Brixmor Property Group Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Unless otherwise noted, amounts are in millions of dollars. The filing combines Brixmor Property Group Inc. and Brixmor Operating Partnership LP, which are managed as one business.
Business context
Brixmor is a REIT that owns, manages, leases, acquires, disposes of and redevelops open-air retail shopping centers, primarily neighborhood and community centers. At September 30, 2018, its portfolio comprised 445 centers and approximately 77 million square feet of gross leasable area. Revenue is primarily rent and tenant expense reimbursements.
Financial and operating performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $306.5 | $314.5 | $936.7 | $963.1 |
| Net income | $147.3 | $83.4 | $288.7 | $230.5 |
| NAREIT FFO | $128.4 | $157.2 | $437.5 | $480.7 |
| NAREIT FFO per diluted share/OP unit | $0.42 | $0.52 | $1.44 | $1.58 |
| Cash from operating activities | — | $400.2 | $421.1 |
Q3 diluted EPS was $0.49, compared with $0.27; nine-month diluted EPS was $0.95, compared with $0.75. GAAP net income benefited from larger real estate sale gains: $119.3 in Q3 and $159.0 for the nine months, versus $25.9 and $54.9, respectively, in 2017. Debt extinguishment losses were $19.8 in Q3 and $20.2 for the nine months, compared with a gain in 2017.
Same-property NOI increased 1.2% in Q3 to $207.5 and 1.3% for the nine months to $618.5. NOI margin was 73.0% in Q3 versus 74.1%, and 73.2% for the nine months versus 73.7%. At September 30, billed occupancy was 89.4% (89.6% a year earlier); leased occupancy was 92.5% (91.6%).
Balance sheet, cash flow and capital
- At September 30, 2018, total assets were $8.50 billion, net real estate was $7.90 billion, and net debt obligations were $5.11 billion, down from $5.68 billion at December 31, 2017.
- Cash, cash equivalents and restricted cash were $65.0, compared with $110.8 at year-end 2017. The $1.25 billion revolving facility had $1.10 billion of undrawn capacity; outstanding letters of credit of $5.2 reduce availability.
- Nine-month investing cash flow was positive $480.1, principally reflecting $677.0 of real estate sale proceeds; real estate improvements and investments used $185.0. Financing cash flow used $926.0, including debt repayments, distributions and $81.9 of share repurchases.
- The quarterly common dividend was $0.275 per share for Q3. In October, the board declared a $0.28 dividend for Q4, payable January 15, 2019.
Material changes, outlook and risks
- The company disposed of 42 shopping centers and two partial centers during the first nine months, receiving net proceeds of $676.5 and recording $158.5 of gains. It acquired land and outparcels for $9.0, versus $111.8 of acquisitions in the prior-year period.
- Real estate impairment charges rose to $44.2 for the nine months from $27.4. Management attributed impairments to dispositions and revised expected holding periods under its capital-recycling program, and cautioned that future material impairments are possible.
- In August, the company issued $250.0 of floating-rate senior notes due 2022, using the proceeds to repay part of a term loan due in 2019. Variable-rate debt exposes the company to interest-rate movements; $900.0 of interest-rate swaps were outstanding. The company reported compliance with debt covenants.
- Management expects operating cash flow, cash, available credit, debt and equity issuance, and asset dispositions to provide adequate capital for anticipated needs over the next 12 months and beyond. No specific earnings or FFO guidance was provided. The company had 56 capital projects in process with anticipated costs of $340.5, of which $144.2 had been incurred.
- Management cited tenant credit and bankruptcies, local economic and real estate conditions, rental rates, competition and operating-cost increases as factors that could affect results. It reported no material change to the risk factors in its 2017 Form 10-K and no material off-balance-sheet arrangements.
- Previously disclosed accounting and financial-reporting concerns involving income smoothing led to SEC and U.S. Attorney investigations; the company stated it was cooperating. A $28.0 securities class-action settlement is covered by insurance, with $19.5 remaining in escrow at quarter-end. In October, the company agreed to an $8.0 insurance-covered settlement with investors who opted out of that class action; the amount was accrued at September 30. Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much reported GAAP earnings growth reflects property-sale gains, and whether FFO and same-property NOI trends better represent ongoing performance.
- Whether occupancy, rent spreads and same-property NOI can offset revenue pressure from portfolio dispositions and higher property expenses.
- Debt maturities, floating-rate exposure, refinancing needs and actual revolver availability, particularly after the debt transactions and repayments.
- Execution, costs and returns for the 56 active capital projects, and the potential for further impairments or asset sales.
- Insurance coverage and final resolution of the opt-out settlement and prior-period accounting investigations.