Brixmor Property Group Inc. annual report, FY2013

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Brixmor Property Group Inc. — 2013 Form 10-K

Reporting period: Fiscal year ended December 31, 2013. The company completed its IPO on November 4, 2013; its common stock began NYSE trading on October 30, 2013. Unless otherwise noted, financial amounts are in U.S. dollars.

Business context

Brixmor is an internally managed REIT focused on grocery-anchored community and neighborhood shopping centers. At year-end, its IPO Portfolio comprised 522 centers and 86.8 million square feet of GLA, with 70% of centers grocery-anchored. The portfolio was 92.4% leased, up from 91.3% at December 31, 2012. The filing’s consolidated results also include Non-Core Properties that were largely transferred to pre-IPO owners on January 15, 2014, so reported historical results do not reflect that transfer.

Financial and operating performance

  • Revenue: $1.175 billion in 2013, up $55.5 million (5.0%) from $1.119 billion in 2012. Rental income was $908.9 million; expense reimbursements were $249.3 million.
  • Profit: Net loss attributable to Brixmor was $93.5 million, compared with a $122.6 million loss in 2012. Net loss attributable to common stockholders was $93.7 million, or $0.50 per share, versus $122.9 million, or $0.68 per share. The filing attributes recurring losses primarily to non-cash depreciation, amortization and impairment charges.
  • Fourth quarter: Revenue was $312.0 million and net loss attributable to the company was $12.1 million, compared with $285.3 million and a $22.5 million loss, respectively, in fourth-quarter 2012.
  • Cash flow: Cash provided by operating activities was $332.0 million, up from $268.8 million. Cash and cash equivalents were $113.9 million at year-end. Investing activities used $86.4 million and financing activities used $234.8 million.
  • Property operations: Same-property NOI, a non-GAAP measure, rose 4.0% to $766.7 million from $737.4 million. Same-property leased occupancy increased to 92.6% from 91.3%. Adjusted FFO rose 3.0% to $365.8 million, while adjusted FFO per diluted share/unit declined to $1.45 from $1.47.
  • Debt and liquidity: Debt obligations, net, were $6.0 billion on the balance sheet; aggregate principal indebtedness was approximately $6.1 billion. Total liabilities were $6.9 billion. The $2.75 billion unsecured credit facility had $1.1 billion of undrawn capacity at year-end. Management said expected sources of cash were adequate for anticipated needs over the next 12 months.
  • Margins: The filing does not provide a clear consolidated operating-margin figure. Same-property NOI is a non-GAAP operating measure and should not be treated as a GAAP margin.

Material changes versus 2012

  • Revenue growth reflected higher occupancy and leasing spreads, contribution from 43 Acquired Properties, and increased expense recoveries. Same-property NOI increased 4.0%.
  • Interest expense fell $35.7 million, mainly after repayment of approximately $2.6 billion of secured mortgage and term debt carrying a 5.69% weighted-average rate, partly offset by facility interest expense.
  • General and administrative expense increased $32.3 million, chiefly due to $36.1 million of additional IPO-related stock-based compensation expense.
  • The company recorded $23.5 million of impairment on real estate assets outside discontinued operations and $23.1 million of impairment on properties held for sale or disposed of. It also recorded a $21.0 million loss on debt extinguishments and $6.0 million of IPO expenses within “Other.”
  • IPO proceeds were $893.9 million net of underwriting discounts, expenses and transaction costs; $824.7 million was used to repay the unsecured credit facility. Brixmor also issued 15.9 million OP Units for the Acquired Properties.

Outlook, risks and unusual items

  • Management’s strategy is to grow NOI through occupancy gains, rent increases on below-market leases, contractual escalations and anchor-space redevelopment. It reported 2013 new-lease spreads of 29.5% and blended new-and-renewal spreads of 9.8% for the IPO Portfolio.
  • Management completed 26 anchor repositioning/redevelopment projects in 2013 at an aggregate cost of about $88.9 million and cited 19 active projects with expected cost of $88.7 million and targeted average NOI yields of 13%. These are targets, not guaranteed results.
  • Leases covering 8.7% of leased GLA were scheduled to expire in 2014, with 15.2% in 2015 and 14.8% in 2016. Renewal, re-leasing, tenant-improvement costs and downtime could affect future cash flow.
  • 2014 scheduled debt payments and maturities totaled approximately $327.6 million at December 31, 2013. By February 28, 2014, the company had repaid $143.0 million of maturing mortgages and $57.6 million of notes, primarily using the unsecured facility; it intended to refinance the remaining $47.4 million of 2014 mortgage maturities.
  • Key risks include leverage and refinancing needs, variable-rate exposure, tenant financial distress and retail competition including online sales, redevelopment execution, environmental conditions at some properties, and possible uninsured losses. Brixmor disclosed soil or groundwater contamination at some centers, including issues associated with former dry-cleaning and gasoline operations.
  • Blackstone affiliates held 70.3% of voting power, and Brixmor identified itself as a controlled company intending to use NYSE governance exemptions. The company also warned that substantial pre-IPO-owner holdings could become eligible for future sale or exchange.
  • The board declared a quarterly dividend of $0.20 per share, equivalent to $0.80 annually; the 2013 amount was prorated to $0.127 for the post-IPO period. Future distributions remain at the board’s discretion and depend on cash flow, capital needs, debt restrictions and REIT requirements.
  • The company reported compliance with its debt covenants, no material off-balance-sheet arrangements, and no material litigation outside ordinary-course matters. Disclosure controls were judged effective; management’s internal-control assessment and auditor attestation were omitted under the transition rules for newly public companies.

Most important facts for investors to verify

  • Reconcile reported portfolio and occupancy figures by scope: IPO Portfolio, Consolidated Portfolio, and total portfolio including Non-Core Properties.
  • Review the post-year-end transfer of Non-Core Properties and its expected effect on revenue, NOI, assets and debt.
  • Check debt maturities, refinancing completed after year-end, remaining facility availability, covenant headroom and interest-rate hedges.
  • Assess whether leasing spreads, occupancy gains and redevelopment yields translate into sustained cash NOI after tenant improvements, leasing commissions and capital spending.
  • Evaluate the drivers and cash implications of recurring GAAP losses, impairments, IPO-related compensation and debt-extinguishment charges; compare GAAP earnings with FFO and operating cash flow.
  • Monitor Blackstone’s voting control and potential share/unit sales or exchanges, as well as dividend coverage and the company’s ability to maintain REIT qualification.