Bluerock Homes Trust BHOM
May 18, 2022 - 3:30pm EST by
Mustang
2022 2023
Price: 3.32 EPS 0 0
Shares Out. (in M): 30 P/E 0 0
Market Cap (in $M): 285 P/FCF 0 0
Net Debt (in $M): -81 EBIT 0 0
TEV (in $M): 204 TEV/EBIT 0 0

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  • REIT
 

Description

Inflation got you down?  Starting to think all those guys who preach about real assets might be right?  How about buying some single family homes?  Too time consuming to buy?  Too time consuming to manage?  Getting outbid every time?  Boy, I couldn't agree more.  Let's have someone else do it for us. 

I'm recommending a purchase of Bluerock Residential Growth.  Bluerock's multi-family assets are being acquired by Blackstone for $24.25 per share.  Shareholder approval has been obtained and the purchase looks on track for a Q2 anticipated close.  In addition to the $24.25 per share, shareholders will receive Bluerock's single family holdings via a spin-off called Bluerock Home Trust ("BHOM").  I'll caveat by saying that I like this idea best for non-taxable accounts, as the spin-off is taxable.  That said, I believe the investment is interesting to both taxable and non-taxable accounts and will present below primarily assuming a taxable account unless otherwise noted.  When the Company announced the acquisition, management estimated BHOM's NAV at $5.60 per share with an opinion provide by Duff & Phelps. 

OK, so you buy BRG for $26.24 per share.  In pretty short order you get $24.25 per share, meaning you are paying $1.99 for BHOM.  Don't jump up and down yet, because you are going to need to pay some taxes too.  Using management's estimate NAV at the highest marginal federal tax rate, that's $1.34 in taxes too (see below for details on the calculation).  Well, you are now paying $3.32 for something that BHOM & Duff & Phelps says is worth $5.60 per share.  Still looking pretty good.

 

  Today
  BRG $26.24
  Less Blackstone   Consideration ($24.25)
Net Cash Consideration $1.99
   
  Tax Basis $26.24
  Less Blackstone Consideration ($24.25)
  BRG NAV per Company Est. ($5.60)
  Tax Rate 37%
Tax Consideration $1.34
   
  BHOM Consideration $3.32
  Shares Outstanding 30.0
  % Held by Public 35.0%
Implied Market Capitalization $284.5
Less PF Cash  (157.3)
Plus Debt 76.5
Implied Enterprise Value $203.7
   
Implied Cap Rate 9.7%

What?  You don't want to take Duff & Phelps word for it?  Even though the Company likely paid them millions for their opinion??  You want to know more about what you are buying?  Well, don't worry.  You can also have Mustang tell you what it's worth, and I'll do it for free for members of VIC.  

According to the SEC 10-12B filings, you are getting:

- $14.7mm of mortgage notes

- $44.9mm of preferred equity investments in single-family home rental ventures

- 1,789 homes with a cost basis of $317mm

- You are also getting $157.3mm of cash less $76.5mm of debt for net cash of $80.8mm

Note that BRG stockholders will hold 35% of the Company, while Bluerock's OpCo will own 65%.

For the homes, I'm valuing them two ways.

First, I looked at national home price appreciation since the time of BHOM's purchase and applied the same % increase to the Company's properties, that results in the following estimate of FMV:

 

  Investment       FMV
Name Date Ownship Price FMV BHOM
  Navigator 12/18/2019 90% $28.5 $38.5 $34.6
  Springtown 2.0 10/26/2021 80% $3.0 $3.7 $2.9
  Wayford at Conford 06/04/2021 83% $44.4 $48.8 $40.5
  Yauger Park Villas 04/14/2021 95% $24.5 $27.5 $26.1
  Axelrod  10/05/2021 80% $4.1 $4.3 $3.5
  DFW 189 12/29/2021 56% $27.7 $28.1 $15.8
  Golden Pacific 11/23/2021 97% $1.2 $1.2 $1.2
  Granbury 09/30/2021 80% $8.1 $8.5 $6.8
  ILE 10/04/2021 95% $57.1 $59.8 $56.8
  Indy 08/12/2021 60% $3.8 $4.0 $2.4
  Lubbock 09/24/2021 80% $5.6 $5.9 $4.7
  Lubbock 2.0 10/28/2021 80% $9.3 $9.6 $7.7
  Lubbock 3.0 12/08/2021 80% $4.6 $4.7 $3.8
  Lynwood 11/16/2021 80% $2.4 $2.5 $2.0
  Lynwood 2.0 12/01/2021 80% $2.5 $2.6 $2.1
  Springfield 08/18/2021 60% $49.0 $51.7 $31.0
  Springtown 09/15/2021 80% $9.4 $9.8 $7.8
  Texarkana 09/21/2021 80% $3.1 $3.2 $2.6
  Texas Portfolio 183 12/22/2021 80% $28.3 $28.8 $23.0
Total     $316.6 $343.3 $275.3

Second, I look at two single family rental companies that are publicly traded, INVH and AMH.  Each trade for just above 4% cap rates.  

      % of 52 Wk Market Enterp Lvg Cap NOI    
Ticker Name Price Hi Low Cap Value % of Cap Rate Margin $ / Home Avg Rent
INVH INVITATION HOMES INC $36.72 80% 107% $22,408 $29,851 24.9% 4.2% 60.9% $349 $2,074
AMH AMERICAN HOMES 4 RENT- A $37.51 85% 108% $13,064 $18,007 27.4% 4.1% 54.8% $315 $1,872
                       
BHOM Bluerock Homes Trust $3.72     $285 $204 N/A 9.7% 54.2% $114 $1,204

That results in the fair value estimates below:  

 

  FMV Estimate
  Cost Apprc. Comps
  Real Estate $252.7 $275.3 $337.3
  Notes 14.7 14.7 14.7
  Pfd Investment 44.9 44.9 44.9
Total Value $312.3 $334.9 $396.9
(Discount)/Premium -34.8% -39.2% -48.7%
       
  Plus Cash 157.3 157.3 157.3
  Less Debt (76.5) (76.5) (76.5)
Market Capitalization $393.1 $415.8 $477.8
  % Held by Public 35.0% 35.0% 35.0%
  Shares Outstanding 30.0 30.0 30.0
Value Per Share $4.59 $4.86 $5.58
Upside / (Downside) 38.2% 46.1% 67.9%
Upside / (Downside) - No Tax 131.1% 144.4% 180.9%

I think the main impediment to them achieving a valuation in-line with comps is that BHOM will be externally managed.  We'll pay 1.5% + 20% over an 8% hurdle rate.  How much will that ding valuation?  I'm not sure, but imagine we'll never get to $5.58, but bet we'll trade over $4.86.

The other issue with this trade is that you've got to layout a lot of capital to get to BHOM exposure.  For ever $ of BRG, you are getting roughly 13 cents of BHOM exposure.  That probably all works fine, as your main risk is that the merger doesn't go through.  As noted above, the merger is far along.  Additionally, according to the proxy, the nearest bidder was fairly close on valuation.  That said, BRG traded around $10.85 prior to reports of strategic alternatives got into the market in September 2021.  So, that could represent a lot of downside if the deal breaks. To protect your position, you can buy a $22.50 put for $0.30 per share.  That caps your downside at $4.04 ($26.24 - $22.50 + $0.30) or 15.4% on BRG stock's price.  That changes the table above on FMV to the below:

  FMV Estimate
  Cost Apprc. Comps
  Real Estate $252.7 $275.3 $337.3
  Notes 14.7 14.7 14.7
  Pfd Investment 44.9 44.9 44.9
Total Value $312.3 $334.9 $396.9
(Discount)/Premium -26.6% -31.5% -42.2%
       
  Plus Cash 157.3 157.3 157.3
  Less Debt (76.5) (76.5) (76.5)
Market Capitalization $393.1 $415.8 $477.8
  % Held by Public 35.0% 35.0% 35.0%
  Shares Outstanding 30.0 30.0 30.0
Value Per Share $4.59 $4.86 $5.58
Upside / (Downside) 26.8% 34.0% 54.0%
Upside / (Downside) - No Tax 100.8% 112.4% 144.0%

So, from a risk arb perspective, you are risking 16% on a break to make 6% in about a month in a taxable account or 16% in a non-taxable account counting the entire risk capital in the denominator.  

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Completion of spin-off and merger

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