Brixmor Property Group Inc. (BRX) Earnings Call Transcript & Summary

[Audio Gap] session at Citi's 2020 Global Property CEO Conference. I am Christy McElroy with Citi Research, and we are pleased to have with us Brixmor Property Group. We have Jim Taylor, Director, President and CEO of Brixmor; and Angela Aman, CFO of Brixmor. This session is for investing clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available up here and on the webcast on the Disclosures tab. For those in the room or the webcast, you can sign on to liveqa.com and enter code citi2020 to submit any questions or you can just raise your hand. Jim, I'm going to turn it over to you to introduce the company, provide the audience 3 reasons why investors should buy your stock today, and then I will kick off the Q&A.

Thank you, Christy, and thank you for the walk-up song, Human League, that was pretty strong.

The what?

Don't You Want Me Baby.

Oh, I know, I didn't pick it. This is all Bilerman.

Yes. Yes. Thrilled to be here, and thank you for having us. Brixmor, for those of you that don't know the company, is an open-air retail company, primarily neighborhood centers. We own about 400 across the United States. We're in the unique position of having a portfolio that is -- has an attractive rent basis, and we've capitalized on that through reinvesting in our centers at double-digit returns and driving great, importantly, growth in ROI. And if you think about making investments in real estate, one of the key things to focus on is what is your ability to drive growth and underlying return. And I think we've demonstrated that over the last several quarters as we've delivered upon reinvestments that not only drive growth in ROI, but they make our shopping centers intrinsically more valuable. What do I mean by that? Well, they bring down the cap rate that should be applied to the center. So we're in a unique position, I think, amongst almost any of our peers and, frankly, across many other sectors within the REIT space to drive not only growth in cash flows, but also growth in underlying NAV. We've executed a plan that's taken some time to put in place, but now the momentum and the tailwinds are behind us. And I think you'll see us continue to outperform even, and importantly, through an environment of disruption that inevitably occurs in the retail space. We're actually in a position where we can capture that space and make money and we've proven it. The last thing I'd say about Brixmor, and I think this is true when you -- that on any real estate company is that we have, I think, the best team in the business in terms of leasing productivity, discipline and performance in terms of the allocation of capital. We're leasing more space than any of our peers and we're utilizing less capital to do so. We're actually one of the few companies that actually shows you the capital that we're putting to work to lease our properties. And that activity has not only driven the growth that we've delivered to date, but it sets up the visibility that we have on growth, not only for '20 but '21 and beyond. So we're proud of our performance. We think the best days of the company, frankly, lie ahead, given all the hard work we've done to set up this future growth. And we're pleased to be here. So thank you, Christy.

Thank you. And so the -- I'm assuming you answered the top 3 reasons to buy in that sort of...

It's in there.

It's all in there.

Unpacked it.

So we'll improvise. So the first question is ESG is of increasing importance for all company stakeholders. What's the one thing your company is doing to improve your overall ESG score in the next 12 months?

I'd like to say it's one thing, but it's actually hundreds of different things that we're doing, whether from a governance perspective, being rated as one of the best from a corporate governance standpoint, and yet, continuing to improve our corporate governance, whether it's through clawback provisions or other things that we're doing. Also the focus from a social standpoint on making sure that we're attracting and retaining the best talent in the company, but that we're also providing a place for people to grow and be healthy and have opportunities throughout the company. And of course, from an environmental standpoint, making sure that we're being good stewards, whether it's solar generation, which we're investing in across the portfolio, water-efficient landscaping, charging stations, more energy-efficient equipment, submetering, all those things across the board to make sure that we're being a very good steward.

Great. So you're one of the only strip center REITs where same-store NOI is not expected to decelerate meaningfully in 2020. You've got $45 million of leases signed to commence over the next several quarters. How much of that are you assuming will be offset by fallout? So nonrenewals and bankruptcy-driven vacancy and rent relief as you think about your same-store trajectory?

Well, we've factored that into our guidance, and we certainly expect the level of disruption this year to be higher than it's been in previous years. About everything that we've done from a capital allocation standpoint, from a leasing standpoint, has been to set up this growth that we've said was going to occur for some time and we've now begun delivering on that. And you mentioned the signed but not commenced, that's a critical part of it. It gives us tremendous visibility on that growth, not only in '20 but '21. The overall environment is one where I think retail disruption will continue. But as we give our outlook, Christine, I think Angela did an excellent job on the call going through this, so go back to our transcript. We do both a bottoms-up and a top-down approach. So we not only look at what our historical levels of bad debt expense are, we go space-by-space to look at renewals, nonrenewals, move-outs, likely tenant failures. And then we look at the overall watch list, which, by the way, I think we have one of the lowest in the sector, and make it some broad top-down assumptions as to what kind of additional fallout we might see. So as we gave that guidance, we gave it with the expectation that we'll see more disruption this year than we did last.

I agree. I thought Angela's explanation was a good one on the call and you went through it well. As you think about the trajectory of the growth rate through the year that somewhat of a leasing tailwind helped you a little bit in the back half of last year, especially in the fourth quarter. Does that create a tougher comp in the back half of 2020? Or is that just superseded by just more commencement in this year?

Yes. I think if we were going into this year with materially lower amount in that signed but not commenced bucket, I think you're right. Mathematically, you would be up against a tougher comp, particularly in the fourth quarter, but in the third and fourth quarters. As we really try to emphasize on the call, we had significant commencement activity in the second half of 2019, and yet that pool of signed but not commenced leases is approximately the same size as it was a year ago. And that's just additional robust leasing activity on prior bankruptcy backfills, normal course leasing across the portfolio and the value-enhancing reinvestment pipeline. So I do think, in the first half of the year, you're going to see some of the fallout from tenant disruption that's already been announced, Dress Barn, A.C. Moore, things like that. The unanticipated piece, we're going to continue to monitor the market and see how that shakes out over the course of the year. But the rent commencement activity that you're going to see throughout 2020 is really going to offset a lot of that.

The other thing I'd point to is that our pipeline is as strong as ever. And our pipeline really isn't going to be impacting '20, it's really impacting '21 and beyond. And that's just because of the downtime and between when you actually sign a lease and that rent commences. And again, we're seeing that productivity that I referred to earlier continue in our pipeline in terms of the deals that we have underway, which I think speaks to a lot of the decisions that we've made as a company in terms of capital allocation. I think we've been very disciplined, we've recycled out of those assets that we didn't see good growth opportunity. And one of the things I highlighted on the call that I think is important for people to recognize is that we're signing volumes of leases on 403 assets that are comparable to what we did on 500. So what we're showing is proven tenant demand being in our centers and we're showing some accelerating performance there.

And so one thing that was a little bit of a point of confusion, not necessarily for me, but just on the noncash stuff, right? So the idea that it was elevated in 2019 because of the -- that straight-line rent was elevated because of the time as the tenant took the possession of the space before rent actually commenced on cash basis. But why wouldn't that repeat as you think about tenants commencing later this year? Is it a function of how long it takes them to build out the space and to open the store once they've taken possession because of the box size or the nature of the space, right? Why doesn't that repeat? Why don't you get that GAAP benefit again?

Yes. I mean your hunch is right, your instinct is right. We get good disclosure around what's actually in that signed but not commenced bucket in the supplemental. And what you see if you try to compare it year-over-year is that, well, the size of the pool is approximately the same as it relates to total ABR. It is much more heavily weighted to small shop tenancy than it was before, which speaks very well in terms of the execution of the plan and everything we've been talking about are -- as it relates to portfolio quality and our ability to catch kind of the industry from a small shop occupancy perspective as we invest in the assets. So with the small shop tenancy, certainly, there's less risk, I think, around rent commencement dates in 2020 than they might be in 2019 despite the fact that we hit our dates in 2019. But the period, attendance and possession of the space is much shorter on the small shop side than it is on the anchor side, so that's really driving that.

Understood. That makes a lot of sense.

And we need to highlight that in part because, also the FAS 141 adjustments that we have running through our numbers mask the true underlying cash flow growth that's occurring in the portfolio as those numbers naturally decelerate.

Sure. So how do you communicate that in terms of the true growth rate?

Well we, I think, gave a great walk down in our guidance in terms of, step-by-step, where our NOI growth is contributing to FFO, what the impact of the FAS 141 and straight-line deceleration is, which again, is a non-cash item. And then also what the impact of past capital recycling spend on that number.

Why can't we agree on or move to more of an AFFO metric? I understand that there has been some hesitancy, given that it can be seen as a liquidity metric and you can't show it on or -- so perception that you can't show it on a per-share basis, but the net lease companies provide AFFO. It seems like a cleaner measure of cash flow and it sort of eliminates all this noncash noise, what...

We would agree, strongly. I mean I don't think it's something embraced yet within the shopping center space. We give you the information to get there. And importantly, we're very transparent in terms of all the capital that we spend and what we're spending on TIs. And we're -- I think, as an investor, you should be wary of investing in a company that's not showing you the capital that's required for leasing. We do. So not only are we producing the best cash spreads in the business, but we're driving growth in that effective run as well.

Right. I think everyone provides the information. I think the problem is all of us just calculate it differently and there's no real standard.

Yes.

Yes. Maybe I'll get on that. Dave and myself and my peers agree on a metric will be. I'll probably know.

We'll be right with you.

Yes.

Guess what, it's favorable to us because if you go through the underlying cash flow, we screen even better.

Yes. So just going back to the -- on the shop side, shop occupancy. How much has your shop occupancy grown? Just to provide a sort of a past picture since you started that significant box repositioning effort. And then sort of as we look forward, what is the runway of growth there on the shop side?

So when we joined the company, small shop occupancy was around 84%, we're closing in on 87%. One thing to appreciate is that our reinvestment pipeline, our redevelopment pipeline has a small shop occupancy of 79%. So as we deliver that reinvestment, we'll of course see follow-on benefit of several hundred basis points in the small shops for those centers, where we're tearing down the anchor box, reconfiguring, adding out parcels or doing whatever we might be doing. So it provides us some visibility and tailwind in terms of how we're going to take that 87% to a level that's probably close to 90%, I think, on a stabilized basis.

And then you also talked about a 50- to 75-basis-point contribution expected in 2020 from the larger scale redevelopments. What level of spend is driving that? I think you mentioned on the call $150 million to $200 million may be being on the higher end of it. But I wasn't sure if that was referring to sort of your entire repositioning and redevelopment pipeline or just the redevelopment side.

Yes, it is. I would say it's probably around, rough numbers, maybe $150 million of capital just on the larger scale redevelopment side.

Okay. And then the repositioning is another...

Yes, anchor repositioning, outparcel development projects and then smaller redevelopment projects and other value-enhancing activities are the other buckets that contribute to, probably, the total capital spend number on the value-enhancing side of a touch above $200 million this year.

Okay. Got it. Thank you for clarifying that. And you spoke about your longer-term growth trajectory at your Investor Day, was it about 1.5 years ago, a year or so ago?

3.

2017, yes.

Was that 2017? No.

December of 2017.

I thought it was December of 2018. Oh my god, time flies. Can you -- maybe you can provide an update then on your sort of longer-term view in thinking about your stabilized same-store growth rate between contractual spreads, occupancy and you just talked about redevelopment?

I think we're in line with what we laid out at our Investor Day. We expect the intrinsic embedded growth in our leases to trend up from below 1%, closer to 2% over time. We expect to generate another 150 basis points or so through the rolling of our leases, as we do every quarter and every year. Our new cash spreads have been in the 30% to 40% range. The average new and renewal has been in the mid-teens. And then on top of that, we expect to add another 50, 75, 100 basis points based on reinvestment and redevelopment. And if anything, we feel more confident today in our ability to deliver that even than we did a couple of years ago. One of the things that I worried most about at that point in time was our ability to find liquidity for the assets that we needed to sell to deleverage the balance sheet and make sure that we set up a long-term self-funded plan. We've done that. We've sold over $1.8 billion in 130 separate transactions, generating significant proceeds at cap rates I might add that are often inside of where we're trading as a company. We were able to find private market bidders for what is effectively the bottom quartile of our portfolio.

And you've had some success improving property margins as well, how much more runway is there on that?

I think there's upwards of 100 basis points over time as we continue to implement a lot of things at the property level to drive better efficiency, many of which dovetail with our efforts on ESG, as I mentioned on the call.

Any questions in the audience? The market has been a lot more focused on earnings growth in 2020. I think last year was more same-store growth focused for you guys. Redevelopment or capital recycling, sorry, activity has been modestly dilutive. You've talked about a more balanced year this year, only about $0 to $0.02 of potential dilution from that. Is there a risk that market -- whether it's market factors change or whatever you're seeing sort of in the environment that changes, right? That you decide to sell more? What would make you change that strategy?

Well, I think what won't change about our strategy is that we'll be more balanced. And the nice thing about having gotten the liquidity and the deleveraging done is that we can be a bit more agnostic about where absolute cap rates are because we're both buying and selling. What will drive the ultimate volume of transactional activity is, honestly, opportunities that we see on the acquisition side to meet our criteria and, importantly, leverage what we think are some of the benefits and competitive advantages of our platform, particularly as it relates to understanding today where tenants are allocating their capital. And one thing to appreciate about this company is we're the leading landlord to some of the fastest-growing tenants today. And not only are we their leading landlord, but we're also capturing a disproportionate share of their new store openings. We out-index with Burlington, with T.J., with a number of these specialty grocers. And I think that reflects not only the demand that they have to be in our centers, but the strength of our platform, which as a capital allocator is incredibly important because we're competing for properties that are generally held in private hands that may not have the visibility into -- that T.J. wants to relocate their store in that particular submarket. Well, those are information asymmetries, if you will, that exist that benefit larger platforms like ours in this environment.

What are you seeing in the market for the stuff that you are looking to sell from a cap rate perspective?

I think we're continually impressed with how low those cap rates are going and the amount of capital that's there on the sidelines, particularly for transaction sizes that are below $50 million. And it's a pretty broad group of capital sources. We are, frankly, capitalizing on a couple of things. One, the availability of leverage at attractive rates. Borrowers can leverage these properties at 9% debt yields at spreads inside 200 over, which, on the basis of pretty consistent, sustainable cash flows, drive a nice current levered return. That buyer continues to be pretty aggressive.

And are you still exiting markets? Or is it...

We have a few more that we need to exit. For those of you who haven't followed the company closely, we were at over 530 assets, and we had a number of assets that were in single-asset markets where, I think, generally, you will underperform. We've exited probably over 50 of those markets and there are a few more that we will exit. For a couple of them, we're finding acquisition opportunities to grow in those markets.

And on the call, you talked about mixed-use -- potentially doing mixed-use in the future and focusing on the retail, but working with a capital partner on the non-retail stuff. But it sounds like that stuff could stay in the same-store pool. Is there any -- as we think about that going forward, is there any downtime or disruption that we should be thinking about that could result from initiating those projects?

Well, let me be as clear as I can beyond this. As we continue to reinvest in our properties, many of them will yield opportunities to create value through additional uses not core to our retail business. But I think what's important to appreciate about our strategy is that we're working hard today to capture that value through entitlements. Because most of the development profit is ultimately going to be captured in fully entitled land. Then the question becomes, do we pursue that with our capital or do we partner with others and harvest the value that we've created through the entitlement? It's going to be the latter. And there are a number of ways that we can do that. It's not our core competency. I think bringing 100% ownership of some of those additional uses onto your balance sheet yields more complexity, it yields more volatility in underlying cash flows. And again, it's something that we're not the experts in. We know the retail, but where we have the opportunity to get student housing as we do in a number of our centers entitled or market rate multifamily or limited-service hotels or senior housing. We're working hard on creating that entitlement value today and then we'll harvest it as prudent and we'll do it typically through sales, through ground lease, through potentially some joint ventures where we mitigate our exposure and leverage the product expertise of the partner.

Any questions? You re-upped your share repurchase program last month. Given the current market disruption that we've been seeing, how do you think about utilizing your share buyback program right now?

I think our shares are a pretty compelling investment right now.

How do you think about using your share buyback program right now?

Again, I think when you look at the spread between...

Well maybe just in the context of the -- just as a use of capital, right? I mean you have other uses of capital. So how...

I think it's always in balance. I think where we are right now, it's pretty compelling. But remember that we are running a long-term business plan. We re-upped the shelf intentionally so that we would have the flexibility through periods of dislocation like this to capitalize on it. Obviously, we can't comment on whether we are or we aren't. But I can tell you in terms of how we think about utilizing our capital, we have the ability to sell some of the bottom of our portfolio at cap rates that are well inside of where we're trading. That seems to be a pretty compelling use of capital.

Do you see -- just given the current fears around coronavirus, do you see any impacts to the supply chain? Any disruption there? And what do you think could be the longer-term implications of that?

We've certainly seen the headlines, as everybody else has, in terms of manufacturing shutdowns and so forth in China. One thing to appreciate about our core tenancy is they're not typically manufacturers of products, they are value players who actually benefit from some of these disruptions in the supply chain. In fact, I've sat with a couple of their CEOs recently who are now sitting on a bit of dry powder to capitalize on the disruption that will occur in the supply chain and with inventory. So net-net, we think it's going to be a benefit for many of our core tenets. I think, more broadly, it depends on how long this disruption continues. But one of the nice things about our asset classes is effectively a defensive asset class. We have long-term leases with high credit quality. Something that I invite each of you to dig into is our top tenancy, and you'll get an appreciation for how forward thinking we've been as a management team to reduce our exposure to certain weaker credits. And that's been very intentional exactly for environments like this. I don't think anybody predicted it would be this extreme. But I do think any prudent long-term plan is always thinking about your credit risk.

Were you at the Open-Air Conference last week and did this come up?

The topic came up, but it was interesting, not quite with the vehemence that you saw late in the week.

It just didn't -- you're saying. I'm sorry.

I mean we -- it came up in several different settings, but it wasn't at the forefront of discussions. And for those of you who don't know, the Open-Air Conference is a conference sponsored by ICSC, where open-air landlords and retailers get together and talk about trends, talk about deal points, et cetera.

And then Angela, maybe you could -- I don't think you're looking at reissuing any debt right now. But have you had conversations about how open the credit markets are at this point, just given all the disruption in the capital market.

I mean we, certainly, from a balance sheet standpoint, set ourselves up to be opportunistic. We don't have any maturities at this point until 2022, so we really don't have to be active in the markets to the extent they're not available for us. But certainly, with the treasury and the tenure where it is right now, if the market were to reopen and we were to see some high-grade issuance, I think it's something we would be interested in and potentially look at taking out some of the 2022 bonds early, just continuing to add duration to the balance sheet and advance our broader balance sheet goals. At this point, I don't have any specific insight. Obviously, last week was a very quiet week in the investment-grade market. So it will be interesting to see, as we move later into this week, if we get some market stability, how that market reopens.

Yes, I'm just curious with the move in the tenure, how things have changed, and whether there's a potential opportunity there.

Yes. I mean our secondaries are trading in the bond market. So we really don't have -- and that's true for many of our peers as well. We don't -- I don't think any of us have a great read on where the market really is now. I think we need to see some price discovery and some new issuers topping the market.

I think what's important to appreciate, again, all very intentional, we don't have to do anything, right? And that strategy of only accessing the capital markets when it's opportunistic to do so is something that we believe is a very important thing to remain focused on. So if the markets become open and it's opportunistic, we might step in and capitalize on it. But importantly, all the hard work we've done over the last couple of years puts us in a position where we don't need to do anything.

Given your grocery focus, we've seen some of the regional grocers file for bankruptcy, Fairway or Fair Lucky's -- or Lucky's shutting down. What's your sort of risk on the regional grocery side to fall out? And how do you think about this recent activity in the context of your longer-term views on grocery?

We do have some regional grocers, but I would say that our exposure to the weaker concepts is very small, as demonstrated again by our relatively low watch list. I think that the biggest disruption that's coming through the grocery sector is the advent of some of these discount grocers, and how they are set up to shop much like a specialty grocer and how they're really meeting the need from a quality and a price perspective. So that's what we have our eye on. And we're always very cognizant of what our overall exposures are to any particular retail or grocer.

Any questions? Come on, guys. I know it's...

Are all the meetings as bad in terms of questions?

I would say I usually get a lot on Veracast or, I don't know, I get nothing.

One of the things, honestly, that it's kind of cool, if you will, as a team, and we're hearing this refrain a lot, you guys have done exactly what you said you'd do. Yes, we have, right? We laid out our business plan almost 3 years ago, and we've executed on it, and it hasn't been any grand insight. It's been that we have a portfolio that's unique, I think, in the industry, in terms of older, well-located assets that have the opportunity to drive real growth and ROI through better management through reinvestment and through capturing, frankly, more market share with the tenants who are growing, which is something that we've done. So we're really proud of how our performance over the last couple of years has been absolutely in line with what we've said and, importantly, is setting us up to continue to outperform from a growth perspective over the next couple of years, just as we said it would, right? And we're providing you with a tremendous amount of visibility in terms of that signed but not leased, the reinvestment pipeline. We provide full disclosure on all the capital that we're putting to work in our business. Remember, we're showing you incremental returns. Our gross returns are in the mid- to high teens. That's phenomenal. By the way, that's not common. So when you think about the quality of a real estate investment, in particular, you think about the quality of an investment in the retail sector, I think you need to be focused on the ability and track record of that team to drive growth in underlying cash flows. So it's an exciting time for us as a company. And the other thing I'd say, and this is a softer point, but we're seeing the team step up and achieve things that they even didn't think were possible as we continue to improve the portfolio.

How are you guys using technology differently today in terms of collecting as much data as possible to both carry your centers, but also give you leverage in the lease negotiation?

Well, data is more available than it's ever been, and particularly through the use of cellphone tracking technology, we're able to understand at a very granular level how our centers shop and what the traffic is within the center. And that's really a more recent development over the last 12 to 18 months. Whereas before, we were able to really tell what the refined trade area of the shopping center is. Now we can look at where cellphones visit within the center, what other centers they visit, where they go to work, where they go home at night. And it allows us to have a much more refined view in terms of how to merchandise the center. So for example, at our redevelopment project in Newtown, we saw some patterns going to McCaffrey's, our specialty grocer and fitness uses that were elsewhere in the market, that was a great case for us to bring some of those boutique fitness uses into our center there at Newtown. So we are using it. Tenants will tell you in protest that it's not an accurate predictor of sales, but I think part of their product station is driven by the fact that we now can track traffic to a much more refined level, and then not only understand what the traffic is in our center, but then rank it. So we can see that T.J. is the third most traffic T.J. in the State of Virginia or whatever it might be. So we're just beginning, I think, to leverage the availability of that data to drive merchandising decisions, capital allocation decisions, tenant negotiations and a whole array of opportunities.

Great. We'll do the rapid-fire. Will the U.S. strip center sector have more or fewer companies a year?

Fewer.

What will same-store NOI growth be for the sector overall in 2021?

1.5.

What will the 10-year treasury yield be 1 year from today? Today, it's, I think, at 1.08.

I always guess higher, 1.70.

1.70?

Yes.

And in what year will the U.S. enter a recession?

I think we've got another 2 to 3 years of run. So what year would that be? 2024?

Thank you so much, guys.