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

Welcome to the Brixmor Property Group roundtable. From Brixmor, we have Jim Taylor, President and CEO; and Angela Aman, Executive VP, CFO and Treasurer. Also on the line is Alex Pernokas. Alex Pernokas will be monitoring incoming questions that you submit through Veracast. Brixmor is a real estate investment trust that owns and operates high-quality national portfolio of open-air shopping centers. Its 398 retail centers comprises approximately 70 million square feet of prime retail space in the U.S. Jim will begin with a short overview of the company. And remember, if you have a question, please enter it and submit it through Veracast. Jim, can you take it away?

Craig, thank you very much, and thank you for having us, both at the conference and on this panel. The timing of it, I think, is propitious and that we're announced about 6 months into the pandemic and its impacts on our business. And I think have some interesting perspectives and data to report on and also sort of talk about where we see the business going from here. I'm pleased to report that we continue to see an accelerating rate of cash collections. We're now in the mid-80% range. With -- when you factor in deferrals, we're now addressing over 90% of our base rent. And that really has been following the pace of reopenings that we've seen across the portfolio. We're now at about 96% of our ABR reopened. Those categories that remain open or unopen, shouldn't be surprised. They're concentrated in areas like casual, full-service dining, entertainment and also small format fitness, particularly fitness, that relies on class type structures. Those tenants that have reopened are reporting anecdotally to us, good business, higher basket sizes and conversion rates, which we find encouraging. And we're also seeing the traffic levels at our shopping centers, is tracked through cell phone data, to be in line with the pace of tenant reopenings that we have on a year-over-year basis. So it's clear that our focus on necessity-based community centers has been one that has been fortunate. I think our portfolio has shown through this crisis, both its durability and its resilience. What's also important to note is that within our portfolio, we continue to see strong net new demand. In fact, our new leasing pipeline is as large as it's ever been, and we are signing new leases at healthy spreads on an accelerating basis as we move through the third quarter, which we find particularly encouraging. Given the work that Angela and team have done on our balance sheet, we have more than ample liquidity to fund our business for the next several years, which is important given the volatility that we've seen in the capital markets. And the other thing that I think is important for folks to appreciate about Brixmor is that we're executing the very same business plan that we were precrisis. That we're capitalizing on some of the very same trends that we were precrisis, through the crisis. Certainly, the crisis has accelerated many of those trends. But given the well-located nature of our portfolio, and importantly, our attractive rent basis, we're actually able to make money through this disruption. And do so, through reinvesting accretively in our shopping centers and driving value, both in terms of returns on capital but also returns on the value of the underlying assets that we're improving. So as we look forward, don't expect any surprises from us, expect us to continue to, I believe, outperform as it relates to leasing productivity, improvement in underlying cash flows and positioning the company, frankly, to capitalize on this disruption that we're seeing. So that's kind of where we are, Craig, in a nutshell, and I'd love to maybe answer any questions.

Great. Thank you for that. I think a lot of people would be surprised that new leasing is that active. Can you kind of tell us who's looking at adding new locations during the COVID crisis?

Yes. It's -- we've been very pleasantly surprised by the demand as well, Craig, and it's our core tenancy. It's tenants in the grocery category, value discount. Home has been a particularly strong category in recent months. As well as some new entrants into each of those categories that we're seeing grow and roll out expensive -- or extensive national rollout programs. And believe it or not, we are even seeing net demand in areas like fitness. We've seen some well capitalized operators looking to capitalize on available inventory within the fitness space. So that's been a particular surprise to us, in addition to fast casual restaurants, concepts that have done well through the pandemic and are continuing to grow. So it's been a pretty broad funnel of demand that's been coming into the portfolio. Mostly within our core types and users. And as we look forward, we're encouraged by the LOI and lease negotiations that we have underway.

Great. And then you touched on this in your opening remarks, but maybe you can say what are the differences in Brixmor versus some of your strip peers in terms of how you've been impacted by the COVID crisis, including low rent base and the location of your centers?

I think one thing for everybody to appreciate as they think about the strip shopping center is that the public companies own probably 10% to 11% of the total stock of institutional quality open air centers. And the reason I raise that point is what's interesting, Craig, is that we generally don't compete with each other at the real estate level. And that's important to understand because as we're moving through this part of the crisis, the national scale, the relationships with tenants, the access to capital are huge competitive strengths as you think about the types of owners that we're typically competing with day in and day out. Owners that might own 1 or 2 shopping centers that might not have the ability to put financing on the asset in this environment or have restricted financing that limits what they can do with the asset. Landlords who have to rely on third parties to understand underlying tenant demand versus meeting with the tenants that are growing several times a year. And understanding exactly where their new flags are, how they're measuring sales, how they're identifying voids in the various submarkets. Those are critical advantages that I believe Brixmor has. And frankly, many of our public peers tab as well who also have national platforms. I'd say in addition to that, we've worked hard to improve our liquidity as a company, and we have ample balance sheet flexibility to fund what we have in our reinvestment pipeline and our business for the next several years. And also importantly, we benefit from a portfolio that's older and has lower rent basis. And so as we are making some of these deals with tenants today, we're actually making money, we're reporting positive leasing spreads. Last quarter, our leasing spreads again led the sector, close to 20% on a cash basis. So I think in that way, we're probably even better positioned than some of our public peers.

Great. And then you did mention that rent collections continue to increase and improve. What are your expectations for the coming months on rent collection? And have the deferred rents changed in nature as we're a little further along in the COVID crisis?

Well, we have been now, because we're further along, actually collecting on some of those deferrals that were granted in the April, May and June time frame. So we're seeing those collections begin to come in. As we think about more broadly the portfolio and its tenancy, the tenants who aren't paying today really aren't -- it's somewhat intentional on our part. And what I mean by that is these are tenants who are smaller mom-and-pops in segments that have been disproportionately impacted by this crisis. And we're working to make sure those tenants get reopened. We're not forgiving rent, but we're really more focused on getting those tenants reopen. And the importance of that is as the tenants reopen, they're once again in a position to pay rent, at least on a current basis, and then we can work with them to find ways to address the amounts that were unpaid during the height of the crisis. But as you can appreciate, these are tenants for whom, oftentimes, the business is their principal source of livelihood. And we've seen a tremendous amount of durability out of these tenants as they've reopened.

Okay. And then in 2020, we've been experiencing a record high number of bankruptcies and store closing through mid-September. What do you expect the trajectory of store closings in the next 3.5 months of this year?

Well, what's interesting for us is that even with the elevated level of bankruptcies, and we've had some of those bankrupt tenants in our portfolio, we haven't seen the level of store rejections coming out of bankruptcy or store closures that we would typically expect, given the bankruptcy levels. And our view is that, that will come across all portfolios in time. I think it speaks in part to the low rent basis we have and the ability of even some of these weaker tenants to be profitable given where the rents are. And tenants aren't going to close profitable locations as they go through restructures. But we generally have been surprised by the relatively low rate of tenant failures and store closures within the portfolio. And you can see that in our occupancy numbers, which have held relatively steady. We do expect that to roll through the portfolio. Given where our rent basis is, we'd love to be able to accelerate some of that. But I think the truth is that it's just going to take place over the next few quarters. And perhaps accelerate a bit as we get through the holiday season.

Okay. Do you know the Brixmor's ABR exposure to tenants that have filed for bankruptcy? And do you still feel the reserves taken year-to-date are sufficient?

Yes. I'll let Angela comment a little bit in specifics, but I would tell you that we believe we've been appropriately conservative, not just with respect to tenants that have gone into bankruptcy, but also tenants that we have concerns about, their future prospects where we've taken them to a cash basis from an accounting standpoint. Angela?

Yes. I'd just say as it relates to the bankruptcy exposure, if you look at ABR as of June 30, the total exposure to bankrupt tenants is about 250 basis points. Obviously, the impact as it relates to 2020 from any store closures related to that 250 basis points would be a much smaller number based on Jim's commentary about the pace of store closures or rejections. And then as it relates to collections, the only other thing I would point out is in the investor presentation we posted last week, we did update some of the collection and reserve analysis based on things that have happened in terms of cash collection subsequent to quarter end. And that disclosure really highlights that for the amount that's been accrued or was accrued in the second quarter, but uncollected and unaddressed through deferral agreements. We're approximately 66% reserved on those outstanding amounts. So I think, again, pointing to the conservatism and the reserve policy.

Great. And let me pause for a second and turn and -- Alex, do we have any questions from the field?

Yes. We have a couple of questions. First one is, do you expect 2022 same-property NOI to be higher, lower or similar to 2019?

2022?

2022, correct.

I think that we're going to see a reset in terms of the NOI levels in '21. And I think the amount of that reset is going to, in some measure, be driven by timing. I think the difficult part, as we've talked about is, for example, the pace of tenant failures is not as rapid as we might otherwise model or frankly want given our desire to get some of that space back. We certainly expect, though, based on the forward leasing pipeline to see some growth and to be in a position where we're re-leasing that space, getting the space's cash flowing again, which is going to benefit substantially what we're doing in '22. The last thing I just observe in terms of the forward look at our business, much of the leasing that we've been doing over the last several quarters hasn't even impacted 2020 yet, right? So it's going to be coming through our '21 numbers and frankly, our '22 numbers as well, which gives us additional tailwind, given that leasing productivity. But in terms of specific levels of what '22 looks like relative to '19, not really in a position to provide that type of guidance. But I do think we're going to be in a healthy position.

Okay. Great. And then the next one is on occupancy. To the extent, occupancy declines in the next few months, quarters. When will we see the bottom, early to mid-2021?

Again, it's really difficult to call this from a timing perspective. We would expect naturally that as tenants reopen, and their businesses are good, and we're seeing traffic levels return. And frankly, new concepts backfilling the store closures that we're getting, that we'll see some positive momentum. But at what point in '21 the bottom occurs is difficult to predict.

Okay. And then the last one is around the dividend. Given high levels of liquidity and modest capital needs going forward. When do you envision, roughly, reinstating the dividend?

Yes, I mean, I think there's a point to highlight here relative to 2020, and that is that we benefited from some tax attributes. Given our historical ownership, that have allowed us to retain 2 dividends for the calendar year 2020. I think others have had to pay some partial dividends to meet their taxable income distribution requirements. We went into this crisis with one of the lowest payout ratios in the sector, good cash flow, good coverage. And we understand and appreciate that a fundamental part of our return to our shareholders is that dividend. The decision around retaining the dividend was really to make sure that we have more than ample liquidity to pursue the reinvestment and growth opportunities that we see in the portfolio. And as we move into '21, and we'll talk more about this on our quarterly call, we will have taxable income that we'll need to distribute through that dividend. But again, as I've talked about in other context, the decision with respect to withholding the dividend was to put us in a position that we didn't have to raise dilutive equity at the worst possible time. And that we're in a position to grow again as a business.

Okay. Appreciate it. Craig, that's it from the fields.

Okay. Jim, are you expecting that there will be a reset on market rents for tenants re-leasing a new space? I know that you've already touched on some of the new leasing. So you obviously are seeing what rents they're willing to pay.

Yes. I've said this before, I think it's only more true now, and that is that tenants are only going to pay rent in which they underwrite their business to be profitable. They need to be 4-wall EBITDA profitable. We have unfortunately benefit from a relatively low rent basis, which allows us to achieve the new leasing spreads that we have, while the tenants can be profitable in terms of what they think their sales are going to be generated out of the stores going forward. So that, I think, is one of the most important questions for investors to ask because market rent is a function of what retailers can and are willing to pay. And again, it's going to be driven by what sales they think they can generate. I think what we've seen across some markets is underlying rental rates outpacing, from an inflation standpoint, tenant productivity. That just can't sustain. And so I think in certain markets, you're going to see pretty significant pressure on where rental rates are going to be going forward. In that market, though, and I just think it's important for people to frame this appropriately, is going to be driven by the rents that tenants are willing to pay, where they think they're going to be profitable, not necessarily a desire to open up a new store in a particular market, whatever the rent might be. Our portfolio is well located. We're near where the rooftops are. I think there's going to be an increasing focus by tenants on being closer to the consumer. I think to some degree, you're going to see more net demand in first string and suburban locations than you are in real urban locations. And I think part of the driver of that, frankly, is the -- in some of those more urban locations, the reset and rents that's going to have to occur for tenants to be willing to make a bricks-and-mortar investment.