FRT

Federal Realty Investment Trust - 10-Q Summary (Q2 2009)

Business Context and Reporting Period

Company: Federal Realty Investment Trust (FRT)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: FRT is an equity REIT specializing in the ownership, management, and redevelopment of retail and mixed-use properties, primarily in the Mid-Atlantic, Northeast, and California. As of June 30, 2009, the portfolio consisted of 84 properties (approx. 18.2 million sq. ft.) with an occupancy rate of 93.2% and a leased rate of 94.0%.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Total revenue increased 1.3% ($1.6M) for the quarter and 2.5% ($6.5M) for the six months compared to 2008. Growth was driven by redevelopment properties and 2008 acquisitions, partially offset by lower same-center performance due to the economic environment.
• Net Income: Net income attributable to the Trust decreased 1.9% for the quarter but dropped significantly by 34.0% ($20.1M) for the six months ended June 30, 2009, compared to the prior year.
• Litigation Provision: A significant non-cash charge of $20.8 million was recorded in the first half of 2009 related to a breach of contract lawsuit regarding a parcel adjacent to Santana Row. This charge materially impacted operating income and net income for the six-month period.
• Debt Refinancing: The company executed major refinancing activities, including a new $372 million term loan and $163.1 million in mortgage loans, to replace maturing debt and retire $40.3 million of senior notes.
• Liquidity: Cash and cash equivalents increased by $154.8 million to $170.1 million, primarily due to the proceeds from the debt refinancing activities.

Guidance, Outlook, and Risks

• Outlook: Management seeks growth through same-center portfolio growth, redevelopment, and acquisitions. However, the current economic downturn poses risks to tenant sales, rent collection, and the ability to re-lease vacant spaces at favorable rates.
• Capital Strategy: The company maintains a conservative capital structure. It expects to fund capital expenditures and operations through cash flow from operations, secured/unsecured refinancings, and its $300 million revolving credit facility (which had a $0 balance at quarter-end).
• Litigation Risk: The company is appealing a $15.9 million judgment (plus costs) related to the Santana Row land dispute. While a $21.4 million accrual has been established, the final outcome remains uncertain, and the appeal process is expected to take over a year.
• Market Risk: The company has $381.4 million in variable-rate debt. A 1.0% increase in interest rates would increase annual interest expense by approximately $3.8 million.

Investor Verification Checklist

• Litigation Accrual: Verify the status of the Santana Row lawsuit appeal and the adequacy of the $21.4 million litigation provision.
• Debt Maturities: Review the schedule of debt maturities, noting approximately $124 million due in the remainder of 2009 and the reliance on refinancing to meet these obligations.
• Occupancy Trends: Monitor the 93.2% occupancy rate and the impact of the economic downturn on tenant bankruptcies and lease renewals.
• FFO vs. Net Income: Analyze the divergence between Net Income (impacted by the litigation charge) and Funds From Operations (FFO), which excludes the litigation provision and depreciation.
• Variable Rate Exposure: Assess the impact of rising LIBOR rates on the $372 million term loan and other variable debt instruments.