Federal Realty Investment Trust — Form 10-Q Summary
Period: Quarter and six months ended June 30, 2017; filed August 2, 2017. The request metadata says 2016 Q2, but the filing itself is for 2017 Q2.
Business context
Federal Realty is an equity REIT focused on ownership, management, and redevelopment of retail and mixed-use properties. At June 30, 2017, it operated 99 projects comprising approximately 23.2 million square feet. The portfolio was 94.5% leased and 93.0% occupied. Results are unaudited.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $208.0 million, up 5.1% from $198.0 million | $415.4 million, up 4.8% from $396.3 million |
| Operating income | $83.1 million, up 3.7% | $164.6 million, up 4.8% |
| Income from continuing operations | $59.1 million, up 3.5% | $117.0 million, up 6.0% |
| Net income attributable to the Trust | $76.3 million, versus $55.9 million | $132.5 million, versus $132.9 million |
| Diluted EPS | $1.05, versus $0.78; continuing-operations EPS was $0.79 | $1.83, versus $1.88; continuing-operations EPS was $1.57 |
| FFO per diluted share | $1.49, versus $1.42 | $2.94, versus $2.80 |
| Operating cash flow | Not presented for the quarter | $241.8 million, versus $203.6 million |
Second-quarter property operating income, a non-GAAP measure, increased 4.9% to $144.4 million. Rental income rose 5.9% in the quarter and 5.3% for the six-month period. Growth reflected redevelopments and lease-up, acquisitions, and residential leasing at Assembly Row and Pike & Rose. Real estate taxes and depreciation and amortization increased, partly offsetting property-level growth.
Six-month net income was slightly lower year over year despite higher continuing-operations income, largely because gains on real estate sales and change in control were lower than in 2016. The 2017 period included a $15.4 million gain on Assembly Row land sales and a $3.3 million Assembly Row condominium gain recognized under percentage-of-completion accounting. The 2016 period included a $25.7 million gain from obtaining control of six Clarion joint-venture properties.
Cash, debt, and liquidity
- Cash and cash equivalents were $96.3 million at June 30, 2017, compared with $23.4 million at December 31, 2016.
- Six-month cash flow: $241.8 million provided by operations, $390.0 million used in investing, and $221.1 million provided by financing. Investing outflows included $168.3 million for acquisitions and $262.8 million for development, redevelopment, and other capital expenditures.
- Balance-sheet debt included $414.9 million of mortgages, $279.3 million of notes payable, and $2.377 billion of senior notes and debentures; capital lease obligations were $71.6 million. The company reported no outstanding borrowings on its $800 million revolving facility at quarter-end.
- In June, the Trust issued $400 million of senior notes, with net proceeds of approximately $399.4 million. It also refinanced the Plaza El Segundo mortgage with a $125 million loan at 3.83%, repaying $50 million of the prior balance.
- Management said cash from operations, cash on hand, its ATM program, revolving facility, and capital-market access were expected to cover operations, debt service, and capital spending. The Trust was in compliance with debt covenants.
Outlook, commentary, and risks
- Management cited strong prospective tenant interest but longer leasing timelines, slower government permitting and inspections, fewer potential anchor tenants, and an uptick in retail tenant closures and bankruptcies.
- For comparable retail space leases signed in Q2, average rents increased 13% on a cash basis and 27% on a straight-line basis. Management expected 2017 leasing volume to be in line with or slightly above historical levels, with positive overall rental growth, but cautioned that signed leases may not commence as planned or produce all contracted rent.
- Approximately $238 million of redevelopment projects were underway, expected to stabilize over the next several years. The Santana Row office project was expected to cost $205–$215 million and deliver in 2019. Phase II projects at Assembly Row and Pike & Rose were underway; the company expected to invest $270–$300 million there in 2017, net of public funding.
- A third-quarter 2017 acquisition was expected: approximately 90% of a joint venture owning six shopping centers and a 25% interest in a seventh, funded with assumed debt and approximately $260 million of cash.
- Management said projects or acquisitions could be delayed or limited if market conditions deteriorated. Risks include tenant nonpayment, early vacancies or bankruptcies, redevelopment cost and schedule overruns, dependence on third parties and public funding, economic conditions, access to capital, interest rates, and compliance with debt covenants.
- No specific earnings or FFO guidance was provided in the filing. Management stated that actual results may differ from forward-looking statements. No material changes to previously disclosed risk factors or material legal-proceeding developments were reported.
Most important facts for investors to verify
- Confirm the reporting period: this filing covers Q2 2017, not Q2 2016.
- Assess whether portfolio occupancy, tenant health, and lease commencements support continued rental growth.
- Track delivery, cost, leasing, and returns for Assembly Row, Pike & Rose, Santana Row, and the redevelopment pipeline.
- Verify funding and closing terms for the anticipated joint-venture acquisition and the expected $260 million cash investment.
- Monitor debt maturities, capital requirements, interest-rate exposure, and reliance on capital markets; $42 million of mortgage debt was scheduled to mature in the remainder of 2017.
- Consider that reported earnings included real-estate gains; FFO is a supplemental non-GAAP measure and is not equivalent to operating cash flow or liquidity.