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Three Top Brixmor Execs Resign After Accounting Review

UPDATED: Disclosure of Accounting Irregularity Prompts Round of Analyst Downgrades As Former DDR Chief Executive Daniel Hurwitz Takes Over As Interim CEO of Shopping Center REIT
February 8, 2016
Former DDR Corp. CEO Danel Hurwitz will take the helm at Brixmor following an audit committee report that showed financial accounting irregularities.
Former DDR Corp. CEO Danel Hurwitz will take the helm at Brixmor following an audit committee report that showed financial accounting irregularities.
Three top executives for shopping center owner Brixmor Property Group Inc. (NYSE: BRX) have resigned and former DDR Corp. chief executive Daniel Hurwitz has taken over as interim CEO following the company's disclosure of an internal accounting review showing that Brixmor's financial results were allegedly manipulated to make quarterly results more consistent.

Brixmor Chief Executive Officer Michael Carroll, Chief Financial Officer Michael Pappagallo, Chief Accounting Officer Steven Splain and an accounting employee have stepped down following the report from an audit committee investigation that began in late December.

The review led Brixmor's board of directors "to conclude that specific company accounting and financial reporting personnel, in certain instances, were smoothing income items, both up and down, between reporting periods in an effort to achieve consistent quarterly same-property net operating income," according to a statement released by the company early Monday.

The disclosure caused the New York City-based shopping center owner's share price to plunge by 20% as of mid-day Monday. Blackstone Group LP took Brixmor public in 2013 and holds a more than 36% stake as the company's largest shareholder.

Brixmor said the amounts involved were not material to the company's same-property NOI or financial results and does not believe it will be required to restate historical financial results, adding that the matter will not impact compliance with financial covenants in its debt agreements. The company has reported the matter to the U.S. Securities and Exchange Commission.

The company does not believe the matter impacts its financial strength or prospects, though final determinations remain subject to the completion of the 2015 audit and Brixmor's filing of its fourth-quarter 2015 results.

"The board is disappointed to have learned of the conduct and lack of appropriate management supervision uncovered as a result of the Audit Committee review," said John Schreiber, chairman of the Brixmor board. "Once the facts were known, we moved swiftly to take remedial action."

"We are fortunate to be able to bring in a seasoned real estate executive of Dan Hurwitz's caliber who can lead the company through this period and effectively manage our portfolio as we move to identify a new CEO and CFO," Schreiber said.

Brixmor's announcement prompted a number of equity analysts to downgrade the company's stock, including SunTrust Robinson Humphrey, which dropped BRX from buy to neutral due to the accounting issues and "veil of uncertainty regarding the company's future, loss of credibility, and ability to raise capital, according to research note by SunTrust analyst Ki Bin Kim.

Although Brixmor's portfolio seems to be performing well, Stifel Nicolaus & Co. downgraded the company from buy to hold because "until BRX's accounting issues are behind it and a new permanents CEO and CFO are named, we cannot recommend buying the shares," Stifel analyst Nathan Isbee said in a note.

Fitch Ratings said it does not anticipate changing its rating or outlook for Brixmor, noting that the restatements of the company's same-store NOI growth are generally immaterial and the company's liquidity position remains adequate. Near-term borrowing costs could increase while access to capital could decrease, however, and Fitch Managing Director Steven Marks said the agency could take a rating action if Brixmor's capital access weakens materially or if the company discloses additional inaccuracies.
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