Brixmor Property : 3Q 2022 Earnings Conference Call Transcript

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3 Q 2 0 2 2 E A R N I N G S C A L L - F I N A L T R A N S C R I P T	N O V E M B E R 2 0 2 2
C O R P O R A T E P A R T I C I P A N T S
James Taylor, Chief Executive Officer and President	Mark Horgan, EVP, Chief Investment Officer
Angela Aman, EVP, Chief Financial Officer	Stacy Slater, SVP, Investor Relation
Brian Finnegan, EVP, Chief Revenue Officer
P R E S E N T A T I O N

Stacy Slater

Thank you Operator. And thank you all for joining Brixmor's third 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

Thanks Stacy and good morning everyone. I'm really pleased to report another quarter of phenomenal execution by our Brixmor team that highlights the accelerating and transformative impacts of our disciplined value-add strategy. Those impacts are reflected in every metric, many of which are post IPO records for the Company. And, importantly, that execution provides exceptional visibility on forward growth through 2023 and beyond, even in a more disruptive economic environment. Allow me to dig into our results and highlight how our all-weather plan positions Brixmor for continued outperformance.

During the quarter, we signed 1.7 million feet of new and renewal leases at a record rent of $19.26 a foot and a blended cash spread of 14.2%, which included 660,000 square feet of new leases at a record rent of $21.20 and a comparable cash spread of 32%. And, as reflected in our strong net effective rents, we achieved those records while remaining disciplined with capital. This record setting performance underscores the transformative impacts of our value-add plan and the related tenant demand to be in our well-located,highly-trafficked centers. I'm also pleased by the breadth of that demand, as we continued to drive strong market share of store openings for our core tenants in categories like grocery, fast casual, wellness, and value apparel. And we've also recently brought exciting new concepts to the portfolio that will drive additional traffic such as Yardbird, Best Buy's outdoor furniture concept, or Bark Social, or the Live by Cordish venue.

Our leasing activity drove overall leased occupancy to a Company record of 93.3%, a year-over-year increase of 180 basis points. And importantly, we commenced another $14 million of new ABR during the quarter, driving our billed occupancy to 89.6%. Importantly, we also set another record in small shop occupancy, which rose to 88.8% on new rents achieved of $24.78 a foot. More than any other milestone achieved, this growth in occupancy and rate for our small shops truly underscores the transformative, follow-on benefits of our reinvestment strategy. We also drove our average in-place ABR to over $16 a foot, another record for the Company, but which still has plenty of room to run as demonstrated by the nearly $20 a foot achieved on all new leases over the trailing 12 months. As we've said many times, our attractive rent basis provides the opportunity to outperform through disruptive environments such as we experienced in 2020, as well as strong supply / demand environments such as we're experiencing today.

Our execution delivered topline same-store growth of 4.8% and NOI growth of 3.6%, which is particularly impressive when you consider the drag of 250 basis points from revenues deemed uncollectible due primarily to declining prior period rent collections as we worked down our remaining receivables. Year-to-date, as we've driven occupancy and improved recovery rates, we've grown bottom line FFO by 6.5% on a comparable basis.

Looking ahead, we have $53 million of signed but not commenced rent, which will commence over the next several quarters, as well as $40 million of annual base rent in our forward new leasing pipeline. Even with the naturally declining rate of prior period collections as those receivables are paid in full and the increased possibility of disruption as economic concerns loom, we still expect continued outperformance in our revenue and NOI growth in 2023 and beyond. This level of visible forward growth truly underscores the all-weather nature of our plan.

Given our increased cash flow and confidence in continued growth, we are pleased to announce a dividend increase of 8.3% which will keep us still at one of the lowest payout ratios in the sector as we utilize free cash flow to self-fund our value-add plan without reliance on the volatile capital markets.

Speaking of that plan, our reinvestment pipeline continued to deliver despite ongoing supply chain issues as we partnered with tenants to get stores open on time. We stabilized $46 million in projects during the quarter at an incremental yield of 8%, bringing our year-to-date deliveries to $113 million at a 10% yield, creating significant value even in a higher cap rate environment. Since we began this program, we've completed over $800 million of reinvestments at an incremental return of 11% and importantly, we have another $400 million leased and underway, providing us significant future value creation. Please do check out our At the Center video series on our website that truly highlights the transformative impacts and accretive returns of our program.

From an investment standpoint, we continued our pause on acquisitions, keeping our powder dry, as we believe there will be compelling opportunities

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in the coming quarters as private, less well-capitalized landlords struggle with upcoming debt maturities and cash flow constraints. With that said, even in this more challenging capital markets environment, we've continued to find some liquidity to sell smaller non-core assets at opportunistic values, with over $110 million in sales transactions completed during and subsequent to the end of the quarter. And importantly, as Angela will discuss further, we have $1.3 billion of liquidity and no debt maturing until 2024, allowing us to be opportunistic from an external growth perspective.

Angela Aman

Thanks Jim and good morning. I'm pleased to report on another strong quarter of execution by the Brixmor team that highlighted both the value creation potential of our portfolio and the ability of our platform to harvest embedded upside. NAREIT FFO was $0.49 per share in the third quarter, driven by same property NOI growth of 3.6%. Base rent growth continues to accelerate, contributing 480 basis points to same property NOI growth this quarter. Excluding the impact of lease modifications and rent abatements in the prior period, base rent growth contributed 440 basis points, representing a 70 basis point acceleration from last quarter, reflecting continued growth in billed occupancy and significant releasing spreads over the last year. Ancillary and other income and percentage rents contributed 80 basis points on a combined basis, while net expense reimbursements contributed 50 basis points. Revenues deemed uncollectible detracted 250 basis points from same property NOI growth primarily due to the fully expected moderation of out-of-period collections of previously reserved amounts. Year-to-date, we have recognized approximately $21 million, or $0.07 per share, of out-of-period collections related to prior years, and our current expectation is that such amounts will be minimal in 2023. As a result, we do expect revenues deemed uncollectible to be a headwind to both same property NOI and FFO growth next year, as the total level of revenues deemed uncollectible reverts to historical levels.

Our operational metrics continue to reflect the strength of the current leasing environment, despite macro headwinds, and the continuing successful transformation of our portfolio. Billed occupancy was up 60 basis points sequentially, while leased occupancy was up 80 basis points sequentially. The anchor leased rate now stands at 95.4%, up 60 basis points sequentially, while the small shop leased rate stands at 88.8%, up 110 basis points sequentially, reflecting another new portfolio record for this metric.

The spread between leased and billed occupancy grew to 370 basis points this quarter and the total signed but not yet commenced pool, which includes an additional 50 basis points of GLA related to space that will soon be vacated by existing tenants, totaled $53 million. While the size of the pool is in line with last quarter, there's been significant continued velocity within the pool, as we commenced leases representing over $14 million in annualized base rent this quarter, while adding $14 million of newly executed leases to the population. As we've highlighted in the past, one of the strongest indicators of forward growth is a persistently widespread between leased and billed occupancy, while both billed and leased occupancy are increasing. In addition, the blended annualized base rent per square foot on the signed but not yet commenced pool remains well above $19, approximately 20% above our portfolio average, reflecting the broad-based impact of our granular reinvestment initiatives.

From a balance sheet perspective, as of September 30, we had $1.3 billion of available liquidity, only 4% floating rate debt, and no debt maturities until mid-2024. As a reminder, with the execution of our amended credit facility in April, we obtained a $200 million delayed draw term loan that we expect to utilize before April 2023 to continue to extend the duration of the balance sheet. While our existing $300 million term loan has been swapped through July 2024, the delayed draw term loan has not yet been swapped. As noted in last night's release, we have also renewed both our $400 million share repurchase program and our $400 million at-the-market equity offering program, which were set to expire in January, proactively extending our ability to capitalize on a wide range of capital markets conditions.

As Jim highlighted, we are pleased to also announce an 8% increase in our quarterly dividend last night to $0.26 per share, or $1.04 on an annualized basis. This dividend increase reflects the strong growth in taxable income experienced over the last year, while also allowing the Company to retain as much free cash flow as possible to continue the execution of the value-enhancing reinvestment program. The revised dividend level represents a payout ratio of just over 50% of our third quarter FFO and a dividend yield of 4.8% on last night's closing stock price.

As it relates to guidance, we have maintained our previous guidance range for same property NOI growth at 5.5% to 6% and we have revised our FFO guidance to a range of a $1.94 per share to a $1.97 per share.

QUESTION AND ANSWER

Craig Schmidt - BofA

I'm wondering, will there be any pullback on the redevelopment investment given the potential for a recession in 2023?

James Taylor

What we're finding is continued demand, as well as highly accretive returns. So even in an environment of increasing costs, we're offsetting that very effectively with the rent that we're able to achieve. As we've talked a lot about a lot, our business plan is built for an environment of higher rates, less liquidity, because it's self-funded and because, importantly, the absolute returns that we're achieving are quite compelling. And we also, as you're seeing in all of our metrics, Craig, we're driving some real important follow-on benefit, not measured in initial returns, in terms of follow-on occupancy and rate in our small shops. So, we like how our plan is positioned. We like that it allowed us to outperform during the disruption of COVID, where over that two and a half year period, we grew our NOI, I think, at the top of the peer group. But also, in a strong environment, such as the one we're in today. We're really seeing more tenant demand than we've seen in quite some time. But then importantly, to what's implicit, in your question,

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should we see a reversion to more normalized levels of tenant failure, et cetera we believe this reinvestment plan is the way to really position us to outperform in that environment as well.

Craig Schmidt - BofA

And then just what are the positives and negatives of having local tenants at 21% of your ABR?

James Taylor

It's important to have the center be relevant to the community it serves. And one of the things that really struck us through the pandemic was the strength of that tenancy. We did have some failures. And interestingly, even with the small and local tenants, we saw demand to backfill those tenants with better, more well-capitalized operators. And so, it's a balance. Obviously, out of the small shop tenancy, whether it's local, regional, or national, we're able to drive higher absolute rents. We're typically able to drive higher embedded growth as well as absolute growth in that portion of our tenancy. But we like, importantly, how it's positioned today. We think we've got a very good balance of national, regional, and local tenants that provide great visibility on and stability from a cash flow perspective.

Todd Thomas - KeyBanc

Following up on the local tenants and that exposure in the portfolio, I'm wondering if you're seeing any change in the health or ability of your local small shop tenants to pay rent today? Any increase in rent relief requests or otherwise at all?

James Taylor

Quite the contrary. We're seeing very good strength out of our entire tenant base and particularly in the small shops. It's reflected, Todd, in the rents and occupancy levels we're achieving, which we're really proud of. And frankly, as we've executed this plan, and upgraded the quality of tenancy, which we think is implicit in our results, but something that's worthy of being highlighted, our collections levels continue to be very strong and, importantly, also our traffic levels continue to be very strong to our centers. So, we like how we're positioned.

Angela Aman

I would just add as it relates to revenues deemed uncollectible, there's some disclosure in the supp that gives you a good sense for what we're reserving as it relates to collection shortfalls for current period revenue, and that's been stable over the last few quarters at around 135 basis points to 140 basis points. So certainly, with some of the macro headlines lately, we have not seen any deterioration in credit quality. And the other thing I would emphasize is, as both Jim and I sort of talked about in our remarks, out-of-period collections of previously reserved amounts have continued to be pretty significant. We are continuing to collect amounts from 2020 and 2021 and even earlier in 2022. Despite the fact that there were some delays in payment with those tenants, the fact that many of those tenants are fully paying off amounts that were underpaid during the pandemic is a really good sign of how they've come through the last few years and how they're positioned going into a more disruptive economic environment.

James Taylor

And I put our collections experience at the top of the group. When you look at what we've been able to drive in terms of collections and in the enforcement of our leases, I think we've done a really good job there.

Todd Thomas - KeyBanc

I wanted to ask about your comments in the prepared remarks around the embedded growth from leasing and the signed not occupied pipeline. Notwithstanding some of the noise from out-of-period collections that you mentioned, Angela, are you expecting to see minimum rent growth continue to improve into the fourth quarter from the 4.4% in the third quarter? And can you provide some additional context around what you're anticipating for minimum rent growth heading into 2023?

James Taylor

I appreciate the question and the focus on this point because it is important. So, without giving specific guidance, what I will tell you is that we do expect continued strength in topline growth. And it's being driven by that visibility on the signed but not occupied pipeline, as well as the forward pipeline. So, if you think about it over a long period of time, we feel good that rent growth is going to trend towards the upper end of the range.

Angela Aman

I would say on a year-to-date basis, our contribution from base rent growth, sort of stripping out the lease modification and abatement number, year- to-date, is that 430 basis points. The guidance we've given earlier in the year, we said that for the full year we'd be somewhere between 400 basis points and 500 basis points. So certainly, I do think you could see some acceleration in Q4 to get us to the midpoint of that range. And as Jim said, we're very pleased with the signed but not commenced pipeline in the way that that continues to deliver, and the leasing pipeline Jim mentioned in his remarks behind that.

Haendel St. Juste - Mizuho

Given the recent transaction activity, I was hoping you could provide some perspective on cap rates, especially curious on where cap rates on grocer versus non-grocer assets are today and how they've moved over the last quarter? And could you provide, or can you give the cap rates for the $81 million you sold here in the fourth quarter?

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James Taylor

We are seeing, Haendel, and I think it's true across the universe, a real slowdown in overall transaction activity. So, data points are less instructive. I think, in an environment of transition like this, everybody can point to a tight cap rate or a lighter cap rate. With that said, I think it's clear that there is upward pressure on cap rates even for the most core grocery-anchored shopping centers due to where the 10 year has gone and where the cost of finance has gone. I don't believe that, by the way, that movement is anywhere near as wide as the movement in asset classes that are trading closer to that risk-free rate. If you look at the cap rates that we achieved on what we've sold through the quarter and subsequent to the quarter, they're very attractive and in part it's a testament to Mark and team finding liquidity from both smaller private buyers, 1031 buyers et cetera, as well as buyers looking at alternative uses for the properties such as what we capitalized on in College Park, Maryland.

Mark Horgan

I would comment then, when you look at the market over the past few months, it's really been driven by a pretty wide bid-ask spread between owners and sellers. So, there's clearly demand for the asset class and people looking to buy. I think you're seeing some owners say they're going to wait and see what happens in the rate environment. And that's really what's driving, I think, some of the slowness in the market today.

Haendel St. Juste - Mizuho

Would you be willing to provide a cap rate on the $81 million in the fourth quarter so far?

Angela Aman

When I look at the pool of assets we sold subsequent to quarter-end, there were, I believe, five shopping centers in that pool, one of which was sold for an alternative use at a very low cap rate. So, the cap rate blend on the $81 million subsequent to quarter-end is going to be below where you've seen us transact historically. But we prefer to wait and give cap rates on the full quarter once we give Q4 results.

Haendel St. Juste - Mizuho

Fair enough. And Angela, maybe one for you. Looks like the SNO spread widened 20 bps from last quarter, but the embedded rent declined by about $1 million. So, I guess, first off, I'm curious why the ABR within the SNO pipeline is decreasing a bit here, while the spread is expanding. Is that a mix issue? And then second, as you now said, at historically high occupancies, is this SNO spread as good as you think it's going to get?

Angela Aman

There's a bit of a nuance between the spread between leased and billed occupancy and what we report in the signed but not commences pool. That's footnoted in the supplemental under that signed but not commenced table. And the delta really relates to leases that have been signed and have not yet commenced on space that's currently in billed occupancy from the prior tenant, right, so, backfills of existing tenants. Last quarter, the total signed but not commenced pool represented 420 basis points and included 70 basis points of space related to tenants that were currently in billed occupancy, getting you down to that 350 basis point spread between leased and billed occupancy. Today, we're still at 420 basis points in the signed but not commenced pool. But only 50 basis points of that is related to tenants that are currently in occupancy. So more of the signed but not commenced pool, even though the total number did not change, more of that pool today is incremental than it was a quarter ago.

Haendel St. Juste - Mizuho

Got it. I just wanted to follow up on just the SNO pipeline. Are you seeing any logjams forming or still expect to get the doors open next year and that SNO rent commenced on time?

Brian Finnegan

Our team's done a great job of minimizing that. We've certainly had some delays across the portfolio. But I think as Jim talked about in his opening remarks and as we've talked about on prior calls, our operating teams are working very closely with retailers. We found that our retail partners are being incredibly flexible in this environment, keeping existing HVAC units or keeping the bathrooms in the locations where they're at, because they're incentivized to get these stores open. And we've had some great successes year-to-date, and I think what we've been able to do has really positioned us going forward to negotiate those scopes upfront. So, some of the best practices we're learning, we'll even take advantage of in a more normalized environment. So, I think the team's done a great job.

James Taylor

I would agree and I would say what we're actually commencing in the quarter is exceeding our expectations. So, we talked about the $14 million of rent that commenced this quarter and the teams just doing a phenomenal job of getting the tenants open and in occupancy. And as you can imagine, we're absolutely aligned with the tenants in that regard. So as Brian highlighted, we and the tenants are working together to get those stores open as quickly as possible.

Greg McGinniss - Scotiabank

Just thinking about occupancy, curious what you see is a reasonably achievable full occupancy, I'm doing air quotes for those not in the room with me, for the portfolio as it stands today. You've spoken about the 150 basis points of occupancy locked up in the active redevelopment pipeline. I'm curious how much more benefit is embedded in the future pipeline? And really kind of what do you see as the low-hanging fruit left to fill in the near-term?

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James Taylor

Loved the question and appreciate the air quotes. As we think about the plan, what we're excited about is that we continue to increase not only occupancy, but potential occupancy for the portfolio. And so that's why you're seeing us set records today, but we still believe we have room to run. We believe we have room to run both in overall occupancy of a couple hundred basis points, but we also see it, importantly, in the high rates in the small shop component of our portfolio as well. So, this strategy has had the follow-on benefit of increasing the potential occupancy of this portfolio. And that's something that's important to understand, so that I fully see this portfolio hitting a stabilized occupancy above what it's ever achieved in the past. But another important thing to consider about this strategy, it's not simply about getting to full occupancy. It's about maximizing the ROI on the assets that we have, recycling capital effectively, improving rate, driving NOI high growth, and doing so in a value-added and disciplined manner. It's a very granular strategy. But all you need to do is look at the metrics and results to see the success of it over time. So, even in a more full occupancy environment this is a platform that will continue to create value as we recycle through opportunities that exists throughout the portfolio to create value.

Greg McGinniss - Scotiabank

Then just kind of just digging back on that. Do you have any thoughts on the future redevelopment pipeline and what might be contributed from that in terms of occupancy?

James Taylor

I can't give you specific occupancy guidance on the future redevelopment pipeline. But when you look at it, we have another $400 million underway, substantially leased. That's going to be a 9% to 10% incremental return. And then, we have close to $1 billion of opportunity beyond that that we've identified in the properties that we'll get to as leases mature and give us the opportunity to recapture space and drive the potential of those assets. We've got several years of visibility of value-added activity, even in an environment today, where it's a self-funded and internal growth driven plan. I'm really pleased with what we've done with acquisitions that have been value-added. Obviously, we're in an environment today where I think it makes sense to pause, but we'll find in the future our openings to continue to grow in that regard as well. But what I like about how we're positioned is we don't need that. We've got several years of runway of growth and opportunity that's embedded in the assets that we own and control.

Greg McGinniss - Scotiabank

And Angela, if I can just follow-up with how are you accounting for rent from Regal at this point?

Angela Aman

Yes. It's fair to say that all of our entertainment tenants or our movie theater tenants have been on cash basis through the pandemic. We had three Regal locations at the time of filing. One was rejected. We have two still in place. So, we are recognizing revenue from all of our movie theater tenants as cash is received.

Juan Sanabria - BMO

Just hoping to go back to Craig's question on the redevelopment and maybe a comment you made about the rents you're getting there. Do you expect that the yields you're targeting on those will increase as rents move higher or that the spread would maybe compress a little bit, although still be positive, and definitely better than traditional ground-up developments, just given a higher cost of capital in today's environment with particularly higher interest rates?

James Taylor

Yes, what we've seen, and also on the cost side of the equation, is we're seeing it come through in terms of the cost to redevelop these centers. But fortunately, we've been able to offset that with the rents that we're realizing on the reinvestment projects driven by the tenant demand. So, again, we have pretty good visibility on continuing to be able to drive 9%, 10%, 11% incremental returns. Of course, the gross returns are much higher. And what we like about that is, even in an environment of rising cap rates and rising interest rates, which we've always underwritten, we're still creating significant value, maybe not as much incremental value as when interest rates were in the low-single digits, but we're still clearing it by a healthy margin. And importantly, we're setting these assets up for continued growth as the balance of the assets benefit from the investments we're making.

Angela Aman

I would also just add to that that the risk associated with the type of redevelopment work we're doing continues to be very low. This is very much, as Jim said earlier, a tenant-driven exercise, where we're really not beginning projects, we have no capital at risk, until we have substantially all of the leases signed, all of the revenue kind of contractually obligated. So, when you think about that complexion from a risk standpoint against the returns we're achieving and where cap rates are today or where they might go, I think that activity continues to be very attractive on a risk-adjusted basis.

Juan Sanabria - BMO

Makes a ton of sense. And then just as a follow-up on foot traffic, have you seen any bifurcation in foot traffic to your centers if you cut your portfolio into quartiles or what have you on different demographics or affluence levels, if you've seen any lower foot traffic for some of your less-affluent neighborhoods or anything to point out?

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