store property, Navigator Villas.
Other Income and Expense
Other income and expense amounted to income of $3.3 million for the nine months ended September 30, 2022 compared to income of $0.2 million for the same prior year period. This was primarily due to an increase in preferred returns on unconsolidated real estate joint ventures of $3.6 million due to the acquisition of seven investments in 2021, partially offset by the sale of five underlying investments in 2021, and a recovery of credit losses of $0.4 million. This was partially offset by a net increase in interest expense of $0.9 million primarily due to an increase in the outstanding debt to $153.6 million at September 30, 2022 as compared to $36.6 million at September 30, 2021, partially offset by an increase in the value of our interest rate caps and swaps due to rising interest rates.
Discontinued Operations
Income from discontinued operations amounted to income of $0.3 million for the nine months ended September 30, 2022 as compared to income of $110.6 million for the same prior year period. In 2021, the discontinued operations were due to the sale of six multifamily operating properties and included a $116.6 million gain from sale of multifamily assets and $0.2 million income on operations, partially offset by a $6.2 million loss on extinguishment of debt. In 2022, the income is a result of the reversal of accruals for the sold properties.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, both short- and long-term. Our primary short-term liquidity requirements historically have related to (i) our operating expenses and other general business needs, (ii) acquisition of properties, (iii) committed investments and capital requirements to fund development and renovations at existing properties, (iv) ongoing commitments to repay borrowings, including our revolving credit facilities and our maturing short-term debt, and (v) distributions to stockholders.
Our ability to access capital on favorable terms as well as to use cash from operations to continue to meet our short-term liquidity needs could be affected by various risks and uncertainties, including the effects of the COVID-19 pandemic and other risks detailed in Part II, Item 1A titled “Risk Factors”. W hile occupancy remains strong at 90.9% as of September 30, 2022, in future periods we may experience reduced levels of tenant retention, and reduced foot traffic and lease applications from prospective tenants, as a result of the impact of COVID-19.
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In general, we believe our available cash balances, cash flows from operations, $115.0 million capacity, of which $12.2 million is available, on our revolving credit facilities dedicated to single-family residential investments, proceeds from future mortgage debt financings for acquisitions and/or development projects, and other financing arrangements will be sufficient to fund our liquidity requirements with respect to our existing portfolio for the next 12 months. In general, we expect that our results related to our existing portfolio will improve in future periods as a result of anticipated future investments in and acquisitions of single-family residential properties and build-to-rent development properties. However, there can be no assurance that the worldwide economic disruptions arising from the COVID-19 pandemic will not cause conditions in the lending, capital and other financial markets to deteriorate, nor that our future revenues or access to capital and other sources of funding will not become constrained, which could reduce the amount of liquidity and credit available for use in acquiring and further diversifying our portfolio of single-family properties. We cannot provide any assurances that we will be able to add properties to our portfolio at the anticipated pace, or at all.
We believe we will be able to meet our primary liquidity requirements going forward through, among other sources:
● following transactional adjustments in connection with the Separation, the Distribution and the Spin-Off, $95.8 million in cash and restricted cash available at October 6, 2022;
● capacity of $115.0 million, of which $12.2 million is available, as of September 30, 2022 on our revolving credit facilities dedicated to single-family residential investments;
● proceeds from future mortgage debt financings for acquisition and/or development projects;
● cash generated from operating activities; and
● proceeds from future borrowings and potential offerings of common and preferred stock, as well as issuances of units of limited partnership interest in our Operating Partnership, or OP Units.
The following table summarizes our contractual obligations as of September 30, 2022 related to our mortgage notes secured by our properties and revolving credit facilities. At September 30, 2022, our estimated future required payments on these obligations were as follows (amounts in thousands):
Remainder of
Total
2022
2023-2024
2025-2026
Thereafter
Mortgages Payable (Principal)
$
98,597
$
366
$
3,165
$
39,188
$
55,878
Revolving Credit Facilities
55,000
—
55,000
—
—
Estimated Interest Payments on Mortgages Payable and Revolving Credit Facilities
28,437
1,909
13,691
7,562
5,275
Total
$
182,034
$
2,275
$
71,856
$
46,750
$
61,153
Estimated interest payments are based on the stated rates for mortgage notes payable assuming the interest rate in effect for the most recent quarter remains in effect through the respective maturity dates.
As of September 30, 2022, the aggregate amount of our contractual commitments to fund future cash obligations in certain of our preferred equity and joint venture investments was $6.7 million; as of November 1, 2022, this amount was $5.9 million.
At the current time, we do not anticipate the need to establish any material contingency reserves related to the COVID-19 pandemic, but we continue to assess along with our network of business partners the possible need for such contingencies, whether at the corporate or property level.
As equity capital market conditions permit, we may supplement our capital for short-term liquidity needs with proceeds of potential offerings of common and preferred stock, as well as issuance of OP Units. Given the significant volatility in the trading price of REIT equities generally associated with the COVID-19 pandemic and our otherwise stable financial condition and liquidity position, we cannot provide assurances that these offerings are a likely source of capital to meet short-term liquidity needs.
Our primary long-term liquidity requirements relate to (a) costs for additional single-family residential investments, including build-to-rent development properties, (b) repayment of long-term debt and our revolving credit facilities, and (c) capital expenditures.
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We intend to finance our long-term liquidity requirements with net proceeds of additional issuances of common and preferred stock, our revolving credit facilities, as well as future acquisition or project-based borrowings. Our success in meeting these requirements will therefore depend upon our ability to access capital. Further, our ability to access equity capital is dependent upon, among other things, general market conditions for REITs and the capital markets generally, market perceptions about us and our asset class, and current trading prices of our securities, all of which may continue to be adversely impacted by the COVID-19 pandemic .
We may also meet our long-term liquidity needs through borrowings from a number of sources, either at the corporate or project level. We believe the $115.0 million capacity, of which $12.2 million is available, on our revolving credit facilities will serve as our primary debt source that will continue to enable us to deploy our capital more efficiently and provide capital structure flexibility as we grow our asset base. In addition to restrictive covenants, our revolving credit facilities contain material financial covenants. At September 30, 2022, we were in compliance with all covenants under our credit facilities. We will continue to monitor the debt markets, including Fannie Mae and Freddie Mac, and as market conditions permit, access borrowings that are advantageous to us.
If we are unable to obtain financing on favorable terms or at all, we would likely need to curtail our investment activities, including acquisitions and improvements to and developments of, real properties, which could limit our growth prospects. This, in turn, could reduce cash available for distribution to our stockholders and may hinder our ability to raise capital by issuing more securities or borrowing more money. We also may be forced to dispose of assets at inopportune times to maintain REIT qualification and Investment Company Act exemption.
We also have preferred equity interests in properties that are in various stages of development, in lease-up and operating, and our preferred equity investments are structured to provide a current and/or accrued preferred return during all phases. Each joint venture in which we own a preferred equity interest is required to redeem our preferred equity interests, plus any accrued preferred return, based on a fixed maturity date, generally in relation to the property’s construction loan or mortgage loan maturity.
Off-Balance Sheet Arrangements
As of September 30, 2022, we have off-balance sheet arrangements that may have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures. As of September 30, 2022, we own interests in seven joint ventures that are accounted for as held to maturity debt securities.
Cash Flows from Operating Activities
As of September 30, 2022, we owned indirect equity interests in twenty-nine real estate investments, consisting of twenty-two consolidated operating investments and seven investments held through preferred equity investments. During the nine months ended September 30, 2022, net cash provided by operating activities was $12.4 million after net loss of $2.8 million was adjusted for the following:
● an increase in accounts payable and other accrued liabilities of $5.5 million;
● non-cash items of $4.4 million;
● a decrease in notes and accrued interest receivable of $2.9 million;
● distributions and preferred returns from unconsolidated joint ventures of $1.7 million;
● a decrease in accounts receivable, prepaids and other assets of $0.4 million; and
● a decrease in due from affiliates of $0.3 million.
Cash Flows from Investing Activities
During the nine months ended September 30, 2022, net cash used in investing activities was $167.9 million, primarily due to the following:
● $144.2 million used in acquiring consolidated real estate investments;
● $53.0 million used in funding investments in unconsolidated joint ventures and notes receivable; and
● $16.3 million used on capital expenditures, offset by:
● $45.6 million of repayments on notes receivable.
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Cash Flows from Financing Activities
During the nine months ended September 30, 2022, net cash provided by financing activities was $209.5 million, primarily due to the following:
● contributions from Parent of $121.6 million;
● net proceeds of $55.0 million from borrowings on revolving credit facilities;
● net borrowings of $41.9 million on mortgages payable; and
● contributions from partially owned noncontrolling interests of $6.2 million;
● partially offset by $5.5 million of repayments of our mortgages payable;
● $4.5 million increase in deferred financing costs;
● $2.1 million paid for interest rate caps;
● $1.8 million in distributions paid; and
● $1.3 million in distributions paid to our partially owned noncontrolling interests.
Capital Expenditures
The following table summarizes our total capital expenditures for the nine months ended September 30, 2022 and 2021 (amounts in thousands):
Nine Months Ended
September 30,
2022
2021
Redevelopment/renovations
$
12,291
$
1,015
Routine capital expenditures
2,150
315
Normally recurring capital expenditures
180
106
Total capital expenditures
$
14,621
$
1,436
Redevelopment and renovation costs are non-recurring capital expenditures for significant projects, such as preparing a unit for rental. The renovation work varies, but may include flooring, cabinetry, paint, plumbing, appliances and other items required to make the unit rent ready . Routine capital expenditures are necessary non-revenue generating improvements that extend the useful life of the property and that are less frequent in nature, such as roof repairs and concrete work/asphalt resurfacing. Normally recurring capital expenditures are necessary non-revenue generating improvements that occur on a regular ongoing basis, such as flooring and appliances.
Net Operating Income
We believe that net operating income (“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. NOI also is a computation made by analysts and investors to measure a real estate company’s operating performance.
We believe that this measure provides an operating perspective not immediately apparent from operating income or net income prepared in conformity with accounting principles generally accepted in the Unites States of America (“GAAP”). NOI allows us to evaluate the operating performance of our properties because it 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.
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However, NOI should only be used as a supplemental measure of our financial performance. The following table reflects net income attributable to Bluerock Homes together with a reconciliation to NOI, as computed in accordance with GAAP for the periods presented (amounts in thousands):
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
Net income attributable to Bluerock Homes
$
841
$
40,792
$
31
$
99,661
Net (loss) income attributable to partially owned noncontrolling interests
(265)
5,397
(2,844)
12,094
Income from discontinued operations
(311)
(45,921)
(311)
(110,578)
Real estate depreciation and amortization
3,585
1,649
12,020
2,907
Non-real estate depreciation and amortization
121
121
366
365
Non-cash interest expense
(2,073)
136
(1,417)
584
Provision for (recovery of) credit losses, net
4
(10)
(369)
—
Property management and asset management fees
1,098
97
2,591
160
Corporate operating expenses
1,727
988
4,764
2,915
Acquisition and pursuit costs
28
20
98
20
Other income, net
—
(183)
(100)
(183)
Preferred returns on unconsolidated real estate joint ventures
(2,613)
(661)
(5,801)
(2,136)
Interest income from loan investments
(69)
(1,188)
(1,285)
(4,149)
Total property income
2,073
1,237
7,743
1,660
Add:
Interest expense
2,095
604
4,399
1,500
Net operating income
$
4,168
$
1,841
$
12,142
$
3,160
Significant Accounting Policies and Critical Accounting Estimates
Our significant accounting policies and critical accounting estimates are disclosed in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” of our Combined Financial Statements.
Subsequent Events
Other than the items disclosed in Note 16 “Subsequent Events” to our Combined Financial Statements for the period ended September 30, 2022, no material events have occurred that required recognition or disclosure in these financial statements. Refer to Note 16 of our Combined Financial Statements for discussion.
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