Federal Realty Investment Trust — Form 10-Q
Period: Quarter ended June 30, 2019. The request metadata says 2018 Q2, but the supplied filing is for 2019 Q2; comparisons below are against 2018.
Business context
Federal Realty is an equity REIT focused on retail and mixed-use properties in selected U.S. markets. At quarter-end, it owned or held a majority interest in 104 projects totaling about 23.9 million square feet. The portfolio was 94.1% leased and 93.3% occupied.
Financial results and key metrics
- Q2 revenue: $230.5 million, up 2.5% year over year; rental income was $229.7 million.
- Q2 earnings: Net income was $82.7 million, up 26.1%; net income attributable to the Trust was $80.9 million, up 27.2%. Basic and diluted EPS were $1.05, versus $0.84.
- Q2 property operating income: $163.9 million, up 4.6%. This is a company-defined non-GAAP measure.
- Q2 FFO available to common shareholders: $121.0 million, or $1.60 per diluted share, versus $114.8 million, or $1.55 per diluted share.
- First-half revenue and earnings: Revenue was $462.7 million, up 2.8%; net income attributable to the Trust was $141.0 million, up 13.0%; EPS was $1.83 versus $1.65; diluted FFO per share was $3.16 versus $3.08.
- Cash flow, first half: Operating cash flow was $242.3 million, down from $263.1 million. Investing used $113.4 million and financing used $97.0 million. Cash, cash equivalents and restricted cash ended at $140.3 million.
- Debt and liquidity: Total debt, net, was $3.16 billion at June 30. Cash and cash equivalents were $105.9 million; the $800 million revolving facility had no balance outstanding. The Trust reported compliance with applicable debt covenants.
- Dividends and equity: Common dividends declared were $2.04 per share for the first half, versus $2.00 a year earlier. The Trust issued 511,938 shares through its ATM program, raising $68.3 million net; $203.4 million of program capacity remained at quarter-end.
Material changes and unusual items
- Q2 operating income rose 16.7%, partly reflecting a $16.2 million real estate sale gain, compared with $4.0 million in Q2 2018. The gain primarily related to sales of Free State Shopping Center and a land parcel. First-half sale gains were $16.2 million versus $7.3 million.
- Underlying property operating income grew 4.6% in Q2 and 4.9% in the first half, supported by comparable-property performance and openings at Assembly Row and Pike & Rose. Property sales partly offset growth.
- Q2 general and administrative expense increased 35.8% to $11.4 million; first-half expense rose 28.4% to $21.0 million. Management cited higher personnel and leasing-related costs, including costs no longer eligible for capitalization under the new lease accounting standard.
- First-half interest expense increased 2.9% to $55.5 million, primarily due to a higher average borrowing rate, partly offset by lower average borrowings.
- Adoption of lease accounting standard ASC 842 on January 1, 2019 added operating and finance lease right-of-use assets and liabilities to the balance sheet and reduced opening accumulated earnings by $7.1 million. Prior periods were not retrospectively adjusted.
- In June, the Trust issued $300 million of 3.20% senior notes due 2029 and used proceeds primarily to repay a $275 million term loan. It also repaid a $20.3 million mortgage; management said no debt remained scheduled to mature in 2019.
- On July 25, 2019, after quarter-end, the revolving facility was increased to $1.0 billion, its maturity extended to January 2024 (with two six-month extension options), and its LIBOR spread reduced to 77.5 basis points. An increase to $1.5 billion is subject to bank approval.
Outlook, management commentary and risks
Management expects growth primarily from comparable-property operations, development and redevelopment, and acquisitions. It described tenant interest as relatively strong but noted longer lease negotiations and permitting delays, fewer available anchor tenants, and more early departures and tenant bankruptcies. At June 30, comparable-space leases signed in Q2 showed a 7% average cash rent increase; management cautioned that signed leases may take time to commence and may not all result in rent collection.
Redevelopment projects underway had projected total costs of approximately $325 million. Major projects include Santana Row, Assembly Row and Pike & Rose; management provided project-specific cost and delivery estimates, with some phases extending through 2022. It expected to invest $175 million to $200 million at Assembly Row and Pike & Rose during 2019. Project costs, delivery timing, tenant demand, permitting and expected returns remain uncertain.
Management said existing cash, operating cash flow, the ATM program, revolving credit access and capital-market access were expected to be sufficient for operations, debt service and capital spending. If market conditions deteriorate, it may delay projects, limit acquisitions, reduce operating expenditures or reassess dividends. Other stated risks include tenant credit and occupancy, redevelopment execution and costs, access to financing and interest-rate changes, property market conditions, and maintaining REIT status. Management did not believe pending legal matters would materially adversely affect financial position or operating trends; litigation nevertheless involves uncertainty.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q2 2019, not Q2 2018.
- Assess how much earnings growth reflects recurring property operations versus real estate sale gains and lease-accounting presentation changes.
- Track occupancy, tenant departures and bankruptcies, lease commencements, and whether signed rent increases translate into collected rental income.
- Monitor redevelopment spending, leasing, permitting, delivery schedules and returns against management’s project estimates.
- Review debt maturities, refinancing and covenant headroom, as well as the implications of the amended revolving facility.
- Compare operating cash flow and capital spending with dividend requirements and ongoing development commitments.