Yield hungry investors have been driving the real estate sector higher all year. The XLRE Real Estate Sector SPDR, even considering some recent weakness, is up more than 33% YTD. The reason for this is simple, real estate companies enjoy stable, long-term income and they provide healthy dividends for investors. With the yields on short-end U.S. treasuries hovering at or below the broad market S&P average this trend is likely to continue.
Brixmor Property Group is one of 2019’s best-performing REITs. The operator of specialty/mixed-use and open-air malls is up nearly 60% for the year. Add in the dividend and total returns are well above 60% and the gains are not over yet. Brixmor management has been executing well on its growth plan and likely to continue exceeding analyst’s expectations long into 2020.
The Results Say It All
The company’s plan is multi-faceted and includes new acquisition, selling older less profitable locations for newer more profitable locations, and renovation of existing facilities. Renovations of existing facilities center around anchor-store relocation and are expected to drive double-digit NOI growth per property.
Brixmor management has found that by allowing, and even encouraging, its tenant partners to move to new locations within existing properties both can maximize profitability. This works well for Brixmor because it has helped the company improve occupancy rates and rent revenue. By working so closely with their tenants Brixmor was able to improve its occupancy rate by 50 bps over the last quarter.
The company’s enterprise-level NOI increased by 4.4% due to increased occupancy and positive rent spreads. Rent spread is the difference between previous and new leases and a primary driver of earnings growth. Spreads on renewal leases are running over 13% which is exciting because these leases include periodic increases. The spreads on new leases are even more exciting at over 30%.
The company raised its guidance to a tight range at the high-end of its previous range. At the current rate of earnings, Brixmor is on track to hit or exceed the high-end of that range. The company has reported $1.45 in FFO in 2019 YTD and the analysts are expecting $0.48 in FFO in the 4th quarter, a net FFO of $1.93 or $0.02 above FY 2019 consensus.
Dividend Growth Is A Driver Of Capital Gains
Brixmor Property Group is distributing $1.14 annually according to the most recent dividend declaration. At this level, the payout ratio is expected to run about 59% in 2020, sufficiently low enough for investors to expect this dividend-growing stock to increase its yield yet again. Brixmor has been increasing the yield for five years and is expected to raise it again next year.
The Technical Outlook
Shares of Brixmor Property Group have been on a tear all year. The stock popped after the last earnings release and broke above a key, multi-year resistance level. The stock has since pulled back to support and now offering investors another chance to get in. There is a risk the stocks run is completed but, based on valuation, that risk is low. Other mall REITs like Simon Property Group (SPG), Spirit Realty Capital (SRC), and Kimco (KIM) are trading in the range of 12.20X to 16.20X while Brixmor Property Group is still valued at only 11.5X forward earnings. A multiple expansion could add another $2 to $10 to this stock over the next six to twelve months.
Companies Mentioned in This Article
|Brixmor Property Group (BRX)||$21.83||+0.3%||5.13%||11.80||Hold||$19.81|
|Simon Property Group (SPG)||$148.24||-0.2%||5.67%||12.22||Hold||$187.56|
|Spirit Realty Capital (SRC)||$52.52||-0.1%||4.76%||13.89||Buy||$51.50|
|Kimco Realty (KIM)||$21.18||0.0%||5.29%||14.61||Hold||$19.58|