Welcome to the 2:20 P.M. session at Citi's 2023 Global Property CEO Conference. I'm Craig Mailman here with Citi Research, and we're pleased to have with us Brixmor CEO, Jim Taylor. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or the webcast, you can sign on to liveqa.com and enter code GPC23 to submit any questions if you do not wanna raise your hand. Jim, we'll turn it over to you to introduce your company and any members of management that are with you today, provide any opening remarks, and then we'll get into Q&A.
Great. Thank you for having us here today. I'm Jim Taylor. I have with me Angela Aman, our CFO, and Stacy Slater, our head of IR and Capital Markets. We're excited to be here and appreciate your interest in Brixmor. It's a compelling time for this company as we are now almost six years into a value-added plan to capitalize on our older, well-located shopping centers. We currently own about 300 centers across the country. They are characterized by being well-located, older centers that have low rent bases. We've been able to capitalize on that low rent bases by creatively reinvesting in these shopping centers, driving high single, low double-digit incremental returns, and also fundamentally improving the quality of the assets that we're touching. That strategy is very compelling because it's one that's self-funded.
We don't rely on the external capital markets to fund what we're doing. We're driving it through free cash flow, we're creating a significant amount of value on the other side as we complete these reinvestments. It's part of what's driven our performance as a company from an operating and cash flow standpoint to the top of the sector. Importantly, we have great visibility for the next several years, given where our rent basis is relative to where we're signing new rents. That's the overview of where we are, and I'm sure you've got some questions for us.
Yeah. We'll start with the one that we've been asking everybody. Just what are the top three reasons an investor should buy your stock today?
You know, I think the first and foremost is our track record of execution, as I highlighted. We laid out our business plan in 2017, we've hit it in terms of timing and overall impact. That business plan drove our relative outperformance through the pandemic and is part of what's setting us up for outperformance from a growth perspective going forward. The second is really the portfolio itself. You know, we've put now well over $800 million to work and an incremental 11% return in about 35% of our portfolio. Imagine replacing an old tired Kmart with a brand new Sprouts in Burlington. We are improving the value of that center.
We've had the ability across hundreds of our centers to reposition and bring in better tenants at better rents that we believe leads to much more value than may be appreciated in the market today. The third element is the visibility that we have on growth. If you look at our expiring rents over the next 3-4 years, from an anchor perspective, those rents average about $9 a foot. If you look at where we're signing rents today for anchor space, it's in the mid-teens. We have 35%-45% upside in these rents as they come due. We happen to be in a demand environment that's very compelling for landlords because retailers recognize the store as a profitable channel to serve the customer. We're seeing no new supply in our markets.
In fact, there hasn't been new supply for over 10 years, and we don't foresee new supply over the next few years. Really those three reasons, you know, platform, portfolio transformation, and visibility on forward growth, we think set us apart in an industry that's seeing good fundamentals today.
The leasing environment has been or the strength of the leasing environment has been one of the big topics, right? You mentioned limited new supply, a breadth of new tenants, and the fact that the hawkish Fed has not been able to really sap consumer spending or unemployment yet. I mean, as we sit here today and you look at your leasing pipeline and what those tenants are looking to take space for, whether it's 2024, 2025, and those growth plans, you know, what's the, I guess, the bear case here from a demand erosion perspective relative to, you know, maybe what you're seeing on the ground?
You know, you're always worried about the consumer at the end of the day. That's ultimately who the retailers are serving. Our retail mix is necessity-based, it's value-oriented, we think it's more durable and resilient through economic slowdown. Certainly, the concern is always the consumer. One of the things that makes me a bit more bullish about this demand cycle from the tenants is that they're utilizing data to better understand how a store is gonna operate and perform before committing to it. This isn't a rational exuberance. They realize that the store is profitable, they're utilizing data more than ever before to assess whether or not a location is gonna be truly incremental from an EBITDA perspective. They also are committing to these stores, as you alluded to-2024, 2025.
It's a long-term forward commitment, almost looking through the cycle to where they're gonna be delivering the stores and serving the customer. The other comment I would make is that the breadth of demand is quite healthy. Not only are we seeing traditional open-air tenants in groceries, specialty grocery, value apparel, fitness, restaurants, et cetera, we're seeing mall native tenants coming into open-air centers to benefit from the lower cost of occupancy, the high daily traffic and the better visibility that you have in an open-air center. Then we're also seeing new uses in the medical fields, health, wellness, beauty services that recognize that having a storefront near where their customers live and where they go on a daily basis is compelling. This isn't, you know, one pocket of demand.
It's pretty broad-based, and as I mentioned, the nature of it is pretty resilient, even in an economic slowdown.
You know, part of the story for early 2023 has been some of the headline tenant issues. I don't know, Angela, if you just wanna run through maybe where bad debt's coming in this year, what the watch list looks like, and maybe offset that with where the SNO pipeline is and what kind of cushion that also gives you from an earnings perspective?
Thanks, Craig. I would say, you know, the way we handle sort of the potential for tenant distress or disruption this year is really in two ways. First, just on the bad debt line or revenues deemed uncollectible line, we expect that you'll see about 75 to 110 basis points of total revenues during the year as just bad debt expense. That covers more of kind of the normal course credit issues across the portfolio over the course of the year, will tend to be more heavily skewed towards small shop disruption, and that tracks very closely to kind of our pre-pandemic levels. You've kind of returned to normalized as it relates to just bad debt expense.
As you alluded to, we're also, you know, some tenant bankruptcy activity come through for the first time in the last several years, and we've certainly also contemplated that activity in our guidance as well. Our overall expectation and guidance for same property NOI this year is 1.5% to 3.5%. That reflects at the midpoint of the range about 150 basis points of potential disruption from recently announced or anticipated tenant bankruptcies. That's really embedded in the specific guidance we gave for the base rent and expense reimbursement line items. What I mentioned on our conference call, our fourth quarter call, was that about 60 basis points of that 150 basis points is related to known activity. That includes a few bankruptcy rejections we've already seen.
It also includes, four locations, four Bed Bath & Beyond locations that we're proactively taking back in the first quarter because we have really significant embedded upside. You mentioned on the call that the mark-to-market in those four boxes is about 60%. We really are getting in front of some of those potential situations and taking back space early in anticipation of how things may play out over the course of the year. That really leaves us with 90 basis points at the midpoint of the range that reflects unknown activity at this point over the course of the year.
Just to provide some context around that number, if we had a full liquidation or we took back all of our Bed Bath & Beyond spaces at the beginning of the second quarter, that would reflect about 40 basis points of the 90. If we took back all of our Tuesday Morning locations, which also filed for bankruptcy recently, that'd be about another 20 basis points. Even with full liquidations or us proactively taking back all of our locations pretty early in the year, we'd still have about 30 basis points to handle additional activity that might come up over the course of the year.
I'd just say, you know, overall, even with that level of disruption kind of embedded in the results, again, for good reason, because we are trying to get in front of some of these situations, given the upside in the portfolio, you know, we're putting up same property NOI growth of 1.5%-3.5%, despite a really difficult comparison due to prior period collections in 2022. As you alluded to, we also have a very significant signed but not commenced pipeline. Right now that totals about 2.7 million-2.8 million sq ft. It's about $55 million of just base rent that we expect to come online primarily during the course of 2023. About 75%-76% of that number should show up over the course of 2023 pretty ratably.
That's certainly gonna be a tailwind, really, as it has been for us, since 2019, a pretty significant tailwind to growth over the course of this year.
We're really pleased with the visibility on growth that our plan is showing today. When you pick apart those numbers and you appreciate that, you know, we're growing top line revenue 3.5%-4.5% with 150 basis points assumed for revenue loss due to tenant disruption, that's pretty powerful. Then you think about the NOI range, and you think about the 300 basis points of prior period rent collection drag that we have. We're still growing, we're still dropping growth to the bottom line. I also think when you look at that top line, it gives you a perspective on where our business is heading, not just for 2023, but 2024 and beyond.
That was gonna be what I wanted to touch on because 2023 is an interesting year because you have a couple headwinds of a comp of prior period plus this headwinds. You get to 2024, depending upon what happens with some of these tenant situations, there may be, you know, a continuation of that drag. As you start to get to 2025, you normalize. If that top line revenue growth can continue to be held up given the rolling up of your space. You get the benefit of marking to market some of this. You know, the silver lining of any bankruptcies is getting at it earlier. You know, you could conceivably have a little bit of a lull here with a re-acceleration.
Once some of these headwinds and I know you never fully get rid of a headwind or a tough comp, but on a normalized basis, if, you know, rent growth can, you know, supply doesn't get out of hand, rent growth stays in and around the area it is now. I mean, where from a normalized growth perspective should we expect the Brixmor portfolio to kind of trend relative and put that against maybe where you guys trade versus some other companies in the sector that are, you know, can be several turns above everybody else with less growth. I'm just trying to, you know, square that with valuations and how the market views you guys.
We believe that we're setting ourselves up to grow at the upper end of the historical ranges we set forth at our investor day in 2017. You think about it from an NOI perspective, it's 3.5%-4.5%. You think about that dropping down to the bottom line, FFO, all other things being equal without giving guidance, it's 200 basis points better than that. You know, timing will obviously be a big driver. The other thing you have to think about in terms of the bottom line is while we've done a phenomenal job of managing our balance sheet, we do face an increasing cost of borrowing as we get into our first maturities in 2024 and beyond. We have a pretty well laddered maturity profile, but that will be a little bit of headwind.
On a relative basis, that's something everybody faces. I think given the job Angela's done managing the balance sheet, we face it less on a relative basis. Be that as it may, it will be a headwind for us going forward. You make the fundamental point, which is, we're producing outperformance in terms of growth in a business plan importantly that's low risk. We're not committing capital until we have signed leases. The projects themselves have average sizes of $5 million-$7 million. You know, we're making high single, low double-digit incremental returns, which importantly are still making money in this rising rate environment. At the same time that we're doing that and driving that ROI, we're also on a cap rate neutral basis, compressing the cap rate that would otherwise be applied to the center.
We know that we're creating value, that it will get recognized. Capital flows finds a level. We're really encouraged and proud, frankly, of that track record of execution, but also the visibility it provides us going forward to continue to outperform.
Is there, you know, you've mentioned a couple of times that your base rents are typically at the lower end, maybe of peers? Can you talk a little bit about the positive feedback loop of as you start to get some of these centers re-tenanted and recurated and some of these rents up over time, how that resets the expectation at that center from a positioning within that market and a viewpoint from brokers, from tenants, and how that can kind of feed upon itself over time? You know, it takes time, but...
You're already seeing it. You're talking about the follow-on benefit that we often see in our small shops in terms of occupancy and rate as we reconfigure an anchor and bring in a more relevant traffic generator and use to that center. Oftentimes we're not touching the small shop as part of that anchor reposition or overall redevelopment. That upside in both rate, which sometimes can be 20%-30%, as well as occupancy, which can be several hundred basis points, is a great flywheel effect, if you will, of the original investment and the value that's been created. You're seeing it in our numbers today. Where are you seeing it? You're seeing an all-time record high small shop occupancy, all-time record high rate. You see it in the continued growth in our average in place AVR.
Again, what we're excited about is that we're just beginning to get into the benefit of that as we've delivered these reinvestment projects over the last several years. It is an important thing for us in terms of visibility on that long term growth. One of the things we continue to challenge the team on is to make sure that we're driving rate and focused on rate. We're not managing the portfolio for occupancy.
The one thing I found picking up retail is CapEx disclosures are less comparable across. Can you talk about, you know, your CapEx profile either as a % of total lease value or however you guys measure it, and how that's trended over time versus, maybe some of the perception that, you know, maybe you guys are getting some of these base rents because you're buying up with CapEx?
Well, the proof's in the pudding because we actually disclose to you our net effective rent, which is not common practice. You can see what we're spending to drive that increase in rate. The other thing that we're disclosing is the returns that we're getting on the reinvestments themselves project by project. If you look at our supplemental every quarter, you can see what we're delivering. I talk about it in terms of deliveries and returns. We're truly creating value on that capital spend. Angela can give you kind of a better view of what it means in relation to our NOI, what we're spending in terms of recurring maintenance, CapEx and so forth.
I'd start with just underscoring the point Jim made about net effective rent. If you're looking at CapEx, just, you know, to try to really assess the CapEx profile of the leasing transactions we're doing, we do give very good disclosure on that. That shows you the component pieces, both what the base rent piece was and what the capital per square foot is over the term of the lease. You can see how that shifts and changes over time. We also give you disclosure on what the mix between small shop and anchor space is in any given period, right? You've got a little more context about what that number and what those capital numbers mean than you would otherwise. We're trying to be very disclosed that we do not believe we're buying up, rent in these transactions.
The reason we're generating the spread we are is because the portfolio historically had been undermanaged and undermaintained for an extended period of time, and the rents were below market. We've got a real opportunity to put a market level of capital into leasing deals and achieve a market rent, which is well above kind of the rent in place in the portfolio today. In terms of, you know, the broader kind of CapEx picture, I'd say from a maintenance CapEx perspective, we're spending sort of around $0.70-$0.80 a sq ft right now. I would, over time, expect to continue to see that number decline, probably trend over, you know, the next five years or so, closer to $0.50 a sq ft as we continue to address some of that legacy deferred maintenance through redevelopment programs where we're generating accretive returns.
Leasing capital certainly ran a little bit higher in 2022. It was between kind of $85 million and $90 million in total. I certainly hope it runs at that level in 2023 as well. That's all productivity driven, and really relates to the fact that we are in an occupancy growth, you know, sort of component of our life cycle. What you're seeing is not just revenue maintaining capital embedded within that line. Certainly, there's some of that, but the lion's share of that is really revenue generating capital. On the redevelopment side, we're spending between $150 million and $200 million a year. We've been really right in the middle of that range over the last three years.
We actually are hopeful that as we continue to navigate this year, we have more opportunities, like we're doing on Bed Bath & Beyond, to pull forward some of those opportunities to harvest the mark-to-market embedded in the portfolio and maybe spend closer to the top end, if not a little bit above the top end of that range.
The power of low rent bases is it allows you to drive adequate return on the capital you're deploying. You know? That's why we disclose for you our net effective rent. If we had a fully at market rent portfolio, that would be more painful because you'd see that we were spending capital instead of generating new revenue to keep revenue in place. You know, we would encourage this question to be asked of all. You know, we would encourage you as investors to look at what returns are actually being generated on the capital spend per leasing.
You guys, you know, mentioned the opportunity again within the portfolio. The external side of the equation is still a little bit more disjointed, right? Because of just an inability to have a viewpoint or clarity on where cap rates are, cost of capital is moving. I'm just kinda curious, even with your cost of capital moving higher, sort of the redevelopment return thresholds where those are versus, you know, people saying, "Why are you out there doing acquisitions or finding land sites," right? Like, on a risk-adjusted basis too, it's already in the portfolio. Kinda what's your viewpoint on that spread, the ability to continue to put capital out and the real benefits to shareholders versus something a little bit more true external?
We love that we're able to generate outperformance through internally generated opportunity that's funded through free cash flow, and actually in a manner that's deleveraging when you think about the returns that we're making on that reinvestment spend of 9%, 10%, 11%, which is well far ahead of where the cost of financing is, where the cost of capital is, where the cap rate would be. We've always operated our plan as an all-weather plan with a view that rates are gonna be higher in the future and cap rates are gonna be higher in the future. As it relates to external growth, we don't see the opportunity immediately today, but we are watching very carefully the dislocation in the asset level financing market.
We're watching what that does for private owners who have to rely on asset level financing to recapitalize their assets, to put capital in, to backfill tenants, et cetera. We're cautiously optimistic that that external growth opportunity, not in the next quarter or so, but over the next few quarters, becomes compelling enough to execute upon. It's going to be opportunity driven. We recognize that our incremental cost of capital has increased, and yet it will be interesting to see how this all settles out from a capital markets perspective for owners of privately held assets. One thing to appreciate about our space is that it's 87% held in private hands. It's been a long time in a cycle since you've seen securitization on any scale from private to public hands.
If we do go into an environment where asset level borrowers are disadvantaged because of the lack of availability of bank capital, the conduit maybe not being there, the life companies having finite levels of financing for platforms such as ours that have investment-grade balance sheets and the capacity to access the unsecured market, we may find acquisitions penciling. They're not today, right? The good news is we can be disciplined because we're generating great growth on our internal plan. You know, at this point, it's more speculation and trying to look out into what's happening over the next several quarters. We'll see. Keep an eye on.
Angela, if you had to go in the debt market today, where do you think you'd be able to price debt?
I mean, the indications are sort of in and around 200 basis points from a spread perspective for a 10-year. You know, that's certainly down very significantly from where we were a couple months ago. The spreads certainly have tightened in, but still very wide of the last time we accessed the unsecured market. You know, we don't have any debt maturities until June of 2024. We've got a lot of time to navigate this environment and to wait for an opportunistic window. I would say that we did, and we talked about it on the conference call. We recast our credit facility about a year ago, and we did, as part of that, get a delayed draw term loan of $200 million.
We've effectively pre-funded $200 million of our $500 million maturity in 2024, and that will be at a materially lower cost than where we can access the unsecured market today. We're looking for those opportunities where we can, you know, efficiently continue to refinance debt on the balance sheet as it comes due, take advantage of the time and flexibility I think we've created on the balance sheet to make sure that we find the right windows to go to market.
We have a question coming in from the audience. Are your leases CPI linked? Do those leases require tenants to report their sales? What is the current tenant occupancy cost and trend?
The occupancy cost, to answer the last part first, depends on the category of tenant. You know, restaurant tenants, certain other categories of tenant can tolerate a higher level of occupancy cost than, say, a grocer. We actually have an average occupancy cost across our grocery fleet of below 2%, which is pretty compelling from the standpoint of the productivity of the grocers versus the rent that we have. You know, most of our leases have fixed embedded rent growth. Either, on the national side, we have typically up 12% or 10% every 5 years, so that's a CAGR of 1.7%-2%. On the small shop leases, we're able to do better than that, 3%-4%. We don't have a significant part of our portfolio that's CPI linked.
We'd rather drive better rent up front. You know, if we're getting into a negotiation with a tenant, we can get another $1 or $2 of rent and min rent up front, not based on sales, not based on where CPI is. I think we're creating more value, certainly from a certainties perspective, but we're also driving better spreads and, you know, that hits our cash flow once that rent begins to commence.
I've asked this of a few other of your peers, but, you know, during COVID, part of the lease negotiation was to get better rights for the landlord, maybe more flexibility from the parking field or other concessions. I mean, are you still getting those types of concessions from tenants? You know, having had some of those now for two years, are there opportunities within the portfolio that you guys have evaluated to do more out parcel, more pads that may be less capital intensive-
Well-
-returns?
Yes. In the $350 million that we have underway today are projects that were unencumbered during the pandemic as we got no build restrictions lifted, as we got co-tenancy relief, et cetera. It's a very important point because that's not showing up in our spreads, but it's huge from a value creation standpoint. Certainly, as we're moving forward, we, as a national platform that are doing multiple deals with these tenants, know where we can push and unencumber properties, know what the tenant is willing to live with to open up opportunities in the pad site, to open up opportunities for different types of co-tenancy. It's part of what's fueling our forward, reinvestment pipeline as well.
It's a critical part of the lease negotiations that doesn't necessarily show up in our quarterly statistics, but here's where it shows up, in our reinvestment pipeline, in the yields that we're getting, in the pad site opportunities that we're delivering upon at, you know, mid-teens incremental returns. It's an incredibly important part of the business and one where the fact that we have the tenant relationships that we do, I think we outperform in. The tenants can trust that we're gonna execute in a way that doesn't harm their business.
From an ESG perspective, you know, everyone's been wanting to give more than one, so I'll say what's the top one or two kind of initiatives you have on the board for 2023?
You know, our number one asset is our people. I believe great real estate matters, great people matter far more. The health, wellness, development, and continued growth of our team is always at the forefront, in addition to making sure that we're creating an atmosphere of diversity and inclusion so that we bring multiple perspectives to the benefit of the company, and that we have a culture of trust where we can have good, honest conflict, but always focused on the growth of the team. Ultimately, you can have a great piece of real estate, and I've seen this throughout my career, and a mediocre person, and you're gonna get a mediocre outcome. You can have an okay piece of real estate and a great talented person, you're gonna get a great outcome.
As we think about ESG, we are obviously capitalizing on opportunities to be more sustainable, whether it's solar, car charging stations, higher efficiency roofs, you know, low water landscaping. Those are all ways that we continue to monitor our progress from an environmental standpoint. From a governance standpoint, I believe that we have some of the strongest corporate governance in the industry, as recognized by many third parties. Really my focus though is always on culture. It's always on the S, because I believe that's what drives better than expected outcomes.
Angela, have you been able to tie any of your debt metrics to ESG? Kind of, can you walk through what some of those break points would be and other things?
Yeah. When we recast the credit facility about a year ago, we did add a sustainability linked pricing feature. We qualify for 1 or 2 basis point reduction in the spread every year based on the reduction in greenhouse gas emissions. We have not done a green bond as of yet. It's easier if you're doing a ground up development to be able to circle the use of proceeds that, you know, will tie to the amount you're raising under a green bond. For redevelopment activity, such as we're doing, it's been a little bit harder to make the direct link from a use of proceeds perspective. As I mentioned, we did get that flexibility or optionality in the credit facility recast last year.
Before I move to rapid fire, does anyone in the room have a question? Great. Same store wide growth for the strip group in 2024, not necessarily for Brixmor, unless you want to give guidance.
2%.
2%. Best real estate decision today. Buy, sell, build.
Redevelop, redevelop.
Within the strip group, will there be more, fewer, the same amount of public companies a year from now?
Every year you bet on fewer, and yet somehow the crowd persists. We'll see. I, you know, I think the natural answer would be fewer, but I don't bank on that.
Great. Well, thank you guys so much.
Thank you.
Thanks, Craig.
Everyone enjoy the rest of the conference.
Yeah.