FRT

Business Context and Reporting Period

Company: Federal Realty Investment Trust (Federal Realty)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Nine months ended September 30, 2003

Business Overview: Federal Realty is an equity REIT specializing in the ownership, management, development, and redevelopment of high-quality retail and mixed-use properties. As of September 30, 2003, the Trust owned or had an interest in 60 community/neighborhood shopping centers and 53 urban mixed-use properties, primarily in the Northeast and Mid-Atlantic United States. The portfolio was 94.3% leased (excluding Santana Row) and 93.9% leased (including Santana Row).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 13.0% to $258.5 million, driven by a 13.1% increase in rental income. This was primarily due to the phasing into service of the Santana Row development ($11.7 million increase), acquisitions in the first quarter ($2.2 million), and same-center rental income growth of 5.6%.
• Expense Increases: Property operating expenses rose 18.9% to $85.7 million, largely due to Santana Row operations and increased snow removal costs in the Northeast/Mid-Atlantic. Interest expense increased 20.4% to $54.6 million due to lower capitalized interest as Santana Row moved to operations and higher balances on the revolving credit facility.
• Discontinued Operations: The Trust recognized a $7.7 million gain on the sale of real estate in the first nine months of 2003, compared to a $9.5 million net gain in the same period of 2002. Income from discontinued operations decreased to $0.3 million from $1.6 million.
• Preferred Stock Redemption: The Trust redeemed $100 million of Series A Preferred Shares in June 2003, resulting in a $3.4 million charge to net income available to common shareholders due to the excess of redemption cost over carrying value.

Guidance, Outlook, and Risks

• Financing Update: On October 8, 2003 (post-period), the Trust closed a new $550 million unsecured credit facility to replace maturing debt. This facility includes a $300 million revolving credit line and term loans.
• Santana Row Development: The Trust is completing Phase I and II of Santana Row in San Jose. A fire in August 2002 caused an estimated loss exceeding $120 million; the Trust expects insurance to cover substantially all losses, with final resolution anticipated in Q4 2003. Phase II retail space is 95% pre-leased.
• Recent Acquisitions/Dispositions: In October 2003, the Trust acquired Mercer Mall (NJ) and Plaza del Mercado (MD) and sold a street retail asset in Greenwich, CT, expecting a $4.5 million gain in Q4.
• Risks: Key risks include tenant non-payment, refinancing risks, interest rate fluctuations, and the ability to renew leases at favorable rates. The Trust maintains REIT status by distributing 90% of taxable income.
• Contingencies: The Trust has a potential liability of approximately $28 million related to a put option at Congressional Plaza and a potential obligation of up to $3 million related to a tax increment financing agreement in San Antonio.

Investor Verification Checklist

• Santana Row Insurance Claim: Verify the final settlement amount and timing of the remaining insurance proceeds related to the 2002 fire.
• Debt Refinancing: Confirm the terms and covenants of the new $550 million credit facility closed in October 2003.
• Occupancy Rates: Monitor the leasing progress of Santana Row Phase I and II to ensure projected rental income is realized.
• Condemnation Proceeds: Track the closing of the Rockville, MD shopping center condemnation, expected in mid-2004, for the agreed $14.3 million value.
• Preferred Stock Impact: Review the impact of the Series A redemption on future dividend obligations and capital structure.