What Investors Should Know About the Recent Blackstone IPO

I recently wrote a piece on how the Blackstone Group (NYSE: BX  ) has begun to reap some gains from real estate crops it has planted over the past few years. This isn't surprising since it's a big part of what Blackstone does: It uses private equity capital to buy assets, then it fixes them up and sells them.

This past week, it spun off Brixmor Realty (NYSE: BRX  ) , raising $825 million while retaining more than 70% ownership in the $6 billion market-cap retail shopping center REIT. With that level of Blackstone ownership, if investors are interested in the Brixmor IPO, why not consider buying shares of Blackstone Group? 

For the sake of comparison, Kimco Realty (NYSE: KIM  ) and DDR  (NYSE: DDR  ) have similar portfolios and strategies to Brixmor. Here's how they've both done in the past 12 months compared to Blackstone:

 KIM Total Return Price Chart

The Brixmor prospectus indicated that it expects to pay a $0.20-per-share dividend quarterly for a yield of 4% based on the $20.00-per-share IPO price. Here is a quick comparison if we just look at the dividend yields of the same group as above:

KIM Dividend Yield (TTM) Chart

Brixmor's projected 4% yield is right in the mix with its closest retail sector REIT competitors -- and, as it just so happens, with Blackstone, its sponsor. Let's look at how similar these three REITs are in terms of number of assets, portfolio size, and occupancy percentage.

Kimco Realty has been around the longest, a publicly traded REIT since 1991 with a BBB+ debt rating from S&P. It also has the largest portfolio, which contains 874 properties totaling 128 million square feet in 43 states, Puerto Rico, Canada, and Latin America. The portfolio was 93.7% leased as of September 2013.

DDR is an owner and manager of 435 value-oriented shopping centers representing 115 million square feet in 39 states, Puerto Rico, and Brazil. That is after announcing on Oct. 1, 2013, that it acquired the ownership of 30 power centers from a Blackstone limited partnership -- more than 11 million square feet for $1.46 billion. DDR had owned 5% of the venture and provided leasing and management services. That portfolio was 93% occupied.

Additionally, on October 1, DDR announced it acquired seven prime shopping centers, comprised of 2.4 million square feet of GLA, in a partnership with Blackstone L.P. VII, the same entity that just sold the 95% stake in 30 power centers to DDR. 

Currently, Blackstone owns 95% of the common equity of the second joint venture, and DDR owns the remaining 5%, with the latter providing leasing and management services. This sounds like another Blackstone retail portfolio sale being teed up for DDR.

So Blackstone is hedging its bets with competitor DDR while sponsoring Brixmor Property Group. I suppose that's business as usual.

So what about Brixmor?
Overall, the newly minted Brixmor has a similar look and feel to Kimco and DDR. Brixmor went public on Oct. 29, 2013, owning 520 shopping center properties totaling 87 million square feet located in 38 states. According to the Brixmor website, it is the largest landlord to both Kroger and the TJX Companies -- with more than 70% of its shopping centers having a grocery anchor.

The Brixmor portfolio currently has a lower occupancy rate of 91% compared to its competitors. Here is why I feel this is an opportunity rather than an overall concern.

The current Brixmor average base rent, or ABR, per square foot is $12.44 -- there appears to be an opportunity for Brixmor to increase rates on expiring below-market leases during the next few years.

Since there has been very little new shopping center square footage constructed recently, Brixmor feels this represents a significant near-term opportunity to mark a substantial percentage of the IPO portfolio to market.

Brixmor is taking advantage of the lack of new centers being constructed to upgrade properties. It currently has 25 active projects with an aggregate cost of almost $100 million in the works and a targeted net operating income yield of 15%. 

It appears the building blocks are in place for Brixmor to increase funds from operations, as it expects to maintain the current pace of redevelopment for the foreseeable future.

Investor takeaway
The Brixmor IPO has been initially well received, trading a bit higher during its first week. However, a risk investors should keep an eye on is the projected Brixmor dividend, which was based on a high distribution of free cash flow, almost 98%. In addition, macro concerns are a cloud over most REITs as a potential increase in long-term interest rates may drive down stock prices to increase a REIT's risk-adjusted return.

Blackstone Group is not an easy company to understand. There are a lot of related entities and moving parts. However, given Blackstone's proven ability to raise capital, pay a competitive dividend, and generate attractive total returns, I think it behooves investors interested in owning Brixmor to take a long look at its controlling stockholder.

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