New Grocery Tenants Will Improve Cash Flow But Bankruptcies May Challenge NOI

Key Takeaways

• Strong demand and higher rents are expected to increase revenue growth as Brixmor upgrades tenant spaces and leases.
  
• Significant investments in redevelopment and new project pipelines forecast transformational value and future earnings growth.
  
• Tenant bankruptcies, rising construction costs, and challenges in acquisition strategies and property maintenance risk affecting the company's revenue and profitability.

Catalysts

Brixmor (NYSE: BRX) is a real estate investment trust (REIT) that owns and operates a high-quality, national portfolio of open-air shopping centers.

• Brixmor Property Group is positioned to benefit from a strong demand environment, allowing them to recapture spaces and bring in better tenants at higher rents, which is expected to positively impact revenue growth.
  
• The company has achieved a record in average in-place rent, which remains below the rates of new deals, indicating future potential for increasing net margins as newer leases generate higher income.
  
• Brixmor's significant investment in redevelopment, with projects yielding an average incremental return of 9%, positions them for transformative value creation that is likely to boost earnings in coming years.
  
• Their pipeline for new projects, expected to accrue nearly $400 million at a 10% average return, shows potential for continued revenue and earnings growth.
  
• Upgrading the tenant mix, particularly with grocery anchors which now account for 81% of ABR and show high productivity, is expected to support enhanced NOI and stable cash flow that would drive higher earnings in the future.

Brixmor Property Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Brixmor Property Group's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 26.4% today to 20.1% in 3 years time.
• Analysts expect earnings to reach $299.5 million (and earnings per share of $1.01) by about March 2028, down from $338.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 43.1x on those 2028 earnings, up from 23.5x today. This future PE is greater than the current PE for the US Retail REITs industry at 32.4x.
• Analysts expect the number of shares outstanding to grow by 1.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.4%, as per the Simply Wall St company report.

Brixmor Property Group Future Earnings Per Share Growth

Risks

• The ongoing bankruptcy of certain tenants, such as Big Lots, Party City, and JOANN, is causing occupancy disruptions and potential delays in revenue recognition, impacting the company's net operating income (NOI) growth.
  
• Potential increased tariffs and supply chain challenges could lead to higher construction costs, which might reduce margins on redevelopment projects and impact the company's earnings.
  
• The company aims for disciplined acquisition strategies with high single to low double-digit unlevered IRRs, which poses a risk if acquisition opportunities do not yield expected growth returns, potentially affecting long-term profitability.
  
• The reliance on tenant demand for backfilling vacated or newly acquired spaces, along with the competitive bidding at auction for spaces, could delay revenue realization if unable to secure desirable lease agreements at projected rent spreads.
  
• The planned reduction in maintenance CapEx spending may not be sustainable long-term, potentially risking property upkeep which could affect the attractiveness and revenue-generating potential of the properties if underestimated.

Valuation

• The analysts have a consensus price target of $31.662 for Brixmor Property Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $39.0, and the most bearish reporting a price target of just $27.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $299.5 million, and it would be trading on a PE ratio of 43.1x, assuming you use a discount rate of 8.4%.
• Given the current share price of $26.05, the analyst price target of $31.66 is 17.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.