Brixmor -- Is This Retail REIT a Value Play?
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Is Brixmor ($BRX) a Retail REIT Value Play for Dividend Growth Investors?

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Company Analysis: Brixmor Property Group Inc (BRX)

As it’s getting more difficult to find value in the REIT space, we analyze Brixmor ($BRX) in this article to see if the company provides quality value for dividend growth investors.

As we’ve noted lately, it is getting harder and harder to find value in REITs these days. This is especially true in the world of large-caps. However, there are still value opportunities to be found in the small- and mid-cap REITs if you know what you’re looking for and take the time to do some good research and analysis.

Brixmor Property Group Inc ($BRX) caught my eye as a potential opportunity. In particular, I’m looking for a REIT in the retail space to add additional diversification to our site’s passive income portfolio. Obviously, I’m not interested in the “mall” or “outlet” spaces—I don’t believe in the long-run outlook for these areas.

Having said that, I do have an investment thesis that states retail will remain alive and well when and where it is properly integrated into the local community. BRX fits this model and checked a number of my boxes from a cursory, 30,000-foot scan. Thus, I wanted to do a deep-dive analysis to see if it provided a real value opportunity with long-run growth potential. Let’s see what I discovered…

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Brixmor Company Overview

Brixmor is an internally-managed REIT that owns and operates 422 high-quality, open-air shopping centers (as of 3/31/19)—representing around 73 million square feet of retail space. They are geographically-diversified across the US and partner with around 5,000 retailers, including TJ Max, Kroger, Publix, Wal-Mart, Ross, Kohl’s, Albertsons, Dollar Tree, Bed Bath & Beyond, and L.A. Fitness.

Brixmor Top Tenants

Source: Brixmor Fact Sheet

Brixmor's Top Real Estate Markets

Source: Brixmor Fact Sheet

The company has initiated a “multi-year plan [that] capitalizes on robust tenant demand to be in our established, well-located shopping centers by leasing to better tenants at better rents, reinvesting in our centers and recycling capital for non-core assets to strengthen our balance sheet and fund future growth.”

A few key things are worth noting. First, BRX is committed to the mixed-space, community-centric retail model of the future (more on this later). You see this approach taking place in cities and communities all across the country as revitalization projects are conducted—integrating retail, entertainment, dining, and residential space together into communities within communities.

Second, they recognize the tectonic shift occurring in retail and have embraced the “brick and mobile” strategy that is proving to be essential to retailer success (e.g., a strategy embraced by Target, Walmart, Kohl’s, etc.). This approach recognizes that physical stores drive digital engagement, provides opportunity for personalized experience, improves brand health, and enables retailers to leverage their space through BOPIS (buy-online-pickup-in-store) to reduce delivery costs, engage with customers, and drive incremental in-store purchases during e-commerce order pickup.

Again, this is one of our long-run investment theses behind our position in Kohl’s (Does Kohl’s Represent Good Value?), which—no surprise—is a tenant of BRX.

As a corollary to Brixmor’s plan, they have also addressed weaknesses in their portfolio related to retailers that have become less and less relevant to today’s consumer. They note, “We achieved (2018) leading market share with growing retailers and reduced our exposure to concepts that have lost relevance in today’s environment. By matching relevant retailers with the needs of our local communities, we continue to move towards our goal of being ‘the center of the communities we serve.'”

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Finally, BRX is forward-thinking and constantly evaluating and adjusting their portfolio to maximize total shareholder returns. “Where we have not seen opportunities for growth, we have sold. In fact, during 2018, we sold over sixty non-core shopping centers, generating aggregate proceeds of approximately $1 billion. We utilized those proceeds to strengthen our balance sheet and create ample capacity for several years of future reinvestment and growth.”

This approach and willingness to embrace change where it makes financial sense has and continues to produce strong results. In fact, in 2018 alone, Brixmor “delivered approximately $130 million of accretive reinvestment projects at an average incremental return of 9 percent… [grew their] in process reinvestment pipeline to over $350 million and [their] shadow reinvestment pipeline to over $1 billion.”

While this turnover and reinvestment has produced some dips in revenue recently (as we’ll see when we look at the numbers), it has positioned the company extremely well for longer-run growth and profitability—which is precisely the type we are looking for as buy-and-hold dividend growth investors.

Here are two examples of current redevelopment projects:

Brixmor Redevelopment Project 1
Source: Investor Presentation
Brixmor Redevelopment Project 2
Source: Investor Presentation

Brixmor Management Evaluation

One critical area in REIT analysis that is often overlooked by the inexperienced investor is the management piece of the puzzle. It is critical because the interests of management must be inline with its shareholders, or shareholders are likely to get burned in the long run.

First and foremost, I prefer internal management—which Brixmor provides. I don’t want an external management group that is paid and bonused for things that might not be in my best interest as a shareholder (e.g., expanding the portfolio regardless of the impact on returns).

In addition to internal management, BRX has a highly-diverse board of directors and requires directors and officers to hold company stock—meaning, they have real skin in the game. In fact, Brixmor was ranked third out of all public REITs in the Green Street 2018 corporate governance rankings. Here are some of the reasons:

Brixmor Corporate Governance
Source: Investor Presentation

Brixmor Performance Analysis

BRX revenues grew from 2014-2017 at a CAGR of 1.2%. Revenues then declined in 2018 and are expected to decline further in 2019. However, this decline was driven by a net -$51 million decrease in rental income due to the company’s portfolio changes and reinvestment strategy (they sold 60 non-core and under-performing properties in 2018). If one adjusts for this disposition activity, revenues would have, in effect, remained flat in 2018 and would increase in 2019.

While revenues decreased due to these dispositions, the company’s portfolio was strengthened, and the capital raised was used to both reduce debt and fuel reinvestments—ones with far greater ROI for shareholders.

Regardless of one’s near-term approach to handling the disposal of assets (portfolio turnover), the long-run growth outlook is solid for BRX. In fact, the turnover and related revenue impact provides long-term investors with a great buying opportunity before the results of that growth strategy become more visible and are reflected in the price.

BRX REVENUE
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Call it a “shrink-to-grow” approach if you wish. We call it a prudent strategy given the current real estate and retail environment. Yes, it has a negative short-term impact on revenues. However, we feel these impacts represent buying opportunities (for quality companies) and that the resulting long-run growth potential generated by the approach will greatly benefit their shareholders’ total returns.

This long-run growth thesis is further strengthened by the numbers related to new ABR, new lease productivity, and the company’s PSF trend (all resulting from the reinvestment/redevelopment strategy). Brixmor has a lot of runway still available and solid future growth opportunities.

Brixmor ABR
Source: Investor Presentation
Brixmor ABR 2
Source: Investor Presentation
BRIXMOR NEW LEASE PRODUCTIVITY
Source: Investor Presentation
Source: Investor Presentation

Finally, despite a very challenging retail real estate environment, Brixmor has managed to deliver consistent year-over-year same property NOI—including 2.6% in 2017 and 1.1% in 2018.

Brixmore Same Space NOI

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Brixmor Debt Analysis

Debt is a critical REIT component to analyze. In the case of BRX, we find that it is not overly leveraged. Specifically, it has a debt-capital ratio of 63.3% (a little higher than we like), but a reasonable equity multiplier of 2.9 and debt-equity ratio of 1.9. All reasonable for a REIT.

When you add in the fact that Brixmor (a) is using beneficial portfolio turnover to further reduce debt and (b) has a favorable payoff schedule over the next 10 years, we do not find anything alarming or negative in terms of the company’s financial leverage.

Brixmor Financial Leverage
Source: Investor Presentation

Brixmor Dividend Analysis

When it comes to dividends, there are a couple of key metrics we like to evaluate.

First, we like to analyze the dividend growth rate and pattern. Brixmore has a 5-year CAGR of 7% and has increased its dividend six straight years. While the growth slowed in 2019, we expect the stronger trend to continue as the reinvestment/redevelopment strategy takes root.

Brixmor Dividend Growth CAGR
Source: Investor Presentation

Second, we like to look at the yield and payout ratio. BRX has a strong yield within the overall REIT industry, as well as the retail space. Furthermore, it has a relatively low payout ratio—meaning there is still plenty of room left for dividend growth (not even factoring in anticipated revenue/FFO growth).

Source: Investor Presentation

Finally, Brixmor has a 1.6 dividend coverage, which we would consider comfortable.

So, as always, that brings us to the all-important value question…

Value Analysis for Brixmor

Based on our analysis, I feel Brixmor provides the quality factor we look for in a dividend growth stock:

With those boxes checked, it becomes a question of whether BRX provides dividend growth investors with an attractive current value opportunity. We look at several value metrics when evaluating this question—both in relation to the company itself and to the industry.

In terms of it’s 14.1 trailing PE, the company is trading at a -63% discount to its own 5-year average, as well as a -53% discount to the 5-year REIT industry average.

From a forward PE perspective, we find Brixmor’s 22.5 places it at a -34% discount to its 5-year average, as well as a -53% discount to the REIT 5-year average.

Finally, BRX’s 9.3 P/FFO indicates it is trading at a -42% discount to the REIT industry average and a -38% discount to the retail REIT space.

As such, I believe Brixmor provides an attractive valuation for dividend growth investors—those looking to initiate or add-to a long-term buy and hold position in the company.

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Our Dividend Growth Investing Conclusion

While value has become increasingly sparse for REITS, there are still great opportunities if you look beyond the popular large-cap names and perform your due diligence.

I find that Brixmor Property Group Inc ($BRX) is one such company. While very similar to the more popular, well-known, and currently overvalued $KIM, our analysis indicates that it has a much longer growth runway and a much better valuation—both broadly speaking and specifically compared to this competitor (-22.5% discount to KIM on trailing PE, -8.5% discount to KIM on forward PE, and -21.2% discount to KIM on P/FFO).

While it can be argued (and I would agree) that Kimco has a slightly better balance sheet and portfolio, I would counter that Brixmor is quickly closing that gap with its intelligently executed reinvestment/redevelopment strategy. When you combine that with BRX’s better spreads, growth runway, and value, we are throwing our hat in the ring for Brixmor and starting a developmental position in this REIT.

I would add that we taking a developmental approach because we believe there is a high probability that the price could still fall a bit. We will increase our buying power should the stock drop into our primary target zone of $15.50 to $16. We see significant support in the $14.50 to $14.75 range should it slide further. Should that support fail to hold, we will re-evaluate and likely hold what we have until we see evidence of a positive trend change. All in all, any slippage from our initial entry price will simply provide us with additional value and an improved cost-basis/YOC.

If you’re looking for a REIT in the retail space—one with growth potential and hard to find value, then Brixmor Property Group may be for you. If so, take the time to do your own deep dive and analysis.

Don’t ever take our—or anyone else’s—word when it comes to analysis. Fundamental analysis is subjective—meaning it’s as much an art as a science. Perform your own due diligence and see if you come to the same conclusion as we have.

Best wishes and good trading!

P.S. We’d love for you to share your analytical opinion on BRX with us and the dividend growth investing community. Leave your comment below!

Links to Cited Sources:

Investor Presentation (Quarter Ended March 31, 2019)

Brixmor Fact Sheet (Q1 2019, 3/31/19)

2018 Annual Report

Doug

Doug is the founder of Wicked Capital. He holds an MBA, BBA (Summa Cum Laude), and AAcc from Liberty University and has over 20-years of corporate finance, accounting, and operations management experience--spanning the public, private and nonprofit sectors. He is a member of Sigma Beta Delta International Honor Society in Business Management and Administration, Delta Mu Delta International Honor Society in Business, and Tau Sigma Academic Honor Society. He is also proud to have served his country as a member of the 82nd Airborne Division. His professional wheelhouse is corporate financial reporting, analysis, and forecasting—buoyed by his passion for fundamental analysis and valuation. Doug has been actively engaged in trading and investing for several decades, with a focus on value and dividend-growth investing. He has authored several books and, when he's not busy living the corporate dream, trading and managing investment portfolios, he enjoys playing the drums and spending time with family--especially in the Outer Banks of NC.

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