Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying financial statements of Bluerock Homes Trust, Inc., and the notes thereto. As used herein, the terms “the Company”, “we”, “our”, and “us” refer to Bluerock Homes Trust, Inc., a Maryland corporation formed on December 16, 2021, and, as required by context, Bluerock Residential Holdings, L.P., a Delaware limited partnership, which we refer to as our “Operating Partnership,” and to their subsidiaries. We refer to Bluerock Homes Manager, LLC, a Delaware limited liability company, and an entity affiliated with the Company, as our Manager. 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.
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;
● 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;
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● 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 units;
● 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 units;
● 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, 2023 as filed with the Securities and Exchange Commission (“SEC”) on March 12, 2024, 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 units, 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 March 31, 2024, we held twenty real estate investments, consisting of twelve consolidated investments and eight preferred equity and loan investments. The twenty investments represent an aggregate of 4,366 residential units, comprised of 2,745 consolidated units, of which 170 units are under development, and 1,621 units through preferred equity and loan investments. As of March 31, 2024, our consolidated operating investments were approximately 94.8% occupied.
We have elected to be treated, and currently qualify, as a REIT for federal income tax purposes. As a REIT, we generally are not subject to corporate-level income taxes. To maintain our REIT status, we are 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 we lost our qualification. Such an event could materially and adversely affect our net income and results of operations. We intend to continue to organize and operate in such a manner as to remain qualified as a REIT.
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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, developments in the banking industry in early 2023 caused uncertainty and concern regarding the strength of the banking system. As a result, the cost of obtaining debt from credit and capital markets increased as many lenders 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 Villas at Huffmeister
On March 25, 2024, we, through a 95% owned joint venture entity, acquired a 294-unit single-family residential community located in Houston, Texas known as Villas at Huffmeister. The purchase price of $41.2 million was funded, in part, with a $24.3 million senior loan assumption secured by Villas at Huffmeister, along with cash of $17.4 million that we funded.
Sale of Consolidated Operating Units
During the first quarter 2024, we closed on the following sales: one unit in the Indy-Springfield portfolio, four units in the Peak JV 2 portfolio, and nineteen units in the Peak JV 3 portfolio, pursuant to the terms and conditions of multiple separate purchase and sales agreements. The twenty-four units were sold for an aggregate of approximately $3.9 million, subject to certain prorations and adjustments typical in such real estate transactions, and generated net proceeds of approximately $3.7 million and a gain on sales of approximately $0.3 million.
Loan Investment Activity
During the first quarter 2024, we (i) provided funding in the aggregate amount of $9.6 million for the Wayford at Pringle loan investment, with a remaining commitment of $20.5 million to be funded, and (ii) received paydowns on The Woods at Forest Hill loan investment in the aggregate amount of $4.1 million, which included principal investment of $4.0 million and accrued interest of $0.1 million, reducing the outstanding principal balance to $4.3 million at March 31, 2024.
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Peak Housing Interests
During the first quarter 2024, our preferred equity investment in the operating partnership of Peak Housing REIT (the “Peak REIT OP”) was partially redeemed in the aggregate amount of $2.0 million, which included principal investment of $1.8 million and accrued preferred return of $0.2 million. At March 31, 2024, our remaining preferred equity investment in the Peak REIT OP was $8.8 million, with a remaining 407 units as collateral underlying our investment.
Held for Sale
At March 31, 2024, we classified an aggregate of 96 units as held for sale in our consolidated balance sheets, and for the three months ended March 31, 2024, we recorded an impairment of $0.1 million related to held for sale units which is included in gain on sale and impairment of real estate investments, net in our consolidated statements of operations. The units are included in the following portfolios: 34 units of Indy-Springfield, 11 units of Peak JV 2, and 51 units of Peak JV 3. These units were identified based on submarket analysis and individual unit-level operational review.
Series A Redeemable Preferred Stock
During the three months ended March 31, 2024, we issued 395,628 shares of 6.0% Series A Redeemable Preferred Stock (the “Series A Preferred Stock”) at $25.00 per share (the “Stated Value”) under a continuous registered offering with net proceeds of approximately $8.6 million after (i) commissions, dealer manager fees and sales discounts of approximately $1.0 million, and (ii) costs related to establishing the offering of Series A Preferred Stock of approximately $0.3 million. As of March 31, 2024, we had issued a total of 832,303 shares of Series A Preferred Stock with total net proceeds of approximately $17.3 million after commissions, dealer manager fees, sales discounts and offering costs.
Stockholders’ Equity
Our total stockholders’ equity decreased $2.9 million from $147.4 million as of December 31, 2023 to $144.5 million as of March 31, 2024. The decrease in our total stockholders’ equity is primarily attributable to an adjustment of $1.9 million for noncontrolling interest ownership in the Operating Partnership, a net loss of $0.8 million, and preferred dividends declared of $0.3 million.
Results of Operations
The following is a summary of our consolidated real estate investments as of March 31, 2024:
Operating Investment Name
Market / Location
Number of Units (1)
Average Year Built
Ownership Interest
Average Rent (2)
% Occupied (3)
Ballast
AZ / CO / WA
84
1998
95
%
$
2,091
97.6
%
Golden Pacific
IN / KS / MO
169
1977
97
%
1,722
97.0
%
ILE
TX / SE US
482
1991
95
%
1,844
97.3
%
Indy-Springfield
IN / MO
333
1999
100
%
1,263
95.4
%
Navigator Villas
Pasco, WA
176
2013
90
%
1,584
94.9
%
Peak JV 2
Various / TX
592
1980
80
%
1,294
88.8
%
Peak JV 3
Dallas-Fort Worth, TX
131
1961
56
%
1,160
96.3
%
Savannah-84
Savannah, GA
84
2022
100
%
1,759
97.6
%
Villas at Huffmeister
Houston, TX
294
2007
95
%
1,427
96.3
%
Wayford at Concord
Concord, NC
150
2019
83
%
2,159
96.6
%
Yauger Park Villas
Olympia, WA
80
2010
95
%
2,378
98.8
%
Total Operating Units / Average
2,575
$
1,600
94.8
%
Development Investment Name
Abode Wendell Fall (4)
Wendell, NC
170
—
100
%
—
—
Total Development Units
170
Total Units
2,745
(1) Total operating units includes an aggregate of 96 units classified as held for sale and includes the following portfolios: 34 units in Indy-Springfield, 11 units in Peak JV 2, and 51 units in Peak JV 3.
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(2) 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 March 31, 2024.
(3) Percent occupied is calculated as (i) the number of units occupied as of March 31, 2024 divided by (ii) total number of units, expressed as a percentage. Percent occupied excludes an aggregate of 46 down/renovation units.
(4) Abode Wendell Falls is a build to rent development project expected to commence construction in the second quarter 2024. The total estimated project cost is $56.0 million, of which $6.6 million had been incurred as of March 31, 2024.
The following is a summary of our consolidated operational results for the three months ended March 31, 2024 and 2023 ($ in thousands, except average rental rates):
Three Months Ended March 31,
2024
2023
Variance
Rental and other property revenues
$
10,758
$
10,138
6.1
%
Property operating expenses
$
5,005
$
4,557
9.8
%
Net operating income
$
5,753
$
5,581
3.1
%
Average occupancy percentage (1)
94.5
%
94.2
%
30
bps
Average rental rate (2)
$
1,600
$
1,542
3.8
%
(1) Represents the average of the ending occupancy as of the last day of each month in the period presented. Average occupancy excludes an average of 50 and 46 down/renovation units for the three months ended March 31, 2024 and 2023, respectively.
(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 and loan investments as of March 31, 2024:
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 Woods at Forest Hill (2)
Forest Hill, TX
56
$
17.1
$
17.1
$
225,000
4Q 2022
3Q 2023
$
1,625
Willow Park
Willow Park, TX
58
17.1
17.1
294,828
2Q 2022
3Q 2023
2,362
The Cottages at Myrtle Beach
Myrtle Beach, SC
294
63.2
62.6
214,966
2Q 2023
4Q 2023
1,743
The Cottages of Port St. Lucie
Port St. Lucie, FL
286
69.6
65.7
243,357
2Q 2023
2Q 2024
2,133
Wayford at Innovation Park
Charlotte, NC
210
62.0
45.0
295,238
3Q 2023
3Q 2024
1,994
Wayford at Pringle (3)
Charlotte, NC
102
37.2
16.7
364,706
1Q 2024
4Q 2024
2,453
Total Lease-up Units
1,006
Development Investment Name
Chandler
Chandler, AZ
208
48.2
42.1
231,731
2Q 2024
3Q 2024
1,920
Total Development Units
208
Average
Operating Investment Name
Number of Units
Rent (1)
Peak Housing (4)
IN / MO / TX
407
$
1,013
Total Operating Units
407
Total Units/Average
1,621
$
1,752
(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 March 31, 2024.
(2) The Woods at Forest Hill unit count decreased from 76 units at December 31, 2023 to 56 units at March 31, 2024 resulting from the sales of 20 units during the first quarter 2024. Proceeds from the sales of these units were used to paydown our loan investment in The Woods at Forest Hill. Construction cost amounts shown are based on the initial 76 units. Refer to Note 6 of our consolidated financial statements for further information.
(3) Wayford at Pringle is a loan investment for which we disburse loan proceeds to the borrower for unit acquisitions upon construction completion. Of the total 102-build for rent units that are to be acquired, construction of 37 units was completed during the first quarter 2024 for which we provided the borrower with loan proceeds for their acquisition. The cost to date amount represents outlays related to completed units and those under construction, and we estimate that all units will be completed and acquired, and our loan commitment fully funded, by the end of 2024. Refer to Note 6 of our consolidated financial statements for further information.
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(4) 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 March 31, 2024 (refer to Note 7 of our consolidated financial statements for further information). Unit count excludes units presented in the consolidated investments table above.
Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
Revenue
Rental and other property revenues increased $0.7 million, or 7%, to $10.8 million for the three months ended March 31, 2024 as compared to $10.1 million for the same prior year period. The increase was primarily due to $0.3 million in operational improvements from our active management and organic market rent growth and a $0.3 million increase in ancillary income (such as late fees, term fees, and damage fees).
Our average rent per occupied unit increased $58, or 3.8%, to $1,600 as compared to $1,542 during the prior year period. Average occupancy increased 30 basis points from 94.2% to 94.5% on a year over year basis. The improvements were partially driven by: (i) stabilization of units under renovation within our value-enhancement strategy, and (ii) stabilization of units 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 amounted to $0.4 million for the three months ended March 31, 2024 as compared to zero for the same prior year period due to three new loan investments since the fourth quarter 2023. We did not have any loan investments during the three months ended March 31, 2023.
Expenses
Property operating expenses increased $0.4 million, or 10%, to $5.0 million for the three months ended March 31, 2024 as compared to $4.6 million for the same prior year period. The increase was primarily due to: (i) a $0.3 million increase in expenses (primarily repairs and maintenance) incurred as part of our lease up stabilization strategy and (ii) a $0.1 million or 4% increase in insurance and real estate taxes. 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 $2.5 million and $2.2 million, and non-controllable expenses were $2.5 million and $2.4 million, for the three months ended March 31, 2024 and 2023, respectively.
Property management and asset management fee expenses were $1.1 million for the three months ended March 31, 2024, consistent with the prior year period. 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. Although property revenues increased 6% compared to the prior year period, the negotiation of management fees with two property managers in 2023 resulted in property management fees remaining consistent with the prior year period.
General and administrative expenses amounted to $2.9 million for the three months ended March 31, 2024 as compared to $2.0 million for the same prior year period. Of the $2.9 million total expense in the first quarter 2024, $1.7 million related to direct costs incurred by us, while the remaining $1.2 million related to the operating expense reimbursement to our Manager, which includes rent, utilities, and IT expenses. The expense reimbursement to our Manager also included a $0.8 million reimbursement for accounting and legal services. Prior to the fourth quarter 2023, the Manager elected to not seek reimbursement for legal and accounting services during our first year of operations. For the first quarter 2024, we will pay the full operating expense reimbursement of $1.2 million to the Manager in cash; for the same prior year period, we paid the full operating expense reimbursement of $0.3 million to the Manager through the issuance of C-LTIP Units.
Management fees to related party amounted to $2.1 million for the three months ended March 31, 2024 as compared to $1.9 million for the same prior year period. The increase was due to an increase in equity primarily from our continuous registered offering of Series A Preferred Stock, which began in the third quarter of 2023. For the first quarter 2024, we will pay the base management fee of $2.1 million to the Manager as one half (50%) in C-LTIP Units and the remainder in cash; for the same prior year period, we paid the full base management fee of $1.9 million to the Manager through the issuance of C-LTIP Units.
Acquisition and other transaction costs amounted to zero for the three months ended March 31, 2024 as compared to $1.5 million for the same prior year period. Acquisition costs can vary greatly, and the costs incurred in any given period may be significantly different in future periods. The 2023 expense primarily relates to the transition of property management services for over 1,000 homes.
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Depreciation and amortization expenses were $4.0 million for the three months ended March 31, 2024, consistent with the prior year period.
Other Income and Expense
Other income and expense amounted to income of $0.7 million for the three months ended March 31, 2024 as compared to expense of $0.4 million for the same prior year period. This was primarily due to a $1.1 million increase in interest income from our short-term investments and a $0.3 million gain on sales of real estate investments from the sale of 24 homes during the three months ended March 31, 2024, partially offset by a $0.1 million net increase in interest expense, a $0.1 million impairment on real estate, and a $0.1 million increase in provision for credit losses.
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.
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
March 31,
2024
2023
Net loss attributable to common stockholders
$
(1,020)
$
(1,540)
Add back: Net loss attributable to Operating Partnership Units
(2,169)
(2,985)
Net loss attributable to common stockholders and unit holders
(3,189)
(4,525)
Net loss attributable to partially owned properties’ noncontrolling interests
(234)
(753)
Real estate depreciation and amortization
3,970
3,918
Non-real estate depreciation and amortization
41
61
Non-cash interest expense
251
507
Unrealized loss on derivatives
715
1,133
Provision for credit losses
95
6
Property management and asset management fees
1,132
1,091
Management fees to related party
2,071
1,922
Acquisition and other transaction costs
4
1,455
Corporate operating expenses
2,865
1,973
Interest income
(1,195)
(123)
Preferred dividends
253
—
Other income, net
(240)
(44)
Preferred returns on unconsolidated real estate joint ventures
(2,741)
(2,796)
Interest income from loan investments
(418)
—
Gain on sale and impairment of real estate investments, net
(173)
—
Total property income
3,207
3,825
Add back: Interest expense
2,546
1,756
Net operating income
$
5,753
$
5,581
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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) investment in real estate, (iii) distributions to stockholders, (iv) committed investments and capital requirements to fund development and renovations at existing properties, (v) ongoing commitments to repay borrowings, including our revolving credit facilities and our maturing debt, and (vi) Class A common stock repurchases under our stock repurchase plan.
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, 2023 as filed with the SEC on March 12, 2024. While consolidated occupancy remains strong at 94.8% as of March 31, 2024, in future periods we may experience reduced levels of tenant retention, and reduced foot traffic and lease applications from prospective tenants.
In general, we believe our available cash balances, cash flows from operations, proceeds from the offering of our Series A Preferred Stock, 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:
● $92.3 million in cash available at March 31, 2024;
● capacity of $65 million, of which approximately $15 million was available at March 31, 2024, on our revolving credit facilities;
● proceeds from future mortgage debt financings for acquisition and/or development projects;
● cash generated from operating activities; and
● proceeds from the offering of our Series A Preferred Stock 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 March 31, 2024 related to our mortgage notes secured by our properties and revolving credit facilities. At March 31, 2024, our estimated future required payments on these obligations were as follows (amounts in thousands):
Less than
Total
One year
2025-2026
2027-2028
Thereafter
Mortgages Payable (Principal)
$
123,739
$
1,315
$
40,228
$
25,004
$
57,192
Revolving Credit Facilities
105,000
20,000
85,000
—
—
Estimated Interest Payments on Mortgages Payable and Revolving Credit Facilities
33,707
10,466
12,904
8,576
1,761
Total
$
262,446
$
31,781
$
138,132
$
33,580
$
58,953
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.
At March 31, 2024, the aggregate amount of our contractual commitments to fund future cash obligations in certain of our loan and consolidated real estate investments was $20.7 million.
As equity capital market conditions permit, we may supplement our capital for short-term liquidity needs with proceeds of potential offerings of our common and preferred stock, as well as the 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.
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On February 13, 2024, our board of directors (the “Board”) authorized a stock repurchase plan for the repurchase, from time to time, of up to an aggregate of $5 million of our outstanding shares of Class A common stock, with such repurchases to be conducted in accordance with the requirements of Rule 10b-18 of the Securities Exchange Act of 1934 (the “Exchange Act”) and subject to Rule 10b-5 of the Exchange Act. The repurchase plan has a term of one year and may be discontinued at any time. The extent to which we repurchase shares of our Class A common stock under the repurchase plan, and the timing of any such repurchases, depends on a variety of factors including general business and market conditions and other corporate considerations. We expect to repurchase shares of our Class A common stock through open market transactions subject to market conditions, certain price limitations and other conditions established under the plan. Open market repurchases will be structured to occur in conformity with the method, timing, price and volume requirements of Rule 10b-18 of the Exchange Act. As of March 31, 2024, we had not made any repurchases of our Class A common stock.
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, (iv) cash redemption requirements related to our Series A Preferred Stock, and (v) Class A common stock repurchases under our stock repurchase plan.
We intend to finance our long-term liquidity requirements with net proceeds of additional issuances of common and preferred stock, including issuances in connection with the continuous registered offering of our Series A 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.
As we did in the three months ended March 31, 2024, we may also selectively sell consolidated operating assets at appropriate times, which would be expected to generate cash sources for both our short-term and long-term liquidity needs.
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. In addition to restrictive covenants, our revolving credit facilities contain material financial covenants. At March 31, 2024, 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 expect to maintain a distribution on our Series A Preferred Stock in accordance with the terms which require monthly dividends. While our distributions through March 31, 2024 have been paid from cash flow from operations and in accordance with our policy, distributions in the future may be paid from cash flow from operations, proceeds from the offering of our Series A Preferred Stock, the sales of assets and additional sources, such as from borrowings.
We have notes receivable in conjunction with properties that are in various stages of development and in lease-up. To date, these investments have been structured as senior loans, and in the future, we may also provide mezzanine financing to these types of projects. The notes receivable provide a current stated return and require repayment based on a fixed maturity date. If the property does not repay the notes receivable upon maturity, our income, FFO, CFFO and cash flows could be reduced below the stated returns currently being recognized if the property does not produce sufficient cash flow to pay its operating expenses and debt service, or to refinance its debt obligations.
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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 equity 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 equity 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 March 31, 2024, 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. At March 31, 2024, we own interests in six joint ventures that are accounted for as held to maturity debt securities.
Cash Flows from Operating Activities
As of March 31, 2024, we held twenty real estate investments, consisting of twelve consolidated investments and eight preferred equity and loan investments, with the twenty investments representing an aggregate of 4,366 residential units. During the three months ended March 31, 2024, net cash provided by operating activities was $1.1 million after net loss of $3.2 million was adjusted for the following:
● non-cash items of $6.5 million; and
● distributions of income and preferred returns from preferred equity investments in unconsolidated real estate joint ventures of $0.2 million; offset by:
● an increase in accounts receivable, prepaids and other assets of $1.6 million;
● a decrease in accounts payable and other accrued liabilities of $0.7 million; and
● a decrease in due to affiliates of $0.1 million.
Cash Flows from Investing Activities
During the three months ended March 31, 2024, net cash used in investing activities was $19.3 million, due to the following:
● $17.5 million used in acquiring consolidated real estate investments;
● $9.6 million used in investments in notes receivable; and
● $1.7 million used on capital expenditures; offset by:
● $4.0 million of repayments of notes receivable;
● $3.7 million of proceeds from sale of real estate investments; and
● $1.8 million of proceeds from the redemption of unconsolidated real estate joint ventures.
Cash Flows from Financing Activities
During the three months ended March 31, 2024, net cash provided by financing activities was $30.9 million, primarily due to the following:
● $35.0 million of proceeds from revolving credit facilities;
● net proceeds of $8.6 million from the issuance of shares of Series A Preferred Stock; and
● $1.0 million of contributions from noncontrolling interests; offset by:
● $8.5 million of distributions to noncontrolling interests;
● $3.9 million of distributions to common stockholders;
● $0.5 million of payments of deferred financing fees;
● $0.4 million of repayments on our mortgages payable;
● $0.2 million of distributions to preferred stockholders; and
● $0.1 million of distributions paid to partially owned properties’ noncontrolling interests.
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Capital Expenditures
The following table summarizes our total capital expenditures for the three months ended March 31, 2024 and 2023 (amounts in thousands):
Three Months Ended
March 31,
2024
2023
Redevelopment/renovations
$
769
$
569
Routine capital expenditures
936
646
Normally recurring capital expenditures
121
99
Total capital expenditures
$
1,826
$
1,314
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. Adjustments for notes receivable, unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis.
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 pursuit costs that are required by GAAP to be expensed but may not necessarily be indicative of current operating performance and that may not accurately compare our operating performance between periods. Furthermore, although FFO 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.
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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.
The table below presents our calculation of FFO and CFFO for the three months ended March 31, 2024 and 2023 ($ in thousands):
Three Months Ended
March 31,
2024
2023
Net loss attributable to common stockholders
$
(1,020)
$
(1,540)
Add back: Net loss attributable to Operating Partnership Units
(2,169)
(2,985)
Net loss attributable to common stockholders and unit holders
(3,189)
(4,525)
Real estate depreciation and amortization
3,970
3,918
Gain on sale and impairment of real estate investments, net
(173)
—
Adjustment for partially owned properties' noncontrolling interests
(321)
(520)
FFO attributable to common stockholders and unit holders
287
(1,127)
Acquisition and other transaction costs
4
1,455
Non-cash interest expense
251
507
Unrealized loss on derivatives
715
1,133
Provision for credit losses
95
6
Non-real estate depreciation and amortization
41
61
Other income, net
(240)
(44)
Non-cash equity compensation
2,052
3,005
Adjustment for partially owned properties' noncontrolling interests
(4)
(427)
CFFO attributable to common stockholders and unit holders
$
3,201
$
4,569
Per Share and Unit Information:
FFO attributable to common stockholders and unit holders - diluted
$
0.02
$
(0.10)
CFFO attributable to common stockholders and unit holders - diluted
$
0.27
$
0.40
Weighted average common shares and units outstanding - diluted
12,044,069
11,295,431
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.
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Distributions
Declaration Date
Payable to stockholders of record as of
Amount
Paid / Payable Date
Class A common stock Special Dividend
December 19, 2023
December 29, 2023
$
1.00
January 5, 2024
Class C common stock Special Dividend
December 19, 2023
December 29, 2023
$
1.00
January 5, 2024
Series A Preferred Stock (1)
October 13, 2023
December 22, 2023
$
0.125000
January 5, 2024
January 15, 2024
January 25, 2024
0.125000
February 5, 2024
January 15, 2024
February 23, 2024
0.125000
March 5, 2024
January 15, 2024
March 25, 2024
0.125000
April 5, 2024
Series A Preferred Special Dividend (2)
November 7, 2023
Each day of December 1 - 31, 2023
$
0.002469
January 5, 2024
January 15, 2024
Each day of January 1 - 31, 2024
0.000337
February 5, 2024
January 15, 2024
Each day of February 1 - 29, 2024
0.003458
March 5, 2024
January 15, 2024
Each day of March 1 - 31, 2024
0.004603
April 5, 2024
(1) Holders of record of newly issued Series A Preferred Stock shares that are held only a portion of the applicable monthly dividend period will receive a prorated dividend based on the actual number of days in the applicable dividend period during which each such share of Series A Preferred Stock was outstanding.
(2) Holders of record of Series A Preferred Stock shares as of the close of business on each day of the applicable month are entitled to additional contingent special daily dividends for each such day, to be aggregated and payable (if at all) on the payable date, in each case equal to the amount (if any) by which (i) the Stated Value of the Series A Preferred Stock multiplied by (a) the sum of (I) the average 10-year Daily Treasury Par Yield Curve Rate for the period from the 26 th of the prior month to the 25 th of the applicable month (as reported by the United States Department of the Treasury), plus (II) two percent, divided by (b) twelve, divided further by (c) the actual number of days in the applicable month, exceeds (ii) the quotient of (a) $0.125 divided by (b) the actual number of days in the applicable month.
A portion of each dividend may constitute a return of capital for tax purposes. There is no assurance that we will continue to declare dividends or at this rate. Holders of OP Units, LTIP Units and C-LTIP Units are entitled to receive “distribution equivalents” at the same time as dividends are paid to holders of our Class A common stock.
Our 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 maintain our REIT status for federal income tax purposes. As a result, our distribution rate and payment frequency may vary from time to time. However, to maintain our REIT status for tax purposes, we must make distributions equal to 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 each year. While our policy is generally to pay distributions from cash flow from operations, we may declare distributions in excess of funds from operations.
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 Consolidated Financial Statements.
Subsequent Events
Other than the items disclosed in Note 15 “Subsequent Events” to our interim Consolidated Financial Statements for the period ended March 31, 2024, no material events have occurred that required recognition or disclosure in these financial statements. Refer to Note 15 of our interim Consolidated Financial Statements for discussion.
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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.