Brixmor Property Group Inc. (NYSE:BRX) Q4 2022 Earnings Call Transcript

Brixmor Property Group Inc. (NYSE:BRX) Q4 2022 Earnings Call Transcript February 14, 2023

Operator: Greetings and welcome to Brixmor Property Group Incorporated Fourth Quarter 2022 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. As a reminder, this conference being recorded. It is now my pleasure to introduce your host, Stacy Slater, Senior Vice President, Investor Relations and Capital Markets. Thank you, you may begin.

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 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. At this time, it’s my pleasure to introduce Jim Taylor.

Jim Taylor: Thanks, Stacy and good morning, everyone. Our results this quarter once again demonstrate the strength of our value add plan. The quality of our team and portfolio and importantly the transformative impacts, our execution continues to deliver. Consider for example that during the quarter we signed another 954,000 square feet of new leases at an average cash spread of 44%. Bringing our total new ABR for the year to a record $62 million at an average spread of 37%, in a record new lease average rent per foot of $19.08. We achieved a record total leased occupancy of 93.8% for the portfolio, which does reflect a 360 basis points spread to build occupancy and which also reflects a drag of a 130 basis points associated with our reinvestment activity.

Both of these reflect powerful tailwinds, as we commence billing those leases and deliver those reinvestment projects. We also achieved a record small shop leased occupancy for the portfolio of 89.2%, which has more room to run as we execute our value add strategy, and we drove our overall ABR per foot to a portfolio record of $16.19, demonstrating our continued progress, but also our continued opportunity for growth given that attractive basis. And we continue to drive leading market share of new store openings throughout ’22 with core tenants like Burlington, HomeGoods, Ulta, Five Below, Fresh Market, Ross, AAA, and Starbucks will also bringing new to the portfolio of concepts that drive traffic to our centers like Bark Social, Yardbird, Freepeople.

From a revenue perspective, bottom-line, our team once again delivered with top of the sector same store NOI growth and FFO growth is 7.3% and 6.5% respectively. Simply phenomenal job by Brian and leasing teams capitalizing on the strong tenant demand for our well located centers. Importantly, we’ve also leveraged this tenant demand recapture space from watchlist tenants at accretive returns. Where we can capitalize on our low rent pays to bring-in better tenants at better rents. This is a critical point. Our low rent basis and the demand from thriving retailers to be in our well located centers, positions us to outperform in ’23 and beyond, while also delivering substantial value creation. Let me pause here, am I coming through. Okay. For example, we expect 8 Bed Bath anchor boxes in two Harmon small-shop locations to close.

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We already have control of 4 of the 8 Bed Bath anchor boxes and our at least or LOI on all 4 with best-in class specialty grocery off-price and HomeGoods retailers at average spreads of close to 60%. Our remaining Bed Bath and buybuy Baby anchor boxes have an average in-place rent of $10.35 per-foot, which compares very favorably to the mid-teens rents we expect to achieve, as we take control of them. Looking-forward, we have $54.7 million in signed ABR that will commence as Angela will detail, over the next several quarters and an additional $34 million of annual base rent in our forward new leasing pipeline. These pipelines provide us tremendous visibility on robust revenue growth in ’23 and beyond, even after the assumed bankruptcy impacts embedded in our revenue guidance that Angela will discuss further.

Importantly, this top-line momentum will allow us to continue to grow NOI and FFO at a strong pace for the sector, even with the headwinds of naturally declining collections in prior-period rents, which top $23 million in ’22 and more normalized levels of bad debt. Simply put, we are well-positioned to continue to be at the top of the sector from an NOI and FFO growth perspective, all while continuing to create long-term value as we recapture space. From a reinvestment standpoint, Billhigh and our redev construction teams delivered another 12 projects during the quarter, bringing our total stabilizations during the year to $179 million at an average incremental return of 10%. We are creating tremendous value here with the additional follow-on benefits of higher rates and occupancy as we do follow-on leasing at the centers impacted.

Importantly, we have another $343 million of reinvestment, pre-leased and underway at an incremental return of 9%, creating value even in a higher-rate environment. In a forward pipeline of over $1 billion in projects that importantly exists in assets that we own and control today. We are excited that this year will be bringing great projects online, like the shops at Palm Lakes outside of Miami, Market Town Center in Naples, Florida and Vail Ranch Center in Riverside, California. From a capital recycling standpoint, Mark and team continue to execute well, even in disrupted capital markets environment. Closing in ’22 on $287 million of dispositions at attractive cap rates, which included the highly profitable sale of Campus Village shops in College Park to a student housing developer.

We redeployed that capital into $411 million of acquisitions with upside in our core markets. In addition to upside in rents versus market, these acquisitions also feed our forward reinvestment pipeline, as we execute our value-add strategy and leverage the strength of our platform. Under Angela’s leadership, we continue to enjoy maximum flexibility from a balance sheet perspective to continue to grow – excuse me, to continue to fund our growth strategy without reliance on the volatile capital markets, all while benefiting from our earlier decisions, the pre-pay ’22 and ’23 maturities. From an external growth perspective, we do expect to see some attractive acquisition opportunities in our core markets, as private owners face debt maturities and re-tenanting requirements.

Expect us to remain disciplined however, as we are able to continue to drive outperformance in growth and value-creation for the next several years through opportunities that we own and control today. With that, I’ll turn the call over to Angela for a more detailed discussion of our results, our balance sheet and our outlook. Angela?

Angela Aman: Thanks, Jim and good morning. I’m pleased to report on a very strong conclusion to 2022, as we continue to deliver on our value-enhancing reinvestment program and set the stage for long-term growth and value-creation. NAREIT FFO was $0.49 per share in the fourth-quarter, driven by same-property NOI growth of 7.3%. Base rent growth continues to accelerate, contributing 510 basis-points to same-property NOI growth this quarter. Excluding the impact of lease modifications and rent abatements, base rent growth contributed 490 basis-points, representing a 50 basis-point acceleration from last quarter, driven by growth in build occupancy and significant positive re-leasing spreads. Ancillary and other income and percentage rents contributed 80 basis-points on a combined basis, while net expense reimbursements contributed 240 basis-points, due to improvements in build occupancy and a strong recoverability of certain fourth-quarter expenses.

Revenues deemed uncollectible detracted 100 basis-points from same-property NOI growth, primarily due to the ongoing moderation of out-of-period collections of previously reserved amounts. Our operational metrics continue to reflect the strength of the current leasing environment, despite macro headwinds and the continuing successful transformation of our portfolio. Build occupancy was up 60 basis-points sequentially to 90.2%, while leased occupancy was up 50 basis-points sequentially to 93.8%, a record-high for our portfolio. The anchor leased rate was up 50 basis-points sequentially to 95.9%, while the small-shop leased rate was up 40 basis-points sequentially or 250 basis-points year-over-year to 89.2%, reflecting another new portfolio of record.

The spread between lease and build occupancy ended the period at 360 basis-points and the total sign but not yet commenced pool, which includes an additional 70 basis-points of GLA related to space that will soon be vacated by existing tenants totaled $55 million. The size of the pool is up approximately $2 million since last quarter, despite the commencement of leases representing approximately $16 million of annualized base rent this quarter. As we’ve highlighted in the past, one of the strongest indicators of forward growth is a persistently widespread between lease and build occupancy, while both build and lease occupancy are increasing. In addition, the blended annualized base rent per square-foot on the sign but not yet commenced pool, remains above $19, approximately 20% above our portfolio average, reflecting the broad-based impact of our granular reinvestment initiatives.

In terms of our forward outlook, we have introduced guidance for 2023 same-property NOI growth at a range of 1.5% to 3.5%, comprised of 350 to 450 basis point contribution from base rents, offset by a significant detraction from revenues deemed uncollectible. We estimate that the amount of revenues deemed uncollectible recognized during 2023 will total 75 basis points to 210 basis-points of total revenues, which is in-line with our historical run-rate. This assumption reflects the modest amount of out-of-period collections we expect to realize during the year. The normalization of this line-item in 2023 will result in a 200 basis-point detraction from same-property NOI growth at the low-end of the range or 150 basis-point detraction at the high-end of the range.

As the income associated with revenues deemed uncollectible in 2022, once again becomes expense in 2023. In addition to our assumptions for revenues deemed uncollectible, which primarily address normal-course credit issues across the portfolio, the midpoint of our same-property guidance range also reflects approximately 150 basis-points of drag related to recently-announced or anticipated bankruptcy activity, which is reflected in our expectations for base rent and net expense reimbursements. Of this amount, 60 basis-points relates to known events, including lease rejections that have occurred to date and the impact of locations that we are proactively recapturing from struggling retailers ahead of a likely filing. While the remaining 90 basis-points relates to assumptions about potential future events, providing us with significant capacity to absorb additional tenant disruption within our range.

Our ability to deliver a 350 to 450 basis-point contribution from base rent growth in a year with over 100 basis points of base rent impact from bankruptcy activity, underscores the success of our portfolio transformation and the importance of our signed but not yet commenced pipeline, as a source of forward growth and momentum. We have also introduced guidance for 2023, NAREIT FFO at a range of $1.95 to $2.03 per diluted share. Our guidance assumes a utilization of our $200 million delayed-draw term-loan at the end of April to continue to extend the duration of the balance sheet. In early February, we entered into a forward-starting swap related to the delay draw term-loan, which fixes so-far at a rate of 3.59% from May 1 2023 through July 26, 2027, the maturity of the term-loan, resulting in a fixed-rate for this loan of 4.88%.

As of December 31, we had total liquidity of $1.3 billion, a weighted-average maturity of 4.9 years and no debt maturities until June 2024. And with that, I’ll turn the call over to the operator for Q&A.

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Q&A Session

Operator: Our first question comes from Craig Schmidt with Bank of America. Please proceed.

Craig Schmidt: What are your expectations for transactions in 2023? I know you didn’t acquire anything in the fourth-quarter and how long do you think it’s going to take before we find the new normal cap rates are for opening centers?

Jim Taylor: I think it’s going to take a while, and I think what’s going to transactional activity. As I mentioned in my remarks are really two things, one is the disruption and re-tenanting capital that will be an opportunity for platforms like ours and then refinancing requirements with higher interest rates. So I think that, that’s going to raise the level of overall transactional activity, certainly above what we saw at the end of 2022. And we’re going to be opportunistic, as I highlighted in my remarks, the great thing about our business plan is, it doesn’t require external growth to drive outperformance. So that allows us to remain very disciplined. We certainly have the flexibility in the capital capacity to be acquisitive. But we’re going to pick our spots and I am hopeful that as we move into this part of the cycle, there will be attractive value-add opportunities for us.

Craig Schmidt: Great. And then just as a follow-up question. I mean, your leasing activity actually picked-up in the fourth-quarter. How do you feel about that leasing activity as you head into 2023 relative to 2022?

Jim Taylor: Yes, any quarter can fluctuate a little bit, but I think we’re continuing to see great strength in demand and Brian and team capitalize on it. Brian?

Brian Finnegan: Yes, Craig, we’re really encouraged by what we saw in the fourth-quarter was actually our most productive quarter of the year from a GLA perspective. We had a nice uptick in anchor activity, but also you continue to see small shops come through. And as Jim mentioned, and he highlighted a number of the retailers that we signed leases with during the quarter. So pretty exciting, so what’s more encouraging is, if you look at that pipeline at the end-of-the year from a legal perspective leases that are out, it’s actually up from where it was a year-ago at the end of 2021. So it gives us good visibility in terms of demand for this year, demand that we are seeing for some of the troubled tenant space from core tenants and a lot of new ones that we’ve been able to attract to the portfolio, because of all the work the team has done. So we are really encouraged by what we saw in the fourth-quarter and what we continue to see at the start of the year.

Operator: And our next question comes from Todd Thomas with KeyBanc Capital. Please proceed.

Todd Thomas: Yes, hi, thanks. Hi, good morning. First I just wanted to clarify with regard to the guidance, Angela. So the 350 to 450 basis-points of base rent growth that includes a 150 basis-point drag that takes into account. I think you said 60 basis-points from known events, so move-outs lease rejections and an additional budgeting of 90 basis-points plus a normalized level of uncollectible revenue, that’s the 75 to 110 basis-points on-top of that. Is that right or am I double counting with the 75 to a 110 basis-points on-top of the comment you made around the 150 basis-point drag?