Federal Realty Investment Trust — 2019 Form 10-K
Period clarification: The supplied filing is the annual report for the fiscal year ended December 31, 2019, not a 2018 Q4 filing as indicated in the request metadata. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Business context and reporting period
Federal Realty is an equity REIT focused on owning, managing, acquiring and redeveloping retail and mixed-use properties in densely populated, affluent U.S. markets. At year-end 2019, it owned or held majority interests in 104 projects totaling approximately 23.7 million square feet. The portfolio was 94.2% leased and 92.5% occupied. No single tenant represented more than 2.6% of annualized base rent. The company reported one operating segment.
Financial and operating performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $935.8 | $915.4 | +2.2% |
| Property operating income (non-GAAP) | $637.0 | $627.6 | +1.5% |
| Operating income | $470.9 | $361.6 | +30.2% |
| Net income | $360.5 | $249.0 | +44.8% |
| Net income available to common shareholders | $345.8 | $233.9 | +47.9% |
| Diluted EPS | $4.61 | $3.18 | +45.0% |
| FFO available to common shareholders (non-GAAP) | $465.8 | $461.8 | +0.9% |
| Diluted FFO per share (non-GAAP) | $6.17 | $6.23 | -1.0% |
| Cash from operating activities | $461.9 | $516.7 | -10.6% |
Revenue growth reflected comparable-property gains, openings at Assembly Row and Pike & Rose, and acquisitions, partly offset by dispositions. Comparable-space leases signed in 2019 generated an average cash rent increase of 8%, compared with 12% in 2018. Occupancy declined from 93.6% at December 31, 2018 to 92.5% at December 31, 2019.
GAAP earnings increased substantially, primarily because net gains on real estate sales rose to $116.4 million from $11.9 million. This included an $85.1 million gain on the sale under threat of condemnation of part of San Antonio Center. Excluding the $11.9 million Assembly Square Marketplace lease buyout charge, 2019 FFO available to common shareholders would have been $477.7 million, or $6.33 per diluted share, as reported by the company.
Rental expenses increased 8.5% to $187.8 million; the company cited an $11.9 million lease buyout charge and higher repairs and maintenance. General and administrative expense rose 27.2% to $42.8 million, partly due to ASC 842 accounting changes and higher personnel costs. Interest expense was $109.6 million, slightly below 2018.
Balance sheet, debt, liquidity and distributions
- At December 31, 2019, total assets were $6.795 billion, total debt was $3.357 billion, and shareholders’ equity was $2.636 billion.
- Cash and cash equivalents were $127.4 million. The $1.0 billion revolving credit facility had no balance outstanding at year-end; the company reported $153.6 million of cash, cash equivalents and restricted cash combined.
- Debt was predominantly fixed-rate or hedged; the filing states there was no variable-rate debt outstanding at year-end. The company reported compliance with its debt covenants.
- The company issued $400 million of 3.20% senior notes due 2029 and used the proceeds primarily to repay a $275 million term loan. It amended its revolver, extending maturity to January 2024, with two optional six-month extensions.
- Scheduled principal repayments were $66.9 million in 2020. Total contractual obligations were $5.871 billion, including $572.4 million of development, redevelopment and capital-improvement obligations.
- 2019 common dividends declared were $4.14 per share, compared with $4.04 in 2018. The Trust reported 52 consecutive years of annual dividend increases.
Material changes, outlook and risks
The company adopted ASC 842, Leases, on January 1, 2019, without retrospectively adjusting prior periods. Adoption changed lease accounting and presentation, including recognition of right-of-use assets and liabilities for lessee leases, treatment of tenant collectibility adjustments, and presentation of certain real-estate-tax recoveries. These changes affect comparisons with 2018.
Management reported approximately $315 million of redevelopment projects expected to stabilize over the next several years. It expected to invest $320 million to $350 million in Assembly Row, Pike & Rose and Santana Row during 2020. Projects included office development at Santana Row and Pike & Rose, and Phase III at Assembly Row; the filing describes expected costs, leasing and projected opening periods. Management did not provide a formal earnings or FFO forecast in the supplied filing text. It said 2020 comparable leasing volume was expected to be in line with historical averages, with overall positive rental-income increases, but gave no assurance that lease spreads would remain positive.
Management cited longer tenant decision and leasing timelines, slower government permitting, fewer prospective anchor tenants, and increased early tenant departures and retail bankruptcies. Principal risks include tenant credit and occupancy, online retail competition, geographic concentration, redevelopment cost and timing, capital-market access, debt covenants and interest rates, environmental exposure, natural disasters and climate risks, and maintaining REIT qualification. Legal proceedings were described as arising in the ordinary course; management did not believe current proceedings would materially adversely affect results, liquidity or financial condition.
Unusual items and contingencies include the San Antonio Center condemnation-related sale, with a $45.5 million liability estimate for indemnified costs; the $11.9 million Assembly Square lease buyout charge; and potential partnership-interest put obligations, including an estimated $79 million to $84 million for Congressional Plaza if exercised. Management’s estimates and the eventual costs may differ.
Most important facts for investors to verify
- Confirm the period: this is a fiscal 2019 10-K, not a 2018 Q4 report; review the separate 2018 filing for that requested comparison.
- Assess recurring performance apart from the $116.4 million of 2019 real-estate sale gains and the $11.9 million lease buyout charge; reconcile GAAP earnings with FFO and other non-GAAP measures.
- Track occupancy, comparable-property growth, lease spreads and leasing costs, particularly given lower year-end occupancy and the decline in reported lease spreads from 2018.
- Monitor redevelopment spending, commitments, leasing and delivery progress against management’s 2020 investment plans and project cost estimates.
- Review debt maturities, refinancing access, covenant headroom, dividend coverage and potential partnership puts or condemnation indemnity costs.
- Consider the effects of ASC 842 on year-over-year comparability and on reported revenue and expenses.