With new shopping center supply at a standstill and acquisitions aggressively priced, Brixmor Property Group Inc. (NYSE: BRX) sees its best growth prospects within its existing property portfolio.
To tap those prospects, Brixmor introduced its Raising the Bar initiative more than three years ago. The program was formally unveiled to the public in late October 2014..
“It’s been an ongoing effort to upgrade and reposition the shopping center portfolio by putting in high-quality retailers,” said Michael Pappagallo, Brixmor president and CFO, in an interview with REIT.com.
He pointed out that during the past three years, Brixmor has signed more than 300 anchor leases that have impacted occupancy and net operating income (NOI) growth at more than 179 centers.
Brixmor has identified an additional 160 properties as candidates for the initiative during the next five years.
“We have good velocity in the program so far, and considering where we are in the tight supply environment, there’s more opportunity for us as we go forward,” Pappagallo said.
Opportunity to Boost Rents
Brixmor anticipates spending $80 to $100 million on anchor repositioning in 2015, and roughly $450 million during the next five years. “It is the primary catalyst to our internal growth, both for occupancy uplift and capturing significant spread opportunity relative to our in-place rent,” Pappagallo explained.
In the fourth quarter of 2014, the spread between rents in Brixmor’s expiring and new leases widened to 13.9 percent, the sixth consecutive quarter of spreads exceeding 11percent. For the year as a whole, the spread rose to 12.6 percent.
Pappagallo noted that Brixmor has a “large reservoir” of below-market rents and has been able to implement a “dramatic uplift” in rents at its repositioned centers.
“The recovery in the shopping center market is very broad-based,” Pappagallo said. “The common bond among all of these markets is tight supply.”
Indeed, new shopping center supply fell 90 percent between 2006 and 2014, and development remains at a 38-year low, according to data from Reis, Inc. and the International Council of Shopping Centers.
Acquisitions, meanwhile, “are hard to come by,” Pappagallo noted, and not only on account of price. Another factor is the scarcity of grocery-anchored, infill sites with future redevelopment and growth opportunities that Brixmor particularly wants.
Luring Retailers Away from the Mall
As Brixmor has raised the overall curb appeal and quality of its portfolio, it has also looked for other ways to keep its customers coming back for more. For example, it is luring select mall-based retailers to its shopping centers.
The company announced late last year that it had hired two mall leasing professionals to oversee those efforts. Since then, Brixmor has signed leases with traditional retailers including Gap, Banana Republic, American Eagle Outfitters, Chico’s, Christopher & Banks, and Kay Jewelers.
“We’re looking for opportunities, where it makes sense, to bring some of those mall-based retailers into the community shopping center where their customer is already shopping,” Pappagallo said.
Bolstering Balance Sheet
Meanwhile, in addition to improving the quality of its tenants and boosting occupancy, a third pillar of Brixmor’s current strategy is strengthening its balance sheet.
Pappagallo said Brixmor has made “great strides” in achieving its goal of reducing its debt level in absolute terms, establishing an investment grade-credit profile and reducing secured debt. “As we go forward, it’s really more of the same,” he said.
During 2014, Brixmor received investment-grade ratings from each of the three credit agencies. Earlier this year, the company debuted an unsecured debt bond offering.
“Brixmor is definitely in a good spot,” said Alexander Goldfarb, managing director at Sandler O’Neil & Partners. He noted that private equity firm Blackstone Group L.P.’s involvement with Brixmor at the time of the REIT’s initial public offering (IPO) in 2013 “was a huge positive for Brixmor” in terms of stabilizing its financial position and putting it on a path for growth. Blackstone has been reducing its controlling interest in Brixmor ever since the IPO, and Goldfarb expects Blackstone to have exited the stock in about two years’ time.
In the meantime, Brixmor is “executing a very simple strategy – improve the quality of the tenants, improve occupancy, and improve the balance sheet,” Goldfarb said.