Brixmor Property Group Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Brixmor is a REIT that owns, manages, leases, acquires, sells and redevelops open-air retail shopping centers, operating substantially through Brixmor Operating Partnership LP. Its portfolio included 421 centers and approximately 73 million square feet of gross leasable area.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $291.0 million | $313.0 million | $582.1 million | $630.2 million |
| Net income | $69.0 million | $80.4 million | $131.9 million | $141.4 million |
| Diluted earnings per share | $0.23 | $0.26 | $0.44 | $0.47 |
| NAREIT FFO, diluted per share | $142.7 million; $0.48 | $154.3 million; $0.51 | $285.5 million; $0.96 | $309.1 million; $1.02 |
| Operating cash flow | Not separately presented | Not separately presented | $251.0 million | $280.4 million |
Q2 operating expenses were $185.5 million, down from $204.4 million. The resulting operating income before other income and expense was $105.6 million, compared with $108.7 million a year earlier. Q2 interest expense declined to $48.5 million from $55.2 million; gains on property sales also fell, to $13.0 million from $28.3 million. For the first half, lower interest expense and lower impairments partly offset reduced revenue and property-sale gains.
Same-property NOI, a company-defined non-GAAP measure, increased 1.8% in Q2 to $205.2 million and 1.9% for the first half to $409.1 million. Portfolio billed and leased occupancy at June 30 was 87.5% and 91.5%, respectively, versus 89.4% and 92.5% a year earlier. Comparable new, renewal and option lease spreads were 11.7% for Q2, versus 11.2% in Q2 2018.
Balance sheet, liquidity and capital
- At June 30, 2019, total assets were $8.22 billion, net real estate was $7.73 billion, total liabilities were $5.46 billion and debt obligations, net, were $4.93 billion. Debt was $4.89 billion at December 31, 2018.
- Cash, cash equivalents and restricted cash were $13.3 million at June 30, 2019, compared with $50.8 million at year-end 2018 and $101.6 million at June 30, 2018.
- The $1.25 billion revolving credit facility had $1.1 billion of undrawn capacity, before $4.3 million of outstanding letters of credit. Management said expected operating cash flow and other capital sources would fund anticipated needs for the next 12 months and beyond. No scheduled debt maturities were due in the next 12 months; disclosed maturities begin in 2021.
- In May, the Operating Partnership issued $400 million of 4.125% senior notes due 2029, using proceeds primarily to repay credit-facility borrowings. The company reported compliance with its debt covenants and investment-grade ratings from all three major agencies.
- First-half cash distributions to common stockholders were $167.8 million. The quarterly dividend was $0.28 per share; a third-quarter dividend at the same rate was declared, payable October 15, 2019. The share-repurchase program had $275 million of capacity remaining at June 30 and was scheduled to expire December 5, 2019 unless extended.
Material changes and notable items
- Revenue declined 7.0% in Q2 and 7.6% for the first half year over year. Management attributed the rental-income reductions principally to net property dispositions; remaining-portfolio rental income increased. The decline in portfolio occupancy is another factor to monitor.
- First-half investing cash outflow was $139.3 million, versus $108.0 million of investing cash inflow in 2018, reflecting lower sale proceeds and higher acquisitions and real estate investment. The company spent $169.5 million on property improvements and investments, acquired assets for $79.6 million and received $95.1 million from property sales.
- The company had 61 reinvestment projects in process with anticipated aggregate costs of $414.6 million; $186.2 million had been incurred by June 30.
- Adoption of ASC 842 on January 1, 2019 resulted in a $2.0 million cumulative reduction to retained earnings and changed the presentation of certain lease revenues and uncollectible amounts. The company recorded $46.8 million of operating lease liabilities and $41.8 million of right-of-use assets at June 30. Management said the new accounting also increased reported general and administrative expense by reducing capitalized leasing payroll and legal costs.
- First-half impairment charges were $9.3 million, down from $27.8 million in 2018, based on changed anticipated hold periods in the capital-recycling program. Q2 included a $6.2 million impairment of Westview Center.
- Hurricane Michael damage at two Florida properties resulted in $13.7 million of accelerated depreciation, offset by a corresponding insurance receivable; $10.7 million remained receivable at June 30, with no reported net-income impact.
Outlook, risks and contingencies
The filing provides no quantified earnings, revenue or FFO guidance. Management stated that it expects available cash, operating cash flow, facility borrowings and other capital sources to meet anticipated requirements, and intends to continue extending debt duration. The company’s stated strategy emphasizes portfolio management, reinvestment, selective acquisitions and dispositions, and maintaining capital flexibility.
Risks highlighted include economic and local-market conditions, competition and e-commerce, retail-sector disruption and tenant creditworthiness, occupancy and leasing demand, property expense inflation, repair and re-leasing costs, natural disasters and changes in laws and regulations. Management cautioned that future real-estate impairments may occur. The company also faces interest-rate exposure on variable-rate debt, partially hedged with swaps.
A proposed SEC resolution related to the company’s previously disclosed historical financial-reporting review remained subject to final documentation and SEC approval. Its material terms included a cease-and-desist order, without admitting or denying findings, and a $7.0 million civil penalty, recorded as a contingent liability. SEC and U.S. Attorney inquiries concerning certain former employees were ongoing. The company said it believed no additional government proceedings against the company would be brought. Routine litigation and environmental matters were not expected by management to have a material impact. The filing reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether same-property operating growth can persist while portfolio billed and leased occupancy remain below year-earlier levels.
- How much of the revenue and cash-flow declines reflects dispositions versus underlying property performance, and whether leasing spreads translate into collected rent.
- Progress, remaining cost and expected returns on the 61 active reinvestment projects and the company’s acquisition and disposition activity.
- Debt costs, refinancing requirements, liquidity and covenant headroom, including the effect of variable rates despite hedging.
- Final resolution and payment of the proposed $7.0 million SEC penalty, and any developments in the inquiries involving former employees.
- Collection of the $10.7 million Hurricane Michael insurance receivable and the assumptions underlying property impairments and held-for-sale valuations.