Brixmor Property Group Inc (BRX) 2016 Q1 法說會逐字稿

Good day, and welcome to the Brixmor Property Group Incorporated First Quarter 2016 Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference call over to Ms. Stacey Slater, Senior Vice President, Investor Relations. Ms. Slater, the floor is yours, Ma'am.

Thank you, operator and thank you all for joining Brixmor's First Quarter Conference Call. With me on the call today are Dan Hurwitz, Interim Chief Executive Officer and President, and Barry Lefkowitz, Interim Chief Financial Officer as well as Brian Finnegan, Executive Vice President, Leasing, 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. Lastly, we ask that you please be mindful of your fellow co-participants and limit your questions to one per person. If you have additional questions regarding today's earnings, please requeue.

At this time, it's my pleasure to introduce Dan Hurwitz.

Thank you, Stacey. Good morning, everyone and thank you for joining us today. As you may recall on our Q4 earnings call following my first 21 days as Interim CEO of Brixmor, I indicated how impressed I was with the caliber of the organization at the time. I can now say after spending more than 10 weeks working alongside various departments to stabilize operations, empower our people and working with the Board to select future leadership of the organization, I have only grown more impressed and optimistic about the direction this enterprise is headed and its ability to further enhance its position within the industry. With the selection of Jim as CEO, Angela as CFO and the various talented individuals already running day-to-day operations, this Company now has the leadership, integrity and confidence required to effectively engage with the public markets and strengthen its reputation among the tenant community in order to maximize value for its shareholders.

Before addressing our quarterly results, I'd like to take a moment to thank the Board of Directors for their support and cooperation throughout the search process. We were extremely fortunate and flattered by the pool of candidates, and to say we were pleased with the end result would be an understatement. Management transition can be difficult, but this Board made itself available 24/7 for committee meetings, interviews, contract review or just advisory conversations. The process was extraordinary and the timing and results have clearly validated the effort and highlight this Board's true sense of obligation to all shareholders.

I would also like to take a moment to thank my friend Don Wood for the way he handled the situation with Jim. It is never easy to part ways with the most trusted partner and close friend, and yet the excitement and genuine support Don displayed for Jim to take this next step in his career was truly admirable. We thank Don for the decorum and class with which he handled the situation.

Now moving on to operating results. Despite the obvious internal distractions that remained during the first quarter, the team once again rallied to produce strong results. And in some cases, set new records for the Company. New Deal leasing volume exceeded 850,000 square feet, a 6% increase over Q1 2015 and the highest first quarter new deal leasing volume since our IPO. This record setting volume was largely driven by demand from anchor tenants. Over half of the new deal leasing volume by GLA was for spaces greater than 10,000 square feet, reflecting the continued strong demand from retailers in this category and the increased level of emphasis we placed on this area of leasing within the organization.

Additionally, the team made strong progress leasing up small shop space, increasing occupancy in this category by 70 basis points year-over-year. Amid these results, the overall decline in occupancy of 20 basis points sequentially were driven by seasonal move outs and the continued drag of the A&P bankruptcy. While any decline in occupancy is a disappointment, it is not uncommon to see this trend during the first quarter and a decline in this first quarter was 20 basis points lower than last year. We continue to believe this platform and portfolio can achieve a full-year increase in occupancy up 20 basis points to 40 basis points over 2015 results.

Blended leasing spreads were approximately 11%, which is the low-end of the range of our full year guidance, but were largely driven by timing and transaction make up as contractual options accounted for more than half of our total leasing volume for the quarter with an average spread of 6%. By comparison, since the IPO, options have typically accounted for only 38% of our total leasing volume. So this quarter is a bit of an anomaly. Most importantly, however, new deal leasing spreads remained robust at 35% and we expect full year blended spreads to be in line with previous guidance in the low-to-mid-teen range.

The upside opportunity in this portfolio continues to be occupancy gains and rental growth, and while we are pleased with the initial results of some preliminary organizational changes designed to drive stronger leasing productivity, it will take some time for the full benefits of these changes to financially appear in quarterly results.

Anchor lease transformations continue to play a critical role in generating organic growth with elevating the appeal of our shopping centers to the consumer and co-tenants. While these projects often times result in short-term vacancy, the long-term benefit will accrue to shareholders as the team drives NAV growth. This quarter, we added an additional five anchor space repositioning projects to the pipeline along with one redevelopment project, one new development project, and two outparcel development projects averaging double-digit yields.

Key projects include the repositioning of a former Kmart box, which just expired in February in Ann Arbor, Michigan. At this project, we are remerchandising space with Sierra Trading Post and Home Goods, two of the four leases executed with the TJX Company this quarter, as well as Stein Mart and another junior anchor. Sierra Trading Post is a growth vehicle for TJX, moving the once only concept to bricks and mortar. This will be their first location in Michigan, as well as in our portfolio and we look forward to expanding our relationship with Sierra Trading across our entire portfolio.

In Louisville, Kentucky, we are expanding Kroger from 80,000 square feet to 116,000 square feet by relocating existing shop tenants to facilitate a 36,000 square foot expansion expected to significantly drive sales and foot traffic to the property. This will be our second Kroger marketplace concept in the portfolio. Also in Tampa, Florida, we are redeveloping an existing publics by delivering the new 54,000 square foot prototype on the same footprint. The new store will open in the fourth quarter of this year, at almost double the current rent, and the leasing demand for the remaining shop space has been better than expected, creating the opportunity for considerable NAV enhancement. These projects are indicative of the numerous opportunities embedded in the portfolio and based upon our relationships and continued dialog with key retailers, we expect to leverage our operating platform to help our retail partners, not only achieve their store growth, but to optimize their strategic objectives, while at the same time driving rental growth and creating value for our shareholders.

As we've highlighted before, over the next three years, the average base rent per square foot of expiring leases is $12.25, which is well below market and presents this leasing team was an incredible opportunity to drive further increases in average base rent across the entire portfolio.

As I conclude my tenure at Brixmor, I would like to take this opportunity to thank those of you on this call with whom I have worked with since February 2008. During my short tenure, we had nearly 100 meetings with investors, analysts, bankers, rating agencies and tenants, in an effort to provide transparency and direction in a time of uncertainty. Please know, I have once again thoroughly enjoyed working with each and every one of you and feel extremely confident that you will be very pleased with the future direction of the Company. With Jim at the helm, coupled with an extremely talented group of real estate professionals and now Angela joining the team, I am very excited to watch this Company navigate the myriad of opportunities that lie ahead, and look forward to a smooth and constructive transition with Jim that will continue to build on Company momentum.

At this time, Barry will review financial results and provide an update on our balance sheet initiatives. Barry?

Thank you, and good morning. Our first quarter results highlighted by leasing spreads of 11% and year-over-year ABR per square foot growth of 5% again demonstrate the internal growth profile of our portfolio derived by below market in-place rents and continued favorable supply conditions and tenant demand. NAREIT FFO per share for the quarter increased 15% to $0.53 versus $0.46 in 2015. With higher NOI and lower interest rate -- interest expense generating improved earnings as well as lower year-over-year G&A due to a $0.03 per share of pre-IPO compensation recognized in 2015.

NOI for the 2016 quarter includes $6.4 million or $0.02 a share of income from Circuit City related to their bankruptcy in 2008, $5.6 million of the settlement was attributable to lease rejection claims and it is included in lease termination fees, and as such is not included in same-property NOI.

During the quarter, we incurred $3.65 million or $0.01 a share of additional cost related to the previously disclosed review conducted by the Company's Audit Committee. Also during the quarter, we had the benefit of $2.6 million or $0.01 a share from equity based compensation forfeitures associated with the February executive departures. So when you consider all the variables in this year and last year, the underlying growth was driven by an increase in NOI and lower interest expense. Same-property NOI growth for the quarter was 2.8%, consistent with our guidance.

On the balance sheet side, we ended the quarter with net debt to adjusted EBITDA on a cash basis of 7.1 times. Interest savings for the quarter was about $0.02 a share resulting from 2015 debt repayment of $1.1 billion at 5.8% interest versus the issuance of $1.2 billion of senior unsecured notes with a weighted average interest rate of 3.9%. On April 1, we prepaid $82 million of mortgage debt with June 1 maturities utilizing cash-on-hand and $10 million from the revolver. Remaining maturities for 2016 includes $774 million of mortgage debt with a weighted average interest rate of 5.5%, $86 million of which is due in August and the balance in November and December. This provides continued opportunity to reduce our debt service payments and extend our maturity profile.

Over the past two months, we have had positive and constructive dialog with the rating agencies, lenders and the fixed income community, spending considerable time with each, including over 40 bank meetings. Support for the Company has been exceptional and action to Jim's appointment has been incredibly favorable. There are myriad of options available to the Company relative to refinancing our upcoming maturities. Discussions related to recasting our credit facility and term loans as well as with the fixed income community have been positive and we have seen our bond spreads tighten appreciably over the past few weeks. There was also significant optionality on the secured side including the [life] companies. The ultimate decision on how to proceed will be at the direction of the new management team. That being said, we don't anticipate any issues as it relates to whichever strategies open we selected nor do we have any liquidity concerns or maturity pressures as we have had tremendous support from the lenders and the unsecured investors.

On a personal note, I want to thank everyone at Brixmor and in the investment community for their support over the last few months. I look forward to working with Angela on smooth transition and wish Jim, Angela and the entire Brixmor team much success.

At this point, I would like to turn the call back over to the operator to open up the line for questions. Thank you.

(Operator Instructions) Craig Schmidt, Bank of America.

I guess I'll take advantage of Dan being on the phone. Dan, I've noticed that the Sports Authority elected to go to liquidation, and it seems like troubled retailers pass to liquidation accelerating rather than trying to do a re-org. Is there any pressure on retailers that may be accounting for this?

I don't think so, Craig. I think it's an individual case-by-case basis where individual retailers will assess the viability of their business plan and their strategy. I think the sporting goods category, which in general sells, in many cases, commodity goods at lower margins, it's very hard to justify, not only the square footage that some of the retailers have, but some of merchandise that they carry which has low inventory turn and low productivity per square foot. So I do think that it goes on a case-by-case basis and a lot of it depends on what the category is, what the future of that category is and what the future distribution channels are going to be for those categories.

And sporting goods, as I think we all know, has been under pressure for us for some time and obviously that was not a compelling business model that would prompt others to invest in Sports Authority for it to continue going forward.

Christy McElroy, Citi.

Hi. Good morning, everyone. First in terms of your more aggressive efforts to drive occupancy, have any changes been made within the leasing structure to accommodate that initiative, are there any tenants that you're doing increased business with as a result, and what impact do those efforts ultimately have on your expectations for TIs and re-leasing spreads that you sort of fall that out?

Yes, I'll let Brian Finnegan address that.

Yes. Look, Christy, we really challenged the team at the end of last year with an occupancy decline and try to make some changes to the deal approval process and not as many hands were touching things and we were getting things done faster. It really empowered our people and I think you're starting to see the progress in the first quarter here, we've got some work to do but we're kind of on the right path.

In terms of tenants that are expanding, we talked about the off-price category a lot and as Dan mentioned, we executed four deals with TJX this quarter, we've got leases in the pipeline with Ross, Nordstrom Rack, Sierra Trading Post for TJ is a big growth vehicle, we've got three more deals in the pipeline with them following on our initial deal here in Ann Arbor. We continue to see specially grocers expand, pet stores expand, so we feel like there is a good categories in our space that are expanding right now, particularly in the junior and anchor space and our guys are focused on it from the big box perspective to move the occupancy.

I think it's interesting though, Christy, I think your point is a good one that what was gratifying this quarter was not only to see the volume increase but it did not come at the expense of rent and it didn't come at the expense of TI. So we didn't have to buy a lot more and at the same time, we got what we thought were the appropriate rents for the space, so we weren't sacrificing rent just to get deals done expeditiously.

The bottom line was we just felt that there were too many hands touching every deal and as we have limited -- and not all those hands were constructive, quite frankly, they were time-consuming and not necessarily productive to the process. So as we've eliminated some of the hands touching the deals and we've -- as Brian said, empowered the people with more authority to make deals with retailers directly. That also gets responded to much, much more favorably in the retail market because retailers like to know they're doing business with people that can make decisions and that often prompts the dialog to become much more constructive. So we've tried to enhance that process here and I think we've seen some improvement and I would expect we'll see much more under Jim's leadership.

Haendel St. Juste, Mizuho.

Good morning. Thanks for taking my question. Dan, I guess for you, if I'm not mistaken, both the outgoing CEO and CFO might be (inaudible) operating experience while working, I think with Kimco for a number of years, which guess a little bit of the need for a COO, given that the incoming CEO and CFO, Jim, and Angela, do not have prior operating experience, should we expect or is it the Board's view that the hiring of the COO should be (inaudible) given the skill set required to operate, well, the larger, more disparate Brixmor portfolio and manage the Company's (inaudible) activities? If no, why not, if yes, is that going to be a 2016 event and would that be currently in the contemplated guidance range?

Well, I think first of all, I don't think that's the Board's decision, I think that's the decision of the CEO. So Jim will make that decision after he evaluates the processes, the people, this is the assets, this is a company that is very broad and very deep with talented people that run this portfolio on a day-to-day basis. I know there has been historically no COO at this Company, I am familiar with other companies that haven't had COOs as well, but I will also say that the people that run the operation on a day-to-day basis and have historically run this operation on a day-to-day basis at the asset level are still here, and they're running the assets on a day-to-day basis. And I think it's incredibly admirable that when you see the results that we have in the first quarter, given that we did lose leadership at the top, yet, this company continued to progress, continued to run the operation effectively and I think has proven that the talent at each level of the organization is maybe even deeper than the market thought.

So I think Jim would have to evaluate that upon his arrival. I think he is an astute evaluator of talent, that's one of the things that has impressed us about him over the years, and we will rely on his judgment on that issue and we'll wait to hear from him. But I do think that when he does arrive, he will see that the people that have historically run this Company, the people there at the asset level producing the results on a quarterly basis are still here and doing it.

Ki Bin Kim, SunTrust.

Thank you. Good morning, Dan. So going back to your same-store NOI comments, it seems like without the $900,000 benefit in the Circuit City settlement, it would have been about 2.3%. I know you said that you made some momentum in leasing in April. I was just curious, was that already in the same-store NOI guidance of 3% and whether it was or not, what are you seeing already that makes you comfortable a yield at 3% same-store NOI number?

Well, our guidance for same-store NOI was 2.5% to 3.5% and we're still comfortable with that guidance. The matters that were in the first quarter number were primarily anticipated and going forward, we don't see anything that would change that guidance level. So if we have enormous productivity on the leasing side, that actually opened this year, that would be a positive surprise, but keep in mind and I think I mentioned it, even though you have increased volume on the leasing activity on a quarterly basis, you typically don't see the financial results of that until the following year. So our 2.5% to 3.5% was really based on most of the activity that occurred, the leasing activity that occurred in 2015.

And the volume that you saw in the first quarter and the continued process improvements and execution that we expect for the rest of the year, we feel that you'll see primarily in 2017. But we're still confident with the 2.5% to 3.5%, the 2.8% was not unexpected and we expect the year to follow accordingly.

Jason White, Green Street Advisors.

Hey Dan, just quick retailer question for you. If you look at the department stores, based on some pressures and changing shopping habits and you look at calls, is there a way for them to rework the strategy and become more of an in-favor retailer rather than fighting the same fight that all the other department stores are fighting?

It's a great question Jason and I -- the department store business in general has been a struggle for quite some time and I'm not as negative on the COS or the Macy's as some folks are for a couple reasons. Number one, department stores go through cycles, they have merchandising mistakes, they have merchandising wins and it's affected -- very affected, their sales are affected on a quarterly basis. So when you have merchandising decisions that are made in 9 months to 12 months in advance of any given quarter, sometimes you're right and sometimes you're wrong and it is true that there have been a number of department stores that have been wrong recently and have gambled on the wrong merchandizing mix and they're paying a price for that.

The other thing I think to keep in mind is that in a non-inflationary environment, when you 1% and 2% comp store increases, it's pretty extraordinary. I really don't have a negative view of retailers that plan for a 1% or 2% increase and get 1% and 2% increase, particularly when we're looking at a deflation in ready-to-wear, which is the bulk of their business. So if we were sitting at 3% or 4% inflation, for example and the economy and GDP growth of 3% plus, I don't think we'd be having this conversation. So if you take a look at the numbers, you look at the balance sheets are relatively strong and you look at their results, I think they're being conservative on inventory which is wise, I think being conservative on inventory certainly is going to put a ceiling on your growth, so I don't think we're going to see anything exciting in the same-store category and I think the lack of inflation and the existence of deflation puts enormous pressure on each one of these retailers so if you can put up a 1% or 2% increase or even a flat number, if you plan for a flat number, you can still make money. If you over-inventory, you have a problem and I think retailers are being very wise not to do that.

So again, I think in a non-inflationary or price deflationary environment and in an economy that is not growing at the level that it has historically and we don't know when that will come back, I'm not upset, quite frankly about the production and the numbers that these retailers are producing and I think they'll continue to sort of drag along until the economy gets better or they improve their merchandise mix appropriately.

Todd Thomas, KeyBanc Capital Markets.

Hi, thanks, good morning. Dan, just a question about the CFO search just given Jim's appointment and announcement was made just two weeks ago. Is it safe to assume that the CFO search was primarily handled by you and the Board and what was Jim's involvement if any in the process?

This was Jim's search. Jim was leading the search. He brought his candidate to the Board. The Board interviewed the candidate as swiftly as we could. Many of us, myself in particular knew Angela well for years, I've been always extraordinarily impressed with her talent, her intellect and her abilities. And so now it really wasn't handled by the Board at all, it was handled almost exclusively by Jim who made a recommendation to the Board and he handled the negotiations and he handled the conversations with Angela and we have said all along that we thought that the hiring of the CFO was the responsibility of the CEO, and he started -- he got to work obviously right away as soon as he became our CEO and we supported those efforts.

Jeremy Metz, UBS.

Hey, guys good morning. Just in terms of the dispositions, two parts here, first you didn't sell anything in Q1 and with the new management team coming in, have you essentially put those on hold to see what they want to do in terms of pruning the portfolio?

And then second, probably a little more for Michael, but even if you're pausing the sales here, you're still active in the market and one of your peers talked about continued slowing in buyer pools, particularly in the non-core stuff. So I'm just wondering what you're seeing on the ground and our pricing expectations in the market more generally being set -- being reset for both core and non-core product.

As you mentioned earlier, we have a number of assets in the market currently and a number of those assets have gone under contract, you didn't see a lot of activity in the first quarter because there was a lot of closings in the first quarter, there will be more in the second quarter. We have not slowed the process on the initial group of assets that we have talked about selling, we don't think there will be any disagreement that some of those assets should be sold between us and the new management team but I do think it's prudent to -- after this initial round, it will be up to Jim to review the portfolio and to provide guidance on the size and the scope of the portfolio that ultimately will be sold, if at all and that's something that I know he will address upon his arrival. But in the meantime, we have assets that are under contract, we have assets that we expect will sell during the course of the year and we have not changed our guidance that we gave last quarter on what our anticipated volume of sales will be for the year.

Greg Schweitzer, Deutsche Bank.

Thanks, good morning, everyone. We heard about an unusually high number of store closures that's build over into Q2 relative to trends from past years. Could you talk a little bit about the environment on the ground what you've been seeing so far this quarter, have you seen an increase, an unusual increase or is it still at the level expected with respect to what's baked into guidance?

Brian?

Greg, this is Brian. We're actually down from where we were last year in store closures by about 30% in GLA and so far it's reflective in what we think our guidance is going to be this year. Now obviously we have Sports Authority that we're looking at -- as of right now it does not look like that's going to be a go-forward business. We're in a good position on those boxes, all six locations are in great markets, good locations at under $10 a foot, we've already got activity almost across the board. So I think we're well positioned, we may have some downtime involved in those, but for the most part, store closures are going as expected, and I like said down from where we were last year.

Mike Mueller, JP Morgan.

Hi, thanks. Sure, Jim is going to have some input on this, but should we think of the asset sales as being recurring beyond say, 2016 or really look at this as being some house cleaning where you are just kind of taking care of some asset sales and you evaluate things as they come and they go beyond that?

Yes, fair question, Mike. As you know I've said over the years, I think every portfolio always has some level of asset sales that should occur on an annual basis because things change, particularly in retail. Asset quality changes, tenant move ins, move outs, demographics change et cetera, and I'm sure that's something that Jim will look at very keenly upon his arrival and hope he will be able to ride you with direction specifically in regard to that question.

(Operator Instructions) Well, at this time it appears that we have no further questions, we'll go ahead and conclude the question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Once again, we want to thank you all for your time this morning and we look forward to the next chapter in the Brixmor story. Have a good day.

And we thank you, sir, and to the rest of the management team for your time also today. The conference call is now concluded. At this time, you may disconnect your lines. Thank you and have a great day, everyone.