Brixmor Property Group Inc. Q1 FY2020 Earnings Call

Good day, and welcome to the Brixmor Property Group First Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Stacy Slater. Please go ahead, ma'am.

Thank you, operator, and thank you all for joining Brixmor's first 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, Leasing, 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. 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.

Thank you, Stacy and thanks to all of you for joining our first quarter call. I trust that each of you and your families are safe. I'm grateful to report that the Brixmor team has no known cases of COVID-19, although, tragically, some of our team have lost family members and loved ones. Needless to say, we are beyond grateful to those on the front-lines fighting the virus from the first responders, to the healthcare workers, to importantly those of our essential tenants who've remained open throughout the crisis to ensure that we all have essential supplies. Thank you. Given the events of the last several weeks, this first quarter, which would typically predominate our discussion, seems like a distant memory. While that's the case, it's important to understand the first quarter's performance in the context of our business going forward. As has been the case for the last four years, we continue to deliver industry-leading leasing volumes and spreads and value-added reinvestments. We signed 1.4 million of new and renewal leases at average cash-on-cash spreads of 10% overall and 24% for new leases. We delivered $41 million of reinvestment projects at an average incremental return of 11%, significantly beating our pro forma. We produced 3% same-store NOI growth or over 4% before taking reserves for COVID-19 into account. And perhaps most importantly, we ended the quarter with $43 million of signed but not commenced ABR, which we expect to commence over the next six to eight quarters, as well as a significant pipeline of new leases and LOIs that we expect to execute upon as we move to the other side of this crisis. Simply put these results underscore our confidence that our platform is built to handle this disruption. In early March, as the outlines of the pandemic came into view, we immediately implemented a comprehensive response strategy consistent with our cultural tenets. I couldn't be more proud of how our team responded to ensure that we proactively address the impacts of the crisis and importantly position ourselves for outperformance as we emerge. Our operations team moved quickly to curtail operating expenses by 15% without sacrificing service levels at the property level, to not only reduce CAM leakage, but also reduce the expense burden for those non-essential tenants forced to close. They also immediately implemented additional signage for essential and hybrid tenants who remained open as well as provided signage and set aside marked spaces for curbside pickup and delivery. The response from our tenants for this additional support of their businesses has been overwhelmingly positive. With a priority on liquidity and an eye towards a more favorable cost environment as we emerged from the crisis, our construction and redevelopment teams worked with tenants to extend certain opening timeframes from 2020 into 2021, reducing our forecasted capital spend for value enhancing reinvestment and maintenance capital this year by over $110 million. And again, our spend is for projects that are pre-leased, which underscores the low risk conservatism of our investment pipeline. Our collections team working with our leasing and marketing teams implemented our BrixAssist program, providing our small-shop tenants with assistance in accessing federal and state relief programs, including paid SBA consultants for help in accessing the PPP program. At this time, we believe that over half of our small-shop non-essential tenants have applied for relief and many of those have received funding. Importantly, we've been in dialogue with each of our small-shop tenants forced to close and applying lessons learned in other natural disasters are working to ensure that they have access to all available resources and that they are reopened as soon as it is safe and practicable. Because of these efforts of our leasing and collection teams, we've collected over 66% of our April rent, including over 50% of rent from our non-essential and hybrid small-shop tenants, truly an outstanding result. Our leasing team has also been engaged with those non-essential national and regional tenants that have been forced to close, negotiating the exchange of rent deferral of one to two months for very valuable concessions in the underlying leases. These concessions include the elimination of restrictive use clauses as well as early option exercises and renewals. Our guiding principle in these discussions has been that the value received not only exceeds the cost of the deferral, but that these are deals that we would have deemed favorable prior to the crisis. This is a key point because these concessions act as an accelerant for our performance as we emerged from the crisis. We strongly believe that a refusal to engage with tenants in this environment is not only a lost opportunity. It's just not smart business. But let me be clear, those tenants who are proposing unreasonable accommodations will be addressed through default and the other lease rights we have in our leases. As Angela will cover in more detail in a minute, our financing and capital teams have successfully ensured that we have more than ample liquidity to fund our business for the next several years without having to access the capital markets. We also took the extraordinary measure of suspending our July dividend. As many of you know, we believe that our primary product to investors is a dividend that is well covered and growing. We enjoy one of the lowest payout ratios in the sector, one of the lowest watch list exposures, great tenant and geographic diversification, a strong fully unencumbered balance sheet and a pre-leased reinvestment pipeline. Each of these factors put us in the best relative position possible to fully reinstate the dividend. However, as this crisis plays out, we will see elevated levels of tenant failure across the industry and not addressing the dividend puts any platform in a position of emerging from this crisis with more leverage and less flexibility to reinstate the dividend and importantly capitalize on the recovery. As we've seen in previous dislocations, the greatest value destruction occurs through unwise balance sheet decisions. So on balance and in an abundance of caution given the uncertainties presented by this crisis, we made the tough but we believe responsible decision of suspending the dividend this quarter. Looking forward, perhaps the best way to determine how well this platform is positioned both to weather and emerge from the pandemic is to look at how we enter. Approximately 60% of our ABR comes from essential uses, such as grocery and drug stores and hybrid uses like crafts and electronics. 83% of these essential and hybrid tenants have remained open during the crisis, as have all of our 400 shopping centers. Our core tenancy is very strong; 80% of our top 40 tenants have paid April rent in full and those same 40 tenants have raised collectively an excess of $35 billion of liquidity to weather this storm. We also enjoy strong tenant diversification with no single tenant representing more than 3.4% of our ABR and our top 40 tenants average less than 1%. We are also diversified from a geographic perspective, particularly in certain markets that have been disproportionately impacted with no market representing more than 8% of our ABR. When you look at those sectors most at risk to this disruption, you'll note that only 2% of our ABR is from entertainment uses including theaters, less than half of our restaurant exposure is full-service casual and only 5% of our ABR is from fitness. As you further reflect on how we will emerge from this crisis, note also that we benefit from low rent basis and low occupancy cost ratios. These will be incredibly critical in providing us the flexibility to respond to changing market conditions and still make money, just as we have over the last four years. We believe that the crisis has and will continue to showcase the resiliency and attractiveness of our community necessity-based retail centers and we believe that over the next 18 months, we're going to see an acceleration of some of the trends that have favored our centers over the last four years. In fact, you can already see these shifts in the composition of our forward leasing pipeline, which not only includes new essential uses to our portfolio, but other retailers fleeing obsolete product types in favor of being within the last mile of their consumer. Finally, I would note that every decision that we've made as a company from selling $1.7 billion of non-core assets to de-leveraging and unencumbering our balance sheet, to maintaining discipline and focus on value enhancing low-risk reinvestment, to capturing increased market share with tenants who will thrive long-term, to how we are leveraging this disruption to further enhance our leases, all points to a future for this company that will be even stronger on a relative basis. As the impacts of COVID-19 play out and cause many to reset their business plans, I believe Brixmor will stand apart with the platform, portfolio quality, rent basis and track record to drive tremendous value creation. Thank you for your interest and support. And with that, I'll turn the call over to Angela.

Thanks, Jim and good morning. I will briefly walk through our first quarter results before discussing the important steps we have taken over the last several weeks with respect to our liquidity profile and balance sheet positioning. Despite a macroeconomic backdrop today that looks very different than the one where we're operating in for the majority of the first quarter, the results we reported last night do serve to emphasize the strength of our portfolio and platform. NAREIT FFO in the first quarter was $0.46 per share and same property NOI growth was 3%, driven by a 400 basis point contribution from base rent. These results reflect additional reserves taken in light of COVID-19 with respect to certain nonessential watch list tenants based on a comprehensive financial and liquidity review. These reserves are included in both revenues deemed uncollectable and straight-line rents, totaling $2.6 million and $3.8 million respectively. Absent these reserves, same property NOI growth would have been 4.3% and NAREIT FFO would have been $0.48 per share. These are outstanding results that speak directly to the successful execution of the business plan we laid out several years ago, focused on transforming our portfolio of well-located neighborhood and community shopping centers through strategic reinvestment intended to drive growth and long-term value. Across every facet of our business, we believe that the steps we've taken over the last several years to strengthen the portfolio and the platform have dramatically improved our ability to navigate this period of disruption. Specifically, as we've executed on our reinvestment and capital recycling plans, we've also worked to create a balance sheet that could weather any storm. We reduced leverage ratios and improved coverage metrics, but also importantly extended the weighted average duration of our debt maturities and reduced our reliance on short-term bank debt. The result is a capital structure with $1.2 billion of liquidity and no maturities until 2022. In addition, our portfolio is now fully unencumbered, which provides an invaluable degree of financial and operational flexibility as we navigate an exceptionally dynamic environment. Importantly, I would note that based on current rent collection rates and the adjustments we have made in OpEx and CapEx, we are fully funding the recurring operations of our platform without utilizing any of our substantial available liquidity. More specifically, our breakeven cash collection rate is approximately 50% before CapEx or approximately 60% after normal course maintenance and leasing CapEx. While the liquidity we have in place today and the flexibility afforded to us by our current capital structure position us very well, we also believe that our stakeholders will ultimately be best served by additional efforts to bolster liquidity, given the unknown scope, severity and duration of the pandemic and the resulting economic disruption. As a result, we completed a broad-based assessment of our capital needs including anticipated spending levels on recurring CapEx and on our value enhancing reinvestment pipeline, which resulted in the deferral of approximately $110 million of anticipated 2020 capital expenditures, further bolstering our near-term liquidity and flexibility. With respect to our value enhancing pipeline, the granularity and low-risk pre-leased nature of our projects allowed us to work closely with our retailer partners to find mutually beneficial solutions for the execution of these projects. We will preserve precious liquidity in 2020 without sacrificing the contractually obligated revenue associated with signed leases at these projects or the long-term value that will ultimately be created. In mid-March as our offices around the country closed and the potential magnitude of the current crisis became more clear, we suspended activity under our stock repurchase program, which was funded in the quarter with disposition proceeds, and drew a total of $550 million under our revolving credit facility, which remained in cash on our balance sheet at the end of the quarter. In addition, last night, we announced the Board of Directors has temporarily suspended our dividend. As Jim discussed, this is not a step we take lightly. That said, we are dedicated to taking the actions necessary to ensure that we emerge from this difficult time a stronger and better platform. In conclusion, I'd like to reiterate Jim's appreciation for the efforts of the entire Brixmor team over the last two months. The dedication and perseverance shown at every level of the organization has been humbling and we're truly grateful for everyone's efforts. And with that, I will turn the call over to the operator for Q&A.

Thank you. The operator provided instructions for asking questions. Our first question comes from Craig Schmidt of Bank of America.

Thank you. I was wondering, was there any difference in April rent collections by geography?

Craig, it's Jim. Actually we were struck that it was pretty well balanced with each of our four regions being pretty close to what we've reported overall. If there was any region that was impacted slightly more than the others, it would be the Northeast, which certainly was the region more impacted by the virus, but it's a slight difference.

Okay. And then I just—I'm assuming you've seen in some of your markets the mandated closings on nonessential tenants. I just wonder what has the consumer's reaction to those more discretionary retailers been in terms of consumer acceptance?

Well, I think as you've seen in the general media and we've certainly seen it with our openings, folks are being cautious. Some leases, particularly those that provide pickup and delivery have been more prominent, but we have started to see rapid reopenings across the portfolio in those jurisdictions where the restrictions have been lifted, be it Colorado, Georgia, now in Texas. But I do think that you're seeing the consumers continuing to be careful, as they should be. And I think our tenants are also responding in a way to provide their customers with a safe experience, which I think is going to be critical over the next few months.

Our next question comes from Todd Thomas with KeyBanc Capital Markets.

Hey, Todd.

Hi. Thanks. Good morning. Jim, you spoke about the forward leasing pipeline in terms of seeing demand from essential retailers and others that want to be closer to their customers. Can you just describe what you're seeing there in a little bit more detail around that demand?

I'd be happy to, but maybe Brian, I can turn it over to you.

Yes, Todd, it's a great question. One of the things that's been exciting for us, just in terms of some upside during this period has been the fact that many of these essential businesses continue to move leases forward and actually continue to sign leases. Think about it, at the end of the third quarter, while our leasing certainly moderated a bit, the team was able to sign 38 leases and almost 250,000 square feet in March, 60% of that within the last two weeks when we were effectively shut down. So if you think of the categories like grocery, value, personal electronics, which we still continue to sign leases with and then QSR restaurants, we've been pleased with the pipeline. We certainly do expect it to moderate a bit and many of those tenants who we had large pipelines with had taken a bit of a pause, but Jim did mention the pipeline in his opening remarks for a reason. It's actually up 25% from the end of last quarter. So many of those deals that were moving towards execution have simply been put on hold, even for those non-essential retailers that haven't opened yet. So, while we do expect it to be a little choppy, we are pleased with the activity that we're continuing to see during the slowdown here.

Yes. And I think, Todd, importantly, it puts us in a position, particularly with respect to those leases in the pipeline to ramp up pretty quickly. And, as I alluded to in my remarks and Brian did as well, we are actually seeing new essential uses, new types of grocers, as well as certain tenants that are fleeing product types that aren't close to the consumer. Those were trends that we've been talking about for the last several quarters. I think you're going to only see that accelerate in favor of open-air retail.

Okay. And then I guess sort of following up on that a little bit, maybe thinking about grocery specifically, right. We've seen stores shift to curbside pick-up and do a lot more delivery than ever before. Those trends have really accelerated meaningfully here over the last two months. Do you have sort of a view on how grocery will look going forward? We've seen grocers resort to testing all types of concepts and strategies since March, whether it's in the traditional store itself with micro-fulfillment using dark stores for curbside and delivery only. Do you have a view on what might materialize going forward here and how that might impact your portfolio and shopping centers more generally?

Yes, I think that the curbside pickup and delivery is something that's here to stay. I think that the consumer adoption of it has been incredibly strong and I think it's also a profitable format for the grocers, because the customer still carries the cost at the last mile. I think what the grocers have seen is also that their average basket sizes have increased markedly. So I think that you will see to what you were alluding to, some of the store formats begin to change a little bit and also the grocers looking at their footprints and designating more space within those footprints for micro-fulfillment, where I think we stand very well to benefit from that trend is both our relationships and market share with some of the grocers who are leading in that area, but also the low rent basis that we have and the flexibility generally speaking that we have in the format itself to accommodate those changes. I think that the other thing that this disruption has pointed out is actually the importance of the proximity to the customer and flaws in the overall logistics pipeline that really get dealt with when you're able to have a significant amount of inventory near where the customer is. So I think all of those things are going to accelerate some of the changes in the grocer format. I think we stand pretty well positioned, given our relationships with the grocers and importantly, given our low rent basis and the flexible nature of our assets.

Okay. Thank you.

Our next question comes from Samir Khanal with Evercore ISI.

Yes, good morning. Hey Jim, sorry if I missed this, I joined late, did you provide any early color on sort of May collection at this point?

I haven't. What I can tell you is that month-to-date, we're sitting pretty well, a little better than we were in April, but we do expect that to moderate as I mentioned in our comments, in the opening comments. We are negotiating rent deferrals where we see value in doing so. So, with those tenants that we have negotiated rent deferrals with, there may be only partial payments in May. So, I feel good about where we are month-to-date; in fact, I think we're ahead of where a lot of people were for the entire month of April. But do I expect to be where we were in April? Probably not, I think it's going to moderate a bit.

Okay. And I guess shifting gears a little bit. On the leases that you have signed in March, I mean, what are sort of tenants asking for in these leases today that maybe you aren't seeing, let's say six months ago kind of pre-COVID? I'm trying to understand if there's any kind of COVID language attached in these leases, so just trying to get a sense of that.

Well, I'll let Brian comment on this. But as you could imagine, of course tenants are looking as they negotiate leases to have some type of protection as it relates to future pandemics. But we've been taking a pretty hard line with it and importantly have not had to as of this moment sign any such provision. But as we look forward, we certainly expected, and Brian, maybe you can comment on our approach.

Yes, it's a great question. And in terms of the leases that we signed in March, they really weren't as much addressing it there as much as just looking at the build-out periods. So there were some adjustments maybe 30, 45 days in those, but weren't exactly COVID-specific. And as Jim mentioned, we are starting to see it a bit; it's pretty clear in our leases today that the tenant has the obligation to pay rent. We do expect this to come up with retailers and I think our guiding principle, and I think it's going to be — if and when we do address this, is to acknowledge that they owe the money like they do today, limit the duration of any type of deferral, and then have it paid back within a reasonable time. And that's how we're going to approach these going forward. And again, those will be exceptions, not the rule, because today we've taken a pretty hard line on it.

And we'll go next to Ki Bin Kim of SunTrust.

Thanks. Good morning. You have about 10% of your leases expiring through 2020 or month-to-month. How are you thinking about addressing some of these leases? Because I could imagine that during these times, there's probably some hesitancy for long renewals from both your perspective and from the tenants as well.

Yes. We've really actually gotten after that pretty well, Ki Bin; it certainly is an appropriate thing to be focused on. But we have very little as a percent of our overall rent remaining, that needs to be taken care of as we move through the year. And I think part of the reason for that honestly is that these tenants are making money in our spaces and they expect to make money in these stores as they move forward. And it really more than anything else, points to the importance of low occupancy costs. We've talked about it for 16 quarters since we've been here. If this crisis points to anything, it's that tenants are more than ever going to be focused on the profitability of their stores. So while you quote the 10% number, I'm not going to quote you a specific number, but it's far lower in terms of what remains, and based on the tenants that are rolling, and importantly based on the rent, which is in the single-digits that's rolling, we feel pretty good about where we'll continue to be from a renewal standpoint.

Okay. And sorry, I was looking at the small-shop tenants, I guess you only have about 7% rolling to be officially correct here. In terms of capital allocation, one of the key aspects of Brixmor has been your ability to allocate capital to anchor repositioning and redevelopment in very well-leased, lower-risk projects. How do you think about this segment during uncertain times? And if the rent will be there to justify the cost, if tenant demand will be there, if the small shop follow-through demand will be there, there is quite a lot to think about.

Well, you hit the main point right on the head in your question. And that is that our investment activity is substantially pre-leased. So ironically, the business plan that we've been executing prior to this crisis is the exact same business plan that we're going to execute through and beyond the crisis. Obviously, with a continued focus on making sure that we're driving very attractive risk-adjusted returns on that capital that not only is great on an incremental basis, but as we talked about throughout, creates tremendous amount of intrinsic value. But I think in a strange kind of way, the conservatism and approach of our business model not only positioned us well to come into this crisis, but it's going to be a very similar model that we execute as we emerge and we're going to avoid ground-up or significant speculative investment, because you just don't get paid enough for it. And if anything this crisis points that out, that where you are putting capital to work, which we haven't without those forward lease commitments, you're risking stranding significant amounts of capital. So appreciate the question and I think it just really highlights for us as a company what our relative strength is.

Our next question comes from Hong Zhang of J.P. Morgan.

Hi. I guess what percentage of ABR do those tenants that you took the bad debt reserves on represent in your portfolio? And looking into the second quarter so far, have you identified any other tenants that are at risk of going into catch-up accounting?

Thank you for the question. We did take a real hard look at our watch list tenants and we focused in for purposes of taking the reserve on straight-line and AR in the first quarter on those tenants that are higher at risk. These were tenants that we felt would be disproportionately impacted by the crisis that were weaker going into the crisis. We thought it was conservative and appropriate to specifically reserve for them. I'll let Angela provide a little bit more color.

Yes, Jim laid it out well, it was a pretty targeted assessment of the watch list. Those tenants that were nonessential and closed had disruption to their business. As I mentioned in my remarks, we did a thorough evaluation of their liquidity position to determine which tenants to take the reserves on. I would say their exposure in the portfolio is low single-digits; it was a handful of tenants that made up the reserves we outlined in the press release, but in total, it was low single-digit exposure to those tenants.

We'll go next to Shivani Sood of Deutsche Bank.

Hey, good morning. I'm just curious in terms of the deferral conversations you're having with tenants. Can you give us a sense of how many of those are just for April versus maybe April and May? And Jim, you had touched on this in your opening remarks, but some color on the payback periods that you're targeting in these conversations.

I'm going to let Brian comment with more detail, but I do think it's important to highlight the principle with which we approach these discussions and that is that these are deals that we would have done absent the crisis. So whether it's one month or two months, generally two months have been the time period. We really are focused on looking into those leases and identifying those clauses, the restrictive uses and other items that there's real value in lifting. Brian, you may want to add some more.

Jim covered most of it. Again, these have generally been a month or two payback at the end of 2020 into early 2021. And again, that guiding principle is that the value we're getting or receiving is greater than or equal to the cost of the deferral. And we've been able to lift restrictions, get extensions. So far those discussions have been productive with several retailers. So we're getting to a place that makes sense; we're entering into agreements. When we're not either the tenants paying rent or we're making the decision to pursue our legal rights under the lease, as Jim mentioned in his opening remarks. In terms of the total amount of deferrals, we're still early; each of those negotiations is specific with many of those tenants we expect to have more color as we move forward. But we're making some good progress. I really appreciate the effort of our national account team; their rapport and dialogue with these retailers is helping us get to agreements that, as Jim mentioned, make good business sense, COVID or no COVID.

And we'll go next to Ki Bin Kim of SunTrust. We'll go next to Greg McGinniss of Scotiabank.

Hey, Jim. Just going back to the question you just addressed on markets you've been targeting and geographic diversification. Obviously this environment has created some strange hurdles. I'm just curious, if the potential for changes to physical college tenants, at least in the very near-term, has changed your investment philosophy on university towns?

It's a near-term risk. Many of these university towns are seeing dramatic reductions in their populations as students have gone home and are learning remotely. I don't think it's a long-term issue. But we're certainly focused on those markets like UC Davis or Ann Arbor or College Station, where we have assets and making sure that our tenants are getting to the other side of this. We believe very strongly in the long-term vitality of those markets and as we emerge on the other side of this crisis and students get back to school, I think our tenants are going to thrive.

Okay. Thanks. And Angela, at this point, how should we be thinking about the suspended dividends versus taxable income in Q2 and in 2020? And maybe as a way of helping us out if you can, at what level of GAAP rent collection do you actually reach zero taxable income?

Thanks for the question, Greg. We're continuing to evaluate and monitor taxable income closely. As mentioned in the press release, that'll be a key consideration the Board considers when determining when or how to reinstate the dividend. As Jim talked about in his prepared remarks, the key focus for how we're navigating the crisis, really in every way across the Board is to put us in the strongest position possible coming out of the crisis and to be able to reinstate the dividend fully on the other side. At this point there is just too much uncertainty in the environment to give any more specific color as it relates to 2020.

We'll go next to Floris van Dijkum of Compass Point.

Hey, good morning guys. Thanks for taking my question. A quick question here on your small-shop leasing. Historically, your small-shop occupancy has outperformed sector peers. Obviously, COVID is likely to have a greater impact on the small shop. What do you see as the strategy going forward? And do you see that your occupancy could dip or how do you look at the growth opportunity in the portfolio as a result of the impact on your small shop?

It's a great question and everything that we've done from a strategy perspective has been geared towards utilizing that small-shop vacancy as an additional growth lever, particularly as we're repositioning anchors and leasing off the strength of some of that redevelopment capital. You've seen that trajectory in our small-shop occupancy over the last several quarters. We did see a dip in the first quarter due to Dress Barn, but that underlying momentum we think will continue and be an important part of our growth strategy going forward. Interestingly, if you dig into our April collection numbers, there was real strength in the amount of rent paid by our small-shop tenants, including our small-shop tenants that were non-essential and forced to close. I'm really proud of that statistic, because I think it points to 16 quarters of work of continuing to upgrade the quality of the portfolio, upgrade the anchors. As we emerge on the other side of this, we think we'll be positioned to continue to use that as an opportunity.

Thanks Jim. And let me just ask you one more question regarding the suspension of dividends.

Sure.

You mentioned your payout ratio was very low going into this. Obviously, we're not quite sure how things will look coming out. But would you suspend the dividend for a couple quarters and then resume that same quarterly payment potentially going out of this once you have more clarity, or would you consider paying some of the dividends that you've skipped as a result of this suspension?

Our product at the end of the day is the dividend that grows. We take that decision very seriously and we made the decision to suspend it in an abundance of caution and with the focus of being able to fully reinstate that dividend. We enjoy one of the lowest payout ratios in the sector. We're not taking significant risks from a redevelopment perspective; it's all pre-leased. We have a huge amount of liquidity, far more liquidity than we need over the next several years. This is really a decision of conservatism as we look at the potential for tenant failures and the potential to be on the other side of this. If you haven't addressed the dividend and need to raise equity at what could possibly be the worst potential time — and when you look back to 2008 and 2009, huge amounts of shareholder value were destroyed by companies putting themselves in the position of needing to issue equity at the wrong time. So it is a conservative decision given our low payout ratio, but it's one with an eye towards emerging from this not only being able to fully reinstate the dividend but also being in a position to capitalize on what we think are going to be some very attractive investment opportunities because of this dislocation. Because of the competitive advantage we believe a platform like ours will enjoy going forward, it's not an easy decision but we believe on balance, the right decision.

And we'll go next to Christy McElroy with Citi.

Good morning. Angela, you're sitting with a good amount of liquidity today. In the context of how you're thinking about the environment and risk, how do you think about the potential for holding that larger cash balance for a longer period of time and solidifying that by accessing the debt markets to pay down the line? Have you looked at term loan or unsecured markets for pricing indications?

Thanks Christy. We're certainly looking at all of our options from a capital availability perspective. I do think we're starting to see more REIT deals in the unsecured bond markets and we'll be evaluating that closely. We're very focused on duration also. So I don't know that we gain a tremendous amount by adding in some short-term bank debt to the capital structure at this point, but that's obviously something we would evaluate and consider as well. In terms of the balance on the credit facility and when we might be in a position to address that, I think it's just an ongoing evaluation of where we sit from a business perspective, how things play out over the coming weeks and months, and then as you mentioned, the capital availability picture and what that looks like going forward as well.

Okay. And then, sorry if I missed this, you discussed the 15% reduction in operating expenses. How much of that will actually fall to the bottom line in terms of benefit to NOI and FFO versus being passed on to tenants in the form of lower CAM recoveries?

These are rough estimates, but it's probably somewhere in the 60% to 65% range of that number that will end up being reflected in lower recovery income and passed through to the tenants. The remainder would accrue to Brixmor as a benefit in terms of reduced leakage on the net recovery side.

I'm sorry, but Christy, our focus there is really to make sure we're reducing the burden on those non-essential tenants that have been forced to close.

Yes, I was just wondering how temporary that is. Is that sort of like a quarter, the second quarter thing or more ongoing?

We have the ability to continue it as long as we need to during the duration of these closures. As I mentioned before, we are seeing an accelerated rate of reopening across the portfolio and of course, we'll pivot as appropriate based on the level of businesses that are open in each of our centers.

We'll go next to Jeremy Metz of BMO Capital Markets.

Hey, thanks. Just a couple follow-up items here. You mentioned, Jim, the strength in small-shop payment. So what was the percentage of collections across small shop versus anchor? And then implied in your comments earlier about May moderating in terms of collection and negotiating deferrals with tenants who may pay a reduced amount in May and maybe June, is it implied that some of these deferrals being discussed are with tenants who actually already paid in April?

Let me hit both of those. As it relates to the deferral discussions that we're having now, some of them did pay in April. Some of them didn't. What's interesting is when you look at the collection rates for small shops, particularly those nonessential and hybrid small shops that were forced to close, they were actually higher than some of the national anchors in the same categories. And we've been engaged in what I believe are generally very constructive discussions with some of those tenants who didn't pay in April as well as some who did, really with the guiding principle again and making sure that we're getting appropriate value for the agreement to defer. One thing I want to make abundantly clear: we believe our lease legally entitles us to the rent for April and May. For those tenants that don't honor their obligations under the leases and we don't have constructive discussions with, we're going to pursue all the remedies that we have under those leases. With many of those tenants as we get into negotiations, some decide to pay their rent. Given the success that Brian and his team has had with some of these larger tenants and negotiating deferrals that we think make sense because they unlock real value in the leases, we do expect the rate of collection in May, which is ahead of where we were in April, to moderate a bit.

In April, we were in the low 70% range for anchors and in the low 60% range for small shops.

All right, thanks guys.

Our next question comes from Alexander Goldfarb of Piper Sandler.

Yes. Hey, good morning. So two questions from me. First, Jim, maybe this is a layup, but I hope there's some color you can provide. For your retailers who have both an active robust online platform to complement their physical location, what's been their feedback so far? Everyone's been rushing to the grocery store and drug store to buy things that are out of stock in store and out of stock online. What's been the retailer feedback so far as far as fulfillment? Have they found that certain categories are better actually filled direct in your shopping centers and other things are easier on e-commerce from their platform? Just curious as they look at fulfillment during this time, what the feedback has been?

On balance they've found that the store has been a critical mode of their overall fulfillment across many product types. Those retailers that do have robust online presences are seeing much higher rates of adoption of pickup and curbside delivery outside their stores. They're all very focused on that being a sticky part of their business model going forward.

In talking to our retailers, it's been interesting that those that didn't have a full ship-from-store platform have started to do it. It has been interesting to hear where they're shipping products from across the country. Some electronics retailers were saying, wherever they can find the product, they are looking to ship from store. Coming out of this, you're going to see further integration and acceleration for those retailers that haven't had as much of an omnichannel platform. They'll realize the importance of the store, the importance of curbside pickup and then doing more from a ship-from-store perspective. Coming out of this, we expect a ton of innovation from retailers that were a little bit behind coming in.

Okay. And second question, do you have a sense for how many of your tenants have gotten waivers from their banks or creditors such that being in default of a lease doesn't trip their other lender covenants? Do you have any color on how many of your tenants have gotten those waivers?

It's a great question. Today, we don't believe it's a significant number, but certainly many of them are looking at that, particularly under maintenance covenants which require that they be in compliance with their leases. It's a tough thing to negotiate because you're basically asking a lender to look past the need to actually have units to sell product. We clearly believe in the enforceability of our leases and the remedies we have, which could severely disrupt a retailer's attempt at recovery. Some retailers are looking at it, but from everything we see it's not been a broad-based trend.

Our next question comes from Haendel St. Juste of Mizuho.

Good morning. I hope everyone is well. I want to follow up on Jeremy's question on small-shop collections beyond April and May. My understanding is that as a small operator, if you got a PPP loan, you have to use that money to pay rent to get it forgiven. So it wouldn't necessarily make sense to ask for deferral in April or May because you have to use the money for rent, so you pay April and May. If you need help, you ask for deferral for June and probably July, which suggests that collection deferrals could remain under pressure beyond the second quarter. I'm curious on your view on the level of risk this presents and what steps you take to address and mitigate it.

You're pointing to something very important and that is that local mom-and-pop small shops, which for us in the non-essential and hybrid category represent about 16% of our total ABR, are probably the businesses most economically sensitive to the duration of this crisis. What ultimately plays through will be driven in part by how long this lasts and the shape of recovery. The PPP program has been embraced by many of these tenants and they are allowed to apply a portion of those proceeds to business expenses including rent and get forgiveness. There are other forms of relief we believe these tenants will be able to avail themselves of. Coming behind the PPP program, the one we're watching most closely and positioning to give our tenants meaningful access to is the Main Street lending program, which is a four-year debt product at very attractive rates, far below where public companies like ourselves could borrow. It can provide liquidity not just to get through the duration, but to have working capital to reopen. We're also watching potential further relief legislation. I do believe the Main Street lending program will be a comprehensive form of liquidity for some tenants. Remember, these were businesses that were thriving as we went into this crisis, and the quality shows through in some of our collection rates. We're very focused on it and will continue to provide updates as we move through the crisis.

That's helpful. And more specifically, how much financial assistance is Brixmor open to providing tenants? Are you doing longer-term deferrals beyond six to 12 months? Could these deferrals include interest or be structured like loans to tenants?

We're being very careful with deferrals, generally avoiding open-ended payments across the board and trying to size the deferral to the tenant's underlying need. Brian, David Gerstenhaber and our entire leasing and collections teams are working with each tenant on an individual basis to make sure we emerge as intact as possible. Whether we provide additional working capital loans is a bit premature to comment on, particularly as we watch how broad the Main Street lending program will be. In certain circumstances we would assess providing additional types of working capital if ultimately that is a good business decision to get through to the other side. We have that option, and we have more than ample liquidity to provide it, but we'll make decisions tenant by tenant.

And we'll go next to Vince Tibone of Green Street Advisors.

Good morning. With e-commerce penetration likely accelerating this year, could you see any of your vacant box space converting to dedicated micro-fulfillment centers with little to no selling space potentially?

It's a great question. We are seeing from some users increased demand for micro-fulfillment, actually at rents that in many instances exceed underlying retail rents. So we are very interested in that trend. We're very early and you need to make sure you're doing it at properties that would support that use and that you're not damaging the balance of uses within the center. But it is a category we think will grow significantly. We're having early discussions with different users on that type of use. It points to how valuable these open-air shopping centers are that are within the last mile. It's nice to be close to your consumer.

One more from me, would you consider temporary levering up to go on offense if you feel there are attractive distressed investment opportunities? How do you weigh potentially attractive underwritten returns with maintaining your liquidity and balance sheet position?

We're going to take a really conservative posture through this crisis. I think that's important because what may look like an attractive return right now may not be after we dig in further. We believe maintaining a conservative balance sheet is the right approach. The action we took with the dividend, as we get to the other side of this, puts us in a better position to pursue opportunities, but we're not going to lever up. I've learned from past downturns that those decisions can destroy shareholder value.

And our final question today comes from Linda Tsai of Jefferies.

Hi. Heading into COVID, there was a group of tenants still looking for new space like discount grocers and the Rosses and T.J. Maxx of the world. Understanding those conversations are probably on pause right now, would you expect them to become more aggressive in their negotiations once those conversations start up again?

Actually, Linda, they're not on pause.

They're not on pause. Our pipeline still includes many of those names we were signing leases with — we signed leases in March with Burlington and Ross — and we expect those tenants to continue to have robust pipelines, particularly with increased traffic they will get as department stores close. From a grocery perspective, Sprouts announced a new prototype and will be ramping up new deals. We're talking to Lidl and others. If anything, they want more opportunities and may come back with aggressive terms. From a timing standpoint, there will be a period where non-essential retailers are focused on opening stores, so there may be a pause, but not a pause in moving deals forward and bringing things into committee. Our team has continued to move deals so that when lights turn back on, we'll be able to execute.

Thanks for that color. And then one for Angela, any sense of how overall leverage might trend as we go through year-end 2020 and into 2021?

It's a little difficult to quantify given the uncertainty. We're focused on managing leverage within as tight a band as we can and, as we've said, our medium- to longer-term commitment is to work down to at least the low six-times level. There will be nuances from accounting associated with some of the deferrals we're signing and changes in collectability assessments, which could impact reported leverage in the near term, but maintaining a strong balance sheet is our focus.

At this time, I'd like to turn the call back over to Stacy Slater for any additional or closing remarks.

Thank you everyone for joining us today.

This does conclude today's call. We appreciate everyone's participation. You may now disconnect.