Brixmor Property Group Inc. — 2018 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2018, covering Brixmor Property Group Inc. and its operating partnership. Brixmor is a REIT focused on owning, leasing, managing, and redeveloping U.S. community and neighborhood shopping centers. At year-end, its portfolio comprised 425 centers and 73.7 million square feet of gross leasable area (GLA); 68% of centers were grocery-anchored.
Financial and operating metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $1,234.3 million | $1,283.2 million |
| Net income attributable to common stockholders | $366.3 million | $300.3 million |
| Diluted earnings per share | $1.21 | $0.98 |
| NAREIT FFO | $558.3 million; $1.85 per diluted share | $638.4 million; $2.09 per diluted share |
| Same-property NOI | $796.5 million | $787.9 million |
| Cash from operating activities | $541.7 million | $551.9 million |
| Debt obligations, net at year-end | $4,885.9 million | $5,676.2 million |
| Cash, cash equivalents and restricted cash at year-end | $50.8 million | $110.8 million |
Same-property NOI increased 1.1%; its margin declined to 72.8% from 73.5%. Year-end leased occupancy was 91.9% (91.9% in 2017), while billed occupancy declined to 88.4% from 89.9%. Average ABR was $14.10 per leased square foot. 2018 cash dividends declared were $1.105 per share, and cash dividends paid to common holders and OP unitholders totaled $333.4 million.
Fourth-quarter 2018 revenue was $297.7 million and net income attributable to common stockholders was $77.6 million, or $0.26 per diluted share. In fourth-quarter 2017, the corresponding figures were $320.1 million, $69.9 million, and $0.23 per diluted share.
Material changes versus the prior comparable period
- Annual revenue fell $48.8 million (3.8%), primarily because dispositions reduced rental income by $51.0 million and expense reimbursements by $11.5 million; growth in the retained portfolio partly offset these reductions.
- Net income rose, but included $209.2 million of gains on real estate sales. NAREIT FFO fell $80.1 million (12.6%), reflecting the smaller portfolio and, in part, the $37.1 million debt-extinguishment loss.
- Same-property NOI grew $8.6 million, but higher operating costs, real estate taxes, and doubtful-account provisions reduced the NOI margin. Billed occupancy also weakened.
- Disposition activity accelerated: 62 shopping centers, two partial centers, and one land parcel were sold for $957.5 million net proceeds, versus $330.8 million of property-sale proceeds in 2017. Acquisitions were $17.4 million, compared with $190.5 million in 2017.
- Debt declined by approximately $790 million net. Interest expense decreased $11.6 million, while the company incurred a $37.1 million loss from debt transactions.
Outlook, management commentary, risks, contingencies, and unusual items
- Management’s stated objective is sustainable cash-flow growth through leasing, redevelopment, selective acquisitions and dispositions, and a flexible capital structure. It expects to accelerate redevelopment investment over the next several years; 60 projects were in process at year-end with $352.2 million of anticipated cost and an expected average incremental NOI yield of about 9%. The identified future project pipeline exceeds $1.0 billion.
- For 2019, Brixmor said it intended to take a more balanced approach to capital recycling, potentially directing disposition proceeds to acquisitions as well as redevelopment and share repurchases. It expected available sources of capital and operating cash flow to cover anticipated uses for the next 12 months and beyond; this is management’s expectation, not a guarantee.
- Financing amendments extended the $1.25 billion revolving facility’s scheduled maturity to February 2023 and the $350 million term loan to December 2023. The company reported no scheduled debt maturities in 2019 or 2020 and $938.8 million of undrawn revolving capacity, including the effect of letters of credit. It reported investment-grade ratings and compliance with debt covenants.
- Variable-rate debt totaled about $1.7 billion, with $1.2 billion covered by interest-rate swaps. A 100-basis-point rate increase was estimated to raise annual interest expense by $5.1 million after swaps. About $1.7 billion of debt was LIBOR-indexed, exposing the company to benchmark-transition uncertainty.
- Retail disruption, e-commerce, tenant distress or bankruptcy, lease renewals and expirations, operating-cost inflation, redevelopment execution, property impairments, natural disasters, environmental conditions, and access to capital are principal risks. Approximately 9.4% of leased GLA was scheduled to expire in 2019.
- Unusual and nonrecurring items included $53.3 million of real-estate impairment charges, largely tied to changed holding periods under the capital-recycling program; a $7.0 million accrued SEC civil penalty under a proposed settlement that remained subject to final documentation and SEC approval; and litigation settlements. The $28.0 million class-action settlement was within insurance coverage, with $19.5 million remaining in escrow at year-end and an offsetting receivable recorded.
- The Audit Committee’s 2016 review found that certain accounting and financial-reporting personnel had shifted income items between periods to achieve consistent quarterly same-property NOI growth. The SEC and U.S. Attorney’s Office inquiries concerning former employees were ongoing. Management reported effective disclosure controls and internal control over financial reporting at December 31, 2018; the auditor issued unqualified opinions on the financial statements and internal controls.
- Adoption of the new lease standard in 2019 was expected to materially affect the balance sheet; Brixmor estimated an operating lease liability of $45–$55 million and a corresponding right-of-use asset of $40–$50 million.
Important facts for investors to verify
- Whether same-property NOI and billed occupancy stabilize or improve, and whether leasing spreads translate into durable rent and cash-flow growth.
- How much of reported earnings depended on property-sale gains, and the drivers of the sharp decline in FFO.
- Execution, funding, costs, and realized returns on the redevelopment pipeline, alongside planned dispositions and any acquisitions or repurchases.
- Debt levels, liquidity, refinancing terms, variable-rate exposure, LIBOR transition provisions, and future interest costs.
- Progress and final resolution of the SEC matter and remaining related litigation, including insurance coverage and any additional costs.
- The effect of the 2019 lease-accounting adoption and the sustainability of dividends relative to operating cash flow and capital needs.