Description

I am recommending the 8.25% series A preferred stock of Bluerock Residential Growth REIT.

Bluerock Residential Growth REIT, Inc. is a real estate investment trust that focuses on developing and acquiring a diversified portfolio of institutional-quality highly amenitized live/work/play apartments in demographically attractive knowledge economy growth markets. The REIT owns 31 properties comprised of 10,374 units. Major market concentrations focused in the Sunbelt include Orlando, Atlanta, Charlotte, San Antonio and Austin.

I am generally looking for yield and finding appropriate risk reward lacking in the high yield marketplace.

I have been looking for opportunities in preferred stocks but finding a dearth of opportunities and generally the opportunities that do exist are high yielding for a reason - the issuers are BOTH highly levered and have deteriorating fundamentals (I'm thinking of CBL among others).

Bluerock is highly levered but seems to have a stable fundamental outlook.

At a price of 25.68 the Bluerock series A stock has a current yield of 8.00% and a yield to worst of ~6.9% to the first call at 25 in 10/21/20.

The preferred stock is very unique because it has 3 signficant protective covenants including the ability for holders to put the preferred on 10/21/22.  As such even though the preferred is not strictly a term preferred I view it as having an effective maturity of 2022 or approximately 4 years from now.  That put right is basically without precedent in the preferred stock marketplace.

The covenants are as follows:  

On 10/21/2022, the issuer will pay cumulative cash dividends on the Series A Preferred Stock at an annual dividend rate increased an additional 2.00% of the liquidation preference per annum on each subsequent anniversary thereafter, subject to a maximum annual dividend rate of 14.0% (see prospectus for further information).

On 10/21/2022 holders of Series A Preferred Stock may, at their option, elect to cause the issuer to redeem their shares at a redemption price of $25.00 per share plus an amount equal to all accrued but unpaid dividends.

Mandatory Redemption for Asset Coverage may occur if the issuer fails to maintain asset coverage of at least 200%, the issuer will redeem a portion of its outstanding Redeemable and Term Preferred Stock (see prospectus for further information).

Incidentally, the Series C preferred stock has the same covenants but the Series D preferred stock and Series B (not publicly traded) preferred stock do not.

I think it is highly likely the Company actually calls the Series A preferred stock at or shortly after the first call date of 10/21/20 because they have demonstrated the ability to issue private (meaning not publicly traded) preferred stock at 6% (vs. the 8.25% coupon on the Series A) and the private preferred also minimizes potential dilution, because it is unlike -- a standard preferred, it is convertible as a common stock.

At the end of 2Q18 the quarterly fixed charge coverage ratio (defined as modified Q2 EBITDAre divided by interest expense and preferred stock dividends) was 1.34x.  Net Debt/Modified Q2 EBITDAre (annualized) was 10.05x.

Catalyst

No strong catalyst.  I view this as attractive yield to call paper (6.9% yield for effectively 2 year duration security).