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

Good afternoon. Welcome to Citi's 2024 Global Property CEO Conference. I'm Craig Mailman with Citi Research. I am pleased to have with us Brixmor and CEO, Jim Taylor. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or the webcast, you can go to liveqa.com and enter code GPC24 to submit any questions if you do not want to raise your hand. Jim, I'll turn it over to you to introduce your company and team providing the opening remarks and maybe tell the audience a few reasons why investors should buy your stock today, and then we can jump into Q&A.

Well, first of all, thank you for having us. It's a great conference. I have to my far left, Steve Gallagher, our Chief Accounting Officer and Interim CEO -- our CFO, excuse me, Brian Finnegan, our Chief Operating Officer; and Stacy Slater, our Head of IR. When you think about Brixmor against the crowded retail shopping center space, one of the things that we're particularly proud of is our ability to execute a value-added strategy that drives out performance. It's also transformed the portfolio. And it's impressive when you look at really any observable metric, whether it's spreads, rate, occupancy, et cetera, that our strategy has really not only unlock value over time but importantly, set us up for future outperformance as we look ahead. Obviously, we have great visibility on growth with the $64 million of signed but not commenced rent coming in. We have a very big in legal and leasing pipeline beyond that. But even more importantly, we're demonstrating each and every quarter, our ability to drive great spreads and the ability to realize that mark-to-market. So as we look forward, we like how we're positioned to continue to outperform.

Tenant credit has kind of hit the news again with JOANN. So maybe we'll start there with the obligatory kind of what do you think the impact will be? What does the balance of the watch list look like at this point? And maybe what is -- for Steve, what's baked into guidance? Is this sort of within plan? Or is this in addition to that bad debt?

Steve, do you want to start?

Yes. Just on the guidance perspective, this is sort of how we outlined it on our earnings call as well. We have -- the way we approach our budgeting guidance is, as my team and Brian's team goes space by space, tenant by tenant, lease by lease, really understanding specific assumptions about move out potential early terminations for our small shop tenants. And we roll all that up. And then we're looking at the watch list and thinking about potential disruption that will happen in 2024, and we're evaluating a variety of scenarios that can occur within those tenant names. And when you -- when we step back and look at it, we added about 100 basis points of reserve to our base rent line. So when you look at our base rent, guidance is 350 to 400 basis points of growth, and that's in the headwind of 100 basis points. And that's really meant to capture a wide range of potential scenarios that could play out with those tenants. And Brian, can you hit on some of the individual?

Yes. So I think it's important to look at the backdrop, though, that we're in with this disruption discussion. I mean this is the tightest box environment that we've ever seen. We have the smallest number of boxes over 10,000 square feet that we've ever had across the portfolio. You saw how quickly we address the Bed Bath boxes, the Tuesday Morning spaces last year, and you saw how quickly they were absorbed across the industry. So against that, with the news with JOANN that was out there, what they are anticipating at this point is -- or what's in the news is a prepackaged potential restructure. What that would mean is a recapitalization of the business with no store closures. Bankruptcy is a fluid process. So to the extent there was some level of an event, it would take time for creditors to ultimately get on board with that plan. But as Steve said, I mean we've accounted for a range of outcomes with tenant distress within our within our guidance this year. I think if you look at where we sit at the beginning of the year, tenant distress has been fairly muted at this point -- this time a year ago, Party City had filed, Tuesday Morning had filed, Bed Bath was about to file and we really have had no filings that have had any impact. So from that perspective, we feel like we have conservatively addressed our disruption guidance for the year. And then just from a backfill perspective, again, the demand for box space is as strong as it's ever been. We look at the rents on those JOANN boxes. We think they're about 30% under market. And ultimately, just from a box standpoint, we've been signing those box leases at $15. We have box rents expiring over the next 3 years at around 9. So we have the ability to backfill any of these box spaces that we get back, we have the ability to do it accretively and with better tenants.

And just one other point to add is when I talk about that 100 basis points, it's really focused on how we think those national bankruptcies may play out, right? So it's in the base front line. In addition to that, we also have 75 to 110 basis points of total revenues in our revenues gained uncollectible to really capture some of the normal course activity that we see from year-to-year. So when you think about the overall sort of ability we have to capture some of these items, you have to think about those 2 lines in combination.

And not to belabor the point but as you guys came into the year, would you have expected a prepackaged bankruptcy to happen more restructuring? Or at the midpoint, did you expect a little bit more of a headwind kind of in numbers versus what we may ultimately see? And also kind of the bankruptcy cadence, right, if we're not seeing stuff now and then the next wave would come a little bit later in the year. So from a timing perspective, are you -- is that also kind of ahead of plan to some extent?

Well, a prepack is likely to keep the stores open. So it would be less significant than what we put in our range of potential outcomes. And I think what's important to appreciate is that we looked at a wide range of different scenarios when we came up with that reserve to really provide for appropriate provision for what may come. And that's, I think, important as we look ahead to the year and we look to the year beyond.

Any questions from crowd? Okay. Just generally on the leasing front, conditions have been good. I'm kind of just curious if there's -- what the trends have been here into March? You talked about, Jim, good activity in legal and beyond kind of the snow pipeline. What ultimately you guys could drive occupancy to -- in the shop portfolio this year if the stars were to align with what you have sort of in the pipeline?

We believe we have a couple of hundred basis points in the shops to move. It's not going to happen all in 1 year but it's going to happen over several quarters. And we're very encouraged by what we're seeing in terms of not only the depth of tenant demand but the breadth of tenant demand to be in open air centers. So we're seeing our traditional uses in specialty grocery, value apparel, et cetera, looking for space and committing to space out into '25 but we're also seeing mall-native tenants across many categories coming into the space, and we're able to leverage that to drive great terms.

To that point, Macy's obviously, is shutting down stores in the mall but is focusing on their open-air exposure of Blue Mercury and there are other concepts. Are you seeing that kind of coming into your properties? And how do you underwrite that kind of credit? Do you feel comfortable with that kind of expansion plan given maybe what's going on with the legacy stores?

We're in a position where we don't need to make a sacrifice from a credit perspective. So we're not only driving great terms, we're driving better credit. And that's been a focus. So as we think about without picking on a particular retailer, as we think about some of the mall native concepts that are looking to come in open air centers. We look at it with a cautious eye. But beyond that, there are plenty of great concepts coming out of that space in jewelry, shoes, kitchen, et cetera, there we're driving net activity with.

And just curious, shrink in security has been an issue for a while. Target has come out and said, they're kind of rethinking the self-kiosks. I know that this has been kind of something everyone's been looking at. But if all of a sudden, a lot of these stores that went to self-checkout is a way to expedite the customer experience decide that it's not worth the excess shrink and they go back, from an occupancy cost, is that -- along with insurance and taxes and all the other kind of upward pressure, do you feel that from an occupancy cost ratio perspective, that would have enough of an impact to mute sort of the benefits that the sector has seen on being able to push market rents up?

I think that's going to be in very specific markets where you have more crime and more of those issues. Generally not the markets that we're in, where we're not seeing quite that level of shrink experience from our tenants. Where it is occurring, it's certainly a headwind.

And then just from a capital sources and needs perspective over the next 12 to 18 months, you guys have the ongoing redevelopment program. It seems like the acquisition market may be reopening a bit. You've been a very large seller of assets over the last couple of years as you guys have kind of trimmed and repositioned the portfolio. Could you just talk about if you were to get more active on the acquisition front, maybe the best sources and uses and trying to get ahead of that kind of activity.

So last year, we were a net seller of $197 million of properties. We achieved a very attractive cap rate on these noncore assets. As we look forward, we believe we have some dry powder to be acquisitive. But as we go up the scale in terms of volume, we'd be balanced in terms of capital recycling.

Would you look to more match fund with kind of be -- kind of neutral on your capital, your disposed versus your acquisitions? Would you look to raise debt kind of is there anything around that? Does OP unit deals start to come into play at all? We've heard some people say that maybe there are some families out there that would prefer that kind of currency rather than cash.

At the right valuation, certainly, that could be an option. But barring that, we're going to continue to execute as we've executed, which is balanced capital recycling.

What markets would you guys be more interested in getting kind of deeper into? Are there any new markets that you would look to enter at this point?

We are going to be focused on the markets where we already have a presence. So from an acquisition standpoint, we're focused in Texas, Florida, Coastal Carolina and then up into the Northeast, where we're seeing some potential opportunity.

How are you thinking about required returns today versus we've seen one of your competitors sell a lot of product in the average 6.5% to 7% range with maybe a wide range at the top and the bottom of that. But kind of where are you guys targeting required returns? What does that translate into where you'd be comfortable kind of on an initial cap rate basis to pull the trigger on some of these opportunities?

So for it to underwrite for us, it needs to be high single digit, low double-digit and unlevered IRR. And to get there, you need to have good visibility not only on your going-in return being adequate but good visibility on near-term growth opportunity through marking rents to market, adding density to the property, et cetera, much like we've done over the last several years. So that's kind of where we're underwriting to. From a cap rate perspective, it translates into 6.5% to 7.25%, just depending on the nature of the particular asset. But again, we're really focused on making sure that we can execute an accretive plan from an ROI perspective with good visibility in the near term in terms of how we're going to drive those returns.

And how do you to think about those type of returns versus what you can get on redevelopment, which is arguably maybe a little bit lower risk since that you already know the assets, you have a sense of the tenants that want to come in. So the decision to commit that capital to a new asset versus an asset in your portfolio that you've had plans drawn up for a while and want to go maybe it's not Phase I, maybe it's Phase II, right, which even lowers the risk even more. So on a risk-adjusted basis, how you think about that capital deployment...

From a sizing and a risk-adjusted basis, we're typically doing somewhere between $150 million to $200 million a year of annual spend and delivery of reinvestment projects. We've been pretty consistent falling in that range, and it's largely driven by the leases that roll and give us access to the project. So when we think about external growth, it's got to be funded with proceeds other than our free cash flow generally, it's got to be funded through capital recycling and more of a balanced approach as we demonstrated, all with an eye on keeping our balance sheet strong, keeping debt-to-EBITDA at 6x, making sure we have good coverage and good access to the capital markets.

Any question from the audience? Maybe an update on the CEO -- our CFO search -- sorry, Jim, you're still there, you got your job, the CFO search?

So we're very pleased with the candidates that we have in the process. As I mentioned on the conference call, we expect to be in a position at the end of this month, early next month to announce the candidate. We've been very pleased with the breadth of demand and the quality of talent that we've seen for the role, and I think we'll be in good shape.

Kind curious if tomorrow, you woke up and you were a private company, not public, not beholden to all of us sitting in this room. What would you be doing differently given the portfolio that you have and the -- for capital deployment options, leasing challenges, leasing tailwinds, what would you be doing differently or the same or in a different way?

I think putting aside the access to the public debt markets for a moment, which is part of what makes our plan so compelling because we have the flexibility to reinvest without getting lender consent and that type of thing. Barring that, I would say, it would be a very similar business plan balanced in terms of sources and uses and reinvestment activity and self-funded. The key for us is to be in a situation where we don't have to raise external capital at any point in time, but to rather be opportunistic as we've demonstrated in terms of accessing the debt markets and driving better outcomes that way.

Would it change all under your view on going in cap rates and timing on doing a deal that maybe has a 5- to 10-year horizon versus that initial year dilution that weight -- weighs on earnings and gets all yelling at you? Or you guys feel like you have enough flexibility to kind of do a deal that you would want to do as a real estate guy versus a straddling the public company guy?

I think that as a public company guy, we're very focused on making sure the real estate makes sense that we can drive real value, real growth in ROI and accretion, not just from the standpoint of near-term FFO but accretion overall to ROI and returns. So that's really no different from the public to the private. And it's a discipline that we've held pretty true to over the last several years. You've not seen us chase acquisitions just to do them. And it's not just been through the prism of what might be near-term accretive. It's what's going to really add value over the long term.

We have a question coming in. What steps do you think you would take to bridge the multiple gap at what your stock trades versus peers?

I think that we've been very successful in terms of closing that gap. And as we've continued to execute our strategy, and frankly, as I look forward and think about our ability to continue to outperform and drop that growth, I think we'll continue to close that gap. And I'm really pleased with the progress that we've made but understanding that it's not something that can happen overnight.

I actually just lost my train of thought. I was monitoring too many things at once. Sorry, it's been a long day already. I guess -- the -- I'm at loss, anyone want to jump in for a second? Dennis, thank you?

Just in terms of subsectors, whether it's apparel, electronics, food, what have you, where are we seeing the most growth in terms of new tenants, demand for space?

Go ahead.

Sorry, Jim. So I think from a space size perspective, we certainly see it in value apparel on the Ross, the Burlington's, the TJ concepts of the world. So we continue to see a significant amount of growth there. As Jim touched on specialty grocery as well, whether that's Whole Foods, Sprouts, Trader Joe's has really picked up their growth recently as well as ALDI and Lidl. They continue to have pretty strong expansion plans. I think the next busiest category would be within the QSR restaurant category, both from national companies as well as from large multiunit franchise concepts as well. And then the last one I'd say is wellness. And I put into wellness, whether that's fitness, medical service uses, that's become more commonplace in our centers. And I think if you just look in totality, the depth of demand is as strong as really it's ever been coming from a wide range of categories to be in open-air centers. But if I had to pick a few of those would be the highest from a demand standpoint.

I got my train of thought back, by the way. And it kind of dovetails a little bit to the earlier question. But I think one of the themes around 4Q earnings calls was looking through the initial guidance this year with the same-store NOI growth and where that could trend as we get into 2025 on a more normalized basis to hopefully get to a point where steady same-store growth translates into better AFFO growth to justify maybe multiples moving higher. So I know you guys don't want to give 2025 guidance at this point. But I'm just trying to get a sense of the earnings power if we don't have -- if JOANN's is kind of how you underwrote it, right, it's -- you don't get a bunch of stores back. It sounds like it will just be a prepackaged deal, goes back to the earlier of how you get that multiple up, right? It just feels like things have been very good for retail for strips in particular. Growth has been pretty steady in that 3-ish plus or minus a bit. AFO growth has been a little bit challenged because of interest expense and other things and timing related space coming offline for Bed Bath and what have you. But as we head into '25 and I'll leave it at '25, I won't go to '26 but as you get in there, is the market missing kind of that earnings power piece? And do you guys feel like you are significantly undervalued given what you guys are seeing internally?

I think that we are undervalued in terms of the visibility on that growth and what we believe we're going to deliver. It's evident in the numbers that we're guiding to this year in terms of the relative outperformance and the very same things that without giving guidance into '25, the very same things that set us up for '24 will continue into '25. One thing to appreciate is that a lot of the leasing that we're doing now is for '25 and a lot of the sign but not commenced, will commence ratably over the year but contribute to '25. So I like how we're positioned to perform both on an absolute and a relative basis. And it's very visible in what we're doing.

And so will the snow pipeline compressed to a level where CapEx will normalize versus where we've seen kind of post COVID as things have been. You've had a couple of bankruptcies, you've had to backfill those. Are we going to get to a level, again, we're a more normalized level of CapEx? Or -- and I hate to say this but I covered office for a very long time, every time you thought CapEx was going to slow something else popped up, right? It was [indiscernible], is that sort of the issue that potentially plague strips or are we going to get past that hump because tenant credit has gotten better, and the consumer has gotten better, there's no new supply? It's gotten to be a more rational market. because maybe that's kind of the fear of investors where it's like things are great but you're getting 2% earnings growth on 3% same-store growth. So I'm just -- it always feels like the CapEx piece is the -- a little bit of that variable from an AFFO perspective.

Yes. It's that snow pipeline delivers, and we continue to move up build occupancy. You'll see leased occupancy climb as well but the level of that gap should compress. And remember, we're driving leasing through the -- through that CapEx. So it's accretive and it's dropping.

And for you guys, I mean, it feels like one of the differentiators is the redevelopment pipeline because as that snow compresses, it feels like you have that embedded capital deployment valve that some others don't. Is that kind of a fair way to couch how you guys feel that, that's the piece that maybe is not being picked up in where the stock is trading relative to some others in the group?

We think it's a very attractive use of capital that not only drives great incremental returns but improves the assets and drives good follow-on performance in terms of occupancy and rate, particularly in the small shop, and you see it in our numbers. You see it in the record small shop occupancy, you see it in the record small shop rate. So certainly, as we continue to execute upon that, it puts us in a position to drive additional growth beyond just rolling the leases to market.

Any questions from the audience? Yes. Go ahead, Tom.

I just had a question going back to the small shop demand. So I guess you said it's pretty strong right now. Like how do you weigh the credit versus kind of these contractual rent bumps and now like the give and take between those two?

We are more focused on credit than ever as we make these decisions in terms of bringing tenants into the portfolio. And we really have been since the pandemic capitalizing on the opportunity to not only bring in better tenants at better rents, but bring in better credit. So if you look at the composition of our small shop tenancy, the national and regional percentages have continued to climb but so has the underlying credit quality of those tenants. So we think as we look forward, we should be pretty well positioned should there be any economic disruption. Tammy?

[indiscernible]

Yes. So there absolutely is we're using this environment to deliver and not only great upfront leasing spreads but much better intrinsic terms, including embedded ramp-ups. So as we've continued to do that, we've grown our embedded rent growth from low 1% to the mid-1% range. And we're getting embedded rent bumps in over 98% of our leases where you're seeing small shops getting into the 4% range, and you're seeing nationals going from 10% every 5 years to 12% plus. And in some instances, even achieving 3%. So we're seeing an acceleration of that in this demand environment and a general willingness on the part of retailers to be subject to that embedded rent bump to get in the space.

I think the other thing, Tammy to mention too, just as Jim talks about overall intrinsic lease terms outside of economics, there's flexibility. And our retailers have been much more accommodating today in terms of common area use changes, development rights, use rights because not just because of the competitive environment but also because those wellness tenants, those fitness tenants, the additional density is helping drive significant traffic to the stores, they can see that. So that's been -- we've been able to push that a lot more in those discussions. Our retailers have been much more accommodating. If you were to look at our reinvestment pipeline, the bulk of those reinvestments do involve some level of a consent from a retailer. And because of the relationships that our teams have across the country, we've been able to capitalize on that and get that in our leases going forward.

I mean there's a question here that kind of dovetails to Tammy, but just how you balance the ability to get some of the non-rent concessions versus the last dollar rent and kind of mixing it all into the formula to say, from a total economic package, this is the right deal to do, even though maybe it doesn't have the highest mark-to-market that we could show on the deal?

We like to say we want it both, right? If you want the highest increase and then nice growth. But in all seriousness though the nature of the environment has allowed us to push. And to Jim's point, we are making significant progress with small shop tenants, 3% to 4%. But it's that incremental progress that we are making with some anchors where it may have been 10% historically. You're pushing that to 12.5%, 15%. It may have been 4 options historically, you're able to get that to do 2. It is the nature of the competition for space that's ultimately driving it. And I think it's a balance, Craig, too, because they understand -- the retailers certainly understand some of the value that is in some of the rights, the development rates. It was why we were really intentional during the pandemic. of lifting a lot of those development restrictions that we have in order leases. And we're incredibly intentional upfront about negotiating this stuff before it goes through a tenant committee. So I'd say it's a balance that all gets thrown into the pot, but for us, flexibility can sometimes be as important as some of those other intrinsic terms.

When you look at the performance we've delivered, it shows that we're not sacrificing as it relates to our spreads and the penetration we're getting in terms of the embedded ramp-ups and the growth in terms of what's within the overall portfolio. So it's the cheapest form of growth, Tammy to your question and something that we're very focused on continuing to drive and think it's an opportunity.

And do the anchors -- have they post COVID, where a lot of them had to give up some of these co-tenancy rights or other kind of rights that they had, have they seen that landlords generally are not abusing kind of that increased power that they've been given or that they had to give up as part of rent concessions and that, for the most part, the improvements or the outparcel development or whatever you and other landlords have done to improve the center is actually beneficial from them from a traffic perspective? It hasn't been detrimental.

I think if you talk to the head of real estate -- heads of real estate for a number of the junior anchor retailers, they would say that they're seeing the benefit of traffic from those outparcel developments from the improvements that we've made across the portfolio. And I think that's the important thing. They've seen what we've been able to do and the investments that we're making in our centers. This is an asset class where it really matters where your neighbors and they're seeing that we've been able to, with those investments, attract better tenants, which is ultimately helping them drive sales. So from that standpoint, they know when we go to them for a redevelopment consent, that they can see what the track record has been and they're allowing that much more -- be much more accommodating with that across the portfolio.

I think maybe we'll move to our rapid fires. For 2025, what do you think same-store NOI growth will be for the strips.

3%.

Will strips have more, fewer of the same number of public companies a year from now?

Fewer.

What is the best real estate decision today, buy, sell, build, redevelop or repurchase stock?

Redevelop, reinvest.

Perfect. Thank you guys so much. Everyone, enjoy the rest of the conference.

Thank you.

Thanks, Craig.

Thanks, everybody.