Fitch Ratings has upgraded the Long-Term Issuer Default Rating (IDR) for Brixmor Property Group Inc (BRX) and Brixmor Operating Partnership LP to 'BBB' from 'BBB-'.

In addition, Fitch has affirmed Brixmor Operating Partnership LP 's underlying senior unsecured debt to 'BBB' from 'BBB-'. The Rating Outlook is Stable.

The ratings and Outlook reflect Brixmor's solid execution of its investment strategy, investment grade credit metrics, consistent capital access, and transparent business model. Fitch expects leverage to trend toward 6.0x over the next few years, consistent with the rating level.

Key Rating Drivers

Investment-Grade Credit Metrics: Fitch expects BRX's leverage to decrease to approximately 6.0x by 2023, compared with mid-6x in the prior ratings case. Fitch believes this is appropriate for the 'BBB' rating level, and that the company remains committed to its long-term leverage target of 6x.

Brixmor has fully unencumbered its portfolio and its NOI covers net unsecured debt at 2.1x, when assuming a stressed 8.5% capitalization rate. Fitch considers a 2.0x UA/UD appropriate for investment grade REITs. Grocery-anchored assets and other essential businesses that fared relatively well in the pandemic are in high demand from both lenders and investors. Fitch believes BRX's assets are readily financeable and would support the company's liquidity profile should the need arise.

Performing on Strategy: Over the past several years, Brixmor has executed on its portfolio strategy, recycling non-core assets and redeveloping to improve the portfolio quality and growth profile. Portfolio average ABR (annualized base rent) was $15.42/sf at Dec. 31, 2021, and remains below the $19/sf average for the peer group, but grew 4.6% from 2019, outpacing the 2.9% increase for the sector.

Strong leasing activity driven by redevelopment spend will continue to drive above average rent growth for BRX. The company signed 3.1 million sf of new leases for the TTM Dec. 31, 2021 at average rents of $18.66, versus 3.5 million at $16.52 for the same period in 2019. Comparable new leases for 2021 were signed at $19.70/sf, a 28% spread. Brixmor estimates that roughly 30% of its portfolio has benefited from redevelopment activity or is in the pipeline.

Shopping Centers a Relative Winner: Shopping center assets have performed relatively well during the pandemic, with easy outdoor customer access and grocer anchors driving traffic to the asset type. Collections have largely normalized, and actual rent performance was better than prior ratings cases across the sector. Tenant demand has also returned, with many of the larger national brands in better financial position than 2019, and new tenants adapting to consumer preferences by relocating from malls to open air centers.

Fitch believes retailer brick-and-mortar strategies will be acutely focused on occupancy costs and the ability for real estate to supplement their e-commerce initiatives. Shopping center assets provide more direct customer access and better accessibility for evolutions such as curbside pickup. Customer accessibility has been a critical component of retailer success during the pandemic and is expected to remain so even as the pandemic subsides.

Strong Capital Access: BRX's larger size and scale relative to some peers in the space allow it to tap diverse capital sources. The company has historically demonstrated solid capital access, including to common equity, public unsecured debt markets, secured mortgage debt, unsecured bank debt, and joint ventures. Fitch views this positively, as it can allow the company to efficiently monetize asset value to provide contingent liquidity.

High Portfolio Granularity, Diversified Tenant Base: Broad geographic and tenant diversity should reduce earnings volatility during periods of macroeconomic weakness. Brixmor's portfolio consists of 382 assets in over 100 markets, with the 50 largest MSAs in the U.S., accounting for 69% of ABR in 4Q21. Fitch views the company's tenant diversity and limited individual tenant exposure (largest tenant is 3.5% of ABR) as a net positive in the current retail environment. BRX's portfolio derives 33% of its portfolio ABR from 'essential' retailers, including grocery and pharmacy.

Approximately 70% of the company's assets are grocery anchored, which have performed well through the pandemic, and which Fitch expects to continue drawing foot traffic to support the businesses of in-line tenants. In this category, BRX's top tenants by ABR include Kroger (2.4% of ABR), Publix (1.6%), Ahold Delhaize (1.3%), and Albertson's (1.0%). The company expects grocery-anchored centers to grow to nearly 80% of the portfolio, given recent leasing and redevelopment activity.

Other top tenants consist of leading discount retailers, such as TJX Companies (3.5%), Dollar Tree Stores (1.8%) and Ross Stores (1.3%), which Fitch expects will continue to fare well even under less robust economic conditions.

Derivation Summary

Fitch expects BRX's credit metrics to remain appropriate for the 'BBB' rating, including leverage of approximately 6x and unencumbered assets/unsecured debt at or above 2.0x, generally in line with other similarly rated peers. BRX's strong capital access is a key credit strength supporting the rating.

BRX has a large, diverse portfolio of shopping centers, but with weaker portfolio metrics relative to the peer group, as measured by portfolio demographics, in-place rents and occupancy, which may impact institutional demand for the assets; however wider geographic diversity can lead to lower earnings volatility in a downturn.

Fitch rates the 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 store NOI in the low-to-mid single digits excluding redevelopment deliveries;

Dispositions of $250 million per year to fund annual acquisitions of $250 million to $400 million;

Redevelopment spend of $200 million to $250 million per year;

Equity issuance consistent with maintaining 6x leverage.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch's expectation of REIT leverage (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 (net debt excl preferred to recurring operating EBITDA) sustaining above 6.5x;

Fitch's expectation of fixed-charge coverage sustaining below 2.5x;

Fitch's expectation of unencumbered assets to unsecured debt (UA/UD) based on a stressed 8.5% cap rate sustaining below 2x.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Strong Liquidity: Fitch expects Brixmor's liquidity coverage to remain solid for the rating. Fitch estimates BRX's sources of liquidity, unrestricted cash, availability under its revolving credit facility capacity and retained cash flow from operations, to cover its uses (debt maturities, committed development expenditures and maintenance capex) by over 3x for Dec. 31, 2021-Dec. 31, 2023. Fitch views liquidity coverage above 2x as strong for the 'BBB' category.

BRX's primary sources of liquidity are its $296 million in cash and equivalents, near-full availability under its $1.25 billion revolving credit facility, and contingent liquidity in the unencumbered asset pool. Fitch projects over $600 million of retained cash flow (after dividends) for the period.

Issuer Profile

Brixmor Property Group (BRX) is a real estate investment trust that owns and operates a portfolio of open-air retail assets. BRX's portfolio comprised 382 shopping centers totaling approximately 67 million square feet of space as of Dec. 31, 2021.

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

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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