Brixmor Property Group Inc. — Q1 2016 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2016, compared with Q1 2015. Brixmor owns and operates grocery-anchored community and neighborhood shopping centers; at quarter-end it held interests in 518 centers, including 517 wholly owned properties. The Parent Company is a REIT and consolidates Brixmor Operating Partnership LP.
Financial and operating highlights
- Revenue: $323.1 million, up 2.5% from $315.3 million. Rental income rose $7.6 million, including a $5.6 million settlement from a former tenant and a $5.1 million increase in annualized base rent; lower net lease-intangible accretion partly offset growth.
- Profit: Net income was $61.5 million versus $31.1 million; net income attributable to common stockholders was $60.5 million versus $30.4 million. Diluted EPS was $0.20 versus $0.10. NAREIT FFO, a supplemental non-GAAP measure, was $161.3 million, or $0.53 per diluted share/OP unit, versus $139.2 million, or $0.46.
- Expenses and margins: Total operating expenses decreased to $203.4 million from $221.9 million, primarily reflecting lower depreciation and amortization and general and administrative expense. The filing does not provide a clear operating-margin measure. G&A included $3.7 million of Audit Committee review-related legal and consulting costs; lower equity compensation drove much of the year-over-year expense reduction.
- Cash flow: Operating cash flow was $114.0 million, compared with $112.9 million. Investing used $37.1 million, including $36.3 million for real estate improvements and investments. Financing used $40.6 million. Cash and cash equivalents ended the quarter at $105.8 million.
- Debt and liquidity: Debt obligations, net, were $6.01 billion, up from $5.97 billion at year-end 2015. The company reported $794 million of undrawn capacity under its unsecured credit facility and stated it was in compliance with debt covenants. Scheduled remaining-2016 debt maturities were $873.0 million; total scheduled maturities were $6.00 billion.
- Portfolio and leasing: Billed occupancy was 90.4%, versus 90.3% a year earlier; leased occupancy was 92.4% in both periods. The company executed 497 leases covering 3.6 million square feet. Comparable new and renewal leases had a 10.9% increase in average annualized cash base rent versus prior leases; new leases alone had a 34.9% increase.
Material changes and outlook
- Interest expense declined $5.1 million year over year, primarily following 2015 debt repayments, partly offset by subsequent note issuance.
- Management said expected cash flows and available financing should cover anticipated needs for the next 12 months, including debt service, tenant improvements, and REIT distributions. This is management’s assessment, not quantified earnings guidance; no specific earnings or FFO outlook is provided.
- The board declared a quarterly dividend of $0.245 per share/OP unit for Q1, paid April 15, 2016, and declared the same amount for Q2, payable July 15, 2016.
- Management identified rent growth, occupancy gains, contractual escalations, and anchor-space repositioning, redevelopment, and outparcel projects as expected growth drivers. At quarter-end, 39 such projects had anticipated total costs of $156.9 million, of which $52.7 million had been incurred.
Risks, contingencies, and unusual items
- An Audit Committee review found that certain personnel had shifted income items between reporting periods to achieve consistent quarterly same-property NOI growth. The board concluded that this reflected a material weakness in internal control; management stated the actual financial-statement misstatement was not significant but the potential for material misstatement was more than remote. Disclosure controls were deemed ineffective at March 31, 2016. Remediation was underway.
- The SEC opened an investigation into the accounting and reporting matters, and the company said it was cooperating. The company and former officers were also named in a securities class action filed March 31, 2016; the company said it intended to defend the action.
- Several senior executives resigned following the review. Subsequent to quarter-end, James M. Taylor was appointed CEO and President and Angela Aman CFO, both effective May 20, 2016.
- Q1 2016 rental income included the $5.6 million former-tenant bankruptcy settlement. Q1 2015 included a $0.8 million property impairment and a $0.3 million debt-extinguishment gain. Q1 2016 G&A included a $2.6 million equity-compensation benefit associated with executive departures.
- Key business risks include economic and local market conditions, tenant credit and sales, leasing demand and rental rates, competition, and the potential effects of the investigation, litigation, management changes, and control remediation on capital-market access and cost of capital.
Important facts for investors to verify
- Progress and effectiveness of remediation of the material weakness, and whether disclosure controls are later judged effective.
- Status, scope, and potential financial impact of the SEC investigation and securities class action; the filing does not provide a clear estimate of any potential loss.
- Whether reported earnings and FFO growth persist after considering the former-tenant settlement and equity-compensation effects.
- Debt refinancing and liquidity plans for the $873.0 million of scheduled remaining-2016 maturities and future maturities.
- Execution, costs, and returns of redevelopment projects, and the sustainability of leasing spreads, occupancy, and dividends.