With little new construction in the grocery-anchored strip-mall arena, sector specialist Brixmor Property Group (NYSE:BRX) offers investors a unique investment proposition. After selling off unwanted properties and reducing debt under the guidance of Blackstone (NYSE:BX), the recently IPOed real estate investment trust (REIT) is now in a position to get back on the growth path. Only that growth will come more from within than from acquisitions.
A protective embrace
Brixmor is new to the public markets, but hardly a new company. But the story behind its current market position dates back to the 2007 to 2009 recession. This was a troubled period for most companies, but was particularly difficult for Brixmor because it was over leveraged under a previous owner in a weak retail market.
During a recent interview, CEO Michael Carroll explained to me that this forced Brixmor to compete for tenants largely on price. So, between 2007 and the middle of 2011, the company signed leases at low rates and invested little in long-term upgrade projects. Not a compelling business model.
In mid-2011, however, Blackstone bought Brixmor. Often when a private equity shop buys a company it will laden its acquisition with new debt and pay itself a fat dividend. This helps ensure a return on the investment. But to its credit, Blackstone did the exact opposite. It started working to pay down Brixmor's debts.
A part of that process was selling off less desirable assets. More than 230 of the company's 717 properties were put on the block. The proceeds were largely used to reduce debt. But this move also fine-tuned Brixmor's property portfolio, leaving it in a stronger industry position as well as a stronger financial position.
Back to the future
In late 2013, Blackstone brought the "new" Brixmor public, raising over $890 million. Almost $825 million of that was used to, "pay down amounts outstanding under our unsecured credit facility." Blackstone retains about 70% of the voting rights, so it effectively controls the REIT. So, at this point, there's little reason to believe that Blackstone will change the company's deleveraging path.
What Brixmor is set to do is raise rents. According to Carroll, the average lease rate is $11.93 per square foot, but new leases signed in 2013 averaged $13.69 per square foot, with new leases signed during the fourth quarter averaging more than $15 per share foot. That shows just how much potential is built into the company's portfolio of around 520 neighborhood shopping centers. Of course, the entire portfolio won't roll over at once, so this is an opportunity that will take years to play out.
Getting more valuable
Brixmor has plenty of leasing leverage, too. For starters, it fine-tuned its portfolio so it has well-situated assets. But according to Carroll, there's been little construction in this subsector, which makes good properties increasingly valuable. Just ask fast-growing retailers like Ulta (NASDAQ:ULTA), Dollar Tree (NASDAQ:DLTR), and Five Below (NASDAQ:FIVE).
Although these companies aren't likely to be anchor tenants, they do prefer to be in locations with lots of repeat business. Grocery-anchored shopping malls, which make up about 70% of Brixmor's portfolio, are a perfect fit. The above trio signed 23 leases with Brixmor last year.
How big an opportunity are retailers like these? Still small Five Below increased the size of its store base by 25% through just the first three months of 2013. Ulta, meanwhile, has added nearly 230 stores over the last two years, and now has 675 locations. With a national footprint and well-located shopping centers, Brixmor is in prime position to help these retailers continue their expansion.
And, of course, increase its rent roll along the way. That's good news for shareholders, too. The REIT currently pays a quarterly dividend of $0.20 a share, which, according to Carroll, is about 60% of adjusted funds from operations (a REIT measure similar to cash flow). That leaves plenty of room for dividend hikes even if rental growth turns out to be less impressive than hoped.
Nothing stodgy here
A grocery-anchored shopping center sounds downright boring, yet Brixmor's focus on this subsector and unique portfolio profile is anything but. Although it's new to the public eye, it's well worth your time to get to know Brixmor Property Group.