Austin Hankwitz: Hey, everyone, and thanks for tuning in to a very special edition of Seeking Alpha’s CEO interviews. For those of you who might be unfamiliar with myself, my name is Austin Hankwitz. I’m a finance and investing content creator, Co-Founder of Witz Ventures, author of the newly launched Cash Flow Freaks Marketplace and co-host of the weekly show Stock Market Live here on Seeking Alpha.
Through my journey as a content creator, I’ve had the pleasure of interviewing executives from dozens of incredible private and public companies. However, today might just take the cake.
Joining me is Jim Taylor, the Director, CEO and President of Brixmor Property Group (NYSE:BRX). Brixmor is one of country’s largest owners and operators of open air retail shopping centers. The company has a nationally diversified portfolio of nearly 380 shopping centers with over 5,000 national, regional, and local tenants. The company is very intentional about owning and creating properties that are the center of the communities that they serve.
With an incredible 93% lease rate, Brixmor is the landlord behind major retailers like T.J. Maxx, Kroger, Dollar Tree, Publix, Whole Food, Albertsons and many, many more. Jim Taylor joined Brixmor Property Group in 2016, bringing with him over 20 years of extensive commercial real estate experience.
His passion and leadership is grounded in a deep belief that retail shopping centers should do more than reflect the surrounding community. They should be an integral part of local daily life. Jim’s impressive list of experiences include undergraduate and law degrees from the University of Virginia, a decade of work between Price Waterhouse and Hunton & Williams, leading real estate investment banking for Eastdil Secured under Wells Fargo and being the EVP and CFO of Federal Realty Investment Trust.
Jim resume is incredible. Took me an hour to get through it. I’d love for you to maybe fill in any gaps I might have missed or maybe even share with us how you ended up leading Brixmor.
Jim Taylor: Thank you, Austin. Hi. And as you mentioned, the opportunity to join Brixmor came in 2016. And what I saw was the company that owns some great shopping centers, where you might have the opportunity to create real lasting value and growth by reinvesting in those shopping centers, selling out of the markets where maybe you didn’t have a significant presence and focusing your capital and your efforts on those markets where you saw good long-term growth fundamentals.
And importantly, the ability to achieve our purpose, which I’m so glad you highlighted, which is to own, operate, redevelop and create centers that truly are the center the community they serve. And that’s a journey. One that is very gratifying because you’re creating jobs, you’re creating economic opportunity, you’re honoring the community that you’re serving. And you’ve done your job well when that center is no longer a Brixmor center. It’s the community center. It’s where they go to get lunch, get coffee, shop for groceries, workout, get a haircut. see a doctor.
You know, the breadth of uses that happen in our centers is quite broad and really is intended to meet the daily needs of that particular community. So it’s been fun. The last six-plus years, we’ve recycled a significant amount of capital. We’ve reinvested over $800 million into our shopping centers at a very attractive incremental return, importantly driving ROI, not only on our investment. But when you transform a shopping center, you do great things in terms of occupancy and rate.
So you highlighted our occupancy of 9.3.3%,which we just announced this quarter. One thing to recognize is that’s a record for this company. And it’s a record not only in terms of overall occupancy, but also our small shops where we are nearly 89% leased, reflecting the continued momentum of a long-term deliberate, disciplined, and focused strategy of making our centers truly the center of the community.
Austin Hankwitz: I love that, right? I think the one that really hit home with me is the part that you mentioned like the doctor’s offices. I never thought about that, but you’re totally correct, right? I mean, why not offer such a vital resource to people where they’re already shopping, where they’re already going, right? So it does become the heart of that community.
So the first, I guess, broad question I have for you, Jim, can you give us a maybe two-minute overview of Brixmor for our audience who might be tuning in for the first time here, maybe adding some color as to where the company is today and perhaps where they could be headed in the near future?
Jim Taylor: Certainly. So we own about 380 open-air shopping centers. And as you mentioned, most of them are grocery anchored. So we’re a large landlord to Publix, Kroger, Albertsons, also specialty grocers like Trader Joe’s and Whole Foods and Aldi and Lidl. We’re also a very large landlord to value retailers such as T.J.Maxx in Burlington, fitness uses, health and wellness, beauty, quick serve restaurants, sit down formal restaurants.
Our breadth of uses is quite broad, and it really does reflect what is needed in that particular community. But I think it also speaks to the vibrancy and activity in our shopping centers. In fact, if you look at the traffic in our centers versus where we were pre-pandemic, we’re actually higher than where we were in 2019 in terms of traffic by 7%, 8%, 9%, sometimes even 10%, which really reflects the key role that shopping center plays for the consumer and importantly, the retailer.
One thing to realize is that the store is actually the most profitable channel for many of these retailers. And it’s also a very flexible format for them to serve their customers. Their customers want to be served.
So we, at Brixmor, have really capitalized on that. And partnering with these tenants to bring their concepts to the communities in doing so in a way that drives importantly great returns for our investors. And we’re going to continue doing that.
One thing you can count on is that we’re going to be disciplined, that we’re very focused on the returns that we generate from capital, but we’re also very committed to long-term growth and cash flows and value.
So as you bring these better uses to these centers, you drive more traffic that tenants generate more sales. You’re able to pay more rent. You’re able to add density to the projects, bringing in more income, driving better rate, driving better occupancy, and you need look no further than our actual statistics. When you look at our record rate, our record occupancy, you look importantly at the growth in that rate and occupancy over the last several years, and we have room to run.
So when you think about where Brixmor will be four to five years from now, we’ll have grown our cash flow, our centers will be better. We’ll probably own more in our core markets as we recycle capital out of markets that are less integral for our growth plans, and I think continue to deliver outperformance.
Austin Hankwitz: I really appreciate that play by play. It’s one thing to hear you say those things on an earnings call, Jim, but it’s another thing to have it intimately share with you in an interview like this. So this is great.
Speaking of earning calls, there has been a lot of earnings calls that the big question brought on to the management teams across generally, every company right now is inflation and economic uncertainty, right, the economy. The U.S. housing market has definitely cooled off a bit and there’s likely more of a correction on the horizon for single family homeowners. But how do you think the retail real estate market is being impacted by inflation and the economy? And specifically, what’s driving the persistent demand for retail spaces within well-located community shopping centers during these unpredictable times?
Jim Taylor: It’s a phenomenal question. And one thing to think where the retail industry is today versus previous cycles is that we have had literally no news to supply. And that’s a critical thing to recognize. So unlike some of the other property types that you mentioned, there has been very little open-air retail constructed over the last 10 years. So the supply demand is very much in balance.
The second thing to consider is from the demand side, the stores remain very profitable channels of distribution and serving the customer for the retailers themselves. E-commerce is very expensive. Logistics, packing, fulfillment, shipping. oftentimes in businesses that have pretty thin margins. The store is the retailer profitable way to serve the customer, not only within the store, but on the curb and fulfillment out from the store, in a location near and proximate and convenient to that customer.
So that retailer demand, I think, is very broad-based. It’s very healthy. We certainly do look forward and expect higher levels of tenant disruption as we move through this period. But the portfolio is stronger than it’s ever been. The credit quality of the tenants is stronger than it’s ever been. And we believe that that demand from better tenants, it better rents, will continue over the next several years.
In part, because of the supply demand, situation has been pretty well balanced. And real time, you see it in the traffic numbers, you see it in the tenant sales numbers, all speaking to real good momentum in health and vitality.
The last thing I’d say is, as you move through periods of economic disruption, the consumer certainly gets impacted, but they’re still going to shop for groceries. They’re still going to need clothes. They’re still going to believe or not buy a cup of coffee. There is a lot of activity that happens within our shopping centers that’s not recession proof, but recession resistant. And it becomes part of the daily life of the consumer and an important part.
So, we’ll see whether this is a soft landing or a hard landing, and there’s a lot smarter people to prognosticate on that. But I really like how we’re positioned for not only next year, but the next several years.
Austin Hankwitz: I think whenever I was doing the research into Brixmor properties, what really stood out to me was to your point about these, the specific portfolio being the grocers. It is the T.J.Maxx’s. And it’s these places that people will still end up despite macroeconomic uncertainty.
You mentioning that is actually a really good segue into my next question. It’s the portfolio transformation, right? So since 2019, you’ve seen implied total net operating income growth of 8.8%, while your competitors have seen under 5%. Your new lease spreads during 2022 have been nearly 14% higher than competitors. Your annualized base rate change has been over 2.5% higher than competitors as of recent.
And just in Q3 alone, you executed new leases with major companies like Chick-fil-A, Raising Cane’s, Fresh Market, J.Crew and Ulta Beauty. So what’s the secret sauce here, right? Like, you all transformed this portfolio in such a meaningful way. What did you specifically change that might have catalyzed this impressive growth?
Jim Taylor: The key thing is recognizing that the best way to make money in this business is to take an older well-located shopping center and make it better, make it more relevant. Hopefully, you’re going in as we did with attractive rent basis because that’s the key to making money. If you’re sitting on high rents, it’s difficult to bring in a new tenant, bring in the capital necessary to bring in that new tenant and make money if you’re at a high going in rent.
So, we are blessed, if you will, by very attractive rent basis and a very attractive portfolio, which allows us to bring in, as I like to simply say, better tenants at better rents and make money doing so. And that’s been what we’ve been doing over the last 6.5 years.
There’s nothing really secret to the sauce other than a very disciplined asset by assets, space by space, focused on what is the right tenant, what can we do to drive our return on investment, how will the impact of this investment translate into continued performance for the balance of the shopping center, and where we don’t see that opportunity we sell. And we’ve sold over 2 billion of shopping centers.
In fact, when I started, we were at 540 shopping centers. Now we’re a little over 380, generating comparable cash flow off of a much smaller base of assets. And cash flow is ultimately how you measure your success. So are you generating growth and the returns on the capital you’ve deployed?
So I would tell you that our relative outperformance has been driven by our ability to really mine for value within our existing portfolio, continue to benefit from the follow-on prospects, and remain disciplined so that where we don’t see an opportunity to create good long-term growth in cash flow, we exit.
Austin Hankwitz: I – it’s great that you mentioned, right, this 2 billion in exit. I think that was probably the biggest eye opener for me when I was going through your Investor Relations materials, this presentation, right? I said, wow, look at the $2 billion, it was – it just bothers me to think about.
But another thing that really caught my attention was this idea of creating value through reinvestments, right? You’ve stabilized over 220 different projects whether it’s in Louisville, San Francisco, Tampa, Minneapolis. I understand the general premise, but redevelopment generally takes less total investment as opposed to a ground-up development, I’d get that.
But how are you creating so much value at one-third of the investment cost? Maybe can you walk us through the reinvestment strategy for Brixmor?
Jim Taylor: Sure. So when we make that comparison, what we’re comparing it to is ground-up development. So you start with an existing proven retail location where you don’t have to – unlike a ground-up development, you don’t have to convince retailers what to traffic patterns will be or could be with the transformation.
The second is it’s a very flexible format. When you think about the buildings themselves, they’re basically industrial buildings with the HVAC and services on the roof and pretty facades. What that means is you’re not dealing with multiple level buildings with vertical transportation, complicated heating and cooling. You have the ability to reconfigure, downsize, expand, move walls, that type of thing, and do so in a manner that’s pretty efficient.
The other thing is that you have strong demand from really vibrant retailers to go into these open-air centers where you can take, say, an old Kmart box and bring in a Sprouts and a Burlington and a TJ concept. And suddenly, you take what was a zero traffic generator and drive a lot of traffic in that building, which then has follow-on benefits for the balance of the center in terms of occupancy and rate.
As you recapture some of those boxes, you might also unencumber the outparcels and bring in a Chick-fil-A, as you mentioned, or a Chipotle, or some other vibrant use like a Starbucks on the out parcel in what was a parking lot producing no income prior.
So as you can see, as you begin transforming these centers, you generate more vibrancy and follow-on benefit, but you’re also taking less risk. You’re taking less risk because generally, you’re not committing any significant capital until you have to sign leases, unlike a ground-up development where you’ve got to tie up the land, get zoning and entitlements, and it’s a much longer investment period. For a redevelopment, typically, you can get one start to finish in 18 months to two years. Ground-up development can be several years.
And then lastly, and you kind of hit on this point, and that is that your relative returns are typically higher for reinvestment when you’re coming in at an appropriate rent basis. So we’ve generated nearly a 11% incremental returns on the 800-plus million of capital we’ve reinvested in our shopping centers. If we were doing ground-up, those returns would likely be closer to 6% to 7%. So that spread is a multiplier, right, in terms of to create the same amount of value and ground-up development as you would in reinvestment, you’d have to do three to four times the level of activity based on the spread.
So it’s lower risk, higher return, has the follow-on benefits of leasing and rate that I’ve talked about. And importantly, you’re doing something for the community, bringing them something that they can be proud of that respects the community, and the community supports.
Austin Hankwitz: I love it. This has been a lot of fun, Jim. This has been wonderful. Thanks for walking us through the incredible business model of Brixmor.
The last question I have here are kind of general questions coming your way. The first one is kind of a high level. Where do you see retail real estate a decade from now? Maybe like two decades from now, kind of crazy speculation? Any ideas?
Jim Taylor: I think you’re going to see local retail real estate continue to evolve and be vibrant. You’re going to see an even broader range of uses. You’re already seeing it today. We talked about health and wellness and medical. But having a physical presence near the consumer, I think is going to be critical for a wide range of businesses beyond what people think about as traditional retail.
I think you’re going to see more density on many of these sites because there’s going to be less need for parking. And I think communities are really embracing more green alternatives for the parking lot. And I think that’s going to continue to evolve and transform the way the centers interact with the community. And I think you’re going to see some non-retail uses come into these centers over time as people try to benefit from the traffic and other activity being generated. So I think it’s exciting.
The other thing I would tell you is as long as the supply demand picture remains in balance, and I think it’s going to, I think that you’re looking at a run of several years of good rental rate and growth, which is incredibly important in an inflationary environment. And the irony is the disruption in the capital markets that we’re seeing today is forestalling new construction, right? And that has a multi-year impact in terms of the new supply when you think about the lead times that are required for new construction.
So as I look forward, I think the future for the next several years for open-air retail is exciting. I think it’s going to be dynamic. And I think it’s going to create great opportunities for disciplined investors to drive real value.
Austin Hankwitz: I like that word dynamic. You know what’s dynamic, Jim? Nashville. Nashville is dynamic. I love living here at Nashville. Any plans of maybe you have your eyes on any cool communities where it’s like, wow, we need something in Nashville. I need something in Tampa. Any cool ideas there for the…?
Jim Taylor: We own a couple of assets in Nashville, and we’re always…
Austin Hankwitz: I’m really okay.
Jim Taylor: We’re always looking at bringing new centers into our portfolios in great markets like, as you mentioned, Nashville, Tampa, Southwest, Florida, Southern California, Texas. We’re a large owner in Philadelphia and up through the Northeast. And our strategy is really one of clustering our investments in great growing markets like that.
And the reason is you actually do better at the top line when you have more assets in a particular market. So we’d love to be bigger in Nashville. It’s expensive, so we’ll remain disciplined. Perhaps this disruption will give us an opportunity to find some great centers to add what we already on.
Austin Hankwitz: This has been an awesome opportunity, Jim. Thank you so much for joining Seeking Alpha’s CEO interviews. Again, I’m Austin. This is Jim Taylor, the CEO of Brixmor Property Groups Jim, this has been great. I appreciate it. We’re going to sign off here.
Do you have any last words you might want to share with people listening right now?
Jim Taylor: It’s just a lot of fun and I invite people who’d like to learn more about the company to come to our website brixmor.com. We’ve got great presentations. Follow us on LinkedIn. You’ll see some of the transformation that Austin and I’ve talked about at a center level. And I think you’ll find that it’s a great company and a great story.
Austin Hankwitz: Most definitely. Thanks, everyone.
Jim Taylor: Thank you, Austin.
Be the first to comment