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

Good morning, everyone, and welcome to the conference meeting with Brixmor Property Group. Brixmor Property Group owns and operates grocery-anchored community and neighborhood shopping centers with rents at a low-cost base. With us today, we have James Taylor, President and CEO; and Angela Aman, Executive Vice President, CFO. Before I turn it over to management for its opening remarks, I want to remind everyone that if you want to ask a question, please use Veracast software to input your question at the bottom of the screen. We will be looking for these questions and asking them on your behalf. I'll now pass it to Jim to start us off with an introduction overview of Brixmor Property Group. Jim?

Craig, thank you very much. We're pleased to be here and have the opportunity to speak with you about our company and our business plan, which we think has truly revealed its strength over the last 2 years. If you think about the value-added approach that we take to the shopping center business, we delivered well over $600 million of investment in the last 4-plus years and incremental returns above 10%, which has been part of what was driving our success and outperformance going into the pandemic, through the pandemic. And now as we emerge from the pandemic, provides us tremendous visibility on how we can not only drive growth, but also value at the asset level. If you take a step back and you think about that $600 million, if it were ground-up development, it would be the equivalent given the spreads of over $2.5 billion of investment. But the good news is that this investment has been pre-leased, it's lower risk, it's more granular, and it's having a compelling impact across our portfolio as we continue to lease our assets to better tenants at better rents. Craig, you mentioned the low rent basis that we enjoy, that's part of the fuel that's helped us drive accretive reinvestment. And frankly, as we look forward, we're very excited about the growing demand tenants have to be in our centers, the breadth of uses that we're seeing and the visibility that provides us as a management team, not only on the pipeline that we have underway of reinvestment, but what is ahead of us from an opportunity perspective. So we like how we're positioned as a company. With Angela's stewardship, we've really strengthened our balance sheet. We have plenty of capacity and liquidity to continue to execute our plan without having to access the capital markets. And we're real pleased, again, with the visibility that we have on our continued execution.

Great. Thank you for that. This summer, we really saw retailers and landlords benefit from higher traffic, higher sales and improved leasing metrics. But has the Delta variant and the rising COVID cases had any impact in traffic? And are you seeing any hesitancy from retailers for leasing new space?

It's a great question. And it's -- the traffic at our centers is something with the availability of data, particularly cell phone data that we're able to track much more closely than just a few years ago. And as we look at that week-over-week traffic and we compare it to 2019, we're actually seeing continued growth in relative traffic levels as recently as just a few weeks ago. So we're feeling very good about the traffic levels at the center, even with concerns around Delta. And I can tell you that from a retailer's perspective, they are incredibly focused on their new store opening pipelines, which is helping drive competitive demand for the boxes in the spaces that we have, helping us continue to drive growth and occupancy, albeit also at accretive spreads to where our rents were previously. So we're very optimistic even against the backdrop of some of these delta concerns about the durability and resiliency of our business and importantly, the demand by retailers to be in our open-air centers.

Yes. I'm just -- it's been very impressive how the leasing volume has been elevated, is that something you think is going to continue for the rest of the year heading into 2022? And how much of that is just new tenants coming in? I mean, the expanding of the pie versus you stealing the market share as some retailers use COVID as an opportunity to [ curate up ] the centers.

I think that there is growth in the overall supply or demand, excuse me. If you look at the store opening plans of our core tenants, they're quite robust. And we're actually working, Craig now on deals for openings in 2023 and beyond as retailers continue to commit to robust forward opening pipelines. And we have also seen a breadth of new tenants coming into the space. We're seeing tenants from other retail formats coming into the space, we're seeing tenants just generally recognizing the importance of being within the last mile of the customer, the importance of that physical presence and frankly, the flexibility our assets provide to serve the customer through multiple channels with that store format. So it's encouraging for us that we're seeing real legs to this demand from a retailer perspective.

Great. And are you using this elevated volume to make any kind of merchandise mix at your centers either more discretionary, less discretionary, more restaurants? Are you doing anything to change the mix?

Our purpose as a company is to drive our centers to be the center of the communities they serve for and with uses that are truly relevant to those communities. And so yes, we are seeing growth in value. We are seeing growth in restaurant uses. And those types of tenants are driving significant value. As we've talked about on some of our recent earnings calls, we're also seeing a significant growth in the grocery segment and are encouraged by that. We're -- particularly for centers that don't have a grocery use, we're utilizing this opportunity to bring grocers to those communities. And we're getting great reports from those groceries that we've added in terms of their sales productivity as they open new stores. In fact, if you look at our overall mix of grocery and non-grocery anchored shopping centers and you look at what we have in our pipeline, that mix increases from the low 70% range in terms of grocery-anchored assets to the upper 70% grocery-anchored relative share. And that reflects, I think, the strong demand for grocery, the strong demand for those grocery tenants to be in our shopping centers and again, the execution of our value-added business plan to make our centers more relevant, but do so in a way that's accretive and drives ROI.

Great. And then the store closings in 2021 have been unusually benign. I see somewhat 2020 was so heavy with bankruptcies and such that it pulled some of the store closings forward. But do you see maybe other reasons that are driving that low store closing? And could that store closing remain low into 2022?

Angela, I'd love for you to comment on this.

Sure. Yes, I think we've been very encouraged by the outlook and sort of what our experience has been in 2021 from a store closure perspective. I think you're right that certainly there was some pull forward of distress into 2020. But we also had -- if I look at our internal watch list and tenants that we've been keeping an eye on for a long time, you've also seen a lot of their businesses strengthen, and many of them have had opportunities to shore up their balance sheets and capital positions as well. So I do think there's more at play than just kind of a pull-forward of activity into 2021. I think some of our weaker tenants have had the ability to really kind of right the ship and institutionalize some of those tailwinds they had in certain cases during the pandemic through an improved capital position as well. And I think that will continue to benefit a lot of those tenants as we move into 2022.

So it sounds like you're saying there's a pretty significant weeding out of the weaker participants?

Both weeding out. And then like I mentioned, you had some categories on the watch list that actually benefited from some of the kind of macro trends during the pandemic, and then we're able to re-equitize and strengthen balance sheets as well. So I do think we had a number of names on the watch list that I'm less concerned about going into 2022 than I might otherwise be because they did -- they have seen their businesses improve, sometimes in sort of a structural or longer-term way, and they've done the right things on the balance sheet with some of those tailwinds as well. So I do think the overall outlook from -- at least from a national tenant perspective has definitely improved and as strong as it's been at any point in the last few years.

Great. And then maybe just sticking with you for a second. What is your current net debt to EBITDA? And what is the range that you're comfortable operating Brixmor in with regards to net debt to EBITDA?

Yes. So we're back to the low 6x range. I think we were 6.3x on a current quarter annualized basis as of June 30. So that's in line with where we were at the end of 2019, in pre-pandemic, which we're very pleased about. We've always said that we're focused on sort of being in and around the 6x range. So we're definitely very close at this point and believe we'll continue to work debt-to-EBITDA down over the coming quarters as we continue to grow EBITDA. So very comfortable, very encouraged by what we've seen in terms of returning to something more normalized and looking forward to continuing to improve that number and our other credit metrics over the coming quarters.

Yes. And I might -- Craig, an important point to consider is the upside that we have within our portfolio. The upside rents and again, the ability for us to put capital to work at highly accretive incremental returns continues to bring down that debt-to-EBITDA number. As we like to say our properties are under EBITDA at this point. And we have much more visibility on how we're going to drive the growth in that and continue to improve that metric, just as we were doing before the pandemic through and now as we emerge.

Okay. Great. What is your plan for ATM? You're reasonably active with ATMs in the past?

Actually, we haven't been, Craig. We believe that we have significantly more upside in where our company is being valued, particularly against this backdrop where cap rates have gone. And also importantly, the value that we've been creating. As I mentioned in my initial comments, we've delivered over $600 million of investment and an incremental return above 10%. But that not only has driven growth in ROI, but it has also compressed the cap rates of the centers that we've impacted. We -- when we started, had over 20 Kmarts, we've now reduced our exposure to Kmart to 0. But in the process, we substantially improved the centers that we impacted, just as we're doing across hundreds of centers in our portfolio, bringing in more relevant uses as I like to say, better tenants at better rents. So we're not only driving good incremental growth and return, but we're compressing the cap rates substantially for the centers that we've impacted. So we're mindful of that and the value creation that we've driven as we think about ATM use.

Yes. We've always had an ATM program and a buyback program simultaneously in place and think that's just good corporate governance and being prepared. We've never announced any issuances off of the ATM. So to just clarify that.

Maybe talk about your targeted volume for annual development and redevelopment and what's your projected yield. I know you said you've had $433 million in process in reinvestment projects with $1 billion pipeline. But maybe talk about you seem to stay active in terms of your redevelopment efforts and how it differs from maybe some of your peers?

We're pleased with what we have underway. As you mentioned, it's over $400 million and an incremental return of 9% to 10%. As you also mentioned, we have a shadow pipeline behind that, that we're leasing and setting up for future reinvestment activity. One thing, again, to highlight with respect to that reinvestment activity is it's substantially pre-leased. So once we put it on the supplement, there isn't much speculative risk in terms of our ability to deliver that income because that pipeline is, again, substantially pre-leased. As we laid out in 2017 at our Investor Day and as we've been executing subsequently, you'll see that pace of deliveries be somewhere between $150 million to $200 million annually. And that's a good level for us in terms of our ability to execute and deliver it well. And it's also a level of activity that provides a substantial additional growth for the next several years as we look forward. So that overall level of activity is something you should expect. Some years we may be a little over $200 million, some years we may be closer to $150 million, but that's a pretty good run rate.

Great. I've got a couple of questions from the field. Let me just turn to that. The first question is, what is your current [ loss to lead ]?

Angela?

Just in terms of our mark-to-market?

I guess so. What is your current [ loss to lead ], sorry?

That's okay. From a mark-to-market perspective, we have been reporting even throughout the pandemic, spreads on new leasing activity of around 20%, kind of high teens to low 20%. When we look forward, if you look at the lease expiration schedule over the next several years, we see some really good momentum in space that we'll control when it comes back. So we reported our lease and expiration schedule 2 ways, assuming everyone who has options exercises them and then without -- just for the space, we know we'll control. We think it's about 3.5 million square feet of anchor space coming due over the next several years and rents in the $8.75 a square foot range, and we've been signing new anchor rents over the trailing 12 months over $12. So there's a really healthy embedded rent mark-to-market in those spaces, and we'll continue to look to capture that as we continue to improve the centers and transform the portfolio.

Great. And then the second question, how long do you think it will take to get the dividend back to where it was before the pandemic?

We've got good momentum from a growth perspective. That's going to drive that growth in the dividend where we were pre pandemic. I can't give guidance in terms of where that -- or when that will occur, but just ask that you look at what our quarterly results are, and you can see that trajectory as we bolster our underlying cash flows and, frankly, put ourselves in a position where we will have to increase the dividend given our minimum payouts.

Great. And then how has the transaction market changed from over a year ago? And are you seeing more product being brought to the market for sale?

The market from a transaction standpoint has been incredibly robust. We see a lot of institutional capital coming in. We see cap rates continue to compress. As I mentioned before, we believe that for our product type, those cap rates have compressed upwards of 75 basis points within the last 8 months to a year as institutions that historically were redlining retail have seen how well the asset classes performed. That is open-air retail, its durability, and resilience and also the relative spread to other asset classes, such as multifamily and industrial. So we're seeing a lot of capital coming in. We're seeing a lot of product now being offered, I think in response to the demand from a capital perspective. We're focused on those external growth opportunities where we can add value. We believe we're a value-added leader in the space. So we're looking at opportunities where there's vacancy, which we don't think is necessarily fully priced; mark-to-market opportunities in the rent; and again, opportunities for us to put more coal in our redevelopment furnace, where we can add outparcel densities, reconfigure obsolete and underperforming anchor boxes, drive better small shop positioning throughout the center. And in that area, we're seeing a nice pickup and opportunities for us to continue to grow externally as well.

Great. And then the next question is on BOPIS and curbside feature, but I just wanted to bring up Brian Finnegan was on a panel yesterday afternoon on [ clicks and bricks too ]. And I just -- I recommend anyone to really watch, it is a great panel. Brian does a great job. So you have the landlord's perspective, you have a retailer's perspective target, and there's a consultant's perspective. And I think between the 3 of them on that panel, they do a really good job efficiently summing up, just how important BOPIS and curbside and last mile is. But maybe I could just have you talk about how many -- how much of your portfolio has the BOPIS or curbside feature? And what are you hearing new in terms of last-mile efforts from your retailers?

Nearly every one of our shopping centers offers retailers that flexibility. We were early on in the adoption of it, particularly in the grocery segment. And what the great -- one of the great outcomes of the pandemic has been it's accelerated and broadened the implementation of those types of delivery channels by retailers. And again, our assets provide the flexibility to accommodate retailers in terms of special pickup areas, signage, and convenience for both the retailer and the customer. I think it's here to stay. And I think what retailers are recognizing is it also presents an opportunity to efficiently cover that last mile by providing that customer the convenient option of picking it up just within the store or curbside. So I think it's here to stay. I think it's one of the compelling attributes of the open-air asset class, and it's been particularly encouraging for us. I'm sure, as the team talked about on the panel yesterday in terms of its breadth of adoption and the profitability the retailers are enjoying, executing that model. And of course, for us, it draws more traffic into the centers and our broader tenancy really appreciates and supports where we're providing retailers with that additional amenity.

Great. And do you think we're going to continue to see more M&A activity in the strip REIT space?

I think with the capital that's coming in, I think it's likely that we see additional consolidation. One of the things that's important to think about -- as you think about consolidation, is not only the capital that's coming into the space and what that might mean. But also the importance of scale from an operating platform perspective. When you are significant to these national tenants, you have a much better perspective into what their growth plans are, what their store location plans are, how they're reconfiguring their stores. And we're in a space that still is highly disaggregated in terms of ownership. So I think there's a real benefit to scale and platform that maybe folks don't fully appreciate, but certainly part of what's driving our success in the -- in this current environment.

Great. And then to play devil's advocate, what do you say to those people say, this is the time to pivot from the resilient names to those retail REITs that have -- have more opportunistic upside given they took a little bit more damage during COVID?

I think as an investor, you've got to look at not just whether or not somebody is filling a hole that was created during the pandemic from an income perspective, but how well are they positioned to grow from there. To me, that's really the litmus test, is less about what they're able to recover in terms of what they've lost and much more about what prospects did they have to grow beyond that and going forward. Because the former category is simply filling a hole. It's finite. And then what do you do? And are you in a position where you're having to utilize a lot of capital to catch market rents that are no longer where they were? So I think the better opportunities within our space are those -- just like as we look at shopping centers to acquire, what are the opportunities for growth from here, not simply about the recovery, which our portfolio is largely recovered. We're now in a position where we're growing off our '19 levels and I think have great visibility on how we're driving that, both through spreads, reinvestment, and some of our capital recycling. So that to me is, I think, what folks should consider.

Okay, great. And I know Angela touched on some really attractive spreads in the anchor space. But it seems from my perspective that a lot of the growth can come from your small shops. Are you doing anything special to drive that NOI portion?

It's part of our plan. As we've talked about, as you replace an anchor with a better, more compelling, more relevant tenant and a better rent I might add, you see follow-on impact and benefit in the small shops, both in terms of occupancy, where we see several hundred basis points of improvement, but also in terms of rate and quality of that small shop tenancy. And that to me is additional upside and growth for us that you're starting to see us realize as we've been delivering these anchor repositionings and some of these larger redevelopments. The follow-on benefit of that small shop momentum is quite significant. And importantly, it's not even in our initial returns. That's just for the space that we've touched. But as you improve that anchor, as you bring in a specialty grocer and a great value player in a center that didn't have the benefit of that, you start seeing a ripple effect in terms of both occupancy and rate in the small shops, which help us drive additional growth and long-term value. So that's always been a fundamental part of our strategy. And what's nice, if you look at our performance, just look at the numbers, you can see it. It's there. It's coming. We're not saying, wait, we're delivering it now. And we have continued runway from where we are. So I'm particularly excited about that.

Great. And then maybe you can just tell us a little bit about your ESG efforts and maybe highlight some of the things you're most proud of.

I'd say it's always been integral to how we do the business. We believe that strong ESG principles are absolutely consistent with our purpose and mission as a company. So whether it's being more efficient at the property level in terms of the resources that we consume, employing use of solar, charging stations, more efficient water metering, better and more efficient roofing materials, better and more efficient landscaping materials, that investment in sustainability is, I think, a great business decision. Just as when we think about the social elements, having an engaged and motivated team is incredibly important. As we like to say, great real estate matters, but great people matter far more. And so the strides that we continue to make from a social perspective, I think are absolutely in line with our mission as a company. And finally, from a governance perspective, we're very proud of the fact that several third parties rates us as one of the very top REITs in the industry in terms of the strength of our governance and our structure. And we think it all works together, sustainability, social and governance, to continue to drive us to be a better company and help us deliver more consistent results for our stakeholders.

Okay. Great. At this point, I'd like to go to our rapid-fire questions. We have 3 of them. The first one is which of the following is the greatest challenge facing U.S. REITs today: a, Fed action and higher rate; b, supply chain issues, which were including labor and logistics; or c, flow to nontraded REIT?

I'd probably say the second. We'll see how that ultimately works its way through. But I am concerned, particularly from a labor market perspective, as retailers grow, are they going to have the teams to actually execute. We haven't seen much adverse impact from that, but that's something that I think is an important concern. Certainly, rising rates is something out of our control and something that we've always managed our balance sheet to be ready for, to be in a position to not have to raise capital at a particular point in time and to have a well-laddered unencumbered debt profile the way we do. The unlisted REITs, which are raising significant amount of capital, I think it ultimately is a net positive for the public REITs because I think it's bringing capital and compressing cap rates and the product type, which I think should drive additional value appreciation on the public side as well.

Okay. And then the second question, over the next 5 years, which market will outperform, urban coastal or Sunbelt?

I think it depends on where you are in each market. I know that's not the answer you want. But certainly, the migration trends, the housing trends, the job are very constructive throughout the Sunbelt, which are low-cost jurisdictions that are attracting companies and attracting employers, which I think has been a real positive. But then within the coastal markets, you're seeing pockets of real growth as well. So perhaps on balance, the Sunbelt, but I wouldn't write-off the coastal markets.

Good. And then what percent of your assets are in Sunbelt? Do you know?

Angela? Probably 60%, something like that.

That is about right.

Okay. And then third question, for your company's office plans, that means your company, post pandemic, will you, a, have no changes from pre-pandemic; b, leave it up to the team; c, opt for hybrid; or d, go full remote?

So we're going to be implementing hybrid structure. And really, the purpose behind that is to utilize the best of what we were doing on a remote basis in terms of found time efficiency with what we've been missing from an in-person basis in terms of collaboration. It's scheduled, really with the intent of maximizing the benefits of both and the flexibility that we think it provides our team.

Great. Where are you both calling from today?

I'm in Boston at the ICSC Conference.

I'm in [ West Chelmsford ].

Okay. That's it. I guess a final question. When you think of Brixmor, there's a lot of things that separates you from the pack, but what do you think is the most significant difference between you and the 17 other public strip REITs?

The opportunity to deliver very attractive, absolute, and risk-adjusted returns and the visibility on that as we demonstrate over the last couple of years. I think it would have surprised many, not us, to have seen our relative performance going into the pandemic, that outperformance at the top of the group through the pandemic, and then as we emerge, the visibility and momentum that we have to grow from here. I think that's what sets us apart. It's part of the history of where this company has been. It's older, well-located assets. I think it's part of the strength of the team that we've assembled, but also a track record that we're now delivering upon. So we're not asking folks to wait.

Okay. Great. Well, listen, I think we're near the end of our time. I want to thank Jim and Angela for agreeing to do the roundtable. I hope you have a great rest of the year and a great rest of the conference. And again, thank you for agreeing to do this roundtable.

Great. Thank you for hosting us. It's good to see you virtually, and we can't wait to see you and everybody on this call in person.

Okay. Take care, guys.

Bye-bye.