Brixmor Property : 1Q 2022 Earnings Conference Call Transcript

1Q 2022 EARNINGS CALL - FINAL TRANSCRIPT

MAY 2022

CORPORATE PARTICIPANTS

James Taylor, Chief Executive Officer and President

Angela Aman, EVP, Chief Financial Officer

Mark Horgan, EVP, Chief Investment Officer Stacy Slater, SVP, Investor Relation

Brian Finnegan, EVP, Chief Revenue Officer

PRESENTATION

Stacy Slater

Thank you Operator. And thank you all for joining Brixmor's first quarter conference call. With me on the call today are Jim Taylor, Chief Executive Officer and President, and Angela Aman, Executive Vice President and Chief Financial Officer, as well as Mark Horgan, Executive Vice President and Chief Investment Officer; and Brian Finnegan, Executive Vice President, Chief Revenue Officer, who will be available for Q&A.

Before we begin, let me remind everyone that some of our comments today may contain forward-looking statements that are based on certain assumptions and are subject to inherent risks and uncertainties, as described in our SEC filings, and actual future results may differ materially. We assume no obligation to update any forward-looking statements. Also, we will refer today to certain non-GAAP financial measures. Further information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in the earnings release and supplemental disclosure on the investor relations portion of our website. Given the number of participants on the call, we kindly ask that you limit your questions to one or two per person. If you have additional questions regarding the quarter, please re-queue. At this time, it's my pleasure to introduce Jim Taylor.

James Taylor

Thank you Stacy and good morning everyone. I'm pleased to report yet another strong quarter for Brixmor. It's a quarter that not only reflects the positive trends we're seeing in the open-air retail industry, with record levels of tenant demand, increasing customer traffic, and limited new supply, but another quarter of performance for Brixmor in particular that demonstrates the unique durability and momentum of our value-added plan. Ours is a business plan that outperformed through the last three years and which continues to produce fundamental growth beyond pre-pandemic levels, and importantly, it's a business plan that positions us to continue that outperformance in the future. Said differently, our value-added plan benefits immensely from the strong industry fundamentals we're seeing today, yet it's also durable enough to outperform in less favorable conditions.

This quarter we delivered 11.4% year-over-year FFO growth, driven primarily by same-store NOI growth of 8.4%. Those are strong headline numbers certainly, but I think what truly stands out in the quarter is the strong growth before the impact of bad debt. We expect this fundamental growth to continue and accelerate well beyond the transitory benefits of bad debt recoveries, which do reflect well on the performance of our underlying tenancy, but which are finite in impact. Importantly, our performance metrics this quarter again bring into sharp relief the growth and transformative impact delivered through the continued execution of our value-added plan. Consider for example, the nearly 1.4 million square feet of new and renewal leases signed during the quarter at a cash spread of 18.1%, including 780,000 square feet of new leases at a comparable spread of 35.9%. That's a record level of Q1 productivity of incremental new rent on a portfolio that is 20% smaller in GLA than we began our plan. Or consider the all-time record small shop occupancy of 87%, which includes a drag of 120 basis points from in-process and future redevelopments. Or consider the year-over-year growth in overall leased occupancy of 130 basis points or the continued growth in average in place ABR to a record of $15.64 per square foot or the significant growth in traffic levels over pre-pandemic peak for this portfolio.

In addition to underscoring the momentum our value-added transformation has driven, our metrics this quarter provide great visibility on continued growth, including $52 million of signed but not commenced ABR at an average rate of $18.92 a foot that we expect to commence over the next several quarters, as Angela will detail shortly, and an additional $50 million of ABR from new leases in our forward leasing pipeline at an average rent of over $18 a foot. This forward leasing activity provides us confidence in our outlook for base rent to contribute 4% to 5% growth, not only this year, but into 2023 and beyond. We are excited about our ability to continue to capitalize on our proven locations, our attractive rent basis and our transformative value-added reinvestment to drive outperformance in the future.

Speaking of reinvestments, I'm pleased to report that we delivered another $28 million of accretive reinvestment this quarter at an incremental return of 10%, delivering the same value creation as over $110 million of ground-up development before considering the additional value of cap-rate compression on the centers impacted as we brought in better tenants at better rents. Simply put, our value creation engine continues to fire on all cylinders, not only delivering highly accretive returns, but also enhancing and transforming the assets impacted. To date, we've delivered over $720 million of accretive reinvestments, impacting over 30% of our portfolio, and our pipeline remains strong with an additional $419 million of active reinvestment projects leased and underway at an average incremental return of 9%, as well as a shadow pipeline of nearly $1 billion of opportunities at compelling returns that we'll continue to convert to active over the next several years. We invite you to tour our assets with our regional teams in markets like Southern California, Texas, Chicago, South Florida, Philadelphia, and New York to not only see the transformation that has occurred, but the value to come as we continue to execute on our disciplined strategy of capitalizing on attractive rent basis. You can also checkout our progress via our "At the Center" videos posted on our website and on LinkedIn.

From an external growth perspective, we continue to find and execute upon attractive opportunities from our target list that further cluster our investments in our core markets. Importantly, these assets present significant value-add opportunities to leverage our leasing and reinvestment platform and to deliver significant growth in ROI from releasing and remerchandising, lease up of in-place vacancy, mark-to-market of in-place rents on rollover, densification including outparcel development, and accretive redevelopment. Recent examples closed subsequent to quarter-end include

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450 Lexington Avenue ¦ New York, NY 10017 ¦ 800.468.7526

West U Marketplace in Houston, a highly productive Whole Foods anchored center across from our Braes Heights asset that presents near-term upside through re-merchandising and marking the shops to rents equivalent to what we're achieving right across the street. Elmhurst Crossing and North Riverside Plaza, both grocery anchored centers in highly dense, affluent suburbs of Chicago just minutes from our regional office. Both assets have highly productive anchors at below market rents with near-term upside through the lease up of vacancy to tenants pre-identified by our national accounts team, who desire to be at these highly trafficked centers, as well as the addition of pad sites and other accretive reinvestment. I'm pleased to report that our regional and national accounts teams have already driven new lease and LOI activity on a recently closed acquisition at rents well in excess of what we originally underwrote, demonstrating the strength of our team, the conservatism of our underwriting, and the compelling nature of the value-added opportunities we've executed upon.

In summary, I'm grateful for how this Brixmor team continues to execute, delivering outperformance and tremendous value for our stakeholders as we advance our purpose of creating and owning centers that truly are the center of the communities we serve.

Angela Aman

Thanks Jim and good morning. I'm pleased to report another strong quarter of execution by our team as we continue to deliver on our portfolio transformation, while capitalizing on the strength of the current leasing environment. Nareit FFO was $0.49 per share in the first quarter and same property NOI growth 8.4%, reflecting approximately $8 million of cash collected on previously reserved base rent and expense reimbursement income. Base rent growth meaningfully accelerated in the first quarter, contributing 410 basis points to same property NOI growth, while percentage rents and ancillary and other revenues contributed 130 basis points on a combined basis. Net expense reimbursements detracted 30 basis points from same-property NOI growth in Q1 due to the quarterly volatility of operating expenses experienced in 2021. I would note, however, that we do expect net expense reimbursements to be a positive contributor to growth for the full-year due to prudent expense management and anticipated occupancy gains across the portfolio.

The impact of our value-added strategy continues to be evident across all of our operational metrics. Billed occupancy was down only 10 basis points this quarter, defying normal seasonal trends, while leased occupancy was up 10 basis points driven by a 30 basis point improvement in the small shop leased rate to 87%, a portfolio record. As a result, the spread between leased and billed occupancy for the entire portfolio expanded to 350 basis points, and the total signed but not commenced pool, which includes an additional 60 basis points of leases signed on space that will soon be vacated by existing tenants, increased to $52 million, at a blended rate of nearly $19 per square foot, more than 20% above our portfolio average. As our new disclosure on page 30 of the supplemental package highlights, we expect that over 70% of the signed but not commenced pool, or $38 million, will commence throughout the balance of this year. As Jim highlighted, leasing results in the first quarter were exceptionally strong, with new lease spreads totaling 35.9% and renewal spreads accelerating to 12.1%, increasing our blended new and renewal spread by 360 basis points to 18.1%. Importantly, new lease productivity in the first quarter was 780,000 square feet, representing the highest first quarter total since 2018.

In terms of the balance sheet during the first quarter, we utilized existing cash on hand to repay $250 million of floating rate notes upon maturity, and subsequent to quarter-end, we amended our unsecured credit facilities, improving pricing, adding a sustainability linked feature, and extending the maturities of our revolver and $300 million term loan. In addition, our amended term loan has $200 million of additional capacity, which may be utilized by the Company at any point in the coming year. As of March 31, pro forma for the amendment, we have approximately $1.4 billion of available liquidity and no debt maturities until 2024, allowing us ample time and flexibility to opportunistically access the capital markets.

Since last quarter's call, our credit rating has been upgraded to BBB by Fitch and has been placed on positive outlook by S&P. We're very pleased to see such recognition for the improvements that have been made to the balance sheet, the portfolio and the platform over the last six years.

Turning to guidance, we have revised our 2022 same property NOI growth expectations from 2% - 4% to 3% - 4.5%, due to the significant out-of-period collections of previously reserved amounts in the first quarter and an improvement in our outlook for revenues deemed uncollectible through the balance of the year. We now expect that for the full-year revenues deemed uncollectible will total approximately 60 to 100 basis points of total revenue, resulting in a detraction from 2022 same property NOI growth of approximately 100 to 150 basis points. Nareit FFO guidance has been revised to a range of $1.88 - $1.95 per share from the previous range of $1.86 - $1.95 per share.

QUESTION AND ANSWER

Craig Schmidt - BofA

I know that small shops had just reached a new high, but how much further can you push it? You seemed to mention a drag that sounds like you were still working on additional lease up of small shops.

James Taylor

Thank you for the question and highlighting the drag that I did mention. It is a drag of about 120 basis points for projects that are active or soon to be active redevelopment projects where, from a strategy standpoint, we're holding some small shop vacancy to benefit upon the redevelopment of the center to drive both rate and occupancy. But more importantly, when you think about what's been happening with this portfolio overall, we really clearly expect us to continue to set new records in terms of that small shop occupancy, and see it increase several hundred basis points above where it is today. It's part of the value-add nature of what we're doing. Oftentimes we're not including the follow-on lease up that we see in these 2

reinvestments as we talk about the returns, but it's something we fully expect as we continue to improve the portfolio.

Craig Schmidt - BofA

Then just as a follow-up, are there any changes to the structure of back-office space to tenants to better accommodate the last mile fulfillment needs?

Brian Finnegan

Tenants are certainly looking at how they're utilizing their store, not just to connect with the customer at the shopping center, but, to your point, to be able to fulfill goods from the stores. Target just reported earlier this year that 95% of their sales are fulfilled from the stores. What's been interesting about it is that tenants have been able to integrate this within their current prototypes and as we're working with tenants in terms of their build-outs and getting them open for stores, both for this year and in 2023, they're certainly focused on how to integrate that into the store. It's been interesting to see the likes of Ulta and other tenants who are relying on that omni-channel platform do. It's also part of our curbside program we've talked about on prior calls, how we've been very accommodating with large format retailers, and some of our junior boxes are doing more curbside really across the portfolio as well. All that goes into making the store really the focal point of what they do to connect with the customer.

James Taylor

If you think about it, Craig, it's also the most profitable logistics space for these tenants as they transfer a lot of the last mile cost to the consumer.

Todd Thomas - KeyBanc

I just wanted to ask about on the investment activity in the quarter. It was a relatively big quarter and year-to-date of net investment activity for the Company. Can you talk a little bit about the pipeline and what might be on tap for both buys and sells in the near term and throughout the balance of the year and maybe comment on whether your appetite has changed at all for new investments in light of the current macro backdrop?

James Taylor

Our discipline and focus has always been on those opportunities within our target list that we think present value-added return opportunities. What do I mean by that? Investment opportunities where we have significant visibility on near-term growth, and I highlighted some of the areas where we're realizing that on some of these recent acquisitions, including lease up of vacancies that our national accounts team has pre-identified, to rolling rents to market, et cetera. Our appetite for value-added opportunities in this environment remains strong. We're pleased with what we've executed to date in terms of dispositions. We do have some more in the pipeline and expect that to pick up a bit over what we've done year-to-date. We'll always remain opportunistic. That's really our discipline. We're not trying to go into new markets. We're looking at opportunities on our target list where we think, even in a low cap rate environment, which interestingly, given the volatility in rates, has remained pretty persistent, where we can get to returns that we can justify from a use of capital standpoint. That's really been our focus and expect us to remain disciplined and continue to capitalize on what we think is a competitive advantage in terms of our leasing and redevelopment platforms, particularly, Todd, in a universe that's still almost entirely held by private owners. Some of this interest rate volatility may shake loose some opportunities that we haven't seen in the past. It may even drive cap rates higher. It remains to be seen, but I think we're in a great position to continue to be opportunistic.

Todd Thomas - KeyBanc

Are you changing your return hurdles at all as you evaluate new investment opportunities? Do you have a sense whether pricing is changing at all for new deals that might be coming to market?

James Taylor

Certainly where rates are and spreads impact our hurdle rates, no doubt about it, which just puts more emphasis on finding those opportunities, again, where we can clear those hurdle rates with highly visible growth. In terms of what we're seeing in the market, as I alluded to, it's been pretty stubborn, and Mark, you might comment on it, but cap rates remain pretty tight perhaps in part due to those risk-free spreads.

Mark Horgan

Yes. I agree with you, Jim, that ultimately the rate environment will impact the cap rate environment, but we've continued to see very strong pricing real time in the market today. We've seen very strong movement of institutional investment interest in our space as we have really seen that strong tenant demand, that strong consumer traffic. That's really showing them that open air cash flows are quite durable. We continue to trade at a pretty large yield premium relative to other major asset classes. I think that wave of capital coming into the space is making cap rates somewhat sticky. I think the best example of that has been pricing on recent portfolios, where it appears to us at least that we've seen portfolio premiums and it shows you institutional investors are paying up to get into the space and there's strong demand to continue to access open air retail cash flows.

Christopher McCurry - Citi

Just a quick follow-up on the external growth conversation and return hurdles. Any commentary you could give us for appetite on entering new markets or maybe appetite for larger portfolio acquisitions and just any insights to pricing you're seeing on some larger portfolios?

James Taylor

In terms of new markets, we see ample opportunity in the markets we're in and our strategy from the start has been to exit single assets markets or markets that we don't see as long-term core and cluster our investments as we've been doing, in Southern Florida, Texas, Chicago, in those submarketswhere we see great retailer demand, where we're not having to guess what the rents are. We have properties there and we also really understand through our national and regional accounts teams what the tenant demand is to be there. I think those are what present the best risk adjusted returns for us versus going into new markets.

Christopher McCurry - Citi

Just commentary around appetite for larger portfolio acquisitions and just pricing insights you're seeing into some of the larger portfolios on the market.

Mark Horgan

Yes, as I mentioned before, there has been a variety of portfolios that have traded and we do think they've traded at a premium relative to the underlying asset-by-asset cap rate, showing that real strong demand to be in the space. While we've looked at those portfolios, we have remained disciplined with respect to our return hurdles, and we think we've gotten better value in the one-off market recently. A good example from a recent deal we just announced with Ravinia, if you look at that asset, we purchased it at 81% occupied. As Jim mentioned, the local team and our national accounts really saw strong tenant demand to be at that asset. The first couple of weeks, we brought in a large lease that's going to increase the yield there by about 110 basis points and drive occupancy by about 10%, which we think is a really great return on that asset and we'll see more growth beyond it. When we've seen the assets coming from portfolios, we've seen a lot less growth. We've been really pleased, again, with the one-off execution and the pricing we think we can get there and the return that we think we can achieve over time.

James Taylor

When you couple that with a portfolio that naturally isn't going to be consistently value-added, with the fact that portfolios are tracking a premium right now, it just makes it difficult for us to be competitive.

Christopher McCurry - Citi

Yes, makes sense. Then could you just walk us through some of your capital plans following the Fitch and S&P announcement? Any appetite for tapping the debt capital markets this year or could you just give us an outline of some of your capital plans?

Angela Aman

With the amendment of the credit facility, what you see in the supplemental is a 2023 maturity that has now been pushed out to 2026, so we don't have any remaining debt maturities until 2024, which gives us a lot of time to monitor the debt capital markets in particular and pick a point that makes sense and feels opportunistic for issuance. I'm glad we have a lot of flexibility and runway, it really reflects all of the capital raising we did throughout the pandemic, putting us in a position to be a little patient and pick the best window.

Juan Sanabria - BMO

You referenced the record small shops space occupancy. Just curious on how you think that could evolve or what you're forecasting in your model for the balance of the year and ultimately the target and confidence to get there?

James Taylor

Angela will kill me if I give guidance as to where we think the small shop occupancy is going to be over the next few quarters. But it is a significant growth lever for us and it's a growth lever in part because of the value-add strategy that we've been executing upon. As I mentioned earlier, we do expect that level of small shop occupancy to continue to accrete, not just from an absolute occupancy standpoint, but importantly also from a rate standpoint. We're not driving just to get to occupancy, we're driving to get to both rate and occupancy. As I mentioned, in time, I won't give specific guidance, we do expect to be several hundred basis points above where we are today, market neutral, given the execution of our plan. When you bring in a vibrant new specialty grocer into a center that didn't have such a tenant before, as you can imagine, the follow-on leasing and what happens to the small shops as part of that is highly accretive. As I alluded to in my remarks, we're now a little over five years into the execution of our plan. We've invested over $720 million into our portfolio, close to a 10% incremental return. Importantly, we've impacted about 30% of our centers. When you consider the $420 million of active and leased reinvestment that we have under way, and importantly, the pipeline behind it, we really have, I think, unparalleled visibility in terms of how are we going to drive that. It's a key component of, I think, what differentiates our plan from others in that this isn't a recovery play. This is a value-added play, and it's part of what drove our out-performance in the three years that just passed, but it's also what gets us excited about how we're going to perform going forward in great market, which gives us tailwind, and in a neutral or even a more challenging market, we like how we're positioned from a visibility on growth standpoint.

Juan Sanabria - BMO

Just following up on the rate side of the equation, could you give us any sense of how, on like-for-like space that maybe hasn't had the benefit of redevelopment, how rents are trending for leases you are signing today versus a 2019 benchmark, just to get a sense of the true pricing power?

James Taylor

We're seeing the benefit of the low rent basis we have across the entire portfolio, not just the assets that we're accretively reinvesting in. That upside in rate oftentimes opens up the opportunity for additional reinvestment, but it's not always required. You can see that in the consistency of our quarterly spread numbers that Brian and team continue to generate.

Brian Finnegan

You can also see it in terms of the rates in which we're able to sign small shops. This quarter, we signed small shops at the highest rates than we ever have across the portfolio, which is indicative of everything that Jim had talked about, the investments that we're making in our centers, the improved operations, the capitalizing on the anchors that we've been putting in. Then just a really strong environment in terms of the depth of demand for space, whether that's in the health and wellness category or the QSR restaurant category. We're just seeing some really great tenants that we've been able to attract to our centers, and again, at the highest rents we've ever signed. We've been really encouraged by it, and to Jim's point, we see a long runway for growth.

Ki Bin Kim - Truist

If you think about the macro concerns and even the retailer equity prices versus the strong commentary that you have on leasing volume, there's a disconnect. When you think about that, can you help us bridge that gap? At what point do you think retailers confidence could start to wane?

James Taylor

I think it's going to be driven ultimately by the consumer. The consumer continues to shop at these retailers, the consumer continues to buy groceries. With the inflation that we're seeing today, the retailers have largely been able to pass that on to the consumer, perhaps in no small measure because of wage inflation. The other thing to think about that's going on, and maybe a broader background theme, is how the retailers themselves in an inflationary environment are more disciplined and strict about assessing the profitability of different channels, and the store remains the most profitable channel for them to get to the customer. But what we're seeing real time continues to underscore the strength of that leasing environment, where tenants really do want to get stores open sooner. They want to fill their pipelines, not just for '22 but '23 and beyond.

Brian Finnegan

I would just add to Jim's point, we still do have retailers that are looking for 2022 openings. We talked about the record start that we had this year, the best start we've had since 2018, but our forward leasing pipeline has also grown 15% since last quarter. We're seeing more deals come to committee. We're seeing the strength of our core tenants, new tenants to the portfolio, like the mall native brands that we continue to attract to our centers. From that standpoint, we're encouraged by it, and as we continue to make these investments, we're seeing more competition for space in than some type of pullback. Overall, again, we've been really encouraged by what we're seeing to date.

James Taylor

But Ki Bin, maybe more broadly to your point, and it was something that I tried to highlight at the opening of my remarks, ours is a business plan, because of our attractive rent basis, that can outperform in a less robust demand environment. Particularly as tenants are increasingly focused on the profitability of their various channels. That attractive rent basis is a huge advantage.

Ki Bin Kim - Truist

You guys had pretty good operating results this quarter, good leasing volume, good spreads and were more active in capital deployment. I would have just thought high level your FFO growth guidance would have been a little bit higher than just $0.01. I was also just curious if there were other line items that might be weighing on the full-year FFO guidance?

Angela Aman

I'd say a few things. I think it's important to step back and think about the context of our original guidance. This is part of the reason for us giving so many components of the same-store property guide last quarter as well. When we initiated our guidance, on the previous call, with our NOI guide at 2% to 4%, that embedded top line guidance, the contribution from base rent of 400 to 500 basis points, which would be materially in excess of any number that the portfolio's ever produced, and really reflected, I think, the strength of the current environment. Certainly, we have had this quarter wins on bad debt and that certainly was reflected in the improved same-property NOI guidance and the improved FFO guidance, particularly at the low end of the range. But I would just say we came out with guidance that was pretty strong to begin with and certainly reflected the strength we were seeing in the environment last quarter, and that we delivered on this quarter. As we look across other line items, certainly we are cognizant of the environment as it relates to inflation and interest rates across a number of line items, but again, I would say that didn't really affect the guide. It was really a reflection of the strength in top line that we believed we would see last quarter and that we continue to see this quarter.

Greg McGinniss - Scotiabank

I just want to go back to the lease spreads and rent growth. How much rent growth have your different geographies experienced since 2019 and separately, what is the current mark-to-market of the portfolio?