Brixmor Property Group Inc. Q1 FY2021 Earnings Call

Greetings and welcome to the Brixmor Property Group Inc. First Quarter 2021 Earnings Conference Call. As a reminder, this conference is being recorded. It’s now my pleasure to introduce your host, Stacy Slater, Senior Vice President of Investor Relations and Capital Markets. Thank you. You may begin.

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, Chief Revenue Officer, who will be available for Q&A. Before we begin, let me remind everyone that some of our comments today may contain forward-looking statements that are based on certain assumptions and are subject to inherent risks and uncertainties as described in our SEC filings. And actual future results may differ materially. We assume no obligation to update any forward-looking statements. Also, we will refer today to certain non-GAAP financial measures. Further information regarding our use of these measures and reconciliations of these measures to our GAAP results are available in the earnings release and supplemental disclosure on the Investor Relations portion of our website. 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 good morning, everyone. Thank you for joining our call. I'm extremely grateful for how this Brixmor team continues to deliver. Our performance prior to, during and now emerging from the pandemic highlights not only the strength of our portfolio, but also the quality of our team, our value-added platform and the disciplined execution of the business plan we implemented nearly five years ago. But just—don't just take my word for it. Simply look at our NOI performance in 2019, 2020 and now emerging from the pandemic in 2021. In each period, our performance stands apart. And when you stack that performance for the entire timeframe the difference is even more striking. This pandemic has revealed several fundamental truths about the shopping center business, including the durability and resilience of our asset class, the importance of being within the last mile with the consumer and the flexibility of our format. But among the most important truths is that if you're looking to drive value and growth and ROI, rent basis matters. For a retailer to be successful, you must not only have a location that is convenient to their customer, you must provide a cost of occupancy by which they can be profitable, continue to invest in their store’s growth and sales, and thereby afford growing rents. If our job is to grow rents and ROI, we believe having a high rent basis is a potential liability, not an asset. We further believe having an attractive rent basis enhances the cap rate or multiple that should be applied to our centers. That is to say, it's not where ABR is, but where it's going. At Brixmor our attractive rent basis and value-added execution position us to substantially outperform as the economy accelerates post-pandemic. The markers of that coming from outperformance are evident in our sector-leading leasing volumes, our build-forward leasing pipeline, our strong cash spreads on new and renewal leases, our continued delivery of accretive reinvestments and, importantly, the impact of those investments have on our asset value. During the quarter, the national and regional teams executed leasing at a blistering pace under Brian's leadership, signing 1.4 million square feet of new and renewal leases with cash spreads on new leases of over 20% with 140 new leases executed during the quarter. New lease productivity was on par with the peak in 2019. We will provide additional color in the question and answer session, but encouragingly, we are seeing demand across all of our core tenant categories including specialty, grocery, home, general merchandise, value apparel, pet store, restaurants and health and wellness. Also, we're seeing a remarkable recovery in demand from small shop tenants, including national, regional and local tenants, which allowed us to drive sequential growth of 40 basis points in our small shop occupancy during what is typically a seasonally slow quarter. This improvement in small shop demand, which in part reflects the fruits of our reinvestment program and enhanced operating discipline will be yet another lever of growth as we move through the recovery. And our forward visibility on growth continued to improve this quarter, as our productivity and executed leases drove over $40.4 million of signed but not yet commenced revenue, which is equally balanced between small shop and anchor spaces and 70% of which is expected to commence before year-end. Our strong productivity is also reflected in our forward leasing pipeline, which currently stands at over 2.2 million square feet and $41.2 million of ABR. We continue to execute under our reinvestment program under Bill and team leadership, delivering another $28 million of value-enhancing investment and an incremental return of 11% with another $400 million of projects underway at an average return of 9%. These projects not only drive great ROI while enhancing our centers, they also create value through reducing the cap rate that would be applied to the centers enhanced through that leasing and reinvestment. Since we've begun the program, we've delivered over $500 million of reinvestments at an average incremental return of nearly 10%. Just on the capital deployed, we've created huge value given those accretive yields. But in fact, those investments have also reduced the applied cap rates on the impacted centers—centers that comprise nearly 30% of our total NOI. That cap rate compression is a value multiplier. And for those of you focused on growth in NAV, I would invite you to review the projects we've completed in our supplement or on our website to fully appreciate that follow-on value creation. We are also seeing positive momentum from an external growth perspective under Mark's leadership. We are pleased to announce subsequent to quarter end the $48.5 million acquisition of the Center of Bonita Springs located on the prime corner of one of the busiest intersections in Southwest Florida with an exceptionally highly productive grocery. This center, which is our 48th in the state, will generate tremendous upside as we execute the repositioning of an underperforming anchor currently paying only $2 a foot in rent, as well as lease up the small shop space, which is currently at 60% occupied. Mark and team continue to see their pipeline and build a target list of assets in our core markets that will yield great opportunities for us to continue to leverage our platform and generate growth. And under Angela’s leadership, our balance sheet remains very strong with more than ample liquidity to capitalize on what we believe will be a growing pipeline of attractive acquisition opportunities. But most importantly, regardless of what opportunities we derive from an external growth perspective, I'm particularly pleased with how the ongoing execution of our balanced business plan that we communicated over four years ago has demonstrated outperformance both through the pandemic and as we emerge in 2021, 2022 and beyond. With that, I'll turn the call over to Angela for a more detailed look at our results this quarter and our improved outlook. Angela?

Thanks, Jim, and good morning. As Jim highlighted the first quarter further demonstrated the resiliency of our portfolio and the strength of our tenancy as we leverage our platform to capitalize on the ongoing recovery. NAREIT FFO was $0.44 per share in the first quarter, reflecting $3 million or $0.01 per share of items that impact FFO comparability including litigation and non-routine legal expenses and loss on debt extinguishment in addition to $1.6 million or $0.01 per share of straight-line rental income reversals. Same property NOI growth was negative 1.5% in the first quarter, as base rent and net recoveries detracted from growth and were offset by positive contributions from ancillary and other income, revenues deemed uncollectible and percentage rents. While base rent and net recoveries were impacted by a 150 basis point year-over-year decline in billed occupancy, base rent was also impacted by 120 basis points of lease modification deferral agreements and abatements, the majority of which were reserved for in 2020. For those previously reserved, the result is a geography change between base rent and revenues deemed uncollectible this quarter, with no net impact to same property NOI or FFO. Total revenues deemed uncollectible totaled $4 million in Q1, representing an $8 million sequential improvement. Revenues deemed uncollectible this quarter were comprised of approximately $11 million related to first quarter billed base rent, $2 million related to prior period base rent and $1 million related to net recovery or reimbursement income, which were collectively offset by the $2 million of lease modification and abatement geography adjustments that I highlighted earlier and nearly $8 million of cash collected on base rent amounts previously reserved. As we look forward, it remains challenging to predict the exact trajectory of revenues deemed uncollectible. That said, we are encouraged by the continued improvement we are experiencing in collections rates on our cash basis tenants, which account for 15% of our total portfolio ABR. As of March 31, we had collected 66.2% of our first quarter billed base rent from our cash basis tenants, which improved by 250 basis points to 68.7% as a result of cash collected subsequent to quarter end. And the trend has continued to improve in April, where we have now collected over 72% of April billed base rent from our cash basis tenants. While there's still work to be done to return to full collection levels on this segment of our tenancy, we are making meaningful progress. As Jim highlighted in his remarks, we're also very encouraged by the strength of new leasing demand against the backdrop of significant rent commencements across the portfolio and moderate move-out activity. Billed occupancy in the first quarter was flat sequentially, beating the typical seasonal trend of declines early in the year. During the quarter, we commenced over $9 million of annualized ABR and added over $12 million to the signed but not commenced pool. As a result, the spread between billed and leased occupancy expanded to 300 basis points, representing over $40 million of contractually obligated rent of which approximately $28 million is expected to come online ratably over the course of 2021. We've updated our 2021 FFO expectations to a range of $1.60 to $1.70 per share, based on an improved same property NOI growth range of 1% to 3%. Our current expectations reflect our strong first quarter performance and the positive trends we're seeing across the portfolio, while also remaining appropriately balanced at this point in the recovery. As always, our guidance range does contemplate additional expected transaction activity during the remainder of the year, but does not contemplate any items that may impact FFO comparability in future periods, including litigation and non-routine legal expenses, loss on debt extinguishment or any one-time items. In addition, I would underscore that this range does not contemplate the conversion of any tenant to or from cash basis accounting during the remainder of the year, either of which could result in significant volatility in GAAP straight-line rental income. Turning to the balance sheet, during the first quarter, we again accessed the unsecured bond market raising $350 million that was utilized to repay our $350 million unsecured term loan, maturing in 2023. This transaction was opportunistic and consistent with our broader goal of continuing to extend duration across the balance sheet. At quarter end, we had $1.6 billion of total liquidity representing our undrawn $1.25 billion revolving credit facility and over $370 million of cash on hand. We have no debt maturities in 2021 and only $250 million of remaining maturities in 2022. In conclusion, I'd like to thank the entire Brixmor team for another outstanding quarter that spotlights the extent of the portfolio and platform transformation that has occurred at the company over the last five years. Through your efforts, we successfully navigated the pandemic and are well positioned to drive growth and create intrinsic value throughout the recovery. And with that, I'll turn the call over to the operator for Q&A.

Thank you. Our first question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Hi, thanks. Good morning. First question around investments: seems like the investment landscape is falling out a little bit. What should we expect moving throughout the year in terms of deal flow? And then in terms of pricing, seems like there's been a greater appetite from REITs and institutional capital looking for value-add deals—how competitive is the landscape today? Are you seeing that competition materialize for assets that you're looking at?

It's always competitive. And we certainly see competition in some of the assets that we're looking for today. We are encouraged by the breadth of opportunities that we're seeing. And yes, part of that is being driven by some of those very same institutional investors looking to reduce their exposure to retail. From a value-added perspective, we continue to see opportunities, importantly to put our platform to work where we can leverage our knowledge of tenant demand, our reinvestment and redevelopment capability to really drive IRR. So we're encouraged by what we see. But obviously, we're not going to be providing estimates of what we expect to do until we actually get it done. So we're all encouraged by the closing on the Center of Bonita Springs. We talked a little bit about it in our prepared remarks; that's certainly an asset that I think is emblematic of some of the opportunities that we're seeing in our core markets.

Okay. Angela, I think you've commented that the guidance does contemplate additional transactions. Can you just elaborate on that a little bit? And then can you also touch on the cash balance—it's still north of $300 million? Do you expect to sit with an above-average balance for an extended period of time or is that earmarked for something specific? Just curious if you could talk about the deployment of that cash and also what's embedded in the guidance from that standpoint?

Sure. In terms of that transaction activity contemplated in guidance: as is typical for us, we build in some expectations for additional activity as we move through the year. We'll update those as appropriate as time passes. At this point, when you consider the fact that we were a net seller in 2020, which has implications for 2021, and then our expectations for acquisition and disposition activity during 2021 itself, I would say the total dilution from both years is in the $0.04 to $0.06 range embedded within our guidance and that contemplates our current expectations about the timing and potential activity. As it relates to the cash balance: I think about it this way—we have effectively prefunded the 2022 maturity, which is early in 2022. We have repaid now our 2023 term loan. And so we'll continue to—as Jim sort of highlighted—look for opportunities in the market where we might be able to deploy some of that cash. But I would say the guidance range at this point contemplates that we do carry a higher-than-average cash balance for the remainder of the year.

Okay, thank you.

Thank you, Todd.

Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Good morning. So, two questions. First, Angela: just going to the credit side. Clearly the narrative on retail has done a 180, right? I mean, we haven't read a debt of retail article in probably a year. Curbside, the retailer feedback, customer feedback to open-air has been clearly proven. You guys have sort of still been in the penalty box from the accounting stuff of years ago, while your bonds trade much better than where your rating is. In your view, what are the latest conversations with the agencies? Are they still skittish on moving or do you think they'll finally recognize that the rating that you have now is not indicative of where your credit truly is?

Yes, Alex, I'd say if you go back pre-pandemic, we were on positive outlook from two of the three agencies that cover us. I do think that was an acknowledgement of the progress that had been made on the balance sheet over those few preceding years and the fact that, objectively speaking, the credit metrics here do line up with some of our more highly rated peers. So I think we were certainly on that path; I think that path was paused or moved to stable outlooks at the beginning of the pandemic. I really believe that, as we've continued to demonstrate and execute over the course of the last year, our performance and the stability and resiliency of the cash flow stream here really speaks volumes about the quality of this portfolio and how the credit should be priced and rated. I won't speak for the rating agencies, but we're very hopeful that the execution over the last year can address any concerns specifically related to the pandemic and highlight the overall stability and resiliency of this cash flow stream.

Okay. And then a question for Mark: you guys made a pretty big acquisition, I think it's the first one in quite a number of years. I was just curious, any comment around cap rate or how you guys underwrote it, and the bigger picture: how have your acquisition underwriting thoughts changed now versus a few years ago?

Right, we really haven't changed our strategy. We've spent years looking at the assets we want to buy; we do have a target asset list, it is updated and organic, but we haven't really changed why we want to buy assets—it's really assets where we can drive value through leveraging our platform. So we're just seeing more of it today because the markets are back open. There was a bit of a backlog through COVID of assets that when they come to market, we really are seeing a wider range of opportunities today than we've seen in the last couple of years. From a cap rate perspective, I think Bonita is a great example and a great example of why we do have some advantages in the transactions market. We move pretty quickly from a range of prices to close because we're an all-cash buyer, which is great from a cap rate perspective. It was a bid-to-high fixed cap rate we think and underwrote to that high single-digit, low-double-digit unlevered IRR. So we really see a bunch of value-add opportunity here; it's actually pretty clear. We've got a really hot, highly productive grocery. It's actually in line with the production we see down in Naples, but the inline occupancy, as Jim said, is around 60% versus high 90s down in Naples. So we really do see great value-add there. And Jim mentioned the anchor box where we're paying low $2, $2 per square foot and we think there's a five-times rent spread there. So really excited about that one; we think we can find more opportunities like that as we go through time here.

So just to be clear, the mid-to-high 6s reflects that the inline occupancy is at 60%. So it's not really a stabilized cap rate—it's a composite of…

Correct. Yes.

Okay, cool. Thank you.

Our next question comes from the line of Craig Schmidt with Bank of America. Please proceed with your question.

Thank you. I was wondering where you expect leasing volume will be in 2021 versus 2020?

Significantly higher. One of the interesting things when you look at 2020 is we saw a pretty significant pause in the second quarter as retailers—national, regional and local—took a pause to assess the timing of their pipelines and how they were responding. But encouragingly Craig, we actually saw pickup in the third quarter; it was more weighted towards anchor-type transactions, and then in the fourth quarter and now in this first quarter, we've seen very good volumes and good balance between anchor and small shop leasing. As we look ahead, the strength of that forward leasing pipeline is about as strong as it's been. Brian, I don't know if you have other thoughts.

Yes, I would just add the new and renewal leasing volume, Craig: it’s up 50% versus the height of the pandemic and ABR per square foot is at an all-time high of close to $19. If you look at the productivity that we had during the first quarter, it was in line with the first quarter of 2019, where we had one of our most productive small shop years as a company. And Jim mentioned the pipeline of 2.2 million square feet—that's up 15% versus the end of the year, despite all those executions during the first quarter. So we're very excited with the depth of demand. Again, it speaks to the investments that we've made in our shopping centers. As we continue to deliver those, we expect that activity to continue, and we're very encouraged with what we've seen at the start of the year.

Great. And then I noticed a number of your anchors include fitness centers—Jim can you tell how you got comfortable with those retailers or that category?

Yes, one of the biggest surprises for us coming through and out of the pandemic has been the strength of fitness providers. Certainly we saw some turbulence in the middle of 2020. But when we look at traffic levels, when we talk to the fitness operators themselves, and we look at their cash flows and their overall credit, we've been quite encouraged by the strength of return of the consumer to utilizing gyms and other fitness uses. So we remain pretty bullish on that segment and continue to see a lot of demand from some very well-capitalized operators.

Thanks.

Our next question comes from the line of Katy McConnell with Citigroup. Please proceed with your question.

Thanks, good morning. Did you provide some insight into the volume of acquisitions that you evaluated with or screened out over the last quarter? And would you expect recent sector M&A to have a meaningful impact on pricing for one-off deals going forward?

It's a great question. We screen a lot more assets than we transact on—probably four times what we actually transact on at least. And the other thing Mark highlighted, which is important to appreciate, is that we target assets for acquisition before they become available and we track them such that when it does come a moment in time to trade, we're in a position to move quickly as we did with Bonita Springs, which is a great example and also points to the speed with which we were able to get that asset closed. The real interesting dynamic right now within the acquisition market is that assets that are smaller in size remain pretty liquid, and we see a lot of depth of competition. Larger, more complicated assets with more moving pieces—we see less competition. So as we move forward, we do expect to see some compelling opportunities. I'm a little hesitant to give you an estimate of what that pipeline might look like, because we aren't going to report on it until we're actually closed. But we're encouraged by the level of activity that we're seeing.

And then I think you asked about a read-through from M&A to the property market. I think you'd be surprised that you really don't get a large read-through. REIT M&A represents only a small fraction of overall property market transactions, so there isn't a large read-through from those REIT M&A moves into the broader property market.

Okay, thanks. And then can you walk us through some of the key factors that are now assumed in the revised low end of your guidance range? And what is the range contemplated for cash basis tenant collection improvement?

Yes, I would say as it relates specifically to cash basis collections, which does remain one of the key pieces within the range between the low end and the top end of our guidance range: at the bottom end of the range, we've effectively assumed trends kind of in line with where they were in Q1 or towards the end of Q1—really no significant additional improvement from this point going forward, and no additional recoveries of prior reserved amounts at the low end. As you get into the top end of the range, we have embedded some additional occupancy upside and an improving collections picture from cash basis tenants and/or some modest recoveries of prior period amounts. But importantly, you can certainly get to the top end of the range without any prior recoveries of amounts that were reserved for in 2020 and without collections from cash basis tenants getting back to 100%. So that's kind of how I frame up the two ends of the range.

Okay. Jim, thank you.

Thank you, Katy.

Our next question comes from the line of Paulina Rojas Schmidt with Green Street. Please proceed with your question.

Good morning. I'm curious, if you have to guess, how do you think market rents will evolve in the next year or couple of years given how strong the economic recovery appears to be and on the other hand the higher levels of vacancies in the market?

Well, we're encouraged by what we see: very broad-based tenant demand. In fact, we were hearing from several of our tenants: 'please show us your available space, your available boxes,' and those tenants were working through the opportunity. We're in a position where we're able to generate some pretty healthy competition, which is one of the key drivers to growth and underwriting rent. One of the things I highlighted in my remarks that I'm particularly encouraged by is that we're going into this recovery with a very attractive rent basis. So even if the recovery is more modest, we're still going to be making money, we're still going to be driving growth, and we're still going to be finding opportunities to creatively reinvest in our assets. If the recovery continues as strong as it appears to be, that's really like a turbocharger for us, because I think we'll see that inflation reading through into the underlying rents—tenants are willing to pay and drive even better growth over the next couple of years.

And then more of the same philosophical question: we're seeing robust leasing volumes and what appears to be broad-based tenant demand for space. How have you reconciled these retailer appetite for growth with the idea that there is too much retail GLA in the U.S.? There's a risk that some retailers may be short-sighted and opening stores to take advantage of a recovery that could be short-term in nature.

The retailers themselves have shown remarkable and ongoing discipline as it relates to new store openings. Their ability to project what the sales will be served by a particular location, given their access to data, has never been better. So they have a very informed view as to what a new unit will produce. In our discussions with national and regional tenants, we're seeing that accuracy in sales forecasts coming through. The other thing I'd say is, as it relates to the comment about GLA out there, there's really no new supply being created and you do have obsolescence that occurs every year in the base of product out there that's not of institutional quality or acceptable to the tenants who are opening stores in this environment. So we like how we're positioned to capitalize on those dynamics. And the other thing I would say is remember we're a segment of the overall retail space in the country. I think the pandemic has shown the growing breadth of demand for retailers that previously weren't in open-air product to come into open-air product—why? Because it's convenient to the customer. It's got great access, great visibility, and importantly, a reasonable cost of occupancy so that they can be profitable serving their customer with flexibility to serve them in a multi-channel format, whether it's in-store fulfillment, fulfillment at the curb, etc. Retailers are seeing the real power of coming into these community and neighborhood centers such as the ones that we own.

Thank you.

Our next question comes from the line of Ki Bin Kim with Truist Securities. Please proceed with your question.

Good morning.

Good morning, Ki Bin. How are you?

Good morning. So I wanted to talk about the leasing activity that you guys have been posting. Not just for you guys, but for the industry too. I'm curious: has the credit quality and the type of tenants composing that leasing activity changed at the margin? I can imagine a scenario where there's a lot of inventory to lease out and maybe this isn't the time to be so picky. Perhaps on the margin, the industry is leasing space to not the same type of credit quality as pre-COVID?

We've actually been really encouraged by the trajectory in terms of the improvement of the quality of the tenants. Brian, maybe you can talk a little bit about the types of tenants that we're seeing and the improvement in quality.

Yes, Jim, you're spot on. In terms of the depth and credit quality—just the overall quality of the tenant base we're doing deals with—I've mentioned a number of the categories, Ki Bin. If you look at specialty grocery, which has been among the most active categories that we have, we signed three more grocery leases during the quarter and we have another 15 grocery leases either at lease or final ROI. That's across a broad range of segments in traditional, ethnic and specialty grocers, and all very strong operators. And as we look at value apparel, health and beauty, pet store, general merchandise and home, these are very strong tenants that we continue to attract to our shopping centers. You highlighted outparcel demand in the past: that's another one of our most active categories. During the quarter, we signed leases with Starbucks, Chipotle and Chick-fil-A and we have a depth of demand with them as well. We're also seeing entrepreneurs and multiple-unit local operators that are seeing an opportunity here with some businesses that may have failed during the pandemic, so we're actually improving the credit quality for a number of those tenants that are coming in as second-generation operators in restaurant space or services like hair salons and nail salons. Overall, we've been extremely pleased with the depth and quality of our tenancy.

Okay, great. And a question for Angela: the $40 million of signed but not commenced leases—can you provide more color? One common question I get is: does that really become additive or is it replacing in-place tenants that are paying rent when they expire? Is it just staying on the treadmill at the same speed? Can you comment?

Yes. Almost all of it is truly additive. Start with a simple point: a tenant who's currently paying today is not counted in both the billed and signed-but-not-commenced categories. We don't show them in that $40 million until the existing tenant has left and it's truly additive. Based on historical retention rates, I would expect something like 80% of it to truly be additive relative to how normal move-outs trend. So it really is a significant tailwind for us from a growth perspective as we move forward. If you look at the year-over-year occupancy decline we had throughout the pandemic, a significant reason for that was the fact that we went into the pandemic with such a large signed-but-not-commenced pool and we continued to commence leases throughout the course of 2020 and in the first quarter of 2021. So you've seen it, I think, relative to the broader industry in terms of what's happened to our occupancy over the last year—how additive that really can be.

Okay, thank you.

Ki Bin, I would also highlight that we've discussed our signed-but-not-commenced for several quarters and we've delivered that growth for several quarters—we've delivered that outperformance in part because of the continued demand and that forward pipeline.

Thank you.

Our next question comes from the line of Derek Johnston with Deutsche Bank. Please proceed with your question.

Hi, everybody. Thinking pre-COVID to now, how have leasing contracts evolved or what stipulations are now included or omitted that were normal practice before the shutdown? Are you doing more or less percentage rents? And how have your omni-channel requirements or perhaps store-use asks from tenants evolved?

Brian, do you want to handle that?

Sure. Derek, what's been interesting is many of the things we're focused on—embedded rent growth, sales reporting, conversion of tenants to capture more from an accounting perspective—we've still been able to achieve those. In fact, our embedded rent growth over the course of our leases in 2020 was the best that had been since 2017. We don't have a tremendous amount of percentage-rent-only leases; I think we might have done a handful over the past year. As it relates to omni-channel, we've spoken on prior calls for years about how accommodating we've been with our grocers in terms of rolling out click-and-collect. Jim talked about the flexibility of our format; we've been able to do that with a number of national tenants—accommodating them from a curbside pickup perspective. It really speaks to the platform where we're able to go to those tenants through our relationships, create one agreement and get those deployed very quickly—we saw that during the third quarter, where we wanted to have as many of those pickup spaces in place for the holidays for our tenants. That's been a focus of ours. When we talk to our tenants, their number-one asset is their stores, and everything they're doing around it—whether it's shipping from stores or curbside pickup—is to drive more traffic to the store. So what we're seeing with many of these initiatives is more trips that otherwise would not have occurred. From a lease contract perspective, we've been very encouraged by what we've been able to continue to negotiate with our tenants.

I would say the quality of those leases continues to hold. Certainly some tenants were looking for future flexibility in leases, and we were able to strike the right balance there and ensure our leases remain enforceable through whatever may happen in the future.

Okay, thank you. And secondly, with leasing demand so strong, how patient are you planning to be with your cash basis tenants in both buckets—those who are paying and especially those who are challenged? It seems that sticking with these tenants may be somewhat of an opportunity cost versus taking space back and re-leasing given the demand backdrop. Can you weigh in?

Yes, we've approached this on a tenant-by-tenant basis—looking at their productivity prior to the pandemic, what impact the pandemic had on their business and importantly how they're emerging. We've worked with tenants where it's appropriate to help them get to the other side, and I think that's been a positive approach given our outperformance coming into the recovery. For tenants that have not engaged with us or who continue to struggle, we're being more and more assertive in resolving their occupancy. It's difficult to generalize, but that's our approach: tenant-by-tenant, based on what the real estate level center dynamics indicate.

Our next question comes from the line of Greg McGinniss with Scotiabank. Please proceed with your question.

Hey, good morning. It was encouraging to see stable occupancy this quarter and especially the increase in small shop leasing. Are you comfortable saying that you've turned the corner on declining occupancy and can start to build from here? Are there still some pockets of tenant risk to navigate and if so, what categories might still be elevated risk?

We're very encouraged by what we're seeing generally within the small shop segment of the portfolio. As Brian alluded to earlier, the strength of operators that persisted through the pandemic and the strength of demand for second-generation states we've recaptured have been notable. Could there be a quarter or two of volatility? Certainly. But most importantly we're seeing momentum and great demand out of small shop tenants across categories—national, regional and local. In the last quarter and a half we've been pleased with the strength of demand from mom-and-pop and local businesses positioning themselves for the recovery.

Was there ever a shift in market rents for those mom-and-pops and as the economy starts opening up more people are shopping, can we potentially start to see rent spreads expand from here?

I think the way this recovery is setting up is positive for the direction of rents and we are well positioned to benefit. The pandemic itself didn't materially change market rents in a lasting way—the impacts were largely transitory. We're seeing good recovery and demand and importantly we're creating competition for the space we're leasing which helps push rents as well.

Great, thanks. One more: on the cash basis tenants—thinking about Q2 and Q3 of last year—how have tenants doing impacted your decision to move them to cash basis? Trying to get a sense for the unaccrued rent that you may reasonably expect to collect without asking for specific numbers?

We made decisions at each point in the process based on the amount of uncertainty and what we were seeing from a collection standpoint and category exposure. Given the unique dynamics of a pandemic, we knew that to the extent we got through to recovery some tenants would likely be moved back to accrual. It's certainly possible as we get further into the recovery later in the year. We haven't moved anybody back to accrual yet, but we're watching a number of tenants where their businesses or categories have significantly improved or where they've had recapitalization events. We'll continue to monitor that and I think we made robust calls based on information at each point in time; we'll continue to evaluate as we move through the second quarter and into the second half of this year.

Thanks, Angela. Thank you, Jim.

Thank you.

Our next question comes from the line of Juan Sanabria with BMO. Please proceed with your question.

Hi, good morning and thanks for your time. Just a question on cap rates: given all the redevelopments you've done and what's in the pipeline, where do you see stabilized cap rates for high-quality shopping center grocery-anchored centers and power centers?

Mark?

Hey, Juan. We are seeing trades for grocery-anchored centers trading into the low-5% range at this point—low-to-mid 5s—and a lot of it is dependent on scale. When you're really just a grocery-anchored asset with some small shop you get pretty tight cap rates and strong demand from local buyers who are putting bids on those assets. What's interesting in the market right now is a bit of a following-on into more boxy, power-center assets. Some assets we've looked to transact on, the liquidity we're seeing is allowing us to exit some assets at opportunistic prices, and you're starting to see some of those cap rates begin to compress and come back in line with what you were seeing pre-pandemic.

One of the other interesting characteristics about this environment is that the marginal buyer typically is utilizing leverage, in particular asset-level bank financing, and that buyer is less able to put the same type of value on vacancy that we might given our visibility on how we're going to lease that vacancy up and drive returns. So in that way it's a nice environment for integrated platforms such as ourselves to capitalize on real value-add opportunities.

Thanks. And then just a quick follow-up: has the increase in raw material costs, labor, yields, what have you, impacted expected redevelopment yields? We've noticed in the most recent additions a bit below what's already in the pipeline—are those opportunities being impacted by what we're seeing on the cost side?

We're watching it carefully. Fortunately, most of what we have in the pipeline has been pre-committed, pre-bought and is under GMP-type contracts, so we're somewhat hedged for what we have underway. We're monitoring issues of cost but also availability of product—steel, lumber and certain other equipment that we use in our redevelopment pipeline. It's difficult to point to what the long-term impact might be on future returns because we're also seeing nice demand and growth in rents. So we're watching it closely. In the near term the thing we're most focused on is timing and making sure we continue to hit our project timelines.

Thank you.

Our next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed with your question.

Hi, good morning. Maybe just as a follow-up on leasing spreads and pricing: Jim you talked at the beginning about how historical spreads have been a differentiator for Brixmor, but it appears that those spreads on a trailing 12-month basis have come in somewhat. To what extent have those mark-to-market spreads been impacted by the pandemic, and do you expect the spreads to pick back up or is this how you were always expecting the trend would play out?

There's no doubt that on a trailing 12-month basis you're picking up the height of the impact of the pandemic and it did create drag. What I'm particularly encouraged by is we're seeing these spreads—whether they be new leases or renewals—continue to accelerate into the longer-term trajectory we've been delivering over the last four to five years. Given the quality of what we're seeing in the pipeline, we feel pretty good about where the spreads will be on a rolling-forward basis. You may see quarters of volatility here and there, but we're particularly pleased with what we're seeing in the forward pipeline both for new and renewal deals.

Okay. And then back to redevelopments: you have a long list of current and future opportunities. To what extent has the pandemic changed this pipeline of projects? For example, have you changed any projects, return expectations, target tenants, or what do you think will work now versus before—or has there been little change?

One thing we've been particularly encouraged by through the pandemic is the beneficial impact it's had on grocers—in terms of their cash flows and willingness to invest in existing stores, as well as their willingness and capacity to invest in new stores. So against the backdrop of the pandemic and underlying food price inflation, we've been particularly encouraged by the breadth of grocery demand. We're also seeing great demand from other core categories—value apparel, general merchandise, fitness, services, etc.—and as we come into this recovery we're even more encouraged by what we see in the shadow pipeline we discussed in the supplement. Every quarter we continue to add new projects to the pipeline while we're also delivering. This past quarter we added $25 million to $35 million of new projects while delivering $27 million or $28 million. That constant refreshment of the pipeline while delivering allows us to avoid long-leap risk. The projects are substantially preleased, costs are in hand before we commit, which makes what we're doing from a reinvestment perspective particularly attractive both through the pandemic and in the recovery.

Got it. Okay, thanks.

Our next question comes from the line of Mike Mueller with J.P. Morgan. Please proceed with your question.

Good morning. So going back to cap rates, are you seeing differences by market—say major coastal markets versus sunbelt and other areas—how are cap rates differing by geography for similar product?

Mark?

Yes, you do see cap-rate variance by market. A lot of cap rate is driven by what the future forward cash flow looks like. You do see assets where we see strong growth; buyers will lean into tighter cap rates. Generally, some Midwest markets have traded a bit wider than coastal markets. One trend in the past two years is that the spread between tertiary market cap rates for grocery-anchored assets and big-market cap rates appears to be shrinking a bit. We're seeing positive momentum there. Markets like Southern California always trade very tight relative to others.

Got it. Okay. And then just thinking about physical occupancy: do you have a sense as to where physical occupancy could end the year given the leasing in place?

I would say there's still a relatively wide range. Embedded in our expectations for the year we have a 200-basis-point spread in the same property NOI guidance. We're certainly encouraged by what we saw in the first quarter—in particular billed occupancy remaining flat on a sequential basis, which was a positive indicator. We do have that $40 million signed-but-not-commenced to provide support and hopefully growth as we move through the year. But there are parts of the tenancy we continue to watch closely and monitor how strong the recovery is in certain categories, so it's too early to be definitive.

Got it. Okay, that was it. Thank you.

Thanks, Mike.

Our next question comes from the line of Tamara Fique with Wells Fargo Securities. Please proceed with your question.

Good morning. Question for Angela: how should we think about quarterly FFO throughout the year given the implied drop-off in guidance from the $0.45 comparable FFO reported in first quarter, and the improving and positive indicators you guys are discussing today?

There are two factors to think about. First is the impact of potential transaction activity: 2020 activity and 2021 activity together should cost us a total of $0.04 to $0.06 on a year-over-year basis, and you don't see all of that impact in the first quarter. The biggest factor is revenues deemed uncollectible. The first quarter benefited from a significant amount of cash collected from amounts we did reserve for in 2020—about $7.6 million just on the base rent piece, and about another $1 million or so of other recoveries we collected in the first quarter. As I mentioned earlier, the guidance, particularly at the low end, doesn't assume we'll collect any additional amounts that we had reserved last year. So that's the biggest factor in how to think about the trend through the year.

Okay, great, thanks. One more: are you seeing notable differences in demand based on geography, particularly given migration trends that have accelerated or would you say demand is generally strong across the entire portfolio?

Brian?

Tamara, we have seen significant demand in our South region, but what we've been encouraged by is how broad-based the demand has been. The Northeast had a strong year in many respects, and in California there was a bit of tepid demand during some periods due to restrictions, but that has picked up. As restrictions lift, tenants often come back to the table. So it's fairly broad-based—significant in the South, but positive across the portfolio.

Great, thank you.

Our next question comes from the line of Floris van Dijkum with Compass Point. Please proceed with your question.

Thanks for taking my question, guys.

Good morning.

Angela, for you: can you comment on bad debt and generally what you are assuming later this year presuming that the cash basis tenants remain on cash basis? What are you assuming going forward?

At the low end of the guidance range we're assuming cash basis tenant collections are similar to where they were toward the end of the first quarter—in the high 60% range. The low end also doesn't contemplate additional recoveries of amounts we reserved in 2020. The higher end of the range assumes collections improve, and modest recoveries of prior reserved amounts could be included. We can get to the top end of the range without needing cash basis collections to recover entirely to 100%. Page 11 of the supplemental breaks out how much we reserved in Q1 related to billed base rent, based on a lower cash collection number in the mid-to-high 60s.

Right. And then Jim: as you think about allocating capital and given your $280 million of redevelopments and a pipeline at a certain return (call it 9% cap), and some peers transacting at mid-5 cap rates, how do you think about doing bigger deals versus steady improvement in your own portfolio? What's your appetite?

I'm encouraged by what we're seeing: both the reinvestment pipeline yields and external growth opportunities. We can bring our fully integrated platform to bear and drive value and IRR as Mark described with Bonita Springs, where we're coming in at a reasonable cap rate in the mid-to-upper 6s on an asset with significant vacancy and below-market rents. We underwrote high single-digit to low-double-digit IRRs without stretching. The marginal buyer we're competing with often relies on leverage and is less able to underwrite vacancy in the same way. So I'm excited by both our internal reinvestment program and external acquisition prospects as we capital recycle and identify assets in our core markets.

Thanks, Jim.

You bet.

There are no further questions in the queue. I'd like to hand the call back over to Stacy Slater for closing remarks.

Thanks, everyone for joining us today.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.