Brixmor Property Group Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. Dollar amounts are in millions except per-share data. Brixmor is a REIT operating 480 open-air shopping centers totaling approximately 82 million square feet, primarily through Brixmor Operating Partnership LP.
Financial and operating performance
- Revenue: $317.2 million, down 2.6% from $325.8 million. Rental income declined $6.3 million, largely reflecting dispositions and lower occupancy; base rent in the remaining portfolio increased $2.9 million. Expense reimbursements fell $2.3 million.
- Profit: Net income was $61.0 million versus $71.7 million; diluted EPS was $0.20 versus $0.23. Higher impairment and doubtful-account charges more than offset lower operating costs, depreciation, and interest expense.
- Margins and property results: Same-property NOI rose 0.7% to $218.2 million; NOI margin was 72.9% versus 72.8%. Same-property billed and leased occupancy were 89.8% and 92.1%, respectively, compared with 90.5% and 92.6% in the comparable-property table for Q1 2017. Portfolio-wide occupancy was reported as 89.8% billed and 92.1% leased, versus 90.4% and 92.5% at March 31, 2017.
- Leasing: New, renewal, and option leases generated a 14.5% rent spread overall, compared with 13.4% in Q1 2017. New and renewal leases produced a 16.7% spread versus 16.4%.
- FFO: NAREIT FFO was $154.8 million, down from $161.6 million; diluted FFO per share/unit was $0.51 versus $0.53.
- Cash flow: Operating cash flow was $124.5 million, up from $108.2 million. Investing activities provided $28.2 million, chiefly reflecting $104.2 million of property-sale proceeds, partly offset by $76.8 million of real estate improvements and investments. Financing used $170.7 million, including distributions and $29.8 million of share repurchases. Cash, cash equivalents, and restricted cash totaled $92.8 million at quarter-end, down from $110.8 million at year-end 2017.
- Balance sheet and liquidity: Total assets were $9.0 billion and net debt obligations were $5.62 billion, down from $5.68 billion at December 31, 2017. The $1.25 billion revolving credit facility was undrawn, which management cited as available liquidity. The company reported compliance with debt covenants and investment-grade ratings from all three major agencies.
- Distributions: The quarterly dividend was $0.275 per share/unit, up from $0.260 in Q1 2017. The board declared a second-quarter dividend of $0.275 per share, payable July 16, 2018.
Material changes and notable items
- Total revenue declined while same-property NOI increased modestly. The company attributed lower revenue mainly to net dispositions and reduced billed occupancy.
- Real estate impairment charges rose to $15.9 million from $5.7 million, principally following changes in expected holding periods associated with the capital-recycling program. The company sold six shopping centers and one outparcel for $104.2 million in net proceeds, recording an $11.4 million gain; it made no acquisitions.
- Capital spending on real estate improvements and investments increased to $76.8 million from $39.3 million. Brixmor had 48 projects in process with anticipated aggregate costs of $287.7 million, of which $109.9 million had been incurred.
- The company repaid $50.0 million of unsecured term-loan debt, funded primarily with disposition proceeds. Debt maturities included $148.3 million for the remainder of 2018, $618.7 million in 2019, and $672.7 million in 2020; $3.03 billion was scheduled thereafter.
Outlook, risks, and contingencies
- Management said cash flows and available capital sources were expected to cover anticipated needs for the next 12 months, including debt service, capital improvements, distributions, and other obligations. No numerical earnings or FFO guidance was provided.
- Key business risks include economic and local-market conditions, rental rates and space demand, competition, tenant creditworthiness, tenant sales affecting percentage rent, and property operating-cost increases. Interest-rate exposure remains relevant despite $1.4 billion of swap notional hedging variable-rate debt.
- SEC and U.S. Attorney’s Office investigations into aspects of prior-period accounting and financial reporting continued; the company said it was cooperating. The background includes a 2016 Audit Committee finding that certain personnel had shifted income items between periods to smooth reported same-property NOI growth.
- A securities class-action settlement of $28.0 million received final court approval in December 2017. The settlement was within insurance coverage; $19.5 million remained in escrow at March 31, 2018, with a corresponding insurance receivable accrued. Certain investors opted out, and the company expected any related claims to remain within insurance coverage.
- Management reported no material expected environmental liability, no material off-balance-sheet arrangements, and no material change in previously disclosed risk factors. Disclosure controls were assessed as effective at quarter-end.
Important facts for investors to verify
- Whether occupancy and rent-spread trends translate into durable same-property NOI growth, given the reported year-over-year occupancy declines.
- Whether the $15.9 million of impairments and the capital-recycling program signal further expected property dispositions or valuation pressure.
- Upcoming debt maturities, refinancing terms, variable-rate exposure, and the continued availability of the undrawn revolver.
- Progress and final distributions under the insured securities settlement, as well as outcomes of the ongoing government investigations and any opt-out claims.
- Execution, remaining costs, and returns on the 48 active capital projects, alongside the dividend and share-repurchase program’s demands on cash.