Brixmor Property Group Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This annual filing also provides quarterly data, including fourth-quarter results. Brixmor is a REIT operating a U.S. portfolio of open-air community and neighborhood shopping centers through Brixmor Operating Partnership LP.
Business context and operating performance
- At year-end, the portfolio comprised 486 centers and approximately 82.8 million square feet of gross leasable area; 69% of centers were grocery-anchored.
- Leased occupancy was 92.2% and billed occupancy was 90.3%, versus 92.8% and 90.7%, respectively, at year-end 2016. Occupancy below 10,000 square feet was weaker, at 84.5% leased.
- 2017 leasing produced a 15.5% spread on new and renewal leases, excluding options, and a 12.6% spread including options; new-lease spreads were 34.1%. Average portfolio annualized base rent was $13.47 per leased square foot.
Financial highlights
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $1,283.2 million | $1,275.8 million |
| Net income | $300.4 million | $278.1 million |
| Net income attributable to common stockholders | $300.3 million; $0.98 per diluted share | $275.5 million; $0.91 per diluted share |
| NAREIT FFO | $638.4 million; $2.09 per diluted share/OP unit | $632.0 million; $2.07 per diluted share/OP unit |
| Same-property NOI | $875.3 million | $853.1 million |
| Same-property NOI margin | 73.7% | 73.7% |
| Cash from operating activities | $551.9 million | $567.5 million |
Revenue increased about 0.6%; net income rose about 8%, and FFO per share/unit increased about 1%. Same-property NOI grew 2.6%. GAAP earnings included substantial property-sale gains and were affected by higher impairment charges.
- Operating expenses totaled $827.9 million, including $375.0 million depreciation and amortization and $40.1 million of real estate impairment, compared with $5.2 million of impairment in 2016.
- Net interest expense was $226.7 million, broadly unchanged year over year. Investment cash flow was a $52.9 million use; financing cash flow was a $491.2 million use.
- Cash, cash equivalents and restricted cash totaled $110.8 million. The $1.25 billion revolving credit facility was undrawn at year-end.
- Debt obligations, net, were $5.68 billion at year-end, down from $5.84 billion. The company reported approximately $5.7 billion of principal debt, including $0.9 billion secured. Debt maturities and scheduled amortization totaled $203.1 million in 2018. The company was in compliance with debt covenants.
- Common dividends declared were $1.055 per share for 2017, up from $0.995 in 2016; the fourth-quarter declared dividend was $0.275 per share.
Material changes and notable items
- Property dispositions generated $330.8 million in net proceeds; Brixmor acquired properties and outparcels for $190.5 million. Sales produced $68.7 million in gains and $22.9 million in impairment charges. The unconsolidated joint venture interest was also sold for $12.4 million, producing a $4.6 million gain.
- Same-property base rent and expense reimbursements increased, but portfolio occupancy declined. Total rental income fell slightly, partly due to lower lease accretion and lease settlement income.
- Brixmor issued $400 million of 3.90% notes due 2027 and $500 million of 3.65% notes due 2024, and entered into a $300 million variable-rate term loan due 2024. It repaid $815 million of unsecured term loans and $389.1 million of secured loans.
- The board authorized a $400 million share repurchase program; approximately $5.9 million was used in 2017 to repurchase 326,958 shares at an average $17.96 per share.
Outlook, risks and contingencies
- Management said expected operating cash flow, cash balances, available credit and other capital sources should cover anticipated needs over the next 12 months, including debt service, capital spending and REIT distributions. It did not provide specific earnings or FFO guidance.
- Management reported 47 reinvestment projects in progress, with expected aggregate costs of $294.9 million and an average incremental NOI yield of about 9%; a future redevelopment pipeline was estimated at approximately $1.0 billion. Completed 2017 projects averaged an approximately 12% incremental NOI yield.
- Key business risks include retailer distress and bankruptcies, e-commerce and competition for tenants, occupancy and lease renewal performance, redevelopment execution and cost overruns, property impairment, leverage, refinancing and interest-rate exposure, environmental conditions, and natural disasters. A 100-basis-point rate increase was estimated to raise annual interest expense by $1.9 million after swaps.
- In 2016, an Audit Committee review found that certain accounting and financial-reporting personnel had shifted income items between periods to achieve consistent quarterly same-property NOI growth. The company reported the matter to the SEC and said SEC and U.S. Attorney investigations continued; it was cooperating. A securities class-action settlement received final approval in December 2017 for $28 million, accrued with an offsetting insurance receivable. Certain institutional investors opted out; the company expected related claims to be within insurance coverage.
- The company recognized effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether occupancy—particularly in smaller spaces—and tenant credit conditions improve, and whether signed rent spreads convert into realized rental growth.
- The recurring earnings contribution versus disposition gains, impairments and other non-recurring items; assess FFO and same-property NOI alongside GAAP net income.
- Funding and returns for the $294.9 million of projects in progress and the broader redevelopment pipeline, including actual costs, timing and occupancy outcomes.
- Debt maturities, floating-rate exposure, swap coverage, covenant headroom and the availability of the revolving facility.
- Resolution and insurance coverage of the SEC/DOJ investigations and any claims by class-action opt-out investors; also verify the collectability and terms of the recorded insurance receivable.
- Dividend sustainability relative to operating cash flow, capital spending, debt obligations and REIT distribution requirements.