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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____ to_____
Commission File Number: 001-36160 (Brixmor Property Group)
Commission File Number: 333-201464-01 (Brixmor Operating Partnership LP)

Brixmor Property Group Inc.
Brixmor Operating Partnership LP
(Exact Name of Registrant as Specified in Its Charter)

Maryland (Brixmor Property Group Inc.)
 
45-2433192
Delaware (Brixmor Operating Partnership LP)
 
80-0831163
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
450 Lexington Avenue, New York, New York 10017
(Address of Principal Executive Offices) (Zip Code)
212-869-3000
(Registrant’s Telephone Number, Including Area Code)

N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Brixmor Property Group Inc. Yes þ No Brixmor Operating Partnership LP Yes þ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Brixmor Property Group Inc. Yes þ No Brixmor Operating Partnership LP Yes þ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Brixmor Property Group Inc.
 
 
Brixmor Operating Partnership LP
Large accelerated filer
þ
Non-accelerated filer
 
 
Large accelerated filer
Non-accelerated filer
þ
Smaller reporting company
Accelerated filer
 
 
Smaller reporting company
Accelerated filer
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Brixmor Property Group Inc. Yes No þ Brixmor Operating Partnership LP Yes No þ

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
As of October 1, 2016, Brixmor Property Group Inc. had 304,321,127 shares of common stock outstanding.






EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2016 of Brixmor Property Group Inc. and Brixmor Operating Partnership LP. Unless stated otherwise or the context otherwise requires, references to the “Parent Company” or “BPG” mean Brixmor Property Group Inc. and its consolidated subsidiaries; and references to the “Operating Partnership” mean Brixmor Operating Partnership LP and its consolidated subsidiaries. The terms the “Company,” “Brixmor,” “we,” “our” and “us” mean the Parent Company and the Operating Partnership, collectively.

The Parent Company is a real estate investment trust (“REIT”) which owns 100% of the common stock of BPG Subsidiary Inc. (“BPG Sub”), which, in turn, is the sole owner of Brixmor OP GP LLC, or the General Partner, the sole general partner of the Operating Partnership. As of September 30, 2016, the Parent Company beneficially owned, through its direct and indirect interest in BPG Sub and the General Partner, approximately 99.9% of the outstanding partnership common units of interest (the “OP Units”) in the Operating Partnership. Certain current and former members of the Company’s management collectively owned the remaining 0.1% interest in the Operating Partnership.

The Company believes combining the quarterly reports on Form 10-Q of the Parent Company and the Operating Partnership into this single report provides the following benefits:

Enhances investors’ understanding of the Parent Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
Eliminates duplicative disclosure and provides a more streamlined and readable presentation; and
Creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.

Management operates the Parent Company and the Operating Partnership as one business. The management of the Parent Company consists of the same individuals as the management of the Operating Partnership. These individuals are officers of both the Parent Company and the Operating Partnership.

We believe it is important to understand the few differences between the Parent Company and the Operating Partnership in the context of how the Parent Company and the Operating Partnership operate as a consolidated company. The Parent Company is a REIT, whose only material asset is its indirect interest in the Operating Partnership. As a result, the Parent Company does not conduct business itself other than issuing public equity from time to time. The Parent Company does not incur any material indebtedness. The Operating Partnership holds substantially all of our assets. Except for net proceeds from public equity issuances by the Parent Company, which are contributed to the Operating Partnership in exchange for OP Units, the Operating Partnership generates all remaining capital required by the Company’s business. Sources of this capital include the Operating Partnership’s operations, its direct or indirect incurrence of indebtedness, and the issuance of OP Units.

Stockholders’ equity, partners’ capital, and non-controlling interests are the primary areas of difference between the unaudited condensed consolidated financial statements of the Parent Company and those of the Operating Partnership. The Operating Partnership’s capital includes OP Units owned by the Parent Company through BPG Sub and the General Partner as well as OP Units owned by certain current and former members of the our management. OP Units owned by third parties are accounted for in partners’ capital in the Operating Partnership’s financial statements and outside of stockholders’ equity in non-controlling interests in the Parent Company’s financial statements.

In order to highlight the differences between the Parent Company and the Operating Partnership, there are sections in this report that separately discuss the Parent Company and the Operating Partnership, including separate financial statements (but combined footnotes), separate controls and procedures sections, separate certification of periodic report under Section 302 of the Sarbanes-Oxley Act of 2002 and separate certification pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. In the sections that combine disclosure for the Parent Company and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of the Company.

The Parent Company consolidates the Operating Partnership for financial reporting purposes, and the Parent Company does not have material assets other than its indirect investment in the Operating Partnership. Therefore, while stockholders’ equity and partners’ capital differ as discussed above, the assets and liabilities of the Parent Company and the Operating Partnership are materially the same on their respective financial statements.




TABLE OF CONTENTS

Item No.
 
Page
Part I - FINANCIAL INFORMATION
1.
Financial Statements
 
Brixmor Property Group Inc. (unaudited)
 
 
Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015
 
Condensed Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2016 and 2015
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015
 
Brixmor Operating Partnership LP (unaudited)
 
 
Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015
 
Condensed Consolidated Statements of Changes in Capital for the Nine Months Ended September 30, 2016 and 2015
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015
 
Brixmor Property Group Inc. and Brixmor Operating Partnership LP (unaudited)
 
 
Notes to Condensed Consolidated Financial Statements
2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
3.
Quantitative and Qualitative Disclosures about Market Risk
4.
Controls and Procedures
Part II - OTHER INFORMATION
1.
Legal Proceedings
1A.
Risk Factors
2.
Unregistered Sales of Equity Securities and Use of Proceeds
3.
Defaults Upon Senior Securities
4.
Mine Safety Disclosures
5.
Other Information
6.
Exhibits




- 3 -




Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” “targets” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under the section entitled “Risk Factors” in our Form 10-K for the year ended December 31, 2015, as such factors may be updated from time to time in our periodic filings with the Securities and Exchange Commission (the “SEC”), which are accessible on the SEC’s website at www.sec.gov. These factors include (1) changes in national, regional or local economic climates; (2) local conditions, including an oversupply of space in, or a reduction in demand for, properties similar to those in our Portfolio; (3) the attractiveness of properties in our Portfolio to our tenants; (4) the financial stability of tenants, including the ability of tenants to pay rents and expense reimbursements; (5) in the case of percentage rents, sales volume of our tenants; (6) competition from other available properties; (7) changes in market rental rates; (8) changes in the regional demographics of our properties; and (9) litigation and governmental investigations following the completion of the recent Audit Committee review described under “Part 1. Business-Recent Developments” in our annual report on Form 10-K for the fiscal year ended December 31, 2015. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our other periodic filings. The forward-looking statements speak only as of the date of this report, and we expressly disclaim any obligation or undertaking to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except to the extent otherwise required by law.




- 4 -



PART I - FINANCIAL INFORMATION

Item 1.    Financial Statements
BRIXMOR PROPERTY GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited, in thousands, except share information)
 
September 30,
2016
 
December 31,
2015
Assets
 
 
 
Real estate
 
 
 
Land
$
2,004,264

 
$
2,011,947

Buildings and improvements
8,955,726

 
8,920,903

 
10,959,990

 
10,932,850

Accumulated depreciation and amortization
(2,100,229
)
 
(1,880,685
)
Real estate, net
8,859,761

 
9,052,165

 
 
 
 
Investments in and advances to unconsolidated joint ventures
5,044

 
5,019

Cash and cash equivalents
31,143

 
69,528

Restricted cash
45,662

 
41,462

Marketable securities
26,580

 
23,001

Receivables, net of allowance for doubtful accounts of $17,831 and $16,587
176,086

 
180,486

Deferred charges and prepaid expenses, net
127,201

 
109,149

Other assets
41,232

 
17,197

Total assets
$
9,312,709

 
$
9,498,007

 
 
 
 
 
 
 
 
Liabilities
 
 
 
Debt obligations, net
$
5,857,431

 
$
5,974,266

Accounts payable, accrued expenses and other liabilities
566,744

 
603,439

Total liabilities
6,424,175

 
6,577,705

 
 
 
 
Commitments and contingencies (Note 12)


 


 
 
 
 
Equity
 
 
 
Common stock, $0.01 par value; authorized 3,000,000,000 shares; 304,321,127 and
    299,138,450 shares outstanding
3,043

 
2,991

Additional paid in capital
3,321,475

 
3,270,246

Accumulated other comprehensive loss
(15
)
 
(2,509
)
Distributions in excess of net income
(440,348
)
 
(400,945
)
Total stockholders’ equity
2,884,155

 
2,869,783

Non-controlling interests
4,379

 
50,519

Total equity
2,888,534

 
2,920,302

Total liabilities and equity
$
9,312,709

 
$
9,498,007

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



- 5 -



BRIXMOR PROPERTY GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Rental income
$
247,859

 
$
245,829

 
$
744,580

 
$
733,429

Expense reimbursements
69,469

 
65,304

 
200,944

 
200,570

Other revenues
1,249

 
1,892

 
6,214

 
6,430

Total revenues
318,577

 
313,025

 
951,738

 
940,429

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Operating costs
31,041

 
27,952

 
97,507

 
93,779

Real estate taxes
47,812

 
45,472

 
130,886

 
133,635

Depreciation and amortization
98,337

 
102,439

 
294,634

 
315,424

Provision for doubtful accounts
2,218

 
1,953

 
6,579

 
6,973

Impairment of real estate assets
1,971

 

 
1,971

 
807

General and administrative
21,787

 
22,030

 
69,709

 
73,030

Total operating expenses
203,166

 
199,846

 
601,286

 
623,648

 
 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Dividends and interest
89

 
57

 
481


241

Interest expense
(57,855
)
 
(61,567
)
 
(171,482
)

(186,289
)
Gain on sale of real estate assets
2,450

 

 
10,232


9,224

Gain (loss) on extinguishment of debt, net
(1,042
)
 
137

 
(949
)

922

Other
(1,370
)
 
2,880

 
(4,258
)

(115
)
Total other expense
(57,728
)
 
(58,493
)
 
(165,976
)
 
(176,017
)
 
 
 
 
 
 
 
 
Income before equity in income of unconsolidated joint ventures
57,683

 
54,686

 
184,476

 
140,764

Equity in income of unconsolidated joint ventures
122

 
133

 
348

 
358

 
 
 
 
 
 
 
 
Net income
57,805

 
54,819

 
184,824

 
141,122

 
 
 
 
 
 
 
 
Net income attributable to non-controlling interests
(313
)
 
(1,046
)
 
(2,399
)
 
(2,814
)
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
57,492

 
$
53,773

 
$
182,425

 
$
138,308

Per common share:
 
 
 
 
 
 
 
Net income attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.19

 
$
0.18

 
$
0.61

 
$
0.46

Diluted
$
0.19

 
$
0.18

 
$
0.61

 
$
0.46

Weighted average shares:
 
 
 
 
 
 
 
Basic
303,013

 
298,464

 
300,697

 
297,714

Diluted
303,521

 
298,936

 
301,146

 
304,706

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

- 6 -



BRIXMOR PROPERTY GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
57,805

 
$
54,819

 
$
184,824

 
$
141,122

Other comprehensive income (loss)
 
 
 
 
 
 
 
Unrealized gain (loss) on interest rate hedges
1,321

 
(112
)
 
2,413

 
(1,831
)
Unrealized gain (loss) on marketable securities
(54
)
 
21

 
81

 
39

Total other comprehensive income (loss)
1,267

 
(91
)
 
2,494

 
(1,792
)
Comprehensive income
59,072

 
54,728

 
187,318

 
139,330

Comprehensive income attributable to non-controlling interests
(313
)
 
(1,046
)
 
(2,399
)
 
(2,814
)
Comprehensive income attributable to the Company
$
58,759

 
$
53,682

 
$
184,919

 
$
136,516

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.




- 7 -



BRIXMOR PROPERTY GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited, in thousands)

 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
Number
 
Amount
 
Additional Paid in Capital
 
Accumulated
Other
Comprehensive
Loss
 
Distributions in Excess of Net Income/Loss
 
Non-controlling Interests
 
Total
Beginning balance, January 1, 2015
296,552

 
$
2,966

 
$
3,223,941

 
$
(4,435
)
 
$
(318,762
)
 
$
76,593

 
$
2,980,303

Common stock dividends ($0.675 per common share)

 

 

 

 
(202,343
)
 

 
(202,343
)
Distributions to non-controlling interests

 

 

 

 

 
(4,554
)
 
(4,554
)
Equity based compensation expense

 

 
18,939

 

 

 
420

 
19,359

Issuance of common stock and OP Units
33

 

 
(743
)
 

 

 
765

 
22

Other comprehensive loss

 

 

 
(1,792
)
 

 

 
(1,792
)
Conversion of Operating Partnership units into common stock
1,903

 
19

 
19,223

 

 

 
(19,242
)
 

Shared-based awards retained for taxes

 

 
(430
)
 

 

 

 
(430
)
Net income

 

 

 

 
138,308

 
2,814

 
141,122

Ending balance, September 30, 2015
298,488

 
$
2,985

 
$
3,260,930

 
$
(6,227
)
 
$
(382,797
)
 
$
56,796

 
$
2,931,687

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance, January 1, 2016
299,138

 
$
2,991

 
$
3,270,246

 
$
(2,509
)
 
$
(400,945
)
 
$
50,519

 
$
2,920,302

Common stock dividends ($0.735 per common share)

 

 

 

 
(221,828
)
 

 
(221,828
)
Distributions to non-controlling interests

 

 

 

 

 
(2,304
)
 
(2,304
)
Equity based compensation expense

 

 
7,954

 

 

 
87

 
8,041

Issuance of common stock and OP Units
207

 
2

 
(1,395
)
 

 

 
1,604

 
211

Other comprehensive income

 

 

 
2,494

 

 

 
2,494

Conversion of Operating Partnership units into common stock
4,976

 
50

 
47,876

 

 

 
(47,926
)
 

Shared-based awards retained for taxes

 

 
(3,206
)
 

 

 

 
(3,206
)
Net income

 

 

 

 
182,425

 
2,399

 
184,824

Ending balance, September 30, 2016
304,321

 
$
3,043

 
$
3,321,475

 
$
(15
)
 
$
(440,348
)
 
$
4,379

 
$
2,888,534

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



- 8 -



BRIXMOR PROPERTY GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Nine Months Ended September 30,
 
2016
 
2015
Operating activities:
 
 
 
Net income
$
184,824

 
$
141,122

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
294,634

 
315,424

Debt premium and discount amortization
(10,630
)
 
(13,972
)
Deferred financing cost amortization
5,827

 
6,236

Above- and below-market lease intangible amortization
(29,471
)
 
(34,367
)
Provisions for impairment
1,971

 
807

 Gain on disposition of operating properties
(10,232
)
 
(9,224
)
Equity based compensation
8,041

 
19,359

Other
797

 
106

(Gain) loss on extinguishment of debt, net
937

 
(4,502
)
Changes in operating assets and liabilities:
 
 
 
Restricted cash
(2,651
)
 
(1,782
)
Receivables
4,042

 
10,502

Deferred charges and prepaid expenses
(33,101
)
 
(23,932
)
Other assets
350

 
(295
)
Accounts payable, accrued expenses and other liabilities
3,201

 
6,442

Net cash provided by operating activities
418,539

 
411,924

 
 
 
 
Investing activities:
 
 
 
Improvements to and investments in real estate assets
(135,868
)
 
(147,393
)
Acquisitions of real estate assets
(6,733
)
 
(52,278
)
Proceeds from sales of real estate assets
31,068

 
41,795

Change in restricted cash attributable to investing activities
(1,548
)
 
2,182

Purchase of marketable securities
(35,172
)
 
(19,320
)
Proceeds from sale of marketable securities
31,622

 
15,014

Net cash used in investing activities
(116,631
)
 
(160,000
)
 
 
 
 
Financing activities:
 
 
 
Repayment of debt obligations and financing liabilities
(865,918
)
 
(733,815
)
Repayment of borrowings under unsecured revolving credit facility
(805,000
)
 
(1,118,475
)
Proceeds from borrowings under unsecured revolving credit facility
481,000

 
619,000

Proceeds from unsecured term loan and notes
1,087,623

 
1,188,146

Deferred financing costs
(10,673
)
 
(3,153
)
Distributions to common stockholders
(220,627
)
 
(201,398
)
Distributions to non-controlling interests
(3,492
)
 
(24,841
)
Repurchase of common shares in conjunction with equity award plans
(3,206
)
 

Net cash used in financing activities
(340,293
)
 
(274,536
)
 
 
 
 
Change in cash and cash equivalents
(38,385
)
 
(22,612
)
Cash and cash equivalents at beginning of period
69,528

 
60,595

Cash and cash equivalents at end of period
$
31,143

 
$
37,983

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of amount capitalized of $1,918 and $2,131
$
183,505

 
$
191,125

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


- 9 -



BRIXMOR OPERATING PARTNERSHIP LP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited, in thousands, except unit information)
 
September 30,
2016
 
December 31,
2015
Assets
 
 
 
Real estate
 
 
 
Land
$
2,004,264

 
$
2,011,947

Buildings and improvements
8,955,726

 
8,920,903

 
10,959,990

 
10,932,850

Accumulated depreciation and amortization
(2,100,229
)
 
(1,880,685
)
Real estate, net
8,859,761

 
9,052,165

 
 
 
 
Investments in and advances to unconsolidated joint ventures
5,044

 
5,019

Cash and cash equivalents
31,107

 
69,506

Restricted cash
45,662

 
41,462

Marketable securities
26,363

 
22,791

Receivables, net of allowance for doubtful accounts of $17,831 and $16,587
176,086

 
180,486

Deferred charges and prepaid expenses, net
127,201

 
109,149

Other assets
41,232

 
17,197

Total assets
$
9,312,456

 
$
9,497,775

 
 
 
 
 
 
 
 
Liabilities
 
 
 
Debt obligations, net
$
5,857,431

 
$
5,974,266

Accounts payable, accrued expenses and other liabilities
566,744

 
603,439

Total liabilities
6,424,175

 
6,577,705

 
 
 
 
Commitments and contingencies (Note 12)


 


 
 
 
 
Capital
 
 
 
Partnership common units: 304,698,828 and 304,366,215 units outstanding
2,888,287

 
2,922,565

Accumulated other comprehensive loss
(6
)
 
(2,495
)
Total capital
2,888,281

 
2,920,070

Total liabilities and capital
$
9,312,456

 
$
9,497,775

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


- 10 -



BRIXMOR OPERATING PARTNERSHIP LP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per unit data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Rental income
$
247,859

 
$
245,829

 
$
744,580

 
$
733,429

Expense reimbursements
69,469

 
65,304

 
200,944

 
200,570

Other revenues
1,249

 
1,892

 
6,214

 
6,430

Total revenues
318,577

 
313,025

 
951,738

 
940,429

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Operating costs
31,041

 
27,952

 
97,507

 
93,779

Real estate taxes
47,812

 
45,472

 
130,886

 
133,635

Depreciation and amortization
98,337

 
102,439

 
294,634

 
315,424

Provision for doubtful accounts
2,218

 
1,953

 
6,579

 
6,973

Impairment of real estate assets
1,971

 

 
1,971

 
807

General and administrative
21,787

 
22,030

 
69,709

 
73,030

Total operating expenses
203,166

 
199,846

 
601,286

 
623,648

 
 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Dividends and interest
89

 
57

 
481

 
241

Interest expense
(57,855
)
 
(61,567
)
 
(171,482
)
 
(186,289
)
Gain on sale of real estate assets
2,450

 

 
10,232

 
9,224

Gain (loss) on extinguishment of debt, net
(1,042
)
 
137

 
(949
)
 
922

Other
(1,370
)
 
2,880

 
(4,258
)
 
(115
)
Total other expense
(57,728
)
 
(58,493
)
 
(165,976
)
 
(176,017
)
 
 
 
 
 
 
 
 
Income before equity in income of unconsolidated joint ventures
57,683

 
54,686

 
184,476

 
140,764

Equity in income of unconsolidated joint ventures
122

 
133

 
348

 
358

 
 
 
 
 
 
 
 
Net income attributable to Brixmor Operating Partnership LP
$
57,805

 
$
54,819

 
$
184,824

 
$
141,122

Per common unit:
 
 
 
 
 
 
 
Net income attributable to partnership common units:
 
 
 
 
 
 
 
Basic
$
0.19

 
$
0.18

 
$
0.61

 
$
0.46

Diluted
$
0.19

 
$
0.18

 
$
0.61

 
$
0.46

Weighted average number of partnership common units:
 
 
 
 
 
 
 
Basic
304,659

 
304,270

 
304,577

 
303,899

Diluted
305,167

 
304,742

 
305,026

 
304,706

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

- 11 -



BRIXMOR OPERATING PARTNERSHIP LP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net income attributable to Brixmor Operating Partnership LP
$
57,805

 
$
54,819

 
$
184,824

 
$
141,122

Other comprehensive income (loss)
 
 
 
 
 
 
 
Unrealized gain (loss) on interest rate hedges
1,321

 
(112
)
 
2,413

 
(1,831
)
Unrealized gain (loss) on marketable securities
(54
)
 
21

 
76

 
40

Total other comprehensive income (loss)
1,267

 
(91
)
 
2,489

 
(1,791
)
Comprehensive income attributable to Brixmor Operating Partnership LP
$
59,072

 
$
54,728

 
$
187,313

 
$
139,331

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


- 12 -



BRIXMOR OPERATING PARTNERSHIP LP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL
(Unaudited, in thousands)

 
 
 
 
 
 
 
Partnership Common Units
 
Accumulated Other Comprehensive Loss
 
Total
Beginning balance, January 1, 2015
$
2,984,381

 
$
(4,425
)
 
$
2,979,956

Distributions to partners
(206,798
)
 

 
(206,798
)
Equity based compensation expense
19,359

 

 
19,359

Other comprehensive loss

 
(1,791
)
 
(1,791
)
Issuance of OP Units
22

 

 
22

Share-based awards retained for taxes
(430
)
 

 
(430
)
Net income attributable to Brixmor Operating Partnership LP
141,122

 

 
141,122

Ending balance, September 30, 2015
$
2,937,656

 
$
(6,216
)
 
$
2,931,440

 
 
 
 
 
 
Beginning balance, January 1, 2016
$
2,922,565

 
$
(2,495
)
 
$
2,920,070

Distributions to partners
(224,148
)
 

 
(224,148
)
Equity based compensation expense
8,041

 

 
8,041

Other comprehensive income

 
2,489

 
2,489

Issuance of OP Units
211

 

 
211

Share-based awards retained for taxes
(3,206
)
 

 
(3,206
)
Net income attributable to Brixmor Operating Partnership LP
184,824

 

 
184,824

Ending balance, September 30, 2016
$
2,888,287

 
$
(6
)
 
$
2,888,281

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


- 13 -



BRIXMOR OPERATING PARTNERSHIP LP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Nine Months Ended September 30,
 
2016
 
2015
Operating activities:
 
 
 
Net income attributable to Brixmor Operating Partnership LP
$
184,824

 
$
141,122

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
294,634

 
315,424

Debt premium and discount amortization
(10,630
)
 
(13,972
)
Deferred financing cost amortization
5,827

 
6,236

Above- and below-market lease intangible amortization
(29,471
)
 
(34,367
)
Provisions for impairment
1,971

 
807

 Gain on disposition of operating properties
(10,232
)
 
(9,224
)
Equity based compensation
8,041

 
19,359

Other
797

 
106

(Gain) loss on extinguishment of debt, net
937

 
(4,502
)
Changes in operating assets and liabilities:
 
 
 
Restricted cash
(2,651
)
 
(1,782
)
Receivables
4,042

 
10,502

Deferred charges and prepaid expenses
(33,101
)
 
(23,932
)
Other assets
350

 
(295
)
Accounts payable, accrued expenses and other liabilities
3,201

 
6,444

Net cash provided by operating activities
418,539

 
411,926

 
 
 
 
Investing activities:
 
 
 
Improvements to and investments in real estate assets
(135,868
)
 
(147,393
)
Acquisitions of real estate assets
(6,733
)
 
(52,278
)
Proceeds from sales of real estate assets
31,068

 
41,795

Change in restricted cash attributable to investing activities
(1,548
)
 
2,182

Purchase of marketable securities
(35,163
)
 
(19,316
)
Proceeds from sale of marketable securities
31,622

 
15,014

Net cash used in investing activities
(116,622
)
 
(159,996
)
 
 
 
 
Financing activities:
 
 
 
Repayment of debt obligations and financing liabilities
(865,918
)
 
(733,815
)
Repayment of borrowings under unsecured revolving credit facility
(805,000
)
 
(1,118,475
)
Proceeds from borrowings under unsecured revolving credit facility
481,000

 
619,000

Proceeds from unsecured term loan and notes
1,087,623

 
1,188,146

Deferred financing costs
(10,673
)
 
(3,153
)
Partner distributions
(227,348
)
 
(206,266
)
Distributions to non-controlling interests

 
(19,870
)
Net cash used in financing activities
(340,316
)
 
(274,433
)
 
 
 
 
Change in cash and cash equivalents
(38,399
)
 
(22,503
)
Cash and cash equivalents at beginning of period
69,506

 
60,450

Cash and cash equivalents at end of period
$
31,107

 
$
37,947

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of amount capitalized of $1,918 and $2,131
$
183,505

 
$
191,125

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


- 14 -



BRIXMOR PROPERTY GROUP INC. AND BRIXMOR OPERATING PARTNERSHIP LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, unless otherwise stated)

1. Nature of Business and Financial Statement Presentation
Description of Business
Brixmor Property Group Inc. and subsidiaries (collectively, the “Parent Company”) is an internally-managed REIT. Brixmor Operating Partnership LP and subsidiaries (collectively, the “Operating Partnership”) is the entity through which the Parent Company conducts substantially all of its operations and owns substantially all of its assets. The Parent Company owns 100% of the common stock of BPG Subsidiary Inc. (“BPG Sub”), which, in turn, is the sole member of Brixmor OP GP LLC (the “General Partner”), the sole general partner of the Operating Partnership. The Parent Company engages in the ownership, management, leasing, acquisition, disposition and development of retail shopping centers through the Operating Partnership, and has no other substantial assets or liabilities other than through its investment in the Operating Partnership. The Parent Company, the Operating Partnership and their controlled subsidiaries on a consolidated basis (collectively the “Company” or “Brixmor”) believes it owns and operates the second largest open air retail portfolio in the United States, comprised primarily of community and neighborhood shopping centers.

The Company does not distinguish its principal business or group its operations on a geographical basis for purposes of measuring performance. Accordingly, the Company believes it has a single reportable segment for disclosure purposes in accordance with U.S. generally accepted accounting principles (“GAAP”).

Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of the unaudited Condensed Consolidated Financial Statements for the periods presented have been included. The operating results for the periods presented are not necessarily indicative of the results that may be expected for a full fiscal year. These financial statements should be read in conjunction with the financial statements for the year ended December 31, 2015 and accompanying notes included in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 29, 2016.

Principles of Consolidation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Parent Company, the Operating Partnership, each of their wholly owned subsidiaries and all other entities in which they have a controlling financial interest. The portions of consolidated entities not owned by the Company are presented as non-controlling interests as of and during the periods presented. All intercompany transactions have been eliminated.

Income Taxes
The Parent Company has elected to qualify as a REIT in accordance with the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a REIT, the Parent Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted REIT taxable income to its stockholders. It is management’s intention to adhere to these requirements and maintain the Parent Company’s REIT status.

As a REIT, the Parent Company generally will not be subject to federal income tax, provided that distributions to its stockholders equal at least the amount of its REIT taxable income as defined under the Code. If the Parent Company fails to qualify as a REIT in any taxable year, it will be subject to federal taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. The Operating Partnership is organized as a limited partnership and is generally not subject to federal or state income taxes.

BPG Sub also has elected to qualify as a REIT under the Code and is subject to the same tax requirements and tax treatment as the Parent Company. BPG Sub has a taxable REIT subsidiary, and the Parent Company and BPG Sub may in the future elect to treat newly formed subsidiaries as taxable REIT subsidiaries which would be subject to income tax. Taxable REIT subsidiaries may participate in non-real estate-related activities and/or perform non-

- 15 -



customary services for tenants and are subject to United States federal and state income tax at regular corporate tax rates.

The Company has analyzed the tax position taken on income tax returns for the open 2013 through 2015 tax years and has concluded that no provision for income taxes related to uncertain tax positions is required in the Company’s unaudited Condensed Consolidated Financial Statements as of September 30, 2016 and December 31, 2015.

New Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-15, "Statement of Cash Flows (Topic 230)." ASU 2016-15 provides classification guidance for certain cash receipts and cash payments including payment of debt extinguishment costs, settlement of zero-coupon debt instruments, insurance claim payments and distributions from equity method investees.  The standard is effective on January 1, 2018, with early adoption permitted. The Company is currently in the process of evaluating the impact the adoption of ASU 2016-015 will have on the unaudited Condensed Consolidated Financial Statements of the Company.

In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718)." ASU 2016-09 sets out improvements to Employee Share-Based Payment Accounting. The new standard impacts certain aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statements of cash flows. The standard is effective on January 1, 2017, with early adoption permitted. The Company is currently in the process of evaluating the impact the adoption of ASU 2016-09 will have on the unaudited Condensed Consolidated Financial Statements of the Company.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The standard is effective on January 1, 2019, with early adoption permitted. The Company is currently in the process of evaluating the impact the adoption of ASU 2016-02 will have on the unaudited Condensed Consolidated Financial Statements of the Company.

In February 2015, the FASB issued ASU 2015-02 “Amendments to the Consolidation Analysis to ASC Topic 810 Consolidation.” ASU 2015-02 updates to include all reporting entities within the scope of Subtopic 810-10 Consolidation - Overall, including limited partnerships and similar legal entities, unless a scope exception applies. Overall the amendments in this update are to simplify the codification and reduce the number of consolidation models and place more emphasis on risk of loss when determining controlling financial interests. ASU 2015-02 was effective for public businesses for interim and annual periods beginning after December 15, 2015. This ASU was effective for the Company beginning in the first quarter of the year ending December 31, 2016. The Company has evaluated the impact of the adoption of ASU 2015-02 on its unaudited Condensed Consolidated Financial Statements and has determined under ASU 2015-02 the Operating Partnership is considered a variable interest entity (“VIE”). The Parent Company is the primary beneficiary of the VIE and the Parent Company’s partnership interest is considered a majority voting interest. As such, this standard did not have a material impact on the unaudited Condensed Consolidated Financial Statements of the Company.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” ASU No. 2014-09 contains a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.  The guidance in ASU No. 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards.  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  For public entities, ASU No. 2014-09, as amended by ASU No. 2015-14, is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.  Early

- 16 -



adoption is permitted for reporting periods beginning after December 15, 2016.  The Company is currently in the process of evaluating the impact the adoption of ASU No. 2014-09 will have on the unaudited Condensed Consolidated Financial Statements of the Company.

Any other recently issued accounting standards or pronouncements not disclosed above have been excluded as they either are not relevant to the Company, or they are not expected to have a material effect on the unaudited Condensed Consolidated Financial Statements of the Company.

2. Acquisition of Real Estate
During the three and nine months ended September 30, 2016, the Company acquired the following (dollars in thousands):
 
 
 
 
 
Purchase Price
Description
Location
Month Acquired
GLA
 
Cash
 
Debt Assumed
 
Total
Building at Rose Pavilion
Pleasanton, CA
Sept-16
28,530

 
$
6,733

 
$

 
$
6,733

During the nine months ended September 30, 2015, the Company acquired the following, in separate transactions (dollars in thousands):
 
 
 
 
 
Purchase Price
Description
Location
Month Acquired
GLA
 
Cash
 
Debt Assumed
 
Total
Building at Bardin Place Center
Arlington, TX
Jun-15
96,127

 
$
9,258

 
$

 
$
9,258

Larchmont Centre
Mt. Laurel, NJ
Jun-15
103,787

 
11,000

 
7,000

 
18,000

Webster Square Shopping Center
Marshfield, MA
Jun-15
182,756

 
31,950

 

 
31,950

 
 
 
382,670

 
$
52,208

 
$
7,000

 
$
59,208

The aggregate purchase price of the properties acquired during the nine months ended September 30, 2016 and 2015, respectively, has been allocated as follows (2016 allocation amounts are preliminary and 2015 allocation amounts are final): 
 
 
 
Nine Months Ended September 30,
Assets
2016
 
2015
 
 
Land
$
2,829

 
$
13,004

 
 
Buildings
3,552

 
35,606

 
 
Building and tenant improvements
352

 
7,006

 
 
Above market rents

 
95

 
 
In-Place leases

 
4,101

 
Real estate, net
6,733

 
59,812

 
Deferred charges and prepaid expenses, net

 
1,792

Total assets
6,733

 
61,604

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Secured loan payable
$

 
$
7,000

 
 
Secured loan fair value adjustment

 
440

 
Debt obligations, net

 
7,440

 
Accounts payable, accrued expenses and other liabilities (Below Market Leases)

 
1,956

Total liabilities

 
9,396

Net Assets Acquired
$
6,733

 
$
52,208


In addition, the Company acquired the following outparcel buildings and land parcels adjacent to existing Company owned shopping centers in connection with its repositioning activities at those centers: (i) during the nine months ended September 30, 2016, two land parcels and one outparcel building for an aggregate purchase price of $1.2 million; (ii) during the three months ended September 30, 2015, two outparcel buildings for an aggregate purchase price of $6.5 million; and (iii) during the nine months ended September 30, 2015, four outparcel buildings for an aggregate purchase

- 17 -



price of $8.6 million. These amounts are included in Improvements to and investments in real estate assets on the Company’s unaudited Condensed Consolidated Statement of Cash Flows.

The real estate operations acquired were not considered material to the Company, individually or in the aggregate, and therefore pro forma financial information is not necessary.

During the three months ended September 30, 2016 and 2015, the Company incurred $0.1 million and $0.1 million of transaction expenses, respectively. During the nine months ended September 30, 2016 and 2015, the Company incurred $0.3 million and $1.6 million of transaction expenses, respectively. These amounts are included in Other in the Company’s unaudited Condensed Consolidated Statements of Operations.

3.    Dispositions and Assets Held for Sale
During the three months ended September 30, 2016, the Company disposed of two shopping centers for net proceeds of $10.6 million resulting in a gain of $2.5 million. During the nine months ended September 30, 2016, the Company disposed of four shopping centers and one outparcel building for net proceeds of $31.1 million resulting in a gain of $10.2 million and an impairment of less than $0.1 million. The Company had two properties classified as held for sale as of September 30, 2016 with a carrying value of $24.1 million. In connection with these properties becoming held for sale, the Company recognized a $2.0 million impairment to reduce the carrying value of one of the properties to its estimated net realizable value. The impairment charge was based upon the sales price in the signed contract with the third party buyer, adjusted to reflect associated disposition costs. These inputs are classified as Level 3 of the fair value hierarchy. The Company did not have any properties classified as held for sale as of December 31, 2015.

During the nine months ended September 30, 2015, the Company disposed of four shopping centers and two outparcel buildings for net proceeds of $41.8 million resulting in a gain of $9.2 million and an impairment of $0.8 million. The impairment charge was based upon the sales price in the signed contract with the third party buyer, adjusted to reflect associated disposition costs. These inputs are classified as Level 3 of the fair value hierarchy. The results of operations from the disposed shopping centers are included in income from continuing operations.

There were no discontinued operations for the three and nine months ended September 30, 2016 and 2015 as none of the dispositions represented a strategic shift in the Company's business that would qualify as discontinued operations.

4.    Real Estate
The Company’s components of Real estate, net consisted of the following:
 
September 30, 2016
 
December 31, 2015
Land
$
2,004,264

 
$
2,011,947

Buildings and improvements:
 
 
 
Buildings and tenant improvements
8,110,633

 
8,043,325

Lease intangibles (1)
845,093

 
877,578

 
10,959,990

 
10,932,850

Accumulated depreciation and amortization (1)
(2,100,229
)
 
(1,880,685
)
Total
$
8,859,761

 
$
9,052,165

(1) 
At September 30, 2016 and December 31, 2015, Lease intangibles consisted of the following: (i) $766.7 million and $796.8 million, respectively, of in-place leases, (ii) $78.4 million and $80.8 million, respectively, of above-market leases, and (iii) $629.0 million and $606.5 million, respectively, of accumulated amortization. These intangible assets are amortized over the term of each related lease.

In addition, at September 30, 2016 and December 31, 2015, the Company had intangible liabilities relating to below-market leases of $493.3 million and $505.8 million, respectively, and accumulated amortization of $260.7 million and $237.2 million, respectively. These intangible liabilities, which are included in Accounts payable, accrued expenses and other liabilities in the Company’s unaudited Condensed Consolidated Balance Sheets, are accreted over the term of each related lease, including any renewal periods that are considered to be below market.

Net above and below market lease intangible accretion income for the three months ended September 30, 2016 and 2015 was $9.4 million and $9.9 million, respectively. Net above and below market lease intangible accretion income for the nine months ended September 30, 2016 and 2015 was $29.5 million and $34.4 million, respectively. These amounts are included in Rental income in the Company's unaudited Condensed Consolidated Statements of Operations. Amortization expense associated with in-place lease value for the three months ended September 30, 2016 and 2015

- 18 -


was $14.5 million and $20.7 million, respectively. Amortization expense associated with in-place lease value for the nine months ended September 30, 2016 and 2015 was $47.7 million and $67.9 million, respectively. These amounts are included in Depreciation and amortization in the Company's unaudited Condensed Consolidated Statements of Operations. The estimated net accretion (income) and amortization expense associated with the Company’s above and below market leases and in-place leases for the next five years are as follows:
Year ending December 31,
 
Above- and below-market lease accretion (income), net
 
In-place leases amortization expense
2016 (remaining three months)
 
$
(8,005
)
 
$
13,071

2017
 
(29,198
)
 
40,948

2018
 
(26,285
)
 
31,721

2019
 
(22,054
)
 
24,925

2020
 
(17,606
)
 
18,892


On a continuous basis, management assesses whether there are any indicators, including property operating performance and general market conditions, that the value of the Company’s assets (including any related amortizable intangible assets or liabilities) may be impaired. To the extent impairment has occurred, the carrying value of the asset would be adjusted to an amount to reflect the estimated fair value of the asset. See Note 3 for information regarding impairment charges taken in connection with the disposition of certain properties and certain properties classified as held for sale.

5.    Financial Instruments - Derivatives and Hedging
The Company’s use of derivative instruments is limited to the utilization of interest rate agreements or other instruments to manage interest rate risk exposures and not for speculative purposes. In certain situations, the Company may enter into derivative financial instruments such as interest rate swap and interest rate cap agreements to manage interest rate risk exposure arising from variable rate debt transactions that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s objective in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements.

Cash Flow Hedges of Interest Rate Risk
The Company uses interest rate swaps to manage its exposure to changes in benchmark interest rates. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without changing the underlying notional amount. During the three and nine months ended September 30, 2016 and 2015, the Company did not enter into any new interest rate swap agreements. See note 14 for additional information on interest rate swap agreements entered into by the Company during October 2016.

A detail of the Company’s interest rate derivatives designated as cash flow hedges outstanding as of September 30, 2016 is as follows:
 
 
Number of Instruments
 
Notional Amount
 
Interest Rate Swaps
 
5
 
$
1,500,000

 

The Company has elected to present its interest rate derivatives on its unaudited Condensed Consolidated Balance Sheets on a gross basis as interest rate swap assets and interest rate swap liabilities. A detail of the Company’s fair value of interest rate derivatives on a gross and net basis as of September 30, 2016 and December 31, 2015, respectively, is as follows:
 
 
Fair Value of Derivative Instruments
Interest rate swaps classified as:
 
September 30, 2016
 
December 31, 2015
Gross derivative assets
 
$

 
$

Gross derivative liabilities
 
(23
)
 
(2,437
)
Net derivative liability
 
$
(23
)
 
$
(2,437
)


- 19 -



The gross derivative liabilities are included in accounts payable, accrued expenses and other liabilities on the unaudited Condensed Consolidated Balance Sheets. All of the Company’s outstanding interest rate swap agreements for the periods presented were designated as cash flow hedges of interest rate risk. The fair value of the Company's interest rate derivatives is determined using market standard valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. These inputs are classified as Level 2 of the fair value hierarchy. The effective portion of changes in the fair value of derivatives designated as, and that qualify as, cash flow hedges is recorded in other comprehensive income (“OCI”) and is reclassified into earnings as interest expense in the period that the hedged forecasted transaction affects earnings.

The effective portion of the Company's interest rate swaps that was recorded in the Company’s unaudited Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2016 and 2015 is as follows:

Derivatives in Cash Flow Hedging Relationships (Interest Rate Swaps)
 
Three Months Ended September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Unrealized gain (loss) on interest rate swaps
 
$
79

 
$
(2,477
)
 
$
(1,704
)
 
$
(9,150
)
Amortization of interest rate swaps to interest expense
 
$
1,242

 
$
2,365

 
$
4,117

 
$
7,319


The Company estimates that less than $0.1 million will be reclassified from accumulated other comprehensive loss as an increase to interest expense through the expiration of the Company's interest rate swaps on October 1, 2016. No gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on the Company’s cash flow hedges during the three and nine months ended September 30, 2016 and 2015.

Non-Designated (Mark-to Market) Hedges of Interest Rate Risk
The Company does not use derivatives for trading or speculative purposes. As of September 30, 2016 and December 31, 2015, the Company did not have any non-designated hedges.

Credit-risk-related Contingent Features
The Company has agreements with its derivative counterparties that contain a provision whereby if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. If the Company were to breach any of the contractual provisions of the derivative contracts, it would be required to settle its obligations under the agreements at their termination value including accrued interest, or approximately $0.4 million.


- 20 -


6.    Debt Obligations
As of September 30, 2016 and December 31, 2015, the Company had the following indebtedness outstanding:
 
 
Carrying Value as of
 
 
 
 
 
 
September 30,
2016
 
December 31, 2015
 
Stated
Interest
Rates
 
Scheduled
Maturity
Date
Secured loans(1)
 
 
 
 
 
 
 
 
Fixed rate secured loans(2)
 
$
1,360,845

 
$
2,226,763

 
4.40% - 8.00%
 
2016 – 2024
Net unamortized premium
 
27,432

 
40,508

 
 
 
 
Net unamortized debt issuance cost
 
(498
)
 
(1,752
)
 
 
 
 
Total secured loans, net
 
$
1,387,779

 
$
2,265,519

 
 
 
 
 
 
 
 
 
 
 
 
 
Notes payable
 
 
 
 
 
 
 
 
Unsecured notes(3)
 
$
2,318,453

 
$
1,218,453

 
3.25% - 7.97%
 
2022 - 2029
Net unamortized discount
 
(9,403
)
 
(4,676
)
 
 
 
 
Net unamortized debt issuance cost
 
(18,048
)
 
(9,923
)
 
 
 
 
Total notes payable, net
 
$
2,291,002

 
$
1,203,854

 
 
 
 
 
 
 
 
 
 
 
 
 
Unsecured Credit Facility and Term Loan
 

 
 
 
 
 
 
Unsecured Credit Facility(4)
 
$
1,592,000

 
$
1,916,000

 
1.76% - 1.91%
 
2018 – 2021
Unsecured Term Loan
 
600,000

 
600,000

 
1.96%
 
2019
Net unamortized debt issuance cost
 
(13,350
)
 
(11,107
)
 
 
 
 
Total Unsecured Credit Facility and Term Loan
 
$
2,178,650

 
$
2,504,893

 
 
 
 
 
 
 
 
 
 
 
 
 
Total debt obligations, net
 
$
5,857,431

 
$
5,974,266

 
 
 
 
(1) 
The Company’s secured loans are collateralized by certain properties and the equity interests of certain subsidiaries. These properties had a carrying value as of September 30, 2016 of approximately $2.1 billion.
(2) 
The weighted average interest rate on the Company’s fixed rate secured loans was 6.05% as of September 30, 2016.
(3) 
The weighted average interest rate on the Company’s unsecured notes was 3.82% as of September 30, 2016.
(4) 
The Amended Credit Facility (as defined below) consists of a $1.25 billion revolving credit facility, a $1.0 billion term loan and a $0.5 billion term loan. The Company had interest rate swap agreements that converted the floating interest rate on the $1.5 billion of term loans to a fixed, combined interest rate of 0.844% plus an interest spread of 135 basis points. These swap agreements expired on October 1, 2016. See Note 14 for more information on swaps entered into during October 2016.

2016 Debt Transactions
In June 2016, the Operating Partnership issued $600.0 million aggregate principal amount of 4.125% Senior Notes due 2026 (the “2026 Notes”), the proceeds of which were utilized to repay outstanding indebtedness, including borrowings under the Company's $1.25 billion unsecured revolving credit facility, and for general corporate purposes.  The 2026 Notes bear interest at a rate of 4.125% per annum, payable semi-annually on June 15 and December 15 of each year, commencing December 15, 2016. The 2026 Notes will mature on June 15, 2026. The 2026 Notes are the Operating Partnership’s unsecured and unsubordinated obligations and rank equally in right of payment with all of the Operating Partnership’s existing and future senior unsecured and unsubordinated indebtedness. The Operating Partnership may redeem the 2026 Notes at any time in whole or from time to time in part at the applicable make-whole redemption price specified in the Indenture with respect to the 2026 Notes.  If the 2026 Notes are redeemed on or after March 15, 2026 (three months prior to the maturity date), the redemption price will be equal to 100% of the principal amount of the 2026 Notes being redeemed plus accrued and unpaid interest thereon to, but not including, the redemption date.

In July 2016, the Operating Partnership entered into an Amended and Restated Revolving Credit and Term Loan Agreement (the “Amended Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent (the “Agent”), and the lenders party thereto as set forth in the Amended Credit Facility. The Amended Credit Facility amends and restates the Company's $2.75 billion Revolving Credit and Term Loan Agreement, dated as of July 16, 2013, as amended (the “Unsecured Credit Facility”).

The Amended Credit Facility provides for (1) revolving loan commitments of $1.25 billion (the “Revolving Facility”) maturing July 31, 2020 (representing a three-year extension from the applicable maturity date under the Unsecured

- 21 -


Credit Facility) and (2) a reallocation of the term loan under the Unsecured Credit Facility that was to mature on July 31, 2018 into two non-amortizing term loan tranches comprised of a $1.0 billion tranche A term loan maturing July 31, 2018 (the “Tranche A Term Loan”), and a $500.0 million tranche B term loan maturing July 31, 2021 (the “Tranche B Term Loan”). The Revolving Facility includes two six-month maturity extension options, the exercise of which is subject to customary conditions and the payment of a 0.075% fee on the extended commitments. The Amended Credit Facility includes the option to increase the revolving loan commitments by, or add term loans in an amount, up to $1.0 billion in the aggregate to the extent that any one or more lenders (from the syndicate or otherwise) agree to provide such additional credit extensions.

Borrowings under the Amended Credit Facility will bear interest, at the Operating Partnership’s option, (1) with respect to the Revolving Facility, at a rate of either LIBOR plus a margin ranging from 0.875% to 1.55% or a base rate plus a margin ranging from 0.00% to 0.55%, in each case, with the actual margin determined according to the Operating Partnership’s credit rating and (2) with respect to each of the Tranche A Term Loan and Tranche B Term Loan, at a rate of either LIBOR plus a margin ranging from 0.90% to 1.75% or a base rate plus a margin ranging from 0.00% to 0.75%, in each case, with the actual margin determined according to the Operating Partnership’s credit rating. The base rate is the highest of the Agent’s prime rate, the federal funds rate plus 0.50% and the daily one-month LIBOR plus 1.00%. In addition, the Amended Credit Facility requires the payment of a facility fee ranging from 0.125% to 0.30% (depending on the Operating Partnership’s credit rating) on the total commitments under the Revolving Facility.

Additionally, on July 25, 2016, the Operating Partnership entered into Amendment No. 2 to Term Loan Agreement (“Term Loan Second Amendment”) with JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto. The Term Loan Second Amendment amends the Company's $600.0 million Term Loan Agreement, dated as of March 18, 2014, as amended (the “Existing Term Loan Agreement”). The Term Loan Second Amendment does not change any of the maturity or pricing terms of the Existing Term Loan Agreement, but otherwise implements various covenant and technical amendments to make the Existing Term Loan Agreement consistent with amendments made to corresponding provisions of the Unsecured Credit Facility pursuant to the Amended Credit Facility.

In August 2016, the Operating Partnership issued $500.0 million aggregate principal amount of 3.250% Senior Notes due 2023 (the “2023 Notes”), the proceeds of which were utilized to repay outstanding indebtedness, including borrowings under the Company's Revolving Facility, and for general corporate purposes.  The 2023 Notes bear interest at a rate of 3.250% per annum, payable semi-annually on March 15 and September 15 of each year, commencing March 15, 2017. The 2023 Notes will mature on September 15, 2023. The 2023 Notes are the Operating Partnership’s unsecured and unsubordinated obligations and rank equally in right of payment with all of the Operating Partnership’s existing and future senior unsecured and unsubordinated indebtedness. The Operating Partnership may redeem the 2023 Notes at any time in whole or from time to time in part at the applicable make-whole redemption price specified in the Indenture with respect to the 2023 Notes.  If the 2023 Notes are redeemed on or after July 15, 2023 (two months prior to the maturity date), the redemption price will be equal to 100% of the principal amount of the 2023 Notes being redeemed plus accrued and unpaid interest thereon to, but not including, the redemption date.

During the nine months ended September 30, 2016, the Company repaid $849.5 million of secured loans, resulting in a $1.5 million gain on extinguishment of debt. These repayments were funded primarily from borrowings under the Company’s Revolving Facility and proceeds from the issuance of senior unsecured notes. In connection with the execution of the Amended Credit Facility, the Company recognized a $2.5 million loss on extinguishment of debt.

Pursuant to the terms of the Company’s unsecured debt agreements, the Company among other things is subject to maintenance of various financial covenants. The Company was in compliance with these covenants as of September 30, 2016.











- 22 -


Debt Maturities
As of September 30, 2016 and December 31, 2015, the Company had accrued interest of $23.8 million and $31.1 million outstanding, respectively. As of September 30, 2016, scheduled amortization and maturities of the Company’s outstanding debt obligations were as follows:
Year ending December 31,
 
 
2016 (remaining three months)
 
$
11,782

2017
 
349,659

2018
 
1,019,476

2019
 
620,126

2020
 
858,577

Thereafter
 
3,011,678

Total debt maturities
 
5,871,298

Net unamortized premiums on secured loans
 
27,432

Net unamortized discount on notes
 
(9,403
)
Net unamortized debt issuance costs
 
(31,896
)
Total debt obligations, net
 
$
5,857,431


7.     Fair Value Disclosures
All financial instruments of the Company are reflected in the accompanying unaudited Condensed Consolidated Balance Sheets at amounts which, in management’s judgment, reasonably approximate their fair values, except those instruments listed below:
 
 
September 30, 2016
 
December 31, 2015
 
 
Carrying
Amounts
 
Fair
Value
 
Carrying
Amounts
 
Fair
Value
 
 
Secured loans
$
1,387,779

 
$
1,491,125

 
$
2,265,519

 
$
2,367,070

 
Notes payable
2,291,002

 
2,389,624

 
1,203,854

 
1,198,504

 
Unsecured Credit Facility and Term Loan
2,178,650

 
2,193,861

 
2,504,893

 
2,516,000

 
Total debt obligations, net
$
5,857,431

 
$
6,074,610

 
$
5,974,266

 
$
6,081,574


As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy is included in GAAP that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs that are classified within Level 3 of the hierarchy).

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The valuation methodology used to estimate the fair value of the Company’s debt obligations is based on discounted cash flows, with assumptions that include credit spreads, loan amounts and debt maturities. The Company determined that the valuations of its debt obligations are classified within Level 3 of the fair value hierarchy. Such fair value estimates are not necessarily indicative of the amounts that would be realized upon disposition.

The Company’s marketable securities and interest rate derivatives are measured at fair value on a recurring basis. The fair value of marketable securities are based primarily on publicly traded market values in active markets and are classified accordingly on the fair value hierarchy. See Note 5 for fair value information regarding the Company's interest rate derivatives.




- 23 -


The following table presents the placement in the fair value hierarchy of assets and liabilities that are measured at fair value on a recurring basis:
 
Fair Value Measurements as of September 30, 2016
 
Balance
 
Quoted Prices in Active markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Marketable securities(1)
$
26,580

 
$
1,483

 
$
25,097

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Interest rate derivatives
$
(23
)
 
$

 
$
(23
)
 
$

 
 
 
 
 
 
 
 
 
Fair Value Measurements as of December 31, 2015
 
Balance
 
Quoted Prices in Active markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Marketable securities(1)
$
23,001

 
$
1,167

 
$
21,834

 
$

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Interest rate derivatives
$
(2,437
)
 
$

 
$
(2,437
)
 
$

(1) 
As of September 30, 2016 and December 31, 2015 marketable securities included less than $0.1 million of net unrealized gain and $0.1 million of net unrealized losses, respectively.

The Company’s impairment charges are measured at fair value on a non-recurring basis. See Note 3 for fair value information on the impairment charges.

8. Equity and Capital
ATM
In 2015, the Parent Company entered into an at-the-market equity offering program (“ATM”) through which the Parent Company may sell from time to time up to an aggregate of $400.0 million of its common stock through sales agents over a three-year period. No shares have been issued under the ATM and as a result $400.0 million of common stock remained available for issuance under the ATM as of September 30, 2016.

Common Stock
During the nine months ended September 30, 2016 and 2015, the Company withheld 127,295 shares and 12,754 shares respectively, in connection with common shares surrendered to the Company to satisfy statutory minimum tax withholding obligations on the vesting of restricted stock units (“RSUs”) under the Company’s equity-based compensation plans. 

Dividends and Distributions
During the three months ended September 30, 2016 and 2015, the Company declared common stock dividends and OP unit distributions of $0.245 per share/unit and $0.225 per share/unit, respectively. During the nine months ended September 30, 2016 and 2015, the Company declared common stock dividends and OP unit distributions of $0.735 per share/unit and $0.675 per share/unit, respectively. As of September 30, 2016 and December 31, 2015, the Company had declared but unpaid common stock dividends and OP unit distributions of $75.8 million and $76.0 million, respectively. These amounts are included in accounts payable, accrued expenses and other liabilities on the Company's unaudited Condensed Consolidated Balance Sheets.

Non-controlling interests
As of September 30, 2016, the Parent Company beneficially owned, through its direct and indirect interest in BPG Sub and the General Partner, 99.9% of the outstanding OP Units. Certain members of the Parent Company’s current and former management collectively own the remaining 0.1% of the outstanding OP Units. During the nine months ended September 30, 2016, certain investment funds affiliated with The Blackstone Group L.P. (“Blackstone”) converted all their remaining OP Units into common stock. Holders of OP Units (other than the Parent Company, BPG Sub and the General Partner) may redeem their OP Units for cash based upon the market value of an equivalent number of shares

- 24 -


of the Parent Company’s common stock or, at the Parent Company’s election, exchange their OP Units for shares of the Parent Company’s common stock on a one-for-one basis subject to customary conversion rate adjustments for splits, unit distributions and reclassifications. The number of OP Units in the Operating Partnership beneficially owned by the Parent Company is equivalent to the number of outstanding shares of the Parent Company’s common stock, and the entitlement of all OP Units to quarterly distributions and payments in liquidation is substantially the same as those of the Parent Company’s common stockholders.

9. Stock Based Compensation
In 2011 and 2013 prior to the Company's Initial Public Offering (the "IPO"), certain employees of the Company were granted long-term incentive awards which provided them with equity interests as an incentive to remain in the Company’s service and align executives’ interests with those of the Company’s equity holders. The awards were granted to such employees by the certain partnerships affiliated with Blackstone (the "Partnerships"), in the form of Class B Units in each of the Partnerships. The awards were granted with service and performance conditions. A portion of the Class B Units were subject to performance conditions which vested on the date that certain funds affiliated with certain of the Company’s pre-IPO owners received cash proceeds resulting in a 15% internal rate of return on their investment in the Company. In connection with the IPO, certain of these awards vested and the vested awards were exchanged for a combination of vested common shares of the Company and vested shares of BPG Sub which were subsequently converted to vested common shares of the Company. The remaining unvested Class B Units as of the IPO effective date were exchanged for a combination of unvested restricted common shares of the Company and unvested restricted common shares of BPG Sub, (collectively, the “RSAs”) which were subsequently converted to unvested restricted common shares of the Company. The RSAs were subject to the same vesting terms as those applicable to the exchanged Class B Units.

During the year ended December 31, 2013, the Board of Directors approved the 2013 Omnibus Incentive Plan (the “Plan”). The Plan provides for a maximum of 15.0 million shares of the Company’s common stock to be issued for qualified and non-qualified options, stock appreciation rights, restricted stock and restricted stock units, OP Units, performance awards and other stock-based awards.

During the nine months ended September 30, 2016, the Company granted RSUs in the Company to certain employees. During the year ended December 31, 2015, the Company granted RSUs in the Company to certain employees, or at the election of certain employees, long-term incentive plan units (“LTIP Units”) in the Operating Partnership. The RSUs and LTIP Units are divided into multiple tranches, with each tranche subject to separate performance-based vesting conditions, market-based vesting conditions and service-based vesting conditions. Each award contains a threshold, target, and maximum number of units in respect to each tranche. The number of units actually earned for each tranche is determined based on performance during a specified performance period, and the earned units are then further subject to time-based vesting conditions. The aggregate number of RSUs and LTIP Units granted, assuming that the target level of performance is achieved, was 0.8 million and 0.7 million for the nine months ended September 30, 2016 and year ended December 31, 2015, respectively, with vesting periods ranging from one to five years.

During the nine months ended September 30, 2016, the Company reversed $2.6 million of previously recognized equity compensation expense as a result of forfeitures and recognized $2.7 million of expense associated with the accelerated issuance of shares, both in connection with the separation of several Company executives. During the nine months ended September 30, 2015, as a result of it becoming probable that the Company’s pre-IPO owners would receive a 15% internal rate of return on their investment, the Company recognized $9.9 million of equity based compensation expense as a component of General and administrative expense in the Company's unaudited Condensed Consolidated Statements of Operations. The Company recognized $3.5 million and $3.8 million of equity based compensation expense for the three months ended September 30, 2016 and 2015, respectively. The Company recognized $8.0 million and $19.3 million of equity based compensation expense for the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016, the Company had $14.6 million of total unrecognized compensation cost related to unvested stock compensation expected to be recognized over a weighted average period of approximately 2.1 years.


- 25 -


10.     Earnings per Share
Basic earnings per share (“EPS”) is calculated by dividing net income attributable to the Company’s common stockholders, including participating securities, by the weighted average number of shares outstanding for the period. Certain restricted shares issued pursuant to the Company’s share-based compensation program are considered participating securities, as such shares have rights to receive non-forfeitable dividends. Unvested restricted shares are not allocated net losses and/or any excess of dividends declared over net income, as such amounts are allocated entirely to the common stockholders. Fully-diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into shares of common stock.

The following table provides a reconciliation of the numerator and denominator of the EPS calculations for the three and nine months ended September 30, 2016 and 2015:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Computation of Basic Earnings Per Share:
 
 
 
 
 
 
 
 Net income
$
57,805

 
$
54,819

 
$
184,824

 
$
141,122

 Income attributable to non-controlling interests
(313
)
 
(1,046
)
 
(2,399
)
 
(2,814
)
 Non-forfeitable dividends on unvested restricted shares
(9
)
 
(6
)
 
(26
)
 
(17
)
 Net income attributable to the Company’s common stockholders for basic earnings per share
$
57,483

 
$
53,767

 
$
182,399

 
$
138,291

 
 
 
 
 
 
 
 
 Weighted average number shares outstanding - basic
303,013

 
298,464

 
300,697

 
297,714

 
 
 
 
 
 
 
 
 Basic Earnings Per Share Attributable to the Company’s Common Stockholders:
 
 
 
 
 
 
 
 Net income (1)  
$
0.19

 
$
0.18

 
$
0.61

 
$
0.46

 
 
 
 
 
 
 
 
Computation of Diluted Earnings Per Share:
 
 
 
 
 
 
 
 Net income attributable to the Company’s common stockholders for basic earnings per share
$
57,483

 
$
53,767

 
$
182,399

 
$
138,291

 Allocation of net income to dilutive convertible non-controlling interests

 

 

 
2,814

 Net income attributable to the Company’s common stockholders for diluted earnings per share
$
57,483

 
$
53,767

 
$
182,399

 
$
141,105

 
 
 
 
 
 
 
 
 Weighted average shares outstanding - basic
303,013

 
298,464

 
300,697

 
297,714

 Effect of dilutive securities:
 
 
 
 
 
 
 
    Conversion of OP Units

 

 

 
6,185

    Equity awards
508

 
472

 
449

 
807

 Weighted average shares outstanding - diluted (2)
303,521

 
298,936

 
301,146

 
304,706

 
 
 
 
 
 
 
 
 Diluted Earnings Per Share Attributable to the Company’s Common Stockholders:
 
 
 
 
 
 
 
 Net income (1)
$
0.19

 
$
0.18

 
$
0.61

 
$
0.46

(1) 
The sum of the quarterly Basic and Diluted earnings per share may not equal the Basic and Diluted earnings per share for the nine months ended September 30, 2016 and 2015 due to rounding.
(2) 
For the three months ended September 30, 2016 and 2015, the weighted average number of vested OP Units outstanding was 1.6 million and 5.8 million, respectively and was not dilutive. For the nine months ended September 30, 2016, the weighted average number of vested OP Units outstanding was 3.9 million and was not dilutive.


- 26 -


11.     Earnings per Unit
Basic earnings per unit is calculated by dividing net income attributable to the Operating Partnership’s common units, including participating securities, by the weighted average number of partnership common units outstanding for the period. Certain restricted units issued pursuant to the Company’s share-based compensation program are considered participating securities, as such shares have rights to receive non-forfeitable dividends. Unvested restricted units are not allocated net losses and/or any excess of dividends declared over net income, as such amounts are allocated entirely to the Operating Partnership's common units. Fully-diluted earnings per unit reflects the potential dilution that could occur if securities or other contracts to issue common units were exercised or converted into shares of common units.

The following table provides a reconciliation of the numerator and denominator of the earnings per unit calculations for the three and nine months ended September 30, 2016 and 2015:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015