Brixmor Property Group Inc. — Q2 2016 Form 10-Q
Business context and reporting period
Quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. Brixmor is a REIT owning and operating open-air community and neighborhood shopping centers. At quarter-end, it owned interests in 516 centers and reported 90.6% billed occupancy and 92.8% leased occupancy. The filing combines Brixmor Property Group Inc. and its operating partnership; financial amounts below are consolidated.
Key financial metrics
Amounts are in millions except per-share data and percentages.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $310.1 | $312.1 | $633.2 | $627.4 |
| Net income | $65.5 | $55.2 | $127.0 | $86.3 |
| Net income attributable to common stockholders | $64.5 | $54.1 | $124.9 | $84.5 |
| Diluted EPS | $0.21 | $0.18 | $0.42 | $0.28 |
| NAREIT FFO | $152.7 | $149.1 | $314.0 | $288.2 |
| Diluted NAREIT FFO per share/OP unit | $0.50 | $0.49 | $1.03 | $0.95 |
- Q2 net income margin was approximately 21.1% versus 17.7% in 2015; six-month margin was approximately 20.1% versus 13.8% (calculated as net income divided by revenue).
- Six-month operating cash flow was $270.5 million, compared with $271.4 million. Investing cash outflow was $69.4 million versus $107.2 million; financing cash outflow was $156.3 million versus $182.0 million.
- At June 30, debt obligations, net, were $5.967 billion, versus $5.974 billion at year-end 2015. Cash and cash equivalents were $114.3 million; restricted cash was $47.9 million. The $1.25 billion revolving facility was undrawn at quarter-end.
- Total assets were $9.428 billion and total liabilities were $6.527 billion. The company reported compliance with debt covenants at June 30.
- Common dividends and OP-unit distributions declared were $0.245 per share/unit for Q2 and $0.49 for the first half. A Q3 dividend of $0.245 was declared in July.
Material changes versus prior comparable periods
- Q2 revenue declined $2.1 million, as rental income rose $1.5 million but expense reimbursements fell $3.7 million, primarily from tax reconciliations and refunds. Six-month revenue increased $5.8 million; rental income rose $9.1 million, including a $5.6 million former-tenant bankruptcy settlement.
- Net income increased in both comparison periods. Lower depreciation and interest expense contributed; six-month operating expenses fell $25.7 million and interest expense fell $11.1 million. Q2 general and administrative expense increased $6.9 million, largely due to executive severance, accelerated equity compensation and costs for the new leadership team.
- Q2 rent spreads on comparable new and renewal leases and option exercises were 11.5%, versus 14.9% in Q2 2015. For the first half, the filing reports the same 11.5% versus 14.9% comparison. First-half comparable new leases had a 29.2% rent increase over prior tenants; comparable new and renewal leases combined increased 15.8%.
- The company sold two shopping centers and one outparcel for $20.5 million net proceeds and recorded a $7.8 million gain. It acquired no shopping centers in the first half, compared with acquisitions in 2015.
- In June, the operating partnership issued $600 million of 4.125% senior notes due 2026, using proceeds to repay debt, including revolver borrowings, and for general purposes. During the first half it repaid $168.4 million of secured loans.
Outlook, risks, contingencies and unusual items
- Management said cash from operations, cash balances, available credit, debt and equity issuance, and asset sales should provide adequate capital for anticipated needs over the next 12 months. It gave no numerical earnings or FFO guidance in the provided filing text.
- On July 25, 2016, the company amended and restated its credit facility: a $1.25 billion revolver now matures July 2020, and the prior term loan was reallocated into a $1.0 billion tranche due 2018 and a $500 million tranche due 2021. No revolver amounts were drawn on that date. The amendment included customary financial covenants; the existing $600 million term loan’s maturity and pricing were unchanged.
- The Audit Committee review found that certain personnel had smoothed income items between reporting periods to produce consistent quarterly same-property NOI growth. Management said the actual financial-statement misstatement was not significant, but the control override created a material weakness. Disclosure controls were deemed ineffective as of June 30, 2016; remediation was underway.
- The SEC has commenced an investigation into the accounting matters, and the company is cooperating. The company and former officers are defendants in a putative securities class action; Brixmor says it intends to vigorously defend itself. Management cannot assure the outcome or the effect of these matters.
- Several senior executives resigned following the review; a new CEO and CFO were appointed effective May 20, 2016. Management cited changes in economic conditions, tenant financial health, demand, competition, rental rates and property expenses as business risks.
- Unusual first-half items included the $5.6 million bankruptcy settlement and executive-related costs. No material off-balance-sheet arrangements were reported; environmental liabilities were not expected by management to have a material impact.
Investor verification priorities
- Review the Audit Committee findings, the material weakness, remediation milestones and subsequent assessments of internal controls.
- Track the SEC investigation and securities litigation, including potential costs, outcomes and disclosure developments.
- Verify leasing and occupancy trends, rent spreads, tenant credit quality, and the sustainability of revenue growth excluding the bankruptcy settlement.
- Assess debt maturities, refinancing needs, interest-rate exposure and covenant headroom, including the effects of the July 2016 credit-facility amendments.
- Reconcile NAREIT FFO growth and dividend coverage with GAAP earnings and operating cash flow; FFO is a non-GAAP measure and is not a substitute for cash flow.