Brixmor Property Group Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Brixmor is a REIT that owns and operates open-air retail shopping centers, primarily neighborhood and community centers. Its portfolio comprised 409 centers and approximately 72 million square feet of GLA at quarter-end. Unless noted, amounts below are in millions of dollars; results are consolidated for Brixmor and its Operating Partnership.
Financial performance and position
- Q3 revenue: $293.0, down 4.4% from $306.5 a year earlier. Net income: $80.9, or $0.27 per diluted share, versus $147.3, or $0.49 per share. The prior-year quarter included substantially larger real estate sale gains.
- First nine months: Revenue was $875.1 versus $936.7; net income was $212.7 versus $288.7; diluted EPS was $0.71 versus $0.95.
- FFO: NAREIT FFO was $145.3, or $0.49 per diluted share, in Q3 versus $128.4, or $0.42, in Q3 2018. Nine-month FFO was $430.8 versus $437.5, or $1.44 per diluted share in both periods. FFO is a non-GAAP measure.
- Same-property operations: Q3 same-property NOI increased 4.4% to $204.3 from $195.7; same-property revenue was $275.2. The implied NOI margin was approximately 74.3%, versus 72.9% a year earlier. Nine-month same-property NOI rose 2.8% to $604.1. These are non-GAAP measures.
- Occupancy and leasing: Portfolio billed and leased occupancy were 88.6% and 91.9%, respectively, versus 89.4% and 92.5% a year earlier. Q3 comparable new and renewal leases achieved a 13.3% rent spread; new leases alone achieved 30.5%.
- Cash flow: Operating cash flow for the first nine months was $399.9, essentially unchanged from $400.2. Investing used $110.5, compared with $480.1 provided in 2018, reflecting lower property-sale proceeds and higher investment spending. Financing used $308.7 versus $926.0. Cash, cash equivalents and restricted cash totaled $31.5 at September 30, 2019, versus $65.0 a year earlier.
- Debt and liquidity: Debt obligations, net, were $4,852.5 at September 30, 2019, down from $4,885.9 at year-end 2018. The $1.25 billion revolving facility had $1.2 billion of undrawn capacity, with $4.3 million of letters of credit reducing availability. No scheduled debt maturities fell within the 12 months after issuance of the financial statements; stated maturities include $750 million in 2022 and $850 million in 2023. The Company reported compliance with debt covenants and investment-grade ratings from all three major agencies.
- Capital returns: The Q3 dividend was $0.28 per share. The board declared a $0.285-per-share Q4 dividend. The share repurchase program had $275 million of remaining capacity at quarter-end; $14.6 million of shares were repurchased in the first nine months.
Material changes and drivers
- Revenue declined mainly because of net property dispositions: rental income was lower by $21.0 in Q3 and $74.6 for the first nine months. Growth in the remaining portfolio partly offset the declines, supported by base-rent increases and leasing spreads.
- Lower sale gains were a major reason net income fell: gains on real estate sales were $25.6 in Q3 2019 versus $119.3 in Q3 2018, and $46.3 for the first nine months versus $159.0.
- Interest expense fell by $7.7 in Q3 and $22.9 year to date, primarily due to lower overall debt obligations. Lower impairment charges and lower debt-extinguishment losses also helped comparisons, while reported net income remained affected by the much smaller property-sale gains.
- Property investment increased: improvements and investments in real estate totaled $282.2 for the first nine months, versus $185.0 in 2018. The Company had 62 projects in process with anticipated total costs of $413.9; $191.6 had been incurred by quarter-end.
- Property dispositions slowed versus the prior year. In the first nine months of 2019, Brixmor sold 18 shopping centers and four partial centers for $239.4 in net proceeds, versus 42 centers and two partial centers for $676.5 in 2018. It acquired assets for $79.6, compared with $9.0 a year earlier.
Outlook, risks and unusual items
- Management stated that operating cash flow, available credit, dispositions and access to debt and equity capital are expected to provide adequate funding for anticipated needs for the next 12 months and beyond. The filing does not provide numeric earnings or FFO guidance.
- Management’s strategy emphasizes portfolio leasing and reinvestment, selective acquisitions and dispositions, and maintaining financial flexibility. It intends to continue regular dividends while evaluating the policy quarterly.
- Key risks include retail-sector disruption and tenant financial health, e-commerce and competition, occupancy and lease renewals, property expense inflation, local economic and real-estate conditions, and natural disasters or other uninsured losses. Management said there were no material changes to the risk factors disclosed in the 2018 Form 10-K.
- The Company adopted ASC 842 on January 1, 2019, recording a $2.0 cumulative reduction to retained earnings and changing lease-cost presentation. Expensing certain indirect leasing costs contributed to higher general and administrative expense.
- In August 2019, Brixmor finalized an SEC settlement, without admitting or denying the findings, including a $7.0 civil penalty paid in Q3 and engagement of an independent consultant to assess policies and procedures for certain non-GAAP measures. The Company remains obligated to indemnify former officers for certain legal costs, which may exceed insurance coverage.
- Q3 real estate impairment charges were $8.2; nine-month charges were $17.5, largely associated with dispositions and changes in expected holding periods. Hurricane Michael damage resulted in a $7.4 insurance receivable at quarter-end; the filing reported no net-income impact from the recognized damage and estimated recoveries.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether same-property NOI growth and leasing spreads can offset portfolio-wide occupancy declines and continued portfolio dispositions.
- How the $413.9 project pipeline, including remaining costs, will be funded and affect future cash flow and returns.
- Debt refinancing and interest-rate exposure, including the 2022–2023 maturities, revolver availability and effectiveness of interest-rate swaps.
- Tenant credit, receivables collectability, and the remaining Hurricane Michael insurance recovery.
- Any continuing costs or obligations related to the SEC settlement, consultant review, or indemnification of former officers.