Federal Realty Investment Trust — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The request metadata says 2018 Q1, but the supplied filing is for 2019 Q1. Federal Realty is a REIT focused on retail and mixed-use properties; it operated 105 projects totaling approximately 24.2 million square feet. Properties were 94.0% leased and 93.0% occupied at quarter-end.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $232.2 million | $225.4 million | +3.0% |
| Property operating income (non-GAAP) | $160.3 million | $152.2 million | +5.3% |
| Operating income | $91.1 million | $89.5 million | +1.8% |
| Net income | $61.8 million | $62.9 million | -1.8% |
| Net income attributable to the Trust | $60.1 million | $61.2 million | -1.8% |
| Diluted EPS | $0.78 | $0.81 | Down $0.03 |
| FFO per diluted share (non-GAAP) | $1.56 | $1.52 | +2.6% |
| Cash from operating activities | $104.9 million | $124.2 million | Down $19.3 million |
Property operating income was approximately 69.0% of revenue, versus 67.5% a year earlier. This is a calculated ratio, not a company-reported margin. Cash and cash equivalents were $43.0 million; cash, cash equivalents and restricted cash totaled $82.2 million. Total assets were $6.35 billion and total liabilities were $3.72 billion at March 31, 2019.
Net debt was reported at $3.16 billion, comprising $452.5 million of mortgages, $299.1 million of notes payable and $2.405 billion of senior notes and debentures. The $800 million revolving facility had $20 million drawn at quarter-end; the company reported covenant compliance. A $275 million term loan matures in November 2019. The common dividend declared was $1.02 per share, compared with $1.00 in Q1 2018.
Changes and notable items
- Revenue growth reflected higher income from non-comparable properties, including Assembly Row and Pike & Rose, and comparable-property growth. Comparable-space leases signed in the quarter had an average cash rent increase of 10% overall; new leases increased 17% and renewals 1%.
- Property expenses fell 1.7%, helping property operating income rise 5.3%. However, higher general and administrative expense, depreciation and interest, together with the absence of the prior-year $3.3 million real-estate sale gain, contributed to lower net income and EPS.
- Operating cash flow declined, which management attributed primarily to timing of cash receipts. Investing cash use rose to $104.0 million, including $63.4 million for development and redevelopment, $14.1 million for other capital expenditures and the $22.5 million Fairfax Junction acquisition.
- The Trust sold common shares through its ATM program for $68.4 million net proceeds in the quarter; $203.4 million of ATM capacity remained at March 31.
- Adoption of lease accounting standard ASC 842 on January 1, 2019 added operating-lease right-of-use assets and liabilities to the balance sheet and resulted in a $7.1 million charge to opening accumulated dividends in excess of net income. It also changed certain revenue and expense presentation, affecting year-over-year comparisons.
Outlook, commentary and risks
Management expects 2019 comparable-space leasing volume to be within its historical range of 1.2–1.7 million square feet, with overall positive rental-income increases, but gave no specific full-year earnings or FFO guidance in the supplied filing. It expects higher property investment in 2019 as development and redevelopment advance, including an estimated $175–$200 million investment at Assembly Row and Pike & Rose. Major projects include Santana Row, Assembly Row and Pike & Rose, with costs and delivery schedules subject to market conditions and execution.
Management cited continued tenant interest but longer lease-decision and permitting timelines, fewer prospective anchor tenants, and increased early tenant departures or bankruptcies. Risks include tenant rent-payment and occupancy weakness, development delays or cost overruns, access to capital and refinancing, higher interest rates, debt covenant restrictions, and general real-estate and economic conditions. Management said current liquidity sources should be sufficient for operations, debt service and capital spending, while noting projects or acquisitions could be delayed or limited if market conditions deteriorate. Legal proceedings were not believed likely to have a material adverse effect; the filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile the decline in GAAP EPS with growth in FFO per diluted share, including the effects of the prior-year sale gain, higher interest expense and lease-accounting changes.
- Track occupancy, tenant bankruptcies and departures, lease commencement timing, and whether signed rent increases translate into collected rent.
- Monitor cash flow against dividends and planned development spending, and assess project budgets, leasing, pre-leasing and delivery timelines.
- Review the November 2019 $275 million term-loan maturity, subsequent refinancing or repayment, revolver availability and covenant headroom.
- Assess the impact of ATM share issuance and ongoing capital needs on per-share results, and confirm the effect of ASC 842 presentation changes on comparisons.