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 wasBluerock Residential Growth REIT, Inc , aMaryland corporation ("Bluerock Residential" or "Parent"). We have historically operated as part of Bluerock Residential and not as a standalone 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. See also "Forward-Looking Statements" preceding Part I. We refer toBluerock Real Estate, L.L.C. , aDelaware limited liability company, and its affiliate,Bluerock Real Estate Holdings, LLC , aDelaware limited liability company, together as "BRE," and we refer to our external manager, Bluerock Homes Manager, LLC, aDelaware limited liability company organized in 2022, as the "Manager." Both BRE and our Manager are affiliated with us. Overview
We were incorporated as aMaryland corporation onDecember 16, 2021 . 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 units, 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. We have no employees and are supported by a related-party service agreement with the Manager (the "Management Agreement"). We are externally managed by the Manager, which manages our day-to-day operations under the Management Agreement. The Management Agreement has a one-year term expiringOctober 6, 2023 and will be automatically renewed for a one-year term each year onOctober 6 , unless previously terminated in accordance with the terms of the Management Agreement. The Manager is responsible for managing our affairs on a day-to-day basis and for identifying and making real estate investments on our behalf. Substantially all our business is conducted through our operating partnership,Bluerock Residential Holdings, L.P. , aDelaware limited partnership (our "Operating Partnership"), of which we are the sole general partner. As ofDecember 31, 2022 , we held an aggregate of 3,977 residential units held through seventeen real estate investments, consisting of ten consolidated operating investments and seven investments held through preferred equity investments. As ofDecember 31, 2022 , our consolidated operating investments were approximately 94.8% occupied. 61
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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 ended December 31, 2022 upon the filing
of our U.S. federal income tax return for such taxable year. 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 and maintain our qualification 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.
The Separation and the Distribution
OnDecember 20, 2021 , Bluerock Residential entered into an Agreement and Plan of Merger (the "Merger Agreement") withBadger Parent andBadger 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 ofBluerock Homes' single-family residential rental business have been derived from (i) Bluerock Residential's historical accounting records and are presented on a carve-out basis for the period ended and prior toOctober 6, 2022 , and (ii) the Company's accounting records as a standalone company subsequent to the Spin-Off. 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 for the period ended and prior toOctober 6, 2022 . 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.
Significant Developments
Acquisitions of and Investments in Real Estate
During the year ended
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 . In addition to the investments summarized in the tables below, 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 approximately$46.7 million in aggregate. 62
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The following is a summary of our real estate investments made during the year
ended
Number of Ownership Purchase
Operating Investment Name Market Month (1) Units Interest Price
First Quarter
Peak JV 2 (2) Various / TX March 34 80 % $ 7.7
Peak JV 4, formerly Savannah 319 Savannah, GA March
19 80 % 4.5
Golden Pacific IN / KS / MO Various 62 97 % 11.8
ILE TX / SE US Various 31 95 % 7.0
Second Quarter
Ballast AZ / CO / WA Various 65 95 % 26.1
Golden Pacific IN / KS / MO Various 66 97 % 14.0
ILE TX / SE US Various 108 95 % 27.8
Peak JV 4 Savannah, GA Various 20 80 % 4.8
Third Quarter
Ballast AZ / CO / WA Various 19 95 % 6.2
Golden Pacific IN / KS / MO Various 35 97 % 7.9
ILE TX / SE US Various 64 95 % 16.7
Peak JV 4 Savannah, GA Various 14 80 % 3.4
Fourth Quarter
Golden Pacific IN / KS / MO October 1 97 % 0.2
Peak JV 4 Savannah, GA Various 13 80 % 3.2
Total Operating 551 $ 141.3
Date of Number of Commitment InvestmentMezzanine Loan Investment Name Location Investment Units Amount Amount Weatherford 185 (3) Weatherford, TX February 15, 2022 185 9.6$ 9.6 Total Mezzanine Loan 185$ 9.6 Total 736$ 150.9
(1) For those months where "Various" is listed, we, on various dates throughout
that specified quarter, acquired additional units that were added to the
respective existing portfolios. For Ballast, the units acquired in the second
quarter 2022 were our first acquisitions for the portfolio.
(2) Peak JV 2 includes the portfolios formerly presented as Axelrod,
are in
2.0 portfolio, the only portfolio acquired by the joint venture during the
year.
(3) Our investment in the property was through a mezzanine loan to an
unaffiliated third party. The loan was paid off in
table below.
Loan Investment Payoffs
During the year ended
The following is a summary of our loan payoffs during the year ended
Number of BHM Net
Mezzanine Loan Investment Name Location Date Sold / Payoff Units Sale Price Proceeds
The Hartley at Blue Hill (1) Chapel Hill, NC February 28, 2022 414 $ 114.2 $ 39.4
Weatherford 185 Weatherford, TX July 22, 2022 185 - 9.7
Total 599 $ 114.2 $ 49.1 (1) In
parcel of land adjacent to The
for $5.0 million . The senior loan payoff is included in the BHM Net Proceeds
amount.
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Our total stockholders' equity increased $9.2 million from $150.8 million as of
December 31, 2021 , to $160.0 million as of December 31, 2022 . The increase in
our total stockholders' equity is primarily attributable to net contributions of
$98.2 million , partially offset by a cash distribution to Parent at spin-off of
$68.5 million , $17.5 million of equity reclassified at spin-off and $1.0 million
of net loss.
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, including the 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.
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 94.8% as of December 31, 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. The extent to which the COVID-19 pandemic and any resulting
macro-economic changes impact our operations and those of our tenants will
depend on future developments, which are uncertain and cannot be predictedwith confidence. Industry Outlook The single-family rental industry has historically been more resilient to economic cycles than the multi-family sector and is currently benefiting from significant industry tailwinds that have accelerated during the pandemic. We believe industry dynamics present a compelling investment opportunity for us, including:
Supply at accessible price points remains extremely tight, with little new
affordable rental product coming on-line over the last decade. These supply and
? affordability gaps have been in place and intensifying since the wind-down of
the Great Recession, with rental prices continuing to increase in step with
home price appreciation. Limited institutional ownership of single-family rental stock, currently
estimated to be approximately 3%, creates potential for outsized growth. Our
? institutionally operated properties benefit from experienced regional
owner-operators and a technology-aided platform, delivering not only a
competitive market advantage but also operating growth potential that can
benefit investors.
Demand fundamentals are strong and strengthening further, particularly from
rental-biased and debt-burdened millennials now reaching peak single-family
? house consumption age. We believe that a continued upswing in propensity to
rent, coupled with the limited and depleting supply at the middle-income range,
signals significant opportunity.
Results of Operations
Note 4 "Sale of Real Estate Assets"; Note 5 "Investments in Real Estate"; Note 6 "Acquisition of Real Estate"; Note 7 "Notes and Interest Receivable"; and Note 8 "Preferred Equity Investments inUnconsolidated Real Estate Joint Ventures ," to our Combined Consolidated Financial Statements provide discussion of the various purchases and sales of properties and joint venture equity interests. These transactions have resulted in material changes to the presentation of our financial statements. 64 Table of Contents The following is a summary of our consolidated operating real estate investments as ofDecember 31, 2022 : Number of Average Year Ownership Average % Name Market Units Built Interest Rent (1) Occupied (2) Ballast AZ / CO / WA 84 1998 95 %$ 2,139 89.3 % Golden Pacific IN / KS / MO 171 1976 97 % 1,688 94.7 % ILE TX / SE US 482 1991 95 % 1,786 98.1 % Navigator Villas Pasco, WA 176 2013 90 % 1,493 96.6 % Peak JV 1 (3) IN / MO 334 1997 60 % 1,174 97.0 % JV 2 (4) Various / TX 608 1980 80 % 1,285 89.7 % JV 3, formerly DFW 189 Dallas-Fort Worth, TX 189 1962 56 % 1,029 96.7 % JV 4, formerly Savannah 319 Savannah, GA 66 2022 80 % 1,689 98.5 % Wayford at Concord Concord, NC 150 2019 83 % 2,128 95.3 % Yauger Park Villas Olympia, WA 80 2010 95 % 2,364 96.3 % Total Units / Average 2,340$ 1,528 94.8 %
(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
(2) Percent occupied is calculated as (i) the number of units occupied as of
percentage. Percent occupied excludes an aggregate of 26 down/renovation
units.
(3) Peak JV 1 includes the portfolios formerly presented as Indy and
(4) Peak JV 2 includes the portfolios formerly presented as Axelrod,
are in
The following is a summary of our consolidated operational results for the years
ended
2022 2021 Variance
Rental and other property revenues
$ 15,171 $ 3,230 370 % Net operating income$ 17,688 $ 6,045 193 %
Average occupancy percentage (1) 92.4 % 95.8 % (340) bps Average rental rate (2)
$ 1,447 $ 1,388 4 %
(1) Represents the average of the ending occupancy as of the last day of each
month in the year.
(2) Represents the average of the ending average effective rent per occupied unit
as of the last day of each month in the year.
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The following is a summary of our preferred equity investments as of
December 31, 2022 :
Total Actual/
Actual/ Estimated Actual/ Actual/ Actual/
Planned Construction Estimated Estimated Estimated Estimated
Number Cost Cost to Date Construction Initial ConstructionAverage
Name Location / Market of Units (in millions) (in millions) Cost Per Unit Occupancy Completion
Rent (1)
Lease-up Investment
The Woods at Forest Hill Forest Hill, TX 76 $ 14.8 $ 14.5 $ 194,737 4Q 2022 3Q 2023 $ 1,625
Willow Park Willow Park, TX 46 14.5 13.6 315,217 2Q 2022 3Q 2023 2,362
Total Lease-up Units 122
Development Investment The Cottages at Myrtle Beach Myrtle Beach, SC 294 63.2 45.3 214,966 2Q 2023 4Q 2023
1,743
The Cottages at Warner Robins Warner Robins, GA 251 53.1 39.7 211,554 3Q 2023 4Q 2023
1,346
The Cottages of Port St. Lucie Port St. Lucie, FL 286
69.6 41.6 243,357 2Q 2023 1Q 2024 2,133
Wayford at Innovation Park Charlotte, NC 210 62.0 19.1 295,238 3Q 2023 3Q 2024 1,994
Total Development Units 1,041
Number Average
Operating Investment of Units Rent (1)
Peak Housing (2) IN / MO / TX 474 $ 962
Total Operating Units 474
Total Units/Average 1,637 $ 1,565 (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
(2)
preferred equity investments in a private single-family home REIT (refer to
Note 8 of our combined consolidated financial statements for further
information). Unit count excludes units presented in the consolidated
operating investments table above.
Year ended
Revenue
Rental and other property revenues increased$23.6 million , or 254%, to$32.9 million for the year endedDecember 31, 2022 as compared to$9.3 million for the same prior year period. This was due to a$23.1 million increase from the acquisition of 551 units in 2022 and the full period impact of 1,613 units acquired in 2021 and a$0.5 million increase from our same store property,Navigator Villas . From an operational perspective, our average rent per occupied unit increased$59 or 4.3% to$1,447 as compared to$1,388 during the prior year period. Average occupancy decreased 340 basis points from 95.8% to 92.4% on a year over year basis due to the following (i) during the 2021 period, average occupancy of 95.8% included only 1,789 units which were fully operational and stabilized during the period, and (ii) we acquired an additional 551 units sinceJanuary 1, 2022 of which 485 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$4.1 million , or 76%, to$1.3 million for the year endedDecember 31, 2022 as compared to$5.4 million for the same prior year period due to the payoff of five loans totaling$72.0 million in 2022 and 2021. 66 Table of Contents Expenses Property operating expenses increased$12.0 million , or 370%, to$15.2 million for the year endedDecember 31, 2022 as compared to$3.2 million for the same prior year period. This was due to a$11.9 million increase from the acquisition of investments in 2022 and 2021 and a$0.1 million increase from our same story property,Navigator Villas . Property management and asset management fees expense were$3.8 million for the year endedDecember 31, 2022 as compared to$0.6 million in the same prior year period. This was primarily due to a$3.2 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 prior toOctober 6, 2022 based on relative unit count. These allocated expenses were 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. General and administrative expenses increased$2.5 million , or 55%, to$7.1 million for the year endedDecember 31, 2022 as compared to$4.6 million for the same prior year period. This was due to a$2.0 million increase in allocation from Bluerock Residential throughOctober 5, 2022 primarily due to the increase in size of the carve out portfolio since the prior year period. The remaining$0.5 million increase represents an increase of actual expenses incurred fromOctober 6, 2022 throughDecember 31, 2022 compared to the allocated expenses in the prior year period. Management fees to related party amounted to$1.8 million for the year endedDecember 31, 2022 . Commencing onOctober 6, 2022 , we are externally managed and advised by our Manager pursuant to the Management Agreement. Base management fees of$1.8 million were expensed in the year endedDecember 31, 2022 . There was no management fee expense prior toOctober 6, 2022 . Acquisition and pursuit costs amounted to$0.2 million for the year endedDecember 31, 2022 as compared to none 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$16.0 million for the year endedDecember 31, 2022 as compared to$5.9 million for the same prior year period. This was due to a$9.7 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$3.7 million for the year endedDecember 31, 2022 compared to income of$0.6 million for the same prior year period. This was primarily due to an increase in preferred returns on unconsolidated real estate joint ventures of$5.4 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$2.8 million primarily due to an increase in the outstanding debt to$153.2 million atDecember 31, 2022 as compared to$62.1 million atDecember 31, 2021 .
Discontinued Operations
Income from discontinued operations was$0.3 million for the year endedDecember 31, 2022 as compared to$110.9 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$116.7 million gain from sale of multifamily assets and$0.3 million income on operations, partially offset by a$6.1 million loss on extinguishment of debt. In 2022, the$0.3 million of income is a result of the final liquidation of the sold properties.
Net Operating Income
We believe that net operating income ("NOI") is a useful measure of our
operating performance. We define NOI as total property revenues less total
property operating expenses, excluding depreciation and amortization and
interest. Other REITs may use different methodologies for calculating NOI, and
accordingly, our NOI may not be comparable to other REITs. NOI also is a
computation made by analysts and investors to measure a real estate company's
operating performance.
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We believe that this measure provides an operating perspective not immediately
apparent from operating income or net income prepared in conformity with
accounting principles generally accepted in the United States of America
("GAAP"). NOI allows us to evaluate the operating performance of our properties
because it measures the core operations of property performance by excluding
corporate level expenses and other items not related to property operating
performance and captures trends in rental housing and property operating
expenses.
However, NOI should only be used as a supplemental measure of our financial
performance. The following table reflects net (loss) income attributable to
common stockholders together with a reconciliation to NOI, as computed in
accordance with GAAP for the years ended
2022 2021
Net (loss) income attributable to common stockholders$ (1,000)
(1,927) 65,826
Net (loss) income attributable to common stockholders and unit holders (2,927)
100,151
Net (loss) income attributable to partially owned noncontrolling interest (2,998)
11,652
Income from discontinued operations (311)
(110,858)
Real estate depreciation and amortization 15,825
5,705
Non-real estate depreciation and amortization 483
487
Non-cash interest expense 2,441
746
Unrealized gain on derivatives (3,084) - Recovery of credit losses (402)
(28)
Property management and asset management fees 3,834
550
Management fees to related party 1,787
-
Acquisition and pursuit costs 167 -
Corporate operating expenses 6,801 4,269
Transaction costs 24 -
Weather-related losses, net 25 -
Other income, net (446) (253)
Preferred returns on unconsolidated real estate joint
ventures (8,588) (3,190)
Interest income from loan investments (1,285)
(5,355)
Total property income 11,346 3,876
Add back: Interest expense 6,342 2,169
Net operating income $ 17,688 $ 6,045 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 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 I, Item 1A titled "Risk Factors". While occupancy remains strong at 94.8% as ofDecember 31, 2022 , in future periods we may experience reduced levels of tenant retention, and reduced foot traffic and lease applications from prospective tenants, whether as a result of the impact of COVID-19 or otherwise. OnJanuary 25, 2023 , we filed a registration statement on Form S-11 (File No. 333-269415) with theSEC (the "January 2023 Registration Statement"). The securities covered by theJanuary 2023 Registration Statement include a maximum of 20,000,000 shares of 6.0% Series A Redeemable Preferred Stock (the "Series A Redeemable Preferred Stock"). While theJanuary 2023 Registration Statement has been filed with theSEC , as of the date of this Annual Report on Form 10-K, theJanuary 2023 Registration Statement has not yet been declared effective by theSEC , and there are no shares of Series A Redeemable Preferred Stock issued or outstanding. In the event theJanuary 2023 Registration Statement is declared effective, we expect to commence an offering of the Series A Redeemable Preferred Stock at$25.00 per share, for a maximum offering amount of$500,000,000 in Series A Redeemable Preferred Stock (the 68
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"Series A Redeemable Preferred Offering"). The Series A Redeemable Preferred Stock to be registered pursuant to theJanuary 2023 Registration Statement may not be sold nor may offers to buy be accepted prior to the time theJanuary 2023 Registration Statement becomes effective. Any disclosure concerning the Series A Redeemable Preferred Offering is neither an offer nor a solicitation to purchase our securities. There can be no assurance that we will be able to commence the Series A Redeemable Preferred Offering or successfully sell the full number of shares of Series A Redeemable Preferred Stock to be registered pursuant to theJanuary 2023 Registration Statement. In general, we believe our available cash balances, cash flows from operations, proceeds from 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:
?
proceeds from our revolving credit facilities dedicated to single-family
? residential investments, which we expect to add additional collateral to
increase our availability up to approximately
was no availability at
? proceeds from future mortgage debt financings for acquisition and/or
development projects;
? cash generated from operating activities; and
proceeds from potential offerings of common and preferred stock, as well as
? issuances of units of limited partnership interest in our
("OP Units").
The following table summarizes our contractual obligations as ofDecember 31, 2022 related to our mortgage notes secured by our properties and revolving credit facilities. AtDecember 31, 2022 , our estimated future required payments on these obligations were as follows (amounts in thousands): Less than Total One year 2024-2025 2026-2027 Thereafter Mortgages Payable (Principal)$ 98,231 $ 1,519 $ 3,356 $ 38,337 $ 55,019 Revolving Credit Facilities 55,000 - 55,000 - - Estimated Interest Payments on Mortgages Payable and Revolving Credit Facilities 29,907 8,462 11,120 6,926 3,399 Total$ 183,138 $ 9,981 $ 69,476 $ 45,263 $ 58,418 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
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.
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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. 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 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. AtDecember 31, 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 ofDecember 31, 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 ofDecember 31, 2022 , we own investments in seven joint ventures that are accounted for as held to maturity debt securities.
Cash Flows
Year ended
As of
?non-cash items of$7.0 million ; ?a decrease in notes and accrued interest receivable of$2.9 million ; ?distributions and preferred returns from unconsolidated joint ventures of$2.1 million ; ?an increase in due to affiliates, net of$2.1 million ; and ?a decrease in accounts receivable, prepaids and other assets of$0.1 million ; offset by
? a decrease in accounts payable and other accrued liabilities of
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Cash Flows from Investing Activities
During the year ended
?$147.8 million used in acquiring consolidated real estate investments;
?
and notes receivable; and
?
?
Cash Flows from Financing Activities
During the year ended
?
? proceeds of
? borrowings of
? capital contributions of
?
?
?
?
?
Operating Activities
Net cash flow provided by operating activities decreased
?Decrease of$6.2 million attributable to loss on extinguishment of debt; ?Decrease in accounts payable and other accrued liabilities of$5.6 million ; ?Decrease in net distributions of income and preferred returns from preferred equity investments of$2.3 million ; and ?Operating income, adjusted for non-cash activity, decreased$0.4 million ; offset by ?Decrease in notes and accrued interest receivable of$4.8 million ; ?Net increase in net due to affiliates of$2.0 million ; and ?Decrease in accounts receivable, prepaid expenses and other assets of$1.4 million .
Investing Activities
Net cash used in investing activities was
?Lower proceeds from the sales of real estate investments of$401.8 million ; ?Lower proceeds from sale and redemption of unconsolidated real estate joint ventures of$41.3 million ; and ?Higher investments in unconsolidated real estate joint venture interests of$6.9 million ; offset by; ?Decrease in acquisition of real estate investments and capital expenditures of$90.6 million ; ?Increased repayments on notes receivable of$23.3 million ; and ?Decrease in investment in notes receivable of$0.8 million .
Financing Activities
Net cash provided by financing activities was$119.3 million in 2022 as compared to net cash used in financing activities of$84.5 million in 2021. This increase of$203.8 million is primarily explained by:
?A decrease in net mortgage repayments of
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?A decrease in revolving credit facility repayments of$63.0 million ; ?An increase in proceeds from credit facilities of$25.0 million ; and ?A decrease in distributions to noncontrolling interests of$14.6 million ; offset by ?An increase in cash distribution to Parent at spin-off of$68.5 million ; ?A decrease in contributions from Parent of$62.2 million ; ?A decrease in contributions from noncontrolling interests of$15.1 million ; ?An increase in deferred financing fees of$3.4 million ; and ?An increase in the purchase of interest rate caps of$2.3 million .
Capital Expenditures
The following table summarizes our total capital expenditures incurred for
the years ended
2022 2021
Redevelopment/renovations $ 16,122 $ 1,875 Normally recurring capital expenditures 314 132 Routine capital expenditures
2,888 549
Total capital expenditures $ 19,324 $ 2,556
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
asphalt resurfacing. Normally recurring capital expenditures are necessary
non-revenue generating improvements that occur on a regular ongoing basis, such
as flooring and appliances.
Funds from Operations and Core Funds from Operations Attributable to Common Stockholders and Unit Holders
We believe that funds from operations ("FFO"), as defined by the National
Association of Real Estate Investment Trusts ("NAREIT"), and core funds from
operations ("CFFO") are important non-GAAP supplemental measures of operating
performance for a REIT.
FFO attributable to common stockholders and unit holders is a non-GAAP financial
measure that is widely recognized as a measure of REIT operating performance. We
consider FFO to be an appropriate supplemental measure of our operating
performance as it is based on a net income analysis of property portfolio
performance that excludes non-cash items such as depreciation. The historical
accounting convention used for real estate assets requires straight-line
depreciation of buildings and improvements, which implies that the value of real
estate assets diminishes predictably over time. Since real estate values
historically rise and fall with market conditions, presentations of operating
results for a REIT, using historical accounting for depreciation, could be less
informative. We define FFO, consistent with the NAREIT definition, as net income
(loss), computed in accordance with GAAP, excluding gains or losses on sales of
depreciable real estate property, plus depreciation and amortization of real
estate assets, plus impairment write-downs of certain real estate assets and
investments in entities where the impairment is directly attributable to
decreases in the value of depreciable real estate held by the entity, and after
adjustments for unconsolidated partnerships and joint ventures. Adjustments for
notes receivable, unconsolidated partnerships and joint ventures will be
calculated to reflect FFO on the same basis.
CFFO makes certain adjustments to FFO, removing the effect of items that do not
reflect ongoing property operations such as acquisition expenses, non-cash
interest, unrealized gains or losses on derivatives, provision for (recovery of)
credit losses, losses on extinguishment of debt and debt modification costs
(includes prepayment penalties incurred and the write-off of unamortized
deferred financing costs and fair market value adjustments of assumed debt),
one-time weather-related costs and stock compensation expense. We believe that
CFFO is helpful to investors as a supplemental performance measure because it
excludes the effects of certain items which can create significant earnings
volatility, but which do not directly relate to our core recurring property
operations. As a result, we believe that CFFO can help facilitate comparisons of
operating performance between periods and provides a more meaningful predictor
of future earnings potential.
Our calculation of CFFO differs from the methodology used for calculating CFFO
by certain other REITs and, accordingly, our CFFO may not be comparable to CFFO
reported by other REITs. Our management utilizes FFO and CFFO as measures of our
operating
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performance after adjustment for certain non-cash items, such as depreciation
and amortization expenses, and acquisition and pursuit costs that are required
by GAAP to be expensed but may not necessarily be indicative of current
operating performance and that may not accurately compare our operating
performance between periods. Furthermore, although FFO and CFFO and other
supplemental performance measures are defined in various ways throughout the
REIT industry, we also believe that FFO and CFFO may provide us and our
stockholders with an additional useful measure to compare our financial
performance to certain other REITs.
Neither FFO nor CFFO is equivalent to net income (loss), including net income
(loss) attributable to common stockholders, or cash generated from operating
activities determined in accordance with GAAP. Furthermore, FFO and CFFO do not
represent amounts available for management's discretionary use because of needed
capital replacement or expansion, debt service obligations or other commitments
or uncertainties. Neither FFO nor CFFO should be considered as an alternative to
net income, including net income (loss) attributable to common stockholders, as
an indicator of our operating performance or as an alternative to cash flow from
operating activities as a measure of our liquidity.
We historically operated as part of Bluerock Residential and not as a standalone
company. On October 6, 2022 , Bluerock Residential completed a spin-off
transaction that resulted in its single-family residential real estate business
and certain other assets being contributed to us. The accompanying combined
consolidated financial statements have been derived from (i) Bluerock
Residential's historical accounting records and are presented on a carve-out
basis for the period ended and prior to October 6, 2022 , and (ii) our accounting
records as a standalone company subsequent to the spin-off transaction. All
revenues and costs as well as assets and liabilities directly associated with
our business activity 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 for the period
ending and prior to October 6, 2022 . However, amounts recognized by us are not
representative of the amounts that would have been reflected in the financial
statements had we operated independently of Bluerock Residential. As such, the
results presented in the table below are not directly comparable and should not
be considered an indication of our future operating performance.
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The table below presents our calculation of FFO and CFFO for the years ended
2022 2021
Net (loss) income attributable to common stockholders
(1,927) 65,826
Net (loss) income attributable to common stockholders and unit holders (2,927)
100,151
Real estate depreciation and amortization 15,825
8,397
Gain on sale of real estate investments (258)
(116,690)
Adjustment for partially owned noncontrolling interests (2,715)
11,799
FFO attributable to Common Stockholders and Unit Holders 9,925
3,657
Acquisition and pursuit costs 167 - Non-cash interest expense 2,441 982 Unrealized gain on derivatives (3,084) - Recovery of credit losses (402)
(28)
Loss on extinguishment of debt -
6,172
Non-real estate depreciation and amortization 483 487 Weather-related losses, net 25
87
Transaction costs 24 -
Other income, net (446) (130)Non-cash equity compensation 5,246
2,098
Adjustment for partially owned noncontrolling interests (1,293)
(595)
CFFO Attributable to Common Stockholders and Unit Holders
Per Share and Unit Information: FFO attributable to Common Stockholders and Unit Holders - diluted
$ 0.88
$ 1.16
Weighted average common shares and units outstanding - diluted 11,239,378
11,214,229
Operating cash flow, FFO and CFFO may also be used to fund all or a portion of certain capitalizable items that are excluded from FFO and CFFO.
Presentation of this information is intended to assist the reader in comparing the sustainability of the operating performance of different REITs, although it should be noted that not all REITs calculate FFO or CFFO the same way, so comparisons with other REITs may not be meaningful. FFO or CFFO should not be considered as an alternative to net income (loss) attributable to common stockholders or as an indication of our liquidity, nor is either indicative of funds available to fund our cash needs, including our ability to make distributions. Both FFO and CFFO should be reviewed in connection with other GAAP measurements. Our Board will determine the amount of dividends to be paid to our stockholders. The determination of our Board will be based on several factors, including funds available from operations, our capital expenditure requirements and the annual distribution requirements necessary to qualify and maintain our REIT status under the Internal Revenue Code. As a result, our distribution rate and payment frequency may vary from time to time. However, to qualify as a REIT for tax purposes, we must make distributions equal to at least 90% of our "REIT taxable income", determined without regard to the dividends paid deduction and excluding net capital gains, each year. While our policy is generally to pay distributions from cash flow from operations, we may declare distributions in excess of funds from operations. There were no distributions for the years endedDecember 31, 2022 , and 2021.
Critical Accounting Policies and Estimates
Below is a discussion of the accounting policies that we consider critical to an
understanding of our financial condition and operating results that may require
complex or significant judgment in their application or require estimates about
matters which are inherently uncertain.
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Principles of Consolidation and Basis of Presentation
We conduct our operations through theOperating Partnership , of which we are the sole general partner. The combined consolidated financial statements include our accounts and those of theOperating Partnership and its subsidiaries. As ofDecember 31, 2022 , limited partners other than the Company owned approximately 67.0% of the common units of theOperating Partnership (35.03% is held by holders of limited partnership interest in theOperating Partnership ("OP Units") and 31.97% is held by holders of theOperating Partnership's long-term incentive plan units ("LTIP Units"), including 3.48% which are not vested atDecember 31, 2022 ).Bluerock Homes consists of the combined consolidated 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 Housing , Peak JV 1 (formerly Indy andSpringfield ), Peak JV 2 (formerly Axelrod,Granbury ,Granbury 2.0,Lubbock ,Lubbock 2.0,Lubbock 3.0,Lynnwood ,Lynnwood 2.0,Springtown ,Springtown 2.0,Texarkana and Texas Portfolio 183), Peak JV 3 (formerly DFW 189), Peak JV 4 (formerlySavannah 319), 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 financial statements also include allocations of certain general, administrative, sales and marketing expenses and operations from Bluerock Residential for the period ended and prior toOctober 6, 2022 . The combined consolidated statement of operations for the year endedDecember 31, 2022 includes (i)Bluerock Homes' results of operations for the period ofOctober 6 - December 31, 2022 , which represents the results of operations following our spin-off from Bluerock Residential, and (ii)Bluerock Homes' results of operations for the period ending and prior toOctober 6, 2022 , which represents a carve-out of revenues and expenses attributable to us related to Bluerock Residential's single-family residential home business. Our historical financial information for the year endedDecember 31, 2021 was prepared on the same basis as the carve-out period of 2022. As a result, results of operations for the year endedDecember 31, 2022 may not be comparative to our results of operations reported for the prior year presented.
The COVID-19 Pandemic
For much of 2020, the ongoing pandemic of the novel coronavirus and variants
thereof ("COVID-19") created significant uncertainty and economic disruption
that adversely affected us and our tenants. The adverse impact of the pandemic
moderated during 2021 and has significantly diminished during 2022. However, the
continuing impact of the COVID-19 pandemic and its duration are unclear, and
various factors could erode the progress that has been made against the virus to
date. If conditions similar to those experienced in 2020, at the height of the
pandemic, were to reoccur, such conditions and any resulting macro-economic
changes could have material and adverse effects on our financial condition,
results of operations and cash flows. We continue to closely monitor the impact
of COVID-19 on all aspects of our business. For further information regarding
the impact of COVID-19 on the Company, see the section titled "Risk
Factors---Risks Related to Our Business, Properties and Industry" set forth in
Item 1A of this Annual Report on Form 10-K.
Real Estate Investments, Preferred Equity Investments and Notes Receivable (
We first analyze an investment to determine if it is a variable interest entity
("VIE") in accordance with Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") Topic 810: Consolidation and, if so,
whether we are the primary beneficiary requiring consolidation of the entity. A
VIE is an entity that has (i) insufficient equity to permit it to finance its
activities without additional subordinated financial support or (ii) equity
holders that lack the characteristics of a controlling financial interest. VIEs
are consolidated by the primary beneficiary, which is the entity that has both
the power to direct the activities that most significantly impact the entity's
economic performance and the obligation to absorb losses or the right to receive
benefits from the entity that potentially could be significant to the entity.
Variable interests in a VIE are contractual, ownership, or other financial
interests in a VIE that change in value with changes in the fair value of the
VIE's net assets. We continuously re-assess at each level of the investment
whether (i) the entity is a VIE, and (ii) we are the primary beneficiary of the
VIE. If it was determined that an entity in which we hold an interest qualified
as a VIE and we are the primary beneficiary, the entity would be consolidated.
If, after consideration of the VIE accounting literature, we have determined
that an entity is not a VIE, we assess the need for consolidation under all
other provisions of ASC 810. These provisions provide for consolidation of
majority-owned entities through a majority voting interest held by the company
providing control.
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In assessing whether we are in control of and requiring consolidation of the
limited liability company and partnership venture structures, we evaluate the
respective rights and privileges afforded each member or partner (collectively
referred to as "member"). Our member would not be deemed to control the entity
if any of the other members has either (i) substantive kickout rights providing
the ability to dissolve (liquidate) the entity or otherwise remove the managing
member or general partner without cause or (ii) substantive participating rights
in the entity. Substantive participating rights (whether granted by contract or
law) provide for the ability to effectively participate in significant decisions
of the entity that would be expected to be made in the ordinary course of
business.
We analyze each investment that involves real estate acquisition, development,
and construction to consider whether the investment qualifies as an investment
in a real estate acquisition, development, and construction arrangement. We have
evaluated our real estate investments as required by ASC 310-10 Receivables and
concluded that no investments are considered an investment in a real estate
acquisition, development, or construction arrangement. As such, we next evaluate
if these investments are considered a security under ASC 320 Investments - Debt
Securities .
For investments that meet the criteria of a security under ASC 320 Investments -
Debt Securities , we classify each preferred equity investment as a
held-to-maturity debt security as we have the intention and ability to hold the
investment to maturity. We earn a fixed return on these investments which is
included within preferred returns on unconsolidated real estate joint ventures
in our combined consolidated statements of operations. We evaluate the
collectability of each preferred equity investment and estimate a provision for
credit loss, as applicable. We account for these investments as preferred equity
investments in unconsolidated real estate joint ventures in our combined
consolidated balance sheets.
For investments that do not meet the criteria of a security under ASC 320
Investments - Debt Securities , we have concluded that the characteristics and
the facts and circumstances indicate that loan accounting treatment is
appropriate. We recognize interest income on our notes receivable on the accrual
method unless a significant uncertainty of collection exists. If a significant
uncertainty exists, interest income is recognized as collected. Costs incurred
to originate our notes receivable are deferred and amortized using the effective
interest method over the term of the related notes receivable. We evaluate the
collectability of each loan investment and estimate a provision for creditloss, as applicable. Real Estate Assets
Real Estate Purchase Price Allocations
Upon acquisition, we evaluate our acquired residential properties for purposes of determining whether a transaction should be accounted for as an asset acquisition or business combination. Purchases of residential properties are treated as asset acquisitions and, as such, are recorded at their purchase price, including acquisition costs, which is allocated to land and building based upon their relative fair values at the date of acquisition. Acquisition costs typically include legal fees, broker commissions and title fees, as well as other closing costs. In making estimates of fair values for purposes of allocating the purchase price of acquired properties, we utilize various sources including our own market knowledge obtained from historical transactions, published market data, and independent appraisers. In this regard, we also utilize information obtained from county tax assessment records to assist in the determination of the fair value of the land and building. Intangible assets include the value of in-place leases which represents the estimated fair value of the net cash flows of leases in place at the time of acquisition, as compared to the net cash flows that would have occurred had the property been vacant at the time of acquisition and subject to lease-up. We amortize the value of in-place leases to expense over the remaining non-cancelable term of the respective leases, which is on average six months. Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require us to make significant assumptions to estimate market lease rates, property operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, prevailing interest rates and the number of years the property will be held for investment. The use of inappropriate assumptions could result in an incorrect valuation of acquired tangible assets, identifiable intangible assets and assumed liabilities, which could impact the amount of our net income (loss). Differences in the amount attributed to the fair value estimate of the various assets acquired can be significant based upon the assumptions made in calculating these estimates.
Capital Additions, Depreciation and Amortization
We capitalize costs incurred in connection with our capital additions activities, including redevelopment, development and construction projects, other tangible improvements, and replacements of existing components. Repair and maintenance and tenant
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turnover costs are expensed as incurred. Repair and maintenance and tenant
turnover costs include all costs that do not extend the useful life of the real
estate asset. Accordingly, many factors are considered as part of our evaluation
processes with no one factor necessarily determinative. Depreciation and
amortization expense are computed on the straight-line method over the asset's
estimated useful life. We consider the period of future benefit of an asset to
determine its appropriate useful life and anticipate the estimated useful lives
of assets by class to be generally as follows:
Buildings 30 - 40 years
Building improvements 5 - 15 years
Land improvements 5 - 15 years
Furniture, fixtures and equipment 3 - 8 years
In-place leases 6 months
Impairment of Real Estate Assets
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of our real estate and related intangible assets may not be recoverable. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets may not be recoverable, we assess the recoverability of the assets by estimating whether we will recover the carrying value of the asset through its undiscounted future cash flows and its eventual disposition. Based on this analysis, if we do not believe that we will be able to recover the carrying value of the real estate and related intangible assets and liabilities, we will record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the real estate and related intangible assets. No impairment charges were recorded in 2022 or 2021. Revenue Recognition
We recognize rental revenue on a straight-line basis over the terms of the rental agreements and in accordance with ASC Topic 842 Leases. Rental revenue is recognized on an accrual basis and when the collectability of the amounts due from tenants is deemed probable. Rental revenue is included within rental and other property revenues on our combined consolidated statement of operations. Amounts received in advance are recorded as a liability within other accrued liabilities on our combined consolidated balance sheet.
Other property revenues are recognized in the period earned.
Current Expected Credit Losses (CECL)
We estimate provision for credit losses on our loans (notes receivable) and
preferred equity investments under CECL. This method is based on expected credit
losses for the life of the investment as of each balance sheet date. The method
for calculating the estimate of expected credit loss considers historical
experience and current conditions for similar loans and reasonable and
supportable forecasts about the future.
We estimate our provision for credit losses using a collective (pool) approach
for investments with similar risk characteristics, such as collateral and
duration of investment. In measuring the CECL provision for investments that
share similar characteristics, we apply a default rate to the investments for
the remaining loan or preferred equity investment hold period. As we do not have
a significant historical population of loss data on our loan and preferred
equity investments, our default rate utilized for CECL is based on an external
historical loss rate for commercial real estate loans.
In addition to analyzing investments as a pool, we perform an individual
investment assessment of expected credit losses. If it is determined that the
borrower is experiencing financial difficulty, or a foreclosure is probable, or
we expect repayment through the sale of the collateral, we calculate expected
credit losses based on the value of the underlying collateral as of the
reporting date. During this review process, if we determine that it is probable
that we will not be able to collect all amounts due for both principal and
interest according to the contractual terms of an investment, that loan or
preferred equity investment is not considered fully recoverable and a provision
for credit loss is recorded.
In estimating the value of the underlying collateral when determining if a loan
or preferred equity investment is fully recoverable, we evaluate estimated
future cash flows to be generated from the collateral underlying the investment.
The inputs and assumptions utilized to estimate the future cash flows of the
underlying collateral are based upon our evaluation of the operating results,
economy, market trends, and other factors, including judgments regarding costs
to complete any construction activities, lease-up and occupancy rates, rental
rates, and capitalization rates utilized to estimate the projected cash flows at
the disposition. We may also obtain a third-
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party valuation which may value the collateral through an "as-is" or "stabilized value" methodology. If upon completion of the valuation the fair value of the underlying collateral securing the investment is less than the net carrying value, we record a provision for credit loss on that loan or preferred equity investment. As the investment no longer displays the characteristics that are similar to those of the pool of loans or preferred equity investments, the investment is removed from the CECL collective (pool) analysis described above.
New Accounting Pronouncements
See Note 2, "Basis of Presentation and Summary of Significant Accounting Policies," to our Notes to the Combined Consolidated Financial Statements for a description of accounting pronouncements. We do not believe these new pronouncements will have a significant impact on our Combined Consolidated Financial Statements, cash flows or results of operations.
Subsequent Events
Issuance of LTIP Units under the BHM Incentive Plans
OnJanuary 1, 2023 , we granted 3,303 LTIP Units pursuant to the BHM Incentive Plans to each independent member of the Board in payment of the equity portion of their respective annual retainers. Such LTIP Units were fully vested upon issuance.
Acquisition of Additional Interests in Peak JV 4, formerly
On
Issuance of C-LTIP Units for Payment of the Fourth Quarter 2022 Base Management Fee and Operating Expense Reimbursement
The Manager earned a base management fee of$1.8 million during the fourth quarter 2022. This amount was payable 50% in C-LTIP Units with the other 50% payable in either cash or C-LTIP Units, at the discretion of the Board. In addition, the Manager was entitled to a$0.4 million reimbursement for operating expenses it incurred on our behalf for the fourth quarter 2022. This reimbursement was payable in cash or C-LTIP Units, at the discretion of the Board. Upon consultation with the Manager, the Board elected to pay 100% of the base management fee and the operating expense reimbursement in C-LTIP Units. OnFebruary 22, 2023 , we issued 85,750 and 17,462 C-LTIP Units in payment of the base management fee and the operating expense reimbursement, respectively,
for the fourth quarter 2022. Peak REIT OP Interests OnMarch 3, 2023 , our agreement with Peak REIT OP regarding our total preferred equity investment was amended. Previously, we earned a 7.0% current return and a 3.0% accrued return, for a total preferred return of 10.0% per annum, on$16.0 million of our investment. On our remaining$4.3 million investment, we earned a 4.0% current return and a 4.0% accrued return, for a total preferred return of 8.0% per annum. On our total$20.3 million investment, we earned a total weighted average preferred return of 9.6% per annum. As part of the amendment, our two tranches of preferred equity investments were combined into one$20.3 million preferred equity investment earning a 6.4% current return and a 3.2% accrued return, for a total preferred return of 9.6% per annum. In addition, the amendment increased the collateral underlying our preferred investment from 474 units to 648 units.
On
Acquisition of Additional Interests in Peak JV 1, formerly Indy and
OnMarch 8, 2023 , we purchased Peak REIT OP's interest in Peak JV 1, increasing our interest in the joint venture from 60% to 100%. We purchased Peak REIT OP's interest for$4.1 million in cash after our priority equity contributions, plus adjustments typical in such real estate transactions, in the aggregate of$40.4 million were applied against the aggregate unit purchase prices of$50.6 million . 78 Table of Contents Investment Activity
Subsequent toDecember 31, 2022 and through the filing date of this Annual Report on Form 10-K, we (i) acquired an additional 18 consolidated operating units included in Peak JV 4, (ii) increased our preferred equity investment commitment in theWillow Park joint venture by$2.1 million , for a total commitment of$4.6 million , and (iii) increased our preferred equity investment commitment inThe Woods atForest Hill joint venture by$2.3 million , for a total commitment of$5.6 million .
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