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

For those who don't know, I'm Craig Schmidt. I am [indiscernible] Bank of America. With Brixmor, we have Jim Taylor, CEO, to my left. To his left we have Angela Aman, Executive VP and CFO [indiscernible].

That's actually whom we report to.

We're going to keep it as interactive as possible [indiscernible] and at this point, I'll turn it over to Jim Taylor for an overview of Brixmor and then we will head into questions.

Well, first of all, thank you, Craig, for having us. It's been a great conference, and it's nice to be able to catch up with everybody, particularly as we see all the volatility and turbulence in the capital markets to talk a little bit about what's happening in our business. As most of you know, we're an open-air shopping center company. Angela and I joined the company a little over 6 years ago. And what we saw was a great opportunity was taking these older well-located assets and repositioning them, putting money to work at double-digit returns and also fundamentally improving the portfolio as we were executing on that strategy. So what that's meant over the last 5-plus years is we put to work a little over $750 million of capital at better than a 10% incremental return driving not only accretive growth and ROI but fundamentally improving the quality of our assets. While at the same time, we harvested a substantial number of our assets. So we've taken our portfolio from 540 or so shopping centers to now just about 390. Interestingly, the 390 are producing comparable cash flow than what the 540 produced. Our balance sheet is substantially deleveraged, thanks to Angela's efforts. We have tremendous capacity. And as we face this potential economic uncertainty, we're very confident in the durability and resilience of our value-added plan. We've got $400 million of reinvestment underway at a 9% incremental return. We have $1 billion behind now in opportunity, and why that's important is we believe we can generate intrinsic growth at the top of the peer group through our value-added strategy without relying on any external opportunity, but also not relying on the capital markets. Our plan is self-funded. We're -- I know we'll get a lot of questions on this, but real time, we're seeing strong growth in traffic over where 2019 levels were. We're continuing to set records in terms of occupancy and rate, healthy demand from tenants to have stores located near where their customers are. And we feel very well positioned from a competitive standpoint. So I'd like to think that we're the value-add leader in the space. I think it shows up in our statistics across the board. I think it shows up in our disciplined allocation of capital. But most importantly, and what I'm excited about in a post-COVID world is to actually show you what's happening at our shopping centers, the fundamental improvement across well over 100 shopping centers that we've impacted to give you a sense of the value that's been created.

Right. And let me start where I started [indiscernible]. Obviously improved second quarter the end of your lease [indiscernible] -- and I would also say we had very strong consumer [indiscernible]. Has that continued through in September?

It has. I mean the best real-time data is our traffic. Our traffic is up 9% over where it was in 2019 reflecting the continued strength of the consumer, also reflecting the continued improvement of our portfolio. I'd stack that traffic level up against any of our peers in terms of relative growth. We're seeing it in our forward leasing pipeline. What comes to leasing committee every week continues to be robust. We're continuing to find ourselves in a position where we have multiple tenants competing for the same space, which allows us not only to drive rate, but also importantly, terms, things like cotenancies, no-build areas, fewer options, better intrinsic growth. So we find ourselves still in a very robust environment from a leasing perspective. And the other comment I'd make on that is that we're actually doing business for '24 and beyond, right? Much of '23 is largely done from a forward leasing standpoint. We'll do some, certainly, but speculative. But Angela talked a lot about our forward leasing pipeline on the earnings call, both what we have signed, but also what's behind in our shadow pipeline, and we remain very encouraged by them.

And then pretty traffic [indiscernible].

That's for the last 2 weeks.

Down from the [indiscernible]

So what we've been seeing pretty consistently is mid- to upper single-digit growth over '19. So 5%, 6%, 7%, 8% and most recently, 9% up. You got.

What are you hearing from your retailers? I mean they're hearing possible recession in 2023, and yet then they continue to be very active, as you said, with a lot of 2023 are better already. So -- do you think [indiscernible] more suddenly? Or is it just that you have long-term goals and [indiscernible].

Well, there are a couple of things that I think are important to appreciate. One is the secular shift within the retailers themselves as they think about how they're allocating their capital. Few years ago, there was a debate and there was capital tension between the online platform and the store. What's happened with pandemic is the store has become the primary channel, is the most profitable channel for the retailers. So their focus is on growing stores where they can be profitable, and that's an important point. Unlike prior cycles where you had retailers just opening up 100 stores a year or wherever they saw potential white space, the retailers are making much more sophisticated decisions using data to estimate what the sales of that new store or relocated store will be. So we're not dealing with the background of the irrational exuberance. These retailers are actually profitable in the store and their focus has been on where they can locate new stores and will be profitable. And that's part of what's driving the demand to come into our center, which I find very encouraging. And we've not seen an abatement with that. In fact, Angela and I were at the Open Air Conference last week, and we had the opportunity to sit down and just catch up with a number of our larger retailers in the grocery, value and beauty, fitness space. And they remain very focused on filling their pipelines, not just for '23 because that's largely done, but they're looking on the '24 and beyond. So could that change? Sure. But it's not something that we're seeing really any signs.

What's your expectations? [indiscernible] what's your expectations for Halloween?

From what we're hearing from the retailers, just like back-to-school has been pretty strong. I think they're feeling pretty good about where the holidays will be up a few 100 basis points, we'll see. Certainly, the traffic numbers continue to hold, I think that supports that view. I do think the retailers will be working their way through some inventory. So you may see some discounting and other things. But generally speaking, most of the retailers that are tried and which are most of them have figured out their supply chain issues. So while they may be sitting on some larger inventories, I don't think we're going to have an issue of being outstocked.

And have you seen any supply chain issues with new [indiscernible]

We continue -- it's harder to keep schedule in this environment, but we've been able to do it by reducing scope, by negotiating with the tenants, the acceptance of more existing conditions, by planning ahead on things like roofing and HVAC. And fortunately, where we've seen increases in costs, we've been able to offset that with increases in rent. So you've seen us as we show you every quarter hold our returns on our reinvestment deliveries in part because of the rental rate environment that we're in. But I think the biggest challenge has been, and I think it's always going to be time, are you hitting your openings more so with inflation and underlying costs. So as we like to say, the day a store is not open is the day of lost rent and getting the tenants open on time, the prototype has been focused.

What are the leverage [indiscernible] estimates in place. You can have orders in a row double-digit spread [indiscernible] maintain that double digit [indiscernible] going forward.

Yes. No, we're really pleased to see sort of the reacceleration in leasing spreads, but we're back at levels that reflect kind of what the portfolio was putting up prior to the pandemic. So just to focus for a minute on just new leasing spreads, we have been running pretty consistently from the time of the IPO up through the pandemic at about 30% to 35% new leasing spreads on a trailing 12-month basis. That's sort of where we are again. We obviously had pulled back a little during the height of the pandemic, but we're still posting new leasing spreads of about 20% positive through kind of the worst part of the pandemic. Those leasing spreads really reflect the inherent mark-to-market across the balance of the portfolio and all of the work, as Jim highlighted, that's going into reinvesting in the portfolio and harvesting the below-market rent basis across the board. When we look at the lease expiration schedule over the coming few years, we have, give or take, 3 million square feet expiring. And if you just look on the -- just anchor space expiring where the anchor has no remaining options. So where we know we'll be able to control the space and reset those rents to market. And the implied mark-to-market in that space, just based on where we've been signing leases over the trailing 12-month basis, is over 40%, close to 45%. So we not only feel that there's sort of good runway going forward based on the lease expiration schedule, but that the continued improvement in the portfolio is going to show up both in those anchor leasing spreads over time and importantly and continuing to maximize small shop rate and occupancy as we reposition those assets.

You had [indiscernible] bit lower than peers. Are you tougher on these leasing spreads and as a result it might be a little bit lower or why do you think that is somewhat lower?

Well, I think it's part of the execution of our plan. If you look at what we have in active redevelopment, a few hundred basis points of drag on our occupancy more than that in small shops. So as we actually deliver these projects, we see the follow-on growth occupancy and rate. And you can see it consistent, but it's not something to snap your fingers. I mean these projects take 18 months, 24 months. They're relative to ground-up development, they're very short duration. But as we deliver those, you'll continue to see that level accrete. And it's part of why I think we're out positioned even if we come into some economic disruption because of the fundamental strength of what we're doing. We're not trying to replace over market rent, right? We're capitalizing on below-market rents to not only drive great ROI but drive forward growth opportunities as well. Every one of those reinvestments that we detail in our supplement drives value beyond the scope of what we're reinvesting. When you bring in a specialty grocer and a value player in place of the debt-hired tenant concept, the balance of the center's impact even when you bring a great new outparcel opportunity, the balance of the center is positively impacted. I think it's showing up in our traffic levels. It's certainly showing up in our occupancy rate and levels where we continue to sell new bonds. So I like the trajectory that we're on, but most importantly, I like what the fundamentals are that are driving. And as we move through this capital markets volatility, again, what I really am confident about is that we'll be able to continue to deliver and execute because we're not relying on external opportunities, and we're self-fund. So as it relates to external growth, we're watching. We're pausing a bit, which I think is a prudent thing to do as the capital markets settle up.

[indiscernible]

It's what we currently hold today. And then we've got another $400 million of projects underway, which accretes that a bit more. And then we have another $1 billion behind us that's going to impact even more of our portfolio. And I really appreciate the question because I think one of the things not understood fully by our investors is the transformation that's occurred at the center. I invite you to check out at the center video series, check out our website and we'll show you what we're doing property by property. It's -- we've had the pandemic, which prevented people from traveling, but it's also a very granular execution. It's highly profitable, highly accretive, but we cannot point the one brand project. We can point to 100 each one. And I'm hopeful that as we emerge from the pandemic, that we've been getting more people out and see what we're doing in the investment environment and really creating lot of value.

[indiscernible]

Yes. I think the team will let me hang around that one. So yes, we've got several more years. Interestingly, what we were finding when we were acquisitive was more open funds. So when you think about assets like Bonita Springs or others that were acquired we're setting them [indiscernible].

Just to add to that a little bit, that $1 billion pipeline really reflects projects that we know we'll be able to execute on in the next few years. There are certainly projects across the portfolio where we have an anchor expiration in maybe 2027 or 2028, that we know is below market, and we know we'll be the catalyst for kicking off a broader redevelopment project, but isn't yet reflected on the future redevelopment list that we disclosed publicly because it's just so far in the future. So as we continue to execute on those $1 billion of projects and at quarter in and quarter out move projects into the active pipeline, you continue to see us replenish the forward redevelopment pipeline because we are trying to give visibility about what's near term and as time passes and situations change with specific retailers, you'll see some of those opportunities come forward.

[indiscernible]

Feel very good where we are now, but we will continue to act at some markets at the right time. At the right time is an important point because even markets that we may not consider long-term core, we've had tremendous value-add opportunities. So as we complete and deliver those maximized value, you expect us to continue to bring that market footprint we have a bit more. It's not going to be drastic, but it will be a bit in line. While at the same time, we're reinvesting in those core markets and making our assets better. And should capital markets conditions improve, we'll find additional growth opportunities from our target list in those markets. But we like how the portfolio is balanced from a market perspective.

And do you want to continue to grow [indiscernible] your growth in revenue?

It's happening naturally as a result of our value-added program and work. We're taking centers that didn't have grocery. We're bringing grocery into. So we're in the low 70% range now, expected as we continue to deliver on our reinvestment program to approach 80%. But we're doing it where it makes sense where we can really drive a lot of value.

Maybe -- just maybe talk about the transaction market, what you're seeing. I mean we obviously experienced in a low list if that raises cap rates down. You need to see that flow through the system, but what's your acquisition appetite, disposition appetite and what are you seeing on the transaction?

We're still finding liquidity for some of what we'd like to dispose, which I'm encouraged by. From an investment standpoint, we're on a bit of a pause. And the reason is much of what you're seeing transact right now was negotiated and agreed to kind of pre this environment. So I think the prudent thing to do is to allow the liquidity to return, particularly within the debt capital markets to understand better where pricing is. I don't expect pricing to move substantially in part because that risk premium to the underlying treasury is still pretty wide even with where cap rates were. But we do expect some movement in it, and a prudent thing to do is to be ready. We have over $1.2 billion of liquidity. For when the market returns, you start seeing a little bit more product and getting a bit more pricing discovery.

Great. I've read that you have 99% of employees feel proud to work at Brixmor. Maybe we can talk about your efforts with [indiscernible] rather high percentage have felt very engaged plus I wondered where 1% [indiscernible].

So when we started at the company, the first thing that we did was, we set our culture. And the first cultural tenet for us is that great real estate matters, the great people matter far more. And our focus has always been first on talent because you can have a great piece of real estate and a mediocre leasing person, and you're going to get a mediocre outcome. I don't care what you say, but you can have an okay piece of real estate and an outstanding person and you exceed the expectations for what it is. So our focus has always been on talent first because that's what's delivering these phenomenal results that we've been responsible for. And we wanted to have a culture of which we could be proud. We wanted it to be open, transparent, focused on the growth of the individual. So we've really invested a lot of time in training and development, engagement. We have speakers come quarterly to talk about things that aren't necessarily specific to the job, but they're specific to the growth of the individual. We've had Dan Harris, who came and gave us a talk about meditation. We've had others come talk about time management or we've got a speaker coming next quarter that I'm particularly excited about. He's going to talk about his -- talk about diversity in his journey from the streets of Baltimore. So we're really focused on making sure that we're building the best team possible, where you can have trust, honest, constructive debate and entertain a wide variety of views. One of the things that I think often happens in organizational culture is that you go to the lowest common denominator because you can't have conflict. You don't have trust. You don't invite a wider variety of views. We do our best to try to combat that sort of resting place and many cultures ponder upon and have fun, right, and surround ourselves with wonderful talented people.

Great. Maybe touch just on Bed Bath & Beyond exposure. Do you want?

Yes. We have about 60 basis points of ABR from Bed Bath & Beyond about 22 locations as of June 30, I think there was one location that came back to us in July, which was entirely expected and has already been released to another user. Of the 21 locations remaining, I think 13 of them are Bed, Bath locations, and then we have a handful of buybuy Babies as well.

My understanding is that buybuy BABY is much healthier and not expecting closings to -- future closings so much from that flag versus the Bed, Bath & Beyond. Is that what you're hearing?

It's a very strong concept, right, without a clear sort of natural stand-alone competitor at this point.

And importantly, when you look at our rents on those spaces, they average about $11. So as we go through the inevitable disruption that will occur, and it won't happen on the timetable that people expect it to. It will probably happen more slowly. We're actually going to make money, right? So we're going to be bringing in better tenants at better rents. I mentioned we were at OAC last week, I can't tell you the number of tenants that approached us that talked about specific Bed, Bath locations saying. If you get that box, we'd love to have them. So we're really not worried. And I don't think the industry is worried about how we're going to backfill the Bed, Baths. And I think we're in the additional strong position of having very attractive rent basis, which will allow us to make money.

And just to follow up on that, the average rate on new anchor leases over the last year, over the trailing 12 months was over $14.

And for this space, we think we can do even better. So it's a -- it's a -- when you take a step back and you think about where we've been over the last 2.5 years, we've had remarkably little tenant disruption. So it just feels like we're kind of moving into more of a prepandemic level of tenant failures, which is part of the business. It's against a backdrop of no new supply. So really, the supply for our tenants is what the disruption may bring.

Question that I'm getting now is just startup of a reacceleration of store closings. I personally feel that we still have some buffer because of the closing that happened in 2020. We cleaned up so many bad retailers and so many people who are able to move their balance sheet. But look, store closings were going to happen at some point. But I don't -- I'm not expecting an immediate follow-up of store closing announcements between now and say even March '23?

Yes. I think as Jim sort of highlighted, we have been expecting that at some point, you are going to see some normalization of bankruptcy activity. I think we shared the view that given the way that many of our retailers are now positioned from a balance sheet perspective, do both sort of fallout we had during 2020, equity raises, other balance sheet improvements that happened throughout the pandemic for many retailers. That retailers are going into this period of time in a much stronger positioning than you would typically have at this point in the cycle. So I think all of that's very encouraging. But clearly, there's some questions being asked around Bed, Bath. We've seen a file from Regal. So there's certainly somewhat more activity. We, again, just continue to believe it's going to be below historical norms and that it will be easily digested given the strength of leasing demand in the environment.

The other interesting thing to appreciate that you alluded to a bit is how the tenancy itself is transformed. Who would have thought coming through the pandemic that we would have an improvement in the overall credit quality of the tenancy as they access liquidity, refocus their capital on the stores. There's also been a shift within the small shop universe of more national, regional and multiunit operators that got accelerated through the pandemic. So a lot of the weaker single mom-and-pop tenants were taken over by multiunit operators for that second generation space. That was a big surprise. Not something that you would have intuitively expected. The national and regional is moving into the small shops. We've been seeing that for several years and that also got accelerated. So when you think about the tenancy as a whole, it's about as robust as I can recall.

We have a have question.

[indiscernible] people back to work...

We always keep -- we sort of have an ongoing process about updating the tenant watch list. There have been no major shifts based on sort of return to normalization post-COVID. But that is a list that's very active. We talk about it all the time because we use the watch list, not just as it relates to who might be a potential credit event in the near term, but just which are concepts that are on the decline, which over the longer term, we might expect more closures from where we should make sure that our operational teams are keeping an eye on that space and thinking about who the right backfill is, whether or not taking back that space at any point could sort of kick off another redevelopment project, how to really maximize the value of that real estate? So that's a process we run on a quarterly basis, sometimes more frequently, but we're always looking at the tenancy and making sure that we're being thoughtful about kind of the trajectories for each of the tenants and really who should be on the list in a more holistic way.

And it's interesting. You mentioned people aren't making bread anymore, but it's also interesting to see how much of that grocer Bob has stuck. And we continue to be in percentage rent on many of our grocery leases, reflecting the strong sales that have continued, I think, in part because of the hybrid environment that we're in. People are spending more time at home and the grocers have really gotten the benefit of that. So we're not conquered down, but I think we're all spending more time at home than we were prepandemic.

Is there any other question in the queue? Okay. I guess one for me, then I do have some rapid fire. But what is the major misperception of Brixmor?

As I said earlier, it's the transformation that's occurred, and I'm really excited to show it to you. We're doing some property tours. We invite you if you're in a market to tour our assets, go to our website, look at our at-the-center video series. And if you happen to be in a market, we can have one of our regional teams meet with you and show you what's happened. Because while we've moved up a little bit on a relative multiple basis, I don't think people fully appreciate the compression in cap rate that's occurred because of the quality that we've added to the portfolio. It's very real. I'm very confident that we would get value for it in the private market. I just don't think the public markets are fully caught up to the transformation that's occurred. And again, part of it's been the pandemic. Part of it is it's a very granular story to understand. But I think we're at a point now where people should be able to look at the fundamental improvement and give us credit for it.

Great. Okay. The rapid fire is which of the following is the greatest macro challenge facing U.S. public REITs today, risk of higher rates, risk of a recession, rise of private equity and NTRs?

Well, I think the rise of private equity and NTRs is actually a good thing. It brings more liquidity to the space. I think probably of those, it would be a deeper recession than I think anybody expects. I think REITs are well positioned over time to deal with inflation. It's always on the shoulders that it's most -- as you know better than I, most impactful in terms of where values go. But I would say it would be a deep recession. Now within that, where do you want to be? I think you want to be in assets that are more defensive, that are more necessity based which are assets that we own, but I think that's probably the bigger threat.

And which of the following is the greater sector-specific risks: One, labor issues; two, supply; and three, capital markets?

Supply, we don't see changing in the next several years because of the capital markets, because of cost and because retailers aren't going to go to unproven ground up locations. What were the other ones?

Labor and capital.

I don't know what do you think?

I mean it depends on how you sort of define the question, I think. But certainly labor has been very challenging for many of our retailers who are making some really smart investments to deal with labor challenges within the store. We haven't seen it necessarily be a constraint on growth at this point. But the labor market, obviously, overall continues to be much stronger and has continued to be strong well past when we thought we might see some softening or easing of that. So it's certainly top of mind for retailers as they think about store growth, but I think they've navigated it pretty well and continue, like I said, to make some smart technology investments to address it.

And then just the last one, I think you talked about it. Are you seeing any signpost of weakening demand? Yes or no.

No.

Great. Happy to end on that note. Thank you all for coming.

Thank you for having us. Bye.

Thanks.