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

Brixmor Property Group Inc. (NYSE:BRX), incorporated in 2003 and headquartered in New York, NY, owns and operates open-air retail properties, mainly consisting of community and neighborhood shopping centers, all over the country.

This is a company that has increased its dividend at an attractive pace and is likely to continue doing so given the current secular tailwind. With manageable debt maturities and a strong liquidity level, the risks of holding this REIT are mostly confined to general ones like interest rate changes and potential long-term market headwinds. With valuation at an attractive level, this is also a good pick to be considered by value investors.

Portfolio and Outlook

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

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

The same quality of diversification is observed in its industry exposure, as restaurants account for 17% of ABR, the highest concentration. Grocers, who provide a more stable cash flow also represent a respectable concentration at 14% of ABR. Moreover, TJX, the REIT’s top tenant, accounts for only 3.4% of ABR.

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

Significant internal 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 by e-commerce. In fact, if you look at the REIT’s business exposure, you will see that it mainly serves either essential tenants or tenants that can/will mostly operate through physical stores:

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

Even though it’s tough to tell whether demand will increase given the currently high economic uncertainty, it will take a while before supply catches up with current demand due to the nature of the real estate 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 are reflective of this attractive market condition for retail properties. Its lease spreads on new leases were 40% in 2023, while the blended spread for new and non-option renewals was 19.3% (15.3% when including only option renewals). Total leased occupancy also experienced tremendous growth as it grew by 90 bps YoY to 94.7%. Moreover, same-property increased by 4.02% to $846 million and FFO per share reached $2.04, experiencing a 4.62% YoY growth.

An acceleration in its growth is indicated by the latest results as in the second quarter the REIT’s blended spread with options excluded was 27.7% (19.7% with options included), comprised of a 50.2% new lease spread and an 18.9% renewal spread. Consequently, same-property NOI experienced higher growth as it grew by 5.52%. FFO increased by 3.85% to $0.52 per share.

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

Leverage & Liquidity

Brixmor’s debt finances 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 servicing.

Its liquidity level is also high based on a 5.8x debt/EBITDA ratio and a 4.1x fixed-charge coverage. It’s not a surprise the REIT has received investment-grade ratings from Fitch, Moody’s, and S&P. Also, with $1.7 billion in available liquidity, the upcoming maturities shouldn’t be too difficult to deal with:

Dividend & Valuation

BRX currently pays a quarterly dividend of $0.27 per share, resulting in a forward yield of 3.86%. This is about average for retail REITs these days and probably too low for many income investors to be interested in. However, the payout ratio looks very attractive at 51.18% and as profits continue expanding we should expect management to raise the dividend at an attractive pace. In the past 10 years, the annualized growth rate of the distribution has been 7.41%. Additionally, even though it had to cut the dividend back in 2020, Brixmor has almost brought it back to prepandemic levels.

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

Last, with an implied cap rate of 6.79%, which is about the average when it comes to retail property transactions these days, I think that the REIT is undervalued on an absolute basis as well. Moreover, as cap rates start going down, getting the shares at such an implied cap rate may prove to be a wise investment; it’s likely that interest rates will go down from this level which should lower mortgage costs and, in sequence, cap rates across all property sectors.

Risks

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

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

There is also interest rate risk. If the Fed doesn’t cut the Federal Funds rate when and at the pace that the market expects, BRX could face some short-term pressure. Especially if some of its complete recovery since the Fed started hiking can be attributed to such expectations:

Verdict

All in all, the prospects outweigh the risks in the case of BRX. Growth is likely to persist at an attractive pace and management seems like it can take advantage of the unevenness between current supply and demand for retail space. The price is also attractive considering the risks involved, so I am rating BRX a buy.

What do you think? Do you own this stock or do you favor some other REIT? I’d love to know! Also, please leave a comment if you found this post useful; it means a lot.