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Brixmor CEO Sees Big Upside to Grocery-Anchored Shopping Centers

April 22, 2014
Brixmor CEO Mike Carroll touts the company's large, geographically diverse grocery anchored portfolio as a 'streamlined, straight forward, pure-play'  story for investors.
Brixmor CEO Mike Carroll touts the company's large, geographically diverse grocery anchored portfolio as a 'streamlined, straight forward, pure-play' story for investors.
Blackstone Group LP raised eyebrows in 2011 when it acquired the U.S. shopping center portfolio owned by Australia-based Centro Properties Group in a $9 billion transaction.

After two years of balance sheet cleaning and portfolio repositioning, Blackstone took its shopping center portfolio back to Wall Street in October repackaged as Brixmor Property Group (NYSE: BRX), a REIT that owns and operates the largest wholly owned grocery-anchored shopping center portfolio in the U.S. -- 522 properties across 38 states.

Seventy percent of Brixmor's shopping center portfolio is anchored by major grocers like Kroger, Publix, Safeway, H-E-B, Giant Eagle, Stop & Shop, Giant, Jewel-Osco, ShopRite and Trader Joe’s. The $950 million initial public offering last fall -- which ranks as the largest community and neighborhood shopping center IPO in history -- successfully recapitalized Brixmor by paying down debt and achieving an institutional-grade capital rating.

Brixmor is headed by CEO Michael Carroll, who has expansive retailer relationships established over 21 years in the shopping center industry and has been involved in more than $1 billion in anchor space repositioning/redevelopment projects. Prior Brixmor's acquisition in April 2007 by former parent Centro, Carroll was executive vice president of real etate oerations for New Plan Excel Realty Trust, Inc., where he had worked in all areas of the business since 1992.

CoStar caught up with Carroll to discuss "the new" Brixmor's strategies and future prospects:

CoStar News: It may not seem so risky now but that was a gutsy move by Blackstone to buy Centro in 2011.

Michael Carroll: Yes, it certainly was a bold move at the time. They had been tracking the Centro situation since late 2007. It took a long time for Centro to become 'transactionable' because of various stakeholder-relation issues, mainly related to a cross-border lending group.

When it became transactionable, Blackstone understood the capital constraints Centro had been under for those four years. They understood that the underlying business had a good starting point -- good locations, infill markets, strong grocery anchors. The real opportunity was to buy something priced well below replacement cost, and that was their overall thesis. Centro couldn’t lease the vacant space because they simply didn’t have the capital.

With a few months under your belt since the IPO, how has entering the public market paid off for the company? How is it expected to continue rewarding investors going forward?

Every quarter that Blackstone owned the company (before taking it public), the same-property NOI growth was positive. In the latter period of that, it was running at about 4% -- that’s at the top end of our peer group. Blackstone was able to take advantage of the pricing discount coming in because they were willing to be bold at a time when others weren’t. NOI grew, and they took it public without having sold a single share of their stock. They've done nicely and made a nice multiple on their investment.

Were you surprised at the positive reception from investors to the IPO?

No. I’ve been with this business for a long time and fundamentally it’s very strong. It’s hard to operate a business like this without capital. What gave us a lot of confidence in the success of that IPO was what we did to reshape the business in the two-plus years with Blackstone. And all of it was done in the private market, so there was no dilution for public investors at all.

How has being a pure-play REIT helped your investment story?

After the Centro acquisition, we streamlined everything -- consolidated all the joint ventures, sold non-core assets or assets that didn’t fit or weren’t part of a pure-play community/neighborhood shopping center company, and we delivered the business. What really resonated with investors was that we were a pure-play company, and that we had done all that work in the private market, disposing of almost 240 assets totaling roughly 33 million square feet. When you think about the massive amount of properties that were disposed to reshape the company, that’s as big as a company like Retail Properties of America, and twice as big as a company like Equity One. The combination of all that put us in a position where investors saw us in a place where all our peers are trying to reach -- a streamlined, straight forward, pure-play company. We did all of that without dilution of shares.

And there are a lot of peers in your space. You've spoken about the ‘X Factor?’ What is that, and how do you differentiate from all the competition?

We have the largest wholly owned community/neighborhood shopping center portfolio in the U.S. The wholly owned component really resonates with investors. When we report same-property NOI of 4%, the investors know it will work its way down the income statement, to cash flow available for dividends, for debt repayment, etc. They know the cash is not diverted into other kinds of issues like currency hedges on overseas properties, or broken development projects, or minority interests in JVs.

Add in a lineup of very productive grocery anchors anchoring 70% of the portfolio, with sales of $525 per square foot, and it’s a high-quality asset base represented in the top 50 markets in the U.S. Then, you layer in the capital distress overhang from 2007-2011, the below-market leases that we have throughout the portfolio, and the general age of the portfolio.

Also, this is not a new construction portfolio. The benefit of that is you have long-term leases maturing on a fairly regular basis. With our redevelopment and repositioning effort, we have the clearest, easiest-to-understand internal growth drivers approaching 4% for the next several years. It’s just very straightforward, and that’s what we call our X Factor.

How does having a large redevelopment platform create an advantage in terms of attracting and retaining retailers and other tenants?

We have a very large portfolio across a very large geography. That (scale) gives us tremendous access to our retailers. They know they can spend time with us and can look at a multitude of sites across markets, as opposed to being able to show them only one or two sites in a market. That puts us on the inside with a lot of retailers -- we can really be a part of the strategic process when they're rolling out new stores and formats.

For example, we’ve been very active with Wal-Mart on their Neighborhood Markets stores. We worked with them on the initial rollout in Southern California and Denver and we're actively engaged with them in several southeast markets. That’s a coast-to-coast exercise, and very few owners can do that with a retailer.

Another example would be Publix supermarkets. We’ve been doing on-site replacement stores for Publix in many of our centers -- where they actually close their existing store and we rebuild a brand-new prototype store in its place. We recently did one of those with a 50-year-old store in Naples, FL, building a new store in six months. Ultimately, it was an opportunity for us to take a very old, dated lease and bring it to a market rent. And for Publix, to replace a truly outdated store.

How do you assess the risk of Sears/Kmart and its announced closures of multiple stores?

We’re very focused on tenant diversification. Kroger is our largest tenant at just 3.4% of annual base rents. The only other tenant above 3% in our portfolio is TJ Maxx. All the others, including Sears-Kmart, are below 2%. Sears Kmart is actually 1.3% of annual base rents.

We have 22 remaining Kmart stores and the average rent on those stores is just below $5 a square foot. We believe it’s a tremendous opportunity. Market rents in those markets are significantly higher than that. We feel that if we were fortunate enough to get those stores back, we would mark those stores to market. Up to two times their current rate is where we’d expect those leases to come back on the market.

In the environment we’re in today with very little (new) supply, it just magnifies the opportunity. Kmart really hasn’t really opened a new store in 15 years and even before that there were very few store openings. We have some that are 1960s vintage. At that time they were the most dominant retailer in the outdoor center open-air space, so their rent levels are extremely attractive. While you’re spending a significant amount of capital on demolition and redevelopment, the rent potential is such that it’s very accretive and a great return on investment opportunity -- not just for us, but for all the companies in the space.

Shopping center development remains at a historic low. How does that translate into upside for a grocery anchored focused REIT like Brixmor?

We really think we’ve got a 5-to 10-year window before we have any material competitive threat from new development coming on line. This muted economic recovery, with generally soft macro retail sales, has left a lot of the large-format retailers on the sidelines. They’re not looking to add net new stores. None of the traditional grocers, or the home improvement companies or department stores, are adding net new stores.

Those stores have been the drivers of new development -- the 100,000-square-foot retailer, the 65,000-square-foot supermarkets that sign 20-year leases, or they own their own real estate and handle a big component of the site work or entitlement costs. They're on the sidelines, and I think they will be for some time. We're nowhere near the days where they’re each opening 100 new stores and development projects a year.

Is the market undervaluing Brixmor’s shares?

There’s been a big balance sheet transformation here. We continue to make progress on de-levering and we’re making a lot of progress toward an unsecured balance sheet and being a corporate borrower, so moving away from secured mortgage debt, which has been a big focus due to more flexibility but also to access the capital markets with another tool in our toolkit. We’ve been in the term loan market and we’re moving toward an investment grade rating, which will put us in the bond market.

On the operating side, business remains very strong. We have guidance of 3.7% to 4.1% same-property NOI. Our in-place rents today are under $12 per square foot, in a market where last quarter we signed new leases at $15 per square foot.

We have that kind of mark-to-market opportunity for several years to come, and I think that’s one of the misunderstood aspects by the investment community about the company. It's a long-term opportunity that’s structurally different from a number of our peers -- we have below-market leases throughout the portfolio and this great opportunity internally to drive sector-leading growth. As we go forward, we’re very confident investors will reward us for that.

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