Business context and reporting period
Federal Realty Investment Trust is a retail and mixed-use REIT operating 104 predominantly retail projects, totaling approximately 24.0 million square feet, in the Mid-Atlantic, Northeast, California and South Florida. This filing covers the quarter and six months ended June 30, 2020. The request metadata says 2019 Q2, which does not match the filing.
At quarter-end, properties were 93.0% leased and 90.8% occupied, versus 93.3% occupied at June 30, 2019. The filing attributes the period’s results principally to COVID-19-related business closures, tenant payment difficulties and revised rent collectibility estimates.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $176.2 million | $230.5 million | $407.8 million | $462.7 million |
| Property operating income | $109.2 million | $163.9 million | $267.4 million | $324.1 million |
| Net income attributable to the Trust | $10.5 million | $80.9 million | $65.3 million | $141.0 million |
| Net income available to common shareholders | $8.5 million | $78.9 million | $61.2 million | $137.0 million |
| Diluted EPS | $0.11 | $1.05 | $0.81 | $1.83 |
| FFO available to common shareholders per diluted share | $0.77 | $1.60 | $2.27 | $3.16 |
- Q2 revenue fell 23.5% and property operating income fell 33.4% year over year; six-month declines were 11.9% and 17.5%, respectively. Q2 operating income was $48.3 million, down 55.9%.
- Q2 rental income included $55.2 million of collectibility-related adjustments, including $9.4 million of straight-line rent receivables written off. Revenue for approximately 32% of tenants, measured by commercial leases, was being recognized on a cash basis at June 30.
- Six-month operating cash flow was $181.4 million, down from $242.3 million. Investing cash outflow was $257.2 million; financing cash inflow was $923.4 million. Cash, cash equivalents and restricted cash ended the period at $1.001 billion.
- At June 30, cash and cash equivalents were $980.0 million and the $1.0 billion revolving credit facility had no balance outstanding. Reported total debt, net, was $4.462 billion. The Trust had $400 million outstanding under a LIBOR-based term loan maturing in May 2021, with one 12-month extension option. Management reported compliance with applicable debt covenants.
- Common dividends declared and paid were $2.10 per share in the first half, including $1.05 per share in Q2. The filing reports no numerical earnings or FFO guidance.
Material changes, outlook and risks
- To strengthen liquidity, the Trust drew $990 million on its revolver in March, then repaid it using proceeds from a $400 million term loan and $700 million of senior notes issued in May. The new notes included $300 million of 3.95% notes due 2024 and $400 million of 3.50% notes due 2030. Debt issuance increased interest expense, partly offset by lower borrowing rates.
- Management said rent collections had increased monthly since April, but expected collections to remain below contractual obligations and historical levels. As of June 30, rent deferral agreements covered approximately 20% of tenants by commercial leases; negotiations with other tenants continued. Approximately 11% of tenants by occupied square footage remained closed due to government orders as of July 31, compared with 51% at March 31.
- Management maintained its long-term growth strategy but cautioned that COVID-19 was affecting near-term operations. Construction had resumed, though at a slower pace and with elevated costs. Development timing and costs remain subject to restrictions and economic conditions. Projects discussed include Assembly Row Phase III, Pike & Rose, Santana West, and approximately $318 million of redevelopment work.
- Six-month development and redevelopment capital expenditures were $213.2 million, compared with $133.6 million a year earlier. The Trust said investment could rise in the remainder of 2020 if construction activity continued, while also reserving the option to delay projects, limit acquisitions, reduce operating expenditures or reevaluate dividend policy.
- Other notable items include a $11.7 million gain on the sale of a Pasadena building and increased losses from hotel investments at Assembly Row and Pike & Rose. Management identified uncertainty around tenant solvency, rent collection, vacancies, development costs and timing, access to capital, interest rates, and public-health and natural-disaster risks. It reported no material developments in legal proceedings and no material change in internal controls.
Important facts for investors to verify
- Confirm the period: the filing is for Q2 2020, despite the request metadata indicating 2019 Q2.
- Track actual rent collections, deferred-rent repayment and any further changes to collectibility assumptions, including the number of tenants remaining on cash-basis revenue recognition.
- Monitor occupancy, tenant closures and leasing activity; management expected 2020 leasing volume and rental-rate increases to be adversely affected.
- Review liquidity and refinancing needs, especially the $400 million term loan due in May 2021 and other debt maturities; assess covenant compliance and the impact of borrowing costs.
- Assess project costs, construction delays and leasing progress against management’s development estimates, as well as the sustainability of dividends amid lower operating cash flow.