Business context and reporting period
Federal Realty Investment Trust (FRT), an equity REIT focused on retail and mixed-use properties, filed this unaudited Form 10-Q for the quarter ended March 31, 2011. The filing compares the three months ended March 31, 2011 with the same 2010 period; balance-sheet figures compare March 31, 2011 with December 31, 2010. Amounts below are in millions unless stated otherwise.
At quarter-end, FRT owned or held a majority interest in 86 predominantly retail projects comprising approximately 18.6 million square feet; these properties were 93.8% leased and 93.5% occupied. Its 30%-owned joint venture held seven projects and reported 90.5% leased and 90.4% occupied.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 / prior date |
|---|---|---|
| Total revenue | $138.5 | $138.3 |
| Operating income | $56.8 | $59.0 |
| Net income attributable to Trust | $31.2 | $29.2 |
| Net income available to common shareholders | $31.1 | $29.1 |
| Diluted EPS | $0.50 | $0.47 |
| FFO available to common shareholders, non-GAAP | $61.3; $0.99 per diluted share | $57.8; $0.94 per diluted share |
| Cash from operating activities | $46.0 | $58.0 |
| Cash used in investing activities | $(52.9) | $(25.2) |
| Cash from (used in) financing activities | $1.1 | $(145.5) |
| Cash and cash equivalents | $10.0 | $15.8 at Dec. 31, 2010 |
| Total debt and capital leases | $1,804.1 | $1,767.1 at Dec. 31, 2010 |
| Total assets / total liabilities | $3,217.5 / $1,995.8 | $3,159.6 / $1,978.4 at Dec. 31, 2010 |
Property operating income was $93.4 million, essentially flat year over year; its margin on total property revenue was approximately 67.4%, versus 67.5%. Operating margin was approximately 41.0%, compared with 42.7%. Common dividends declared were $0.67 per share, versus $0.66 a year earlier. Cash from operations was below declared common and preferred dividends paid in the quarter; FFO is a non-GAAP measure and is not equivalent to cash flow or liquidity.
Material changes versus the prior comparable period
- Rental income rose $3.9 million (3.0%), supported by acquisitions, redevelopment properties and higher same-center rents. Other property income fell $3.8 million, mainly from lower lease-termination fees; total revenue consequently increased only 0.1%.
- Operating expenses rose $2.4 million, including higher depreciation and general and administrative expense. Operating income declined $2.2 million (3.8%); continuing-operations income rose 5.7%, partly reflecting a $3.1 million year-over-year swing in early-extinguishment-of-debt items.
- Net income attributable to the Trust increased 6.7%, and diluted EPS increased from $0.47 to $0.50. FFO available to common shareholders increased 6.0%.
- Operating cash flow declined $12.0 million, primarily because of the $16.2 million payment of a previously accrued legal judgment and timing of tenant billings and operating-expense payments. Investing outflows increased, including the Tower Shops acquisition and higher capital investment.
- FRT acquired Tower Shops in Florida for a net purchase price of $66.1 million, including an assumed mortgage, and repaid that mortgage early using its revolver. It also repaid $75.0 million of 4.50% senior notes at maturity using revolver borrowings.
- FRT issued approximately 592,600 shares under a new at-the-market (ATM) program, raising $48.0 million net. Total debt and capital lease obligations increased from year-end, while common shares outstanding also increased.
Outlook, commentary, risks and unusual items
- Management expects redevelopment projects with projected costs of approximately $47 million to stabilize in 2011 and $52 million in 2012. It expects to invest $10 million–$30 million in Assembly Row during 2011, net of expected public funding. Construction of the first phase is conditional on transit-stop bids and funding conditions; if the project does not proceed, FRT warns it may be unable to recover its basis and could record an impairment.
- Management expected 2011 leasing activity to be similar to prior years, with overall positive rental-income increases, but gave no specific earnings or EPS guidance. Comparable-space leases signed in Q1 showed average rent increases of 11% on a cash basis and 24% straight-line; signed leases may not all commence or pay as contracted.
- Management expected short-term occupancy pressure as approximately 103,000 square feet became vacant following Borders and Blockbuster lease rejections in their bankruptcy proceedings. Re-leasing could take several quarters. Tenant financial distress, rent relief requests, vacancies and reduced recoveries remain risks.
- The $300 million unsecured revolving credit facility, with $192 million drawn at March 31, matured July 27, 2011. Management was working to refinance it and anticipated similar commitment levels, but at a higher rate; this was an expectation, not a completed refinancing at quarter-end. FRT stated that available operating cash flow, cash, the ATM program and revolver were expected to fund operations and capital needs.
- FRT had $37.3 million of mortgage maturities for the remainder of 2011 as of March 31; $31.7 million was repaid on April 29 using revolver borrowings. The facility maturity and refinancing remain important liquidity considerations. Cash on hand was $10.0 million at quarter-end.
- Interest-rate exposure: FRT reported $201.4 million of variable-rate debt and no open derivatives at March 31. A 1 percentage-point rate increase was estimated to raise annual interest expense by approximately $2.0 million. All reported debt covenants were in compliance.
- Other notable items: FRT paid the previously accrued $16.2 million Santana Row land judgment in March. An approximately $18.3 million mortgage investment was in default and foreclosure proceedings; FRT was negotiating a refinancing, with a deed-in-lieu remedy if repayment or modification failed. The filing says the loans were on non-accrual status.
Important facts for investors to verify
- Confirm the outcome and terms of the July 2011 revolver refinancing, including commitment size, pricing, covenants and subsequent borrowings.
- Track tenant backfills and occupancy for the approximately 103,000 square feet vacated after Borders and Blockbuster rejected leases, and monitor rent collections and tenant credit quality.
- Assess Assembly Row’s transit-stop funding and bid conditions, planned investment, construction decision and potential impairment exposure.
- Review the defaulted Norwalk-area mortgage loans for resolution, recovery value and any changes to foreclosure or non-accrual status.
- Reconcile capital spending, acquisitions, ATM share issuance and debt levels against cash generation and dividend requirements; treat FFO as supplemental, not as a substitute for GAAP cash flow.