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Explaining Bluerock Residential's Double-Digit Yield: High Debt, Potential For Dividend Cut

Published Wed, 01 Apr 2020 11:01:00 -0400 on Seeking Alpha

BRG is a lesser known residential REIT which has churned out impressive SS NOI growth.
Shares yield over 10%, but is there more than meets the eye?
BRG trades at a large discount to peers, but I explain why the discount makes sense.
I explain why a dividend cut may be coming.
I'm neutral on BRG due to leverage.
Bluerock Residential (BRG) is an apartment REIT which has found a niche extracting value from older apartment units through renovations. Shares trade at a deep discount to peers, or at least at first glance they do. I explain how debt muddies the investment proposition and helps to explain the large relative discount. While BRG appears to be performing decently, the elevated debt load from the balance sheet indicates that liquidity may not prove sufficient if they are forced to defer or forego rent for an extended period of time. I'm neutral on the shares.
Deep Value At First Glance
BRG is a landlord of approximately 14,700 apartment units located in the top 40 markets across the nation:

(2019 Presentation)
BRG has targeted markets with strong demographics, as evidenced by the better than average employment and household income growth:

(2019 Presentation)
The most common way BRG grows cash flows is by raising rents. Aside from annual increases, BRG also has implemented a strategy of acquiring older apartment units with the aim of increasing rent through renovations. We can see below the example of Arium Glenridge (top left) which due to being older had significantly lower rents than neighboring units:

(2019 Presentation)
Aside from the significant bump in rent income from the renovation, BRG also is able to create significant value when the property is valued at market cap rates. We can see below that the bulk of the value creation comes from multiple expansion to a 5% cap rate.

(2019 Presentation)
Their hands on strategy has enabled it to report the strongest SS NOI growth among peers... Read more

Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
AVALONBAY COMMUNITIES 209.53   31.6 6.62 6.08 2.89
EQUITY RESIDENTIAL 85.36   42.7 2.00 2.27 2.69
ESSEX PROPERTY TRUST 324.02   52.2 6.21 7.80 2.43


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