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

Good morning, everyone. This is Samir Khanal from Evercore ISI. Welcome to the retail panel this morning. On the retail panel this morning, we have Jim Taylor, who's the CEO of Brixmor; we have Ken Bernstein, CEO of Acadia; we have Jeff Olson, CEO of Urban Edge; and we have Mark Bratt, who heads up Westwood Financial. Those of you not familiar with Westwood, they have a portfolio of 72 shopping centers, concentrated primarily in the West Coast, Arizona, Texas, Colorado and North Carolina, mostly grocery anchored and neighborhood centers.

So just to start off, maybe each one of you can spend a few minutes providing a sort of an update on the business. I know I saw a few presentation decks this morning in case the audience hasn't been able to see that. So Jim, why don't I start with you and then we can kind of go with everybody else.

Sure. Samir, thank you, and good morning, everybody. I'd say maybe the first thing I'd reflect on, as we sit about 6 months into this COVID environment is just how durable and resilient our asset class has shown itself to be. At the height, we had about 44% of our tenants by revenue closed. We're now back to about 96% reopened. And as you could imagine, the tenants who remain closed are in categories that you would expect, such as entertainment, restaurants, and certain types of fitness uses. With the increase in tenant openings, we're seeing an accelerating rate of cash collections. And addressing about 90% of our overall revenue, either through cash collections or deferral agreements. So we're encouraged, but we still have a significant part of our tenancy. If you had thought about it this 12 months ago, somebody were to tell you that 4% to 5% of your tenancy would remain close for a substantial period of time, it would cause some concern. So we're very focused on that element of our tenancy and looking at ways to make sure that those types of tenants can get to the other side. But by and large, we're pleased where we sit today. And I'm sure this is the case for everybody on this call. But maybe not well understood is that we're still signing leases today. It's slightly lower volumes perhaps than we were before, but there's a broad -- and I'm sure we'll talk about it more later, but there's a broad funnel of tenancy, if you will, across sort of our core users that are signing new deals today. So from a business perspective, we're continuing to pivot from sort of defensive to make sure tenants stay open or that we've got the rent collected, or that we've entered into mutually satisfactory deferral agreements to playing off once again, leasing vacant space and anticipating the space that we'll be getting back.

I guess same question for you, Ken, just kind of an update on August and maybe early reads into September?

Sure. So to compare and contrast with what Jim said, our portfolio has 2 key areas of differentiation. One is the core portfolio that is dominant in several of the key gateway cities, which have been at the epicenter of the pandemic. So D.C., New York, Boston, Chicago, San Francisco, is where the vast majority of our core assets are. And then the other area of differentiation is our fund business, and I can get into that later. In terms of the core portfolio, it is I think comforting to see the progress that has been made across the board. Similar to what Jim said, early April, half of our tenants did not pay us rent. And of the half that didn't pay us rent, over half of them were high-quality credit tenants facing an existential crisis that we're all aware of, and thankfully now, fast forward to August and then into September, our collection rate is up to 80%. And of the 20% that are still not paying, about half our credit tenants that are going to come around, and then the other half fall into categories, like Jim said, as well as into markets that are just reopening, New York City being an example of that. So overall, what we have seen and what we said on our prior earnings call is there is no doubt that this epidemic and the financial crisis that has ensued has hit a variety of our different types of retailers significantly. But we are seeing signs of most of them bouncing back, some of them bouncing back even stronger. Because notwithstanding the markets I just mentioned, Target is our largest tenant. Trader Joe's is a significant tenant, Stop & Shop, so we have plenty of essentials. We also have significant off-price in terms of the apparels. And all of them are doing quite well and consistent with what Jim said, we are seeing them continue to sign new leases, and we do think that we will see, over time, resilience in those areas and then once we get past the pandemic. Then -- again, and it's time for us to start thinking about it because our retailers are calling us, telling that they're not thinking about it. Once we get past this health crisis and then these key markets are going to become critical to a variety of retailers, and we look forward to that.

Mark, same question for you. I guess maybe you can kind of let us know kind of what your numbers were from a collection standpoint in the second quarter and kind of what you're seeing in August and maybe into September here?

Yes, Samir. So good morning, everyone. It's nice to be here. I think that the -- for the last 4 months, we've collected 89% on a cash collection basis. We have about 7% of our rents have been deferred over that 4-month period. We have about 95% of our tenants are open. And I think we probably share many categories that are experiencing a little more difficulty, but I am also pleasantly surprised by the resilience of some of the shop tenants. I think they've done -- the good operators have done very well.

Okay. And then -- and Jeff, just turning it over to you, same question, maybe an update. And as well, when we spoke last year, one of the topics you had brought up was sort of the differences in open air and strips as well, right? And then we had talked at length at the panel last year. Some of that -- a lot of that is sort of coming into sort of what you had thought in terms of reality, maybe a bit accelerated. But just maybe an update on that view as well and kind of what you're seeing in operations in your portfolio.

Yes, sure. No, it certainly has come to play. First, on the tenant side, I mean, there has been a lot of airtime over which tenants are not doing well, which would be the gyms, the entertainment users and full price apparel and some of the restaurants. But on the other hand, we are definitely seeing these pockets of strength within a tenant base that was previously deemed to be at risk. So whether that's the furniture category, which is doing very well, whether it's a sports category, we have an academy they're now going public, they were one of our at-risk tenants before, whether it's pets, whether it's electronics, home improvement certainly is accelerating a lot, office supply as well as grocery. So we are definitely seeing a lot of positive impact to tenant categories that may have been deemed to be at risk earlier. In terms of our business, like many others, we've come a long way since May. In May, about 50% of our tenants were open for business. As of yesterday, 98% of our tenants are now open for business, as measured by ABR. We've collected about 80% of our July and August rent so far, and we're hopeful that, that number is going to increase as -- and get even closer to the 98% of the tenants that are open for business as time goes on. Our leasing activity is stronger than what one would expect during this time period. We're seeing the most interest from grocery stores. We've recently signed 2 leases, 1 with ShopRite, 1 with Uncle Giuseppe's. We have 7 more grocery store leases under negotiation right now. And then also discounters, off-price retailers and drug stores are looking to add to our portfolio. We announced a deal this morning with an industrial user, who's taken the largest vacancy in our portfolio that went to a company called AAA Wholesale. Today, about 5% of our asset value is in the industrial space. We own about 1 million square feet of industrial in East Hanover, New Jersey. And we are aggressively pursuing industrial throughout the balance of our portfolio, and we're starting to see a lot of interest because of the large boxes that we have, because of our large sites in -- predominantly in -- throughout the New York Metropolitan region. So I would expect that you'll start to see that increase from a focus, from our standpoint. And then lastly, on the residential side, we're highly focused on getting approvals in both -- at Bergen and at Yonkers, in part, taking advantage of the demand, the increasing demand that we see from people moving from Manhattan into the suburbs. So I think that gives you a pretty good overview. On the mall space versus the strict center space, I think that will continue to play itself out. The mall space, in particular, I believe there's about $30 billion of secured debt that's coming due over the next 4 years. And there's really no visibility to refinance any of that. So my guess is that you're going to start to see some distressed plays, where malls that previously that may have been valued at $300 million or $400 million, may be trading at $0.10 to $0.20 on the dollar at some point. So we'll keep an eye out for that. But at the same time, we are aggressively looking at mall tenants and trying to bring those tenants into our open air centers.

Jim, as a follow-up, if you include the collections and deferrals, you're at about 90% of what you stated. And can you give us an idea of sort of on the balance of that 10%? I mean how are negotiations going on that front? I mean what are they asking for? What's sort of the give and take that's going on in that balance there?

Well, again, a significant amount of what's left, if you will, as others have alluded to are in categories that you would expect like restaurant, entertainment and fitness. And there, we're just taking a more flexible approach, with the focus on getting some of those tenants reopened. And anything that we might agree to now with many of those tenants, you may have to renegotiate later. So for some of those tenants, we're being patient and working with them to get them to reopen as soon as they're allowed to in the jurisdictions in which they operate. And I think as we move forward and as many of these jurisdictions reopen, we'll continue to see what we've seen over the last 6 months, which is as tenants get open, they begin paying rent. And then sometimes the discussion is what do you do with the amounts that are past due and you work those into a deferral or some other type of agreement, or you get them to come current. And it's a very laborious tenant-by-tenant process, which I'm glad to report, we're largely through because it takes a tremendous amount of organizational effort and focus working with these tenants and being good partners. And I think for all of us, as we're getting to the point where you're hearing about these collection rates in the 80s and address rent approaching 90%, all of us now can begin pivoting to playing offense and capitalizing on this disruption to continue to improve our centers. Jeff mentioned some of the grocery tenants that they're signing deals with. I would wager that all of us are seeing a significant increase in that type of interest from essential uses. But I think you'd also be surprised by some of the categories of tenants, whether it's in home, even fitness in some markets, restaurants and other markets now who are beginning to get out there and open up new businesses. Obviously, we're being very judicious about what types of deals we're striking, but it's encouraging to me to see early signs of even some of the more troubled sectors beginning to come out with first space.

I guess turning it over to you, Ken. I mean you talked about sort of 80% rent collections, where 20% not paying. But where do you think that collection rate goes to? I mean what -- how should we think about the second half? Is it towards the 90%? Can we cross 90%? What's the thought around that?

Yes. That's certainly -- and in our prior earnings call, that was the goal that we articulated. So to be clear, as I said in April, early 50s, then we got into the 70% cash collection plus about 12% deferrals. Those deferrals now are beginning to convert to cash and, thus, on a cash basis, we are at 80%. And then between deferrals and other credit tenants, it gets us to that 90%. So while being respectful of the health crisis because who the heck knows what next month holds in place, here's what we've seen. One, the consumer, when they're allowed to, is coming out. And the consumer, while hopefully being safe, is not nearly as fearful as we feared as landlords or as our retailers feared. The pent-up demand was far in excess of what any of us thought and across almost all segments, if it was a strong retailer and they saw a nice bounce back. And now as the economy is reopening, now as the job market gets better, now as, hopefully, we see economic recovery, I think, and what I said was there is going to be a short-term hit, but getting back to 90% is something that we are confident we can do. Then where it gets interesting is trying to think about what does the world look like post-vaccination, when we now have a consumer who has enjoyed cooking at home for a long time, but is sick and tired of it, wants to get out, want to see people, wants to exercise, needs to exercise given all the home cooking. And what our tenants are telling us in all of those categories, consistent with what Jim said, it's not just about 1 or 2 categories. We are seeing fitness, we are seeing furniture, we're seeing a variety of retailers saying we're ready to go back on office, and we want to make sure our portfolio is positioned for that.

Mark, just shifting it over to you. I mean you have a primarily sort of a grocery-anchored portfolio, a lot of sort of small shop space in the portfolio from an exposure standpoint. I mean can you give us a view on kind of what your thoughts are on that segment for the next 6 months, especially with some of the burn-off of some of the stimulus and what you're hearing on that end?

I think our shop tenants, for the most part, have been surprisingly resilient. I mean you can see in the cash collection number, right? We collect 2/3 of our rent basically from shop tenants. And the fact that we're getting 89% is, I think, a good sign, and we're up 7% for the month of September. Now I think in terms of whether we get the -- some of the deferred rent agreements that we've made on time or in some case, collected all, remains to be seen. But I'm -- I think that the shop tenants, the good operators, have done very well. And I think who has fallen out is really some of the people who didn't really have the right balance sheet, didn't have the right concept, et cetera. But I'm pleasantly surprised by the amount of durability that the shop tenant category has had for us.

Okay. Jeff, just turning it over to you. One of the -- many retailers have filed for bankruptcy this year, right? But one of the things we've seen, it's coming through a lot of restructurings of rents, et cetera. And then some of the closures have come in a bit lower than we would have thought. I guess do you expect the wave of bankruptcies or closures to increase as we kind of head post-holidays, maybe in the first quarter of next year? How are you thinking about that?

I think it's very likely that you will see more closures as a result of everything that's happened because a lot of these weaker tenants just can't survive much longer. And that focus is going to be full-price apparel, it's going to be the theaters in particular, gyms and restaurants. And so we're highly focused on all of those spaces, actively figuring out what we can do to replace those tenants. But yes, I would expect that you'll see more closures next year than what you've seen this year.

Jim, is that something you would -- does that agree with kind of your view as well, that the way of bankruptcies or closures will sort of increase post holidays here?

I think that's right. And I think what had been striking is that today, we've all seen relatively low levels of tenant closures. But I think we all expect, as we go through this disruption, to see additional tenant closures in some of those more at-risk categories that Jeff just mentioned. But as we've already talked about, I think what's important for folks to appreciate is the breadth of demand for the open-air space, both from traditional tenants, but also new tenants to the space. And as somebody was saying earlier, we're seeing many of kind of our core categories in some of these essential uses, but also uses like home and hardware and equipment and other types of tenants actually significantly increasing their appetite for space. So as we begin working through this disruption, I think it's coming slower than we originally expected in terms of the rate of tenant failures. But frankly, gives us some time to make sure that we're on the front of our foot as it relates to backfilling some of those tenants, which we believe there's more than adequate demand.

I guess following up on that one...

Samir, if I can just add to that. Because last year, I remember at the panel, we talked a little bit about the advantage that all of us have as public companies in that we're highly regarded by the retailers. They trust us. They know that we have the capital and we can deliver. And a lot of our competition is not amongst the panelists here. It's amongst private operators in our markets that, in many cases, do not have the capital, do not have the expertise, do not have the relationships to keep their centers fresh and exciting. And I really do believe that one of our competitive advantages is all of that. We have the capital, we have the relationships. And so I think our centers, when we come out on the other side, collectively as a -- within the REIT industry, are going to be much better positioned than that of our -- the private competition.

If I can just chime in here. On that point, and Jeff, I totally agree with you. But additionally, I'm just thinking through the bankruptcies of the last few months. I can't recall a post-bankruptcy rent negotiation that we've gone through. For the most part, the bankrupt -- the tenants that have filed bankruptcy, and I'm sure there are exceptions, have needed to go away. And so it wasn't like, hey, if you can take 10% off the rent, then we stick around. Or they're very valuable stores and they do stick around. So most of our rent negotiations, ironically, the deferral agreements were with well-capitalized companies. That is different than any of the recessions I've worked through in the last 30 years. Let's hope that that's a thing in the past. But the bankruptcies have not been particularly the issue. It's a matter now of getting strong retailers capable of operating their businesses. And I think many of them, when I think about our portfolio, the Targets of the world, the Walmarts, et cetera. I think they're in a very good -- very, very good position to capitalize as we go forward.

Are there -- I mean, one of the categories this time around during earnings has been let's -- I've seen a lot of focus is the off-price guys, right? And the off-price guys have been -- I mean that was one tenant base that was expanding, right? And they will still expand. But I think just with this with sort of the reporting that we saw, with comps being down a lot without having much of an e-commerce platform and with some of the struggles in inventory, I mean, how are they thinking about sort of openings right now? Have they taken a bit of a step back? Or are they saying, "Hey, you know what, let's look for space. We're continuing to expand." How are they looking at the ability to grow here?

I think one -- can you hear me?

Yes, we can hear you.

Look, I think many of the off-price guys are going to continue to benefit from the demise of department store period. Some of the results that they had, obviously, were impacted by the fact that they had to close stores during part of the crisis. And I think what's important for us all to think about is that as they've reopened, just like grocery stores, they've demonstrated that they can reopen safely and adopt safeguards and appropriate measures for their customers. And I think as they've reopened, they've seen much higher conversion rates and larger basket sizes, which I think they found encouraging. So I think each and every one of us is actually very actively engaged with them as they think about new stores, as they think about new store formats. As I've said many times before, there is an increasing willingness in many of our core tenant categories to relocate, which is also, I think, going to be a net positive for these larger, well-capitalized platforms that have the relationships with the tenants and understand where they need new stores. So I think that, that's going to be a category that continues to be strong for each of us.

I agree. A few things that I think it's important everyone understands. The pent-up demand to get back into those off-price stores was very strong. But the supply chains were not necessarily equipped in every market in every region to staff the shelves. So some of the weakness that you saw in some of the reporting wasn't lack of demand. It was just because of disruption in the supply chain. Fast forward 3, 6, 9 months, what our retailers are telling us is that will be solved. And if anything, as we know, there's going to be a lot of product in the system. And as Jim said, while the formats are going to change and relocations may occur because a tenant off-price that was 24,000 now wants to be 18,000, I think they're going to be in a strong spot. They have also defied most, if not all, of our expectations, and this is something we should watch, is almost all of them have said they do not need to play in the omnichannel and the online world. And so far, they've done quite well without having an online presence. Omnichannel has helped a variety of retailers during the shutdown because they at least had a channel. But these folks are not paying for free shipping, not paying for that [ test spend ] and seem to be doing quite well. And I would expect to see that continue amongst those handful of off-price that are really strong.

And I guess some of these tenants are continuing to sign leases. And with the plan to open stores, I mean, how are they sort of underwriting some of the sort of second wave impact from, let's say, the virus again. I mean how are they signing leases and at the same time, kind of saying, "Okay, well, what if there is a second wave of the virus here, or we're not able to find a vaccine?" How are they balancing that as they look to open stores?

I think he wants you to answer that, Jim.

I think that what you have to remember is that their underlying business is strong. As Ken alluded to, there's significant pent-up demand for high-quality clothing at a good value or good price. So I think their business models remain intact. And I think even if we go into a second wave, one thing I find particularly encouraging is that these retailers have demonstrated an ability to operate safely. And I think if there were a second wave, which let's hope there's not, but if there were a second wave, I think we've learned a lot of lessons in terms of how these closure orders roll through various economies and what are businesses that should be treated as essential and what are businesses that perhaps aren't. And so I think these are incredibly well-run platforms. As Ken was alluding to, they're profitable. They understand how to deliver what the customer wants in terms of experience and selection and, importantly, value. And I think some are even poised to begin capitalizing on some of the lessons learned in terms of buy online, pick up in-store or other ways of serving their customers. So they realize that their stores are their biggest asset. And they also, I think, appreciate that the consumer will continue to return to the store because of what they deliver.