Federal Realty Investment Trust — Form 10-K Summary
Period clarification: The supplied filing is the annual report for the fiscal year ended December 31, 2011, not a 2010 Q4 filing. It includes quarterly data for 2011 and 2010.
Business context
Federal Realty is an equity REIT focused on owning, managing, acquiring and redeveloping retail and mixed-use properties in affluent, densely populated U.S. markets, primarily in the Northeast, Mid-Atlantic and California. At year-end 2011, it owned or controlled 87 projects totaling approximately 19.3 million square feet; the portfolio was 93.4% leased and 92.4% occupied. A 30%-owned joint venture held seven additional projects. No single tenant accounted for more than 2.5% of annualized base rent. The Trust reported 44 consecutive years of common-dividend increases.
Key financial metrics
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $553.1 million | $541.8 million |
| Rental income | $538.7 million | $522.7 million |
| Property operating income | $382.9 million | $372.6 million |
| Income from continuing operations | $131.6 million | $125.9 million |
| Net income attributable to the Trust | $143.9 million | $122.8 million |
| Diluted earnings per common share | $2.28 | $1.98 |
| FFO available to common shareholders, non-GAAP | $251.6 million; $4.00 per diluted share | $239.2 million; $3.88 per diluted share |
| Cash provided by operating activities | $244.7 million | $256.7 million |
| Cash used in investing activities | $196.4 million | $187.1 million |
| Cash and cash equivalents at year-end | $67.8 million | $15.8 million |
| Debt and capital lease obligations | $2.11 billion | $1.77 billion |
Property operating income increased 2.8%; rental expenses were 20.0% of rental income plus other property income, down from 20.6%. Interest expense declined 3.4% to $98.5 million, primarily reflecting lower borrowing rates and increased capitalized interest, partly offset by higher borrowings. The filing does not present a single consolidated operating-margin percentage as a headline measure.
Common dividends paid were $2.70 per share in 2011 versus $2.65 in 2010; dividends declared were $2.72 and $2.66, respectively. Cash flow from operations covered cash dividends paid to common and preferred shareholders of $169.3 million, before investing needs and other financing flows.
Changes versus the prior comparable year
- Revenue rose 2.1%, and property operating income rose 2.8%, supported by acquisitions, redevelopment properties and same-center rent growth.
- Net income increased 16.7%, but the increase includes $15.1 million of real-estate sale gains and a $2.0 million gain on deconsolidation of a variable-interest entity. Income from continuing operations rose 4.5%.
- FFO available to common shareholders increased 5.2%. This is a non-GAAP measure and should not be treated as cash flow or a substitute for net income.
- Operating cash flow decreased $12.0 million, principally because the Trust paid a $16.2 million final judgment in the Santana Row land litigation.
- Year-end debt and capital leases increased about $343 million, reflecting acquisitions and new financing. The Trust issued 1.66 million shares through its ATM program for $139.3 million net proceeds.
- Occupancy declined from 93.2% to 92.4%; management attributed revenue growth to rent increases and acquired and redeveloped properties despite this decrease.
Liquidity, debt and capital commitments
At December 31, 2011, the Trust had a $400 million unsecured revolving credit facility with no balance outstanding, maturing in July 2015 with a one-year extension option. It also had a $275 million unsecured term loan due in November 2018, effectively fixed at 3.17% through interest-rate swaps. Management said operating cash flow, cash on hand, the ATM program and the revolver were expected to fund operations and capital expenditures. Financial covenants were in compliance at year-end.
Approximately 99.6% of debt was described as fixed-rate or effectively fixed-rate; the $9.4 million municipal-bond balance was variable-rate at year-end. Scheduled 2012 principal and capital-lease repayments total approximately $205.7 million, including $175 million of 6.00% senior notes due in July. The filing separately describes approximately $192 million of debt maturities for 2012; investors should reconcile the differing totals and definitions.
Contractual obligations totaled approximately $2.98 billion, including principal and interest on fixed-rate debt, leases and development commitments. The Trust reported $44.5 million of contractual development, redevelopment and capital-improvement obligations at year-end, in addition to broader planned development spending.
Outlook, commentary and notable items
- No specific earnings or FFO guidance was provided. Management expected leasing activity in 2012 to be similar to prior years, with positive overall rent increases, and expected occupancy to remain relatively flat in the short term.
- Management expected approximately $57 million of redevelopment projects to stabilize in 2012. It anticipated investing $20–$40 million in Assembly Row and $15–$35 million in Pike & Rose during 2012, net of expected public funding at Assembly Row. The filing describes approximately $500 million of investment in major projects over the coming years.
- Assembly Row Phase 1, including 575 residential units developed by AvalonBay and approximately 323,000 square feet of retail, was expected to start construction in early 2012 and stabilize in 2015. Pike & Rose Phase I was expected to begin in 2012 and stabilize in 2015–2016. Residential projects also carry demand and execution uncertainty.
- 2011 acquisitions included Tower Shops, Montrose Crossing and Plaza El Segundo; the Trust also acquired adjacent development land. It sold Feasterville Shopping Center and its Newbury Street joint venture sold three buildings. The $11.8 million Newbury Street gain was expected to be recognized in first-quarter 2012 due to one-quarter-lagged reporting.
- The Trust corrected the classification of redeemable noncontrolling interests, reclassifying approximately $65 million at December 31, 2010 to mezzanine equity and recording a $0.3 million prior-period-related expense in 2011. Management said the correction was not material to previously issued statements.
- Principal risks include tenant financial distress and anchor-tenant departures, lease rollover and re-leasing costs, development delays or cost overruns, dependence on committed but not fully funded public support for Assembly Row, refinancing and capital-market access, interest rates, environmental and weather-related events, and joint-venture or partner put rights.
- The Santana Row litigation judgment was paid in 2011. Item 3 reports no legal proceedings; the notes describe ordinary-course claims and state that other matters were not believed likely to have a material adverse effect. Management and the auditor concluded internal control over financial reporting was effective; the financial statement audit opinion was unqualified.
Important facts for investors to verify
- Reconcile the filing’s 2012 maturity figures, particularly the $175 million senior-note maturity and the difference between approximately $192 million of stated debt maturities and the $205.7 million scheduled repayment total.
- Track occupancy, tenant credit quality, rent collections and lease renewals; 2011 occupancy fell to 92.4%, while leasing spreads and management’s near-term outlook remain dependent on market conditions.
- Assess the funding, timing, cost and expected returns of Assembly Row, Pike & Rose and Santana Row, including the status of public funding and third-party development responsibilities.
- Distinguish recurring operating performance from gains and other unusual items, and review FFO alongside GAAP earnings and operating cash flow.
- Evaluate the impact of acquisition-related debt, ATM share issuance, upcoming maturities, covenant restrictions and potential partner put obligations on leverage, liquidity and per-share results.