Blackstone-Backed Brixmor Property IPO Should Be Avoided

Oct.22.13 | About: Brixmor Property (BRX)

Brixmor Property Group, (NYSE:BRX), a massive REIT that owns and operates grocery store-centered shopping centers, is hoping to raise $750 million in its upcoming IPO. The New York, New York-based firm will offer 37.5 million shares at an expected price range of $19.00-$21.00; at the midpoint of that range at $20.00 per share, Brixmor will command a market value of $5.9 billion. The major shareholder pre and post IPO is the premier Blackstone Group (NYSE:BX).

BRX filed on July 18, 2013.
Joint Bookrunners: BofA Merrill Lynch, Citi, J.P. Morgan, Wells Fargo Securities, Barclays, Deutsche Bank, RBC Capital Markets, UBS Investment Bank
Co-Managers: Blackstone Capital Markets, Baird, Evercore Partners, KeyBanc Capital Markets, Mitsubishi UFJ Securities, PNC Capital Markets, Sandler O'Neill, Stifel, Suntrust Robinson Humphrey

Brixmor is an internally-managed REIT that owns and operates grocery-anchored community and neighborhood shopping centers. The firm's portfolio includes 522 shopping centers (with the exception of one, Brixmor is the 100% owner of these centers) shopping centers with approximately 87 million square feet of leasable space. Over 70% of the shopping centers are anchored by market-leading grocers. The firm's largest and most important tenants include The Kroger Co. (NYSE:KR), The TJX Companies, Inc. (NYSE:TJX), Publix Super Markets, Inc. and Wal-Mart Stores, Inc. (NYSE:WMT). The firm has put significant focus on improving its facilities in recent years, having invested some $339 million in improvements since 2011.

Brixmor offers the following figures in its S-11 balance sheet for the year ending December 31, 2012:
Revenue: $1,173,350,000
Net Loss: ($61,433,000)
Total Assets: $10,144,525,000
Total Liabilities: $7,138,924,000
Total Equity: $2,984,134,000

We're very wary of BRX's initial offering in the $19 to $21 price range. The REIT's heavy investments in improving its facilities were certainly a necessary step, but the staggering losses posted in recent years do not appear to have been remedied by these investments.

The firm's recent relocation of its administrative staff to a centralized office in Philadelphia is likewise a good move, but hints at deeper organizational problems that may not have been resolved by the centralization. The very high compensation taken by the executive officers also causes us concern given their history of losing millions of dollars.

Until and unless BRX can prove its ability to turn a profit renting space to low margin businesses, we're not buying this stock.

BRX is very much dependent upon the value of retail square footage, which in turn is fairly directly driven by the health of the general consumer economy - when consumers have more to spend and aren't afraid to do so, space from which to sell them consumer goods becomes much more valuable. In the current recovering economy the value of retail space should be on the rise, but recent political events in the United States have shaken consumer confidence and have proven that there is the potential for the country to throw itself back into another economic downturn.

BRX faces competition from other retail centers and their owners. Some of these competitors are better capitalized than BRX and have access to superior resources. Major competitors include Phillips-Edison ARC, Regency Centers Corp (NYSE:REG), and Garrison Investment Group.

CEO Michael A. Carroll has served in that role since 2009, and as the firm's COO from 2007-2009. He previously served as Executive Vice President, Real Estate Operations and Senior Vice President, Director of Redevelopment of New Plan Excel Realty Trust, Inc., the firm's predecessor. Mr. Carroll's total compensation was $3,151,024 according to page 173 of the prospectus filed on 10/17/2013. This amount seems excessive given that he lost over $61,000,000 for the owners in 2012 on a "pro forma" basis.

Disclosure: I 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.

Additional disclosure: This article was partially based on the company's S-11. Investors should read the prospectus and consult with their financial adviser before purchasing securities.