Brixmor Property Group Inc (BRX) 2013 Q3 法說會逐字稿

Good morning and welcome to the Brixmor Property Group third quarter 2013 earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Stacy Slater, Senior Vice President of Investor Relations. Please go ahead.

Thank you, operator and thank you all for joining Brixmor's first teleconference since completing our IPO in November. With me on the call today are Michael Carroll, Chief Executive Officer, and Michael Pappagallo, President and Chief Financial Officer, as well as other key executives who will be available for Q&A.

Before we begin, we would like to remind everyone that the remarks and responses to your questions that we provide today may contain forward-looking statements. These statements do not guarantee future performance and undue reliance should not be placed on them. These statements are based on current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated in any forward-looking statements, including those identified in the Risk Factors section of our S-11 filed with the SEC and available on our website, as such factors may be updated from time to time in our SEC filings. Brixmor assumes no obligation to update any forward-looking statements.

In today's remarks, we will refer to certain non-GAAP financial measures, reconciliations of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings release and supplemental disclosure on the Investor Relations portion of our website. This call is being webcast and a replay will be available on our website. At this time, it's my pleasure to introduce Michael Carroll.

Thanks, Stacy. This is a very exciting day for our Company as it marks yet another significant milestone in our recent evolution. We want to take this opportunity this morning to thank all of you for your support during the IPO process. We look forward to our ongoing partnership and are excited about the path forward. Our investment thesis is simple: we are a team of operators and we'll build lasting shareholder value through consistent NOI growth and strong balance sheet management, prioritizing building NAV over managing FFO. Our plan generates sustained and reliable cash flow growth. Our results will be clearly indicative of our performance as NOI growth will track to our EBITDA.

Our portfolio has been optimized in the private market. We have resolved or removed several impediments, including any noise around joint ventures, unresolved land banks, stalled development projects, or infrastructure improvement needs. Most importantly, we entered the public domain without a non-core pool and the need to execute dilutive dispositions. We are defined simply as a wholly-owned grocery-anchored shopping center portfolio located primarily across the top 50 markets in the US. Our grocers are market-leading and highly productive, providing a strong foundation for our portfolio. Today, we are free from the obstacles of the past and our portfolio is primed for growth.

I would like to reiterate this morning the key components of our portfolio strategy. As we look across our national platform, we are now seeing recovery occurring in most US markets. Even as there is limited quality anchor space availability, we still see little appetite for new development. We are bullish these fundamentals will continue and the low supply/strong demand combination creates an environment opportune for the execution of our business plan. Given this environment, our best use of capital is to invest internally and our own portfolio. We are aggressively doing just that. The risk-adjusted returns that we can achieve are much more compelling than we can find externally. We continue to see strong demand from retailers in the 10,000 square foot and above category that allows us, as operators, to continue to create repositioning opportunities to drive and create value.

We are clearly focused on driving same property NOI growth that will approach 4% over the foreseeable future. We are confident because of the following, first we have below-market leases across the portfolio. Our portfolio average rents are $11.87 per square foot in contrast to our forward leasing pipeline where we have deals under negotiation at $14.50 a square foot. Given our above average lease expiry schedule, this is an incredibly compelling opportunity. This opportunity is amplified based on the fact that we are in an increasing market rent environment, bolstered by the lack of new supply. This is a key to our story and it should not be understated.

Second, we have, still have considerable occupancy upside, both in our anchor and small shop space. We expect our small shop occupancy gains to accelerate as the nearly 200 anchor leases we have already executed continue to commence. These anchor lease commencements provide an exceptional catalyst for our small shop leasing program.

Third, our portfolio provides us with a deep pipeline of anchor space repositioning and redevelopment opportunities. We have a proven track record of capitalizing on these opportunities. And lastly, we have solid contractual rent steps that exist throughout the portfolio. Now turn the call over to Mike, who'll run through our financials.

Thank you, Mike. Hello again, everyone; it's good to be back. I'm also very excited to be part of our team to help capture the significant opportunity in front of us and to increase shareholder value through a very simple and focused business plan. Our goal on disclosure is to have an easy-to-understand, transparent financial information. Unfortunately, due to the timing of the IPO, this initial financial statement presentation is admittedly a bit messy. So you can get a feel for the go-forward Company end results, we've provided a healthy dose of pro forma information, reflecting portfolio additions and deletions at the IPO date, the impact of proceeds raised in the offering and other adjustments for the one-time costs and fees that specifically relate to the IPO process.

Our objective for this earnings release and conference call are really twofold: first, to initiate the financial and operating disclosures that we will supply the investment community to provide complete transparency; and second, to offer our initial 2014 guidance range with key assumptions. This supplemental financial report contains a host of portfolio metrics of the 522 assets in the public Company as well as information related to what we define as the same property portfolio, which is essentially all of the assets of the IPO Company other than the 43 properties brought into the Company at the IPO date. Among other things, we've included details on all of our properties and of our debt structure and net effective rent analysis, and the components of same property NOI and other financial statement details. One benefit of this simple and focused business plan is the ease in tracking key drivers that will influence our future financial results.

Our initial estimates for FFO per common share for 2014 is between $1.80 and $1.84 per share using the fully diluted share base of 304 million shares. One important item I'd like to call out is the impact of GAAP accounting adjustments for below-market leases and straight-line rents. We have a relatively large amount of this accounting income, most of which was the consequence of marking leases to market, when Blackstone acquired the Company in 2011. The combined effect of below-market lease amortization and straight-line rent is $62 million or $0.20 per share of FFO in 2014. We wanted everyone to be aware of this impact for other calculations you may be doing such as AFFO.

Notwithstanding the accounting items, the FFO per share range of $0.04 represents a spread of about $12 million, which in turn, reflects variability in only two areas, property NOI growth and interest costs. We do not assume acquisition activity as we see the best use of capital directed to our portfolio opportunities. We estimate somewhere in the neighborhood of $130 million to $140 million of capital spend for leasing and value-enhancing activities. In addition, we will spend between $17 million to $20 million on recurring maintenance CapEx. Included in that leasing capital number is approximately $70 million related to our key anchor leasing and repositioning deals as well as larger redevelopment projects. We do not assume any dilutive disposition activities; those non-strategic assets were left out of the IPO pool.

We expect 2014 same property NOI to range between 3.7% to 4.1%. Again, this range relates to the entire portfolio population other than the 43 assets added at the IPO date. That group becomes part of the same property pool beginning in 2015. Overall growth and NOI will be driven by an increase in occupancy of over 1%; blended leasing spreads of between 8% to 10%, which does include options and renewals against 8.3 million square feet of expiring leases and in-place contractual rent steps of about 1.1%. On the interest expense side of the equation, any costs above our planned assumptions may lower FFO per share slightly, but would reflect a positive development in that it suggests we will be accessing longer-term debt.

We will be refinancing, approaching $800 million of secured debt next year, over half of which is floating rate with a similar level of unsecured term loans and other corporate financings as part of our strategy to aggressively unencumber properties and position the balance sheet for an eventual investment grade rating. Any opportunity to accelerate that process and extend the maturity profile is well worth the marginal increase in interest costs. As importantly, we will continue to reduce debt levels from normal amortization of existing loans as well as additional reductions from free cash flow; in total, about $65 million to $75 million worth of debt paydown in 2014. One other item for those of you working on earnings models. We anticipate total general and administrative expenses in 2014 to be in the area of $78 million. Note that all of the expenses to operate the business are in this line item. There are no allocations or reclassifications of the categories on the earnings statement.

There is plenty to do, but the entire Brixmor organization is primed to execute on our plan and deliver the results. As you saw with our earnings release and supplemental disclosures here yesterday, we are committed to providing best-in-class disclosure, ongoing transparency, and open communications and we certainly welcome suggestions you have for making this even better going forward. So thanks, and we are now ready to take your questions and we recognize that many of you are unable to ask questions during this post-IPO quiet period.

(Operator Instructions)

Christy McElroy, Citi.

Mike, regarding the $62 million of straight-line rent in FAS 141 in 2014, can you break out what you expect between the two and what should we expect in terms of FAS 141 burn off over the next few years?

I'd actually like -- let Steve Splain, our Chief Accounting Officer, cover that. Steve?

The FAS 141, the so-called mark-to-market lease adjustment is approximately $42 million and the straight-line rent is $20 million, so that's the breakdown there. We would expect that the straight line to remain relatively flat going forward and the FAS 141 will decrease approximately $3 million to $4 million per year for the next few years.

Okay. And then in 2014, can you say what your expectations are for management fee income, and also, other expenses, I think the majority of which looks like it's tax related?

Yes, I -- we would suggest that the management fee income is about $2.5 million and that relates, for the most part, the ongoing management and leasing activity for the properties that were left behind. The IPO, so-called, non-owned or non-strategic assets. As and it relates to other expenses, above and below G&A, it's probably about $5 million or so, most of that relating to state and local tax expense.

Okay. You mentioned occupancy expected to be up about 100 basis points year over year. I assume that's the lease rate with the spread between the lease percentage and the commenced occupancy at about, I think it's 190 basis points today, where would you expect that spread to be at year-end 2014?

It will be probably somewhere between 150 to that 190. A more normalized level as we think long-term is that 150-ish range but it has been elevated to a certain extent because of more bias towards anchor signings. So as we throughput into 2014 with having additional anchor signings, it will stay somewhat elevated and then probably about 2014 into 2015, we'll revert to the more traditional 150 number.

Okay. And then in terms of your breakout of FFO on an as adjusted basis, would you consider providing as adjusted or sort of core FFO guidance going forward in addition to your reported FFO guidance?

I think what we'll -- to that point, Christy, I think what will happen is, for us right now, FFO versus FFO in adjusted will only account for transactional activity. And considering that most of the guidance has very little transactional activity, those numbers will be the same. What we will pursue, as we go forward, recognizing this burn-off of these accounting adjustments to make sure that the investment and research community understands how the FFO is being impacted by those accounting adjustments and probably stating the number ex accounting adjustments. What we did not want to get into was to further confuse the investment community by coming up with our own version of FFO. There's a lot of confusion in terms of one-time adjustments and those things.

We didn't want to add to that, so we'd rather go out with a straight definition and then provide the differences and the calculations of those items that really shouldn't be considered in using that metric.

I do want to emphasize something though that Mike had made in the prepared remarks, is that certainly, we recognize that FFO is an important metric, as is AFFO and CAD and so on. But as we think about our business plan and our strategy, our focus is about as much about longer-term value creation, so for us, it's going to be as much as the NAV growth and along with that, the resulting cash flow growth of the business. So we're thinking very much in those terms and not trying to micro-manage or manage quarterly FFO statistics.

And then just lastly, can you provide Q4 '13 FFO guidance?

I would say the best way to look at that, if you think about the third quarter, which was $0.43 as we think about the fourth quarter, we'll have some uptick, so $0.44 would probably be a good number to use as we think about the velocity of the business and the leasing and NOI growth for the quarter.

Samit Parikh, ISI.

My question related to the recovery ratio. Mike, I don't know if you have this data, but my guess is as you continue to increase small shop occupancy, that recovery ratio is going to creep higher. At 87%, I think you're right now with lease, the lease percentage of rent-paying occupancy about 90%; as it moves higher, how high do think that recovery ratio could go? I don't know if you have the data of where that recovery ratio was? Sort of your prior peak occupancy for the same portfolio right now?

This is Steve Splain. We don't have that in the prior -- the data from the prior peak but we do expect the recovery rate to move with occupancy and slightly outpace the occupancy due to the small shop leasing. So we would approach at a stabilized occupancy of 95% approached 90% recovery rates on all of our CAM and real estate taxes.

Okay, that's helpful. That is actually all I had, thanks.

Ki Bin Kim, SunTrust.

Just going back to your leasing. 51% on new leases, it was definitely pretty high. What should we expect on, when you split out the roll up on leasing between renewals and new leases going forward?

Hi Ki Bin. It's Mike Carroll. I think what you should be thinking about, We've been -- we've had good acceleration in spreads, I think indicative of better leasing at the properties and the anchor leasing that we've done. We are thinking next year that, on a blended basis, we should be in the 8% to 10% range. But I think there's a reasonable chance of outperformance there, given supply and again, the quality of leasing that we've been doing and generally improving market rent environment.

I think renewals will continue to be in the range that they've been in, and the new deal spreads, they're a little bit harder to quantify but in an improving rent environment, we would think that those would continue to be north of the 20% that -- 20% to 30% that they tend to be in that range someplace at the higher end of that range.

Okay. Could you help us understand when you have tenants that come up with renewal options; are those options typically at a stipulated rate? Or is that a market? What is the typical renewal options look like?

It's Tim Bruce. Those are generally if the renewal options are at a contract rate basis, the increases vary based on the lease requirements. So generally, Ki Bin, you should be thinking about those option leases are generally, I'm going to say, in the 10% range as a bump. Sometimes a little bit less, sometimes a little bit more, sometimes there's a CPI quantifier in there, but I think that 10%ish is a good number.

Todd Thomas, KeyBanc Capital.

Just a couple of questions, first, looking at the composition of the same-store NOI growth in the quarter and year-to-date, the 50 to 60 basis points of growth that was attributable to redevelopment. As you think about the guidance of 3.7% and 4.1% in 2014, is that 50 to 60 basis point contribution from redevelopment consistent, or do you see that increasing or decreasing?

Todd, it's hard for us to quantify that because redevelopment, ins and outs are often based on when leases start to commence, what new projects may commence that take existing space off-line, et cetera. But what I would say, is that rough range of 50 basis points, plus or minus, is not an unreasonable estimate in how we think about the redevelopment piece of the total NOI growth. I'm just a little hesitant in terms of really tightening that number at this point. As we get more into 2014, and projects completed and new projects commence, I probably can give you a little bit more precision on that.

Okay. And then you mentioned that demand for spaces 10,000 square feet and larger is pretty strong, and rent growth in the boxes that are 35,000 square feet, are great or was strongest in the quarter, and it was actually lowest than the below 5,000 square foot space. I was just wondering, what gives you confidence that the leasing will accelerate in the small shop space, like you're forecasting, given that there's usually a little less lead time on those size spaces?

Todd, I'll start and then I'll give it to Tim for color. I think you really -- a big part of understanding our story is the anchor leasing that's been done over the last couple of years. We've signed nearly 200 leases; many of those commenced during this quarter, many commence during the first quarter next year, it is really important to understand the small shops are going to follow those anchors and when those anchors get open and are solidified, that's when we can achieve the best rate on shop space, particularly that small shop space. And so that's been the lagging of that space to date and you've seen some acceleration, as we've commenced more anchor leases, and if it -- it does provide a great platform for it. We have seen good demand and Tim can talk about some of the demand that we're seeing in that space.

Sure, and just to follow-on leasing from all of our anchor leasing initiatives over the last couple of years have been tremendous. We have robust demand from shop space in category 10 and below, in particular, most of the divisions of [Assena], Carters', Pet Co, and lease, PetSmart, just to name a few. We continue to see that as -- on our leasing initiatives, national accounts handles all of the national tenants; the regional players do all of the local leasing. And so both on a national accounts and on a local level, we see a lot of robust leasing interest in our space.

Okay. Just one more. I know the Company's strategy in the near term surrounds leasing and internal growth and you mentioned, Mike, that there's no acquisitions or dispositions in guidance. I was just curious though if you think about external growth, when should we expect to see any acquisitions or dispositions? I guess when will the Company consider recycling capital and making new investments?

Todd, I think what we've been saying is, we did use this time as a private Company to shed the portfolio of non-core assets. Everything that we have in the portfolio today, we feel like we have a plan that we can extract growth and grow NOI at those properties. As we start to move through this year and into next year, we've harvested and capitalized that growth, as we start to see growth rates flatten out, at that point, I think we'll be looking to do some recycling. But as we sit here today, it really is -- it's more about the operations of those properties in an environment where we've got recovery now really across the US. We just don't feel like before taking advantage of that growth, that it would be prudent to be deep into a recycling strategy.

(Operator Instructions)

I'm showing no additional questions. I'd like to turn the conference back over to Mike Carroll for any closing remarks.

Thank you. Again, I can't express enough how thrilled we are to have completed this phase of our journey. Our team is honored to be back in the public markets. We recognize it is also a great responsibility. This team here is very committed; they're focused and we would look forward to reporting our progress to you in our quarters to come. Thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.