Business Context and Reporting Period
Company: Federal Realty Investment Trust (REIT)
Reporting Period: Quarter and Six Months Ended June 30, 2003
Business Overview: The Trust specializes in owning, managing, and developing high-quality retail and mixed-use properties. As of June 30, 2003, the portfolio included 60 community/neighborhood shopping centers (approx. 13 million sq. ft.) and 55 urban mixed-use properties (approx. 2.5 million sq. ft.), primarily in the Northeast and Mid-Atlantic U.S. Occupancy was 93.6% excluding the Santana Row development project.
Key Financial Metrics (Six Months Ended June 30, 2003)
| Metric | 2003 (in thousands) | 2002 (in thousands) |
|---|---|---|
| Total Revenue | $171,710 | $151,031 |
| Property Operating Income | $113,989 | $104,037 |
| Net Income | $34,502 | $34,004 |
| Net Income Available to Common Shareholders | $25,156 | $24,292 |
| Funds From Operations (FFO) | $59,953 | $46,781 |
| EBITDA | $105,357 | $88,356 |
| Cash Provided by Operating Activities | $58,483 | $65,992 |
| Total Debt Outstanding | $1,129,529 | $1,051,008 |
| Cash and Cash Equivalents | $18,609 | $23,123 |
Per Share Data (Diluted): Net Income EPS was $0.55 (vs. $0.60 in 2002); FFO per share was $1.28 (vs. $1.13 in 2002).
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 13.7% ($20.7 million) driven by a 13.1% increase in rental income. This was due to same-center rent increases (retenanting/lease rollovers), new acquisitions (South Valley Shopping Center, Mount Vernon Plaza), and the phasing-in of the Santana Row project.
- Expense Increases: Property operating expenses rose 22.8% ($10.7 million), primarily due to increased snow removal costs in the Northeast/Mid-Atlantic and initial operating expenses at Santana Row. Interest expense increased 12.8% due to higher balances on the revolving credit facility and new senior notes, partially offset by lower capitalized interest.
- Dispositions: The Trust sold a street retail property in Bethesda, MD, for a gain of $551,000. In the prior year, six properties were sold for a combined gain of $19.1 million, significantly impacting the year-over-year comparison of net income.
- Debt Structure: Total debt increased by approximately $78.5 million. The Trust redeemed $100 million of Series A Preferred Shares and $75 million of Convertible Subordinated Debentures, funding these payoffs through a $98.6 million common stock offering and increased borrowings under its revolving credit facility.
Outlook, Risks, and Management Commentary
- Santana Row Project: The primary capital need for 2003 is the completion of Santana Row (San Jose, CA). A fire in August 2002 destroyed residential units and damaged retail space in Building 7. The Trust estimates a loss in excess of $100 million but expects insurance to cover substantially all losses. $88.8 million in insurance proceeds had been received by July 2003. Phase II is scheduled to open in late 2003.
- CEO Transition: Following the resignation of Steven J. Guttman in January 2003, Donald C. Wood became CEO. A $13.8 million restructuring charge was recorded in late 2002; $6.3 million of the unpaid balance was settled in the first half of 2003.
- Liquidity and Debt: The Trust has $332 million in debt maturing in 2003 (revolving credit facility and term loan), which management plans to renew. The Trust remains in compliance with all financial covenants.
- Risks: Key risks include the ability to renew leases at favorable rates, the performance of the Santana Row development, interest rate fluctuations on variable-rate debt ($216.4 million outstanding), and general economic conditions affecting retail tenants.
- Guidance: Management expects growth in net income and FFO to depend on the core portfolio, offset by Santana Row expenses. They anticipate re-leasing Kmart spaces (Flourtown, Leesburg) on favorable terms.
Investor Verification Checklist
- Insurance Recovery: Verify the final settlement amount for the Santana Row Building 7 fire and the timing of remaining insurance proceeds.
- Debt Refinancing: Confirm the renewal terms for the $332 million in debt maturing in December 2003, particularly interest rates and covenants.
- Santana Row Occupancy: Monitor the leasing velocity and opening dates for Phase I and Phase II of Santana Row to ensure projected revenue targets are met.
- Same-Center Performance: Review same-center rental income growth excluding Santana Row and new acquisitions to gauge the health of the core portfolio.
- Condemnation Proceeds: Track the valuation and settlement of the Rockville, MD shopping center subject to condemnation by a local governmental authority.