Fitch Ratings has assigned a 'BBB' rating to the proposed senior unsecured notes issued by Brixmor Operating Partnership LP, the operating partnership of Brixmor Property Group Inc. (NYSE: BRX).
Fitch expects the proceeds from this offering to be used for general corporate purposes, including repayment of indebtedness.
Key Rating Drivers
Investment-Grade Credit Metrics: Brixmor is on track to reach Fitch's expectation that REIT leverage will decrease to the low-6x vicinity through the forecast period, which is appropriate for the 'BBB' rating level and in line with management's commitment to a long-term leverage target of 6.0x. The company had historically operated at higher levels, in the mid-6x to low-7x range. REIT fixed-charge coverage also is expected to remain healthy, despite the higher interest rate environment, sustaining in the low- to mid-3x range through the forecast period.
Brixmor has fully unencumbered its portfolio, and its 3Q23 net operating income (annualized) covered net unsecured debt by 2.2x when assuming a stressed 8.5% capitalization rate. Fitch considers a 2.0x unencumbered asset to unsecured debt (UA/UD) ratio appropriate for investment-grade REITs. Open-air shopping center REITs, particularly those that are anchored by groceries, pharmacies, as well as other essential businesses, have experienced solid demand.
Over 70% of Brixmor's centers are grocery-anchored. In this category, Brixmor's top tenants by annualized base rent (ABR) at Sept. 30, 2023 include The Kroger Co. at 2.4%, Publix Super Markets, Inc. at 1.5% and Amazon.com, Inc./Whole Foods Market Services, Inc. at 1.1%. These asset types are expected to continue to bolster the performance of the in-line tenant base, driving regular foot traffic to centers and supporting the long-term durability of the properties. In addition, Fitch believes these assets are readily financeable and would support the company's liquidity profile if needed.
Performing on Strategy: Brixmor executed on its portfolio strategy over the past several years, recycling noncore assets and redeveloping/developing to improve the portfolio quality and growth profile. ABR was $16.77 psf at Sept. 30, 2023, increasing 4.7% yoy; however, this remains below the peer group average.
Strong leasing activity driven by redevelopment/development spending will continue to drive above average rent growth. Brixmor signed 3.1 million sf of new leases for the TTM ended Sept. 30, 2023 at average rents of $21.04 psf, compared with $19.64 for the year-earlier TTM period. Comparable new leases for the TTM ended Sept. 30, 2023 were signed at $22.67 psf, a 41.9% spread.
Strong Capital Access: Brixmor's larger size and scale relative to some peers allow it to tap diverse capital sources. The company has demonstrated solid capital access, including in common equity, public unsecured debt markets, secured mortgage debt and unsecured bank debt. Fitch views this positively, as it can allow Brixmor to efficiently monetize asset value to provide contingent liquidity.
High Portfolio Granularity, Diversified Tenant Base: Fitch favorably views Brixmor's broad geographic footprint, tenant diversity and limited individual tenant exposure, as they are expected to reduce earnings volatility during macroeconomic weakness. Brixmor's portfolio consists of 364 properties in over 100 markets, with the 50 largest core-based statistical areas in the U.S. accounting for 71.5% of ABR in 3Q23.
Only three states exceed 10% of 3Q23 ABR: Florida at 14.0%, California at 11.7% and Texas at 11.6%. In addition, no tenant comprised more than 3.5% of ABR, and its top 10 tenants accounted for 16.7%, which is healthy for the rating. Positively, Brixmor's portfolio derives 33% of its portfolio ABR from retailers considered essential, including grocery and pharmacy, which accounted for 15% of the total. The portfolio has high granularity, with no property accounting for more than 2% for ABR and its top 10 assets representing a total of 11% of ABR, which is solid for the rating.
Derivation Summary
Fitch expects Brixmor's credit metrics to remain appropriate for the 'BBB' rating, including REIT leverage in the low-6x range and UA/UD at or above 2.0x, both of which are generally in line with other similarly rated peers. Brixmor's strong capital access is a key credit strength supporting the rating.
Brixmor has a large, diversified portfolio of shopping centers, but with some weaker portfolio metrics compared with the peer group rated by Fitch, as measured by ABR per square foot and occupancy, which may affect institutional demand for the assets. However, wider geographic and tenant diversity can lead to lower earnings volatility in a downturn.
Fitch rates the Issuer Default Ratings (IDRs) of the parent REIT and subsidiary operating partnership on a consolidated basis, using the weak parent/strong subsidiary approach and open access and control factors, based on the entities operating as a single enterprise with strong legal and operational ties. No Country Ceiling or operating environment aspects have an impact on the rating.
Key Assumptions
Same-property NOI growth in the low-single-digit range;
Dispositions of $300 million per year through the remainder of the forecast period to fund annual acquisitions of $300 million;
Spending of $175 million-$225 million per year for anchor space repositionings, outparcel developments and redevelopments;
REIT leverage of approximately 6.0x through the forecast period;
REIT fixed-charge coverage of 3.0x-3.5x through 2026.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade
Fitch's expectation of REIT leverage, defined as net debt excluding preferred to recurring operating EBITDA, sustaining below 5.5x;
Fitch's expectation of fixed-charge coverage sustaining above 3.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade
Fitch's expectation of REIT leverage sustaining above 6.5x;
Fitch's expectation of fixed-charge coverage sustaining below 2.5x;
Fitch's expectation of UA/UD based on a stressed 8.5% cap rate sustaining below 2.0x.
Liquidity and Debt Structure
Strong Liquidity: As of Sept. 30, 2023, Brixmor's base case liquidity coverage for Oct. 1, 2023 to Dec. 31, 2024 is 2.2x, which is solid for the rating. Fitch views liquidity coverage above 2.0x as strong for the 'BBB' category. The company's primary sources of liquidity include $861,000 of cash and cash equivalents, nearly full availability under its $1.25 billion revolving credit facility (funds available are reduced by $5.0 million outstanding and five outstanding letters of credit totaling $1.4 million), and contingent liquidity in the unencumbered asset pool. Fitch projects $350 million-$400 million of retained cash flow after dividends for the period.
Brixmor has debt maturities totaling $300.4 million in 2024 related to its 3.65% senior notes following the repurchase of $199.6 million of the notes pursuant to a tender offer commenced by the operating partnership in April 2023. The operating partnership funded the tender offer with proceeds from its $200.0 million delayed draw term loan, which was drawn on April 24, 2023. Other uses of liquidity include Brixmor's sizable pipeline of anchor space repositionings, outparcel developments and redevelopments, as well as leasing related and maintenance capex.
Fitch defines liquidity coverage as sources of liquidity divided by uses of liquidity. Sources include readily available cash and equivalents, the undrawn portion of committed facilities and estimated cash flow from operations after common dividends. Uses include pro rata debt maturities, estimated maintenance capex and unfunded (re)development commitments.
Issuer Profile
Brixmor (NYSE: BRX) is a real estate investment trust (REIT) that owns and operates a high-quality, national portfolio of open-air shopping centers. Its 364 retail centers comprise approximately 65 million square feet of prime retail space in established trade areas.
Summary of Financial Adjustments
No material non-standard financial adjustments. Stock based compensation was considered a reduction to SG&A and an addback to EBITDA.
Date of Relevant Committee
25 August 2023
Sources of Information
The principal sources of information used in the analysis are described in the Applicable Criteria.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
BRIXMOR PROPERTY GROUP INC. 
