5/2/2023
Greetings and welcome to the Bricksmore Property Group first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your hosts, Stacey Slater. Thank you. You may begin.
Thank you, Operator, and thank you all for joining Bricksmore's first quarter conference call. With me on the call today are Jim Taylor, Chief Executive Officer and President, Angela Ahman, Executive Vice President and Chief Financial Officer, and Brian Finnegan, Executive Vice President, Chief Revenue Officer. Mark Horgan, Executive Vice President and Chief Investment Officer, will also 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. Given the number of participants on the call, we kindly ask that you limit your questions to one or two per person. If you have additional questions regarding the quarter, please re-queue. At this time, it's my pleasure to introduce Jim Taylor.
Thank you, Stacy, and good morning, everyone. Our results this quarter once again underscore the proven tenant demand for our well-located centers, and most importantly, the outstanding execution of the Bricksmore team in not only delivering growing value for our stakeholders, but positioning this platform for continued outperformance. Highlights for the quarter include our growth in overall occupancy to 94%, a record for the company, in an occupancy level that not only grew on a year-over-year basis, but also sequentially during what is typically a seasonally low quarter. Our continued momentum in small shop occupancy as well, which grew to 89.3%, another all-time record for the company. Our new and renewal leasing spreads of 43% and 14%, respectively. Our average rate on new and renewal leases is over $22 a foot. which grew our average in-place rent to $16.46, showing we have room to run while remaining disciplined with the capital to drive that growth. Our growth and expense recoveries, even while delivering a higher operational standard of excellence to our tenants. Our delivery of another $14 million of reinvestment during the quarter at an incremental return of 10%, bringing our total delivery since we began to $885 million at an incremental 11%. and our successful harvesting of $125 million of lower growth non-core assets at a blended cap rate well inside our implied cap rate. Bottom line, we are proud of how our durable value-added business plan continues to deliver, with same-store NOI and FFO growth during the quarter of 4.9% and 3.5% respectively, results that I believe will compare favorably within the sector. as we all face declining prior period rent collections, tenant disruption, and higher interest rates. Importantly, Bricksmore is proving real-time the quality of our portfolio, as well as the cumulative momentum of our value-added execution. In just a few minutes, Brian will provide some additional color on our robust leasing activity, our progress on recaptured space, and the continued strong demand from growing tenants. And then Angela will provide additional color on our operating results, our strong and liquid balance sheet, as well as our improved outlook and guidance for the balance of this year. I'd like to focus on the unparalleled visibility our execution provides on forward growth, particularly in an environment of increased disruption that we've been preparing for the last several quarters. That visibility begins with the $60 million of AVR that we've commenced over the past year. for which we will get the full benefit of in the coming 12 months. Second, we have our signed but not commenced lease pipeline, which has $56 million of ABR that will commence as Angela will detail in a minute over the next several quarters. Third, we have nearly $38 million of leases in our forward new leasing pipeline. And finally, we have an even larger amount of ABR under LOI. This cumulative activity will propel growth that we believe will be at the top of the sector for the next several quarters, even through much more significant levels of disruption. And please remember, the spreads we continue to achieve underscore the competitive advantage of our attractive rent basis, allowing us to unlock value as we execute our plan. Importantly, this leasing momentum is also driving our value accretive reinvestment pipeline. which currently stands at $360 million at an incremental return of 9% and a gross return several hundred basis points higher. Not only are we creating huge value even in a higher interest rate environment, we enjoy the flywheel effect of follow-on small shop leasing, growing rate, and lower applied cap rates that the center has impacted. Lastly, we have the free cash flow to fund our reinvestment pipelines, on a deleveraging basis for the next several years without having access to capital markets. Simply put, we benefit from an all-weather strategy of delivering growth. We also enjoy a strong balance sheet with debt EBITDA 6.1 times, a very well-laddered debt maturity schedule, and over $1.2 billion of capacity. Looking forward, I believe this strong balance sheet position may unlock some interesting acquisition opportunities as private asset-level borrowers face refinancing capital requirements in an environment of constrained liquidity. But importantly, as always, expect us to remain disciplined, as our self-funded internal growth strategy already provides us with visibility on achieving top-of-the-sector growth. With that, I'll turn the call over to Brian for a more detailed look at our leasing activity and outlook. Brian?
Thanks, Jim, and good morning, everyone. We drove yet another quarter of outstanding leasing productivity as our team continues to capitalize on robust retailer demand in a supply-constrained environment, attracting great tenants to our portfolio at much higher rents. The demand for space is coming from a broad range of tenants that are focused on expanding and investing in their physical store footprints, including leading operators in the off-price, health and wellness, specialty grocery, restaurant, and service categories. The transformation of this portfolio is also putting us in a great position to continue to capture an outsized share of retail demand going forward. This was evident during the quarter as our team added new leases with best-in-class retailers such as Target, PetSmart, HomeSense, Five Below, Barnes & Noble, Planet Fitness, Chipotle, First Watch, and Bath & Body Works. We have also leveraged this demand to proactively recapture at-risk tenant space and quickly advance new leases with tenants that will improve the overall appeal of these centers. This is clear on our progress out of the gate with Bed Bath. At year end, we had 19 Bed Bath locations representing 60 basis points of ABR. As of today, we have control of 10 of these locations and have already leased two to great tenants, Sprouts Farmers Market and HomeGoods. Our team is well underway in leasing the remaining space with leases and LOIs out to multiple retailers. primarily single-tenant backfills in the off-price, home, health and wellness categories at rents that are in line with the overall 35% to 40% growth in new leases that we have been achieving the last several quarters. What is particularly encouraging and important to note is the speed in which we have executed leases on recaptured space, with deals being completed in under 90 days. This really demonstrates the strength of these locations and how quickly tenants want to open in our centers. As we look forward in the year, we continue to be encouraged by the depth of tenant demand, putting us in a great position to not only navigate the disruption, but to continue to attract great tenants to our centers at among the highest rents we've ever had. With that, I'll hand it over to Angela for a more detailed review of our financial results. Angela?
Thanks, Brian, and good morning. I'm pleased to report on a very strong start to 2023 that positions us well to respond to rising levels of tenant disruption and macroeconomic volatility. May read FFO was $0.50 per diluted share in the first quarter, driven by same property NOI growth of 4.9%. Base rent growth contributed 500 basis points to same property NOI growth this quarter, reflecting the continued successful transformation of our portfolio and the strength of the current leasing environment, which have resulted in significant occupancy growth at rent per square foot levels well above our portfolio average. In addition, net expense reimbursements and percentage rents contributed 120 basis points and 20 basis points respectively. As anticipated, revenues deemed uncollectible detracted 150 basis points from same property NOI growth, primarily due to the ongoing moderation of out-of-period collections of previously reserved amounts. As Jim highlighted earlier, we achieved record total lease occupancy during the first quarter of 94%, driven by a 20 basis point sequential increase in the anchor lease rate to 96.1%, and a 10 basis point sequential increase in the small shop lease rate to a record 89.3%. Our continued leasing momentum resulted in a spread between leased and billed occupancy of 400 basis points at the end of the quarter, up 40 basis points since year end. In addition, our total signed but not yet commenced pool, which includes an additional 50 basis points of GLA related to space that will soon be vacated by existing tenants, totaled $56 million of annualized base rent, of which we expect $36 million, or approximately 65%, to rent commence during the remainder of 2023. As Jim and Brian have both highlighted, we fully expect that recent retailer bankruptcy announcements will result in occupancy pressure as we move through this year. That said, the significant and near-term weighted nature of our signed but not yet commenced pool will help to minimize the impact of retailer disruption on our operational and financial metrics, while also allowing us to accelerate our efforts to harvest the below market rent basis inherent in many of these spaces and set the stage for future growth. From a balance sheet perspective, we ended the quarter with debt to EBITDA of 6.1 times, a fully unencumbered balance sheet, 99% fixed rate debt, and total liquidity of $1.4 billion. Subsequent to quarter end, we utilized $200 million of our liquidity in the form of our delayed draw term loan to tender for $200 million of our 2024 unsecured bonds. extending the maturity through 2027 at swapped fixed rate pricing well inside of where we could issue new unsecured bonds today. As a result, we now have only $300 million of remaining debt maturities through year-end 2024. In terms of our forward outlook, we have narrowed our 2023 guidance for same property NOI growth to a range of 2% to 3.5%, reflecting improved expectations for base rent and net expense reimbursements at the lower end of the range. Our assumptions for revenues deemed uncollectible remain consistent with our previous guidance of 75 to 110 basis points of total revenues for the full year. Please note that out of period collections in the second quarter of 2022 were materially higher than in any other quarter during the year, creating a challenging comparison for second quarter 2023. In addition, the midpoint of our same property guidance range continues to reflect approximately 150 basis points of year-over-year impact related to recently announced or anticipated bankruptcy activity, which is reflected in our expectations for base rent and net expense reimbursement. Approximately half of the 150 basis point impact is related to store closures or lease rejections that have occurred to date, while the remainder is related to potential additional disruption from tenants currently in bankruptcy and from future bankruptcy filings that may occur during 2023. We have also raised our guidance for 2023 NAIREAD FFO to a range of $1.97 to $2.04 per diluted share. In addition to our revised expectations for same property NOI growth, our revised FFO guidance also incorporates the recent $200 million tender, which will result in the recognition of a $4.3 million gain on debt extinguishment in the second quarter. And with that, I will turn the call over to the operator for Q&A.
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Jeff Spector with Bank of America. Please proceed with your question.
Jeff, you on?
Yes, I'm sorry about that. I'm here. Thank you, and congratulations on the quarter. My first question is on acquisitions. We recently saw you, and I know we talked a little bit about acquisitions during our meeting, but given you commented on potentially taking advantage of opportunities in the future, I guess where is the market today? Do we have any more clarity on pricing?
I think the market is still in transition. So we really haven't seen enough deal flow to establish where pricing has moved, but there's clearly been upward pressure because of where interest rates have moved. Mark, I don't know if you have any additional color.
Yeah, I think it's clear there's good demand for assets. Pricing's moved out probably 100 basis points at least since the end of 21. So from a forward perspective, we think we'll start to see assets that make more sense from a risk-reward perspective later this year. And sellers really are starting to understand where the market is, and the bid-ask spread is narrowing. The market does remain pretty slow at this point, but we're cautiously optimistic. We'll start to see better opportunities here as the year progresses.
And Jeff, we can be patient, right? And so we are looking at a lot of opportunities, but we'll wait when we feel it's opportunistic.
Okay, thank you. And is there something in particular that you would focus on, whether it's one type of open-air center versus another or a region?
You know, it would be consistent with what we've already done to drive value. So we'd be looking for centers in and around the markets that we currently serve today so we could continue our clustering strategy. And importantly, we're looking at centers that have some value add component to it, whether it's through reinvestment and redevelopment, additional density, mark to market in the rents. We expect to see some interesting opportunities going forward, of course, because of the tenant disruption that we're seeing, as well as, as I mentioned in my prepared remarks, tightening lender requirements as it relates to refinancing. You know, we haven't fully seen that work through yet, so when it does, I think we'll be ready, but it will be consistent from an overall strategy standpoint with what you've seen us execute in the past.
Great. Thank you.
You bet.
Our next question comes from Todd Thomas with KeyBank Capital Markets. Please proceed with your question.
Hi. Thanks. Good morning. Angela, you mentioned that there might be some occupancy pressure in the near term as a result of some of the bed bath space that you anticipate recapturing. I guess two questions. One, you have a lot of positive momentum in place. Do you expect occupancy to decrease in the near term or perhaps just not increase? further as you recapture some of that space. And then second question, you know, maybe for Brian, you know, do you anticipate that the recapturing of space from Bed Bath, you know, not just in Bricksmore's portfolio, but maybe across open air altogether, do you expect that space to be a potential risk that, you know, could throw, you know, certain markets perhaps out of equilibrium a little bit to some extent?
Sure. I'll take the occupancy question first, Todd. You know, you're right to point out that we have a lot of momentum going into this year. We talked about how significant the near-term weighted nature is of the sign but not commence pool. And there is just under 2 million square feet of that 3 million square feet is expected to rent commence over the course of this year, which is very significant, several hundred basis points from an occupancy perspective. We continue to see outside of bankruptcy situations very high retention rates across the portfolio. So while there will be some move-outs, we continue to operate in an environment where those move-outs are pretty muted, again, outside of the bankruptcy situation. Based on the tenants who have filed to date and our expectations around the liquidation of some of those platforms, we believe we could still post a pretty healthy occupancy increase over the course of this year or through year-end. I think the question is really going to be whether or not there are additional filings over the course of this year, and we feel very comfortable that we've adequately accounted for any additional disruption within our same property NOI guidance range. But the timing of that activity and the ultimate impact in terms of restructuring versus liquidations will make an impact on occupancy. Still feel very confident we'll be in a position, or certainly hopeful we'll be in a position to continue to move occupancy higher given that signed but not commenced tailwind.
Yeah, and Todd, just on the overall supply dynamic, I mean, just remember that these boxes are coming online in a market that has been incredibly supply-restricted the last few years. We're coming off two years of record low move-outs. All of the names that have filed have been on folks' radar for a long time. Our team has been proactively marketing these spaces. I think the other thing you're seeing broadly in the market is retailers bidding on this space. You look at Five Below, who took out 30 Tuesday morning spaces. And as we look at the demand that we're seeing for the bath boxes, with the LOIs and leases we're negotiating in addition to the ones we're already signed, we don't think this materially alters the supply dynamic really at all. You have great operators that are expanding in the specialty grocery, off-price, health and wellness segments that just are really looking for a lot of good boxes, good boxes that we have in the portfolio. So overall, we feel pretty comfortable with where the supply dynamic is despite the space coming back online.
All right, great. That's helpful. And then just last question on the space that you're getting back. Sounds like you're expecting a good portion of that to be single-tenant backfills. What's the downtime that you're anticipating before you would have rent commence in those spaces?
It's a great question. All but one of the spaces we're negotiating on right now are single-tenant backfills. So we're confident we can start to see this space come online in 24. It's potentially the earlier part of the year, but we're in negotiations right now and feel really comfortable with that pace in 24 overall.
Okay, great. All right, thank you.
Our next question comes from Handel St.
Just with Mizzou. Please proceed with your question.
Hey, good morning. Thanks for taking my question. First one, Maybe for you, Angela, curious, what's driving the expense recovery here? You're at 89% in the first quarter. I think historically you've been more mid-80s. And is this a level you expect to sustain? Is it a new norm, perhaps? Thanks.
Yeah, thanks, Handel. You know, the recovery ratio in the first quarter does look high at 89.6%. That has to do with a couple things, but significantly with the – the mix of expenses we experienced in the first quarter just being a little bit more highly recoverable. We do think for the full year that that line item, net expense reimbursements, are going to be a positive contributor to same property NOI growth, somewhere in the 50 to 75 basis point range. But that recovery ratio is going to moderate as we move through the year, and you just sort of get a different mix of expenses as we move through the year. The positive... positive improvement or positive contribution to NOI over the course of the full year is really being driven by efficiency and spending, certainly, but also most significantly by that significant increase in weighted average bill occupancy.
Thanks for that. And one more, if I could, just on the snow sitting here at 400 basis points. Clearly, it's just, you know, gives forward visibility, but it's a bit higher than I think a lot of us were expecting. especially as physical occupancy continues to get higher here. So I guess I'm curious, is there anything that you're seeing with the timelines regarding rent coming online that could be impacting that? And should we expect that to remain similarly high over the next couple of quarters? And what does that suggest for occupancy, perhaps, over the next 12, 18 months? Thanks.
Yeah, the pipeline is not growing because of delays in getting rent commenced. We commenced more rent during the first quarter than we had originally expected. The pipeline continues to grow just because of good momentum on leasing productivity and the fact that we're just continuing to lease up some of that vacant space and benefit from some of the tailwinds of the reinvestment activity over the last few years. That's also why you've seen, you know, the small shop component of the signed but not commenced pool continue to grow as well. So no issues in getting rent commenced. Things continue to happen, you know, in line with our expectations or a little bit earlier, but no delays to note.
Thanks, Handel.
Our next question comes from Craig Mailman with Citi. Please proceed with your question.
Hey, good morning. Angela, maybe just to circle back on bad debt. I know you guys didn't adjust it here, but I'm just kind of curious, one, whether conversations have increased with any tenants outside the known bankruptcy that would make you feel like there could be more kind of distress coming as the year progresses. And two, just given the cadence of seasonality here, from an impact to earnings, does it feel like even though you have the same level of bad debt, maybe the FFO impact in 23 could still be a little bit less if it's more back-end weighted at this point?
Thanks, Greg. No, I'd say a couple of things. We're not at this point seeing any issues in any significant way as it relates to rent collections from cash basis tenants or additional disputes or anything that would move our guidance for bad debt higher. We did come in a little bit lower than that in the first quarter. Some of that was expected just based on things we knew about going into the first quarter, which is part of why we maintain the guidance for the full year. But I think also just given the macroeconomic volatility, I think you heard Jim, Brian, and I all allude to, it felt prudent at this point in the year to keep the range where we had it and wait to see how things play out as we move through the middle of the year here. In terms of the impact from FFO guidance, I guess I would just remind you that the bad debt guidance we gave is 75 to 110 basis points of total revenues. So that translates into a specific dollar amount. It's, give or take, $8 to $12 million of bad debt expense over the course of the year. So even if that ends up being more back-end or second-half weighted, it would have the same impact on FFO.