One of the biggest difficulties when it comes to real estate investment trusts (REITs) is growth. The easiest way to grow is to buy new assets, but there are only so many good assets to buy. This is why Brixmor (NYSE: BRX) is such an interesting story, given that it has another sizable growth arrow in its quiver that should keep paying dividends for years to come. Here's a quick look at what you need to know.
The core of the business
There's very little question about what Brixmor does -- it owns and operates a portfolio of community shopping centers (75% of rent), power centers (13%), and grocery-anchored regional centers (11%). With 389 properties, it's one of the larger REITs in the broader open-air retail space. Notably, roughly 70% of its centers have a grocery component, which is good because it draws repeat customers to the properties.
When the REIT IPOed in 2013, it actually owned a much larger portfolio, totaling around 520 assets. In 2016, it decided that just being big wasn't the right approach and started to sell off weaker assets so it could focus its attention on its best properties. Over the last five years, it has pruned nearly $2 billion worth of properties from its portfolio.
That said, there's some growth built right into the portfolio because Brixmor is able to roll over older leases to current rates. This has allowed the company to create a lease spread of around 20% when it inks new deals, a number partially driven by the effort to focus on the best assets in its portfolio.
Investors should like that, but Brixmor isn't the only retail landlord that benefits from this industry dynamic. This makes it important that this isn't the only way this particular retail landlord is growing its business.
Making things better
One of the ways REITs can grow is via acquisition. That's an issue to watch here, but Brixmor doesn't want to be big for big's sake. Indeed, it was bigger but chose to shrink. It's more likely that it will continue to rightsize its portfolio with a mix of buying and selling, trying to create a desirable mix of properties rather than the biggest portfolio. A much more important area to watch at this REIT is redevelopment.
In Brixmor's case, that means making improvements to a property to increase its value in some way. There's any number of things that could include, from something as simple as updating the look of a property to a more complex effort to add retail space via ground-up construction at a center with space that's not being fully utilized. This is a big deal.
Since 2016, Brixmor has completed around 170 projects at an average cost of around $4 million each. These projects have resulted in an incremental net operating income (NOI) yield of 11%. Clearly, this is a worthwhile effort, and it's nowhere near complete.
Brixmor estimates that it has $1 billion worth of investment opportunities in its portfolio. The goal is to deliver between $150 million and $200 million of redevelopment projects each year. In the first quarter, the company brought around $28 million of new development online and gave the green light to another $35 million or so worth of new projects. The near-term capital spending pipeline is in the $400 million space, which is about a two-year runway. There's a double benefit here.
First, the spending increases the cash that can be generated from a property. That is the result of improved assets leading to higher rents and an increase in the space that can be rented. Second, when properties generate higher rents, the market looks at the assets more favorably and affords them higher valuations. In other words, this is a material avenue for value creation, and it's built right into the portfolio.
Bigger and bigger
There's no question that 2020 was a difficult year for retail-oriented REITs. However, the pandemic really hasn't changed the internal opportunity Brixmor has to make good assets even better by upgrading them. In fact, now that the U.S. is starting to get a better handle on the coronavirus, Brixmor is likely to speed things up a little bit.
Indeed, with around $1 billion of potential investments either in the queue or on the drawing board, investors looking at Brixmor need to think about the REIT as more than just a strip mall landlord. Its execution on the redevelopment front is where the real growth story lies.