Business context and reporting period
Period discrepancy: The request identifies 2010 Q2, but the filing is Federal Realty Investment Trust’s Form 10-Q for the quarter ended June 30, 2011, filed August 3, 2011. Comparisons below are against Q2 and the first six months of 2010. The interim statements are unaudited.
Federal Realty is a retail and mixed-use REIT. At June 30, 2011, it owned or held majority interests in 86 predominantly retail projects totaling approximately 18.6 million square feet; the portfolio was 93.4% leased and 92.7% occupied. It also held a 30% interest in a joint venture with seven properties.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $136.3 million | $133.2 million | $273.9 million | $271.0 million |
| Operating income | $57.3 million | $55.8 million | $113.7 million | $114.6 million |
| Income from continuing operations | $33.9 million | $30.6 million | $65.9 million | $61.0 million |
| Net income attributable to the Trust | $34.8 million | $31.1 million | $65.9 million | $60.3 million |
| Basic / diluted EPS | $0.55 / $0.55 | $0.50 / $0.50 | $1.06 / $1.05 | $0.98 / $0.98 |
| FFO available to common shareholders, diluted per share | $1.02 | $0.98 | $2.01 | $1.92 |
Q2 property operating income was $95.6 million, up 2.9%. Six-month property operating income was $188.4 million, up 1.4%. Rental income grew 2.6% in Q2 and 2.7% for six months; other property income fell 49.7% for six months, mainly because of lower lease termination fees. Interest expense declined 4.7% for six months, primarily from lower average borrowing rates, partly offset by higher borrowings.
For the six months, operating cash flow was $118.7 million, down from $129.3 million; investing cash use was $76.8 million, and financing cash use was $37.9 million. Cash rose $4.1 million to $19.8 million. The operating cash flow decline primarily reflected a $16.2 million payment of a previously accrued legal judgment.
At June 30, total assets were $3.221 billion, total liabilities $1.957 billion, and shareholders’ equity $1.264 billion. Debt and capital lease obligations totaled approximately $1.760 billion, including $487.0 million of mortgages, $209.3 million of notes payable, $1.005 billion of senior notes and debentures, and $59.3 million of capital leases. The Trust reported compliance with its debt covenants.
The Trust had $189.0 million drawn on its $300 million revolving facility at June 30. On July 7, it replaced that facility with a $400 million unsecured revolver maturing in July 2015, with an optional one-year extension and an accordion feature to $800 million. The ATM equity program raised $90.1 million net in the first half; up to $208.3 million remained available at June 30. Common dividends declared were $1.34 per share for the first half.
Material changes and notable items
- Net income attributable to the Trust increased 11.7% in Q2 and 9.3% for the first half. Continuing-operations income rose 10.6% in Q2 and 8.0% for six months.
- Occupancy declined to 92.7% from 93.4% a year earlier. Management cited tenant bankruptcies and expected near-term vacancy related to Borders and Blockbuster lease rejections and Borders’ announced store closures.
- Portfolio growth included the January acquisition of Tower Shops for a net purchase price of $66.1 million. Feasterville Shopping Center was sold July 12 for $20.0 million in a tax-deferred exchange.
- A Norwalk, Connecticut, mortgage refinancing converted defaulted loans into an $11.9 million first mortgage loan at 6.0%, due in 2014 with an extension option. The Trust deconsolidated the property and recorded a $2.0 million gain.
- The Trust issued 1.1 million shares under its ATM program in the first half. Shares outstanding increased from 61.5 million at year-end 2010 to 62.8 million at June 30, 2011.
Outlook, risks and contingencies
- No specific full-year earnings or FFO guidance is provided. Management expects redevelopment projects costing approximately $47 million to stabilize in 2011 and $59 million in 2012, and expects to invest $20 million to $40 million in Assembly Row in 2011.
- Assembly Row construction is contingent on qualified bids confirming the new transit stop can be built within committed funding and on funding conditions being met. If not, the Trust may not proceed and could be required to impair its approximately $121 million carrying value in the development portion.
- Management expects leasing activity in 2011 to be similar to prior years, with overall positive rent increases, but notes that signed leases may not commence as expected and future rental growth is not assured. Q2 comparable-space leases showed average increases of 6% on a cash basis and 16% on a straight-line basis.
- Management cited risks from tenant nonpayment, bankruptcy and vacancies; redevelopment execution and cost; access to capital; interest rates; debt covenants; and broader economic and real estate conditions. A 1% increase in rates on variable-rate debt was estimated to increase annual interest expense by approximately $2.0 million.
- The $16.2 million judgment relating to land adjacent to Santana Row was paid in March 2011 and had been accrued at year-end 2010. The filing reports no material change to previously disclosed risk factors and no other legal proceedings listed in Part II.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for Q2 2011, not Q2 2010.
- Assess the durability of earnings growth apart from the $2.0 million Norwalk deconsolidation gain and other discontinued-operation items.
- Track occupancy, Borders and Blockbuster re-leasing, and whether signed rent increases translate into occupied space and collected rent.
- Review Assembly Row’s transit-funding and bid conditions, remaining investment, and potential impairment exposure.
- Monitor debt maturities, borrowing costs, covenant compliance, and the effect of the larger revolving facility and ATM share issuance on liquidity and per-share results.
- Compare reported cash flow with dividends and planned development, redevelopment, and acquisition spending; FFO is a non-GAAP measure and is not equivalent to operating cash flow.