At this point in time, most investors of Shopping Center REITs understand that their dividends will likely be reduced for at least the remainder of the year as tenants navigate through the challenging environment brought upon by COVID-19. While some REITs such as Urstadt Biddle Properties (UBA) have already cut their payouts, others such as the one I’m focused on today, Brixmor Property Group (BRX), have suspended their dividends in favor of a wait-and-see approach.
In this article, I intend to assess what a likely dividend payout would be and estimate what it would take for Brixmor Property Group to fully cover its dividend based on different scenarios, so let’s dig in!
(Source: Company website)
A Large Operator With A Low Payout Ratio
Brixmor Property Group is one of the largest shopping center owners in the United States, with 400 properties covering 70 million square feet of gross leasable assets (GLA). It was formed by Blackstone (BX) in 2011 through a $9 billion purchase of more than 500 shopping centers from Australia’s Centro Properties Group and was taken public in 2013. In 2016, Blackstone sold its remaining 14% stake in the company, making it completely independent from its former parent.
What sets Brixmor apart from some of its regionally focused peers is its geographic diversification. No single Metropolitan Statistical Area (MSA) represents more than 8% of its average base rent (ABR), and the portfolio is diversified across 130 discrete MSAs. Its properties are evenly spread out across the Northern, Southern, Midwestern, and Western regions, with between 20% and 28% of its properties by ABR in each region. About 70% of its shopping centers are grocery-anchored, and its tenant roster includes many of the country’s leading retailers. The REIT has a diversified portfolio of 5,000 tenants, and the top 10 tenants represent only 17% of its total ABR.
(Source: Company Investor Presentation)
One of the advantages that I see for investors of Brixmor is that its low pre-pandemic dividend payout ratio means that a potential cut would be less deep than that of some of its peers. In Q1, the company paid out a dividend of $0.285 per share for a payout ratio of 62%, based on a Q1 FFO of $0.46 per share.
Based on the rent collection percentages that the company reported for April and May, I expect a total Q2 rent collection rate to be around 68%. With the expectation of a gradual re-opening in Q3, I built into my model a 75% rent collection rate. As seen in the first model below, the dividend appears to be uncovered at a payout ratio of 125%, as the dividend payout totals $86 million, which exceeds the $69 million in estimated FFO (calculated as 75% of Q1 revenue minus operating expenses excluding depreciation minus interest and other expenses).
(Source: Created by author based on company financials)
With a 75% rent collection rate, an 80% payout ratio would mean a dividend payout of $0.186 per share (calculated as 80% of $69 million in estimated FFO, divided by total shares outstanding). This equates to a 35% dividend cut.
Things would look much brighter for the company and its investors if it collects 85% of its rents, which would mean the current dividend of $0.285 per share would be fully covered at an 88% payout ratio.
Next, I wanted to see what dividend coverage would look like if there were a 10% reduction in operating expenses. As seen in the second model below, the dividend would be essentially covered at a 75% rent collection rate, and the payout ratio would fall to a safer 75%, if 85% of its rents were collected.
(Source: Created by author)
Lastly, I take a look at the balance sheet to see if shortfalls in dividend coverage can be made up with cash on hand. As seen below, Brixmor’s cash balance surged to $585 million Q1’20. However, that is due to management drawing upon its credit facilities, as many companies have done to boost liquidity during this recession.
Looking at the pre-pandemic cash balance of $19 million, it appears that Brixmor can sustain its dividend rate for about one quarter without touching its funds from recent borrowings and without a reduction in its operating expenses.
(Source: Created by author)
Brixmor operates a solid base of assets that are occupied by many of the nation’s leading retailers. In addition, its geographic diversity helps to mitigate risks of a second wave of infections in select regions. As demonstrated in the first model, with no operating expense reduction, the company would likely have to cut its dividend to around $0.186 per share if it wants to maintain a safe 80% dividend payout ratio at a 75% rent collection rate. In the second model, with a 10% operating expense reduction, the dividend appears to be covered at the same 75% rent collection rate.
Although I anticipate that Brixmor will have struggles with its dividend payout, I see plenty of upside potential for an eventual easing of the pandemic. I have a Buy rating on shares at the current price of $13.00 as of writing with a P/FFO ratio of 7.2. I have a one-year price target of $16, given it has a well-located and primarily grocery-anchored portfolio with many leading tenants.
(Source: F.A.S.T. Graphs)
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Originally published on Seeking Alpha