Business context and reporting period
Federal Realty Investment Trust is a retail and mixed-use REIT. The filing covers the quarter and six months ended June 30, 2013; although the request metadata says “2012 Q2,” the filing itself is for 2013 Q2. At quarter-end, the Trust owned or controlled 89 predominantly retail projects totaling approximately 19.6 million square feet, excluding unconsolidated joint ventures.
Financial performance and position
| Metric | Three months ended June 30, 2013 | Six months ended June 30, 2013 |
|---|---|---|
| Total revenue | $157.9 million, up 7.0% year over year | $315.7 million, up 7.4% |
| Operating income | $63.9 million | $126.8 million |
| Income from continuing operations | $33.8 million; diluted EPS $0.49 | $69.6 million; diluted EPS $1.02 |
| Net income attributable to the Trust | $37.5 million | $72.1 million |
| Net income available to common shareholders | $37.4 million; diluted EPS $0.57 | $71.9 million; diluted EPS $1.10 |
| FFO available to common shareholders | $71.1 million; $1.08 per diluted share | $145.2 million; $2.22 per diluted share |
| FFO excluding early debt extinguishment charge | $74.5 million; $1.14 per diluted share | $148.6 million; $2.27 per diluted share |
For the first six months, rental income grew 8.7% to $307.0 million and property operating income rose 6.9% to $222.7 million. Occupancy was 94.5% and leased space 95.3% at June 30. Operating cash flow was $146.7 million, compared with $149.9 million a year earlier; investing used $158.2 million, while financing provided $82.9 million. Cash rose to $108.4 million.
At June 30, total debt and capital lease obligations were approximately $2.31 billion; the balance sheet reported total liabilities of $2.61 billion. The Trust had no borrowings outstanding on its $600 million revolving facility and reported compliance with debt covenants. The declared common dividend was $1.46 per share for the six-month period, versus $1.38 in 2012.
Material changes versus the prior comparable period
- Second-quarter revenue increased 7.0%; higher same-center rents, occupancy, recoveries, and acquisitions contributed. Shopping-center occupancy increased to 94.5% from 93.4% a year earlier.
- Second-quarter income from continuing operations was nearly flat at $33.8 million versus $33.6 million; diluted continuing-operations EPS declined to $0.49 from $0.51. A $3.4 million early-extinguishment charge affected 2013.
- Six-month income from continuing operations increased 5.8%, but net income fell 4.0% to $74.6 million, primarily reflecting lower real-estate sale gains: $5.0 million in 2013 versus $11.9 million in 2012.
- Six-month FFO available to common shareholders increased to $145.2 million from $133.4 million; per diluted share it rose to $2.22 from $2.08.
- Cash used in investing increased substantially, mainly due to a $47.2 million property acquisition and increased development and redevelopment spending. Financing shifted from a $61.6 million use of cash to an $82.9 million source, reflecting new senior notes and ATM share issuance, partly offset by debt repayments and dividends.
Outlook, commentary, risks and unusual items
- Management expected positive rental-income growth in 2013, citing recent leasing and occupancy trends, but described its view of improving tenant conditions as cautiously optimistic. It provided no specific full-year earnings or FFO guidance in the supplied filing text.
- Management expected approximately $350 million of investment over two years in current phases of Assembly Row, Pike & Rose, and Santana Row. Expected 2013 investment was $95–$105 million at Assembly Row and $85–$105 million at Pike & Rose; the Santana Row residential project was expected to cost $70–$75 million in total. Project stabilizations were generally expected in 2014–2016.
- Comparable retail leases signed in the first half covered 725,000 square feet and achieved average rent increases of 14% on a cash basis and 27% on a straight-line basis. Tenant improvements and incentives for new leases were elevated at $51.43 per square foot; management attributed this mainly to specific anchor leases and expected costs to move closer to historical levels for the rest of 2013.
- Financing transactions included issuing $275 million of 2.75% senior notes due 2023 and redeeming $135 million of 5.40% notes, incurring a $3.4 million early-extinguishment charge. The revolving facility was upsized from $400 million to $600 million and extended to April 2017.
- A subsequent event: on July 22, 2013, the Trust sold its final building at Fifth Avenue in San Diego for $15.3 million, expecting an approximately $11 million gain.
- Key risks include tenant defaults, vacancies and lease renewals; development cost, timing, approvals, third-party delivery and public-funding risks; access to capital and interest-rate exposure; and real-estate market, environmental, and REIT-qualification risks. Management said pending legal matters were not expected to have a material adverse effect; the filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the supplied metadata says 2012 Q2, while the filing and financial statements identify the quarter ended June 30, 2013.
- Track occupancy, same-center rent growth, lease commencement and collection, and whether signed lease spreads translate into realized income.
- Assess development budgets, remaining funding needs, public-funding assumptions, delivery schedules, and eventual stabilization of Assembly Row, Pike & Rose, and Santana Row.
- Review debt maturities, refinancing exposure, covenant headroom, and the effects of future interest-rate changes; the filing lists substantial maturities in 2014 and 2017.
- Distinguish recurring operating performance from property-sale gains and the debt-extinguishment charge; FFO is a supplemental non-GAAP measure, not a substitute for operating cash flow.
- Monitor capital spending, ATM share issuance and dilution, dividend coverage, and liquidity as development investment continues.