Brixmor: A Dividend Growth Stock at a Good Price (NYSE:BRX)

Brixmor Property Group Inc. (NYSE:BRX), founded in 2003 and headquartered in New York, NY, owns and operates outdoor retail properties, primarily consisting of community and neighborhood shopping centers, throughout the country.

This is a company that has has grown its dividend at an attractive rate and is likely to continue to do so given the current secular tailwind. With manageable debt maturities and a strong level of liquidity, the risks of owning this REIT are largely limited to general ones such as interest rate changes and potential long-term market headwinds. With a valuation at an attractive level, it is also a good choice for value investors to consider.

Portfolio and Outlook

The REIT’s portfolio consists of 360 properties totaling 64 million square feet and spread across 30 states.

The portfolio is well diversified given the fact that Florida properties have the largest exposure at 14% of ABR. Texas and California account for 11.7% and 11.6% of ABR, respectively.

The same quality of diversification is seen in its industry exposure, with restaurants accounting for 17% of ABR, the largest concentration. Grocery, which offers a more stable cash flow, also represents a respectable concentration at 14% of ABR. Moreover, TJX, the REIT’s top tenant, represents just 3.4% of ABR.

Now, 19.6% of Brixmor’s ABR-based leases expire in the next 2 years. Based on current rental rates, the lease spread should be substantial, especially for those leases with no remaining options:

Significant domestic growth is likely given the current market dynamics for retail assets. First, grocery stores enjoy steady demand, and restaurants are not under a significant threat from e-commerce. In fact, if you look at the REIT’s business exposure, you’ll see that it primarily serves either core tenants or tenants that can/will operate primarily through brick-and-mortar stores:

Supply is also tight as net absorption has rebounded from negative levels since the start of the pandemic and construction starts are at a record low:

While it is hard to say whether demand will increase given the current high economic uncertainty, it will take some time for supply to catch up with current demand due to the nature of the housing market. So there is still time for investors to gain exposure to retail portfolios and enjoy the current market tailwind.

Performance

Brixmor’s recent results reflect this attractive market condition for commercial properties. Its leasing margins for new leases were 40% in 2023, while the combined margin for new and non-option renewals was 19.3% (15.3% when including only option renewals). Total leased occupancy also saw tremendous growth as it rose 90bps YoY to 94.7%. Moreover, same-property ownership rose 4.02% to $846 million, and FFO per share reached $2.04, up 4.62% year-over-year.

An acceleration in its growth is indicated by its latest results, as in the second quarter the REIT’s blended spread excluding options was 27.7% (19.7% including options), composed of a margin of new lease of 50.2% and a renewal spread of 18.9%. Consequently, NOI for the same property saw a higher growth as it increased by 5.52%. FFO increased 3.85% to $0.52 per share.

Guidance for 2024 indicates that FFO growth will decelerate further, however, as the lower end of the range ($2.11) implies growth of 3.43% per year.

Leverage and liquidity

Brixmor debt funds 61.57% of its assets, which is a bit high, but 100% of its debt is unsecured and fixed rate, providing flexibility and relatively predictable cash outflows for debt service.

Its level of liquidity is also high, based on a debt-to-EBITDA ratio of 5.8x and fixed charge coverage of 4.1x. It’s no surprise that the REIT has received investment grade ratings from Fitch, Moody’s and S&P. Also, with $1.7 billion in available liquidity, upcoming maturities shouldn’t be too difficult to manage:

Dividends and valuation

BRX currently pays a quarterly dividend of $0.27 per share, yielding a forward yield of 3.86%. That’s about average for retail REITs these days, and probably too low for many income investors to be interested. However, the payout ratio looks very attractive at 51.18%, and as profits continue to expand, we should expect management to increase the dividend at an attractive rate. . Over the last 10 years, the annualized distribution growth rate was 7.41%. Furthermore, even though it had to cut the dividend back in 2020, Brixmor has almost brought it back to pre-pandemic levels.

Its FFO yield is also quite high at 7.56%, indicating good value. Similarly, the FFO multiple of 12.88x is below its peers’ average (14.8x).

Finally, with a default cap rate of 6.79%, which is about average when it comes to retail property transactions these days, I think the REIT is undervalued on an absolute basis as well. Moreover, as cap rates begin to decline, getting shares at such a default cap rate may prove to be a wise investment; interest rates are likely to fall from this level, which should reduce mortgage costs and in turn cap rates across all housing sectors.

risks

Of course, the lack of a clear discount to the current NAV ($27.17 per share based on a 6.9% cap rate) creates a risk. Usually, I like to know that I have a margin of safety, as represented by such a discount, but this is not possible with large-cap REITs most of the time. With Brixmor, the presence of a margin of safety can only be established in the sense that it is a high-quality REIT with strong liquidity and a manageable level of debt. However, other REIT stocks that trade below NAV and offer higher dividend yields may grow faster, representing an opportunity risk here.

There is also a long-term risk in terms of potential secular headwinds. Buying this REIT today may prove to be profitable in the short term, but current retail real estate market conditions may change at some point. It is important to monitor such changes in the market and consider allocating funds to other potentially more attractive real estate sectors.

There is also interest rate risk. If the Fed does not cut the federal funds rate when and at the pace the market expects, BRX could face short-term pressure. Especially if some of its full recovery since the Fed began hiking can be attributed to such expectations:

Verdict

All in all, the prospects outweigh the risks for BRX. Growth is likely to continue at an attractive rate, and management appears to be able to take advantage of the mismatch between the current supply and demand for retail space. The price is also attractive given the risks involved, so I rate the BRX a buy.

what do you think Do you own these stocks or favor another REIT? I would love to know! Also, please leave a comment if you found this post helpful; it means a lot.