12/17/2013 | By Sarah Borchersen-Keto
After raising nearly $950 million in an initial public offering (IPO) last month, Brixmor Property Group Inc. (NYSE: BRX) is upgrading anchor space in its shopping center portfolio, a strategy that the company believes will drive internal growth.
Brixmor owns and operates more than 520 properties in grocery-anchored shopping centers located across 38 states. Private equity firm The Blackstone Group L.P. maintains a controlling interest in the company.
In an interview with REIT.com, Brixmor CEO Michael Carroll explained that the company found itself with empty retail space during the recession as bankruptcy hit tenants such as Circuit City, Linens ‘n Things and Borders. Since mid-2011, however, the company has made a concerted effort to focus on its anchor space, spending $339 million on refurbishments in the process. As a result of that investment, Brixmor has been able to lease nearly 200 anchor spaces. Openings are expected to continue through the first half of 2014, Carroll said.
And the work isn’t complete. Brixmor anticipates spending between $130 million and $140 million in 2014 on redevelopment and repositioning, according to the company’s latest earnings report. The goal, Carroll pointed out, is to ensure that Brixmor’s internal operating performance drives net operating income (NOI) growth that approaches 4 percent in the next several years.
“As we look out, we continue to have a broad pipeline of anchor repositioning-type projects where we’re expanding grocery stores, combining spaces for large tenants like T.J.Maxx, Ross (Dress for Less), Dick’s Sporting Goods and others,” Carroll said.
The process of repositioning and redeveloping anchor space and installing best-in-class retailers has proven to be a stimulus for small-shop leasing, according to Carroll.
“You need the anchors to lead the small shops. Small-shop tenants want to open in a thriving, busy shopping center with successful anchors. As we’ve been able to address that, small-shop leasing has really responded,” Carroll said.
In fact, small shops have proven to be Brixmor’s most profitable leasing business, according to Carroll, with the “highest rents and the least amount of capital required to place tenants.”
Occupancy across the Brixmor portfolio stands at 92 percent today, and the company is working to raise it. Carroll said Brixmor is projecting that occupancy will climb up to the range of 95 percent in “the next several years.” He stresses that Brixmor has a “very compelling internal growth opportunity” based on below-market leases throughout the portfolio and an above-average share of leases expiring in the near future.
“We have to do a very good job in making sure that we capture that rent spread opportunity that we have in the portfolio,” Carroll said.
In terms of lease renewals, Carroll said Brixmor benefits from the current supply-constrained environment. “As you look out, there’s literally no development going on in our markets, and that’s really proven to be a very nice catalyst for renewal rents and overall rent spreads,” Carroll noted.In fact, Carroll said he expects supply to remain low in the next five to 10 years. Financing has become more difficult, and large format retailers lack any robust expansion plans, according to Carroll.
“With them on the sidelines, more or less, it’s keeping things in check,” he said.
Because supply is so constrained, in many instances Brixmor is choosing not to renew existing tenants. The firm is opting, instead, to lease to more profitable tenants, Carroll noted. “Market rent is so much higher (now), and we can really upgrade the quality of the tenant,” he said. Carroll added that Brixmor’s blended lease spread, which incorporates both new and renewed leases, stood at approximately 9.5 percent on a year-to-date basis at the end of September and at about 12 percent for the third quarter.
“We’ve seen a nice acceleration there, and as we look out we think that’s going to continue,” he said.