Brixmor 2.0 Cleans Up House

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In terms of both its finances and its assets, publicly-traded retail REIT Brixmor Property Group Inc. is in repositioning mode.

In February 2016, Brixmor revealed major accounting irregularities and simultaneously announced four of its senior executives had resigned.

Now, those four executives face a lawsuit filed Aug. 1 by the SEC. The suit stems from their alleged scheme—stretching from 2013 to 2015—to manipulate Brixmor’s same-property net operating income (NOI) in order to meet growth targets.

In addition, the four executives face criminal charges for alleged accounting fraud. Steven Splain, Brixmor’s former chief accounting officer, and Michael Mortimer, former senior vice president of accounting, have pleaded guilty in the case. Michael Carroll, Brixmor’s former CEO, and Michael Pappagallo, former CFO, have entered not-guilty pleas.

In 2011, an affiliate of New York City-based investment giant Blackstone Group Inc. purchased Australia-based Centro Properties Group’s portfolio of 585 U.S. retail centers for $9.4 billion and rebranded it as Brixmor Property Group. At the time, Carroll was Brixmor’s CEO.

Brixmor executives said on Aug. 1 that the company had settled the SEC’s civil claims against it regarding securities fraud and related violations. Although it didn’t admit or deny the SEC allegations, Brixmor agreed to pay a $7 million fine. Previously, Brixmor settled all of the shareholder suits tied to the accounting scandal.

As part of the SEC settlement, Brixmor agreed to hire an independent consultant to review how its non-GAAP accounting measures are calculated and presented, including same-property NOI.

In a news release, Brixmor said its board of directors and current management team “are committed to maintaining best-in-class internal controls and financial reporting and corporate governance practices.”

With the accounting matter “now resolved,” the company is focused on executing its business plan. At the heart of the plan is reconfiguring Brixmor’s portfolio.

In 2018, Brixmor sold more than 60 non-core assets for about $1 billion. In an Aug. 1 research note, Green Street Advisors LLC, a real estate research and advisory firm based in Newport Beach, Calif., noted that Brixmor is “inching closer” to shrinking its portfolio from roughly 425 properties in about 150 markets to roughly 400 properties in about 100 markets.

“We’ve aggressively pruned those centers where we don’t see future growth opportunities,” Brixmor President and CEO Jim Taylor said during the REIT’s second-quarter earnings call on July 30.

Furthermore, as of June 30, Brixmor’s repositioning and redevelopment pipeline contained 61 projects with an estimated price tag of $414.6 million.

In a recently-completed project, Brixmor repurposed vacated Kmart and OfficeMax spaces at Erie Canal Centre in suburban Syracuse, N.Y. for anchor tenants Dick’s Sporting Goods, Michaels and Burlington. Additionally, it renovated the entire center and added space for more tenants, including Starbucks, T-Mobile and Spectrum.

In managing its portfolio, Brixmor is also “proactively reducing … exposure to concepts that we think have less relevance,” Taylor said in April.

Taylor was tapped as president and CEO in 2016, after serving as CFO of Rockville, Md.-based Federal Realty Investment Trust. He brought aboard Angela Aman as CFO and Mark Horgan as chief investment officer. Aman formerly served as CFO at Chicago-based retail management firm Starwood Retail Partners LLC and Oak Brook, Ill.-based REIT Retail Properties of America Inc. Horgan previously worked at New York City-based real estate services company Eastdil Secured LLC and Federal Realty Investment Trust.

With this trio in place, “Brixmor 2.0 is in highly capable hands,” Green Street analysts say.

Taylor told Wall Street analysts on July 30 that the positive momentum of Brixmor 2.0 “clearly demonstrates that we are a fundamentally different company than we were three years ago.”

Brixmor’s “solid” investment strategy emphasizes value-add opportunities, while mostly dismissing regional malls and big-box power centers—two asset types that generally have suffered in the current retail environment, says Russ Moroz, first vice president of investments in the Roseville, Calif. office of commercial real estate services company Marcus & Millichap.

“One trend I think will continue to be successful for companies like Brixmor is targeting boring, underperforming … centers in solid locations, and reinventing them by splitting the buildings to better accommodate growing retailers, and developing outparcels that appeal to growing food and service-oriented tenants,” Moroz notes.

Much of Brixmor’s 73 million-sq.-ft. portfolio consists of grocery-anchored, open-air centers around top-performing tenants, including T.J. Maxx, Kroger, Dollar Tree, Publix and Albertsons.

“There is a misconception that e-commerce is decimating all traditional retail tenants,” Moroz says. “While a number of traditional retailers have been hurt, if you study the trends, the general consensus is that boring retail is what’s really been dying for a long time.”

Undertaking a retail repositioning or redevelopment, as Brixmor is doing, requires the will and ability to assume risk, notes Joel Bayer, president of New York City-based real estate investment, development and management firm O’Connor Capital Partners Inc. “It certainly cannot be done by every landlord, and many properties are not good candidates for this.”

But for those landlords that successfully tackle such projects, the payoffs can include higher quality assets, improved NOI and enhanced property value, he adds.

Bayer, whose firm has worked on its own retail repositioning projects in recent years, notes that “it’s often a difficult decision to choose to redevelop an asset. It’s usually easier to keep a property as is, and attempt to maintain occupancy and cash flow in its current condition.”

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