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 formed in Maryland as a wholly owned subsidiary of Bluerock Residential Growth REIT, Inc. (“Bluerock Residential”) on December 16, 2021, and historically operated as part of Bluerock Residential and not as a standalone company. On October 6, 2022, Bluerock Residential completed a spin-off transaction that resulted in its single-family residential real estate business and certain other assets being contributed to Bluerock Homes, and Bluerock Homes becoming an independent, publicly traded 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.
For the period ended and prior to October 6, 2022, the financial statements 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. These financial statements also include general and administrative expenses that have been allocated to Bluerock Homes 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. However, amounts recognized by Bluerock Homes are not representative of the amounts that would have been reflected in these financial statements had it operated independently of Bluerock Residential. 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.
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 volatility in capital and credit markets, or unfavorable changes in economic conditions, including those caused by inflation and rising interest rates, in the markets in which we operate;
● The impact of epidemics, pandemics, or other outbreaks of illness, disease or virus (such as the outbreak of novel coronavirus (“ 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;
● 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;
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● 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, homeowners association (“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 (if any);
● our ability to qualify and maintain our qualification as a real estate investment trust ("REIT"); and
● litigation, including costs associated with prosecuting or defending claims and any adverse outcomes.
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.
The forward-looking statements should be read in light of the risk factors set forth in Item 1A of this Quarterly Report on Form 10-Q, in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the Securities and Exchange Commission ("SEC") on March 22, 2023, and subsequent filings by us with the SEC, or ("Risk Factors").
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.
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As of June 30, 2023, we held an aggregate of 4,077 residential units held through seventeen real estate investments, consisting of ten consolidated operating investments and seven investments held through preferred equity investments. As of June 30, 2023, our consolidated operating investments were approximately 94.4% occupied.
We intend to elect to be taxed and to operate in a manner that will allow us to qualify as a 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 that we would qualify and remain qualified as a REIT.
Inflation and Related Economic Volatility
While inflationary pressures have shown signs of moderation, we continue to monitor increases in inflation and rising interest rates and resulting economic changes in credit and capital markets. Inflation and its related impacts, including increased prices for services and goods and higher interest rates and wages, and any policy interventions by the U.S. government, could negatively impact our residents’ ability to pay rents and our results of operations. Substantially all our leases are for a term of one year or less, which we believe mitigates our exposure to inflation, by permitting us to set rents commensurate with inflation (subject to rent regulations to the extent they apply and assuming our current or prospective residents will accept and can pay commensurate increased rents, of which there can be no assurance). Inflation could outpace any increases in rent and adversely affect us. We may not be able to mitigate the effects of inflation and related impacts, and the duration and extent of any prolonged periods of inflation, and any such related adverse effects on our results of operations and financial condition are unknown at this time. Inflation may also cause increased volatility in financial markets, which could affect our ability to access the capital markets or impact the cost or timing at which we are able to do so. Inflation may also increase the costs to complete our development projects, including costs of materials, labor and services from third-party contractors and suppliers. Higher construction costs could adversely impact our investments in real estate assets and our expected yields on development projects.
Additionally, recent developments in the banking industry have caused uncertainty and concern regarding the strength of the banking system. As a result, the cost of obtaining debt from credit and capital markets has increased as many lenders have increased interest rates, enacted tighter lending standards, and reduced and, in some cases, ceased to provide funding to borrowers. Although our banking relationships are primarily with large national banks, a significant disruption to the banking system could lead to market-wide liquidity problems which could adversely affect our access to capital and our cost of capital. If we need to incur debt from a source other than our revolving credit facilities, we cannot be certain the additional financing will be available to the extent required and on acceptable terms. If debt financing on acceptable terms is not available, we may be unable to fully execute our growth strategy, otherwise take advantage of business opportunities, or respond to competitive pressures, any of which could have a material adverse effect on our results of operations and financial condition.
Other weakened economic conditions, including job losses, high unemployment levels, stock market volatility, and uncertainty about the future, could adversely affect rental rates and occupancy levels. Unfavorable changes in economic conditions may have a material adverse impact on our cash flows and operating results.
Other Significant Developments
Acquisition of Additional Savannah-84 units, formerly Peak JV 4
On February 23, 2023, we acquired 18 single-family residential units located in Savannah, Georgia that were added to the existing Savannah-84 portfolio. We have a 100% interest in the units and the purchase price of approximately $4.2 million was fully funded in cash upon acquisition.
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Acquisition of Additional Interests in Properties
During the six months ended June 30, 2023, we acquired the noncontrolling partner’s interest in the following consolidated operating investments ($ in thousands):
Previous
New
Ownership
Ownership
Property
Date
Amount
Interest
Interest
Savannah-84
January 6, 2023
$
939
80
%
100
%
Indy-Springfield, formerly Peak JV 1
March 8,2023
4,110
60
%
100
%
Sale of Real Estate Assets
During the second quarter 2023, we closed on the following sales: one unit in the Golden Pacific portfolio, six units in the Peak JV 2 portfolio, and two units in the Peak JV 3 portfolio, pursuant to the terms and conditions of multiple separate purchase and sales agreements. The nine units were sold for an aggregate of approximately $2.8 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for payments of closing costs and fees of $0.1 million, the sales of the nine units generated net proceeds of approximately $2.7 million and a gain on sales of approximately $0.7 million.
Preferred Equity Investment Activity
During the six months ended June 30, 2023, our preferred equity investment activity was as follows: (i) we increased our preferred equity investment commitments in (a) the Willow Park joint venture by $2.1 million, for a total commitment of $4.6 million, and (b) The Woods at Forest Hill joint venture by $2.3 million, for a total commitment of $5.6 million, and (ii) our preferred equity investment in the Peak REIT OP was partially redeemed in the aggregate amount of $7.2 million, which included principal investment of $6.8 million and accrued preferred return of $0.4 million, leaving our remaining preferred equity investment in the Peak REIT OP at $13.5 million as of June 30, 2023. Additionally, we funded an aggregate of approximately $6.7 million of preferred equity investments in The Woods at Forest Hill, Wayford at Innovation Park and Willow Park.
Stockholders’ Equity
Our total stockholders’ equity decreased $2.8 million from $160.0 million as of December 31, 2022 to $157.2 million as of June 30, 2023. The decrease in our total stockholders’ equity is primarily attributable to an adjustment of $2.6 million for noncontrolling interest ownership in the Operating Partnership and a net loss of $1.9 million, partially offset by an increase of $1.5 million related to the acquisition of noncontrolling interests.
Results of Operations
The following is a summary of our consolidated operating real estate investments as of June 30, 2023:
Name
Market
Number of Units
Average Year Built
Ownership Interest
Average Rent (1)
% Occupied (2)
Ballast
AZ / CO / WA
84
1998
95
%
$
2,107
96.4
%
Golden Pacific
IN / KS / MO
170
1977
97
%
1,689
96.4
%
ILE
TX / SE US
482
1991
95
%
1,812
97.5
%
Indy-Springfield, formerly Peak JV 1
IN / MO
334
1999
100
%
1,199
90.3
%
Navigator Villas
Pasco, WA
176
2013
90
%
1,535
93.2
%
Peak JV 2
Various / TX
602
1980
80
%
1,281
92.4
%
Peak JV 3
Dallas-Fort Worth, TX
187
1961
56
%
1,039
93.5
%
Savannah-84, formerly Peak JV 4
Savannah, GA
84
2022
100
%
1,703
96.3
%
Wayford at Concord
Concord, NC
150
2019
83
%
2,139
98.7
%
Yauger Park Villas
Olympia, WA
80
2010
95
%
2,399
96.3
%
Total Units / Average
2,349
$
1,557
94.4
%
(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 June 30, 2023.
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(2) Percent occupied is calculated as (i) the number of units occupied as of June 30, 2023 divided by (ii) total number of units, expressed as a percentage. Percent occupied excludes an aggregate of 55 down/renovation units and 2 units of Savannah-84 that are in lease-up.
The following is a summary of our consolidated operational results for the three and six months ended June 30, 2023 and 2022 ($ in thousands, except average rental rates):
Three Months Ended June 30,
Six Months Ended June 30,
2023
2022
Variance
2023
2022
Variance
Rental and other property revenues
$
10,270
$
7,676
33.8
%
$
20,408
$
14,528
40.5
%
Property operating expenses
$
4,582
$
3,774
21.4
%
$
9,139
$
6,554
39.4
%
Net operating income
$
5,688
$
3,902
45.8
%
$
11,269
$
7,974
41.3
%
Average occupancy percentage (1)
94.3
%
91.8
%
250
bps
94.2
%
92.2
%
200
bps
Average rental rate (2)
$
1,557
$
1,406
10.7
%
$
1,549
$
1,377
12.5
%
(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 June 30, 2023:
Total Actual/
Actual/
Actual/
Actual/
Actual/
Estimated
Estimated
Estimated
Estimated
Estimated
Planned
Construction
Cost to Date
Construction
Initial
Construction
Average
Lease-up Investment Name
Location / Market
Number of Units
Cost (in millions)
(in millions)
Cost Per Unit
Occupancy
Completion
Rent (1)
The Cottages at Warner Robins
Warner Robins, GA
251
$
53.1
$
52.9
$
211,554
1Q 2023
2Q 2023
$
1,346
The Woods at Forest Hill
Forest Hill, TX
76
17.1
16.4
225,000
4Q 2022
3Q 2023
1,625
Willow Park
Willow Park, TX
46
16.5
15.6
358,696
2Q 2022
3Q 2023
2,362
The Cottages at Myrtle Beach
Myrtle Beach, SC
294
63.2
55.7
214,966
2Q 2023
4Q 2023
1,743
The Cottages of Port St. Lucie
Port St. Lucie, FL
286
69.6
58.8
243,357
2Q 2023
1Q 2024
2,133
Total Lease-up Units
953
Development Investment Name
Wayford at Innovation Park
Charlotte, NC
210
62.0
28.6
295,238
3Q 2023
3Q 2024
1,994
Total Development Units
210
Average
Operating Investment Name
Number of Units
Rent (1)
Peak Housing (2)
IN / MO / TX
565
$
1,049
Total Operating Units
565
Total Units/Average
1,728
$
1,570
(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 June 30, 2023.
(2) Peak Housing is a stabilized operating portfolio and the number of units shown represents those collateralizing our preferred equity investment in the Peak REIT OP as of June 30, 2023 (refer to Note 7 of our combined consolidated financial statements for further information). Unit count excludes units presented in the consolidated operating investments table above.
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Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
Revenue
Rental and other property revenues increased $2.6 million, or 34%, to $10.3 million for the three months ended June 30, 2023 as compared to $7.7 million for the same prior year period. The increase was primarily due to unit count growth of 349 homes, net of nine homes sold, in our portfolio since April 1, 2022 and operational improvements from our active management and organic market rent growth.
Our average rent per occupied unit increased $151, or 10.7%, to $1,557 as compared to $1,406 during the prior year period. Average occupancy increased 250 basis points from 94.3% to 91.8% on a year over year basis. The improvement was partially driven by: (i) stabilization of homes under renovation within our value-enhancement strategy, and (ii) stabilization of homes that are sometimes purchased from owner occupants which can create modest frictional vacancy for a brief period of time after acquisition.
Interest income from loan investments decreased $0.3 million, or 100%, to zero for the three months ended June 30, 2023 as compared to $0.3 million for the same prior year period due to the payoff of two loans in 2022. We did not have any loan investments during the three months ended June 30, 2023.
Expenses
Property operating expenses increased $0.8 million, or 21%, to $4.6 million for the three months ended June 30, 2023 as compared to $3.8 million for the same prior year period. The increase was primarily due to the acquisition of homes since April 1, 2022 and additional repairs and maintenance as part of our lease up stabilization strategy. 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 $2.1 million and $1.8 million, and non-controllable expenses were $2.5 million and $2.0 million, for the three months ended June 30, 2023 and 2022, respectively.
Property management and asset management fee expenses were $1.1 million for the three months ended June 30, 2023 as compared to $0.8 million in the same prior year period. The increase was primarily due to the acquisition of homes since April 1, 2022. 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 amounted to $1.8 million for the three months ended June 30, 2023 as compared to $1.6 million for the same prior year period. Amounts recognized during the three months ended June 30, 2023 represent our operations as a standalone company. For the period ended and prior to October 6, 2022, allocations of certain general, administrative, sales and marketing expenses were allocated to us from Bluerock Residential based on relative unit count. As such, expense amounts recognized during the three months ended June 30, 2022 are not representative of the amounts that would have been reflected in the financial statements had we operated independently of Bluerock Residential.
Management fees to related party amounted to $2.0 million for the three months ended June 30, 2023. Commencing on October 6, 2022, we are externally managed and advised by our Manager pursuant to a Management Agreement. There was no management fee expense prior to October 6, 2022.
Acquisition and other transaction costs amounted to $0.3 million for the three months ended June 30, 2023 as compared to $0.1 million for the same prior year period. The 2023 expense primarily relates to the transition of property management services for over 1,000 homes.
Depreciation and amortization expenses were $4.0 million for the three months ended June 30, 2023, consistent with the prior year period.
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Other Income and Expense
Other income and expense amounted to income of $2.3 million for the three months ended June 30, 2023 compared to income of $0.1 million for the same prior year period. This was due to an increase in preferred returns on unconsolidated real estate joint ventures of $0.9 million as funding to our preferred equity investments increased to $86.2 million at June 30, 2023 as compared to $72.1 million at June 30, 2022, an increase in gain on sale of real estate investments of $0.7 million due to the sale of nine homes during the three months ended June 30, 2023, and a $0.6 million net decrease in interest expense. The net decrease in interest expense was due to a $0.6 million increase in interest income from our short-term investments, a $0.3 million increase in the fair value of interest rate caps and swaps, partially offset by a $0.3 million increase in interest expense attributable to an increase in the outstanding debt to $167.5 million at June 30, 2023 as compared to $148.2 million at June 30, 2022.
Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
Revenue
Rental and other property revenues increased $5.9 million, or 40%, to $20.4 million for the six months ended June 30, 2023 as compared to $14.5 million for the same prior year period. The increase was primarily due to unit count growth of 560 homes, net of nine homes sold, in our portfolio since January 1, 2022 and operational improvements from our active management and organic market rent growth.
Our average rent per occupied unit increased $172, or 12.5%, to $1,549 as compared to $1,377 during the prior year period. Average occupancy increased 200 basis points from 94.2% to 92.2% on a year over year basis. The improvement was partially driven by: (i) stabilization of homes under renovation within our value-enhancement strategy, and (ii) stabilization of homes that are sometimes purchased from owner occupants which can create modest frictional vacancy for a brief period of time after acquisition.
Interest income from loan investments decreased $1.2 million, or 100%, to zero for the six months ended June 30, 2023 as compared to $1.2 million for the same prior year period due to the payoff of two loans in 2022. We did not have any loan investments during the six months ended June 30, 2023.
Expenses
Property operating expenses increased $2.5 million, or 39%, to $9.1 million for the six months ended June 30, 2023 as compared to $6.6 million for the same prior year period. The increase was primarily due to the acquisition of homes since January 1, 2022 and additional repairs and maintenance as part of our lease up stabilization strategy. 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 $4.2 million and $2.9 million, and non-controllable expenses were $4.9 million and $3.7 million, for the six months ended June 30, 2023 and 2022, respectively.
Property management and asset management fee expenses were $2.2 million for the six months ended June 30, 2023 as compared to $1.5 million in the same prior year period. The increase was primarily due to the acquisition of homes since January 1, 2022. 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 amounted to $3.8 million for the six months ended June 30, 2023 as compared to $3.2 million for the same prior year period. Amounts recognized during the six months ended June 30, 2023 represent our operations as a standalone company. For the period ended and prior to October 6, 2022, allocations of certain general, administrative, sales and marketing expenses were allocated to us from Bluerock Residential based on relative unit count. As such, expense amounts recognized during the six months ended June 30, 2022 are not representative of the amounts that would have been reflected in the financial statements had we operated independently of Bluerock Residential.
Management fees to related party amounted to $3.9 million for the six months ended June 30, 2023. Commencing on October 6, 2022, we are externally managed and advised by our Manager pursuant to a Management Agreement. There was no management fee expense prior to October 6, 2022.
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Acquisition and other transaction costs amounted to $1.8 million for the six months ended June 30, 2023 as compared to $0.1 million for the same prior year period. The 2023 expense relates to the transition of property management services for over 1,000 homes.
Depreciation and amortization expenses were $8.0 million for the six months ended June 30, 2023 as compared to $8.5 million for the same prior year period, with the decrease primarily attributable to in-place leases being fully amortized prior to 2023.
Other Income and Expense
Other income and expense amounted to income of $1.9 million for the six months ended June 30, 2023 compared to income of $0.7 million for the same prior year period. This was due to an increase in preferred returns on unconsolidated real estate joint ventures of $2.5 million as funding to our preferred equity investments increased to $86.2 million at June 30, 2023 as compared to $39.6 million at December 31, 2021 and an increase in gain on sale of real estate investments of $0.7 million due to the sale of nine homes during the six months ended June 30, 2023. These income sources were partially offset by a net increase in interest expense of $1.6 million, of which $1.5 million is attributable to an increase in the outstanding debt to $167.5 million at June 30, 2023 as compared to $148.2 million at June 30, 2022, a $0.8 million net decrease in the fair value of our interest rate caps and swaps (which was partially offset by $0.7 million in interest income from our short-term investments), and a decrease in the allowance for credit losses on unconsolidated real estate joint ventures of $0.4 million.
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 United 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 loss attributable to common stockholders together with a reconciliation to NOI, as computed in accordance with GAAP for the periods presented (amounts in thousands):
Three Months Ended
Six Months Ended
June 30,
June 30,
2023
2022
2023
2022
Net loss attributable to common stockholders
$
(335)
$
(120)
$
(1,875)
$
(277)
Add back: Net loss attributable to Operating Partnership Units
(653)
(231)
(3,638)
(533)
Net loss attributable to common stockholders and unit holders
(988)
(351)
(5,513)
(810)
Add common stockholders and Operating Partnership Units pro-rata share of:
Net loss attributable to partially owned properties noncontrolling interests
(191)
(1,822)
(944)
(2,579)
Real estate depreciation and amortization
3,995
4,000
7,913
8,435
Non-real estate depreciation and amortization
52
123
113
245
Non-cash interest expense
608
560
1,115
780
Unrealized (gain) loss on derivatives
(495)
(167)
638
(167)
Provision for (recovery of) credit losses
20
(11)
26
(373)
Property management and asset management fees
1,104
850
2,195
1,493
Management fees to related party
1,960
—
3,882
—
Acquisition and other transaction costs
325
70
1,780
70
Corporate operating expenses
1,782
1,486
3,755
3,037
Weather-related losses, net
(17)
—
(17)
—
Other income, net
—
(99)
(44)
(100)
Preferred returns on unconsolidated real estate joint ventures
(2,894)
(1,915)
(5,690)
(3,188)
Gain on sale of real estate investments
(661)
—
(661)
—
Interest income from loan investments
—
(331)
—
(1,216)
Total property income
4,600
2,393
8,548
5,627
Add back: Interest expense
1,088
1,509
2,721
2,347
Net operating income
$
5,688
$
3,902
$
11,269
$
7,974
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 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 risks detailed in Part I, Item 1A titled “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on March 22, 2023. While consolidated occupancy remains strong at 94.4% as of June 30, 2023, in future periods we may experience reduced levels of tenant retention, and reduced foot traffic and lease applications from prospective tenants.
On June 28, 2023, the SEC declared effective our registration statement on Form S-11 (File No. 333-269415) (the “2023 Registration Statement”). The securities covered by the 2023 Registration Statement include a maximum of 20,000,000 shares of 6.0% Series A Redeemable Preferred Stock (the “Series A Redeemable Preferred Stock”) at $25.00 per share, for a maximum offering amount of $500,000,000 in Series A Redeemable Preferred Stock (the “Series A Redeemable Preferred Offering”).
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In general, we believe our available cash balances, cash flows from operations, proceeds from the Series A Redeemable Preferred Offering, proceeds from our revolving credit facilities, 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.
We believe we will be able to meet our primary liquidity requirements going forward through, among other sources:
● $79.9 million in cash available at June 30, 2023;
● capacity of $100 million, of which approximately $17 million was available as of June 30, 2023, 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 our continuous Series A Redeemable Preferred Offering and potential offerings of common and preferred stock, as well as issuances of units of limited partnership interest in our Operating Partnership (“OP Units”).
The following table summarizes our contractual obligations as of June 30, 2023 related to our mortgage notes secured by our properties and revolving credit facilities. At June 30, 2023, our estimated future required payments on these obligations were as follows (amounts in thousands):
Less than
Total
One year
2024-2025
2026-2027
Thereafter
Mortgages Payable (Principal)
$
97,485
$
773
$
3,356
$
38,337
$
55,019
Revolving Credit Facilities
70,000
—
70,000
—
—
Estimated Interest Payments on Mortgages Payable and Revolving Credit Facilities
28,590
5,087
11,871
7,673
3,959
Total
$
196,075
$
5,860
$
85,227
$
46,010
$
58,978
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 June 30, 2023, the aggregate amount of our contractual commitments to fund future cash obligations in certain of our preferred equity and joint venture investments was $1.1 million.
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 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 (i) costs for additional single-family residential investments, including build-to-rent development properties, (ii) repayment of long-term debt and our revolving credit facilities, (iii) capital expenditures, and (iv) cash redemption requirements related to our Series A Redeemable Preferred Stock.
We intend to finance our long-term liquidity requirements with net proceeds of additional issuances of common and preferred stock, including our continuous Series A Redeemable Preferred Offering, 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.
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 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. 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.
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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 expect to begin paying a distribution on our Series A Redeemable Preferred Stock, and maintain such distribution, in accordance with the terms of those securities which require monthly dividends. While our policy is generally to pay distributions from cash flow from operations, our distributions may in the future be paid from additional sources, such as from borrowings.
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. Upon redemption of the preferred membership interests, our income, FFO, CFFO and cash flows could be reduced below the preferred returns currently being recognized. Alternatively, if the joint ventures do not redeem our preferred membership interest when required, our income, FFO, CFFO and cash flows could be reduced if the development project does not produce sufficient cash flow to pays its operating expenses, debt service and preferred return obligations. As we evaluate our capital position and capital allocation strategy, we may consider alternative means of financing our development loan and preferred equity investment activities at the subsidiary level.
Off-Balance Sheet Arrangements
As of June 30, 2023, 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 June 30, 2023, we own interests in seven joint ventures that are accounted for as held to maturity debt securities.
Cash Flows from Operating Activities
As of June 30, 2023, we owned indirect equity interests in seventeen real estate investments, consisting of ten consolidated operating investments and seven investments held through preferred equity investments. During the six months ended June 30, 2023, net cash provided by operating activities was $2.1 million after net loss of $6.5 million was adjusted for the following:
● non-cash items of $9.1 million;
● distributions of income and preferred returns from preferred equity investments in unconsolidated real estate joint ventures of $1.0 million; and
● an increase in due to affiliates of $0.2 million; offset by:
● an increase in accounts receivable, prepaids and other assets of $1.0 million; and
● a decrease in accounts payable and other accrued liabilities of $0.7 million.
Cash Flows from Investing Activities
During the six months ended June 30, 2023, net cash used in investing activities was $6.7 million, primarily due to the following:
● $6.7 million used in additional investments in unconsolidated real estate joint ventures;
● $5.2 million used on capital expenditures; and
● $4.3 million used in acquiring consolidated real estate investments; offset by:
● $6.8 million of proceeds from the redemption of unconsolidated real estate joint ventures; and
● $2.7 million of proceeds from sale of real estate investments.
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Cash Flows from Financing Activities
During the six months ended June 30, 2023, net cash provided by financing activities was $8.2 million, primarily due to the following:
● $21.0 million of proceeds from revolving credit facilities; and
● $0.3 million of contributions from noncontrolling interests; offset by:
● $6.0 million of repayments on revolving credit facilities;
● $5.0 million used in the purchase of interests from noncontrolling interests;
● $1.1 million of payments of deferred financing fees;
● $0.7 million of repayments on our mortgages payable; and
● $0.2 million of distributions paid to partially owned properties noncontrolling interests.
Capital Expenditures
The following table summarizes our total capital expenditures for the six months ended June 30, 2023 and 2022 (amounts in thousands):
Six Months Ended
June 30,
2023
2022
Redevelopment/renovations
$
2,541
$
5,435
Routine capital expenditures
1,348
1,363
Normally recurring capital expenditures
212
111
Total capital expenditures
$
4,101
$
6,909
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.
Funds from Operations and Core Funds from Operations Attributable to Common Stockholders and Unit Holders
We believe that funds from operations (“FFO”), as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), and core funds from operations (“CFFO”) are important non-GAAP supplemental measures of operating performance for a REIT.
FFO attributable to common stockholders and unit holders 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 NAREIT definition, as net income (loss), computed in accordance with GAAP, excluding gains or losses on sales of depreciable real estate property, plus depreciation and amortization of real estate assets, plus impairment write-downs of certain real estate assets and investments in entities where the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for notes receivable, unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis.
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CFFO makes certain adjustments to FFO, removing the effect of items that do not reflect ongoing property operations such as acquisition and other transaction costs, non-cash interest, unrealized gains or losses on derivatives, provision for (recovery of) credit losses, losses on extinguishment of debt and debt modification costs (includes prepayment penalties incurred and the write-off of unamortized deferred financing costs and fair market value adjustments of assumed debt), one-time weather-related costs and equity compensation expense. We believe that CFFO is helpful to investors as a supplemental performance measure because it excludes the effects of certain items which can create significant earnings volatility, but which do not directly relate to our core recurring property operations. As a result, we believe that CFFO can help facilitate comparisons of operating performance between periods and provides a more meaningful predictor of future earnings potential.
Our calculation of CFFO differs from the methodology used for calculating CFFO by certain other REITs and, accordingly, our CFFO may not be comparable to CFFO reported by other REITs. Our management utilizes FFO and CFFO as measures of our operating performance after adjustment for certain non-cash items, such as depreciation and amortization expenses, and acquisition and other transaction 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 and CFFO and other supplemental performance measures are defined in various ways throughout the REIT industry, we also believe that FFO and CFFO may provide us and our stockholders with an additional useful measure to compare our financial performance to certain other REITs.
Neither FFO nor CFFO is equivalent to net income (loss), including net income (loss) attributable to common stockholders, or cash generated from operating activities determined in accordance with GAAP. Furthermore, FFO and CFFO 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 CFFO should be considered as an alternative to net income, including net income (loss) 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 historically operated as part of Bluerock Residential and not as a standalone company. On October 6, 2022, Bluerock Residential completed a spin-off transaction that resulted in its single-family residential real estate business and certain other assets being contributed to us. Financial statements for the period ended and prior to October 6, 2022 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 our business activity are included in the financial statements. The financial statements for the period ended and prior to October 6, 2022 also include allocations of certain general, administrative, sales and marketing expenses that have been allocated to us from Bluerock Residential based on relative unit count. However, amounts recognized by us are not representative of the amounts that would have been reflected in these financial statements had we operated independently of Bluerock Residential. As such, the results presented in the table below are not directly comparable and should not be considered an indication of our future operating performance.
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The table below presents our calculation of FFO and CFFO for the periods presented ($ in thousands):
Three Months Ended
Six Months Ended
June 30,
June 30,
2023
2022
2023
2022
Net loss attributable to common stockholders
$
(335)
$
(120)
$
(1,875)
$
(277)
Add back: Net loss attributable to Operating Partnership Units
(653)
(231)
(3,638)
(533)
Net loss attributable to common stockholders and unit holders
(988)
(351)
(5,513)
(810)
Real estate depreciation and amortization
3,995
4,000
7,913
8,435
Gain on sale of real estate investments
(661)
—
(661)
—
Adjustment for partially owned properties noncontrolling interests
(288)
(720)
(808)
(1,562)
FFO attributable to common stockholders and unit holders
2,058
2,929
931
6,063
Acquisition and other transaction costs
325
70
1,780
70
Non-cash interest expense
608
560
1,115
780
Unrealized (gain) loss on derivatives
(495)
(167)
638
(167)
Provision for (recovery of) credit losses
20
(11)
26
(373)
Weather-related losses, net
(17)
—
(17)
—
Non-real estate depreciation and amortization
52
123
113
245
Other income, net
—
(99)
(44)
(100)
Non-cash equity compensation
2,891
684
5,896
1,452
Adjustment for partially owned properties noncontrolling interests
(6)
(1,334)
(433)
(1,333)
CFFO attributable to common stockholders and unit holders
$
5,436
$
2,755
$
10,005
$
6,637
Per Share and Unit Information:
FFO attributable to common stockholders and unit holders - diluted
$
0.18
$
0.26
$
0.08
$
0.54
CFFO attributable to common stockholders and unit holders - diluted
$
0.48
$
0.24
$
0.88
$
0.59
Weighted average common shares and units outstanding - diluted
11,344,400
11,214,229
11,338,246
11,214,229
Operating cash flow, FFO and CFFO may also be used to fund all or a portion of certain capitalizable items that are excluded from FFO and CFFO.
Presentation of this information is intended to assist the reader in comparing the sustainability of the operating performance of different REITs, although it should be noted that not all REITs calculate FFO or CFFO the same way, so comparisons with other REITs may not be meaningful. FFO or CFFO should not be considered as an alternative to net income (loss) attributable to common stockholders or as an indication of our liquidity, nor is either indicative of funds available to fund our cash needs, including our ability to make distributions. Both FFO and CFFO should be reviewed in connection with other GAAP measurements.
Our board of directors (“Board”) will determine the amount of dividends to be paid to our stockholders. The determination of our Board will be based on several factors, including funds available from operations, our capital expenditure requirements and the annual distribution requirements necessary to qualify and maintain our REIT status for federal income tax purposes. As a result, our distribution rate and payment frequency may vary from time to time. To qualify and maintain our REIT status, we will be required to distribute annually at least 90% of our “REIT taxable income”, as defined by the Internal Revenue Code of 1986, determined without regard to the dividends paid deduction and excluding net capital gains, to our stockholders. While our policy is generally to pay distributions from cash flow from operations, we may declare distributions in excess of funds from operations. There were no distributions declared or paid during the six months ended June 30, 2023.
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 Consolidated Financial Statements.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.