BUY (BRG, $12.20)
Upgrading to a BUY Rating and $14.50 Price Target
October 27, 2014
John R. Benda
Investment Conclusion. As bleak macroeconomic new housing data continues to pour in and unemployment remains high, we are upgrading Bluerock Residential Growth REIT, Inc. to BUY from Neutral with a $14.50 price target. Since completing its IPO in April 2012, BRG has successfully priced a secondary offering, grown its apartment portfolio 142.7% from its pre-IPO state and should post Y/Y revenue growth of 113.9%. With its recent secondary raise in early October 2014, bolstered by modest leverage to aide acquisitions, we believe BRG will attain positive FFO dividend coverage by 2Q15 and could be poised for a dividend increase in 2016. Its core operating properties are performing and have all appreciated in value since their acquisition, its investment strategies are working, the non-recurring CAPEX dollars BRG has spent are clearly adding value, and it has a robust investment pipeline of 5,263 units that will help to continue to grow the portfolio. Besting all other externally managed REITs is the internal management option that BRG has, a unique differentiator that should reduce the market discount normally applied to externally managed competitors as the portfolio gains critical mass. Fresh off the heels of a $34mln equity raise yet to be deployed, we believe management should continue to grow the portfolio, driving value for investors. Our $14.50 price target is a blend of our net-asset-value (“NAV”) and price-to-funds from operations (“P/FFO”) valuations, which implies an annual total return including the current 9.5% dividend yield, of 28.4% at the current stock price of $12.20.
Source: Capital IQ, Company reports, National Securities Corporation Estimates
Significant Portfolio Growth Since IPO with Robust Pipeline. Since its IPO in 2Q14 to the most recently available data available from BRG, it has posted an apartment unit growth figure of 142.9%, adding 1,895 units to its 1Q13 portfolio of 1,326. With another fresh capital raise in October that is yet to be deployed, BRG investor relations department will likely be announcing new investments and acquisition over the next few quarters, helping to drive the stock. At the time of the secondary offering in October, BRG had a letter of intent (“LOI”) signed on a 306 unit building in Orlando and a stated investment pipeline of 5,263 units across multiple properties. When investors compare BRG’s Y/Y unit growth at the end of 2014 to its peers, BRG should stand out amongst its...
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