BRIXMOR PROPERTY GROUP INC. The following discussion should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto. Historical results and percentage relationships set forth in the Consolidated Financial Statements and accompanying notes, including trends which might appear, should not be taken as indicative of future operations. Executive Summary Our CompanyBrixmor Property Group Inc. and subsidiaries (collectively, "BPG") is an internally-managed real estate investment trust ("REIT").Brixmor Operating Partnership LP and subsidiaries (collectively, the "Operating Partnership") is the entity through which BPG conducts substantially all of its operations and owns substantially all of its assets. BPG owns 100% of the common stock ofBPG Subsidiary Inc. ("BPG Sub"), which, in turn, is the sole member ofBrixmor OP GP LLC (the "General Partner"), the sole general partner of theOperating Partnership . Unless stated otherwise or the context otherwise requires, "we," "our," and "us" mean BPG and theOperating Partnership , collectively. We believe we own and operate one of the largest open-air retail portfolios by gross leasable area ("GLA") inthe United States ("U.S."), comprised primarily of community and neighborhood shopping centers. As ofDecember 31, 2019 , our portfolio was comprised of 403 shopping centers (the "Portfolio") totaling approximately 71 million square feet of GLA. Our high-quality national Portfolio is primarily located within established trade areas in the top 50 Metropolitan Statistical Areas ("MSAs") in theU.S. , and our shopping centers are primarily anchored by non-discretionary and value-oriented retailers, as well as consumer-oriented service providers. As ofDecember 31, 2019 , our three largest tenants by annualized base rent ("ABR") were The TJX Companies, Inc. ("TJX"), The Kroger Co. ("Kroger"), andDollar Tree Stores, Inc. BPG has been organized and operated in conformity with the requirements for qualification and taxation as a REIT under theU.S. federal income tax laws, commencing with our taxable year endedDecember 31, 2011 , has maintained such requirements through our taxable year endedDecember 31, 2019 , and intends to satisfy such requirements for subsequent taxable years. Our primary objective is to maximize total returns to our stockholders through consistent, sustainable growth in cash flow. Our key strategies to achieve this objective include proactively managing our Portfolio to drive internal growth, pursuing value-enhancing reinvestment opportunities and prudently executing on acquisition and disposition activity, while also maintaining a flexible capital structure positioned for growth. In addition, as we execute on our key strategies, we do so guided by a commitment to operate in a socially responsible manner that allows us to realize our goal of owning and managing properties that are the centers of the communities we serve.
We believe the following set of competitive advantages positions us to successfully execute on our key strategies:
• Expansive Retailer Relationships - We believe that the scale of our asset
base and our nationwide footprint represent competitive advantages in
supporting the growth objectives of the nation's largest and most
successful retailers. We believe that we are one of the largest landlords
by GLA to TJX and Kroger, as well as a key landlord to most major grocers
and retail category leaders. We believe that our strong relationships with
leading retailers afford us unique insight into their strategies and
priority access to their expansion plans.
• Fully-Integrated Operating Platform - We manage a fully-integrated
operating platform, leveraging our national scope and demonstrating our
commitment to operating with a strong regional and local presence. We
provide our tenants with dedicated service through both our national
accounts leasing team based in
offices in
leasing and property management satellite offices throughout the country.
We believe that this structure enables us to obtain critical national
market intelligence, while also benefitting from the regional and local
expertise of our leasing and operations team.
• Experienced Management - Senior members of our management team areseasoned real estate operators with extensive public company leadership
experience. Our management team has deep industry knowledge and
well-established relationships with retailers, brokers and vendors through
many years of operational and transactional experience, as well as
significant capital markets capabilities and expertise in executing
value-enhancing reinvestment opportunities.
26-------------------------------------------------------------------------------- Other Factors That May Influence our Future Results We derive our revenues primarily from rent and expense reimbursements paid by tenants to us under existing leases at each of our properties. Expense reimbursements primarily consist of payments made by tenants to us for their proportionate share of property operating expenses, including common area expenses, utilities, insurance and real estate taxes, and certain capital expenditures related to the maintenance of our properties. Rental income is primarily dependent on our ability to maintain or increase rental rates, renew expiring leases and/or lease available space, and our inability to do so may impact our overall performance. Additionally, increases in our property operating expenses, including repairs and maintenance, landscaping, snow removal, utilities, security, ground rent related to properties for which we are the lessee, property insurance, real estate taxes and various other costs, to the extent they are not offset by increases in revenue, may impact our overall performance. Factors that could affect our rental income and/or property operating expenses include: (1) changes in national, regional and local economies, due to global events such as international trade disputes, a foreign debt crisis, foreign currency volatility, as well as from domestic issues, such as government policies and regulations, tariffs, energy prices, market dynamics, rising interest rates and limited growth in consumer income; (2) local market conditions, including an oversupply of space in, or a reduction in demand for, properties similar to those in our Portfolio; (3) competition from other available properties and e-commerce, and the attractiveness of properties in our Portfolio to our tenants; (4) ongoing disruption and/or consolidation in the retail sector, the financial stability of our tenants and the overall financial condition of large retailing companies, including their ability to pay rent and expense reimbursements; (5) in the case of percentage rents, the sales volume of our tenants; (6) increases in property operating expenses, including common area expenses, utilities, insurance and real estate taxes, which are relatively inflexible and generally do not decrease if revenue or occupancy decrease; (7) increases in the costs to repair, renovate and re-lease space; (8) earthquakes, tornadoes, hurricanes, damage from rising sea levels due to climate change, other natural disasters, civil unrest, terrorist acts or acts of war, which may result in uninsured or underinsured losses; and (9) changes in laws and governmental regulations, including those governing usage, zoning, the environment and taxes. See Item 1A. "Risk Factors" for a further discussion of these and other factors that could impact our future results. Leasing Highlights As ofDecember 31, 2019 , billed and leased occupancy were 89.3% and 92.4%, respectively, as compared to 88.4% and 91.9%, respectively, as ofDecember 31, 2018 . The following table summarizes our executed leasing activity for the years endedDecember 31, 2019 and 2018 (dollars in thousands, except for per square foot ("PSF") amounts): For the Year Ended December 31, 2019 Tenant Improvements Third Party Leasing Leases GLA New ABR PSF and Allowances PSF Commissions PSF Rent Spread(1) New, renewal and option leases 1,757 12,789,345$ 13.89 $ 7.16 $ 1.50 10.9 % New and renewal leases 1,506 7,887,596 16.20 11.57 2.44 13.1 % New leases 622 3,525,712 16.52 23.86 5.30 31.7 % Renewal leases 884 4,361,884 15.94 1.63 0.12 7.8 % Option leases 251 4,901,749 10.17 0.06 - 6.9 % For the Year Ended December 31, 2018 Tenant
Improvements
Leases GLA New ABR PSF and Allowances PSF Commissions PSF Rent Spread(1)
New, renewal and
option leases 1,979 12,370,589 $ 14.36 $ 7.57 $ 1.48 11.8 %
New and renewal leases 1,696 8,467,746 15.72 11.01 2.15 13.8 %
New leases 637 3,867,457 14.89 21.82 4.66 34.4 %
Renewal leases 1,059 4,600,289 16.42 1.92 0.04 7.6 %
Option leases 283 3,902,843 11.41 0.10 0.03 7.0 %
27--------------------------------------------------------------------------------
(1) Based on comparable leases only, which consist of new leases signed on
units that were occupied within the prior 12 months and renewal leases
signed with the same tenant in all or a portion of the same location or
that include the expansion into space that was occupied within the prior
12 months.
Excludes leases executed for terms of less than one year. ABR PSF includes the GLA of lessee-owned leasehold improvements.
Acquisition Activity
• During the year ended
two leases at an existing shopping center and one land parcel for an
aggregate purchase price of
• During the year ended
building, three outparcel buildings and one outparcel for
including transaction costs.
Disposition Activity
• During the year ended
centers and three partial shopping centers for aggregate net proceeds of
impairment of
31, 2019, we received aggregate net proceeds of
previously disposed assets resulting in aggregate gain of
• During the year ended
centers, two partial shopping centers and one land parcel for aggregate
net proceeds of
million and aggregate impairment of
year ended December 31, 2018 , we received aggregate net proceeds of $0.5
million from previously disposed assets resulting in aggregate gain of
$0.5 million .
Results of Operations
The results of operations discussion is combined for BPG and the
Comparison of the Year EndedDecember 31, 2019 to the Year EndedDecember 31, 2018 Revenues (in thousands) Year Ended December 31, 2019 2018 $ Change Revenues Rental income$ 1,166,379 $ 1,233,068 $ (66,689 ) Other revenues 1,879 1,272 607 Total revenues$ 1,168,258 $ 1,234,340 $ (66,082 ) Rental income The decrease in rental income for the year endedDecember 31, 2019 of$66.7 million , as compared to the corresponding period in 2018, was primarily due to an$86.7 million decrease in rental income due to net disposition activity, partially offset by a$20.0 million increase for the remaining portfolio. The increase for the remaining portfolio was due to (i) a$19.5 million increase in base rent; (ii) an$8.4 million increase in straight-line rental income, net; (iii) a$5.1 million increase in expense reimbursements; (iv) a$2.5 million increase in ancillary and other rental income; and (v) a$1.3 million increase in percentage rents; partially offset by (vi) a$9.8 million increase in revenues deemed uncollectible; (vii) a$6.8 million decrease in accretion of above- and below-market leases and tenant inducements, net; and (viii) a$0.2 million decrease in lease termination fees. The$19.5 million increase in base rent for the remaining portfolio was primarily due to contractual rent increases as well as positive rent spreads for new and renewal leases and option exercises of 10.9% during the year endedDecember 31, 2019 and 11.8% during the year endedDecember 31, 2018 . In connection with the adoption of Accounting Standards Codification 842 ("ASC 842"), revenues deemed uncollectible, as noted above, is now recognized as an adjustment to rental income. Prior period provision for doubtful accounts is presented in accordance with our previous presentation and has not been reclassified to rental income. 28 -------------------------------------------------------------------------------- Other revenues The increase in other revenues for the year endedDecember 31, 2019 of$0.6 million , as compared to the corresponding period in 2018, was primarily due to an increase in tax increment financing income.
Operating Expenses (in thousands)
Year Ended December 31,
2019 2018 $ Change
Operating expenses
Operating costs $ 124,876 $ 136,217 $ (11,341 )
Real estate taxes 170,988 177,401 (6,413 )
Depreciation and amortization 332,431 352,245 (19,814 )
Provision for doubtful accounts - 10,082 (10,082 )
Impairment of real estate assets 24,402 53,295 (28,893 )
General and administrative 102,309 93,596 8,713
Total operating expenses $ 755,006 $ 822,836 $ (67,830 )
Operating costs
The decrease in operating costs for the year ended December 31, 2019 of $11.3
million , as compared to the corresponding period in 2018, was primarily due to a
$9.9 million decrease in operating costs due to net disposition activity and a
$3.0 million decrease in operating costs for the remaining portfolio, partially
offset by a $1.6 million increase in operating costs due to insurance captive
adjustments.
Real estate taxes
The decrease in real estate taxes for the year ended December 31, 2019 of $6.4
million , as compared to the corresponding period in 2018, was primarily due to a
$10.7 million decrease in real estate taxes due to net disposition activity,
partially offset by a $4.3 million increase for the remaining portfolio
primarily due to increases in tax rates and assessments from several
jurisdictions.
Depreciation and amortization
The decrease in depreciation and amortization for the year ended December 31,
2019 of $19.8 million , as compared to the corresponding period in 2018, was
primarily due to a $23.9 million decrease in depreciation and amortization due
to net disposition activity, partially offset by a $4.1 million increase for the
remaining portfolio primarily due to an increase in depreciation and
amortization of tenant improvements, partially offset by a decrease related to
acquired in-place lease intangibles.
Provision for doubtful accounts
In connection with the adoption of ASC 842 on January 1, 2019 , we recognize any
revenue deemed uncollectible as an adjustment to rental income. Prior periods
continue to be presented in accordance with our previous presentation.
Impairment of real estate assets
During the year ended December 31, 2019 , aggregate impairment of $24.4 million
was recognized on six shopping centers and one partial shopping center as a
result of disposition activity, three operating properties and one partial
operating property. During the year ended December 31, 2018 , aggregate
impairment of $53.3 million was recognized on 17 shopping centers and one
partial shopping center as a result of disposition activity and three operating
properties. Impairments recognized were due to changes in anticipated hold
periods primarily in connection with our capital recycling program.
General and administrative
The increase in general and administrative costs for the year ended December 31,
2019 of $8.7 million , as compared to the corresponding period in 2018, was
primarily due to a reduction in capitalized leasing payroll and legal costs of
$11.9 million in connection with the adoption of ASC 842 and increased payroll
costs, partially offset by a decrease of $7.0 million related to an SEC
settlement.
29
--------------------------------------------------------------------------------
During the years ended December 31, 2019 and 2018, construction compensation
costs of $14.7 million and $10.6 million , respectively, were capitalized to
building and improvements and leasing payroll costs of $0.0 million and $8.0
million , respectively, leasing legal costs of $0.0 million and $3.9 million ,
respectively, and leasing commission costs of $6.0 million and $7.1 million ,
respectively, were capitalized to deferred charges and prepaid expenses, net.
Other Income and Expenses (in thousands)
Year Ended December 31,
2019 2018 $ Change
Other income (expense)
Dividends and interest $ 699 $ 519 $ 180
Interest expense (189,775 ) (215,025 ) 25,250
Gain on sale of real estate assets 54,767 209,168 (154,401 )
Loss on extinguishment of debt, net (1,620 ) (37,096 ) 35,476
Other (2,550 ) (2,786 ) 236
Total other expense $ (138,479 ) $ (45,220 ) $ (93,259 )
Dividends and interest
Dividends and interest remained generally consistent for the year ended December
31, 2019 as compared to the corresponding period in 2018.
Interest expense
The decrease in interest expense for the year ended December 31, 2019 of $25.3
million , as compared to the corresponding period in 2018, was primarily due to
lower overall debt obligations and interest rates.
Gain on sale of real estate assets
During the year ended December 31, 2019 , we disposed of 18 shopping centers and
two partial shopping centers resulting in aggregate gain of $53.4 million . In
addition, during the year ended December 31, 2019 , we received aggregate net
proceeds of $1.6 million from previously disposed assets resulting in aggregate
gain of $1.4 million . During the year ended December 31, 2018 , we disposed of 49
shopping centers, one partial shopping center and one land parcel resulting in
aggregate gain of $208.7 million . In addition, during the year ended December
31, 2018 , we received aggregate net proceeds of $0.5 million from previously
disposed assets resulting in aggregate gain of $0.5 million .
Loss on extinguishment of debt, net
During the year ended December 31, 2019 , we repaid $500.0 million of an
unsecured term loan under our senior unsecured credit facility agreement, as
amended December 12, 2018 (the "Unsecured Credit Facility"), resulting in a $1.6
million loss on extinguishment of debt due to the acceleration of unamortized
debt issuance costs. During the year ended December 31, 2018 , we repaid $881.4
million of secured loans and $435.0 million of unsecured term loans, and we
amended and restated our Unsecured Credit Facility and term loan agreements,
resulting in a $37.1 million loss on extinguishment of debt, net. Loss on
extinguishment of debt, net includes $24.3 million of legal defeasance fees and
$23.0 million of prepayment fees, partially offset by $10.2 million of
accelerated unamortized debt premiums, net of discounts and debt issuance costs.
Other
Other expense remained generally consistent for the year ended
Comparison of the Year EndedDecember 31, 2018 to the Year EndedDecember 31, 2017 See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K for the year endedDecember 31, 2018 , filed with theSecurities and Exchange Commission ("SEC") onFebruary 11, 2019 , for a discussion of the comparison of the year endedDecember 31, 2018 to the year endedDecember 31, 2017 . 30
-------------------------------------------------------------------------------- Liquidity and Capital Resources We anticipate that our cash flows from the sources listed below will provide adequate capital for the next 12 months and beyond for all anticipated uses, including all scheduled principal and interest payments on our outstanding indebtedness, current and anticipated tenant and other capital improvements, stockholder distributions to maintain our qualification as a REIT and other obligations associated with conducting our business.
Our primary expected sources and uses of capital are as follows: Sources • cash and cash equivalent balances;
• operating cash flow;
• available borrowings under our existing Unsecured Credit Facility;
• dispositions;
• issuance of long-term debt; and
• issuance of equity securities.
Uses
• maintenance capital expenditures;
• leasing capital expenditures;
• debt repayments;
• dividend/distribution payments
• value-enhancing reinvestment capital expenditures;
• acquisitions; and
• repurchases of equity securities.
We believe our current capital structure provides us with the financial flexibility and capacity to fund our current capital needs as well as future growth opportunities. We have access to multiple forms of capital, including secured property level debt, unsecured corporate level debt, preferred equity, and common equity, which will allow us to efficiently execute on our strategic and operational objectives. We currently have investment grade credit ratings from all three major credit rating agencies. As ofDecember 31, 2019 , we had$1.24 billion of available liquidity under our$1.25 billion revolving credit facility (the "Revolving Facility"). We intend to continue to enhance our financial and operational flexibility through the additional extension of the duration of our debt. Subsequent toDecember 31, 2019 , we established a new at-the-market equity offering program. See Note 20 - Subsequent Events to our Consolidated Financial Statements in this report for additional information. InMay 2019 , we issued$400.0 million aggregate principal amount of 4.125% Senior Notes due 2029 (the "2029 Notes") at 99.804% of par, the net proceeds of which were used to repay outstanding indebtedness under our Unsecured Credit Facility and for general corporate purposes. The 2029 Notes bear interest at a rate of 4.125% per annum, payable semi-annually onMay 15 andNovember 15 of each year, commencingNovember 15, 2019 . The 2029 Notes will mature onMay 15, 2029 . We may redeem the 2029 Notes prior to maturity at our option, at any time in whole or from time to time in part, at the applicable redemption price specified in the Indenture with respect to the 2029 Notes. If the 2029 Notes are redeemed on or afterFebruary 15, 2029 (three months prior to the maturity date), the redemption price will be equal to 100% of the principal amount of the 2029 Notes being redeemed plus accrued and unpaid interest thereon to, but not including, the redemption date. The 2029 Notes are our unsecured and unsubordinated obligations and rank equally in right of payment with all of our existing and future senior unsecured and unsubordinated indebtedness. InAugust 2019 , we issued$350.0 million aggregate principal amount of 4.125% Senior Notes due 2029 at 106.402% of par, the net proceeds of which were used to repay outstanding indebtedness under our Unsecured Credit Facility and for general corporate purposes. The notes have substantially identical terms as, constitute a further issuance of, and form a single series with, our outstanding 2029 Notes. 31
-------------------------------------------------------------------------------- InDecember 2017 , the Board of Directors authorized a share repurchase program (the "Program") for up to$400.0 million of our common stock. During the year endedDecember 31, 2019 , we repurchased 0.8 million shares of common stock under the Program at an average price per share of$17.43 for a total of$14.6 million , excluding commissions. We incurred commissions of less than$0.1 million in conjunction with the Program during the year endedDecember 31, 2019 . The Program expired pursuant to its terms onDecember 5, 2019 . Subsequent toDecember 31, 2019 , we established a new share repurchase program. See Note 20 - Subsequent Events to our Consolidated Financial Statements in this report for additional information. In connection with our intention to continue to qualify as a REIT for federal income tax purposes, we expect to continue paying regular dividends to our stockholders. Our Board of Directors will continue to evaluate the dividend policy on a quarterly basis, evaluating sources and uses of capital, operating fundamentals, maintenance of our REIT qualification and other factors our Board of Directors may deem relevant. We generally intend to maintain a conservative dividend payout ratio. Cash dividends paid to common stockholders for the years endedDecember 31, 2019 and 2018 were$334.9 million and$333.4 million , respectively. Our Board of Directors declared a quarterly cash dividend of$0.285 per common share inOctober 2019 for the fourth quarter of 2019. The dividend was paid onJanuary 15, 2020 to shareholders of record onJanuary 6, 2020 . Our Board of Directors declared a quarterly cash dividend of$0.285 per common share inFebruary 2020 for the first quarter of 2020. The dividend is payable onApril 15, 2020 to shareholders of record onApril 6, 2020 . Our cash flow activities are summarized as follows (dollars in thousands):Brixmor Property Group Inc. Year Ended December 31, 2019 2018 Cash flows provided by operating activities$ 528,672 $
541,689
Cash flows provided by (used in) investing activities (172,064 )
669,603
Cash flows used in financing activities (385,850 )
(1,271,304 )
Year Ended
2019 2018
Cash flows provided by operating activities$ 528,672 $
541,689
Cash flows provided by (used in) investing activities (172,285 )
669,605
Cash flows used in financing activities (385,519 )
(1,271,402 )
Cash, cash equivalents and restricted cash for BPG and the
Operating Activities Net cash provided by operating activities primarily consists of cash inflows from tenant rental payments and expense reimbursements and cash outflows for property operating expenses, general and administrative expenses and interest expense. During the year endedDecember 31, 2019 , our net cash provided by operating activities decreased$13.0 million as compared to the corresponding period in 2018. The decrease is primarily due to (i) a decrease in net operating income due to net disposition activity; and (ii) an increase in cash outflows for general and administrative expense; partially offset by (iii) a decrease in cash outflows for interest expense; (iv) an increase in same property net operating income; and (v) an increase from net working capital. Investing Activities Net cash provided by (used in) investing activities is impacted by the nature, timing and magnitude of acquisition and disposition activity and improvements to and investments in our shopping centers, including capital expenditures associated with our value-enhancing reinvestment efforts. 32 -------------------------------------------------------------------------------- During the year endedDecember 31, 2019 , our net cash used in investing activities increased$841.7 million as compared to the corresponding period in 2018. The increase was primarily due to (i) a decrease of$667.8 million in net proceeds from sales of real estate assets; (ii) an increase of$126.4 million in improvements to and investments in real estate assets; and (iii) an increase of$62.2 million in acquisitions of real estate assets; partially offset by (iv) an increase of$14.7 million in proceeds from sale of marketable securities, net of purchases. Improvements to and investments in real estate assets During the years endedDecember 31, 2019 and 2018, we expended$395.1 million and$268.7 million , respectively, on improvements to and investments in real estate assets. In addition, during the years endedDecember 31, 2019 and 2018, insurance proceeds of$7.4 million and$8.4 million , respectively, were received and included in improvements to and investments in real estate assets. Maintenance capital expenditures represent costs to fund major replacements and betterments to our properties. Leasing related capital expenditures represent tenant specific costs incurred to lease space, including tenant improvements and tenant allowances. In addition, we evaluate our Portfolio on an ongoing basis to identify value-enhancing reinvestment opportunities. Such initiatives are tenant driven and focus on upgrading our centers with strong, best-in-class retailers and enhancing the overall merchandise mix and tenant quality of our Portfolio. As ofDecember 31, 2019 , we had 55 in-process anchor space repositioning, redevelopment and outparcel development projects with an aggregate anticipated cost of$413.0 million , of which$199.8 million has been incurred as ofDecember 31, 2019 . Acquisitions of and proceeds from sales of real estate assets We continue to evaluate the market for acquisition opportunities and we may acquire shopping centers when we believe strategic opportunities exist, particularly where we can further concentrate our Portfolio in attractive retail submarkets and optimize the quality and long-term growth rate of our asset base. During the year endedDecember 31, 2019 , we acquired two shopping centers, two leases at an existing shopping center and one land parcel for an aggregate purchase price of$79.6 million , including transaction costs. During the year endedDecember 31, 2018 , we acquired two land parcels, one building, three outparcel buildings and one outparcel for an aggregate purchase price of$17.4 million , including transaction costs. We may also dispose of properties when we believe value has been maximized, where there is downside risk, or where we have limited ability or desire to build critical mass in a particular submarket. During the year endedDecember 31, 2019 , we disposed of 24 shopping centers and three partial shopping centers for aggregate net proceeds of$288.5 million . In addition, during the year endedDecember 31, 2019 , we received aggregate net proceeds of$1.6 million from previously disposed assets. During the year endedDecember 31, 2018 , we disposed of 62 shopping centers, two partial shopping centers and one land parcel for aggregate net proceeds of$957.5 million . In addition, during the year endedDecember 31, 2018 , we received aggregate net proceeds of$0.5 million from previously disposed assets. Financing Activities Net cash used in financing activities is impacted by the nature, timing and magnitude of issuances and repurchases of debt and equity securities, as well as principal payments associated with our outstanding indebtedness and distributions made to our common stockholders. During the year endedDecember 31, 2019 , our net cash used in financing activities decreased$885.5 million as compared to the corresponding period in 2018. The decrease was primarily due to (i) a$747.3 million decrease in debt repayments, net of borrowings; (ii) a$90.3 million decrease in repurchases of common stock; and (iii) a$49.3 million decrease in deferred financing and debt extinguishment costs. Contractual Obligations Our contractual obligations relate to our debt, including unsecured notes payable, unsecured credit facilities and a secured loan, with maturities ranging from two years to 10 years, in addition to non-cancelable operating leases pertaining to our ground leases and administrative office leases. 33 -------------------------------------------------------------------------------- The following table summarizes our debt maturities (excluding extension options), interest payment obligations (excluding debt premiums and discounts and deferred financing costs) and obligations under non-cancelable operating leases (excluding renewal options) as ofDecember 31, 2019 : Contractual Obligations (in thousands) Payment due by period 2020 2021 2022 2023 2024 Thereafter Total Debt(1) $ - $ -$ 750,000 $ 857,000 $ 807,000 $ 2,468,453 $ 4,882,453 Interest payments(2) 180,059 181,403 176,495 155,769 115,359 233,115 1,042,200 Operating leases 7,036 7,066 7,115 5,611 5,246 25,560 57,634 Total$ 187,095 $ 188,469 $ 933,610 $ 1,018,380 $ 927,605 $ 2,727,128 $ 5,982,287
(1) Debt includes scheduled maturities for unsecured notes payable, unsecured
credit facilities and a secured loan.
(2) As of
million term loan; (ii) a
of Floating Rate Senior Notes due 2022; and (iv)
under our Revolving Facility. We have in place seven interest rate swap
agreements with an aggregate notional value of
effectively convert variable interest payments to fixed interest payments.
See Item 7A. "Quantitative and Qualitative Disclosures" for a further
discussion of these and other factors that could impact interest payments.
Interest payments for these variable rate loans are presented using rates
(including the impact of interest rate swaps) as of December 31, 2019 .
Non-GAAP Performance Measures
We present the non-GAAP performance measures set forth below. These measures
should not be considered as alternatives to, or more meaningful than, net income
(calculated in accordance with GAAP) or other GAAP financial measures, as an
indicator of financial performance and are not alternatives to, or more
meaningful than, cash flow from operating activities (calculated in accordance
with GAAP) as a measure of liquidity. Non-GAAP performance measures have
limitations as they do not include all items of income and expense that affect
operations, and accordingly, should always be considered as supplemental
financial results to those calculated in accordance with GAAP. Our computation
of these non-GAAP performance measures may differ in certain respects from the
methodology utilized by other REITs and, therefore, may not be comparable to
similarly titled measures presented by such other REITs. Investors are cautioned
that items excluded from these non-GAAP performance measures are relevant to
understanding and addressing financial performance.
Funds From Operations
NAREIT FFO (defined hereafter) is a supplemental, non-GAAP performance measure
utilized to evaluate the operating and financial performance of real estate
companies. The National Association of Real Estate Investment Trusts ("NAREIT")
defines funds from operations ("FFO") as net income (loss), calculated in
accordance with GAAP, excluding (i) depreciation and amortization related to
real estate, (ii) gains and losses from the sale of certain real estate assets,
(iii) gains and losses from change in control, (iv) impairment write-downs of
certain real estate assets and investments in entities when the impairment is
directly attributable to decreases in the value of depreciable real estate held
by the entity and (v) after adjustments for unconsolidated joint ventures
calculated to reflect FFO on the same basis.
Considering the nature of our business as a real estate owner and operator, we
believe that NAREIT FFO is useful to investors in measuring our operating and
financial performance because the definition excludes items included in net
income that do not relate to or are not indicative of our operating and
financial performance, such as depreciation and amortization related to real
estate, and items which can make periodic and peer analyses of operating and
financial performance more difficult, such as gains and losses from the sale of
certain real estate assets.
34--------------------------------------------------------------------------------
Our reconciliation of net income to NAREIT FFO for the years ended
Year Ended December 31,
2019 2018
Net income $ 274,773 $ 366,284 Depreciation and amortization related to real estate 328,534 347,862 Gain on sale of real estate assets
(54,767 ) (209,168 )
Impairment of real estate assets 24,402 53,295
NAREIT FFO $ 572,942 $ 558,273
NAREIT FFO per diluted share $ 1.91 $ 1.85
Weighted average diluted shares outstanding 299,334 302,339
Same Property Net Operating Income
Same property net operating income ("NOI") is a supplemental, non-GAAP
performance measure utilized to evaluate the operating performance of real
estate companies. Same property NOI is calculated (using properties owned for
the entirety of both periods and excluding properties under development and
completed new development properties which have been stabilized for less than
one year) as total property revenues (base rent, expense reimbursements,
adjustments for revenues deemed uncollectible, ancillary and other rental
income, percentage rents and other revenues) less direct property operating
expenses (operating costs, real estate taxes and provision for doubtful
accounts). Same property NOI excludes (i) corporate level expenses (including
general and administrative), (ii) lease termination fees, (iii) straight-line
rental income, net, (iv) accretion of above- and below-market leases and tenant
inducements, net, (v) straight-line ground rent expense, and (vi) income
(expense) associated with our captive insurance company.
Considering the nature of our business as a real estate owner and operator, we
believe that same property NOI is useful to investors in measuring the operating
performance of our property portfolio because the definition excludes various
items included in net income that do not relate to, or are not indicative of,
the operating performance of our properties, such as depreciation and
amortization and corporate level expenses (including general and
administrative), and because it eliminates disparities in NOI due to the
acquisition or disposition of properties or the stabilization of completed new
development properties during the period presented and therefore provides a more
consistent metric for comparing the operating performance of our real estate
between periods.
Comparison of the Year Ended December 31, 2019 to the Year Ended December 31,
2018
Year Ended December 31,
2019 2018 Change
Number of properties 397 397 -
Percent billed 89.6 % 88.2 % 1.4 %
Percent leased 92.7 % 91.8 % 0.9 %
Revenues
Rental income $ 1,087,370 $ 1,068,026 $ 19,344
Other revenues 1,856 1,146 710
1,089,226 1,069,172 20,054
Operating expenses
Operating costs (120,994 ) (123,561 ) 2,567
Real estate taxes (164,875 ) (160,419 ) (4,456 )
Provision for doubtful accounts - (8,515 )
8,515
(285,869 ) (292,495 ) 6,626
Same property NOI $ 803,357 $ 776,677 $ 26,680
35--------------------------------------------------------------------------------
The following table provides a reconciliation of net income to same property NOI for the periods presented (in thousands):
Year Ended December 31,
2019 2018
Net income $ 274,773 $ 366,284
Adjustments:
Non-same property NOI (27,193 ) (91,757 )
Lease termination fees (3,314 ) (3,672 )
Straight-line rental income, net (23,427 ) (15,352 )
Accretion of above- and below-market leases and
tenant inducements, net (15,230 ) (23,313 )
Straight-line ground rent expense 127 131
Depreciation and amortization 332,431
352,245
Impairment of real estate assets 24,402 53,295 General and administrative 102,309 93,596 Total other income (expense) 138,479 45,220 Same property NOI$ 803,357 $ 776,677 Our Critical Accounting Policies Our discussion and analysis of our historical financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results could ultimately differ from those estimates. See Note 1 - Nature of Business and Financial Statement Presentation to our Consolidated Financial Statements in this report for a discussion of recently-issued and adopted accounting standards. Revenue Recognition and Receivables We enter into agreements with tenants which convey the right to control the use of identified space at our shopping centers in exchange for rental revenue. These agreements meet the criteria for recognition as leases under ASC 842. Rental revenue is recognized on a straight-line basis over the terms of the related leases. The cumulative difference between rental revenue recognized on our Consolidated Statements of Operations and contractual payment terms is recognized as deferred rent and included in Receivables, net on our Consolidated Balance Sheets. We commence recognizing rental revenue based on the date we make the underlying asset available for use by the tenant. Leases also typically provide for the reimbursement of property operating expenses, including common area expenses, utilities, insurance and real estate taxes by the lessee and are recognized in the period the applicable expenditures are incurred. In connection with the adoption of ASC 842, we have evaluated the lease and non-lease components within our leases where we are the lessor and have elected the practical expedient to present lease and non-lease components in our lease agreements as one component. As such, we account for rental revenue (lease component) and common area expense reimbursements (non-lease component) as one lease component under ASC 842. Additionally, we also include the non-components of our leases, such as the reimbursement of utilities, insurance and real estate taxes, within this lease component. These amounts are included in Rental income on our Consolidated Statements of Operations. Certain leases also provide for percentage rents based upon the level of sales achieved by a lessee. Percentage rents are recognized upon the achievement of certain pre-determined sales thresholds and are included in Rental income on our Consolidated Statements of Operations. Gains from the sale of depreciated operating properties are generally recognized under the full accrual method, provided that various criteria relating to the terms of the sale and subsequent involvement by us with the applicable property are met. We periodically evaluate the collectability of our receivables related to rental revenue, straight-line rent, expense reimbursements and those attributable to other revenue generating activities. We analyze individual tenant receivables and consider tenant credit-worthiness, the length of time a receivable has been outstanding, and current economic trends when evaluating collectability. In addition, tenants in bankruptcy are analyzed and estimates are made in connection 36 --------------------------------------------------------------------------------
with the expected recovery of pre-petition and post-petition claims. Any receivables that are deemed to be uncollectible are recognized as a reduction to Rental income on our Consolidated Statements of Operations. Prior period Provision for doubtful accounts is included in Operating expenses on our Consolidated Statements of Operations in accordance with our previous presentation and has not been reclassified to Rental income.
Real Estate
Real estate assets are recognized on our Consolidated Balance Sheets at
historical cost, less accumulated depreciation and amortization. Upon
acquisition of real estate operating properties, management estimates the fair
value of acquired tangible assets (consisting of land, buildings, and tenant
improvements), identifiable intangible assets and liabilities (consisting of
above- and below-market leases and in-place leases), and assumed debt based on
an evaluation of available information. Based on these estimates, the fair value
is allocated to the acquired assets and assumed liabilities. Transaction costs
incurred during the acquisition process are capitalized as a component of the
asset's value.
The fair value of tangible assets is determined as if the acquired property is
vacant. Fair value is determined using an exit price approach, which
contemplates the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date.
In allocating fair value to identifiable intangible assets and liabilities, the
value of above-market and below-market leases is estimated based on the present
value (using a discount rate reflecting the risks associated with the leases
acquired) of the difference between: (i) the contractual amounts to be paid
pursuant to the leases negotiated and in-place at the time of acquisition and
(ii) management's estimate of fair market lease rates for the property or an
equivalent property, measured over a period equal to the remaining
non-cancelable term of the lease, which includes renewal periods with fixed
rental terms that are considered to be below-market. The capitalized
above-market or below-market intangible is amortized as a reduction of, or
increase to, rental income over the remaining non-cancelable term of each lease.
The value of in-place leases is estimated based on management's evaluation of
the specific characteristics of each tenant lease, including: (i) fair market
rent and the reimbursement of property operating expenses, including common area
expenses, utilities, insurance and real estate taxes that would be forgone
during a hypothetical expected lease-up period and (ii) costs that would be
incurred, including leasing commissions, legal and marketing costs, and tenant
improvements and allowances, to execute similar leases. The value assigned to
in-place leases is amortized to Depreciation and amortization expense over the
remaining term of each lease.
Certain real estate assets are depreciated using the straight-line method over
the estimated useful lives of the assets. The estimated useful lives are as
follows:
Building and building and land improvements 20 - 40 years
Furniture, fixtures, and equipment 5 - 10 years
The shorter of the term of the related
Tenant improvements lease or useful life
Costs to fund major replacements and betterments, which extend the life of the
asset, are capitalized and depreciated over their respective useful lives, while
costs for ordinary repairs and maintenance activities are expensed to Operating
costs as incurred.
On a periodic basis, management assesses whether there are any indicators,
including property operating performance, changes in anticipated hold period and
general market conditions, that the carrying value of our real estate assets
(including any related intangible assets or liabilities) may be impaired. If an
indicator is identified, a real estate asset is considered impaired only if
management's estimate of aggregate future undiscounted and unleveraged property
operating cash flows, taking into account the anticipated probability-weighted
hold period, are less than the carrying value of the property. Various factors
are considered in the estimation process, including trends and prospects and the
effects of demand and competition on future operating income. Changes in any
estimates and/or assumptions, including the anticipated hold period, could have
a material impact on the projected operating cash flows. If management
determines that the carrying value of a real estate asset is impaired, a loss is
recognized to reflect the estimated fair value.
37
--------------------------------------------------------------------------------
When a real estate asset is identified by management as held for sale, we
discontinue depreciating the asset and estimate its sales price, net of
estimated selling costs. If the estimated net sales price of an asset is less
than its net carrying value, an impairment is recognized to reflect the
estimated fair value. Properties classified as real estate held for sale
represent properties that are under contract for sale and where the applicable
pre-sale due diligence period has expired prior to the end of the reporting
period.
In situations in which a lease or leases with a tenant have been, or are expected to be, terminated early, we evaluate the remaining useful lives of depreciable or amortizable assets in the asset group related to the lease terminated (i.e., tenant improvements, above- and below-market lease intangibles, in-place lease value and leasing commissions). Based upon consideration of the facts and circumstances surrounding the termination, we may accelerate the depreciation and amortization associated with the asset group.
Stock Based Compensation We account for equity awards in accordance with theFinancial Accounting Standards Board's Stock Compensation guidance, which requires that all share-based payments to employees and non-employee directors be recognized in the Consolidated Statements of Operations over the service period based on their fair value. Fair value is determined based on the type of award, using either the grant date market price of our common stock or a Monte Carlo simulation model. Share-based compensation expense is included in General and administrative expenses on our Consolidated Statements of Operations.
Inflation
For the last several years inflation has been low and has had a minimal impact on the operating performance of our shopping centers; however, inflation may increase in the future. Most of our long-term leases contain provisions designed to mitigate the adverse impact of inflation, including contractual rent escalations and requirements for tenants to pay their proportionate share of property operating expenses, including common area expenses, utilities, insurance and real estate taxes, and certain capital expenditures related to the maintenance of our properties, thereby reducing our exposure to increases in property-level costs resulting from inflation. In addition, we believe that many of our existing rental rates are below current market rates for comparable space and that upon renewal or re-leasing, such rates may be increased to be consistent with, or closer to, current market rates. With respect to our outstanding indebtedness, we periodically evaluate our exposure to interest rate fluctuations, and may continue to enter into interest rate protection agreements which mitigate, but do not eliminate, the impact of changes in interest rates on our variable rate loans. Off-Balance Sheet Arrangements We had no material off-balance sheet arrangements as ofDecember 31, 2019 . 38
--------------------------------------------------------------------------------
© Edgar Online, source
