I didn't mean for this to be a mini-series, but as I was looking through ARL/TCI I remembered another REIT that I looked at years ago, BRT Apartments (BRT), that fits as an addition to the "sunbelt multi-family M&A craziness" themed basket. BRT Apartments is primarily a class B, value-add, garden style apartment portfolio in the southeast and Texas (35 properties, ~9500 units, ~$1150/month rents, loosely similar to NXRT's portfolio).
BRT also shares some similarities to TCI but thankfully is a little simpler, it owns both apartment buildings directly and through unconsolidated joint ventures which makes the accounting a bit challenging to untangle (typical REIT investors shun complexity), and it is also family owned with the Gould family owning ~25% of the stock. The founder, Fredric Gould is 85 and still a member of the board, his two sons hold executive positions including one that is the CEO, and a cousin is also involved as an EVP. The governance issues here don't seem as egregious as ARL/TCI but maybe on par with BRG. The Gould family does have a shared services agreement with their family office that provides "investment advice and long-term planning" and other services to the company (sounds like something an internal REIT shouldn't need to outsource), which has averaged about $1.4MM in each of the last several years. BRT also uses a property manager for some of their properties that is wholly owned by the Gould family. The Gould's also previously managed the company via an external asset manager "REIT Management" but this is now technically an internally managed REIT.
While I haven't seen any press leaks regarding BRT running a sales process, I'm just going on the assumption that every smallish sunbelt apartment REIT is receiving inbound calls from bankers and private equity shops kicking the tires, effectively all are probably evaluating strategic alternatives. I'm going to keep this one quick (BRT has a long history, was previously a lender to multi-family pre-GFC, foreclosed on properties, became the owner, etc, but now pretty clean, just sunbelt multi-family apartments), but if you break out the two baskets:
Joint Venture ArrangementsThe arrangements with our multi-family property joint venture partners are deal specific and vary from transaction to transaction. Generally, these arrangements provide for us and our joint venture partner to receive net cash flow available for distribution and/or profits in the following order of priority (in certain cases, we are entitled to these distributions on a senior or preferential basis): (i) a preferred return of 9% to 10% on each party's unreturned capital contributions, until such preferred return has been paid in full; and (ii) the return in full of each party's capital contribution. Thereafter, distributions to, and profit sharing between, joint venture partners, is determined pursuant to the applicable agreement governing the relationship between the parties. Generally, as a result of allocation/distribution provisions of the applicable joint venture operating agreement, the allocation and distribution of cash and profits to BRT is less than that implied by BRT's percentage equity interest in the venture/property.
- They have used their ATM offering this year, which isn't exactly a sign they're shareholder friendly or think their shares trade at a huge discount as I suggest, but BRG did similar things with the preferred share exchanges there. Some of the ATM issuances were before inflation talk really heated up and we saw a lot of activity in the space, but it is still worth mentioning as a negative.
- The Gould family also runs another REIT, One Liberty Properties (OLP), that's mostly an industrial net lease, attentions and salaries could potentially be repositioned there as that sector also has covid tailwinds. At BRG they found a creative way to keep their jobs by spinning out the SFH rentals, here they could just all move over to their already established REIT.
- I also noticed the Gould family has created a cannabis investment firm, Rainbow Realty Group, could be the seeds of a future cannabis mREIT or other lending structure that have become popular ways to invest in cannabis on U.S. regulated exchanges (e.g., I noticed the old Fifth Street Asset Management (FSAM) team popped up at AFC Gamma (AFCG)). Maybe cash out here and reinvest in that hot theme?
Thank you for the post. How do you get the cap rates normally? is that an average of the cap rate of the properties?
I'm not pulling them from anywhere, just going off of what private market transactions like BRG are being quoted at. If you look at some of the larger sunbelt REITs, they're trading below a 4% cap rate so it doesn't seem too out of line.Delete
WHy is Mitchel Gould a consistent and recent seller of stock if it's so cheap (and I agree it's at a large discount to peers)?ReplyDelete
Dunno, it was just 5500 shares, the day I posted this, who knows, but sure, seeds a little doubt.Delete
I also wonder whether the fact that a lot of the value resides in JVs would deter potential buyers.Delete
Maybe, it probably limits the pool of buyers, but the big PE shops like BX have essentially permanent capital, can parse through the unlock the value there over time.Delete
It's a small speculative position on my part, sized it smaller than my original BRG speculation, there were at least had the news leak they were considering a sale.Delete
Have you looked at AIV and APTS? They are also cheap vs the bigger pureplay MF reits.Delete
I did look at AIV when it was spun, kicking myself for not buying it then, I'll take another look again.Delete
BRG was a great call. I almost missed out due to management ick factor. My instinct is to avoid this as well but your logic makes sense and while very binary (do the Goulds want to sell or not) the ~4:1 upside / downside on the calls feels like a decent line.ReplyDelete
I don't think its worth spending a ton of time to narrow in on the valuation of the assets because (I get to ~$33 per share using slightly higher cap rates) but my working on the Nashville deal is much higher on a price / unit basis ($27.86m for 41.9% interest implies equity value of $66.49m along with construction loan of $47.04m results in $113.5m for the asset / $282k per unit). Where am I wrong in my math? Looking over the portfolio, it looks to me like that asset is probably their best quality one - newest, highest rents / unit, good metro...
Two other data points backing up your valuation are the two dispositions of ~25 year old JV assets in FL and GA in July for ~$200k per unit. These were ~95% occupied at YE 2020 with rents of $1,100 - $1,200 per unit so about average for the portfolio overall. Better metros than average though - Orlando and Atlanta.
The Houston sale in May provides a view of the bottom end of the portfolio in terms of quality, sold for $90k per unit - ~40 year old asset, 92.1% occupancy, rents of $834 per month.
Now the only question that matters - will the Gould's ring the cash register?
Thanks - Yes, that's the question, do the Goulds ring the cash register? They should, but who knows.Delete
Separately, have you looked at BHOM (the BRG spinco)? Incentives would suggest that Bluerock management would undervalue the spin since they're rolling over their OP units into the spin, they're the best situated to know the true value there, might have understated it with a $5.60/share value.
Definitely on the watch list as I agree with the incentives, which might make it worth holding nose (again) on management. A micro-cap, externally managed REIT spin will also hopefully get ignored by the wider market.Delete
I am waiting for the Form 10 to spend real time on this but as of Q3 2021 their operational SFR portfolio was acquired for $176.4m or $138.4m at BRG share, they own just under 80% on average, largely in 2021. Supplemental has $35.4m of debt against the WA properties, $32.6m at BRG share. The SFR Loan / Pref portfolio had a balance of $36.4m at Q3 2021 and $32.3m left to fund.
Those components alone look to be worth $3.75 per share (assuming 1:1 spin and 27.7m shares / OP units) and they have acquired more since then based on the press release citing 3,400 homes.
The plan of merger doc also cites ~$186m of cash at SpinCo at the time of the spin, which would be ~$5.00 per share?
Obviously there must be some gaps that I am not seeing, hope the Form 10 will shed some light on how Duff and Phelps got to $5.60...
I'm still trying to figure this out too, but I think since management is rolling their OP units into the spin, we can't use a 1:1 spin ratio, public shareholders are going to own 35% of BHOM to start. So its basically 27.7m/0.35 = 79m'ish fully diluted shares/op units? But how did they get to the 35/65 split, that's where D&P's valuation might come in and where they might be incentivized to keep the value low to get more of the spinco.Delete
I'm guessing they'll run a similar strategy here, issue preferred through their broker/dealer that's convertible to common, but might act better then they did originally with BRG (really only became major shareholders with the internalization).
BREIT is relentless!Delete
Any thoughts here as the environment shifts?ReplyDelete