Brixmor Property : 4Q 2020 Earnings Conference Call Transcript

4Q 2020 EARNINGS CALL - FINAL TRANSCRIPT

FEBRUARY 2021

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 fourth 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 or 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. Good morning everyone and thank you for joining our call. I trust that each of you, your families and loved ones are well. As I'm sure you are, I'm beyond glad to put 2020 in the rearview. Yet, I'm also very grateful for what the year revealed in terms of the durability and resilience of our team, our portfolio, our business plan and our purpose.

With nearly 95% of our base rents for April through December now collected or addressed, leasing levels and spreads approaching pre-pandemic levels and highly accretive redevelopments delivered at attractive incremental returns, our performance continued to accelerate through the fourth quarter. And it continued in January, where cash collections exceeded where we were at the same point in December. In short, we delivered one of the best performances in the sector in navigating through the crisis. That's true whether you measure it in terms of cash collections -- where we are among the highest, impact on NOI -- where we are among the lowest, the adequacy of reserves for amounts not collected, or value delivered through reinvestment, and importantly, we are among the best positioned for the recovery, with strong visibility on how we will grow going forward.

In a few moments, Angela will cover our performance in more detail, in addition to providing some color on the specific assumptions underlying the guidance we've provided for 2021. I'd like to focus my remarks on those elements of our team, portfolio and plan that provide both visibility and confidence in continued outperformance in the months and years ahead. As always, it begins with leasing, where in the fourth quarter we signed another 1.4 million square feet of new and renewal leases with a vibrant mix of tenants in grocery, value, service, quick serve restaurants and home improvement categories. Importantly, we continue to gain share of new store openings for our core tenants, adding new to the portfolio concepts like Wren Kitchens, and also built a significant pipeline of specialty grocer deals that will trigger some very accretive redevelopments in the future.

Leveraging our attractive rent basis, we achieved cash spreads on new leases of 22% in the fourth quarter. Interestingly, where we have active or completed reinvestments those spreads approached 30%, reflecting the longer tailed benefits of our reinvestment strategy. And we continued our success in driving strong intrinsic lease terms, achieving annual embedded rent bumps of 2.1% in the quarter, while remaining disciplined with capital, where we achieved a near record net effective rent per foot of $15.23. Encouragingly, we also saw an acceleration in small shop activity despite the re-closure orders with 268 new and renewal small shop deals in the quarter, representing over 700,000 square feet. We expect this activity to continue to accelerate as closure orders are lifted.

During the quarter, we commenced another $13 million of new ABR, and as of the end of the quarter, we had $38 million of signed but not commenced ABR, which provides us with a tremendous tailwind as we deliver that rent over the next several quarters. As reflected in our guidance that Angela will cover in more detail, we believe that this production will allow us to deliver growth in 2021 at a level that should set us apart, despite what we believe will be continued disruption from the pandemic. In addition to those signed leases, we have a forward pipeline of leases in negotiation of 1.9 million square feet representing an additional $35 million of ABR. Brian and the leasing team have truly hit their stride at a pace that leads the sector and clearly demonstrates the demand by growing relevant tenants to be in our well located shopping centers.

Importantly, this leasing productivity also unlocks tremendous value creation in our centers through our accretive reinvestment program. During the quarter, we delivered another $21 million of reinvestment at an incremental return of 12%, bringing our total reinvestment deliveries during the year to $113 million at an incremental return of 10%. Stop for a moment and consider that despite a pivot to conserve capital during the height of this crisis, this team still created over $75 million of incremental value through reinvestment during the pandemic. And, as we look forward, our pipeline underway now stands at over $400 million of investment, of which we expect to deliver over $200 million this year at an incremental return of 9% to 10%.

Of course, as always, we remain disciplined, ensuring that we don't commit significant capital ahead of signed lease commitments. That's what makes this reinvestment activity so much more attractive from both an absolute and a risk adjusted return basis versus ground-up development, where youdon't have the same levels of pre-leasing, and you therefore don't know if you're building a bridge or a pier until it's too late to stop. Further, we've phased our spend to ensure that we don't have too much exposure to any specific project. As we demonstrated last year, that discipline allowed us to be flexible in responding to the crisis while still creating significant value. And importantly, with each completed reinvestment, we drive our centers closer to our purpose being the center of the communities we serve. As I mentioned earlier, we are pleased to see the follow-on benefit of this reinvestment strategy in terms of leasing and spreads at centers that we've impacted, which now represents over 30% of our portfolio. I'm also excited about the level of grocery activity in our forward pipeline, which again will be transformative for the center's impact. I strongly encourage you to visit our website to take a virtual tour of the projects we have completed or are underway to get a sense of the scale of what is happening at Brixmor.

From an operations perspective, we began transitioning in the fourth quarter back to normalized OpEx spend levels as our portfolio reached 97% reopened and there was less necessity for us to reduce CAM burdens for closed tenants. Again, I'm very proud of how our team pivoted during the crisis with a focus on our tenants whether it was reducing CAM burdens, assisting with access to the PPP program or providing additional service levels in terms of outdoor dining, curbside pickup and additional signage. As we look forward, our focus from an operation's perspective will be maintaining operating margins, tightening tenant delivery timetables and continued progress towards our "Proudly Owned by Brixmor" standard. And, of course, we will continue to apply the lessons learned over the past year in accommodating the ever-evolving needs of our tenants.

Speaking of those evolving needs, I would highlight in closing that the pandemic has also accelerated many of the longer-term trends that are important to consider as we execute our plan this year and beyond. Those trends include mall native tenants such as Bath & Body Works, Foot Locker, Kay Jewelers, Sleep Number and Visionworks increasingly relocating from malls to our open-air centers; the ever-growing universe of service providers seeking to capitalize on the convenience, flexibility and proximity of our shopping centers to the consumer; the increased tenant demand for buy online, pickup in store, which can be easily accommodated in our format; the increased appeal to retailers of locations like ours near single family rooftops; the focus by retailers opening or relocating stores on partnering with landlords such as Brixmor that have proven track records and access to capital; and the convergence of retail and logistics within the last mile of the customer. Each one of these trends is individually significant for our business and, collectively, we believe they will help us continue to drive outperformance in the years ahead.

Again, thank you for your interest in Brixmor. And with that, I'll turn the call over to Angela before opening the line up for questions.

Angela Aman

Thanks Jim and good morning. As Jim highlighted, our performance in 2020 demonstrated many of the core strengths of the Brixmor portfolio, including the essential nature of our open-air retail centers to the communities we serve, and our significant tenant and geographic diversification. NAREIT FFO was $0.33 per share in the fourth quarter or $1.47 per share for the full year. Fourth quarter NAREIT FFO reflected $0.06 per share of items that impacted FFO comparability, including loss on debt extinguishment, litigation and other non-routine legal expenses, and transaction expenses, in addition to $0.04 per share of revenues deemed uncollectible and $0.01 per share of straight-line rental income reversal. Same property NOI was down 6.4% in the fourth quarter, or 5.4% for the full year. Fourth quarter same property NOI reflected a 420 basis point detraction from revenues deemed uncollectible and 120 basis point detraction from lease modification deferral agreements and abatements, in addition to smaller detractions from percentage rents, all other base rent and net recoveries.

Importantly, rent collection levels have continued to improve since April. As the COVID-19 disclosure provided on page 11 of our supplemental package demonstrates, as of December 31, we had collected 91.8% of fourth quarter billed base rent, which is approximately 450 basis points ahead of third quarter rent collections as of September 30. In addition, during the fourth quarter, we continued to collect additional amounts related to second and third quarter billed base rents, totaling $12.8 million, or 300 basis points of billed base rent during those periods. Revenues deemed uncollectible this quarter totaled $12 million, down from $21 million in the third quarter and $28 million in the second quarter. While still above our historical run rate, the trajectory over the last several quarters reflects both improving cash collections and the appropriateness of reserves taken in prior periods. At year-end, tenants representing approximately 15% of our annualized base rent were on a cash basis. As highlighted on page 12 of our supplemental package, for the second, third and fourth quarters on a combined basis, we are now 72% reserved on all accrued but uncollected base rent, which is comprised of a 52% reserve on executed deferrals not subject to lease modification treatment and an 88% reserve on all accrued but uncollected and unaddressed amounts.

We provided initial 2021 guidance with the range of a $1.56 to $1.70 per share based on same property NOI growth expectations of (1%) to 3%. The width of these ranges reflects the continued uncertainty inherent in the current environment, which may manifest as a combination of continued rent collections headwinds, resulting in reserves related to 2021 billings, particularly for cash basis tenants, and occupancy loss. This dynamic makes it very challenging to provide line item guidance within same property NOI at this point in the year. That said, we believe that our assumptions for reserves and/or potential occupancy loss are appropriately conservative in light of the current environment.

While reserves on accrued but uncollected rent and occupancy pressure, primarily from bankruptcy activity, represented clear headwinds in 2020 that will persist into 2021, rent commencement activity, driven by strong leasing productivity and value enhancing reinvestment execution represents an important and significant tailwind. During 2020, despite the impact of the pandemic, we commenced leases representing $39 million of annualized base rent, approximately $2 million more than we anticipated based on our signed but not commenced pool at the beginning of the year. The full benefit of these commencements will deliver $20 million of base rent growth during 2021. In addition, the spread between billed and leased occupancy was 290 basis points at year end, representing nearly $38 million of annualized base rents, of which approximately $30 million is expected to come online during 2021 and deliver $15 million in base rent during the calendar year. In short, the annualization of 2020 commencements, the partial year benefit of 2021 commencements, in addition to contractual rent escalations, and the impact of consistently positive rent spreads, have put us in a strong position to weather the ongoing impact of the pandemic in 2021, while also delivering expected growth at the midpoint of the range.

As always, our guidance range does contemplate expected transaction activity during the year, but does not contemplate any items that impact FFO comparability, including loss on debt extinguishment, litigation and non- routine legal expenses, or any one-time items. In addition, I would underscorethat this range does not contemplate the conversion of any tenant to or from cash basis accounting during the year, either of which could result in significant volatility in GAAP straight-line rental income.

From a capital allocation perspective, the strength of our forward leasing pipeline is facilitating the reacceleration of our value enhancing reinvestment program, and we anticipate spending as much as $300 million in value enhancing capital during the coming year, slightly above our annual target of $200 million to $250 million. This spend will be focused on continuing to reposition the portfolio with credit-worthy, vibrant retailers that solidify the competitive positioning of our assets in their markets, while providing accretive incremental returns and enhancing the long-term growth potential of our portfolio.

Turning to the balance sheet, we utilized cash on hand during the fourth quarter to redeem our remaining 2022 fixed rate unsecured notes. At year-end, we had $1.6 billion of total liquidity, representing our undrawn $1.25 billion revolving credit facility and $370 million of cash on hand. We have no debt maturities in 2021 and only $250 million of remaining maturities in 2022.

In conclusion, I would like to thank the Brixmor team for their dedication and perseverance during a truly unprecedented year. While we enter 2021 mindful of the current economic backdrop and the challenges that we collectively face, we are confident that this portfolio stands to benefit from the rapid evolution occurring in the retail industry.

QUESTION AND ANSWER

Samir Khanal - ISI

Just curious to know your views on tenant fallout over the next several months, maybe on the shop occupancy side and maybe even on the anchor side. We haven't heard much about bankruptcies, right, so far. I'm just curious what your thoughts are for the next couple of weeks and maybe in the months as we think about the first half, and do you feel better, maybe, as you did three months ago, and what your views are on the first half of this year?

James Taylor

I think it's the big question and we tried to capture this in our guidance, what the shape of the recovery will look like and how much longer we are going to be somewhat shutdown as a result of the pandemic. We are encouraged by the performance of our core tenants, who continue to do well throughout this crisis, and mindful, though, that there are certain tenants in categories like entertainment and restaurants that have struggled -- you see it in our collections --, we could see some additional failures in that space if we continue through this longer than folks expect. So, I would say in general, we feel really good. Obviously, you saw a high level of bankruptcies last year. I don't think we're going to be quite at the same level, but I do think you may see some additional failures in those areas that haven't quite fully recovered.

Samir Khanal - ISI

I guess just as a follow-up or a second question here, and you talked about the long-term trends of the business. One theme is certainly that migration from urban to suburban. Are you seeing an impact at the asset level whether it's traffic or just retailers saying -- Look we need this many stores, greater open-to-buys, because our strategy is to focus more on the suburban markets --or are you hearing that at leasing discussions at this point?

James Taylor

It really is a common theme that we're hearing from many of the retailers in terms of where their new store opening pipelines are focused, and Brian, I don't know if you want to add some additional color.

Brian Finnegan

Yes, as Jim mentioned in his opening remarks, Samir, we've been really encouraged by just the breadth of categories, and it does speak to the traffic that our centers are driving. Our suburban centers are driving demand to be in grocery-anchored centers with daily foot traffic. You're seeing operators coming out of the mall, and we saw it in our results this quarter with Foot Locker, Kay Jewelers and Bath & Body, who are looking at grocery-anchored centers and seeing the foot traffic to deliver the sales that they want, so it's certainly coming up. From an open-to-buy standpoint, we've been very encouraged. Within those categories, most have very strong 2021 open-to-buy pipelines and even into 2022. We're talking about 2022 deals today, so we've been encouraged by pipeline activity, but it definitely speaks to what these retailers have seen coming out of a pandemic in terms of traffic driving to grocery-anchored centers.

James Taylor

And again Samir, I'd say it's that demand that's the biggest indicator of the trend.

Todd Thomas - KeyBanc

A couple of questions around the 2021 outlook, I guess sort of following-up on occupancy. It sounds like the leasing activity is picking up. Jim, you talked about the forward leasing pipeline, but has occupancy bottomed or are you anticipating further pressure on occupancy and leased rates for the portfolio in the near term?

James Taylor

I think it's quite likely that we'll see some additional fallout from an occupancy standpoint as we move through the year, in part in those categories that are most at risk -- entertainment and restaurants -- and again, a lot of that will be driven by the duration of the crisis, but we certainly anticipate that. We're down about 150 basis points or so year-over-year in occupancy. You could see that decline more and that's been our expectations.

Angela Aman

I would just add to that, as I sort of highlighted in my prepared remarks, our same property range of 400 basis points this year does reflect a wide range of potential outcomes as we navigate particularly the next three to six months of the pandemic. That may come through additional occupancy loss, and certainly the guidance range contemplates that. It might also come through some of those tenants hanging on, but maybe they're currently on a cash basis and we will continue to take some reserves based on lower rent collection levels, consistent potentially with where we've been, but lower than a 100%, so both of those potential outcomes are certainly embedded within the range. I would say at the low end of the range, our expectations for total amount of reserves and kind of excess bankruptcy loss are more significant than what we saw in 2020. At the high end of the range clearly, we've embedded some improvements over what we saw in 2020 as well.

Todd Thomas - KeyBanc

That's helpful. And Jim in your remarks, you touched on margin improvements on the backside of the pandemic as we move forward here. Most of your leases are net or triple net. How should we think about the margin upside that you see for Brixmor? Is it more than just improving occupancy and reducing expense slippage? Is there sort of a bigger opportunity for the company?

James Taylor

Our margins already are pretty strong, which I think reflects the discipline that we have, both from an asset level and an overhead perspective in terms of operating the assets. I would say the biggest opportunity, Todd, really comes in improving occupancy over time. That's going to be the biggest drop to the bottom line from a margin perspective, because we really have been disciplined, both during the pandemic and as we emerge, on OpEx spend levels. So I don't think there's really much more that we can do from an efficiency standpoint, but rather, what I mentioned in my remarks is as we return to more normalized levels of OpEx spend, there is going to be a focus on making sure that we're being disciplined with that and matching that as best we can with occupancy. And, of course, avoiding leakage, which is CAM expenses for vacant spaces. So, that's our focus, but I think the biggest upside will be in the latter part of the year and as we move into 2022 as that occupancy begins to pick up, and as that forward leasing pipeline delivers.

Todd Thomas- KeyBanc

The nearly $400 million of cash on the balance sheet, do you expect to maintain an elevated cash balance or is there a use for that baked into the guidance?

Angela Aman

No. It's a good question. I mean obviously we did use a fair amount of the cash that we had going into the fourth quarter for the redemption of the 2022 fixed rate notes, so we have, I think, demonstrated that we're comfortable using some of that cash, continuing to solidify the balance sheet and push out duration. There may be opportunities as we move through the year to put some of that additional capital to work. I think, based on kind of the continued uncertainty, we're comfortable running with higher cash balances than normal at least for another quarter or two here, but we will look at potential opportunities to deploy that cash as well.

Katy McConnell - Citi

Could you talk about the pricing of dispositions completed in 4Q and your expectations around 2021? Can you provide some parameters around potential transaction activity dilution that you're assuming in the guidance range?

James Taylor

I'm going to let Angela comment on the range of impact from potential transaction activity, and I'll let Mark comment a bit on what we're seeing from a pricing standpoint, but I do want to highlight for you, Katy, that we do expect to increase the level of transaction activity and capital recycling, and as I've said before, we expect to be balanced in terms of matching dispositions with acquisitions as we move forward, more in line with a long-term goalpost that we've provided in the past. We're encouraged by what we're beginning to see open up for us both from a liquidity standpoint and an opportunity standpoint in the transaction market, and I'll let Mark comment a little bit on pricing that we've executed and pricing that we see going forward.

Mark Horgan

For the fourth quarter, we sold some net leases, so the pricing, generally was in line with what we've seen historically for the portfolio. That felt pretty good. When we're looking at the market as we go into 2021, we're actually pretty pleased with the demand and liquidity we're seeing for assets, particularly for grocery-anchored deals that are less than $30 million, for net lease-like assets and for small and anchored strip retail. Recent trades and the demand we're seeing real-time for our assets really is demonstrating to us the cap rates could be pretty stable versus pre-COVID, particularly for community centers and that's really across all geographies.

That liquidity supported by a debt market, that appears to be pretty receptive to financing grocery-anchored deals at both CMBS and local banks, and I'd say that the net lease market continues to be very liquid, with trade buyers, institution and REITs really aggressively looking for product, which is allowing us to really achieve attractive sale cap rates across all geographies, which in turn is allowing us to maximize value as we look at exiting non-core assets.

On the acquisition side of things, we're definitely seeing better opportunities now than during the last few years to recycling into assets where we think we can drive value with the platform, given what Brian said earlier regarding demand from tenants, some of the occupancy levels that we think

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