Federal Realty Investment Trust — Form 10-Q Summary
Reporting period: The filing is for the quarter ended June 30, 2014, with six-month comparisons to 2013. This conflicts with the request metadata identifying 2013 Q2; the filing itself clearly reports 2014 Q2. Amounts are unaudited and in U.S. dollars unless noted.
Business context
Federal Realty is an equity REIT focused on retail and mixed-use properties in the Mid-Atlantic, Northeast and California. At June 30, 2014, it owned or held a majority interest in 89 predominantly retail projects totaling about 20.0 million square feet. Its portfolio was 95.3% leased and 94.3% occupied. A 30%-owned joint venture held seven properties.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $167.9 million | $157.4 million | $338.8 million | $314.5 million |
| Operating income | $68.4 million | $63.5 million | $131.8 million | $126.0 million |
| Net income attributable to Trust | $43.5 million | $37.5 million | $82.3 million | $72.1 million |
| Basic and diluted EPS | $0.64 | $0.57 | $1.22 | $1.10 |
| FFO available to common shareholders per diluted share | $1.23 | $1.08 | $2.43 | $2.22 |
| Cash from operating activities | — | $172.1 million | $146.7 million |
FFO is a supplemental non-GAAP measure, not a substitute for GAAP earnings or operating cash flow. Property operating income was $117.4 million in Q2, up 5.2%, and $232.4 million for six months, up 4.9%. Derived property operating income as a share of property revenue was approximately 69.9% in Q2 versus 70.9% in Q2 2013, and 68.6% versus 70.5% for the six-month periods.
Six-month investing cash outflow was $190.1 million, mainly reflecting $154.7 million of development and redevelopment spending. Financing used $29.6 million; cash fell $47.6 million to $41.3 million. Total debt and capital lease obligations were $2.36 billion. The $600 million revolving facility had no balance outstanding at period-end; the Trust also reported $196.5 million of remaining capacity under its $300 million ATM share program. Debt covenants were in compliance.
At June 30, total assets were $4.43 billion, total liabilities $2.70 billion, and total shareholders’ equity $1.62 billion. The common dividend declared and paid for the first half was $1.56 per share, versus $1.46 a year earlier.
Material changes versus comparable periods
- Q2 revenue rose 6.7% and six-month revenue rose 7.7%. Rental income growth reflected same-center rent and recovery increases, acquisitions, and Santana Row residential lease-up.
- Operating costs grew faster than property revenue: property expenses rose 10.3% in Q2 and 14.5% for six months. Management cited winter-related snow removal and utility costs, higher assessments, acquisitions, and increased bad debt. Rental expenses reached 18.8% of rental income plus other property income in Q2, versus 18.1%; for six months the ratio was 20.4% versus 18.5%.
- Interest expense declined 14.5% in Q2 and 15.0% for six months, principally due to lower average borrowing rates and more interest capitalized to development projects.
- 2013 reported earnings included discontinued-operation income and a $5.0 million property-sale gain; neither recurred in 2014. The 2013 periods also included a $3.4 million early debt-extinguishment charge, which increased comparative 2013 expense.
- Cash from operations increased, while development, redevelopment and leasing investment rose. The Trust issued about 896,000 shares through the ATM program in the first half for $102.3 million net proceeds.
Outlook, commentary and risks
- Management was cautiously optimistic about tenant conditions and leasing interest, but provided no quantified full-year earnings or FFO guidance in the supplied filing text.
- Comparable retail leases signed in Q2 covered 537,000 square feet and showed average rent increases of 16% on a cash basis and 30% on a straight-line basis. Management cautioned that signed leases may not commence as expected or produce all contractual rent.
- Management expected 2014 redevelopment projects with approximately $87 million in projected costs to stabilize. Santana Row’s completed 212-unit residential building was 93.9% leased and expected to stabilize in 2014. Assembly Row Phase I costs were estimated at $190–$200 million, with $172 million incurred; 2014 net investment was expected at $65–$85 million. Pike & Rose Phase I costs were estimated at $245–$255 million, with $173 million incurred; 2014 investment was expected at $90–$120 million. The Trust expected about $125 million of investment over 18 months in current phases of Assembly Row and Pike & Rose.
- Management believed cash flows, cash on hand, the ATM program, revolving credit facility and capital-market access would be sufficient for operations, debt service and capital spending. It noted it could defer projects, limit acquisitions, reduce spending or reconsider dividends if market conditions deteriorated.
- Key risks include tenant defaults or vacancies, lease renewal and re-leasing outcomes, development cost or schedule overruns, dependence on third parties and public funding, access to capital, interest rates, debt covenant restrictions, economic conditions, environmental matters and maintaining REIT qualification. Management reported no material change to previously disclosed risk factors.
- The Brook 35 mortgage was refinanced at 4.65% through 2029; a $20.3 million Melville Mall mortgage was repaid early. Scheduled 2015 debt and lease principal payments were about $207.6 million; management reported no additional debt maturing in the remainder of 2014.
- The Clarion joint venture sold its fee interest in Pleasant Shops for $34.3 million on July 24, 2014. Management said pending litigation was not expected to have a material adverse effect, while acknowledging inherent uncertainty.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q2 2014, not Q2 2013.
- Track occupancy, same-center revenue growth, expense trends and lease commencements; occupancy was slightly lower year over year despite strong reported lease spreads.
- Monitor execution, remaining costs, leasing and stabilization at Assembly Row, Pike & Rose and Santana Row, including public-funding and third-party dependencies.
- Review near-term debt maturities, refinancing terms, covenant headroom, interest-rate exposure and future funding needs; the term loan rate was effectively fixed at 3.02% through November 2018.
- Assess the effect of continued ATM issuance and development spending on share dilution, leverage, cash balances and dividend coverage.
- Consider the $9 million mandatorily redeemable Grove at Shrewsbury interest and the additional holder’s right, beginning in 2017, to require a purchase at then-current fair market value.