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

Hello, everyone. Welcome to Citi's 2025 Global Property CEO Conference. I'm Craig Mailman with Citi Research and we're pleased to have with us Brixmor and CEO, Jim Taylor. This session is for Citi clients only and disclosures have been made available at the corporate access desk. [Operator Instructions] Jim, we'll turn it over to you to introduce your company and team provide any opening remarks to tell the audience the top reasons and investors should buy your stock today, and then we can get into Q&A.

Well, thank you, first of all, for having us. This is a great conference, and we love the opportunity to catch up with everybody and explain what we're doing at Brixmor. I have with me Stacy Slater, our Head of IR; Brian Finnegan, our President and Chief Operating Officer; and Steve Gallagher, our Chief Financial Officer. When I think about the reasons to own Brixmor as a shopping center REIT, I think we stand apart in terms of our value-added business plan focused on bringing in better tenants at better rents. And there are 3 outcomes that I think really drive the reason to invest in Brixmor. One is the visibility that we have on growth. With our signed but not commenced pipeline, we're able to grow through near-term tenant disruption and still outperform the peer group. Secondly, and I think maybe not as well understood is the value that we're creating as we bring in those better tenants at better rents as we execute upon our very accretive reinvestment pipeline where we currently have $400 million of pre-leased projects underway at better than a 9% incremental return. And lastly, and I think this is probably the key driver of our success. It's our platform. It's our team, whether it's leasing, operations, redevelopment, financial reporting really across the board, it positions this company to outperform through cycles. I'm very proud of the performance that we've delivered it's ultimately, I think you are investing in a management team.

Perfect. And I'm sure I'm going to start off with a question you haven't been asked recently. Why don't we start off with tenant credit, right? recent spot of bankruptcies. You guys gave guidance recently kind of went through the exposure. But just in case people haven't had a chance to hear the remarks, maybe walk through what you guys are expecting in guidance? And any early read-throughs now that we're almost at the end of the quarter and some of the auctions have happened with JOANNs and Party Cities and kind of where we're at.

I'm going to let Brian talk a little bit more specifically about the tenants. But taking a step back, big picture, we believe that we're going to deliver 3.5% to 4.5% NOI growth despite seeing over 200 basis points of tenant disruption. And it's really that visible growth I referred to and the reasons why to own Brixmor that signed but not commenced pipeline has consistently been over $60 million or better than 60% of our total revenue despite our commencing $15 million to $18 million around new ABR every quarter. So that really puts us in a position to capitalize on this tenant disruption while still providing top of the sector growth. One of the encouraging things that we've seen since the earnings call is the continued momentum in leasing from better tenants that really drive better traffic to our centers. So Brian and team have been all over it, as you would expect. And Maybe, Brian, you could talk a little bit more about some of the specific tenants.

Yes, sure. Taking a step back first. This is the best from a credit profile, this portfolio has ever been. And if you were to look at our top 40 today versus, say, where we were when Jim joined the company, in 2016, you wouldn't see Whole Foods, you won't see ALDI, you wouldn't see Trader Joe's. Right? We've continued to add better tenants to the portfolio and the underlying credit quality is the best it's ever been. So from that position, we're in a great spot in terms of being able to grow through the disruptions, specifically as it relates to the bankruptcy as we talked about bankruptcies, as we talked about on the call, we're about halfway resolved on the big lots either leased or at lease. We have about 5 boxes that we don't have in our control yet from a Big Lots perspective. We're expecting those at the end of March to be back in our possession. We've been really pleased out of the gate with not just the tenants, tenants like ALDI and Burlington and Ross and TJX and Planet Fitness but also the rents, the rents thus far that we've been able to sign on those spaces are in excess of 50% above where those in-place rents were at like at about [ $7.50 ]. From a Party City perspective, you did see a very active auction from the likes of Dollar Tree and Five Below, Boot Barn and Cavender's. We continue to see good demand there from the likes of Trader Joe's and Skechers. The rents are a little bit higher from a per square foot perspective, but in comparison to similar sized spaces at $15 rents with Party City, our Five Below rents are in the low $20s, our Ulta rents are in the mid [ $20s ]. So we still feel really good about the basis. From a visibility perspective, JOANN right now is the one that we have just -- we don't have the most visibility on in terms of the percentage of boxes we may ultimately get back. There will be an auction. We expect to have that in April. We do expect there to be a significant amount of demand for that space from the likes of Michaels, Burlington and ALDI and some of those similar names were involved. But I think high level, this space is coming back to us in the best demand environment that we've seen. Our pipeline at the end of the year was as large as it was at the end of 2023. We continue to see great demand from the tenants that we've been growing a lot with in the portfolio and feel like we're very well positioned to backfill these spaces quickly with better tenants at higher rents.

And I think on the guidance standpoint, Jim hit on the 200 basis points, and we did break down sort of the components of that on the call. The first 100 basis points is really known, right? Those are some of the bankruptcies that were in '24. We know the actual rejection date, so that's already embedded in that second 100 basis points is sort of to capture that range of potential outcomes that Brian just went through with that list of tenants who have filed bankruptcy, just don't know exactly the number of leases we're getting back or the exact timing on that. And I think importantly, what Jim talked about was the fact that we're able to grow through this tenant disruption. You saw it in the fourth quarter, we were able to grow base rent 6% in spite of getting back some of the boxes from Big Lots. So on the other side of this, we feel that sort of what Brian alluded to is we're going to have a portfolio that's growing at the midpoint on same-property NOI and FFO at 4%, but with a tenant profile that's much, much stronger as we get back or we get through some of these tenants who were no longer really relevant to the customers they were serving.

And as some of these and maybe use Bed Bath as sort of a road map perhaps. But as some of these leases are bought at auction, what's been the process of these tenants coming to you that want to control the space longer and actually you guys being able to recognize the mark-to-market that there is on the box, secure a tenant long term versus absorbing that lease running out the term and just hoping to negotiate then? What's sort of been the MO of tenants?

Well, it's a great question. And typically, even if the leasehold is bought at auction, you can have a range of outcomes where they don't come to you looking for flexibility or where they do. And in the latter instance, you're able to drive better economics maybe not fully capture the mark-to-market, but get additional flexibility in the lease that you may not have had originally.

We only had 1 Bed Bath lease that was bought at auction. We've been very active. For those of you who have seen us, we've terminated leases. We bid on 2 locations related to Bed Bath, several and big lots to ensure that we control that space, but we're also going to remain disciplined as well. To the extent there is an operator that we see we maybe have the ability to recast that rent 3 to 5 years out, we do get into those discussions immediately. But to the extent we don't have to put all the capital in, we'll be prudent in terms of those conversations. But as it relates -- as it sits today, just because a retailer does take the space at auction, they may only have 5 to 7 years left. And there could be an opportunity to bring that rent forward today, to reinvest along with them to reset the store. But generally, they're taking that space with no downtime, no cost from the landlord and they're living with a lease that isn't there. So I'd say the conversations depend on the certain situation. But generally, we do have the ability to ultimately bring that rent to market, if not immediately, maybe a few years down the line.

One of the themes for retail over the last couple of years is the limited new supply and these bankruptcies effectively are that shadow new supply coming. And so we've heard from you and others about the depth of demand that's looking at these stores when there is a with of credit issues. What's the pipeline of backfill opportunities? And just from an asset management perspective, how are you guys balancing the -- it's nice to get a tenant as quickly as possible versus really curating the tenant mix [indiscernible] basis of maybe taking a little bit longer to make that lease.

I think we've demonstrated over -- since I've been here over the last 8 years that we've managed this portfolio for quality and growth, not occupancy. So if we have the opportunity to bring in a better tenant at better rent, it's going to drive better traffic, that's what we're going to do. It's part of why our traffic numbers indexed to the top of the peer group. It's because of the cumulative effect of all those individual leasing decisions that we've made. So we look at this as a great opportunity to better merchandise the centers and you get follow-on benefit not only in terms of the box that you're backfilling but in terms of the small shop, both occupancy and rate, where we think we've got additional room to run. So this is a great environment. And as it relates to new supply, there really isn't any. I think we're a few years out before we see anything materially. You are seeing some new centers being built in far suburban Dallas, Scottsdale, Phoenix markets like that, where rooftops, shockingly outpaced retail development. So you're starting to see some activity there. But even those projects aren't going to be delivering for 18 months to 2 years to go through the entitlement, take down the land convince the tenants to be there, get the project finance, those are all significant hurdles that are acting as a break on what is a great supply-demand environment.

Any questions in the room? Just on the leasing front, you guys -- or maybe not leasing, but from an earnings perspective, commencement timing has been a nice tailwind where you've been able to get tenants in, in some instances, a little bit ahead of schedule. With the tariff situation, and I know there's a lot of uncertainty, but just from a material perspective or equipment perspective, is there anything you guys are planning for as you continue with the redevelopment program or you backfill some of these spaces. Is there any concern about related delays of just getting equipment and materials.

In terms of what we have underway, it's already bought. We're -- but we're watching it carefully in terms of the impact on future projects and leases that are in our shadow pipeline. So we're certainly considering the things that you worry about are HVAC equipment, switch gear, et cetera. But with that said, one of the positive trends of the supply-demand environment that we're in, is that you have tenants willing to take existing conditions to a far greater degree than we can recall, both driven by that supply-demand environment. But an interesting outcome of tenants bidding on leasehold interest is their operating teams are becoming more amenable to existing conditions. So we're watching it. That is one area of potential impact, particularly in terms of long lead time items. But so far, we've not seen any near-term impacts.

And how has -- I guess, the lack of supply over the last couple of years, tenants have become, as you said, more flexible, right? -- they don't just stick to the prototype, but it has to be this much square footage. They'll go a little above or a little below. Like how has that helped also from a vacancy perspective, your ability to cast the net wider and maybe get tenants you didn't think would be interested in the space and really drive rent growth in just that better pool?

Well, this environment is interesting. We talk a lot about it internally, but the funnel of potential uses coming into open-air retail is as broad as we can recall, you've got a lot of the traditional tenants, the grocery, you've got rapid growth in specialty grocery you've got value, you've got fitness, you've got quick service restaurants, you've got health wellness service providers. You also have an increasing influx of mall-native tenants coming into the open-air segment. So our -- the canvas on which we can paint is pretty broad, plus we have better data than we've ever had before as we measure traffic, productivity, voids, et cetera. So Brian and team have really been driving that effort to bring in those tenants that are going to drive productivity at the asset.

Yes. Craig, as it relates to existing conditions, I mean, you did see significant pressure on supply chain coming out of the pandemic, whether that was HVAC, whether that was switch gear. Whether that was municipalities that we're approving new facades new pet and new loading docks, right? So what you saw there was retailers had to be flexible to get stores open and they didn't see a material deterioration on their pro formas. And it actually allowed them to work with our operating teams in terms of how they were getting inventory into the store. So because of that, you have seen more retailers be willing to live with the bathrooms where they are, live with the existing storefront. And they're doing that because radically aligned in terms of them getting stores open so they can continue to drive sales. So that has certainly been a benefit. And then you have seen a number of these retailers, particularly in the off-price and the specialty grocery segment that have beefed up their in-house construction teams where they're willing to take on a lot of work because most of the -- a lot of the private landlords that we compete with day in and day out, they don't have the operating platform that we do. So because they've been able to build up their construction teams, we have seen retailers be able to take on more work themselves. Now that may have -- that may lead to some additional time in terms of negotiating the lease because you're really negotiating what goes into that work scope. But does save you time on the back end in terms of their speed to ultimately be able to get the store open, and they may be willing to live with more within the space.

One of the themes that's come up over the last kind of couple of years is fundamentally, this is probably one of the best times for retail that we've seen in a long time from a supply and demand perspective. You guys have had higher same-store than some of the peers, but if you just look broadly at the sector, it's been a 3% to 4% asset class kind of grower, right? And if you guys look down the road, and I know it's a fair amount of time of runway you have with the redevelopment. But let's say, once you get the redevelopment done and you don't get the same level of mark-to-markets. What are you guys doing now from a lease structure perspective from bumps, from just rent levels, right, CAMs, to try to keep this maybe 4% type growth longer term, right, versus reverting back to that 3% to 4% kind of [indiscernible].

What you're driving towards is what can we do with intrinsic growth? I'm going to let Brian talk a little bit about that. But taking a step back, when you look at what we've been able to do from an accretion standpoint, when we began our average in-place rents were $12.25. Today, they're $17.50. Originally, we were signing new leases in the upper teens. Now we're signing those new leases in the mid-20s. So we have several years of runway of mark-to-market within the portfolio that we get sort of the virtuous cycle, if you will, as we upgrade the centers, the rents, this is not a commodity product themselves grow and give us a position for the next several years to accretively reinvest in the properties and continue to drive that long-term NOI growth that we highlight in our company side of better than 4%. I'm really proud of the fact that we can absorb more than 200 basis points of tenant disruption and still deliver growth in that range, which we're often asked, what does that mean you would have grown without the tenant disruption, a lot higher. And I think you need to look no further than where we grew our top line in the fourth quarter of 6%. So we're outperforming on a current basis. But importantly, our strategy set us up for several years of outperformance. That focus on rent basis. The thing that makes me most nervous about a property that we hold or when the rents are too high. It's not rocket science, right? Your ability to deal with tenant disruption and create value is more limited. So that's why you'll see us as a company consistently harvest 3% to 5% of the portfolio through capital recycling. But as it relates to the intrinsic lease terms, Brian and team have been laser-focused on continuing to drive value there.

Yes, 2.5% last year across all size ranges were a record. Again, we've gotten that up to 1.5% in place versus close to 1% when Jim joined the company. But it's not just that, Craig. We're doing that off of still very high initial increases, both on renewals and new leases. We've also been very intentional in terms of freeing up CAM clauses in our leases relative to removing caps, removing carve-outs from expenses to ensure that we're getting paid back for the investments that we're making. So you saw that come through in our record recovery rate last year ahead of where build occupancy was. So that's something that we've been very focused on. Also flexibility. Every one of those reinvestments take some level of a consent. And we have been freeing up the ability to add density to add more restaurants, more fitness and wellness closer to anchor tenants. And also from a CAM perspective, we've been very intentional about where we're deploying fixed CAM across the portfolio, where we have it, we're growing that over 4%. We have resets in there where we do have it with national tenants. So that's something as well. So I think on the whole, we're utilizing the environment just to continue to find additional avenues for growth within the leases that we have. I would point out though that we still have a lot of runway in that reinvestment pipeline, just what we have on the supplemental is $600 million, and we're adding to that like assets that we added in Britton Plaza in Tampa, last quarter. So that's been additional excitement for the team to be able to put the platform to work, but we still see really good opportunities within the existing portfolio.

Yes. And Brian alluded to it, but as we think about external growth, we're focused on the ability to drive ROI. So we're -- as we make these acquisitions, we're building our long-term reinvestment pipeline as well.

And a question coming in from live QA. Just going back to tariffs. Are they having any impact on lease gestation or tenant appetite for space?

We've seen none. It remains robust. I think all of us are waiting to see what actually gets implemented and what the market impacts are but we've seen none to date.

And another one in worst-case tariff scenario, how would your tenant watch list change over time? Are there any tenants you're kind of on the bubble or -- and maybe give a sense of where your watch list is as a percent of ABR or GLA?

Well, the good news is it continues to shrink as we deal with some of those tenant disruption and the categories of tenants we're focused on would not be surprising. Home furnishings is one category. Pharmacy is another. We have less than 1% of our ABR coming from pharmacy uses, but that's 1 that's out there. Certainly, certain types of entertainment where we also have very low exposure in other categories. But retailer distress is something that you see from a long ways away, and we've been proactively managing this portfolio. We were not redoing deals with big lots, right? We substantially reduced our Big Lots exposure before the ultimate outcome. As we look forward and we think about different economic environments, I like how we're positioned in terms of our necessity focus and our value focus. And we also, from a capitalization standpoint, have not nor will we stretched the balance sheet, we're always in a point of view that interest rates will be higher and cap rates will be higher in the future, which keeps you out of trouble in terms of making unwise capital allocations, makes you focused on growth. So we'll see. I like how we're positioned. I like the visibility, frankly, that we have on real solid growth, not only in '25 and '26. Even in a much weaker economic environment induced by tariffs. It's part of why you've heard me say in the past, we have an all-weather business plan. It positions us to outperform from a growth perspective in a great market, but also in one that might be in the future.

And you mentioned the asset management or calling of 3% to 5% of the portfolio a year. But you guys have also gotten a little bit more acquisitive in December. Talk about how you're underwriting -- I know some of those deals, I think, were mid-6s, right, where the market is today, but what's the long-term IRR of those once you stabilize them? What are you seeing in the market? I know there's some bigger lifestyle center deals out there. Is that of interest to you? Or are you guys going to focus more on the product type you've been more involved in with redevelopment aspect to it.

Our filter is always going to be those assets where we think we can drive outperformance from a growth and ROI perspective. So going in cap rate is important. But equally, if not more important, is where are we going to take that 6.5% yield on our capital as we execute our plan. One of the things that we're encouraged by is that the breadth of opportunity that we see coming to market on assets that we've targeted for a long time is encouraging. Pricing is tight, but we still think we can get to your other part of the question, unlevered returns in the high single, low double digits even when we assume as we always do a reversion cap rate that's higher than where we're going in. So it really focuses that discipline into where do we know tenants want to be, where do we know there's a significant mark-to-market in the rents? Where do we know that there's an opportunity to provide additional density at outparcels, to reinvestment, redevelopment. And it was characterized by some of the acquisitions that we announced in the fourth quarter like Britton Plaza, where we think that asset will support $50 million to $70 million of highly accretive reinvestment over time, which drives your ROI given those incremental returns. So last thing I'd observe is we're not going to stretch the balance sheet to pursue an external growth opportunity when we have such great internal growth. What I like is how our business plan has positioned us to outperform without a single acquisition. With that said, I think this platform is capable of doing more and capable of growing and we'll see, but we're not going to chase acquisitions just to do it.

And as you guys kind of underwrite what you're willing to part with, right, if you can deploy capital in the high single, low double digits unlevered on some acquisitions or same type of returns on redevelopment. Where is that incremental IRR on those deals that you want to sell that they just don't make the cut any more from that go forward versus the redeployment opportunities. [ What's that ] spread?

It's been consistently about 150 to 200 basis points between the hold IRR on assets that we're selling and the underwritten IRR of acquisitions that we intend to make. So it's been about that. What I've been -- we go back and we back test with our Board, our performance on our acquisitions, and I'm pleased to report that we've outperformed in terms of rate we've outperformed in terms of timing, and we've outperformed in terms of growth and ROI. You might argue that means we've been too conservative in terms of acquisitions. Perhaps. But again, it's -- we're coming at that external growth lever from a position of strength. It's what we see as additive we'll pursue and will be aggressive. But it's again with that discipline of how can we grow ROI.

And you stalled my question on whether you're too conservative on underwriting. But I mean when you go back and look at kind of the inputs that you had and the deal, versus where you're outperforming. How much of it is just market related versus you guys underestimated something that it was built in conservatism that may be going forward if you want to be more competitive in deals you can tighten that assumption a bit.

I think you do so carefully. I think whether it's been market or just the performance of the leasing team, leasing team tells me it's the latter, and they promised they're not sandbaggers. But no, I'd almost always rather be in the position of having a slightly smaller aperture. So you don't stress what is already a pretty sound growth model. But everything that we look at is through that lens of how do we drive value? How do we create growth in ROI? How do we fit it in a model that, frankly, grows well without it.

And I know NAV, there's a range of them, but at least relative to mine, the equity you guys issued more recently was slightly below. But given the IRRs that you're putting up, right, you can overcome that initial dilution. But how do you guys -- I know capital is fungible for different uses. But how do you...

Capital is precious. Our equity is precious, and we've demonstrated over the last 8 years. I still think we're a net acquirer of our equity. We may have just gotten to neutral. So we look at what is the IRR of where we would deploy those proceeds. What is the IRR on Britton Plaza in South Tampa that's going to be pretty significant relative to what that implied weighted average cost of capital is for both our equity and our debt. And we'll be opportunistic. Obviously, as our stock price is where it is now, we're going to be probably more restrictive as we see opportunities to put capital to work accretively. We'll do it. I think NAV is important, but it's not the only consideration.

And as much fun as is dealing with me and investors in the room, if you were private and not held up every 3 months to how progress is going, would you be doing anything different from a strategy perspective, either on acquisitions or timing of redevelopments or really just any aspect of the business?

I don't think so. I really don't. I think it's a privilege to be public. We've been private before. I've been part of a private platform before, and sometimes it's interestingly more difficult to execute a truly long-term accretive value-added plan when you have differing objectives. I think we understand what investors want. And as long as we consistently deliver that, I appreciate the public format. One of the things that I'm encouraged by is more rationality in the debt market than what we've seen historically. It used to be that we were competing with private capital that could lever the assets 60% to 70%. It spreads on top of where our REIT bonds are trading. That's frustrating. Right? But that's not the case today. We just did a 7-year bond deal last week at 102% over the 7-year to give you a reference, I think the financing on the CMBS for ROIC was about 180, 190 over swaps. So finally, there's a little more rationality in terms of the pricing of our capital. And the flexibility is critical. We have not one mortgage on this portfolio, not one. And that was something that we focus on going in because if we believe something is the right thing to do with the asset, we don't want to have to go get a lender consent, right? And when you talk about the tenant disruption that we're going through, can you imagine having to deal with lenders is you're taking back -- you want to take back that below-market space, but the lender may have a different point of view. So I think it's a privilege to be in the public markets. And I don't think it's something that would alter our strategy or put us in the only if we could do this, we'd be that much better.

And you had mentioned the execution you guys got in the bonds last week. What would the pricing have been if you had gone up to 10 years? Like what's the spread differential across the curve these days for your credit?

Yes, I think a 10-year probably would have been 115 -- [ 110 ] to [ 115 ], somewhere in there.

So what is the thought process just you had the whole in the latter 7 years made sense?

Yes.

Any questions from the audience? All right. Just speak into the mic and press the button. There's no button, I think it's live just -- no it's not.

You have to sing a song first.

So you mentioned cap rates and going in. And obviously, it depends on how much growth you're going to get out of the asset, how many you need to put into the asset, et cetera, et cetera. But to get the middle low to low double-digit, high single-digit IRRs what kind of cap rate range are you looking at going in? And let's say that it doesn't have much growth. What would you need versus, okay, we can do a lot of growth. What would you mean just to understand the spread? I know it's very asset specific and...

Well, if it doesn't have much growth, we're probably not the right buyer for it. But you can go in at a 6% to 7% upfront current yield. And if you can grow that at 4% or better, and then you assume a reversion cap rate 75 to 100 bps higher than where you go in, that gets you to that high 9 kind of unlevered return. And that's kind of where a lot of what we're looking at falls out. There are some instances where you can go below a 6% cap rate, but you've got visibility on 6% growth, still revert the cap rate going out and make that high single, low double-digit unlevered return.

And are you seeing much competition in the acquisition market?

Particularly for core assets. That's where pricing has gotten out of where we can make it make sense. It was interesting. Blackstone jumped into the ROIC opportunity in total a lot of other institutional capital, the water's warm come on in. But our asset class is not a commodity. And by that, I mean it's actually really important to have a leasing platform, a construction team and redevelopment team to help you underwrite the moving pieces and execute a value-add strategy. It's more difficult for passively managed or third-party managed capital to have confidence in being able to execute that. So we are focused on those assets where we see some moving pieces that we can extract value from.

Great. Maybe we'll run -- jump into the rapid fires, your favorite part of the session. What do you guys think same-store NOI growth in 2026 could be for the peer group?

Go ahead, Brian. You take it.

2.5%.

And this time next year, less more of the same amount of companies.

Steve.

Less.

Great. Well, thank you guys so much. Everyone, have a great conference.