Earnings Call Transcript - BRX Q1 2022

Operator, Operator

Greetings and welcome to the Brixmor Property Group, First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded, it is now my pleasure to introduce your host Stacy Slater. Thank you Stacy, you may begin.

Stacy Slater, Host

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.

James M. Taylor, CEO

Thank you, Stacy, and good morning, everyone. I'm pleased to report yet another strong quarter for Brixmor. It's a quarter that reflects the positive trends we're seeing in the open-air retail industry with record levels of tenant demand, increasing customer traffic, and limited new supply. Our performance for Brixmor in particular demonstrates the unique durability and momentum of our value-added plan. This is a business plan that outperformed through the last three years and continues to produce fundamental growth beyond pre-pandemic levels. Importantly, it positions us to continue that outperformance in the future. Our value-added plan benefits immensely from the strong industry fundamentals we're seeing today, yet it's also durable and has proven to outperform in less favorable conditions. This quarter we delivered 11.4% year-over-year FFO growth, primarily driven by same-store NOI growth of 8.4%. Those are strong headline numbers, but what truly stands out is the strong growth before the impact of bad debt. We expect this fundamental growth to continue and accelerate well beyond the transitory benefits of bad debt recoveries, which do reflect well on the performance of our underlying tenancy, but which are finite in impact. Importantly, our performance metrics this quarter highlight the growth and transformative impact delivered through the continued execution of our value-added plan. Consider the nearly 1.4 million square feet of new and renewal leases signed during the quarter at a cash spread of 18.1%, including 780,000 square feet of new leases at a comparable spread of 35.9%. That's a record level of Q1 productivity of incremental new rent on a portfolio that is 20% smaller in GLA than when we began our plan. This quarter, we delivered an all-time record small shop occupancy of 87%, which includes a 120 basis point drag from in-process and future redevelopment. In addition to underscoring the momentum of our value-added transformation, our metrics provide great visibility for continued growth, including $52 million of signed but non-commenced ABR at an average rate of $18.92 a foot that we expect to commence over the next several quarters. This forward leasing activity gives us confidence in our outlook for base rent to contribute 4% to 5% growth, not only this year but into '23 and beyond. We're excited about our ability to continue to capitalize on our proven locations, our attractive rent basis, and our transformative value-added reinvestment to drive our performance in the future. We delivered another $28 million of accretive reinvestment this quarter at an incremental return of 10%, delivering the same value creation as over $110 million of ground-up development. To date, we've delivered over $720 million of accretive reinvestments affecting over 30% of our portfolio, and our pipeline remains strong with an additional $419 million of active reinvestment projects leased and underway at an average incremental return of 9%, plus a shadow pipeline of nearly $1 billion of opportunities at compelling returns that we'll continue to convert to active over the next several years. We're finding and executing attractive growth opportunities from our target list that further cluster our investments in our core markets, which present significant value-add opportunities to leverage our leasing and reinvestment platform to deliver significant growth in ROI. Examples include West U Marketplace in Houston and Elmhurst Crossing in North Riverside Plaza, both of which present near-term upside through re-merchandising and marking the shops to rentals equivalent to what we're achieving. I'm grateful for how this Brixmor team continues to execute, delivering outperformance and tremendous value for our stakeholders as we advance our purpose of creating and owning centers that truly are the center of the communities we serve. Now, I'll turn the call over to Angela to provide further color on our results, our updated guidance, and the balance sheet.

Angela Aman, CFO

Thanks, Jim, and good morning. I'm pleased to report another strong quarter of execution by our team as we continued to deliver on our portfolio transformation while capitalizing on the strength of the current leasing environment. Nareit FFO was $0.49 per share in the first quarter, and same property NOI growth was 8.4%, reflecting approximately $8 million of cash collected on previously reserved base rent and expense reimbursement income. Base rent growth meaningfully accelerated, contributing 410 basis points to same property NOI growth, while percentage rents and ancillary revenues contributed a combined 130 basis points. Net expense reimbursements detracted 30 basis points from same-property NOI growth in Q1 due to the quarterly volatility of operating expenses experienced in 2021. However, we expect net expense reimbursements to be a positive contributor to growth for the full year. The impact of our value-added strategy is evident across all of our operational metrics. Build occupancy was down only 10 basis points this quarter to normal seasonal trends, while leased occupancy was up 10 basis points driven by a 30-basis point improvement in the small shop lease straight to 87%, a portfolio record. The total signed but not commenced pool increased to $52 million at a blended rate of nearly $19 per square foot, more than 20% above our portfolio average. Importantly, our new lease spreads totaled 35.9%, while renewal spreads accelerated to 12.1%. In terms of the balance sheet during the first quarter, we utilized existing cash on hand to repay $250 million of floating rate notes upon maturity and subsequently amended our unsecured credit facilities, improving pricing and extending maturities. We now have approximately $1.4 billion of available liquidity and no debt maturities until 2024, allowing us ample time to opportunistically access the capital markets. Since last quarter's call, our credit rating has been upgraded to triple B flat. Turning to guidance, we have revised our 2022 same property NOI growth expectations to a range of 3% to 4.5%. In terms of Nareit FFO guidance, it has been revised to a range of $88 to $95 per share. And with that, I'll turn the call over to the operator for Q&A.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. One moment, please, while we pull for questions.

Craig Schmidt, Analyst

Thank you. I'm just wondering, I know that small shops had just reached a new high, but how much further can you push it? You seemed to mention a drag that sounds like you are still working on additional lease-up of small shops.

James M. Taylor, CEO

Thank you for the question and highlighting the drag I mentioned. It is a drag of about 120 basis points for projects that are inactive or soon to be redeveloped, where from a strategy standpoint, we're holding some small shop vacancy to benefit upon redevelopment to drive both rate and occupancy. We clearly expect to continue to set new records regarding small shop occupancy and see it increase several hundred basis points above where it is today. It's part of our value-add nature. We fully expect improvement as we continue to enhance the portfolio.

Craig Schmidt, Analyst

Great. And then as a follow-up, are there any changes to the structure of backlog for space to tenants to better accommodate the last mile fulfillment needs?

Brian Finnegan, CRO

Tenants are certainly looking at how they're utilizing their store, not just to connect with the customer at the shopping center, but also to fulfill goods from the stores. Target just reported that 95% of their sales are fulfilled from the stores. What's been interesting is the tenants have been able to integrate this within their current prototypes. They're focused on how to integrate that into the store. We've been very accommodating with large format retailers and some of our junior boxes that are doing more curbside service across the portfolio, connecting with the customer. This also turns out to be the most profitable logistics space for tenants as they transfer some of the last-mile costs to the consumer.

Todd Thomas, Analyst

Hi, thanks. Good morning. First question is on investment activity in the quarter. It was a relatively big quarter in terms of net investment activity for the company. Can you talk a bit about the pipeline and what might be on tap for both buys and sells in the near term?

James M. Taylor, CEO

Thank you for the question, Todd. We've always focused on investment opportunities within our target list that present value-added return opportunities with significant visibility on near-term growth. Our appetite for value-added opportunities in this environment remains strong. We are pleased with what we've executed so far in terms of dispositions and expect that to pick up eventually. We're not trying to go into new markets but rather looking at opportunities where we can generate good returns even in a low cap rate environment. Interestingly, given the volatility in rates, we may see some opportunities shake loose that we haven't seen before. We expect to stay disciplined and capitalize on our competitive advantages in terms of leasing and redevelopment.

Todd Thomas, Analyst

Okay. Are you changing your return hurdles at all as you evaluate new investment opportunities? Do you have a sense whether pricing is changing for new deals that might come to market?

James M. Taylor, CEO

Certainly, the rate environment will impact our return hurdles. It emphasizes finding opportunities where we can meet those hurdles with visible growth. The market has been rather stable with tight cap rates, possibly due to strong institutional demand reflecting the durability of retail cash flows.

Mark Horgan, CIO

I agree that the rate environment will impact cap rates, but we have seen very strong pricing in the market due to strong institutional investment interest. Open-air cash flows remain durable, and we've noticed significant interest in the space, which has kept cap rates relatively stable despite the volatility.

Michael Bilerman, Analyst

Hey, this is Christopher Perry on with Michael. Just a quick follow-up on external growth and return hurdles. Any commentary on appetites in new markets or larger portfolio acquisitions?

James M. Taylor, CEO

In terms of new markets, we've always seen ample opportunity in the markets we're in, and we've strategically exited single-asset markets that we don't see as long-term core. We continue to cluster our investments where we have extensive tenant demand. Regarding larger acquisitions, we've noticed portfolios trading at a premium relative to underlying assets, meaning we've remained disciplined with our return hurdles, achieving better value through one-off markets recently.

Angela Aman, CFO

With our amended credit facility, we have pushed our maturity out to 2026, with no remaining debt maturities until 2024. This allows us time to monitor debt capital markets which is important, given our capital raising throughout the pandemic puts us in a favorable position.

Juan Sanabria, Analyst

Hi, good morning. You referenced the record small shop occupancy. How do you think that could evolve for the balance of the year?

James M. Taylor, CEO

While I won't give specific guidance, we expect small shop occupancy to increase several hundred basis points due to our value-added strategy. This isn't just about occupancy but also about achieving good rates as we move forward.

Michael Mueller, Analyst

I'm curious, what are the characteristics of the assets where you've seen cap rates back up recently?

Brian Finnegan, CRO

It's all about the inherent growth of an asset. When assets have strong growth, that's where cap rates tend to remain stable.

James M. Taylor, CEO

We've passed on investments in core-like assets where cap rates have been strong recently. We're focused on disciplined underwriting and understanding tenant demand, allowing us to remain competitive.

Haendel Emmanuel St. Juste, Analyst

On the retention, your retention rates seem a bit below peers. Is that because you're not retaining certain tenants to capitalize on opportunities to raise rents?

James M. Taylor, CEO

We're leveraging current demand to drive the best terms and rates. We're not focusing on retention but on growth in ROI. If we can't reach an appropriate renewal rent, we'll consider taking vacancies. We're encouraged by generally higher renewal rates, but emphasize good value.

Angela Aman, CFO

We have about $48 million accrued for but uncollected rent since the pandemic. Of that, approximately $42.5 million has been reserved, with $29 million not subject to any existing deferral agreements, and around $14 million subject to payment plans. We see continuing strong collection activity, supported by a favorable environment post-eviction moratoriums.

Operator, Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to Stacy Slater for any closing comments.

Stacy Slater, Host

Thanks, everyone. We'll see many of you at ICSC in the next few weeks.