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

We are pleased to have with us today, Brixmor. This session is for Citi investing clients only. So if media or other individuals are on the line, please disconnect now. Disclosures are available up on the webcast. [Operator Instructions] So now Jim, I'll turn it over to you. Introduce your company and provide some opening remarks.

Thank you, Katy. I'm Jim Taylor, CEO and President of Brixmor. And I'm real pleased to have with me here today, Angela Aman, our Executive Vice President and Chief Financial Officer; as well as Stacy Slater, our Vice President and Head of Investor Relations. Brixmor, for those of you who don't know us, is a company that focuses on the ownership and redevelopment of primarily grocery-anchored community centers. Our purpose as a company is to own centers that truly are the center of the community they serve. And we're fortunate to have a portfolio of very well-located shopping centers across the United States, principally on the East and West Coast, the Upper Midwest and through the Sun Belt, including Texas. Our strategy, as I alluded to, is to find ways to make those centers more relevant to the communities they serve through accretively reinvesting and redeploying our capital when we've maximized value. We're really pleased with how our portfolio demonstrated its durability and resilience through the pandemic. We actually collected or dealt with about 95% of our rent for 2020, and importantly, we continued our leasing momentum that we saw in 2019 in the latter half of the year, generating sector-leading leasing spreads as we are drawing tenants who are actually growing today to our centers to be near the customers that they serve. As we look forward, we believe that we will emerge from this pandemic as one of the platforms least impacted, but importantly, one of the platforms in the best position to grow going forward. Why do we say that? Because much of our forward growth is already in our pipeline. It's already -- we have about $38 million of signed, but not commenced rent that we expect to commence over this year and into 2022, and we have a big pipeline of leases under negotiation with our tenants as well. And these are tenants that are growing and relevant today, tenants in the central categories like specialty, grocery, and some of our core categories like value apparel, home, and other services. So we like how we're positioned as a company, and we're excited about the growth ahead. Katy?

All right. Great. Thank you for the introduction. So to take off each meeting, we're asking each company, if an investor is buying one real estate stock going -- coming out of the pandemic, what are the 3 reasons why they should buy Brixmor in particular?

Well, thank you. First and foremost, it's our portfolio of well-located older assets, where we believe we have significant mark-to-market remaining between where our rents are in place today and where we can sign new rents. All you need to do is look back over the last several quarters since we've started, and you see that we're generating sector-leading leasing spreads. That leasing activity helps us also generate some very accretive reinvestment activity, which is a very attractive risk-adjusted return. When you're achieving the types of incremental spreads on capital that we are through reinvesting in our centers, in many cases, we're doubling the value of that capital as we deliver it. Last year, through the pandemic, we delivered over $110 million of reinvestment at an incremental return better than 10%. We expect to deliver an additional $200-plus million this year at similar type accretive returns, not only generating a great return on that capital, but also fundamentally improving the shopping centers that we've impacted. And again, moving us closer to our purpose as a company. And lastly, I'd say, in addition to that great business plan that we generate, we probably offer more than most, great visibility on the prospects for our growth. As I mentioned, we have much of it already signed. So when you take a step back and you think about our portfolio, we think one of the best in the open-air space, and we're best positioned to benefit in this environment. Our platform, our ability to lease and reinvest in our centers accretively, and finally, our prospects for growth, I think those are 3 reasons why Brixmor will stand apart, not only for how we got through the pandemic, how we'll get through this year, but how we're positioned for '22 and beyond.

And when you look back, what would you say are some of the key lessons learned from the pandemic? And how you're thinking about your strategy differently going forward, if at all?

I would say that it reinforced many of the things that we are already doing. It reinforced our strategy to not go up -- go along, ground-up development. It reinforced our strategy to make sure that we had ample liquidity and a strong balance sheet so that we didn't have to go to the capital markets to fund our forward plan. It reinforced our focus on cash flow, and growth and underlying cash flow. I think that we were uncertain as everybody was going into the pandemic in terms of what the severity of impact would be. We were very pleasantly surprised with how the portfolio performed across all categories, including some of our small shop tenants that we thought might be at particular risk. Clearly, as with everybody else in our sector, we've seen problems in the entertainment space, in certain fitness categories, but by and large, as we come through '20 and now we're in '21, we're seeing continued sequential improvement in our collection rates. And we're seeing, importantly, continued robust leasing activity with tenants that we think are going to be relevant. So if anything, I think the pandemic reinforced some of the -- what we believe to be the strengths of the business plan and reinforced some of the steps that we took to ensure that we had more than adequate liquidity.

Maybe you could talk about your views on suburban migration trends. Do you view this as a permanent shift? And does your target market strategy change for future growth, based on migrations that we've seen since pandemic started?

Yes. This was a trend that we were seeing before the pandemic, and I think that's important to highlight. And negotiations and discussions with some of our key tenants, tenants who continue to grow today, we saw that they were shifting their focus from a new store opening standpoint to markets and locations near where people live in single-family housing. They wanted to be within the last couple of miles of their customer, and they found that our portfolio of well-located assets fit with that. So we already saw that. In terms of what the implications are for us going forward, we see additional opportunities to grow within our existing submarkets and markets. We like what we own, we like how those markets perform, and we think there will be other opportunities for us to invest and grow our concentration. We talked for some time, Katy, about clustering in those markets. And I think you can expect to see us continue to do that versus a need to re-rationalize where we've allocated our capital or to look at markets that we're not currently in.

So you talked about the below-market rent basis of the portfolio and how that's continued to be a competitive advantage for the company. So as you look at the upcoming lease roll, can you walk us through any notable low market opportunities that you expect to get back either through natural lease expirations or early tenant fallout? And how you're thinking about the upside potential there?

So the best place to look -- and it's granular, but the best place to look is our lease expiry profile, which shows, over the next 3 to 4 years, the average rate on anchor leases expiring is around $8 to $9. If you look at where we're signing comparable rents today, it's in the low to mid-teens. So we have a substantial mark-to-market in our rolling anchor expiries over the next 3 to 4 years that we're excited about. It's not any one deal, it's across the portfolio. It's that average. And importantly, when we get after the upside opportunity in the anchor, we also see follow-on benefit in the small shops. What do I mean by that? Well, when you're replacing an old, tired anchor, like an old 24-hour fitness or a Kmart box or long list of struggling retailers with somebody who's more relevant like a specialty grocery use, you're uplifting the entire center, and you see benefit in terms of what happens with the small shop activity beyond that. You're already seeing it in our spreads. If you look at our anchor spreads versus our small shop spreads, it shows that we've been, I think, successfully executing on this reinvestment program and driving growth opportunities in the shops as well.

Then maybe you could talk about recent progress on vaccine rollout and stimulus impacted your broad view on the recovery trajectory. And are you seeing any more positive leasing momentum as a result of that?

Well, I think we began seeing it, honestly, before the vaccine was clear. We started actually seeing it in the third quarter. Admittedly, it was with national tenants, regional tenants. Perhaps the benefit of the vaccine is most seen in our small shop leasing volumes, which really accelerated in the fourth quarter, and we're continuing to see some of that activity as we move into the new year. And what's interesting, Katy, is that we're seeing it across almost every one of our tenant categories. Entertainment lags, but once you sort of put entertainment and some of its specific vertical issues aside, almost every other category, we're seeing recovery of demand and a good breadth of demand.

And how are tenants looking to better utilize their physical store footprint? Over the course of the pandemic, we saw an acceleration of e-commerce sales, but we also saw delivery costs and logistical pressures at the same time. So how are they looking to utilize stores differently?

I think the most fundamental change has been the explosion of buy online, pickup in-store. We saw a lot of that activity within the grocery segment, and we were actually very focused on increasing the penetration in our portfolio of buy online, pickup in-store for our grocery anchors and had great momentum in that before the pandemic hit us. With the pandemic, then we saw many other retailers recognizing a multichannel strategy that buy online, pick up in-store, unlike delivery, was a very profitable way to serve the customer the way they wanted to be served. So we've been more aggressively rolling that capability out across the portfolio through providing pick-up lanes, additional parking -- dedicated parking, additional signage. For now, there is a much wider array of tenants, and we think that, that's going to be key to our property's success going forward, is having the flexibility to actually allow a tenant to do both in-store business and curbside business, which we think is going to be a trend that's here to stay.

And are tenants trying to negotiate leases differently at all? If they're getting more grocery sales coming in online that are actually being fulfilled through the stores? Or is that -- that's something that's happening in the grocery space?

We're not seeing that in the grocery space. If anything, we've been really pleasantly surprised by the growth in grocery demand, both from traditional grocers and importantly, specialty grocers. Over the last couple of quarters, we've seen record volumes of new grocery activity, which tends to be more of a stable part of our portfolio. We're actually seeing significant net new demand, and we're bringing grocery uses to shopping centers that didn't have grocery before. So that's exciting. What we're seeing in terms of other tenants is, certainly, tenants are always going to negotiate hard. They're going to try to drive to the lowest rent. They want their stores to be profitable. And really, our only response to that is to make sure we have more than one tenant competing for particular spaces so that we can make sure we continue to drive those important lease terms that you've heard us talk a lot about over time, which is good, embedded rent growth, fewer options to the tenants, appropriately long term to cover any initial capital investment that you have in those assets. And if you look at our leasing disclosure, we show you all of that. We show you what our average terms are. We show you what our average leasing CapEx is per foot. We talk about and provide information in our supplement about what are the embedded rent growth that we're getting. And those are all sort of the nonspread terms that are nonetheless really important. Last thing I'd tell you is, of course, some tenants are looking for the relief for the next pandemic, and we've been able to pretty much hold the line there as it relates to not giving abatements. Or if we give any type of relief, it's limited deferral, much like what we did as we went through the pandemic. The sanctity and strength of the lease is important to us.

Yes. Maybe to that point, you can talk about your collections to date, and how has your initial strategy on lease negotiations, deferrals and abatements changed over the course of the pandemic?

Well, we had a number of tenants come to us at the outset of the pandemic, looking for rent relief, looking for rent abatement, and in some instances, rent deferral. We showed it in our disclosure, but we only gave abatement and rent relief in very, very limited circumstances. Instead, what we focused on was rent deferral particularly with creditworthy tenants, where in exchange for giving that rent deferral, we could unlock valuable provisions in their leases, eliminating cotenancy clauses, for example. Also opening up our ability to develop in the parking lot ahead of these -- or in front of these tenants. So we did a lot of negotiation in the underlying lease itself to make sure that we thought we were getting more NAV value, significantly more NAV value in unencumbering our properties to some of those lease restrictions than we were giving rent deferral. And that approach with respect to rent deferral being the path was pretty consistently what we applied, and it shows in our numbers through the onset of the pandemic.

And after going through COVID, how are you thinking about industry exposure and any changes you'd like to make? And what's your comfort level around discretionary tenant health returning?

Well, I think that we're really well positioned from a defensive standpoint in terms of the balance of the central uses that we have and how integral our tendency proved itself could be to the communities it served during the pandemic, and we think emerging from the pandemic. We think that they're going to be increasing numbers of tenants from property types that are obsolete coming into our centers, and we're certainly seeing that and benefiting from that from a momentum standpoint. In terms of discretionary type uses, it's always in balance, right? You don't want to move to a place where all you have within the shopping center is essential-only uses. You like having that mix. And we've seen from the traffic patterns that we monitor that as these markets reopen, the traffic levels resumed to levels that we saw in 2019. And we think as the market further recovers, we'd frankly like to have some of that discretionary tenancy in our portfolio. And Angela, please chime in here, but the one category that we are most cautious on is entertainment.

I think that's well said, Jim. No, I think, it has always been about a balance. And we've really been, I think, thoughtful as we worked through everything we've had to work through over the last year, really taking a very customized approach to the tenant base, not just with respect to new leasing activity, but with all the negotiations we've done with tenants over the last year, really trying to understand what's happening in people's specific businesses, and then really understanding the support they were going to need from us to get to the other side of the pandemic. We haven't taken sort of a one-size-fits-all approach to the tenant base. Again, with respect to new leasing activity or with respect to negotiations throughout the pandemic, and I think that's really been a benefit and helped drive the collection numbers you've seen.

And can you talk about the tenant categories that have the strongest open to buys right now that are driving most of your backfill leasing pipeline today?

Angela, do you want to cover that?

Yes. It's been really surprisingly across the board. You saw anchor activity really pick up in the third quarter, and that broadened out much further to a number of small shop categories in the fourth quarter. You saw the mix of leasing between Q3 and Q4 shift pretty materially. In terms of anchor, it's spent lots of tenants that we're growing with going into the pandemic, including value-oriented retail, specialty grocery, as Jim mentioned. We are seeing demand from well capitalized restaurant concepts and even well capitalized fitness, and we're being cautious about how do we execute in those categories, given where we are from a pandemic perspective, especially in certain jurisdictions where there are still significant [ capacity ] constraints. But I think it's very positive that we're seeing well capitalized players in those fields look to take advantage of potential distress in the market with respect to those categories. So it's been really encouraging. On the small shop side, again, restaurants, even other services. So hair and nail salons, we've continued to see demand from medical uses. It really has been very broad-based, which has been, I think, one of the things that's most encouraging in the late stages of the pandemic.

And do you have any updated views on when you'd expect portfolio NOI to get back to pre-COVID levels? Has that changed at all over the last couple of months?

Yes, I don't think so. I think one of the most interesting things about this cycle has been how much of the -- we were down 5.4% in terms of same-store NOI in 2020, but build occupancy was only down 150 basis points year-over-year. So most of the NOI loss we experienced in 2020 was really what I term at this point, at least, as temporary. It was cash collection issues, and it was reserves we took on accrued, but uncollected rent throughout the course of the year. To the extent those tenants remain in occupancy, we continue to work through AR balances with them to keep them in the portfolio. And as the vaccine rollout continues and they're able to get back open, those cash collection issues could go away. Whether or not we collect all of the back rent, obviously, we're appropriately reserved on some of those historical amounts, but that occupancy remains in place, and the pace with which we could recover that NOI decline from 2020 is very quick. With respect to the 150-basis point occupancy decline, I just echo some of Jim's comments earlier, but the 290 basis points of signed, but not commenced, occupancy in the portfolio. And the fact that over the course of 2020, we continue to get tenants open effectively at the same pace as we expected at the beginning of the year. So we have a high degree of confidence in that space coming online about ratably over the course of 2021, and that's going to help us pick up the occupancy that we have lost to date.

So leasing is going to be a main driver of growth in the near term. How are you thinking about when you'll be in a position to pivot towards more offensive external growth opportunities? And does the improvement in your stock year-to-date make you think about getting a little bit more opportunistic?

I don't think we're at a level yet where we find it compelling to issue equity, just to answer the question. And even if it were, we'd have to see the opportunity on the left side of the balance sheet to how it makes sense. We think we've got a great plan to drive good intrinsic growth and cash flow overall, in cash flow per share and put ourselves in a position to outperform from a growth perspective, without having to resort to any external capital sources. And we like the position that, that puts us in. So to improve upon that growth profile, we really have to see something from the opportunity standpoint that was within our core competency and of a scale that would make sense only to fund in that manner. We will be ramping up the level of capital recycling that we're doing as we harvest lower-hold IRR assets and find assets that fit our sweet spot in terms of market. I talked about growing in our existing markets, but also where we have the opportunity to apply our leasing and reinvestment platform, my second reason to invest in Brixmor accretively. And what we're finding is, in this environment that, that space is undervalued, we believe, relative to the visibility we have on tenant demand. Part of it is because of where the financing market is. Vendors aren't going to give you credit for vacancy. And so private landlords may not have the release so space or alternatively, they may not have the view into what the growth plans are of the tenants in terms of that demand of leases space. And in those instances, and stay tuned, I think you'll see us announce a couple where we'll be acquiring an asset with lower overall occupancy where we're going into -- at a 6% to 7%, perhaps. And we believe we can take that to an 8% to 9% in short order as we lease the asset up.

And for the industry overall, are you starting to see a pickup in transaction activity? Or is the financing environment still holding that back?

It's been -- it's actually picked up. I would say, similar to what we said, we've been saying this for a couple of years now. There is definitely a bifurcation in terms of where the transactions are happening. Much fewer transactions happening above $50 million to $75 million. So the sweet spot is kind of below that from the size/range standpoint. But we're seeing transactions in a lot of our markets, many of which, honestly, we haven't been able to compete for because these assets were fully leased. There wasn't much upside opportunity that we saw, and we saw no reason to just simply stretch to add an acquisition.

And how are you thinking about underwriting that risk that you would be taking on? And have your return thresholds changed?

We like where we're positioned in terms of underwriting risk because we oftentimes will go into that, knowing what the backfill tenant is. We understand what the national and regional tenant demand is to be in certain submarkets, which gives us a pretty informed perspective as to not only who we're going to backfill that with, but at what rate and what cost. And we do have a very attractive reinvestment pipeline. So in terms of our return thresholds, again, we need to see, perhaps not quite where we are on a reinvestment standpoint, but something compelling versus a quarter return. We need to see something in the value-add range.

So maybe just shifting to the balance sheet strategy. Has the pandemic changed your views on an optimal leverage level and liquidity position? And when do you plan to get back to a lower targeted leverage level?

Angela?

Yes. I mean, we're making good progress on getting to the goal we had set for ourselves, which was 6x, and have been making real progress towards that as you really started to see the acceleration in growth in the portfolio in the second half of 2019 as the value-enhancing program really kind of took off. What we saw in 2020, like I said, was primarily rent collection issue and reserve issues. And that's sort of why we saw occupancy down to the most significant degree. And as Jim talked about leasing activity across the portfolio over the last year, we really haven't seen any dramatic change in market rents. And we sort of take all of those factors together, the fact that we had made significant progress going in. We like how we're positioned but continued the execution we had even during the pandemic on value-enhancing activity. And the fact that many of these tenants remain in the portfolio, and we're hopeful, based on all of that individual conversations we've had with these tenants about getting them reopen and rent paying again as we get into the second half of 2021. And at this point, I think all of those things considered, we believe that 6x target is still the right level for us. We believe that as the recovery continues to take hold, we're going to continue to see opportunities to harvest that below-market rent basis in the portfolio. And that's why I think even when we get to 6x, if you factor in that low market rent basis, our leverage is effectively going to be a lower level, kind of the mid-5, 5.75% kind of range, which feels right for us. So the trajectory, it's obviously been a little extended, but I don't think significantly extended based on all of those pieces.

So just in early March, you were able to raise $350 million of senior notes at 2 1/4%. So can you talk about that process? And whether pricing was impacted at all from when you started negotiations, just given the movement in the tenure?

No. We've been watching the market closely for a while. We didn't have -- we raised capital in the unsecured bond market twice during the pandemic already back in June of last year, and then we reopened that issue in August. So we had really dealt with our 2021 and the majority of our 2022 maturities. We have a $250 million floating right now, maturing in 2022. It's effectively prefunded with cash on hand. And so we're really kind of looking at opportunities to take advantage of what remains a very attractive financing market to start dealing with 2023. But the unsecured bonds we have maturing in 2023 are very expensive to take out, which is still something we consider all the time as we watch the market and really focus on our big picture balance sheet goals, which have been continuing to extend duration and create additional capacity in the bank debt market for ourselves. We -- when Jim and I joined the company, we had a very bank debt heavy capital structure with a lot of shorter-term floating rate debt, and we've successfully turned a lot of that out. We did have 2 term loans remaining in the portfolio as we went into 2021. One was a $350 million term loan with the 2023 maturity, and then we have another $300 million term loan remaining. And we decided based on strength in the market that it did make sense to go ahead and term out that first term loan on the 2023 maturity. We can take it out without prepayments penalty and really just, again, continue to extend duration and create that additional capacity in the bank debt market. The volatility in interest rates has been very interesting to watch over the last few weeks. And going into last week, we weren't sure we were going to have an opportunity, but there was some stability in the market, and we acted quickly to find a window and have the opportunity to jump in and execute. We were very pleased with the execution, saw, as we have pretty consistently over the last year, really strong support from the fixed income community. And now we have continued to term out in a duration to the balance sheet.

Great. All right. So before we move to the rapid fire, could you discuss where you stand on ESG integration today? And what are your top 3 priorities to improve as you think about next year and improving your score?

Well, as we think about environmental or sustainability, it's the continued implementation of solar, LED lighting, electric charging stations to reduce our footprint with a view towards ultimately getting the neutral in terms of carbon. Social has always been a focus of our company. Our core tenet is that great real estate matters, but great people matter more. And we have been working hard since we began on improving our environment to be one that's inclusive and embraces diversity, builds trust, and certainly, in response to some of the calls for social justice this summer, we refocused and redoubled our efforts. We've created a diversity and inclusion committee, and we're really focused on making sure that we can continue to improve the diversity of the company. And then lastly, from a governance standpoint, while we rate very highly amongst all REIT peers in terms of the strength of our corporate governance, we're always looking for ways to enhance and improve. And you saw us do it with our disclosure around the impact of COVID, which I think was best-in-class in terms of that and our guidance, which included NOI guidance this year. But we're going to continue to push to make sure that our disclosure is transparent and that our investors understand what's happening at the company. So those are kind of the 3 areas that we're most focused on. I would -- if you're interested in our efforts on ESG, I would ask that you check out on our website, our corporate responsibility report, it goes into much more depth in terms of our specific measurable goals on each.

Great. Okay. So we'll go into the rapid fire now. The first question is, when more physically all together again in Florida year for now, what's one thing that will have surprised people the most about your business over the prior 12 months?

I think it's continued outperformance. I think some people think that because we've outperformed through the pandemic that our recovery may be less strong, but I think we're going to show that we are recovering from less of a whole and that the very momentum that drove us towards outperformance in the pandemic is going to drive [indiscernible] the recovery.

So what do you think your corporate travel budget will be next year as a rough percentage of your spend in 2019?

Is that 2021 corporate travel?

I'm sorry, it's 2022 relative to 2019.

I think we're going to be pretty close to where we were in 2019. Inflation held steady; I think we're going to be pretty close.

Okay. What would same-store NOI growth be for your property sector overall in 2022?

Angela?

I'll say 3%.

I'd say lower, 2%.

Okay. And where will the 10-year treasury yield be one year from today?

2.25. Angela?

I'll say, 1.9.

All right. We'll take the average. All right. Well, thank you so much to whole Brixmor team for joining today's session, and hope you all have a great rest of the conference.

Thank you, Katy. We appreciate you hosting us.

Sure thing. Bye, everyone.