Bluerock Residential Growth REIT Redeemable Preferred Stock & Warrants
Bluerock Realty for years was a short term commercial lender and in 2004 it switched its focus to multifamily housing. As of last year, the company owned 21 multifamily properties totaling 6,972 rental units and investments in 10 development multifamily properties representing 2,598 rental units under construction.
BRG has raised three tradable preferred offerings since taking their initial nontraded REIT public in 2014 with their common stock symbol BRG, and now are focusing entirely on the multifamily business. This could potentially be one of those undervalued and/or under followed companies. Currently BRG common is followed by seven stock analysts, all with a Buy rating and an average price target of $15.57. Multifamily still has value if you are willing to own smaller REITs.
Bluerock Residential Growth REIT has five different structures of securities offered below.
Bluerock’s offerings (prices as of 5/22/2017):
- BRG common stock is trading at $12.72 with a net asset value of $17.00 (selling at a discount) with a 9.16% annualized yield.
- BRG Preferred A is $26.38 with a 7.8% annualized yield (offering came out 4/18/2016 with a 7 year redemption) *
- BRG Series B Redeemable Preferred Stock (non-tradable/non-listed) & Warrants with a 6% annualized yield and a 5 year term from investor’s time of initial investment.* There is a 2 year all cash call at Bluerock’s option/discretion. There is a 5 year surrender option in case of investor liquidity needs.
- BRG Preferred C is $26.30 with a 7.26% annualized yield (offering came out 7/19/2016 with a 7 year redemption) *
- BRG Preferred D is $24.80 with a 7.17% annualized yield (offering came out 10/17/2016) *
The common stock sells for a reasonable AFFO multiple and pays shareholders a dividend. While the real estate investment trust’s common shares get most of the attention, income investors may want to also look at the company’s preferred shares.
Bluerock Residential Growth REIT has had strong same-store net operating income growth, is led by an experienced executive team, has a low valuation multiple on a run-rate adjusted funds from operations basis, and has a high 9 percent yield on their common stock.
BRG preferred shares are comparable to the REIT’s common shares. The main reason to invest in the preferred stock of a real estate investment trust is that preferred stock have a higher degree of principle safety than the common shares which are more exposed to the factors that have an impact on stock prices and volatility. Preferred stocks behave more like bonds, providing income investors with a regular flow of dividend income. Since preferred stock ranks above common stock in the capital structure, preferred stock tends to be less volatile. By buying the Preferred A over the common you do not give up much yield and get a relativity more stable stock. *
The REIT’s preferred stock has proven to be much less volatile than Bluerock Residential Growth REIT’s common shares.
The Series A has a coupon rate of 8.25 percent, but since the preferred shares sell for a 5.32 percent premium to their liquidation preference value of $25.00 per share, the effective dividend yield has declined to 7.8%.
The Series A is throwing off a quarterly dividend of $0.5156 per share, and $2.06 per share annually. Bluerock Residential Growth REIT’s common shares pay dividends on a monthly basis, whereas the REIT’s preferred shares A pay on a quarterly basis. Then there is the Preferred B non-listed Redeemable stock with a 6% annualized dividend paid monthly.
If your strategy is capital appreciation and a higher dividend income on a monthly basis, look at Bluerock Residential Growth REIT’s common shares. If your strategy is principle safety with preferred stock dividends, look at Bluerock Residential Growth REIT’s Series A Cumulative Redeemable Preferred Stock. An investment in the Series A preferred shares comes with a decent 8 percent dividend yield. Lower risk is another reason to consider Bluerock Residential REIT’s preferred shares.
Or, if you are looking for income with the safety and stability of a preferred without the volatility of the common or even the limited volatility of the traded preferred stock; and also with the additional opportunity for appreciation with the ability to exercise attached warrants then the new Bluerock Redeemable Preferred B Stock & Warrants would be recommended. They have a redemption/liquidity option as follows:
- Upon issuance, less a 13% fee
- After 1 year less 10% fee
- After 3 years less 5%
- After 4 years less 3% fee
- After 5 years for stated value
At 20 months there is a breakpoint after redemption fee less dividends paid. And the redemption fee is waived in the case of death.
BRG common stock is currently on the Russell 2000 and the Russell 3000. Bluerock’s growth strategy is to meet exchange requirements in order to be a part of the MSCI US REIT Index. The MSCI US REIT Index is a free float adjusted market capitalization weighted index that is comprised of Equity REIT securities. This could potentially increase volume as ETFs and real estate index funds will be required to purchase BRG common.
Bluerock Residential Growth REIT Redeemable Preferred B Stock & Warrants:
- 6% annual preferred dividend paid monthly (covered 2.29).
- Offering size is $150,000,000
- Equity participation. Warrants attached for possible appreciation exercisable 1 year following offering and expiring 4 years from date of issuance. 20 shares of common per Warrant at 20% above the strike price with no floor price. May be redeemed for common stock or liquidated.
- No clawback provision. Upon death of investor no redemption fee.
- Minimum investment $5000 with $1000 increments/share price.
Bluerock invests in partnership with some of the largest apartment firms across the nation (Trammell Crow, Village Green, Alliance, Bell Partners, The Lynd Co., Hawthorne, and Carroll). Bluerock has a full cycle portfolio averaging a net IRR of 18.01%. Institutional ownership is 40% including but not limited to Bluerock, Vanguard, Cohen & Steers, and JP Morgan.
Bluerock only earns a base management fee of 1.5% that is paid by BRG common. BRG also pays all commissions and there are no standard REIT fees such as acquisition, property management, general and administrative, disposition or financing fees that is typical of other nontraded REITs. Total fees of 13% are paid upfront 100% absorbed by common. A lower fee structure is intended to improve investor returns.
Their exit strategy is to return investor’s original principle or issue equivalent BRG common stock at the end of 5 years form the time of the investor’s initial investment. Bluerock has the option to call/liquidate after 2 years.
The average age of the properties is 10 years. And their distributions are well covered with revenues at approximately $31 million and distributions of approximately $13 million.
Bluerock Preferred B Non-listed Redeemable is a compelling income REIT with an opportunity for income with equity appreciation in their warrants (warrants are not offered through their tradable preferred stock). Bluerock has structured this offering to give investors the stability of a preferred non-listed stock without the upfront fees typical of other non-listed REITs and also with an exit strategy. You may be giving up liquidity but the structure has compensated investors by attaching the warrants.
*Shareholders of preferred stock have priority over common stock shareholders when it comes to dividends. If a company is struggling and has to suspend its dividend, preferred shareholders may have the right to receive payment in arrears before the dividend can be resumed for common shareholders. Also, preferred shareholders have prior claim on a company’s assets if it is liquidated, though they remain subordinate to bondholders.
Securities sold through Silber Bennett, Inc., member SIPC and FINRA