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

Why don't we get started? So this is the first panel for me here. Welcome to the Brixmor Roundtable. Happy to have Brian Finnegan with us this morning, who's the CEO of the company. Brian, why don't you -- I mean we have a big group here, maybe introduce the team and maybe provide some opening remarks.

Yes, sure. Samir, thanks for having us. Good seeing all of you today. Joining with me here are Mark Horgan, our Chief Investment Officer; Steve Gallagher, our Chief Financial Officer; and Stacy Slater, our Head of Capital Markets, IR and Strategy. Thanks again for being here today. Look, from our standpoint, I mean, the strategy continues to be accretive reinvestment in our portfolio. Really, my focus for the last 18 months in coming into the seat is not a shift in the strategy. We spent 10 years transforming the portfolio. It's really to accelerate everything that we've been doing. It's been a tremendous environment for open-air retail. Our retailers are performing. Traffic continues to go up at our shopping centers and across the sector. But in particular, the work that we've done to our portfolio has really allowed us to capitalize on that environment. We're signing rents at the highest level that we ever have. We continue to deliver growth at the top of the sector, and we're delivering that more efficiently with lower CapEx with retailers taking on more of that work. And what we show all of you is the visibility on that growth that's really unparalleled in what we own and control today. We're not banking on external growth to grow. We have a signed but not commenced pipeline of $70 million that's contractually obligated. It's been around that level for the past couple of years because we continue to backfill it as we've been commencing $15 million to $20 million a quarter. So as we look out, our plan is to continue to do what we can to accelerate that. We've invested $1.5 billion in the portfolio to date, but we're even more excited about the opportunity set that we have going forward. We've got $1 billion in reinvestment just in our active and future pipelines that we show all of you projects like the half a dozen that we have with Publix in Florida, things like in Metro New York, suburban Philadelphia, suburban Houston as well. So the pipeline continues to be strong. And then while external growth is really additive to what we do, we have found opportunities to put the platform to work. About half -- close to half the acquisition activity that we've done as a public company has been in the last 2 years. And there's a common theme across all of those acquisitions in that they have a growth profile that aligns with the growth profile of the portfolio that we have today, and they're in markets that we know very well. So we're very excited about what we see within the space in terms of how our tenants continue to perform, but even more excited about how we're positioned to capitalize on that going forward.

I mean you mentioned after coming into the role and you talked about accelerating kind of everything you've done here. Maybe diving into that a little bit, maybe where do you find the biggest opportunity to improve the business?

I think it is that, Samir, if you look at where we've kind of taken rents in a couple of different ways. So just in operations alone, we've taken rents from $12.50 to $19 across the portfolio. We're signing those at $25 today. We're at 3 years running of renewal growth that's in the mid-teens. So our retailers are able to pay higher rents because they're performing in our shopping centers. So we think there's continued room to run there from just a rent growth perspective in the existing portfolio. And it's really continuing to capitalize on that, whether that's the 3.5 million square feet of space that's expiring, anchor space in the next 3 years that we control at rents that are $11, and we're signing those at 18 or whether that's in our existing bumps in the portfolio, which were a record at 2.8%. So that's in the initial operation to continue to drive rate in the portfolio and do that more efficiently. I mentioned reinvestment. So getting those projects started, we've been delivering larger projects across the country recently. So you think about Davis, California, Block 59 in suburban Chicago, or in Orlando, the projects that we have in suburban Philadelphia, bringing those forward and getting those commenced. So you will see us start to bring a number of those public projects online next year and in the years to follow. You should expect a steady cadence of that future reinvestment pipeline coming on to the active pipeline as well. And then an area that I'm sure we'll touch on, we have been very forward-thinking in terms of our deployment of technology. And for us, it's very result-oriented. What's the time that we're saving, what's the value that we're creating. And I mentioned a few things in our first earnings call earlier in the year, areas like legal leasing, things that Mark is doing in terms of tenant under -- or property underwriting as we're looking at acquisitions and then tenant health across the portfolio, which we're seeing even more improvement there as well. So that's been a big focus for us.

This is more of the AI and sort of data.

I'd say AI and data across the portfolio.

And you're seeing results.

Absolutely. Absolutely. I mean, look, we cut our outside legal expenses in half. And if you think about the time it takes to review a lease, right, the time it takes to dig into a lease clause to figure out what you need to do to reinvest in that. we've shaved that time down dramatically. So one of the things we measure is time to open from when we have that first conversation to when we get those tenants open. We've cut our time in legal by 15% over the past 2 years. So that's something where we're seeing real tangible efforts. And so if you're able to take that time and have that individual now work on a few more leases, just think of how many days of rent you're able to pull forward.

What about on the underwriting front as you think about acquisitions from a technology perspective?

It's 2 things. It's speed. It's allowing you to get through the data much quicker. So if we get an inbound from a broker, we can get into our model and compare it to our existing portfolio that used to take a day or 2 from an analyst. It's kind of done in 10 minutes, and you can kind of rank your sales performance against the entire portfolio is much, much faster. The other piece, as Brian mentioned, it's a cost perspective as well. So we were cutting about $50,000 out of every acquisition just from a legal perspective. And so we're getting that work done cheaper and faster, which has been great.

Maybe just shifting to the consumer. There's been a lot of conversation on the macro. Talk about -- I know you briefly touched on kind of traffic and tenant sales, but kind of talk to us kind of the trends you're seeing you saw through the summer. Any changes in tone from retailer conversations that you've seen over the last few weeks or several months here?

We remain very encouraged. I mean if you look at our back-to-school traffic was up significantly over last year. We've been up in traffic every month this year. Interestingly, our back-to-college traffic, we have a great college town portfolio. So where we were seeing, call it, 3% to 4% growth year-over-year, we saw 8% growth in Ann Arbor, Michigan. We saw high single-digit growth in the centers of Texas A&M. So we have about 10% of the portfolio in college towns, and we saw significant growth there. I'd say we're seeing the consumer be maybe more intentional with their spend. I think across the income spectrum, they're looking for value. You heard that on a number of the earnings calls with the off-price tenants. I think they're still spending on health and wellness and health and beauty. So you heard that from Ulta. You heard it from a number of the fitness tenants as well. And then I think there has been -- I mean, there's kind of a mixed bag, I think, on some of the grocery results across the board. But if you think about the traditional grocers that went several years without opening new stores like Kroger invested millions of dollars in that fleet and who we've been growing with on the specialty side like Sprouts and Trader Joe's and Whole Foods, we're still seeing strong demand there. So I think from our standpoint, we do have -- we serve 2 customers, right? We serve our retailers and then we serve the customers that shop at our centers. But from a retailer perspective, when they're making 10-year decisions and they're looking at various economic cycles during those 10 years, they're doing that today with more data than they've ever had on those consumers to make those stores as productive as possible. How much in a given -- in an environment are they shipping from that store? How much is getting picked up and being able to connect with the consumer wherever the consumer wants to meet them is important. So I do think the consumer is being intentional with their spend. You certainly heard that from a number of retailers, but they've been incredibly resilient.

Anything on the -- look, I mean, obviously, the watch list, right? As we think about the back half of this year and into next year, I mean, there's been -- you've heard grocery earnings here, right? It's been -- whether it's Kroger or some of those reports. I mean, how do you think about the watch list going into kind of the next 12 to 18 months here?

I would say the underlying tenancy of this portfolio, the healthiest is the healthiest it's ever been. And I'd ask anybody in the room to compare our top 20 from 5 years ago to where it sits today. And what you'd see in the top tenancy is growth from Trader Joe's, you'd see growth from Sprouts, growth from Barnes & Noble, growth from Publix and look at those operators that have left. So I think as you think about categories that could be closing stores, right, we expect drug stores to continue to marginalize their store base. It's 80 basis points of our rent. And even the nature of that exposure for us, they're generally older in-line locations. Think of the former Eckerd or the former Longs in California, filling those spaces with Trader Joe's and Ulta. We've leased every one of our Rite Aids and we got back over 2 years. Office supply will continue to close stores. We cut that exposure in half. We've been signing the bulk of the off-price deals that we've been doing have been in a number of those boxes at rent spreads from 40% to 50%. I do think you'll see them potentially slow down because they've almost closed too many stores. They're not certainly not going to open new ones and then you look at the rest of the exposure. It has been a good summer for movie theaters, but it's 1% of our rent. I think we've invested in a new theater in 7 years. But I think overall, the health of the portfolio, even on that small shop tenancy, the signatures that we were able to get on those leases over the past 5 years have dramatically improved from where they were pre-pandemic. And you see that coming through in the bad debt trends. You see that coming through in the move-out trends. You see that coming through in those retention rates as well. So we feel pretty good about the watch list going forward. I think there are always inevitably some categories that will close stores, but just leave you with the health of the tenancy is as strong as it's ever been in the portfolio.

And I think look to the retailers, their reports have been very strong, right? So even where you may have some stock price performance, that is different than ultimately the sales that they're generating from the actual locations and how they're growing their store fleet. So I think sometimes don't always focus on what an individual stock is doing, really look at what they're doing at the stores.

And I know you guys recaptured some space in the second quarter. Maybe give us an update kind of where you are with that space.

Yes. I think one of the reasons we wanted to signal that we potentially see some occupancy noise in the second quarter was that things have been really good. And I think folks are pointing at any potential negatives. And part of our strategy is going to continue to be capturing the value in undermarket space. Just the nature of the roll this quarter, we expected to take some space back specifically on reinvestment assets in North Jersey and Orlando. We knew it was going to come through. It came through, and we had a handful of the Painted tree boxes that we took back and still only had a 30 basis point dip, also raised guidance during the quarter as well. So you didn't see it impact us in terms of our growth rate for the year. The boxes that we did take back are effectively all leased. At this point, both with[ Ren and with the Pantry], again, with off-price operators, with health and wellness operators. So that positions us for even a better looking forward in terms of the improved rent and the improved traffic on those, getting those backfilled pretty quickly. We don't give occupancy guidance because there are going to be times you saw our term fees pick up last year, and they're a little bit elevated this year where we're going to take space back in an environment like this, sometimes get paid to do it. But we do expect occupancy to get back on a growth trajectory in the back half of the year.

Right, right. So it sounds like I think during the second quarter earnings, you said that there was 6 of the 8, right, boxes you had taken back were had been.

Yes, effectively, and we're effectively like signed or at leased on all of them.

And the rents were up like 40%...

Yes.

And I think that's like just a good window in terms of the supply environment. Like back to what we're hearing from retailers, we're hearing that there's not enough good boxes in great shopping centers. And that's why you're seeing when there are some level of vacancies in boxes like that, that's why they're getting absorbed very quickly. And they're getting absorbed quickly with tenants that are driving traffic and continuing to produce in their stores.

You hit a record of like, I think it was $70 million of ABR as you look at SNO pipeline, right? Help us understand kind of the rent commencement of that? And when does that sort of hit the financials as we think for the next 12 months?

Yes. We expect about $30 million to hit the remainder of the year. And then as you look into next year, the vast majority of that should hit into '27. And just like we've talked about consistently over the last couple of years, that stacking of rent commencement really gives us the visibility into growth like you're seeing in '26 with the midpoint of our same-property NOI being at 5.25%. But also as you go into '27 and then additionally into '28, you'll see that continued stacking rent commencements at pipeline. I think importantly, the rents in place on them are about 25% higher than our in-place rents that we see across the portfolio.

I think the other thing that is helpful, just seeing that visibility and the size of that pipeline, I'd point to 2 things. It has remained in kind of that $60 million to $70 million range for some time. That's because as we've been commencing, call it, $15 million to $20 million a quarter, we've been backfilling that with new leasing. I think the other thing that maybe historically was a knock on the portfolio is, well, what's coming out the back door, right? Well, we have small shop move-outs that are record lows for the portfolio, retention rate that's nearing all-time highs. So from just a move-out trend perspective, you're seeing much more of that growth being additive going forward. with, again, the tenancy being as healthy as it's ever been and continuing those strong retention rate trends.

On the leasing side, I mean, you've hit -- it seems like every quarter is a record for small shop leasing and occupancy, right? Like what's the kind of the -- where can you take shop occupancy you think at this point?

So we continue to take it higher. If you were to look at that future reinvestment pipeline, the 60-or some-odd projects that are on there today, they trail portfolio average by about 400 basis points. So if you were to ask where some of the nonstructural vacancy is, right, it's there. So call it, is that 100, is that 150 basis points. We also have spreads. So back to that SNO perspective, there's a 400 basis point spread in terms of that small shop occupancy coming online that's obligated and baked -- right? So that's visibility on growth. And then overall, is it probably a similar volume. We're 80 basis points below prior peak occupancy. That's by no means a cap on the portfolio. So if you figure another 50 to 100 basis points on top of that.

Brian, you mentioned in your remarks, doing what you can to accelerate the SNO. Can you just talk about what levers you're able to pull to maybe bring forward some of that commencement and how time lines have been trending?

Sure, sure. I mentioned first on the legal side. So it's cutting down the time that we're lease. So you'll hear coming up, I mean, we had a number of anchor tenant deals that we got signed in under a month, right? We're setting kind of back to setting new records in our time with our off-price operators who we're doing a lot with, getting that time frame down, we used to take, call it, 4 to 6 months is now taking 1 to 3. So that's number one. Number two, retailers have been much more willing to take on the work and take on existing conditions themselves. So basically, what that allows us to do is give possession sooner, right? And it allows us to -- it's obviously cheaper for us to do it and allows them to get open a lot quicker. There are also times, and we just did this in Westchester County, where we're doing tiered delivery schedules. And what I mean by that is we'll get a certain amount of work done so that the retailer can get in and start and then come back and maybe do the parking lot or maybe do the loading dock after that where we are doing some work. And then also where we do have these partnerships, we're willing to go at risk in terms of the entitlement spend because the tenant's got a committee-approved deal and we know they're going to move forward. So it's the relationships that we have with municipalities in certain jurisdictions that we're able to get that work started faster. And all of that added is combined is allowing us to start to pull some of these dates up. And then the constant look at the portfolio with somebody like Publix, if you'll notice, -- we added 2 new Publix centers to the active pipeline last quarter, not like we bought those shopping centers, but we're constantly in front of these retailers understanding if they've had shifts in a market. We're doing one of their first new prototypical redemises in suburban Atlanta. It's an area where typically they're tearing down stores in Florida. And as they start to get stores on a vintage of 25, 30, 35 years in the Carolinas, and it's just not as advantageous for us to tear those locations down because those sales may go to a competitor versus going to some of their other stores in Florida. So they're testing out the first one with us. So there could be another pipeline there as well. So it's also constantly in front of tenants and understanding where they may not be willing to pursue a reinvestment in the portfolio.

I'll just pause for a second. I don't know if there's any questions from the audience. Okay. On -- I just wanted to switch to external growth here. You've been active in acquisitions in the second quarter. Maybe give us an update of kind of what you're seeing on the transaction market side, right? A lot of capital entering the space. Talk about pricing and talk about your ability to find acquisitions that sort of meet your return thresholds here.

You want to take that one?