Current Price: $26.63
Acquisition Price: $24.25 + $5.60 est. SpinCo NAV
Estimated Completion: Q2 2022
This idea was shared by Brett.
Bluerock Residential Growth REIT is a real estate investment trust that owns a portfolio of multifamily and single-family rental properties. In December 2021 it was announced that Blackstone (BX) had entered into a definitive agreement with BRG to acquire the Company for $24.25 per share in an all-cash transaction. Prior to the acquisition, BRG will be spinning off its single-family rental business to shareholders. This spun-off entity will become a new REIT called Bluerock Homes Trust with a ticker symbol BHOM. The spin-off and subsequent acquisition are expected to be completed in Q2 2022.
Blackstone’s acquisition offer was at a significant premium to the average closing price of BRG of $11.55 in 2021 and the stock jumped 75% on the news of the offer. However, it seems as though the market is still not attributing proper value to the SpinCo. Prior to the announcement, Duff & Phelps conducted an independent review of the SpinCo and assigned a midpoint NAV of $5.60 per share. Given the current share price of BRG, the market is discounting this NAV by 60%. This NAV estimate should reflect the fair market value of SpinCo’s assets/investments (including pref and mortgages). Duff & Phelps is also a very reputable firm so their assessment of SpinCo’s NAV should be reliable. I used total invested equity per share as a proxy to check the D&P NAV (especially since most of the investments were originated in the last year), which showed that BRG’s equity cost basis in these assets is approximately $5.80. Hence, a midpoint NAV of $5.60 per share would seem reasonable and when you count for some added corporate expenses, I think it makes a lot of sense at $5.60 vs $5.83 investment at cost number.
One key will be understanding whether there will be any debt or long-term liabilities, aside from the $35 million currently secured by two of the SpinCo’s assets, that will be added to the new company’s balance sheet, which could dilute book value. However, aside from these two mortgages (Navigator Villas and Yauger Park Villas), there are really no other outstanding forms of debt on BRGs balance sheet to transfer. I assume there will be some other liabilities transferred as well but don’t expect the amount will be too meaningful. I would think that they will secure a credit facility but not sure there would be a reason to draw on it at the beginning.
I have been informed that BRG expects to file a Form 10 at the beginning of March which will include a pro forma balance sheet that should answer the question as to any debt that may be added to the SpinCo. Form 10 will also provide a pro forma income statement to better understand the implied cap rate based on the income of the SpinCo’s properties.
Really the main risk here is the acquisition not closing, however, I think that the chances of that happening are low. The BX deal is not contingent on financing, and I can say having worked directly with BX in real estate for years, a BX deal is about as close as you can get to 100% certainty of close. They are probably the best financial buyer out there. So the larger threat to not closing would be BRG’s inability to facilitate the spin-off (it is a condition of closing), which I also think is quite unlikely.
Additionally, the Company announced in September that it was exploring strategic options, including a sale, so there was likely a competitive bid process that produced back up bidders that could step in should the deal with BX fall through.
The deal has been unanimously approved by BRG’s board of directors and the last step for full approval is a shareholder vote, which should have little problem passing.
All-in-all I believe the risk profile here is quite low.
This is a reasonably straightforward deal that offers solid upside, with what, in my opinion, is very little downside risk. The max loss here (aside from the deal not closing) is approximately 8% if the SpinCo market cap goes to zero, which is extremely improbable. To lose money at all, the SpinCo would have to continuously trade at a discount to NAV of over 60%, which again is unlikely. As of 1/28/2022 the two single-family home REITS (albeit way larger than the spinco), AMH and INVH, trade at an average discount of 6.4% to consensus NAV (which reflects the fair market value of properties) and an average premium of 9.8% to Green Street’s NAV estimates. Green Street is the top REIT advisory and consulting firm.
Note: It may be advisable to wait for the Form 10 to come out so there is a little more certainty around the capitalization of the SpinCo, but like I said, the Duff & Phelps estimate should be pretty reliable.