Brixmor Property Group Inc. (NYSE:BRX) Q3 2023 Earnings Call Transcript

Brixmor Property Group Inc. (NYSE:BRX) Q3 2023 Earnings Call Transcript October 31, 2023

Operator: Greetings, and welcome to the Brixmor Property Group’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stacy Slater, Senior Vice President of Investor Relations and Capital Markets. Thank you. You may begin.

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; Angela Aman, President and Chief Financial Officer; and Brian Finnegan, Senior Executive Vice President and Chief Operating Officer. Mark Horgan, Executive Vice President and Chief Investment Officer will also 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 the reconciliations of these measures through 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 very pleased to report another quarter of outperformance across every front. It’s a quarter that once again demonstrates the cumulative momentum of our transformative value-added plan. The compelling returns and growth in cash flows that plan continues to produce. The outsized demand from vibrant retailers to be in our transform centers and, most importantly, the strength of our team. As always that outperformance begins with leasing where we signed over 780,000 feet of new leases at an average comparable spread of 52.7%, a post-IPO record for this company and likely once again well above the sector. Importantly, as Brian will discuss further, we signed these new leases with tenants like Trader Joe’s, Lululemon, Ulta and other leading retailers that demand to be in our well located portfolio.

Recent bankruptcies of weaker retailers have proven to be opportunities for us to bring in better tenants at better rents. It’s demonstrated by the spreads and rapid progress on leasing recaptured space. The strength of proven tenant demand to be in our centers allows us to not only drive better intrinsic lease terms, but also additional flexibility to drive even more value through reinvestment. As we renewed existing tenants and signed up new tenants at higher rents, we drove our average in place ABR to $16.77 a foot. Another record for the company, but one which leaves us plenty of room to continue to run. As we often say, rent basis matters if you want to drive growth in ROI and create value, particularly in a rising rate environment. Our small shop results this quarter also demonstrate the cumulative impact of our portfolio transformation as our small shop occupancy grew to a record 89.8% at an average rent achieved on new and renewal leases of $29.12.

Given the momentum from reinvestments underway, we have great visibility on growing small shop occupancy into the low-90s as we deliver those projects, which will have an outsized impact on our forward growth and cash flow. From an operation standpoint, we commenced another $13 million of new ABR during the quarter. Well ahead of our expectations, this hike in our regional teams worked to get rents commenced earlier. We grew our NOI margin to 74.4% and achieved same-store NOI growth of 4.8%. For the year, as Angela will detail in a moment, we now expect to deliver same-store growth of 3.5% to 4%, despite year-over-year headwinds of declining prior period rent collections. In addition, we’ve raised our FFO outlook to $2.03 at the midpoint and have raised our dividend by 4.8%, all while maintaining a conservative payout ratio.

Looking forward into 2024 and beyond, we expect continued NOI outperformance, even as we expect tenant disruption to continue at more normalized levels. Our confidence and visibility are driven by our cumulative leasing activity, which drove our signed but not commenced pipeline to a record $62 million of ABR that will commence over the next several quarters, as well as our robust forward leasing pipeline. From a reinvestment perspective, Bill and team continue to deliver transformative projects at very attractive returns, even in a higher rate environment. This year we expect to exceed $160 million of reinvestment deliveries at a 9% incremental return. From an external growth perspective, Mark and team have wisely been on hold the past several quarters as cap rates have begun to adjust to reflect a higher rate environment, particularly for larger opportunities.

Importantly, we’ve continued to hold capital recycle from dispositions as we expect opportunities will soon begin to hurdle our higher return expectations as private owners and operators face near-term maturities and other capital events. Of course, given the high level of growth we have embedded in the assets we own and control today, we can remain patient. In summary, we are pleased with how our discipline value-added execution continues to deliver. We are proud of how our results this quarter once again demonstrate not only our outperformance across every observable metric, but also our fundamental portfolio transformation. And we are excited by our unparalleled visibility on continued growth and outperformance in the future. Before turning the call over, allow me to congratulate Angela and Brian on their well-deserved promotion, demonstrating the amazing depth of talent Brixmor enjoys, as well as our commitment to growing our talent.

With that, I’ll turn the call over to Brian for a more detailed discussion of our leasing results. Brian?

Brian Finnegan: Thanks, Jim, and good morning, everyone. As our results demonstrate during the quarter, our team continues to capitalize on a favorable retail leasing environment, attracting great tenants to our portfolio, while quickly addressing recently recaptured bankrupt tenant space at much higher rents. During the quarter, we executed on 368 new and renewal leases totaling 1.7 million square feet, including our most productive quarterly new leasing output of the year. The depth of demand was evident in the tenants we added to the portfolio during the quarter, with new leases executed with the likes of Trader Joe’s, BJ’s Wholesale Club, TJX, Ross Dress for Less, Burlington, Barnes & Noble, Five Below, Ulta and Lululemon.

In addition, our team is adding great restaurant tenants that are focused on growing their suburban footprint, as demonstrated by the first of portfolio leases we added during the quarter with CAVA, Torchy’s Tacos, and Urban Plates. This activity led to a 40 basis point sequential increase in small shop occupancy, our 11th consecutive quarter of sequential small shop occupancy growth, achieving another record of 89.8%, with more room to run as we continue to deliver our accretive reinvestments. And while we did see a drop in overall leased occupancy of 20 basis points to 93.9%, our robust leasing activity during the quarter offset a significant portion of the 70 basis points of occupancy drag we had from the recapture of the remaining Bed Bath, Tuesday morning, David’s Bridal, and Christmas Tree Shop locations.

Our team is quickly addressing these spaces with better tenants at higher rents as our company record new lease spreads of 53%, included a 76% increase on recaptured 2023 bankrupt tenant space. As Jim highlighted, our results demonstrate that this retailer disruption is creating an excellent opportunity to upgrade our tendency, capture the embedded upside in the below market rents of these leases and free up compelling opportunities for additional reinvestment. We expect the bulk of the income from these new tenants to start to come online in late 2024 and be fully realized in 2025. Looking forward, we remain confident in the underlying fundamentals of our business plan to drive continued growth. Our centers are located where retailers want to be, new supply in our markets remains almost non-existent, and we continue to add great tenants to our forward leasing pipeline as retailers are recognizing the success our team has had in completely transforming this portfolio.

With that, I’ll hand the call over to Angela, for a more detailed review of our financial results. Angela?

Angela Aman: Thanks, Brian, and good morning. I’m pleased to report another quarter of strong execution and an improved forward outlook as we leverage our ongoing portfolio transformation to capitalize on the robust retailer demand environment. NAREIT FFO with $0.50 per diluted share in the third quarter, driven by same property NOI growth of 4.8%. Base rent growth contributed 400 basis points to same property NOI growth this quarter, despite a drag of approximately 120 basis points related to recent tenant bankruptcies. Net expense reimbursements, ancillary and other income, and percentage rents contributed 70 basis points on a combined basis, while revenue deemed uncollectible contributed 10 basis points this quarter, primarily due to two large settlements received during the period totaling approximately $1 million.

As Jim highlighted, our signed but not yet commenced pool now totaled 2.8 million square feet at a record $62 million of annualized base rent. The increase in the size of the pool this quarter was primarily due to exceptionally strong leasing activity, which added approximately $18 million of new leases to the pool, well outpacing significant rent commencements during the quarter of approximately $13 million. We now expect another $13 million of leases to commence in the fourth quarter of this year and $36 million to commence during 2024, slightly weighted towards the first half of the year. In terms of our forward outlook, we have increased our 2023 guidance for same property NOI growth to a range of 3.5% to 4%, a 75 basis point increase at the midpoint.

The improved outlook has been driven by strong rent commencements, minimal additional tenant bankruptcy in the third and early fourth quarters, and the significant bad debt settlements that occurred during the period. We now expect revenues deemed uncollectible to represent 40 to 60 basis points of same property total revenues for the full year versus the prior range of 75 to 85 basis points. We’ve also increased our guidance for 2023 NAREIT FFO to a range of $2.02 to $2.04 per diluted share, reflecting the change in same property NOI growth guidance and revised assumptions across a variety of other line items, including non-cash GAAP rental adjustments. Looking forward, we’re encouraged by the magnitude of the sign but not yet commenced pool, which at $62 million is $9 million or 17% larger than it was at the same time last year.

And we expect that $49 million or nearly 80% of the total pool will commence over the next 5 quarters, providing a very strong foundation for growth. Tenants that filed for bankruptcy in late 2022 and throughout 2023 are expected to detract just over 100 basis points of same property NOI growth this year. Given our progress in releasing recaptured space, as Brian highlighted, we expect that space impacted by 2023 bankruptcy activity will detract approximately 50 basis points from growth in 2024. We will establish our expectations around anticipated 2024 bankruptcy activity, when we provide guidance in February. As noted earlier, our 2023 guidance for revenues deemed uncollectible is now 40 to 60 basis points of total revenues, versus our long-term historical run rate of 75 to 110 basis points.

As a result, we do anticipate that revenues deemed uncollectible will likely be a negative contributor to growth next year as we continue to return to our historical run rate. Our fully unencumbered balance sheet remains well positioned to support our balanced business plan, with debt-to-EBITDA of 6.1 times and total liquidity of $1.3 billion. We’re pleased that our proactive efforts over the last several years to extend the duration of our balance sheet have resulted in a well-laddered debt maturity schedule, with only $300 million of debt maturing through year end 2024. In addition, as previously disclosed $300 million of interest rate swaps related to a portion of our term loan debt will expire in late July 2024. As always, we’ll be opportunistic, but given expectations that higher rates will persist through next year, we do anticipate that these items will have a meaningful impact on 2024 interest expense.

Although, the macro environment is likely to remain extremely dynamic, the success of our value-enhancing reinvestment efforts at compelling returns, even in a higher-rate environment, our outsized leasing productivity over the last several quarters, and our strong forward-leasing pipeline have put Brixmor in a strong position to navigate the months ahead, and we look forward to continuing to share details of our ongoing portfolio transformation with you. And with that, I’ll turn the call over to the operator for Q&A.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] First question comes from Dori Kesten with Wells Fargo. Please go ahead.

Dori Kesten: Thanks. Good morning. On your new and renewal lease spreads, are there certain markets where you’ve been surprised to the upside [ph] of lease or would you more broadly, say, you’re benefiting from the general strong leasing environment?

Brian Finnegan: Dori, hey, this is Brian. What’s been really encouraging for us is, this is incredibly broad based, whether that’s within anchor, small shops or regions across the country. And we particularly saw that with our bankrupt space during the quarter. We’re driving strong renewal growth across the portfolio as well. And as we continue to invest in our centers, retailers are certainly recognizing it. They’re recognizing the anchors that we put in, which are driving a significant amount of traffic. And the competition for space is really allowing us to drive rate higher. So we’ve been encouraged that the trend’s been fairly broad based.

Dori Kesten: Okay. And I’m wondering what are your expectations for this holiday season? And if you think that there could be any sort of shift in the strength of the leasing environment, looking into 2024 kind of based on that?

Brian Finnegan: Yeah, it’s a good question. The consumer rate remains incredibly resilient. I think you’ve heard Walmart talked about their expectations being strong for holiday. Retail spending was, again, up year-over-year. So we remain very encouraged. But thinking about retailer’s store opening plans, I mean, they’re planning for 2024 at our ICSC meetings in 2023. We’re talking to them about 2025 deals today. So our leasing pipeline is not dependent on how holiday goes, certainly it’s something that retailers are focused on. But as we think about the pipeline, we’ve been encouraged just broadly and we don’t expect a major impact from what we’re seeing from a Christmas holiday season.

James Taylor: And I would just add that that has proven to be very durable demand, given that the store is a profitable channel for these retailers and they see white space for them to continue to grow their footprint. So we’ve been very encouraged.

Dori Kesten: Okay. Thank you.

Operator: Next question, Todd Thomas with KeyBanc Capital Markets. Please go ahead.

Todd Thomas: Hi, thanks. Good morning. Jim, I just wanted to touch on investments. I think last quarter you talked about seeing some investment opportunities beginning to surface maybe deals that were on the market coming back at more favorable pricing. And since last quarter, the 10 years up quite a bit, so borrowing costs are up. Has there been any further change in seller’s willingness to accept either lower prices today? Or are there more price adjustments required before we start to see the company begin to get a little bit more opportunistic with regard to investments? And are you raising your return hurdles further for new acquisitions?

James Taylor: Yeah, I mean, clearly it’s a higher cost of capital environment, so we have a higher hurdle as we evaluate external growth opportunities. And, look, as I mentioned, what I find particularly compelling about our strategy is that we can drive top of the sector growth without relying on external growth. With that said, I think we’re still seeing the market adjust to what’s happened with rates. You’ve seen several deals get pulled as sellers have not been able to achieve expected pricing. And in the background, you have upcoming debt maturities and capital requirements that we think are going to bring folks to the table. So, we’re encouraged by some of what we see from an opportunity perspective, but we’re patient.

Todd Thomas: Okay. And, you’ve recycled capital over the years and sort of prune the portfolio over time. Is there an opportunity at all to maybe accelerate dispositions today if there’s sort of an opportunity to take advantage of somewhat favorable pricing on a one-off basis for assets in the market today?