Brixmor Property Group Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. Brixmor is a REIT owning and operating a primarily community- and neighborhood-shopping-center portfolio. It reported interests in 514 centers, including one held through an unconsolidated joint venture.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $318.6 million | $313.0 million | $951.7 million | $940.4 million |
| Net income | $57.8 million | $54.8 million | $184.8 million | $141.1 million |
| Net income attributable to common stockholders | $57.5 million | $53.8 million | $182.4 million | $138.3 million |
| Diluted EPS | $0.19 | $0.18 | $0.61 | $0.46 |
| NAREIT FFO per diluted share/OP unit | $0.51 | $0.51 | $1.54 | $1.46 |
- Q3 revenue increased 1.8% year over year; nine-month revenue rose 1.2%. Nine-month net income increased 31.0%, with lower operating expenses and interest expense contributing; results also include a $6.2 million former-tenant bankruptcy settlement in rental income.
- For the nine months, operating cash flow was $418.5 million versus $411.9 million. Investing used $116.6 million versus $160.0 million; financing used $340.3 million versus $274.5 million. Cash and cash equivalents were $31.1 million at September 30, 2016.
- At September 30, total assets were $9.31 billion, net real estate $8.86 billion, and debt obligations, net, $5.86 billion, down from $5.97 billion at year-end 2015. Total liabilities were $6.42 billion. Debt fair value was reported at $6.07 billion, above carrying value. Management stated that financial covenants were met.
- The amended credit facility provided a $1.25 billion revolving facility; $1.16 billion was undrawn at quarter-end. The company issued $600 million of 4.125% notes due 2026 and $500 million of 3.250% notes due 2023, and repaid $849.5 million of secured loans during the nine months.
- Declared dividends/distributions were $0.245 per share/unit for Q3 and $0.735 year to date. A $0.26 Q4 dividend was declared in October 2016.
Operating trends and changes versus prior period
- Billed occupancy was 90.6%, versus 90.9% a year earlier; leased occupancy was 92.6% in both periods. Q3 comparable new and renewal lease spreads were 14.7%; new leases alone had a 26.2% spread. Nine-month comparable new and renewal spreads were 15.5%.
- Q3 operating expenses increased $3.3 million, mainly from higher operating costs, real estate taxes and a $2.0 million impairment, partly offset by lower depreciation and amortization. Nine-month operating expenses declined $22.4 million, primarily reflecting lower depreciation and amortization and general and administrative expense.
- Interest expense decreased $3.7 million in Q3 and $14.8 million year to date, primarily due to debt repayments and refinancing at lower average rates. Nine-month gains on real estate sales were $10.2 million, compared with $9.2 million in 2015.
- During the nine months, Brixmor disposed of four shopping centers and one outparcel for $31.1 million net proceeds. It acquired adjacent parcels and outparcel buildings for $7.9 million. At quarter-end, two properties were held for sale with a $24.1 million carrying value.
Outlook, risks and unusual items
- Management said expected operating cash flows, cash balances, credit availability, debt issuance, asset sales and equity issuance should provide adequate capital for anticipated uses over the next 12 months, including debt service, tenant improvements and REIT distributions. No numerical earnings or FFO guidance was provided.
- Management cited rent growth opportunities from below-market leases, contractual increases, occupancy gains, and anchor repositioning, redevelopment and outparcel development. Thirty-five active projects had anticipated costs of $175.1 million, with $88.9 million incurred at September 30.
- The Audit Committee review found that certain personnel had smoothed income items between periods to achieve consistent same-property NOI growth. The Board said actual financial-statement misstatement was not significant, but the control override created more than a remote potential for material misstatement. A material weakness remained, and management concluded disclosure controls were not effective at September 30. Remediation was underway, including personnel changes, new executive appointments, training and control reviews.
- The SEC and the U.S. Attorney’s Office for the Southern District of New York were investigating the matter; the company said it was cooperating. A putative securities class action was pending, and the company said it intended to defend itself. Management did not expect routine litigation or environmental matters to have a material effect.
- Key business risks include tenant credit and rent collections, local economic and property-market conditions, competition, rental rates, and litigation or investigations. October 2016 interest-rate swaps with $1.4 billion aggregate notional were entered into to hedge floating-rate exposure after existing swaps expired.
Investor verification priorities
- Track remediation of the material weakness and whether disclosure controls are later deemed effective; assess the implications of the accounting-smoothing review and ongoing investigations.
- Monitor occupancy, leasing spreads, tenant credit quality and the sustainability of rental growth, including the effect of lease expirations and concessions.
- Review debt maturities and refinancing exposure, variable-rate borrowing and hedge coverage, particularly after the October swap transactions.
- Assess cash available after capital spending and distributions, including the ability to fund the $175.1 million project pipeline and maintain dividends.
- Follow held-for-sale properties, impairments, disposition proceeds and the outcome of the securities litigation.