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

This is our roundtable presentation with Brixmor. And with us today, we have Jim Taylor, CEO; and Angela Aman, CFO. I'm Lizzy Doykan. I work with Jeff Spector covering the retail REITs at BofA. So with that, I'll turn it over to Jim and Angela to start off with any opening remarks about the company and with any latest business operating updates.

Well, thank you, Lizzy, and thank you for having us. It's been a great conference so far, and we appreciate everybody here coming to learn a little bit more about Brixmor. For those of you who don't know the company, we are an open-air retail landlord with about 360 shopping centers, primarily grocery-anchored arranged around the coast and throughout most of the country. We are different in the following respect in that we are a business that's focused on value-added investing in retail. What do I mean by that? We're focused on finding opportunities to grow ROI accretively through better leasing, better tenanting, additional densification and other opportunities to clearly drive value and importantly, cash flow, which I think is increasingly important in this environment. In fact, if you go back and look at what we've done over the last 5 years, we've put about $900 million of capital to work into our shopping centers at an incremental 11% return. That's the same as about $4 billion to $5 billion of ground-up development in terms of value creation. So as we look forward, we're benefiting not only from a more robust retailer supply demand dynamic, but also demand to be in our centers. In our centers that we have accretively reinvested in and we are getting the tailwind benefit from now. It's been a very granular execution. It's -- I think we've impacted now over 200 of our shopping centers, but importantly, we have a lot of opportunity as we look forward with $400 million of reinvestment underway and over $1 billion of opportunity behind that. It's a self-funded plan funded with our free cash flow. And we're pleased to be here and have you learn more about us.

Thank you. Great. If you want to make this interactive, if anyone has any questions please raise your hand. Please go ahead.

Yes. [Technical Difficulty] we should really think about free cash on our side. What is value [Technical Difficulty] add versus the maintenance and how you distinguish [Technical Difficulty] Is there a way to think about kind of like necessary versus [Technical Difficulty].

Well, I think the important thing, it's a great question. And I think investors need to be focused more on capital required to run the business. We're actually generating attractive returns on all the capital that we're using, one. And two, we're actually disclosing to you what our net effective rents are. So you understand what it costs us to backfill space. And you can see through the execution of our plan, we continue to drive growth not only on our top line rents, but also our net effective rents. And that's easy for us to disclose because we're making great money and creating value in doing it. It's not something that's universally done across the sector. I think it should be, particularly in an environment where capital is no longer cheap. So when you look at our disclosure, you see our net effective rents, you see what we're generating in terms of our anchor repositioning transactions, our redevelopments, our outparcels. So you get kind of a comprehensive view of where that capital is being put to work. And importantly, you're seeing it in our growth. You're seeing it deliver much like we laid out as we did at our Investor Day in 2017. So I think it's a very important question. And it's difficult as an investor to find who's making money unless they're actually disclosing to you their net effective rents.

[Technical Difficulty] How do you think about [Technical Difficulty]

Well, the benefit of lower rent in an attractive rent basis is you want the space back as soon as you can get it. You're obviously always going to have downtime associated with retenanting. But where you have attractive rent basis, you've got much more optionality in terms of how you can drive value. You can drive significant renewal spreads as we've been doing with the same tenant. If that's the appropriate tenant for the center, where you can bring in a new tenant, generating great cash leasing spreads and make money on that new tenant, albeit you have some downtime. But that's kind of how you have to think about it is in an environment where you have high rent basis, it's very difficult to make money.

Can you expand on that a bit more? I know we've kind of seen Brixmor report leasing spreads in the 40%-ish range historically. And now we're seeing that ease some, more into the 20, 30-ish range. How do we think about that translating into growth next year? And maybe what are some of the things maybe with an embedded growth or just the different step-ups to think about that growth?

Well, I think -- thank you for the question. I think the first thing to recognize is that the leasing spreads that we're generating, which you said they're moderating. They were a little bit down in the quarter. But when you look at a trailing 12, which is important to look at, we continue to generate great performance. That's showing up in our growth and underlying NOI. And I think that's important to note because it's actually flowing through. Sorry, what was the second part of your question?

I guess how do we think about that translating into growth next year without hinting towards guidance or asking about guidance?

Angela will got me if I give anything with guidance. I think the best way to look at our business and how it's performing because you do have the noise within our numbers of prior period rent collections. And we've talked about this on the call, is to look at what we're generating on a top line basis. Look at our signed but not commenced pipeline, look at our retention rate, look at our renewal spreads and you get a pretty robust view on how we're positioned to grow, not just for '24, but '25 and beyond. So that activity, we disclosed. So without giving you specific guidance, you have the components there to consider as you look at how we're positioned, I believe, to continue to outperform from a growth perspective.

Yes. If I could just amplify the point that Jim made on spreads and the idea that spreads are moderating. As Jim sort of pointed out, we've been really consistently kind of reporting spreads on a trailing 12-month basis. This is new lease spreads alone in sort of a 30% to 35% range. We're actually a touch above that right now in the trailing 12-month period. There are going to be quarters where we're in the 40s and there are going to be quarters we're in the low to mid-20s. It's mostly going to depend on the mix between anchor and small shop in any given quarter. And we really worked hard to emphasize on this quarter's call when spreads were in sort of the low to mid-20% range that it was really because it was a very significant quarter of small shop activity, which is great for other reasons. We're really growing occupancy and build occupancy, in particular, on the small shop side. Small shop rents are significantly above anchor rent. So every square foot of small shop space we're leasing has a sort of disproportionate impact when it comes to revenue generation. But because those leases turn over more frequently, the spreads on those spaces inherently are a little bit below where the anchor spreads are, they're more on the lower end of that 20% to 40% range, then the 30% to 40% spreads we've been recognizing on anchor space, including the Bed Bath & Beyond bankruptcy. So we don't view, and we try to make it very clear on the call. We don't view the spreads as moderating. We do think you're going to see periods where that mix between anchor and small shop is particularly important. And then we really worked hard to emphasize the degree to which small shop occupancy, both build and lease continues to grow and the degree to which that really reflects the portfolio transformation over the last few years. So I think there's a really good sort of embedded story as you think about the second part of your question and growth next year. Spreads are a piece of it, but I really wanted to give that context on the mix, which is important and then occupancy growth on a forward basis.

And then again, Collin, to your question, we disclosed the capital. So you can see the returns that we're generating and you can see it dropping to our growth.

[Technical Difficulty] So how do you think about [Technical Difficulty]? How the economics [Technical Difficulty]

We get modest rent from car charging stations. We don't put any capital at risk. We tie up a few of our parking spaces as you saw, and I think it's an appropriate thing to do. I think it brings additional traffic and stay time into the center and you're serving the center. But we're not tying up prime parking with it and we're getting moderate rent. We're not going to crush it on the...

[Technical Difficulty]

No. No. I think it's an important thing for us to do. Outparcels are a great way to add density to a shopping center. And when we came on board, we saw hundreds of opportunities across the portfolio to add outparcels that bring additional traffic into the center. And importantly, we're in an environment where we're able to unencumber our real estate with anchor restrictions, no-build areas, et cetera, and continue to add density at very accretive returns. If you look at what we realized for the outparcel program, it's mid- to upper teens. So it's a great way to add density, a great way to add value. And in some instances, where we've added really compelling outparcel uses to a shopping center. We generated more demand in the rear of the center for some of the anchors as they look at the traffic and they run their own sales models. So it can be a very beneficial thing.

What's taking outparcels? Is it mainly restaurants or...

It's really across a broad set of categories. It's restaurants, it's vision, it's shoes, it's mall-native tenants that are looking to get more street presence outside of a mall. It's really as broad as I've seen it in some time. Good credit. And as I mentioned before, Jeff, great returns.

Is that how you -- on the outparcels like is there a systematic approach to it where you're trying to create that Street book? It all depends, I guess, on the size of the outparcel?

It does. And for example, we have an asset in Concord where we've created a real walkable street feel to the outparcels. We're going to be doing that in Philadelphia. We've done it in Miami. You want to make sure, to your question, from a real estate perspective that it relates to and serves the broader shopping center, you want to be careful about sidelines, traffic flows, queuing, et cetera. But even with those considerations, there are multiple ways to add the density accretively and add value to the shopping center.

Back on free cash flow, just to confirm how much free cash flow are you generating above the payout of the dividend?

It's about $110 million to $120 million a year. That's after our maintenance CapEx, normal course leasing CapEx and the dividend.

All of which we disclosed, Collin.

And all of -- and at this point, all of that money is going into the reinvestments and the redevelopment effort?

Yes. I mean things are fungible to some degree, right? So we are spending between $150 million and $200 million a year on redevelopment. And that's on an all equity basis, if you think about the free cash flow, all go into the reinvestment effort. So that's deleveraging fundamentally. To stay on a leverage-neutral basis, that does mean that we have additional capacity for acquisitions based on using the free cash flow. So whether you assume it all goes for redev or it goes -- it splits between redev and acquisitions. We certainly have enough capacity to cover everything we're doing in redevelopment. And a relatively healthy net acquisition number in any given year.

Are you taking on more risk to return in your approach to redevelopment opportunities today?

No, our strategy remains the same. It's a granular strategy. It's a great question. What we're looking at shopping centers, we understand what the retailer demand is well before we commit any significant capital. We're signing leases before we start spending construction dollars. That's important to appreciate because not only are we making bets across multiple markets and smaller size, we're getting outsized returns and we're taking very little risk. That's, I think, a compelling model and one that we've executed extraordinarily well. And importantly, we have a great pipeline out there of future opportunities. Sometimes I'm asked, well, why don't you do it all now if it's such compelling returns? You got to get to the underlying leases. You've got to be able to take control of the space and to reposition it. So that's in part why some of this tenant disruption actually represents an opportunity for us given our attractive rent basis where we can backfill a Bed Bath and actually make money. Bring in a more relevant use as I like to say, a better tenant at a better rent, which then not only drives returns on the capital that you've committed to that retenanting, but improves the balance of the shopping center in terms of both occupancy and rate where we've committed meaningful capital to our shopping centers, we see several hundred basis point climb in our small shop occupancy, but equally exciting, we see record rents in terms of small shop rents. So the strategy, I think, remains very attractive on a risk-adjusted basis. And the last thing I'd say is still viable in a higher cost of capital environment. We're not putting capital to risk in ground-up development at 6% returns. We're putting our money to work at much higher unlevered incremental returns. And that's an important thing to appreciate. We are showing you our incremental returns, which is new rent less sold rent over capital deployed.

I guess you brought up acquisitions. I guess just let's touch on M&A. There's been a lot of M&A in the sector. What are your thoughts? We get asked all the time on how many shopping center REITs are appropriate or the size? And I guess, what are your thoughts on M&A in the space? And how does Brixmor fit in?

We are always looking at opportunities for external growth and evaluating them through the simple prism of does it make us a better company. And by that, I mean, does it put us in a position not just to generate near-term accretion but long-term growth. Is it going to be accretive or dilutive to our long-term growth. And that's the same lens we apply to any external growth decision, whether it's a single asset acquisition or a company or a large private portfolio. I think one observation I'd make is that there's not a lot of hidden value in many of these public companies. And we are constantly evaluating and looking at them as you would expect us to. But I actually think some of the more compelling opportunities are likely to come from the private side which still owns about 88% to 90% of the investable stock in our business and which is facing significant capital constraints. We're no longer competing against private owners who have access to free capital or cheap capital where they can put 70 to plus percent leverage in an asset cheaper than we can borrow at an investment-grade 30% leverage. So we'll see. I don't see anything immediate, but I definitely see some long-term trends that favor well-capitalized national platforms such as ours and understand where the retailers want to be and can capitalize on that. So the question is often asked, will there be additional public company consolidation? Probably, but don't expect us to be the consolidator where it doesn't make sense.

So in terms of, let's say, from a leasing standpoint, you're happy with the number of properties you have, like heading into a lease negotiation with national brands, regional brands, you have enough influence enough assets to do that.

It's reflected in our market share. I'm really proud of the market share we get of new store openings for Whole Foods, for Target for T.J., for all the compelling retailers that are out there because we have a large portfolio, we have scale. And importantly, we have a platform that covers the retailers appropriately. We're not commission-based in our national accounts team. It's subjective and it's about coverage. Not only how many deals did you do, but what were the terms of those deals, how well have you institutionalized the relationship? Do we have good communication, not only between leasing and real estate, but between our legal teams, between our construction teams, between our operating teams. Why is that important? Because we always want to be in a position to get the lean. And at the real estate level, again, we're not competing with other public platforms. We're typically competing with private operators who may own one or a handful of assets who don't understand the tenant's businesses as well as we do or they're open to buys as well as we do. So I think that's a huge competitive advantage which is being revealed in our performance, but I don't think it is widely appreciated and understood. But in a higher cost of capital environment, it's going to be critical.

[Technical Difficulty] are seeing some [Technical Difficulty] How do you assess kind [Technical Difficulty]

I love the question. So there are multiple parts to the answer. First, we're focused on where we already own shopping centers. So that gives us a great local view on the market, what the market rents are and what the tenant demand is. Secondly, we understand the larger national and regional tenants where they want to be. Oftentimes, we've been approached and it's happened as recently as Bonita Springs by an existing tenant looking for a better landlord and the tenant will say, "Hey, is this a property that's on your target list." So that relationship with the tenants can be very constructive from that standpoint. But we're not guessing, calling on where the growth is going to come from. We understand where the market rent is. We understand the tenant demand to be there. We understand how or whether you can add additional density to drive returns. And we can underwrite, which we do conservatively what the reinvestment opportunity is in the asset. You're not going to see us acquire the bright, shiny new finished center. That's got high rents and little growth. You're going to see us acquire the very well-located center that has rents below market where we can apply our value-added lens and create real value. And we've done it over and over again. And what's exciting for us also is that many of those acquisitions fuel our future reinvestment pipeline, so it becomes self-sustaining.

Are those opportunities in your existing markets? Or are you looking at new market?

Existing markets. We've not only found that we better understand how the real estate will perform. But as you build significant critical mass in a market as we've done in markets like Texas, Southwest Florida, Southern California, your assets perform better on a top line basis. And in addition to the efficiencies, you garner by having multiple assets in a particular market. So expect us to stick to that discipline. I think going into new markets involves some degree of risk.

So I know at least some of your peers have talked about pricing, and they're saying that on the heavier price tags there is a discount, there's less buyers. So I guess, what does that mean for you? Because are you -- I guess the centers you're looking at, correct me if I'm wrong, like are they -- what price tag are they? Are they more of the smaller, like lower price tag or like so what is the advantage?

We oftentimes find the most opportunity in larger assets. You've watched our not only our rents and our spreads improve and our demographics improve as we've executed our plan, but the average size of our centers is also growing. So the asset needs to present enough different levers that we can get a good view on how we're going to drive growth and outperformance. And usually, that's done in an asset that has multiple anchors and small shops and the opportunity to add outparcels. And so typically, if you look at our acquisitions, they tend to be over $50 million, sometimes over $100 million. And we've acquired a little over $1 billion over the last few years. We've sold 2.5. And what we've sold has been a lot smaller on average than what we've purchased.

Can you -- I guess then what's the catalyst here? Is this something that you're seeing like opportunities increase as we head into the fall? Or is this something that may unfold more in '24 in terms of you said it sounds like private again, have less access to capital when can -- when do you start to see Brixmor get more active?

I think the most important thing to appreciate about Brixmor is we're not reliant on external opportunity to drive outperformance from a growth perspective. Let me repeat that. We have an internally funded growth plan and opportunities that we own and control today that position us to grow at the top of the peer group. That's the position from which we evaluate any external growth. When we look at external growth, we're looking at opportunities that we can drive accretion, not just on the front end, but to our growth rate over time. We're looking for future opportunities within our pipeline. We haven't seen anything actionable yet. But the reason I highlighted it is because I think the currents or the wind direction is very clear. You're going to have a difficult time as a private owner and operator of open-air shopping center real estate over the coming quarters because of the lack of availability of financing, because of the cost of that financing, and because of ongoing and consistent tenant disruption that always happens in our business. So our conversation levels are increasing, Jeff, but to timing, I don't know, maybe it's next year. But I like the way things are setting up for us as an additional lever for growth. But please understand, we appreciate that we have a higher cost of capital today. So we've got a higher hurdle against which to measure whether or not that asset gives -- delivers value to our stakeholders. With that said, again, it's been a long time. My friend, Steve over there. There's been a long time since you've seen in our space public companies have a cost of and access to capital advantage.

Can you leverage other capital like lower cost of capital elsewhere?

You can, but I think you really need to be judicious about that. And does it unlock opportunities that otherwise wouldn't be available to you because it does add complexity. And you just have to strike the right balance there. Our general belief is simpler is better. So to add additional complexity, you got to get paid for it.

Yes, there's a dual benefit on private. It's not just the financing side, but I don't know if it started, but at some point, I guess, on the tenant side, if you're a tenant, maybe again, you are making that decision, the public owned center versus the private owned center.

It's such a great point, and it's happening. Talk to the retailers. You have 2 landlords, private owner, public owner. The public owner is going to provide you more surety of execution, you're going to get to the prototype on budget, on time, but you're also going to be confident that the center is going to be kept clean, well lit, safe, appropriate for your customers. A little bit more difficult when you're dealing with a private owner.

So confirm, again, the compelling case to invest in Brixmor, you're talking about the lower risk. And just big picture, I guess, and on a multiyear view, do you feel like your earnings growth potential, excluding acquisitions, is higher than the peer group. Is that...

I do. I do. And we've been demonstrating that since we began to pivot in the execution of our plan in 2019. We laid out our plan in '17. We said we're going to be selling assets. We're going to be fixing the balance sheet. And it takes a while to launch a massive reinvestment program such as this. But we expect be patient with us that in 2019, will convert to where we're taking down less than we're delivering and that it would become accretive. We hit our mark. That same activity allowed us to outperform through the pandemic and over the last 5 years, and we've delivered growth 150 basis points better than the peer group average, which may not sound like a lot on an absolute basis. But when you think about a business that typically grows at 2% to 3%, it's very significant, and we're not taking risk to do it. We're not doing ground-up. We're not doing speculative activity to any real extent. We're focused on that activity that we can pre-lease before we have to commit significant capital, and we're not making huge bets in any one market or any one asset. The other thing, in addition to driving superior ROI, which I think we're doing, is the applied cap rate that you would put to this portfolio is, by definition, lower than when we started this process. Why is that? Because we brought in better and more compelling tenants at better rents. We brought in grocery. We brought in vibrant retailers who truly are relevant to today's consumer. You can see it in our relative traffic numbers. We continue to grow off of a strong base. So really, any way that you look at this company, you're going to see the fruits of this disciplined execution. It shows up in every one of our statistics. And we believe that we have a lot of room to run given the rolling rent expiries that we have over the next several years and that reinvestment opportunity that we've already identified.

There is concern over the consumer, a little BofA Institute this morning on one of the thematic panels discussed a resilient consumer, but a bit of weakness at the lower end. How should we think about your demographics versus, let's say, your peers like resiliency, let's say, we do head into a deeper slowdown than the market is thinking right now.

Well, I think what you first have to appreciate is that our demographics may trail some in the sector, but they're still incredibly strong. And I think you also have to look at our traffic numbers vis-a-vis our peers. And you can see those are strong. And there's no better proxy for underlying sales generation and traffic, and that continues to be robust. What I also say is that our retailer credit is very strong. It's as strong as any of our peers. And importantly, the retailers themselves are being very judicious about where they're opening new stores. They're not -- there's not irrational exuberance. They're only going to open stores where their data and their modeling tells them that they're going to be profitable. So I think relative to other cycles, this is a very durable demand-driven environment. There's no new supply and platforms like ours can really outperform and benefit from it.

Let's tie that into store openings because it's been much stronger than a lot of people have expected. And it seems to be lasting longer than expected, but we keep getting the incoming concern on future store openings. So as we started September, what are you seeing in terms of store openings. We know we've a surprise, guess, you're already coming off, but what's the talk out there?

Yes, the retailers continue to be focused on the white space. Where can they open new stores that are profitable that won't cannibalize and the better ones are seeing substantial opportunities in that regard. So we've seen no moderation in the forward leasing pipeline. The other thing I would say is that we're actually doing business not for '24. But as you well remember, we're doing business now really for '25 and beyond. We'll have a little bit of speculative activity working its way into '24. But most of that leasing is already done. And even with the more conservative outlook in terms of where the consumer is, these very well-capitalized retailers understand that the store is profitable, and the store is the best way to serve the customer. And so they're willing to commit that capital for new store openings pretty significantly far into the future with a view that things are going to moderate. And it is the forward part of our business. So when you look at our productivity, you'll see its strength in terms of not only leasing spreads that Angela was mentioning, but also underlying volume.

Does Brixmor have -- do you foresee any impact from the latest Kroger Albertsons news of the divestiture of 400 stores to C&S? What does that mean for your exposure to those stores?

We are a significant landlord to both. Part of our capital recycling strategy when we started was focused on capitalizing on a strong bid for grocers that had low productivity per foot. The reason I highlight that is that we sold over $2.5 billion of real estate in the last 5 years that included low grocers. So our average grocer productivity today is over $700 a foot. That is the best insurance against any dislocation or any change within the grocery industry, which remains competitive because you want to make sure that you have a box that's capable of generating a lot of sales so that if you have disruption with who your underlying tenant is, you've got more than ample backfill demand. The other thing you look at is occupancy costs and our occupancy cost is very low, below 2% within the grocer segment. So those 2 things give me a high degree of confidence that whatever may come from this consolidation, and it's too hard to predict what will happen. We're well positioned to not only weather it, but to outperform.

Do you have any C&S operated gross portfolio right now.

We don't.

Great. I think we're out of time, but we have 3 rapid fire questions.

Okay, shoot. Angela has...

So first off, first question is on the Fed. Do you believe the Fed is done hiking? Yes or no. And do you expect the Fed to cut rates in 2024, yes or no?

I think the Fed is likely done and I don't expect them to cut rates.

Okay. Do you believe real estate transactions will meaningfully pick up by fourth quarter of 2023, the first half of '24 or the second half of '24?

This is transactions? First half of '24.

First half of '24. Okay. And last, are you using AI today to help you run your business? Yes or no? Do you plan to ramp up spending on AI initiatives over the next year, yes or no?

Yes. We're using it on the margin right now, but we will be ramping up.

Great. Thank you very much.

Thank you.