The revenue of Bluerock Residential Growth REIT, Inc. (BRG) will likely continue to grow in the coming quarters as the employment situation improves. Further, the shift towards a work-from-home culture is likely to boost BRG’s rental revenues from multifamily residential properties. Overall, I’m expecting BRG’s core funds from operations to grow by 8% year-over-year to $0.75 per share. I’m expecting the REIT to maintain its quarterly dividend at the current level of $0.16 per share; however, the threat of a dividend cut remains. Further, valuation analysis shows that BRG has limited potential upside from the current market price. Considering the dividend yield and the price upside, I’m adopting a neutral rating on BRG.
Teleworking Culture Drives Rosy Revenue Outlook
BRG’s core funds from operations (“CFFO”) improved in the third quarter compared to the second quarter of 2020 due to a 3% growth in revenues as BRG’s portfolio continued to recover from the pandemic. Revenues will likely continue to improve in the coming quarters as unemployment normalizes in the country, leading to greater occupancy and higher rental rates in BRG’s multifamily portfolio. I’m expecting the nation’s average unemployment rate to return to the pre-pandemic level of 3.5% towards the end of 2021.
Additionally, the shift towards a work-from-home culture (“WFH”) will likely benefit BRG as it has properties in smaller cities with lower living expenses than major cities like New York and Los Angeles. BRG has multifamily residential properties in cities like Atlanta, Austin, and Denver, as mentioned in August’s investor presentation. The presentation also gives the results of an analysis by Green Street Advisors that shows the link between the WFH culture and migration of workers towards relatively cheap cities.
‘A new Green Street metric, the WFH utilization rate, reveals a strong worker preference for low-cost markets with good climates. Those markets are poised to benefit at the expense of high-cost/tax cities …’- Green Street Advisors, May 31, 2020
I’m expecting the ending of the President’s executive order barring evictions to have little impact on BRG’s revenues. During the third quarter, BRG experienced $300,000 of collection loss, as mentioned in the third quarter’s investor presentation. The loss represents just 0.5% of total revenues for the quarter; therefore, I’m expecting a negligible impact on revenues once the eviction freeze ends on December 30, 2020.
Apart from rental income, other property revenue is also likely to grow in the coming quarters. The management mentioned in the conference call that the transaction pipeline is increasing substantially. Further, the management believes that its markets are opening, and property valuations are very strong across the board.
BRG’s revenue increased by 4% year-over-year in the first nine months of 2020. Considering the factors mentioned above, I’m expecting BRG’s revenue growth in 2021 to be slightly higher than the nine months of 2020. As a result, I’m anticipating total revenues to increase by around 5% next year, on a year-over-year basis.
Expecting CFFO of $0.75 per Share
Considering the anticipated revenue growth next year, I’m expecting BRG’s CFFO to increase in 2021. Assuming the CFFO margin remains mostly stable at around 11%, I’m expecting BRG to report CFFO of $0.75 per share next year. BRG has recently announced a partial redemption of its Preferred A stock outstanding. However, the impact of the redemption on earnings will get offset by the new issuance of Series T Preferred stock. As of September 30, 2020, BRG had 6.7 million Series T preferred shares outstanding as opposed to a maximum limit of 20 million shares in the primary offering. The following table shows my estimates for revenue, net income, funds from operations, and CFFO.
Actual earnings may differ materially from estimates because of the risks and uncertainties related to the COVID-19 pandemic.
Not Expecting a Dividend Cut But Threat Remains
If BRG maintains its quarterly dividend at the current level of $0.16 per share, then it will offer a dividend yield of 6.14% for 2021. The quarterly dividend estimate of $0.16 per share and projected annual CFFO of $0.75 per share give a payout ratio of 87%, which is quite high from a historical perspective. Consequently, there is a risk that BRG might consider a dividend cut. Nevertheless, I’m expecting the REIT to maintain its dividend at the current level because the CFFO and dividend estimates suggest a payout that’s under 100%. The table below shows the historical and projected dividend payout ratios.
Further, BRG has plenty of liquidity that will help the REIT maintain dividends during the pandemic. As mentioned in the third quarter’s earnings release, BRG had $168.5 million in unrestricted cash and availability under its revolving credit facility as of October 31, 2020. In comparison, common stock dividend made up just $4 million in the third quarter of 2020.
Nonetheless, the risk of a dividend cut remains because of the high payout ratio. As a result, low risk-tolerant, dividend-seeking investors may consider investing in the Series T preferred stock instead of the common stock. The preferred stock pays a dividend of 6.15% and it’s senior to the common stock.
Valuation Analysis Suggests a Small Upside
I’m using the historical price-to-CFFO multiple (“P/CFFO”) to value BRG. The stock has traded at an average P/CFFO multiple of 14.4 in the past, as shown below.
Multiplying the average P/CFFO multiple with the forecast CFFO of $0.75 per share gives a target price of $10.8 for next year. This price target implies a 2.3% upside from the December 1 closing price. The following table shows the sensitivity of the target price to the P/CFFO ratio.
The small price upside and the estimated dividend yield combine to give a total expected return of 8.4% for next year. In my opinion, the total return is not attractive enough given the risks; hence, I’m adopting a neutral rating on BRG.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: This article is not financial advice. Investors are expected to consider their investment objectives and constraints before investing in the stock(s) mentioned in the article.