BLUEROCK HOMES TRUST, INC. The following is a discussion of the historical results of operations and liquidity and capital resources ofBluerock Homes Trust, Inc. ("Bluerock Homes ," "the Company," "we," "us," or "our"), which was incorporated as aMaryland corporation onDecember 16, 2021 . Prior toOctober 6, 2022 , Bluerock Home's sole stockholder was Bluerock Residential Growth REIT, Inc, aMaryland corporation ("Bluerock Residential"). We have historically operated as part of Bluerock Residential and not as a stand-alone company. You should read the following discussion and analysis in conjunction with the accompanying financial statements ofBluerock Homes , and the notes thereto. 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.
The Separation and the Distribution
OnDecember 20, 2021 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") withBluerock Residential, Badger Parent and Badger Merger Sub LLC ("Merger Sub"). As contemplated by the Merger Agreement, onOctober 5, 2022 , we entered into a Separation and Distribution Agreement with Bluerock Residential, Badger Parent,Badger Holdco LLC and theOperating Partnership , pursuant to which, among other things, Bluerock Residential contributed to us its single-family residential real estate business and certain other assets (the "Separation"). OnOctober 6, 2022 , following the Separation, Bluerock Residential completed the spin-off ofBluerock Homes by distributing all our outstanding shares of Class A common stock and Class C common stock to the holders of Bluerock Residential common stock (the "Distribution") as of the record date,September 29, 2022 (the "Spin-Off"). Pursuant to the terms and conditions of the Merger Agreement, following the Separation, the Distribution and the Spin-Off, Bluerock Residential merged with and into Merger Sub, with Merger Sub continuing as the surviving company, and the separate existence of Bluerock Residential ceased. As a result of the Separation, the Distribution and the Spin-Off,Bluerock Homes became an independent, publicly traded company and our Class A common stock is listed under the symbol "BHM" on the NYSE American. Financial statements representing the historical operations of Bluerock Residential's residential rental business have been derived from Bluerock Residential's historical accounting records and are presented on a carve-out basis. All revenues and costs as well as assets and liabilities directly associated with the business activity ofBluerock Homes are included in the financial statements. The financial statements also include allocations of certain general, administrative, sales and marketing expenses and operations from Bluerock Residential. However, amounts recognized by us are not necessarily representative of the amounts that would have been reflected in the financial statements had we operated independently of Bluerock Residential. All significant intercompany balances and transactions have been eliminated. Any references to "the Company," "we," "us," or "our" for all periods endedOctober 6, 2022 and prior refer toBluerock Homes as owned by Bluerock Residential, and for all periods subsequent toOctober 6, 2022 refer toBluerock Homes as an independent, publicly traded company.
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 epidemics, pandemics, or other outbreaks of illness, disease or
? virus (such as the outbreak of 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;
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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, HOA fees,
maintenance, insurance and utilities costs;
? weather conditions that may increase or decrease energy costs and other
weather-related expenses;
? 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 homes;
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
properties;
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;
? our ability to maintain our qualification as a REIT; and
? litigation, including costs associated with prosecuting or defending claims and
any adverse outcomes.
A discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Information Statement filed as Exhibit 99.1 to our Form 8-K filed onSeptember 26, 2022 , as well as risks, uncertainties and other factors discussed in this Quarterly Report on Form 10-Q and identified in other documents filed by us with theSEC . 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. 35 Table of Contents Basis of Presentation
We conduct our operations throughBluerock Residential Holdings, L.P. , our operating partnership (the "Operating Partnership"), of which we are the sole general partner.Bluerock Homes consists of the combined financial statements of theOperating Partnership andBluerock REIT Operator, LLC , as well as the following investments and certain related entities:Alexan Southside Place , ARIUM Grandewood, Ballast, Golden Pacific, ILE, James at South First, Marquis at The Cascades,Mira Vista ,Navigator Villas , Peak (Axelrod, DFW 189,Granbury ,Granbury 2.0, Indy,Lubbock ,Lubbock 2.0,Lubbock 3.0,Lynnwood ,Lynnwood 2.0,Peak Housing ,Savannah 319,Springfield ,Springtown ,Springtown 2.0,Texarkana and Texas Portfolio 183), Park & Kingston,Plantation Park , TheConley , The Cottages atMyrtle Beach , The Cottages atWarner Robins , The Cottages ofPort St. Lucie , The District at Scottsdale, TheHartley at Blue Hill, The Woods atForest Hill ,Thornton Flats , Vickers Historic Roswell, Wayford atConcord , Wayford atInnovation Park ,Weatherford 185,Willow Park andYauger Park Villas . The general and administrative expenses have been allocated to us based on relative unit count. These allocated expenses are for corporate office expenses and management including, but not limited to, executive oversight, asset management, treasury, finance, human resources, tax, accounting, financial reporting, information technology and investor relations.
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 andWestern 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 homes, 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 ofSeptember 30, 2022 , we held an aggregate of 3,963 residential units held through twenty-nine real estate investments, consisting of twenty-two consolidated operating investments and seven investments held through preferred equity investments. As ofSeptember 30, 2022 , our consolidated operating investments were approximately 90.9% occupied. We intend to elect to be taxed and to operate in a manner that will allow us to qualify as a real estate investment trust ("REIT") for federal income tax purposes beginning with our taxable year endingDecember 31, 2022 . As a REIT, we generally will not be subject to corporate-level income taxes. To qualify and maintain our REIT status, we will be 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 our qualification is denied. Such an event could materially and adversely affect our net income and results of operations. We intend to organize and operate in such a manner where we would remain qualified as a REIT.
COVID-19
We continue to monitor the impact of the COVID-19 pandemic and any resulting macro-economic changes on all aspects of our business and single-family residential communities, including how it will impact our tenants and business partners. We cannot predict the future impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows due to the numerous uncertainties. These uncertainties include the scope, severity and duration of the pandemic (including as the pandemic evolves due to future mutations of the COVID-19 virus), the ongoing governmental, business and individual actions taken to contain the pandemic or mitigate its impact, the availability and adoption of COVID-19 vaccines, and the direct and indirect economic effects of the pandemic and containment measures, among others. The outbreak of COVID-19 across the globe, includingthe United States , has significantly and adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. Further, the impacts of potential worsening global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, consumer spending as well as other unanticipated consequences remain unknown. 36 Table of Contents We believe our financial condition and liquidity are currently strong. Although there is uncertainty related to the impact of the COVID-19 pandemic on our future results, we believe the fundamentals of our business model will continue to allow us to effectively manage our business through such uncertainty. While occupancy remains strong at 90.9% as ofSeptember 30, 2022 , in future periods, the Company may experience reduced levels of tenant retention, and reduced foot traffic and lease applications from prospective tenants, as a result of the impact of COVID-19. The extent to which the COVID-19 pandemic and any resulting macro-economic changes impact the Company's operations and those of its tenants will depend on future developments, which are uncertain and cannot be predicted with confidence.
Other Significant Developments
Acquisition of and Investments in Real Estate
During the nine months endedSeptember 30, 2022 , we acquired an additional 537 single-family residential units through four new or existing joint ventures for total purchase prices of$137.9 million . Additionally, we increased our preferred equity investments in The Cottages atMyrtle Beach , The Cottages atWarner Robins , The Cottages ofPort St. Lucie , The Woods atForest Hill and Wayford atInnovation Park by an aggregate of approximately$43.4 million . We entered into a mezzanine loan agreement withWeatherford 185 and provided loan funding of approximately$9.6 million , which was subsequently paid off in full inJuly 2022 .
The following is a summary of our real estate investments made during the
nine months ended
Name - Operating Market Date of Investment (1) Number of Units Ownership Interest Purchase Price Granbury 2.0 (2) Granbury, TX March 11, 2022 34 80 % $ 7.7 Savannah 319 Savannah, GA March 17, 2022 19 80 % 4.5 Golden Pacific IN / KS / MO 1Q 2022 62 97 % 11.8 ILE TX / SE US 1Q 2022 31 95 % 7.0 Ballast AZ / CO / WA 2Q 2022 65 95 % 26.1 Golden Pacific IN / KS / MO 2Q 2022 66 97 % 14.0 ILE TX / SE US 2Q 2022 108 95 % 27.8 Savannah 319 Savannah, GA 2Q 2022 20 80 % 4.8 Ballast AZ / CO / WA 3Q 2022 19 95 % 6.2 Golden Pacific IN / KS / MO 3Q 2022 35 97 % 7.9 ILE TX / SE US 3Q 2022 64 95 % 16.7 Savannah 319 Savannah, GA 3Q 2022 14 80 % 3.4 Total Operating 537 $ 137.9 Name - Mezzanine Loan Market Date of Investment Number of Units Commitment Amount Investment Amount Weatherford 185 (3) Weatherford, TX February 15, 2022 185 $ 9.6 $ 9.6 Total Mezzanine Loan 185 $ 9.6 Total 722 $ 147.5
(1) For those acquisitions where the quarter is specified, we acquired additional
units on various dates throughout that specified quarter. These additional
units were added to the respective existing portfolios. For Ballast, the
units acquired in the second quarter 2022 were the first of our acquisitions
for that portfolio.
(2) At the time of closing, we made a common equity investment in
and provided a mezzanine loan to the portfolio owner. On
full mezzanine loan investment was converted into a common equity interest.
Refer to Note 8 of our combined financial statements for further information.
(3) OnJuly 22, 2022 , theWeatherford 185 loan that we provided was paid off in full. 37 Table of Contents
Sale of Real Estate Assets and Loan Repayments
The following is a summary of our loan payoffs during the nine months ended
Property Location Date of Sale or Repayment Number of Units Sale Price Net Proceeds Notes Receivable The Hartley at Blue Hill Chapel Hill, NC February 28, 2022 414$ 114.2 $ 39.4 (1) Weatherford 185 Weatherford, TX July 22, 2022 185 - 9.7 (2) Total Notes Receivable 599$ 114.2 $ 49.1
(1) On
parcel of land adjacent to The
for
amount.
(2) Net proceeds amount includes
borrower prior to
Results of Operations
The following is a summary of our stabilized consolidated operating real estate
investments as of
Name Market Number of Units Average Year Built Ownership Interest Average Rent (1) % Occupied (2) Ballast AZ / CO / WA 84 1998 95 % $ 2,233 83.8 % Golden Pacific IN / KS / MO 170 1976 97 % 1,622 74.8 % ILE TX / SE US 482 1991 95 % 1,743 85.3 % Navigator Villas Pasco, WA 176 2013 90 % 1,473 98.3 % Peak Axelrod Garland, TX 22 1959 80 % 1,343 100.0 % DFW 189 Dallas-Fort Worth, TX 189 1962 56 % 1,007 98.4 % Granbury Granbury, TX 36 2020-2021 80 % 1,629 100.0 % Granbury 2.0 Granbury, TX 34 2021-2022 80 % 1,715 97.1 % Indy Indianapolis, IN 44 1958 60 % 898 97.7 % Lubbock Lubbock, TX 60 1955 80 % 931 83.3 % Lubbock 2.0 Lubbock, TX 75 1972 80 % 1,231 93.1 % Lubbock 3.0 Lubbock, TX 45 1945 80 % 943 69.0 % Lynnwood Lubbock, TX 20 2005 80 % 1,015 78.9 % Lynnwood 2.0 Lubbock, TX 20 2003 80 % 1,025 90.0 % Savannah 319 Savannah, GA 53 2022 80 % 1,649 94.3 % Springfield Springfield, MO 290 2004 60 % 1,188 96.2 % Springtown Springtown, TX 70 1991 80 % 1,278 88.6 % Springtown 2.0 Springtown, TX 14 2018 80 % 1,499 92.9 % Texarkana Texarkana, TX 29 1967 80 % 1,035 100.0 % Texas Portfolio 183 Various / TX 183 1975 80 % 1,365 91.5 % Wayford at Concord Concord, NC 150 2019 83 % 2,112 96.0 % Yauger Park Villas Olympia, WA 80 2010 95 % 2,331 97.5 % Total Units / Average 2,326 $ 1,483 90.9 %
(1) 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
2022.
(2) Percent occupied is calculated as (i) the number of units occupied as of
a percentage. Percent occupied excludes an aggregate of 86 down units under
renovation.
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The following is a summary of our consolidated operational results for the three and nine months endedSeptember 30, 2022 and 2021 (dollars in thousands, except average rental rates): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 Variance 2022 2021 Variance Number of units at period end 2,326 935 149 % 2,326 935 149 % Rental and other property revenues $ 8,608 $ 2,643 226 % $ 23,136 $ 4,704 392 % Property operating expenses $ 4,440 $ 802 454 % $ 10,994 $ 1,544 612 % Net operating income $ 4,168 $
1,841 126 % $ 12,142 $ 3,160 284 % Average occupancy percentage (1)
91.5 % 97.0 % (550) bps 92.0 % 97.4 % (540) bps
Average rental rate (2) $ 1,483 $ 1,471 0.8 % $ 1,415 $ 1,427 (0.8) %
(1) Represents the average of the ending occupancy as of the last day of
each month in the period presented.
(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 investments as ofSeptember 30, 2022 : Total Actual/ Actual/ Actual/ Actual/ Estimated Estimated Actual/ Estimated Estimated Planned Construction Cost to Date Construction Estimated Construction Average Name Location / Market Number of Units Cost (in millions) (in millions) Cost Per Unit Initial
Occupancy Completion Rent (1)Lease-up Investment Willow Park Willow Park, TX 46 $ 14.5 $ 12.8$ 315,217 2Q 2022 2Q 2023$ 2,362 Total Lease-up Units 46Development Investment The Woods at Forest Hill Forest Hill, TX 76 14.8 10.2 194,737 1Q 2023 3Q 2023 1,625
The Cottages at Myrtle Beach Myrtle Beach, SC 294 63.2 33.7 214,966 2Q 2023 4Q 2023 1,743
The Cottages at Warner Robins Warner Robins, GA 251 53.1 23.4 211,554 3Q 2023 4Q 2023 1,346
The Cottages of Port St. Lucie Port St. Lucie, FL 286 69.6 29.5 243,357 2Q 2023 4Q 2023 2,133
Wayford at Innovation Park Charlotte, NC 210 62.0 17.3 295,238 3Q 2023 3Q 2024 1,994
Total Development Units 1,117
Average
Operating Investment Number of Units Rent (1)
Peak Housing (2) IN / MO / TX 474 $ 945
Total Operating Units 474
Total Units/Average 1,637 $ 1,563 (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
September 30, 2022 .
(2)
preferred equity investments in a private single-family home REIT (refer to
Note 8 of our combined financial statements for further information). Unit
count excludes units presented in the consolidated operating investments
table above.
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The following is a summary of income earned on our preferred equity and loan
investments for the three and nine months ended September 30, 2022 and 2021
(amounts in thousands):
Three Months Ended Nine Months Ended
Property September 30, September 30,Preferred Equity Investments 2022 2021
2022 2021 Mira Vista (1) $ -$ 125 $ -$ 391 Peak Housing 476 340 1,412 574 The Conley (1) - - - 405
The Cottages at Myrtle Beach 664 39 1,624 39 The Cottages at Warner Robins 448 - 660 - The Cottages of Port St. Lucie 682 48
1,490 48
The Woods at Forest Hill 107 - 173 -
Thornton Flats (1) - 109 - 315
Wayford at Concord (2) - - - 364
Wayford at Innovation Park 152 - 192 -
Willow Park 84 - 250 -
Total preferred returns on unconsolidated
joint ventures $ 2,613 $ 661 $ 5,801 $ 2,136
Notes Receivable
Corpus (3) $ - $ 109 $ - $ 109
Jolin (3) - 33 - 33
The Hartley at Blue Hill (4) - 1,046 784 3,104
Vickers Historic Roswell (5) - - - 903
Weatherford 185 (6) 69 -
501 -
Total interest income on notes receivable
(1) Our preferred equity investment was redeemed in 2021.
On
preferred equity investment was redeemed.
We recapitalized Corpus and Jolin on
payoffs of the bridge loans. As part of the recapitalization, both Corpus and (3) Jolin, along with two portfolios of residential units previously owned by our
joint venture partner, were combined into one consolidated operating
portfolio known as Texas Portfolio 183.
In the first quarter 2022, The
(5) In the second quarter 2021, the Vickers Historic Roswell property was sold.
The mezzanine loan that we provided was paid off in full upon the sale.
(6) OnJuly 22, 2022 , theWeatherford 185 loan that we provided was paid off in full. 40 Table of Contents
Three Months Ended
Revenue
Rental and other property revenues increased$6.0 million , or 226%, to$8.6 million for the three months endedSeptember 30, 2022 as compared to$2.6 million for the same prior year period. This was due to a$5.8 million increase from the acquisition of 537 units (through three new and two existing investments) in 2022 and the full period impact of 1,383 units acquired in 2021 (through 16 new investments) and a$0.2 million increase from our same store properties. From an operational perspective, our average rent per occupied unit increased$12 or 0.8% to$1,483 as compared to$1,471 during the prior year period. Average occupancy decreased 550 basis points from 97.0% to 91.5% on a year over year basis due to the following (i) during the 2021 period, average occupancy of 97.0% included only 935 units (over 9 investments) which were fully operational and stabilized during the period, and (ii) we acquired an additional 1,391 units sinceOctober 1, 2021 of which 1,324 units were scattered homes that typically have an operational value-enhancement strategy which includes increasing individual home occupancy levels over time; when acquiring scattered homes, the initial occupancy may be slightly lower as homes are often purchased from owner occupants which can create modest frictional vacancy for a brief period of time after acquisition. Interest income from loan investments decreased$1.1 million , or 94%, to$0.1 million for the three months endedSeptember 30, 2022 as compared to$1.2 million for the same prior year period due to the sale of one underlying investment and the redemption of three loans in 2022, partially offset by the acquisition of one investment in 2022.
Expenses
Property operating expenses increased$3.6 million , or 454%, to$4.4 million for the three months endedSeptember 30, 2022 as compared to$0.8 million for the same prior year period. This was primarily due to a$3.5 million increase from the acquisition of investments in 2022 and 2021 and a$0.1 million increase from same store properties. 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$2.4 million and$0.5 million and non-controllable expenses were$2.0 million and$0.3 million for the three months endedSeptember 30, 2022 and 2021, respectively. Property management and asset management fees expense were$1.1 million for the three months endedSeptember 30, 2022 as compared to$0.1 million in the same prior year period. This was primarily due to a$1.0 million increase from the acquisition of investments in 2022 and 2021. 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. General and administrative expenses have been allocated to us from Bluerock Residential based on relative unit count. These allocated expenses are for corporate office expenses and management including, but not limited to, executive oversight, asset management, treasury, finance, human resources, tax, accounting, financial reporting, information technology and investor relations. Expense amounts recognized are not representative of the amounts that would have been reflected in the financial statements had we operated independently of Bluerock Residential. General and administrative expenses amounted to$1.8 million for the three months endedSeptember 30, 2022 as compared to$1.1 million for the same prior year period. The$0.7 million increase is primarily due to an increase to the relative unit count allocation from Bluerock Residential due to the increase in size of the carve out portfolio since the prior year period. Acquisition and pursuit costs amounted to$0.03 million for the three months endedSeptember 30, 2022 as compared to$0.02 million for the same prior year period. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future periods. Depreciation and amortization expenses were$3.6 million for the three months endedSeptember 30, 2022 as compared to$1.7 million for the same prior year period. This was due to a$2.4 million increase from the acquisition of investments in 2022 and 2021 partially offset by a$0.5 million decrease from our same store properties. 41 Table of Contents Other Income and Expense Other income and expense amounted to income of$2.6 million for the three months endedSeptember 30, 2022 compared to income of$0.1 million for the same prior year period. This was primarily due to an increase in preferred returns on unconsolidated real estate joint ventures of$2.0 million due to the acquisition of four investments and partially offset by the sale of two underlying investments during the period. Additionally, there was a net decrease in interest expense of$0.7 million primarily due to an increase in the value of our interest rate caps and swaps and partially offset by an increase in the outstanding debt to$153.6 million atSeptember 30, 2022 as compared to$36.6 million atSeptember 30, 2021 . This was also partially offset by a decrease in other income of$0.2 million due to origination fees received from our joint venture partner in the prior year period.
Discontinued Operations
Income from discontinued operations amounted to income of$0.3 million for the three months endedSeptember 30, 2022 as compared to income of$45.9 million for the same prior year period. In 2021, the discontinued operations were due to the sale of six multifamily operating properties and included a$49.0 million gain from sale of multifamily assets partially offset by a$3.1 million loss on extinguishment of debt. In 2022, the income is a result of the reversal of accruals for the sold properties.
Nine Months Ended
Revenue Rental and other property revenues increased$18.4 million , or 392%, to$23.1 million for the nine months endedSeptember 30, 2022 as compared to$4.7 million for the same prior year period. This was due to a$18.0 million increase from the acquisition of 537 units (through three new and two existing investments) in 2022 and the full period impact of 1,613 units acquired in 2021 (through 18 new investments) and a$0.4 million increase from our same store property,Navigator Villas . From an operational perspective, our average rent per occupied unit decreased$12 , or 0.8%, to$1,415 as compared to$1,427 during the prior year period. Average occupancy decreased 540 basis points from 97.4% to 92.0% on a year over year basis due to the following (i) during the 2021 period, average occupancy of 97.4% included only 935 units (over 9 investments) which were fully operational and stabilized during the period, and (ii) we acquired an additional 1,391 units sinceOctober 1, 2021 of which 1,324 units were scattered homes that typically have an operational value-enhancement strategy which includes increasing individual home occupancy levels over time; when acquiring scattered homes, the initial occupancy may be slightly lower as homes are often purchased from owner occupants which can create modest frictional vacancy for a brief period of time after acquisition. Interest income from loan investments decreased$2.9 million , or 69%, to$1.3 million for the nine months endedSeptember 30, 2022 as compared to$4.1 million for the same prior year period due to the sale of two underlying investments in 2022 and 2021 and the redemption of three loans in 2022, partially offset by the acquisition of one investment in 2022.
Expenses
Property operating expenses increased$9.5 million , or 612%, to$11.0 million for the nine months endedSeptember 30, 2022 as compared to$1.5 million for the same prior year period. This was primarily due to a$9.4 million increase from the acquisition of investments in 2022 and 2021 and a$0.1 million increase from our same store property,Navigator Villas . 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$5.3 million and$0.9 million and non-controllable expenses were$5.7 million and$0.6 million for the nine months endedSeptember 30, 2022 and 2021, respectively. Property management and asset management fees expense were$2.6 million for the nine months endedSeptember 30, 2022 as compared to$0.2 million in the same prior year period. This was primarily due to a$2.4 million increase from the acquisition of investments in 2022 and 2021. 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.
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General and administrative expenses have been allocated to us from Bluerock Residential based on relative unit count. These allocated expenses are for corporate office expenses and management including, but not limited to, executive oversight, asset management, treasury, finance, human resources, tax, accounting, financial reporting, information technology and investor relations. Expense amounts recognized are not representative of the amounts that would have been reflected in the financial statements had we operated independently of Bluerock Residential. General and administrative expenses amounted to$5.0 million for the nine months endedSeptember 30, 2022 as compared to$3.1 million for the same prior year period. The$1.9 million increase is primarily due to an increase to the relative unit count allocation from Bluerock Residential due to the increase in size of the carve out portfolio since the prior year period. Acquisition and pursuit costs amounted to$0.1 million for the nine months endedSeptember 30, 2022 as compared to$0.02 million for the same prior year period. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future periods. Depreciation and amortization expenses were$12.2 million for the nine months endedSeptember 30, 2022 as compared to$3.0 million for the same prior year period. This was due to a$8.8 million increase from the acquisition of investments in 2022 and 2021 and a$0.4 million increase from our same store property,Navigator Villas . Other Income and Expense Other income and expense amounted to income of$3.3 million for the nine months endedSeptember 30, 2022 compared to income of$0.2 million for the same prior year period. This was primarily due to an increase in preferred returns on unconsolidated real estate joint ventures of$3.6 million due to the acquisition of seven investments in 2021, partially offset by the sale of five underlying investments in 2021, and a recovery of credit losses of$0.4 million . This was partially offset by a net increase in interest expense of$0.9 million primarily due to an increase in the outstanding debt to$153.6 million atSeptember 30, 2022 as compared to$36.6 million atSeptember 30, 2021 , partially offset by an increase in the value of our interest rate caps and swaps due to rising interest rates. Discontinued Operations
Income from discontinued operations amounted to income of$0.3 million for the nine months endedSeptember 30, 2022 as compared to income of$110.6 million for the same prior year period. In 2021, the discontinued operations were due to the sale of six multifamily operating properties and included a$116.6 million gain from sale of multifamily assets and$0.2 million income on operations, partially offset by a$6.2 million loss on extinguishment of debt. In 2022, the income is a result of the reversal of accruals for the sold properties.
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) acquisition of properties, (iii) committed investments and capital requirements to fund development and renovations at existing properties, (iv) ongoing commitments to repay borrowings, including our revolving credit facilities and our maturing short-term debt, and (v) distributions to stockholders. 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 effects of the COVID-19 pandemic and other risks detailed in Part II, Item 1A titled "Risk Factors". While occupancy remains strong at 90.9% as ofSeptember 30, 2022 , in future periods we may experience reduced levels of tenant retention, and reduced foot traffic and lease applications from prospective tenants, as a result of the
impact of COVID-19.
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In general, we believe our available cash balances, cash flows from operations,
$115.0 million capacity, of which $12.2 million is available, on our revolving
credit facilities dedicated to single-family residential investments, 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. However, there can be no assurance that
the worldwide economic disruptions arising from the COVID-19 pandemic will not
cause conditions in the lending, capital and other financial markets to
deteriorate, nor that our future revenues or access to capital and other sources
of funding will not become constrained, which could reduce the amount of
liquidity and credit available for use in acquiring and further diversifying our
portfolio of single-family properties. We cannot provide any assurances that we
will be able to add properties to our portfolio at the anticipated pace, or at
all.
We believe we will be able to meet our primary liquidity requirements going forward through, among other sources:
following transactional adjustments in connection with the Separation, the
? Distribution and the Spin-Off,
available at
capacity of
?
single-family residential investments;
? proceeds from future mortgage debt financings for acquisition and/or
development projects;
? cash generated from operating activities; and
proceeds from future borrowings and potential offerings of common and preferred
? stock, as well as issuances of units of limited partnership interest in our
Operating Partnership, or OP Units.
The following table summarizes our contractual obligations as ofSeptember 30, 2022 related to our mortgage notes secured by our properties and revolving credit facilities. AtSeptember 30, 2022 , our estimated future required payments on these obligations were as follows (amounts in thousands): Remainder of Total 2022 2023-2024 2025-2026 Thereafter Mortgages Payable (Principal)$ 98,597 $ 366$ 3,165 $ 39,188 $ 55,878 Revolving Credit Facilities 55,000 - 55,000 - - Estimated Interest Payments on Mortgages Payable and Revolving Credit Facilities 28,437 1,909
13,691 7,562 5,275
Total $ 182,034 $ 2,275 $ 71,856 $ 46,750 $ 61,153
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.
As of September 30, 2022 , the aggregate amount of our contractual commitments to
fund future cash obligations in certain of our preferred equity and joint
venture investments was $6.7 million ; as of November 1, 2022 , this amount was
$5.9 million .
At the current time, we do not anticipate the need to establish any material
contingency reserves related to the COVID-19 pandemic, but we continue to assess
along with our network of business partners the possible need for such
contingencies, whether at the corporate or property level.
As equity capital market conditions permit, we may supplement our capital for
short-term liquidity needs with proceeds of potential offerings of common and
preferred stock, as well as issuance of OP Units. Given the significant
volatility in the trading price of REIT equities generally associated with the
COVID-19 pandemic 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.
Our primary long-term liquidity requirements relate to (a) costs for additional
single-family residential investments, including build-to-rent development
properties, (b) repayment of long-term debt and our revolving credit facilities,
and (c) capital expenditures.
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We intend to finance our long-term liquidity requirements with net proceeds of additional issuances of common and 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, all of which may continue to be adversely impacted by the COVID-19 pandemic. 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 the$115.0 million capacity, of which$12.2 million is available, on 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. AtSeptember 30, 2022 , 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 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.
Off-Balance Sheet Arrangements
As ofSeptember 30, 2022 , 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. As ofSeptember 30, 2022 , we own interests in seven joint ventures that are accounted for as held to maturity debt securities.
Cash Flows from Operating Activities
As ofSeptember 30, 2022 , we owned indirect equity interests in twenty-nine real estate investments, consisting of twenty-two consolidated operating investments and seven investments held through preferred equity investments. During the nine months endedSeptember 30, 2022 , net cash provided by operating activities was$12.4 million after net loss of$2.8 million was adjusted for the following:
? an increase in accounts payable and other accrued liabilities of
? non-cash items of
? a decrease in notes and accrued interest receivable of
? distributions and preferred returns from unconsolidated joint ventures of
million;
? a decrease in accounts receivable, prepaids and other assets of
and
? a decrease in due from affiliates of
Cash Flows from Investing Activities
During the nine months ended
?$144.2 million used in acquiring consolidated real estate investments;
?
notes receivable; and
?
?
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Cash Flows from Financing Activities
During the nine months ended
? contributions from Parent of
? net proceeds of
? net borrowings of
? contributions from partially owned noncontrolling interests of
? partially offset by
?
?
?
?
interests. Capital Expenditures
The following table summarizes our total capital expenditures for the
nine months ended
Nine Months Ended
September 30,
2022 2021
Redevelopment/renovations $ 12,291 $ 1,015
Routine capital expenditures 2,150 315
Normally recurring capital expenditures 180 106
Total capital expenditures $ 14,621 $ 1,436
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.
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 Unites 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.
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However, NOI should only be used as a supplemental measure of our financial performance. The following table reflects net income attributable toBluerock Homes together with a reconciliation to NOI, as computed in accordance with GAAP for the periods presented (amounts in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021
Net income attributable to Bluerock Homes$ 841 $ 40,792 $ 31 $ 99,661 Net (loss) income attributable to partially owned noncontrolling interests (265) 5,397 (2,844) 12,094 Income from discontinued operations (311) (45,921) (311) (110,578) Real estate depreciation and amortization 3,585 1,649 12,020 2,907 Non-real estate depreciation and amortization 121 121 366 365 Non-cash interest expense (2,073) 136 (1,417) 584 Provision for (recovery of) credit losses, net 4 (10) (369) - Property management and asset management fees 1,098 97 2,591 160 Corporate operating expenses 1,727 988 4,764 2,915 Acquisition and pursuit costs 28 20 98 20 Other income, net - (183) (100) (183) Preferred returns on unconsolidated real estate joint ventures (2,613) (661) (5,801) (2,136) Interest income from loan investments (69) (1,188)
(1,285) (4,149) Total property income 2,073 1,237 7,743 1,660 Add: Interest expense 2,095 604 4,399 1,500 Net operating income$ 4,168 $ 1,841 $ 12,142 $ 3,160
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 Combined Financial Statements.
Subsequent Events
Other than the items disclosed in Note 16 "Subsequent Events" to our Combined Financial Statements for the period endedSeptember 30, 2022 , no material events have occurred that required recognition or disclosure in these financial statements. Refer to Note 16 of our Combined Financial Statements for discussion. 47 Table of Contents
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