Started here. Welcome to the Brixmor Roundtable. Jim, I'll turn it over to you, maybe introduce the team up here and provide some opening remarks.
Be happy to. First of all, thank you for your interest in Brixmor. I have with me Mark Horgan, our Chief Investment Officer, Brian Finnegan, our President and Chief Operating Officer, Steve Gallagher, our Chief Financial Officer, and Stacy Slater, our Head of Capital Markets and Investor Relations. Brixmor prides itself on being a value-added investor within the shopping center space. We're one of the largest open-air platforms in the country with tenants that include Kroger, Whole Foods, Sprouts, TJ Maxx, Trader Joe's. Our strategy as a company has been to take the opportunity to capitalize on below-market rents, bring in better tenants at better rents, creatively reinvest in the property, and provide growth that's at the top of the peer group. We're really proud of our track record of doing just that. We just reported a quarter where we exceeded expectations.
Importantly, we also highlighted for folks the fact that we expect to grow at 4% this year on the NOI line, despite over 200 basis points of occupancy headwind. We also provided guidance in terms of our signed but not commenced pipeline, which represents about 7% of our total ABR, which we expect to commence rapidly over the next several quarters, putting us in a position to have visibility on being able to outperform not just in 2025 but also 2026 and beyond. I thought it might be helpful for Brian, you to give kind of an update in terms of what we're seeing real-time in terms of tenant demand, particularly encouraged by what we're seeing in the grocery segment. It's really broad-based and it's putting us in a position to stock the pipeline of future creative reinvestment projects and continue to drive the transformation of this portfolio. Brian.
Yeah, we remain really encouraged by what we're seeing in the demand environment. We had a great start to the year. The second quarter was one of the best quarters that we've had in years from a productivity standpoint. We just had Orlando ICSC, which is one of the largest regional shows outside of Vegas and New York. What you saw there was retailers who we have been growing a lot with over the last few years continued to be focused on growing their open-air store footprint, whether that's in off-price apparel, whether that's in specialty grocery, health and wellness, QSR restaurant operators. They're looking at deals not just for 2026 at this point, particularly from an anchor perspective. Those leases have to get done effectively now or by the end of the year to get stores open for 2026, really in 2027 as well.
I think from a retailer perspective, this is intentional demand. They know more about their customers today than they ever have. They know how opening a store in a given market will complement the existing store footprint, what it will do from an online sales perspective. We remain very encouraged by what we're seeing from a demand standpoint, as well as what we saw from retailers in terms of the Q2 earnings releases, which were generally positive and ties to what we've been hearing from the real estate folks. Jim mentioned grocery. We have been growing significantly with specialty grocery, whether that's with Trader Joe’s. We've done more in the last 18 months with them than we had done in the prior 10 years. Whole Foods is now in our top 10. We continue to grow with Sprouts, which is in our top 20.
We did one of their first locations here in the New York metro area. Interestingly, on the traditional side, we're seeing some growth opportunities there as well. We'll sign our second new public lease here shortly. We've got half a dozen opportunities with them across the portfolio in the pipeline right now from a redevelopment standpoint. Really excited by what we're seeing there. We're also seeing from the likes of H-E-B, Walmart, who's expanding their neighborhood grocery concept as well. You can really see this come through in really every observable metric across the portfolio, whether that's the spreads we've been able to achieve, the rents that we've been able to sign, and really the traffic that we're generating, which again is at the top of the peer group. With that, we've transformed not just the portfolio but the tenancy.
A lot of you in this room have been familiar with this company for a long time, but I would ask anyone to take our top tenancy from 2019 and compare it to where we are today. What you wouldn't have seen five years ago is you wouldn't have seen Whole Foods where they are. You wouldn't have seen Sprouts, Trader Joe's. You wouldn't have seen Chipotle, Bath & Body Works, operators like Barnes & Noble who have really reinvented their business, who we're growing with as well. We're also doing that on the redevelopment front. We're pretty excited with what we're seeing from a reinvestment standpoint.
We're opening our project in Davis, California, tomorrow, a grand opening across the street from UC Davis and a Trader Joe's anchored center where we're bringing in Nordstrom Rack and Ulta, places like Block 59 in Naperville, where we're adding a brand new Yardhouse, Cheesecake Factory, Stan's Donuts, Shake Shack, and a number of other great operators in what had been a fair some underutilized space up front. You can see that in places like Southwest Florida and Plano, Texas, as well. We have a lot of runway to that going forward. Overall, we remain really encouraged by what we're seeing in the business.
Steve.
I think what Jim and Brian both really highlighted is the culmination of our business plan over the last 10 years has really put us in a position to be able to grow through that tenant disruption. I think importantly, on the other side of it, you do see a much reduced exposure to some of that at-risk tenancy. That combined with this snow pipeline, and we still have $40 million of ABR to bring on in the second half of the year, that stacking of rents, which we've consistently talked about, delivering on average about $15 million of ABR a quarter, really positions us to grow into 2026, 2027, and beyond. We've talked a lot with this group about any disruption to the extent it is accelerated, which we saw in the first half of the year.
While that will impede short-term growth, it really does help accelerate growth over the next couple of years. We look forward to delivering that.
You talked about the disruption earlier this year and maybe even towards the end of last year. I mean, are you tracking ahead of, given how much interest there is in the space and leasing you talked about? Are you tracking ahead of sort of your original assumptions for backfill timing or NOI lift at this point?
I mean, I can take that first. We went into this, Samir, with the lowest box supply that we've ever had in the portfolio, right? It was about a third of where we were 10 years ago. There had been a significant amount of demand in the box space. It's not like we were just sitting waiting for some of this stuff to happen, right? We had reduced our exposure to Big Lots by 30% prior to the filing. Recall that we had terminated five Bed Bath & Beyond leases before that filing as well because we knew they were at risk of getting lost at auction. We've decreased our office supply exposure by 50% and done that with specialty grocers and off-price apparel operators. We were very confident in the demand. It's why we expected to grow at where we're growing year to date.
We've been pleased so far with how quickly our team has been able to address that with the rents that are already starting to come online this year for the Big Lots spaces that we took back last year and what we continue to see in terms of demand for the space.
Yeah, and we're really, Samir, I think one thing to appreciate is we're really not seeing in this year the benefit of a lot of that backfill. That won't be coming on until next year. To still provide 4% growth with 200 basis points of headwind really implies the important underlying point that the execution of this strategy would have delivered 6% unlevered growth but for the bankruptcies. As we look forward, we're excited about the trajectory of the business and importantly the value we've created as we've executed upon it.
Of the spaces you got back, how much of them has sort of been addressed at this point? I mean, how much, you know, LOI commitment?
We're 80% addressed, and the balance we expect to address over the next couple of quarters, as many of those spaces were spaces that we got back later. I'm really pleased with how the team has stepped up and really brought in tenants that are relevant to the communities they serve. When you replace the Big Lots with the Sprouts, you not only get an accretive return, as we have given our rent spreads on the box itself, but you get a follow-on benefit in terms of occupancy and rate on the balance of the center, which gives us visibility several years forward in terms of this upgrade in tenancy that we've executed.
The upgrade and the rent.
Yeah.
Right. How much of a rent uplift are you getting from these boxes you're getting back?
We talked about on the call, Samir, we were about in between 40% and 50% for what we've addressed. The data and the Big Lots are on the high end of that and in line with the Joann and Party City making up the balance.
I'd like to keep this conversation interactive as well. If there's anything, any questions you have, just raise your hand. That's fine.
Have you had to split any of those boxes?
Some, but it's a small percentage. I think as it relates to the Big Lots today, it was actually, frankly, just one. I think we split two of the Bed Bath & Beyond spaces where you haven't split any of the Party City locations. Some of the Joann actually lend themselves to being split, just the nature of the configuration. We can do that. We have two of them. We can do that for small shop spaces. The vast majority have been single-tenant backfills. In those cases where we have split, we're getting paid back for the capital that we're putting to work.
I guess one news that did come out was Amazon's rollout of same-day delivery, right? What was your reaction to that? How is there any change at all in the sector? How do you think about that?
Yeah, I think if this came out 10 years ago, it would be a bit more concerning. The great grocers today have been very focused on their omnichannel footprint and frankly meeting the consumer wherever the consumer wants to meet them. You look at what Kroger has done in both in-store with ClickList pickup as well as Ocado. You look at the partnerships with Instacart. If people want their groceries delivered today in most parts of the country, they can get them delivered. It wasn't surprising to us. We've had a great partnership with Amazon and with Whole Foods. In terms of impact on other grocers, I think the great grocers today, you can walk in the store. When you look at Kroger 10 years ago and they were first starting to deliver, you saw inventory issues.
You saw consumers kind of fighting with pickers to get what they wanted off the shelves. You're not seeing that much today. The data that they have and understanding inventory levels is much stronger. I think grocers are well prepared to be able to handle any additional online competition.
Yeah. Help us think about occupancy, right? Both anchor and anchor is pretty much, I mean, it's record levels. You've got shop occupancy that continues to go up. Help us think through how much more room there is to push kind of.
We continue to reset the bar as we execute the strategy. It's a great question because the historical occupancy levels of this portfolio really aren't a guide to what the potential is going forward. When you look at our reinvestment pipeline, you look at the small shops that are in the reinvestment projects, they drag the overall average by a couple hundred basis points. As you deliver those anchors, you can lease up several hundred basis points of shop occupancy benefiting from that reinvestment. We still think there's room to run from an occupancy standpoint in this portfolio as we've executed this strategy. One thing that we've never done is run the portfolio for occupancy.
We've always managed it for growth, which makes you focus on making sure that you're bringing in the right tenant at the right return on invested capital that's going to drive traffic to the balance of the center. One of the unique things about our asset class is folks ask us all the time about market rent. You can have two centers across the street from each other whose market rent is 30% different, right? That market rent for that center is driven by the anchor, is driven by the co-tenancy. We're really mindful of that. It's showing up in our portfolio. It's showing up in our top tenancy.
Frankly, it's also showing up, and this doesn't get enough focus, in our renewal spreads, which have been at the top of the pack in the mid-teens, all really reflecting the demand to be in our centers and how we're leveraging that demand to drive rate, which is ultimately our core focus.
On the redevelopments you've talked about, you've talked annual goals of $150 to $200 million annually. You're delivering at very high returns. Talk about how big is that pipeline of future opportunities?
Yeah, what we've identified in the supplement represents a little over $800 million of future reinvestment potential. We're often asked, why don't you do that immediately? You've got these pesky things called leases that prevent you from getting to the underlying real estate. Just with what we have in the current shadow pipeline, we've got several years of $150 to $200 million of annual very accretive spend looking ahead. The second part of our strategy has been around capital recycling. As we've sold assets and harvested assets that had limited growth and upside, we've redeployed that into assets where we see future reinvestment, future growth potential, as we recently did with our acquisition of Britton Plaza in South Tampa. We're kind of backfilling that pipeline as we execute our plan and have view on several years of accretive reinvestment.
Jim, you made comments about market rents being driven by co-tenancy and anchors. Earlier in the year, you put out kind of a case study on Middletown Plaza where there's some repositioning there. Trader Joe’s moved in and foot traffic doubled, I think. Yeah. How does that, how do rents and spreads, like, can you quantify the uplift to rents after something like that?
I believe in the case of Middletown, these shop rents nearly doubled. Not only do you see the rates increase, but you see the occupancy increase as well. That is part of what we talk about when we say the flywheel effect of this type of activity is that you not only get an accretive return on the box that you're touching, but you get follow-on growth in the shops that were impacted by bringing in that Trader Joe’s to that center. It opened up a whole new avenue of potential tenants and drove both occupancy and rate. That has happened time and time again across the portfolio.
I think the other piece to quantify it would be we had a former Rite Aid location in there that was doing $3 million at its height, and Trader Joe’s will do $35 million, right? Just think of the traffic that that's ultimately going to bring in and the impact it's going to have in the rest of the shops.
It is showing up across the portfolio. We are really proud of the fact that we have led in terms of year-over-year traffic growth over the last five years, over the last year, over the last month against the peers because of this accretive reinvestment strategy.
Is there anything on, like, what's the biggest pressure on the development process today? Is it cost primarily, or how much have costs gone up?
Costs have actually moderated. I mean, we've seen a moderation with material costs. We did a portfolio-wide roofing bid this year that came in 15% under our expectations. You're seeing some continued labor challenges in some pockets, but not really. I think overall costs have settled with some real moderation from a materials price standpoint. You know, for us, the entitlement process, depending on the municipality, we've got redevelopment teams in our regional offices that they're charged with not only executing the developments but developing great relationships with those municipalities. Ultimately, they're particular about what they want in a given shopping center. Interestingly, they've been much more accommodating in terms of adding density because they don't want these large parking fields, which has given us additional opportunities to add out parcels across the portfolio and densify our assets. I'd say probably that getting ahead of that entitlement piece.
The other thing that we'll do, Samir, when we have visibility on getting leases executed and working with our key tenant partners, we'll start that process very early, right? We'll start that process ahead of having a lease executed when we have trust that ultimately they've got a committee approved to be able to move those forward. We're mitigating that. We mitigate it as well with conforming leases with our key tenant partners. We're really focused on bringing that timeline in. I'd say the one piece that can be challenging in a given market is that entitlement piece.
Importantly, we're not taking significant risk here. This is an existing asset where we're not moving forward with capital until we've got the job priced out from a cost perspective and we've got the leases signed. That makes it even more attractive from a risk-adjusted standpoint.
Anything on the transaction side? I mean, kind of what you're seeing in the market out there, how competitive is it, and maybe talk about pricing?
Sure. The biggest change in the transactions part of the last several years is that the private market has been listening to what Jim and Steve have been saying about the overall business. You're seeing more private capital be interested in the space. Obviously, they had generally avoided the space during the so-called retail apocalypse. You're seeing that flow into the market today, particularly for grocery anchored assets. That's certainly making the market more competitive than it was over the last several years. When you think about the market, though, it is about asset sizing. The smaller the asset, its core gross with not a lot of growth, that gets a lot of bids from pension type investors. As you get out in bigger asset sizes or smaller asset pools, you can certainly see some wider cap rates.
From a cap rate spread differential across the market, you continue to see what we've seen historically in that small core grocery prices the most aggressively from a cap rate perspective. As you get to the bigger community centers, they're a little bit wider given the size. As you get out, dollar value on power centers can certainly move out cap rates. To the extent that we transact, we really try to buy assets where we have very high conviction on growth in our footprint, like we did with Lawson Terra this past quarter in Houston. Houston's our third largest market. We've known that asset for a long time. Our team knows it well. We know the rents. We saw that asset that had significant vacancies that we thought was leasable day one. We saw a huge rent mark to market, particularly on phase one of that asset.
When we go into the market, we try to find those assets where we think we can really deliver very strong growth. We think that asset could deliver 5% to 7% annually over the next 10 years. We think it's a very high growth opportunity for the company. Our whole strategy with respect to capital recycling is actually pretty simple. As Jim said, we really exit assets after we've maximized value and see limited growth and try to reinvest in assets where we see much higher hold IRRs. For example, in Lawson Terra, we think that can generate high single digit, low double digit hold IRRs, assuming cap rates blow out. We always try to underwrite pretty conservatively on the exit basis because we think it's quite important in retail to make sure you're delivering enough growth to generate that hold IRR.
It's been a competitive market, but a healthy market based on, I think, all the things Jim and Brian and Steve have been saying about the overall industry.
Now, for Lawson Terra, what's the, I mean, you talked about the vacancy. Maybe really talk about the upside there in that asset.
Yeah, so the asset, I've known it for a long time, and it was developed over 20 years ago. The phase one of that asset, like the front of it, had assets that we like to call lifestyle 1.0 that were paying well below market rents. That was really attractive. We see big rent spreads on that. There were three or four large vacancies that while we were buying it, we had LOIs in hand. We've been talking to tenants. Maybe Brian, you can discuss kind of how it's come in our last, you know, the first couple of months of hold. Yeah.
It's very interesting. We're getting asked, hey, this is a different asset for you all. It's actually very similar, right? It's grocery anchored. It's in a market that we know very well. It's our third largest MSA. To Mark's point, there's opportunities there to upgrade tenancy in parts of the shopping center. We've got Sephora that's one of their best producing stores across the country. It's got over 5 million visits a year. It's a growth profile that fits with the growth profile of the company. We've been really pleased out of the gate with the leases that we've been able to get done that are ahead of underwriting, operators that our team knows in the market. Frankly, a couple of deals that we were able to get done in Dallas with an awesome restaurant operator that we were able to bring there, like a local institution.
I'll give you a quick example. It's small in scale, but they were going to do a smaller kind of smoothie national franchise where we found this viral great operator in Austin that paid a much higher rent that's going to drive much higher traffic and going to drive better sales. Our team knows the asset, they know the market, and we've been excited with what we're seeing out of the gate and feel some pretty compelling growth opportunities going forward.
We saw in-place rents in the $30 range and the ability to drive those above $60, which we've been encouraged by the LOI and lease activity that we've been generating over the last month that's in excess of what we underwrote.
Yeah, when you think about the assets we're buying, we're buying from assets that were held by pension funds that have a third-party operator and asset manager. They don't have the platform that we have as living and breathing the asset day to day. They have third-party brokers, and they're accepting the market where our team is going and trying to drive those rents, find those great operators to drive the traffic and better rents. I think it's underappreciated that we're a very good operator from an expense perspective. That asset in particular, we saw some pretty significant expense savings. We believe in year one relative to what the benchmark is running the asset. We have much cheaper insurance, for example, given the scale of our portfolio. There are a lot of levers we try to pull when we acquire assets to drive both short and long-term growth.
I feel like there's more lifestyle type assets being acquired these days. I don't know if it's a function of there's more available, or is it, you know, remember back in the 2000s.
I think part of that is the recognition that you're seeing a convergence of tenant demand to be in open-air retail centers. You're seeing tenants that were historically in lifestyle-only type centers understanding the power of co-locating with a very productive grocer. We're seeing it across our portfolio in multiple markets, whether it's Philly, Florida, Southern California, where we're attracting lifestyle-native, mall-native, internet-type tenants into traditional grocery-anchored shopping centers. I think there's a general recognition of the overlap of tenancy and where the tenancy is growing. It makes sense. One of the things about a lot of the product that's been on the market is that the rents were really full. We didn't see an opportunity in some of those other assets that have traded recently to create value or to drive ROIC.
This asset we've known for a long time, as Brian highlighted, over 5 million visits a year with rents in place that were half market. We expect to get to a lot of that first-generation space over the first three to five years of ownership and drive that unlevered IRR into the high single, low double digits.
Yeah, that's the most frustrating thing when you're an acquisitions person. Not every cap rate is created the same when you're a holder or investor. That's why we looked at those and said, this one just has the right growth. You just have to be very disciplined in this business to make sure you're finding those opportunities with growth. Being disciplined is like an asset where if it's pricing wrong, you just can't buy it. We really believe that we're going to find the right assets for us to continue to grow with given our platform. We're excited about what we're seeing in the pipeline.
Any questions from the audience?
As long as I don't need to reset it. Long-term development projects. We've also sold a lot of the original properties. How many properties are left without themselves? For that, what time do you put it out to the second times? It's fruited on. All the economics there are different than the initial.
It's a great question. We've touched about 42% of the portfolio in either single or multiple phases. One of the things that we will do is look at projects in phases because you reduce risk, but you also generate better returns on the balance or on the second phase. For example, in Cudahy, California, we backfilled accretively a Kmart box with a Burlington and a Chuze Fitness. We later went back in a second phase and recaptured a Big Lots box early and brought in a Sprouts Farmers Market. The rent that we got on the Sprouts Farmers Market reflected the uplift of our having done a first phase. Many of the projects that we do will be multiple phases that get us to better risk-adjusted returns. In terms of when we will be through, we've got several years of runway, we think, to accretively reinvest.
Importantly, where we don't see the opportunity in the near to intermediate term to drive good growth, we'll harvest that asset and recycle it into one that presents that type of opportunity.
Jim, you've talked about solid visibility into growth for the next few years. Maybe frame that out a little bit more. I mean, I'm not asking for guidance for 2026, but help us think about major swing factors here. I know that the S&O pipelines are there. Just kind of.
We have provided long-term guidance on an occupancy neutral basis. The expectation and goal that we'll continue to produce 4% unlevered growth, focusing on the embedded rent bumps, the contribution from the reinvestments, and the mark-to-market on the leases. As we look forward, having the size of snow pipeline that we have gives us confidence in not only hitting that range, but potentially doing better than that. Now, we're not going to give guidance as it relates to the out years. If you've been following our business, you see the building blocks being put into place today that will put us in a position that we think external activity aside to be able to grow at the top of the peer group.
I guess, Steven, is there anything that you've seen sometimes, you know, maybe benefits or one time this year that won't repeat next year as we kind of think through that maybe treat models aren't incorporating correctly or.
Yeah, I mean, I think the first half of the year, outside of just the seasonality and some of the line items like bad debt, you obviously have the impact of the bankruptcy, not only in bad debt, but also in the drag in the top line. Obviously, some of those spaces that we've gotten back midway through the year, you'll have some of the headwind related to, you know, Joann did a couple of months on Party City, et cetera. The team has been doing a great job on the ancillary front of driving incremental revenue on some of those boxes as we're releasing them as well. I think it's pretty much a clean first half of the year.
We always look proactively for opportunities to take back space and relet it to better tenants at better rents, and to the extent some of those opportunities present themselves, we'll be willing to do that as well.
Anything on the balance sheet side?
Yeah, I mean, we did a bond offering last week. I think really successful, a lot of support from those in the room as well. I think we're well positioned. You see the impact of a lot of the work we've done over the last 10 years to get our leverage into the mid-fives. I think we feel very comfortable here where we are. I think we're well positioned as we go forward over the next year.
We had a couple of rapid-fire questions, but I'm not sure if there's any more left here. Okay, number one on the rapid-fire, when the Fed starts to cut rates short end, what's your view on the 10-year borrowing rates: decline, stay flat, or potentially rise next year?
Potentially rise.
Okay. Number two, AI initiatives. Majority of companies last year stated they're ramping up spending. How would you characterize your plans over the next year? Higher, flat, or lower?
Higher.
Number three, same story on NOI growth for the sector. Will it be higher, lower, or same next year?
I think it's going to be in line.
Okay, thank you.
Thank you.
All right. Thanks, Ashley. Thank you.