Federal Realty Investment Trust — 2020 Form 10-K
Period clarification: The filing provided is the annual report for the fiscal year ended December 31, 2020, not a 2019 fourth-quarter filing. Comparisons below are with fiscal 2019.
Business context
Federal Realty is an equity REIT focused on owning, operating, and redeveloping retail and mixed-use properties in affluent, densely populated U.S. markets. At year-end 2020, it owned or held majority interests in 101 projects totaling approximately 23.4 million square feet; the portfolio was 92.2% leased and 90.2% occupied. Revenue is primarily rental income. The Trust reported 53 consecutive years of common-dividend increases.
Financial performance
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Rental income | $832.2 million | $932.7 million | Down 10.8% |
| Total property revenue | $835.5 million | $935.8 million | Down 10.7% |
| Property operating income (non-GAAP) | $545.3 million | $637.0 million | Down 14.4% |
| Operating income | $289.5 million | $470.9 million | Down 38.5% |
| Net income available to common shareholders | $123.7 million | $345.8 million | Down 64.2% |
| Diluted earnings per common share | $1.62 | $4.61 | Down 64.9% |
| FFO available to common shareholders (non-GAAP) | $333.8 million; $4.38 per diluted share | $465.8 million; $6.17 per diluted share | Down 28.3% in total |
| Cash from operating activities | $369.9 million | $461.9 million | Down 19.9% |
| Cash used in investing activities | $368.4 million | $316.5 million | Use increased |
| Cash from (used in) financing activities | $661.7 million | $(100.1) million | — |
Property operating income was approximately 65.3% of property revenue in 2020 versus 68.1% in 2019, calculated from reported figures. Rental expenses declined 9.0%, but real estate taxes rose 7.5%. Interest expense increased 24.3% to $136.3 million, reflecting pandemic-related borrowing and other debt issuance, partly offset by lower borrowing rates. The 2020 results also included a $57.2 million impairment charge and an $11.2 million early debt-extinguishment charge. The $98.1 million gain on real estate sales was below 2019’s $116.4 million.
Debt, liquidity, and distributions
Year-end total debt was $4.29 billion, up from $3.36 billion in 2019; total assets were $7.61 billion. Cash and cash equivalents were $798.3 million, and the $1.0 billion revolving credit facility had no balance outstanding. Approximately 90.7% of debt was fixed-rate or fixed through swaps. A $400 million variable-rate term loan was due May 6, 2021, with one 12-month extension at the Trust’s option; the filing reports that subsequent repayments reduced other 2021 maturities.
Common dividends declared were $4.22 per share in 2020, compared with $4.14 in 2019; cash dividends paid were $4.21 and $4.11, respectively. FFO per diluted share of $4.38 was below the declared dividend. The Trust raised capital through $1.1 billion of term-loan and note proceeds in May, $400 million of senior notes in October, and $98.8 million net proceeds from common-share issuance under its ATM program. It also redeemed $500 million of senior notes in December and recorded the related early-extinguishment charge.
Material changes, outlook, and risks
- COVID-19 and rent collection: Tenant closures and operating restrictions materially reduced cash flow, increased vacancy, and weakened collections. The Trust recorded $106.6 million of collectibility-related adjustments; revenue from approximately 35% of commercial tenants, by lease count, was recognized on a cash basis at year-end. Rent deferrals and abatements represented approximately $36 million and $35 million, respectively, of 2020 rent otherwise due. Approximately 32% of commercial tenants had agreed to defer rent by year-end.
- Operations and leasing: Shopping-center occupancy was 90.2%, versus 92.5% at year-end 2019. Comparable-space leases signed in 2020 achieved a 3% average cash-basis rent increase, versus 8% in 2019. Management expected short-term pressure on rents and collections; it reported approximately 98% of retail tenants open as of January 31, 2021.
- Development: Management continued selected construction projects while slowing or pausing other spending. Major projects included Assembly Row Phase III, Pike & Rose, and Santana Row; timing, costs, lease-up, and returns remained dependent on market conditions, tenant demand, and pandemic effects. Management anticipated higher investment in active development and redevelopment projects, but gave no numerical earnings or FFO guidance in the text provided.
- Property impairment and sale: After a $60.6 million non-recourse mortgage on The Shops at Sunset Place matured unpaid and went into default, the Trust recorded a $57.2 million impairment and sold the property on December 31, 2020 for $65.5 million, repaying the loan. The default did not trigger cross-defaults on other debt.
- Other risks and obligations: Key exposures include further tenant defaults or bankruptcies, lease rollover and online retail competition, geographic concentration, development cost and completion risks, interest rates and LIBOR transition, REIT qualification, environmental matters, and natural disasters or public-health events. Contractual redevelopment and capital-expenditure commitments were approximately $356.1 million; potential partnership put obligations include estimated amounts of $69–72 million for Congressional Plaza and $28–35 million for Plaza El Segundo.
- Controls and audit: Management and the independent auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements. Lease collectibility was identified as a critical audit matter.
Important facts for investors to verify
- Confirm the filing and reporting period: this is the FY2020 10-K, not a 2019 Q4 report.
- Track subsequent rent collections, deferred-rent recoveries, cash-basis lease revenue, and portfolio occupancy; reported 2020 rent and earnings were materially affected by collectibility judgments.
- Review liquidity and the 2021 term-loan maturity, including whether the extension option was exercised and how subsequent debt repayments affected maturities.
- Assess the sustainability of the common dividend against FFO, cash from operations, capital spending, and debt service; FFO per share was below the 2020 declared dividend.
- Monitor development commitments and project delivery, lease-up, and costs, as well as the outcome of partnership put options and the San Antonio Center condemnation indemnity.