Bridge Investment Group Holdings Inc. (NYSE:BRDG) Q3 2023 Earnings Call Transcript

Bridge Investment Group Holdings Inc. (NYSE:BRDG) Q3 2023 Earnings Call Transcript November 10, 2023

Operator: Greetings, and welcome to the Bridge Investment Group’s 3Q 2023 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bonni Rosen, Head of Shareholder Relations. Thank you, Bonni. You may proceed.

Bonni Rosen: Good morning, everyone. Welcome to the Bridge Investment Group conference call to review our third quarter 2023 financial results. Prepared remarks include comments from our Executive Chairman, Robert Morse; Chief Executive Officer, Jonathan Slager; and Chief Financial Officer, Katie Elsnab. We will hold a Q&A session following the prepared remarks. I’d like to remind you that today’s call may include forward-looking statements, which are uncertain outside the firm’s control and may differ materially from actual results. We do not undertake any duty to update these statements. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our Form 10-K. During the call, we will also discuss certain non-GAAP financial metrics.

The reconciliation of the non-GAAP metrics are provided in the Appendix of our supplemental slides. The supplemental materials are accessible on our IR website at ir.bridgeig.com. These slides can be found under the Presentations portion of the site along with the third quarter earnings call of that link. They are also available live during the webcast. I will present our GAAP metrics, and Katie will review and analyze our non-GAAP data. We reported a GAAP net loss to the company for the third quarter of 2023 of $17.9 million. On a basic and diluted basis, net loss attributable to Bridge per share of Class A common stock was $0.04, mostly due to changes in non-cash items. Distributable earnings of the operating company were $40.8 million or $0.22 per share after tax, and our Board of Directors declared a dividend of $0.17 per share, which will be paid to shareholders of record as of December 1.

It is now my pleasure to turn the call over to Bob.

Robert Morse: Thank you, Bonni, and good morning to all. From a macro perspective, the third quarter of 2023 was volatile, impacted by a number of cross currents. On the positive side, robust U.S. GDP growth highlighted the strength and resilience of the American economy. GDP growth accelerated to an annualized 4.9% in the quarter. The U.S. labor market remains strong with high wage growth, low unemployment and growing labor force participation. These factors have bolstered consumer income and spending. In particular, wage growth has been high for the lower and middle income cohort of the working population, the part of the income band Bridge serves in much of our leading residential rental investments. While we note wage gains are decelerating relative to their prior peak, they remain strong and above 5% year-over-year, which are levels well above prior cyclical averages.

In addition, the U.S. manufacturing sector has been revitalized by the globalization, reassuring and new U.S. manufacturing tax incentives from the CHIPS Act and other government stimulus, broadly stated and informed by two weeks of international travel recently to meet existing Bridge LPs in Asia and the Middle East. The U.S. remains a preeminent investment destination. In addition to strong growth of the overall economy and household income, inflation metrics have decelerated. Perhaps the most meaningful measure is core CPI minus shelter inflation, which is 1.95% year-over-year compared to the peak in February last year at 7.62%. This has created the conditions for an extended pause in interest rate hikes or potentially a reduction in rates looking forward.

In our view, the confluence of all these factors is supportive of the case for interest rate increases to at least pause and possibly remain higher for longer while the U.S. economy continues to show strength. With the fastest tightening cycle in recent decades, commercial real estate values in the U.S. have reset over the last 18 months and now are at levels, which we believe represents an attractive entry point. This increase in cap rates has created unique opportunities across many of our strategies. We firmly believe that 2024 represents an excellent vintage in which to invest and a reward for the patients we have shown for much of 2023, particularly in our real estate equity strategies. What one buys is important, as is where and at what valuation levels.

We believe residential rental, a core area for Bridge is poised to outperform. Housing prices are at an all-time high measured by the Case-Shiller Home Price Index and combined with a high mortgage rate environment, many households are finding it difficult to access the home ownership market. The most recent census data emphasizes this point; over 1 million new renter households were formed last year compared to 4.4 million formed between 2011 and 2019. This is a historic amount of new renter demand. At the same time, we are appropriately focused on what we see as a short-term surge in housing supply. We also acknowledge we are in a far different environment than in previous cycles. Estimates from Fannie Mae, as an example, suggests that there is a shortfall of 4 million to 5 million housing units today.

With high construction costs and tight credit conditions, we anticipate more shortages are to follow. For residential rental, we see the ability to capture value in today’s market and capitalize on the growth driven by the demographic tailwinds and long-term fundamentals by taking advantage of the 2022, 2023 reset in values and potential balance sheet distress. In real estate credit, investors are benefiting from the increase in base rates and spreads, creating compelling all-in current yields. Amid tightening credit conditions, we note that an increasing number of banks have exceeded their commercial real estate concentration limits, which is sidelining many conventional lenders. With less competition from banks, particularly regional and local banks, we see this not only as a broader opportunity set but also the potential to build lending relationships with new high-quality borrowers with high-quality assets.

With fewer active lenders, we believe this translates to the ability to structure loans with attractive terms at lower leverage points, a great opportunity from a risk-adjusted perspective. Logistics real estate strategies continue to see strong demand tailwinds from a combination of growth in e-commerce, reassuring in manufacturing, and retailer supply chain reconfiguration. Supply chain resilience is further driving demand for novel logistics solutions, creating opportunities in both coastal gateway and intermodal markets. Initiatives like the CHIPS Act have incentivized advanced manufacturing, including battery technology and semiconductors, leading to a rise in real estate investments supporting such industrial activity. Each of these factors highlight the need for logistics infrastructure across the U.S. over the next decade.

Despite some near-term supply issues in certain markets, we continue to see an undersupply relative demand in the infill gateway markets where we invest, which continues to drive rent growth and opportunity. Our private equity secondaries business offers similar opportunity. The overall secondaries market is growing as private markets become increasingly dynamic and complex driving LP demand for sophisticated liquidity solutions. The global private equity market has raised more than $1.6 trillion of new capital commitments over the past 36 months. This surge in primary investment commitments, along with a significant decrease in exit activity and distributions will create significant opportunities for the secondary market in the coming years.

Bridge’s team recently launched capital raising and deployment on its sixth vintage following a 15-year track record of success. We have deployed meaningful capital across these four core strategies at attractive targeted returns and see increased opportunity ahead. Residential rental, logistics, credit and secondaries represent approximately 95% of our fee-earning AUM and should continue to drive value as our platform continues to grow. On the capital raising front, the current macro backdrop is also impacting how investors allocate capital across the industry. The reset evaluation parameters, reluctance on the part of owners to sell assets during volatile times, and general market uncertainty, have contributed to a slower capital raising environment, particularly for commercial real estate equity strategies.

However, significant repricing and a recognition of the compelling demand side are starting to capture more attention, and we see capital beginning to focus on 2024 allocations to take advantage of dislocated pricing. Against this cautionary backdrop, Bridge raised $303 million of new capital during the third quarter across our investment vehicles, including new incremental capital as part of the recapitalization of multifamily Fund III. Year-to-date, we raised approximately $1.3 billion with our large flagship funds still in their investment periods and not actively fundraising, almost all of the strategies, which had closes in 2023 to-date were our newer verticals, including AMBS, net lease industrial income, logistics, solar and single-family for rent.

We also had inflows into our latest opportunity zone vehicle. These newer verticals continue to perform well, are in attractive sectors, and are starting to achieve scale, which is an encouraging indicator for the future growth of these strategies. As we discussed last quarter, some of our mature strategies reached the necessary thresholds to begin marketing the next vintages heading into 2024. The next step strategies vintage will have in close to AUM in the fourth quarter of 2023. Workforce and Affordable II is now 79% allocated and premarketing has begun for the successor vintage with expectations for a strong reception from our LP base and others. Bridge’s secondary strategies did not have a third quarter closing but will have inflows in the fourth quarter.

Our secondary strategy is seeing strong acceptance in the marketplace as the industry broadly continues to grow into its place as a critical piece of the private markets infrastructure. We expect the trend of more limited allocations of capital to persist in the fourth quarter. However, the high level of activity and constructive dialogue with LPs gives us confidence that allocations should start to improve as we enter the New Year. From a sales channel perspective, we continue to maintain a good balance between individual investors and institutional clients. Approximately 47% of our investor base today is from individual investors having raised $8.7 billion since inception through the wealth channel. This is a testament to our strong track record, differentiated platform and high-touch approach to client service.

As we mentioned on our last earnings call, we are also exploring ways to expand our retail efforts by making certain strategies accessible to accredited investors, thereby broadening our potential investor base. We continue to make good progress on this front. With household wealth estimated at approximately $53 trillion in North America alone and allocations to alternatives less than 5%, the opportunity for expansion is huge. With that, I will turn the call over to Jonathan.

Jonathan Slager: Thank you, Bob, and good morning. Despite the market volatility experienced in the third quarter, Bridge was more active on the real estate deployment front compared to recent quarters as we closed on several acquisitions at attractive pricing. Industry-wide commercial real estate transaction volumes remain at depressed levels as higher interest rates and volatility within the debt capital markets continue to weigh on activity. For the latest Real Capital Analytics data, transaction volume for Q3 was down 51% year-over-year. In contrast, transaction activity in the secondaries market has been strong as PE secondaries capital is highly sought by LPs seeking liquidity. Based on the high levels of activity in this segment, the secondary market is now and will continue to be one of the bright spots for deployment activity.

Against this backdrop, Bridge’s deployment during the quarter was mostly centered on our credit strategies as well as our previously announced workforce and affordable housing portfolio. Bridge debt strategies continued to be an active participant in both the investment and origination of floating rate credit collateralized by multifamily properties and investments into investment grade CRE, CLO, and CMBS bonds trading at outsized yields, which have represented an extraordinary risk/return opportunity. As mentioned, we closed on the Boston workforce portfolio discussed last quarter, which expands our multifamily footprint into an attractive major market. We believe that as the debt market stabilize; values and transaction volumes will improve.

And in the meantime, we continue to see more opportunities to deploy capital from sellers who need to recover equity from some assets to support liquidity needs elsewhere. Additionally, we are already seeing potential opportunities for four sellers that no longer have the ability to service, the higher cost of debt, and the credit distress that is coming from higher rates. With $3.6 billion of dry powder and deep and longstanding relationships with lenders and owners, we are well-positioned to find attractive opportunities in the near-term while the broader market normalizes and regular volumes return. The operating trends in our portfolio properties have moderated but remain healthy. Multifamily and workforce same-store effective rent growth for Q3 increased 4.6% year-over-year.

Our apartment communities are benefiting from the effects of a strong labor market on our resident base, though elevated supply pipelines will have near-term impacts in certain submarkets. Fundamentals in our latest single-family rental portfolio are similarly strong with 9.3% year-over-year rent growth in Q3. Logistics, which is a growing component of our AUM, continues to experience historically low vacancy rates. Leasing outperformance continues to drive portfolio returns by exceeding original acquisition underwriting by 24% on a net effective rent basis so far this year. Now, turning to investment performance. Our equity real estate portfolios were down approximately 1.6% as higher current income was offset by slightly more conservative terminal values and cap rates.

Asset pricing continues to be volatile as the rise in interest rates is impacting near-term valuations. We have the ability to hold assets through the market volatility and have managed leverage in our funds to make sure that we have sufficient liquidity to operate through the impacts of this rate regime. In our credit strategies, the increase in base rates has supported a strong and growing distribution yield. We are well-positioned to manage through a more challenging market environment with a stable core business of long duration recurring fund management fees. Looking back to our IPO two years ago, we’ve grown fee earning AUM by over 102%, which represents a 37% compound annual growth rate. This strong growth in long tenured AUM provides stable profitability to our business during periods such as now, when market disruptions impact the overall commercial real estate transaction volumes and values.

Furthermore, we’ve diversified our business model to having 43% of fee earning AUM in credit and secondaries. This diversification adds to the stability of our company, creating opportunity for steadier deployment and fundraising over time. Looking ahead, the future earnings power of Bridge will benefit significantly as real estate transaction markets inevitably recover, enabling a more normalized level of deployment. With the business on solid footing underpinned by stable and recurring management fee revenue, a more diversified platform, and potential upside drivers to transaction revenue, we look forward to the strong future at Bridge. I will now hand the call over to Katie to discuss our financial results.

Katie Elsnab: Thank you, Jonathan. I missed a challenging external operating environment. Third quarter earnings improved from the second quarter, aided by stronger transaction revenue and realization. Recurring fund management fees increased to $61.5 million, up 1% from last quarter and 20% year-over-year. Our recurring fund management fees and the growth we’ve achieved have continued to provide stability to our business. Fee earning AUM increased 31% year-over-year to $21.8 billion and was slightly down from the second quarter, primarily due to a $570 million impact from Workforce Fund II, converting its management fee base from committed capital to deploy capital, as we mentioned on our last earnings call. Future deployment in this fund and capital raises and deployment in other funds will continue to push the trajectory of this number upward.

Over 97% of our fee earning AUM is in long-term, closed-end funds to have no redemption features and a weighted average duration of seven years, adding to the foundational stability of our business. Fee-related earnings to the operating company were $36 million in the quarter, up 3% from Q2, mostly driven by higher transaction revenue, partially offset by higher compensation expenses and the impacts from the FRE attributable to non-controlling interest. The year-over-year FRE comparison was impacted by lower catch-up fees and transaction revenue, along with higher comp expense. Given the recent slowdown in general real estate activity, as Jonathan discussed, we expect a more muted level of transaction and realization revenue in the near-term until capital markets improve.

On a modeling note, there are typically higher placement agent fees in the fourth quarter due to the timing of when the capital was raised. We expect this amount to be approximately $1.5 million higher versus Q3. Fee-related expenses were $44.4 million, an increase of $2.5 million compared to last quarter, with fee-related revenues outpacing this amount. This resulted in margin expansion versus last quarter. We continue to maintain cost discipline with lower activity levels. While we remain confident in the resilience of our business, we also recognize the headwinds that exist in the current backdrop and have taken strategic measures across many business units to drive efficiency and effectiveness in our organization. This has included reallocating resources to support key priorities.

We have also offshore certain tasks and centralized property accounting teams as we continue to carefully manage expenses and seek to be good stewards of capital. This is all being balanced with rewarding good performance and a focus on retaining key talent within the organization. Distributable earnings to the operating company for the fourth quarter were $40.8 million, with after-tax DE per share of $0.22, an increase of 10% from Q2, mostly driven by the increase in realizations during the quarter. This included $14.7 million of performance fees from our successful closing of the approximate $550 million recapitalization of assets from Bridge Multifamily Fund III into a continuation vehicle, which was announced last quarter. We are proud of the success the spend has achieved and the track of returns we have delivered to our investors, while also extending the duration for these assets by five years.

Realization for the quarter also included tax distributions within debt strategies. Unrealized carry for the quarter decreased by $50.9 million to $377.5 million. The decrease was primarily related to the recapitalization and tax distributions just discussed. Since our IPO in 2021, our accrued carry has increased 53%, and we are well-positioned for additional increases as markets stabilize and potentially rebound. As we discussed on our prior earnings call, we collapsed the 2021 profit interest program on July 1. This was the last of our planned legacy profit interest collapses for the foreseeable future. This resulted in an increase to the diluted share count of 2.9 million shares, which is offset by lower non-controlling interest going forward such that the overall transaction should be accretive for public shareholders.

Our long-term capital and asset-light balancing model position us well to navigate the current environment, and we remain confident in Bridge’s long-term vision and strategy for success. With that, I would now like to open the call for questions.

See also 15 Best American Dividend Stocks To Buy Now and 11 Best Dividend Stocks on Robinhood.

Q&A Session

Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions]. Thank you. Our first question comes from the line of Michael Cyprys with Morgan Stanley. Please proceed with your question.

Michael Cyprys: Hi, good morning. Thanks for taking the question. I wanted to ask on real estate debt. Just given, Bob, some of the challenges you alluded to in your prepared remarks, I was hoping we could come back to that just in terms of the challenges facing the banks, new capital rules that are coming down the pipe as well. How do you see this impacting banks’ participation in the CRE marketplace? How do you see the implications to the broader market and CRE playing out as you look out over the next couple of years? Maybe you could talk to some of the opportunity sets that you see for Bridge. What’s the most compelling where Bridge might be able to step in? And maybe talk to some of the steps that you might take over the next 12 months to 24 months to either expand your capability set or to best capitalize on the opportunities set here on the commercial real estate debt side?

Robert Morse: Thanks, Michael. That’s a — that’s a very insightful and complicated question. And you’re right in saying that there are implications, both positive implications for our existing debt business, we think, very positive implications as well as some challenges as it relates to providing leverage for real estate assets that we and others might acquire. The banking sector overall and particularly the regional and local banks have stepped back meaningfully from lending against real estate that’s been evident in terms of construction lending. It’s been evident in terms of acquisition, finance, et cetera, not fully out of the market, but there — the overall attitude waxes and wanes depending on the sector, depending on the particular bank, et cetera.

We think on the positive side, that represents great opportunity for us in our fixed — our real estate-backed fixed income investment vehicles. We’ve had a long and successful track record lending mostly against multifamily assets with some increments from there since our first investment vehicle in 2014, and that opportunity set continues to expand. We’re in a great position, we think, at this point, both as an industry and as an individual manager, base rates are high. Spreads have remained quite wide terms, which are always individually determined with in terms of negotiations generally are way more negotiable than they were in the past and covenants are strong. So unlike some sectors of private credit, the opportunity in private real estate debt, we think, is very strong as we look forward into 2024 and beyond.

We’re starting to see more transaction volume, which provides the fundamentals to make loans, and we think we’re really well-positioned to create compelling returns in that sector. The flip side of that, as your question suggests is that it’s harder to achieve the desired capital structure when you — when one acquires assets. And that’s true to a degree. There are a couple of mitigating factors. The fact that the banking sector broadly defined is less enthusiastic about commercial real estate lending is a fact. There are, in addition to our vehicle, other credit, real estate credit vehicles that have stepped into some of that breach just by note, we never lend from our debt vehicle to our equity vehicles, but others do. And so there’s been some stepping into that breach.

The other factor is at current values, leverage is way less important than it was during the extended period of low rates and leverage is, for the most part, neutral for transactions at this point. So the desire and need for leverage is down from what it was when rates were low. We think that not to plug Bridge too much, but we think that our forward integration into property management is more critical than ever in terms of creating alpha at the asset level. And we’re seeing that in the operating metrics that we’re able to post in the assets that we own and operate and focus on the minutia of every day. Sorry for the long answer, but it was an insightful and several-part question.

Michael Cyprys: Great. And then if I could just a follow-up question on fundraising, specifically for debt strategy. Maybe you could just update us on which debt strategies you have in the market that you’re raising right now, which may enter into the market and raise as you look out over the next 12 months across your real estate debt strategies? And then what new strategies and adjacencies might make sense to be able to extend into over time?

Robert Morse: We generally have reentered the market every two years or so with our debt strategies vehicles. We had a 2014 vintage 2016, 2018, 2020. And we are in the very early stages of raising capital for the debt strategy Fund V vehicle. The — we think that we have a time-tested approach to investing with a singular focus on the multifamily sector in the U.S. It’s a sector that has strong tailwinds behind it. We have expanded our fixed income focus. We have an AMBS oriented investment strategy. We have a net lease income-oriented investment strategy as well. And there is probably additional white space that we can potentially capture going forward. From a broader basis, we have grown to where we are today by finding adjacencies and investing into those adjacencies.

We have enunciated a number of times and are working hard to get to the point where we can, in fact, enter the markets with a accredited investor-oriented suite of vehicles as well. I think from our perspective, the true mass affluent retail space is a beneficiary of a couple of things. The fact that there’s under-penetration of Altice in the accredited investor space. And like some aspects of life, sometimes being the pioneer is not necessarily the best way to structure things and we can stand on the shoulders of all the learning that’s happened from others who have entered the mass affluent space with sophisticated structures and approach and hopefully a highly differentiated suite of products.

Operator: Thank you. Our next question comes from the line of Finian O’Shea with Wells Fargo Securities. Please proceed with your question.

Finian O’Shea: Hi everyone, good morning, and thank you. A question on the transaction revenue improvement this quarter. It sounded like a lot of the deployment was out of the debt and secondary strategies, which we would think entail less of those fees, correct me if I’m wrong. Was it otherwise something like the Boston multifamily deal being outsized or the continuation vehicle driving that improvement?

Robert Morse: Jonathan, do you want to handle that?

Jonathan Slager: Yes. It was — there was a significant amount of fees that were driven by the Boston portfolio is a sizable portfolio, and we did have some other modest multifamily deployment as you might have seen. So those were the primary drivers. We continue to have a significant amount of work that was done in refinancing and restructuring debt and there’s some modest fees that come from that sort of transaction work. But you are correct, there’s no transaction fees oriented with the secondaries business and the debt business, generally speaking doesn’t have any significant deployment DD fees.

Finian O’Shea: Okay. Thank you. And just a higher-level question on the impact of rates against your flagship real estate equity strategies. Are you needing to put more money into your deals to soften those pressures or retain refinancing? And how does the maturity profile look like at this point for the borrowings against your positions in real estate?